UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D. C. 20549

 

FORM 10-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the year ended December 31, 2015

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to ____________

 

Commission file number 333-184529

 

Wowio, Inc.

(Exact name of registrant as specified in its charter)

 

Texas		27-2908187
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

9107 Wilshire Blvd., Suite 450

Beverly Hills, California, 90210

(Address of principal executive offices)

 

(310) 272-7988

(Issuer’s telephone number)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value

 

Indicate by check mark whether the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. ¨ Yes x No.

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K . x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	¨		Accelerated filer	¨
Non-accelerated filer	¨		Smaller reporting company	x

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act) ¨ Yes x No

 

As of June 30, 2015, the aggregate market value of the issued and outstanding common stock held by non-affiliates of the registrant, based upon the last sales price of our common stock of $0.1299 per share was approximately $130,000. For purposes of the above statement only, all directors, executive officers and 10% shareholders are assumed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.

 

Number of shares of common stock outstanding as of April 14, 2016 was 1,686,280,777.

 

 

DOCUMENTS INCORPORATED BY REFERENCE – None

 

TABLE OF CONTENTS

 

			Page
	PART I
Item 1	Business		4
Item 1A	Risk Factors		12
Item 1B	Unresolved Staff Comments		12
Item 2	Properties		12
Item 3	Legal Proceedings		12
Item 4	Mine Safety Disclosures		12
	PART II
Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		13
Item 6	Selected Financial Data		13
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 7A	Quantitative and Qualitative Disclosures About Market Risk		20
Item 8	Financial Statements and Supplementary Data		21
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		22
Item 9A	Controls and Procedures		22
Item 9B	Other Information		23
	PART III
Item 10	Directors, Executive Officers, and Corporate Governance		24
Item 11	Executive Compensation		25
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		28
Item 13	Certain Relationships and Related Transactions, and Director Independence		29
Item 14	Principal Accountant Fees and Services		30
	PART IV
Item 15	Exhibits and Financial Statement Schedules		31
	Signatures		33

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K, including all documents incorporated by reference herein, includes certain statements constituting “forward-looking” statements within the meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act and the Private Securities Litigation Reform Act of 1995, including statements concerning our beliefs, plans, objectives, goals, expectations, anticipations, estimates, intentions, operations, future results and prospects, and we rely on the “safe harbor” provisions in those laws. We are including this statement for the express purpose of availing ourselves of the protections of such safe harbors with respect to all such forward-looking statements. The forward-looking statements in this report reflect our current views with respect to future events and financial performance. In this report, the words “anticipates,” “believes,” “expects,” “intends,” “future,” “estimates,” “may,” “could,” “should,” “would,” “will,” “shall,” “propose,” “continue,” “predict,” “plan” and similar expressions are generally intended to identify certain of the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. Any forward-looking statement is not a guarantee of future performance.

 

These forward-looking statements are subject to certain risks and uncertainties, and actual results may differ materially from those in the forward-looking statements as a result of various factors. You should read this report completely with the understanding that our actual results may differ materially from what we expect. Unless required by law, we undertake no obligation to publicly release the result of any revision of these forward-looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events.

 

 

PART I

 

ITEM 1. BUSINESS

 

Overview

 

WOWIO, Inc. (“WOWIO” or “the Company”) is a Los Angeles-based digital media company with an eBook distribution platform that gives the Company a competitive position in the $40 billion global eBook market. The Company owns a proprietary patent that provides for the specific process for inserting ads into eBooks while adding both personalization and an anti-theft identifier, positioning WOWIO as a participant in the growing eBook distribution arena. In addition to ownership of this patent, the Company has completed the development of a mobile application (“mobile app”) that will allow for the insertion of mobile ads in eBooks read on a mobile device. The Company is currently in the early stages of development of a mobile advertising network that will give WOWIO additional proprietary technology and a unique vertically integrated technology solution that will generate revenues for the company through ad-subsidized eBooks.

 

In 2010, we broadened our operational focus beyond just the eBook distribution platform to include the services of a digital media studio, which we have rebranded to potential business partners as “StudioW.” To that end, that same year, the Company acquired a library of original material in the form of manuscripts, novels, screenplays, comic books and graphic novels that can be distributed as eBooks, across other digital media platforms (some of which are also proprietary to the Company) and into traditional media outlets such as film and television. This provides an advantage for WOWIO as it can create media distribution campaigns for Company-owned content across multiple digital platforms, with a specific focus on the convergence of digital and mobile advertising with digital media.

 

In October 2012, the Company formed a digital publishing entity, Carthay Circle Publishing, Inc. (“Carthay”), in order to identify and acquire additional unpublished content for exploitation and “brand-building” across the digital and traditional media landscape.

 

History

 

WOWIO was founded in 2005 as WOWIO, LLC, a Pennsylvania limited liability company (“WOWIO Penn”), operating as an eBook store using the website, www.wowio.com. On July 15, 2008, Platinum Studios, Inc. (“Platinum”) purchased 100% of the membership interests of WOWIO Penn. On June 11, 2009, Brian Altounian, then President of Platinum, formed Alliance Acquisitions, Inc., a Nevada corporation (“Alliance”). On June 29, 2009, Alliance formed WOWIO, LLC, a Texas limited liability company (“WOWIO Texas”), which was owned jointly by Alliance and Brian Altounian. On June 30, 2009, WOWIO Texas purchased from Platinum 100% of the membership interests of WOWIO Penn, and thereby, all assets, technology, patent claims, and business of WOWIO Penn. On June 16, 2010, WOWIO Texas was incorporated, and formally converted from a limited liability company into WOWIO, Inc., a Texas corporation. In March 2012, the Company filed a dba as “StudioW” to reflect the expanded operations. On October 2, 2012, Carthay was incorporated in the state of Delaware as a wholly-owned subsidiary of WOWIO.

 

WOWIO began as a web-based eBook store in 2005, and was re-launched in early 2010 with a new design and business model geared toward generating revenue through advertising opportunities. In 2010, we were granted a patent that allows for the insertion of specifically targeted advertising into eBooks, which we believe could deliver a new revenue stream for eBook publishers and authors. The scope of our patent covers (i) two methods for providing individuals with a plurality of electronic books containing targeted advertising; and (ii) an apparatus for providing one or more subscribers with a plurality of electronic books containing specifically targeted advertising. We believe that our patent may also provide us with a competitive advantage in the eBook distribution market. We have seen competitors use advertising as “screen savers” on proprietary devices and others that have inserted ads in the “bottom third of the screen”, unrelated to the content contained in the eBook and also without reference to the demographic profile of the reader. Those options fall outside the purview of our patent. We are not aware of competitors using other methods of incorporating advertising around the eBook digital reading experience. We broadened our operational focus to include the services of a digital media studio, which we have rebranded to potential business partners as StudioW.

 

The Business

 

Through wowio.com, we distributed both company-owned and third party-owned eBooks and eComics, generating revenues through eBook and eComics sales transactions. Approximately 87% of the content we distributed through wowio.com was owned by third parties. We generated revenues through the insertion of advertising in eBooks. To date, these advertising campaigns have not fully utilized our proprietary patented technology, but we anticipate such use in the immediate future. We also generated revenues through online advertising on the wowio.com website. We are currently updating www.wowio.com.

 

We intend to generate revenues from our mobile app through the insertion of advertising into eBooks through our own proprietary mobile ad network that we are currently developing. By creating our own ad network, we will be able to retain a higher percentage of revenue than if we used a third-party ad network for the delivery of ads. We also intend to generate revenues by securing corporate branding and sponsorships on mobile devices where our app will be embedded for users to access. We anticipate offering the app to users for free to access the ad-supported content. In addition, we plan to charge a subscription fee for users who do not want to see ads in their eBooks and by offering two different price points: $4.99/month for users to get up to 5 free eBooks without ads and $19.99/month for an unlimited amount of ebooks.

 

 

Through StudioW, we create and produce our own content such as online videos, generating revenues through pre-roll video ads and additional online advertising on our content-oriented websites TheDuck Webcomics, PopGalaxy and our branded YouTube channels. Through our digital publishing entity, Carthay Circle Publishing, we intend to publish our own library of material as eBooks and eComics, which we will distribute on our own wowio.com and wowioapp.com site as well as distribute through other eBook distribution platforms, generating revenues through eBook sales transactions. We intend for approximately 50% of the content from Carthay to be original material created by the Company and approximately 50% to be from third parties. In addition to generating revenues through eBook/eComics sales, we intend to license our content library for exploitation across traditional media outlets such as film and television. We intend to license our patent to other eBook distribution platforms, though we have not yet begun to do so.

 

Through Carthay, we expect to see increased revenues as we anticipate higher revenue participation as a cross-media publishing entity, earning 30-90% of revenues generated from sales of eBooks, audio books and print books as well the possibility of content license fees for other media exploitation such as film, television and video games among others. Going forward Carthay will enter an arrangement with the Company to sell the books it publishes and also make them available for advertising campaigns. We also intend to seek arrangements with other sites such as Amazon, iTunes, Google and Barnes & Noble to sell the books published by Carthay. This is a distinctive difference from the activities and related revenue streams of a pure distribution platform such as wowio.com that generates revenues from advertising dollars based on traffic and only 10-30% of the retail price for each eBook.

 

The digital platform has expanded the global reach for content providers, and content consumers now have access to entertainment choices that they did not have previously. We believe this has the potential to create an expansive and instant cultural exchange. We believe, based on this digital platform, content creators can reach their targeted consumers directly and with greater immediacy than ever before. With social media platforms, the spontaneity and viral reach of the message, the book, the video or the brand can be global nearly overnight. We believe that our proprietary patent, which allows for the insertion of specifically targeted advertising into eBooks, enables at no or substantially reduced costs the delivery of content to the consumer. Over the last few years, as users turn from their desktops to their handheld and mobile devices for their online experience, the digital platform has been expanded into the mobile space and mobile ad spending has risen dramatically, according to research firm eMarketer. We will seek to take advantage of this shift by delivering ads via our own mobile ad network, utilizing our proprietary patent, to generate revenues through the downloading of eBooks on our own mobile app. We believe that our platform can be used on a variety of mobile platforms, regardless of the operating system, and we believe that we can reach a broad international audience as an embedded app on a mobile device and we intend to seek technology partnerships in this area.

 

All eBooks provided by our third party publishing partners are offered to consumers for free when the eBook is subject to an advertising campaign. If eBook-sponsorship ad campaigns are not available for any reason, the eBooks are then offered to the consumer at a retail price selected by the publisher. With the expansion into the mobile platform, we will expand our offering to include a subscription model that will allow the users to have access to a certain amount of eBooks every month by paying the monthly subscription fee. Of the approximately 6,800 total number of eBooks offered on the wowio.com site, about 800 were owned by the Company and over 6,000 were from publishers who have entered into distribution arrangements with the Company, which makes these titles available for free or reduced prices and eligible for advertising campaigns. (Of these 6,000 eBooks, approximately 30 were currently covered by advertising campaigns and the remainder were offered to the consumer at a price selected by the publisher). As the number of successful ad campaigns increases, the Company hopes to increase the number of eBooks eligible for and covered by continued advertising programs. We offer advertisers opportunities to market across all of our websites to consolidated and engaged web-communities in specified demographics.

 

The Company also distributes content across its own websites, (including www.wowio.com, wowioapp.com, www.theduckwebcomics.com and www.popgalaxy.com) and on company-branded YouTube Channels, Facebook pages and Twitter accounts as well as on its partner properties, social media and various web and mobile technologies. WOWIO’s management has a history in the entertainment industry, eBook distribution and previous experience in the comic book development and production industry, which we believe allows our management to access content creators, content libraries, and various distribution avenues. The Company’s revenues are currently generated through the sale of eBooks and advertising. The Company intends to generate future revenue by licensing both its patent rights and its creative intellectual property.

 

We launched the Carthay website in December 2012. We expect to re-launch a multi-channel eBook delivery platform in a newly-designed wowio.com site as an extension of our mobile app platform during 2016. With this combined mobile and online website, we expect to increase online visibility by connecting to other related sites through Application Programming Interfaces (APIs) that will allow us to engage with the audience of partner sites. With a broader audience reach and more attractive product offering, our goal is to increase our revenues through increased sales of eBooks and ad revenues generated from the expected higher traffic. The initial cost to re-launch this site was approximately $250,000 and we engaged Akyumen Technologies to oversee the development of a website capable of delivering content across a number of platforms. Subject to obtaining needed capital, and with the advances of mobile and wireless technology, we now anticipate that site to re-launch during the second quarter of 2016.  

 

The Industry

 

Over the last decade, the Internet has challenged traditional media business models by reshaping how content is consumed, created, distributed and monetized. We believe consumers today spend more of their time online, venturing beyond major Internet portals and visiting an increasing number of websites to find specific content for their personal needs and interests. In addition, consumers are changing the way they discover content online, primarily through advancements in web search technology and the popularity of social media. However, we believe consumers are often unable to find the precise content that they are seeking because the demand for highly specific, pertinent information outpaces the supply of thoughtfully researched, trusted content.

 

 

The increased specificity of consumer demand for online content strains many existing content creation business models. Traditional models focus on producing content with sufficiently broad audiences to justify elevated production costs. This traditional approach is less effective for fulfilling at scale the increasingly fragmenting consumer demand for content. Meanwhile, the widespread adoption of social media and other publishing tools has enabled a large number of individuals to more easily create and publish content on the internet. However, the difficulty in constructing profitable business models has limited such individual endeavors largely to bloggers and passionate enthusiasts who, while often knowledgeable, may lack recognized credibility, production scale and broad distribution and monetization capabilities.

 

The demand for highly specific content also presents new opportunities for advertisers seeking to effectively reach targeted audiences. Finding better ways to reach this fragmented consumer base remains a priority for advertisers, a trend that is likely to accelerate as online advertising growth outpaces that of offline advertising growth, and as advertising dollars follow audiences from offline to online media. Online advertising in the United States is projected to grow from $132.4 billion in 2015 to $181.3 billion in 2016, growing its share of the total advertising industry from 23% to 35%, second only to television, according to Forrester Research.

 

These trends present new and complex challenges for consuming, creating, distributing and monetizing online content that traditional and even new online business models have struggled to address. These challenges have had a profound impact on consumers, content creators, website publishers and advertisers who are in need of a solution that connects this disparate media ecosystem.

 

WOWIO operates in the electronic distribution of digital content. This includes written works including novels, an advertising brand, a screenplay, and games or video. StudioW utilizes a brand strategy approach to content, which includes the development of a broad array of product lines and formats. Consumers of digital content (readers, watchers, listeners, gamers) have now also become creators of content (writers, artists, app developers, producers). For example, 99% of the content on our website The Duck is supplied by the user community. Traditional media outlets, such as radio, television and film, have evolved to integrate the online experience, and the business models are evolving as well.

 

The business goals of StudioW and our consumer-facing properties, wowio.com, The Duck, Carthay, and POP Galaxy, are to increase audience size and procure greater market share in the acquisition, creation, distribution and monetization of traditional content including films, television shows, and books and digital content such as eBooks, eComics, graphic novels, online video content, casual games, apps and enhanced and blended media formats.

 

Traditional media creators have generally focused on a primary distribution window with subsequent distribution in secondary outlets. Our strategy allows us to work around the limitations of this model’s short time frames and high marketing costs. StudioW utilizes a multi-window, day/date release strategy, giving the consumer repeated, overlapping opportunities to discover the content, thus building a “relationship” with the story, the characters, the universe or the brand.

 

WOWIO/StudioW intends to expand its business through the acquisition of creative properties, the establishment of business to business partnerships and the development of its consumer facing brands that will provide enhanced distribution platforms for creators, target monetization pathways for advertisers, and provide a unique user experience for audiences. For example, we intend to increase the advertising sales staff for wowio.com to increase our advertising campaigns in eBooks and also hire a publisher relations specialist to support our current publishers and also solicit additional publishers to enter into distribution arrangements.

 

We believe WOWIO/StudioW has access to creators, content libraries, and various distribution avenues, through its connections in the entertainment industry, which provides an opportunity and monetization path for us to become an entertainment studio that will focus on digital media across platforms and business units within the organization and can take advantage of a mobile distribution pathway, supported by the largest-growing sector in the advertising industry.

 

WOWIO Products and Proprietary Technology

 

Wowio, doing business as StudioW, utilizes a blend of technologies, licensing, acquisitions, B2B services, consumer-facing brands and websites to accomplish the development, production, distribution and monetization of digital media across multiple platforms. The Company is developing intellectual property (“IP”) across its family of brands, ranging from content libraries to technology.

 

StudioW-owned digital distribution channels

 

WOWIO.com ,WOWIOAPP.com(eBooks, eComics and audiobook storefront)

 

Wowio.com, Wowioapp.com is an online source for eBooks and eComics with available media content in a device-agnostic format. WOWIO currently offers eBooks and digital content with a proprietary, patented advantage of allowing a “sponsor” to pay for the eBook content and providing the product to the consumer for no cost. Key to our distribution strategy, this advertising component removes the barrier for the consumer to become familiar with new content while allowing the sponsor to build a brand.

  

 

WOWIO owns a library of books and generates income from the retail purchases. We typically sell eBooks for $0.99 each. Approximately 87% of the content we distribute through wowio.com, wowioapp.com is owned by third parties. Digital content and eBooks provided by third party publishers are offered to consumers for free when advertising campaigns are available. If the eBook or digital content does not contain an advertising campaign, then the eBook is offered to the consumer at a retail price selected by the publisher and the Company receives an allowance for credit card processing charges, for which we hold back approximately 10% of the retail price. When there is an advertising campaign, we charge the sponsorship advertiser between $1.00 and $3.00 a book and we pay the publisher $0.25 - $0.50 per book depending on the length and we keep the remaining portion. The advertising revenue model will differ slightly when a consumer downloads an eBook from our mobile storefront, where we expect the per-book yield to be slightly lower and the corresponding royalty payment to each publisher will also be reduced but we expect the download volume to increase due to a large number of mobile devices available to consumers.

 

Ebook sponsorship ad campaigns are ads inserted into eBooks. To date, these advertising campaigns have not utilized our proprietary patented technology, but we anticipate such use in the future. Currently, advertising campaigns are represented as book “sponsorships” where the ad is presented in the eBook as a digital book cover. These ads are the first two pages of the book and the last page in the file. The digital book covers are personalized with the reader’s name (which the reader has provided to the Company by registering with us to use the site) and include hyperlink connections to the advertiser’s website as well as static copy. This personalization makes every eBook downloaded a unique and original file. The full use of the patent will include this personalization but the selection of the advertisement will be dependent on and matched to the specific user profile of the reader such that all ads will be unique to the reader, will be placed at various locations within the eBook in addition to the front and back eBook cover and will match the reader’s preferences, profile, online behavior, or other unique identifying characteristics.

 

We intend to rebuild and expand wowio.com to have multi-platform distribution capabilities, which would allow us to create a better user experience that allows the users to more easily select their output format, expedite the download process and streamline the purchase procedure. Also, we intend to improve the demographic profile questionnaire, which will provide better granularity for matching reader profiles to advertising campaigns and we intend to implement behavior-tracking software to match advertising to a user’s online activity. Management believes the site improvements will also provide a better back-end experience for publishers and administration with better reporting functionality and allow for more targeted advertising placement within the eBooks. Finally, we have developed additional technology within this expansion to accommodate app development that will provide for mobile access to the site and its contents. We estimate the cost to expand the wowio.com website will be approximately $250,000 and, subject to obtaining needed capital, we expect to launch this mobile storefront in the second quarter of 2016.  

 

The Duck (social media webcomic hosting site)

 

With nearly 15,000,000 monthly page views and over 20,000 webcomics, The Duck is an online community for amateur webcomic creators and fans. The Duck provides a forum to create, share and monetize digital content, utilizing social network and technology services and forums for the artist community and growing fan base. Advertisers buy ad placements on this website for a specified period of time and WOWIO provides the advertising code. Approximately 99% of the content of The Duck is supplied by the user community. In discussions with the site moderators, who represent the consensus of the user community, we believe that the advertising revenue may actually have an inverse impact on our revenue growth due to the resistance of this community to digital advertising. We are exploring a subscription model and other levels of engagement on a cost basis to increase our revenues. We expect to launch the mobile portal to The Duck during 2016 and by utilizing a proprietary advertising network, we intend to expand our mobile advertising revenues on The Duck, leaving the online/non-mobile site free of advertising.   We are exploring a number of new initiatives regarding the expansion of the content categories, and revenue-generating activities

 

POP Galaxy (branded digital content channel)

 

Launched during the 2010 International ComicCon in San Diego, POP Galaxy is a digital television and on-demand video distribution channel for original and acquired IP, serving also as a marketing, traffic and branding vehicle for other StudioW business units. Approximately 95% of the content on Pop Galaxy is created by WOWIO. Original programming covers areas such as entertainment, pop culture, comics, books, blogs, authors, publishers, partners, celebrities, gossip, and the news. We are exploring new ways to facilitate creation of our content. . To facilitate future production of our content we intend to eventually hire a site manager who will oversee the original content creation, identifying the web series material that support titles produced from Carthay Circle Publishing or that are a part of our ongoing web series. Once the material is identified, it is scheduled for production, script writing and filming. We estimate the costs to expand our content are approximately $500,000/year for increased personnel, $50,000/year for increased marketing and $10,000/year for technology costs , although we do not intend to begin that development until adequate funding is secured. 

 

Patents and other IP

 

WOWIO, INC. has patented technology (U.S. Patent No. 7,848,951) for the placement of advertising within the framework of eBooks. The patent was granted by the U.S. Patent and Trademark Office on December 7, 2010 and will expire on December 7, 2030. The patent generally relates to a method and apparatus for providing specifically targeted advertisements and preventing various forms of advertising fraud in electronic books. The scope of our patent covers (i) two methods for providing individuals with a plurality of electronic books containing targeted advertising; and (ii) an apparatus for providing one or more subscribers with a plurality of electronic books containing specifically targeted advertising. The patent covers a method of advertising performed by computer-based apparatus that inserts selected advertisements into an electronic book such that it does not contain the same advertising in the same location of the electronic book as any other electronic book previously provided to a subscriber thereby identifying a unique first electronic book. By creating electronic books with unique advertisements and/or placements of ads in a particular electronic book for a subscriber, advertising fraud, manipulation of copyrighted content and improper or unwanted dissemination of the electronic book by a subscriber or others can be prevented and/or controlled.

 

 

By successfully securing this patent, the Company has begun to establish charter advertising programs and generate eBook sales revenues while also creating broader advertising opportunities in the digital media space. The Company can place advertising across brands, sites and platforms to maximize revenues. We plan to actively utilize this patent through charter advertising programs such as free or discounted book downloads to consumers (book sponsorship) offered on WOWIO.com and Wowioapp.com.

  

By securing continuation applications on the issued patent and by developing additional intellectual property on other platforms such as mobile, as well as procuring licensing opportunities for this exclusive right, the Company believes it has created a barrier to entry for advertising sales revenues within eBooks by industry competitors such as Amazon and Google. We have seen competitors use advertising as “screen savers” on proprietary devices and others that have inserted ads in the “bottom third of the screen”, unrelated to the content contained in the eBook and also without reference to the demographic profile of the reader. Those options fall outside the purview of our patent. Other methods may exist for competitors but are not known to us at this time. The Company feels its patent and the rights granted therein provide a strong competitive advantage in the eBook distribution industry.

 

The Company also has other copyrights in connection with the content that it develops or trademark protection as applicable. The Company also owns twelve domain names in connection with its various websites.

 

Publishing

 

Carthay Circle Publishing, Inc. (publishing label)

 

Carthay was created as a publishing label that can represent authors and original content with full-service publishing support to take advantage of the Company’s distribution platforms. An integral part of the digital media distribution platform, Carthay identifies new and original content that it develops for multiple modes of digital and traditional media production and distribution. Carthay launched its first title, ABOVE, as an eBook across all platforms including wowio.com, wowioapp.com and developed other material across other StudioW outlets. Carthay will be launching additional titles, including a 4-book comic series entitled WILDFIRE with partner Top Cow Productions, which was released in June 2014. A second 4-book series is currently in production and will be released in 2016. Carthay will enter an arrangement with the Company to sell the books it publishes on the Wowio.com online and mobile platforms and also make those titles available for advertising campaigns. We also intend to seek arrangements with other sites such as Amazon, iTunes, Google and Barnes & Noble to sell the books published by Carthay.  

 

SpaceDog Entertainment (content library) 

 

The Company owns a library of over 80   comic   book and graphic novel properties that may be developed as feature films and television projects, original novels, graphic novels, and animated and live action direct-to-web videos. The SpaceDog library of stories told through comic books, graphic novels, screenplays and books, highlights storytelling that is relatable and grounded. StudioW acquired this library in May 2010 to develop the various titles for digital media and traditional media production and distribution. A selection of SpaceDog comic book titles are currently available for download on WOWIO.com and Wowioapp.com. All future titles published out of this library will bear the Carthay label.

 

Custom Publishing (publishing/marketing opportunities) 

 

CauseBooks. CauseBooks is an innovative digital marketing opportunity that leverages the power of celebrity and the expanding popularity of eBooks to inspire consumers to support a worthy cause. Brand sponsors can become part of the editorial and promotional experience. With the CauseBooks campaign, our management team identifies: 1) an eBook; 2) a social cause; 3) a celebrity with a large Twitter/Facebook following and 4) an advertising sponsor. An example of a typical campaign looks this way: 1) a celebrity promotes on Twitter and Facebook about a chosen sponsor that sponsors a number of downloads of free eBooks in support of the selected social cause/charity; 2) the consumer downloads the eBook that contains web links to the sponsor and charity websites; and 3) the sponsor pays approximately $3 per download of the selected eBook and promotes the charity, providing additional marketing to the overall campaign. Of the sponsorship, approximately 50% goes directly to the charity and WOWIO earns approximately 17-22% of the download fee. The Company has completed a prototype campaign and upon securing adequate financing we expect to hire a sales team   to secure additional campaigns, the result of which we believe will lead to higher revenues and marketing/promotional support for the Company sometime during the second half of 2016. 

 

StarTales. StarTales is an app-based program where users engage with a celebrity in a creative environment to create a short story or novella. In this program, the Company identifies a number of celebrity collaborators who will write the first chapter or the start of a short story and users, individually, will finish the story. The Company and the celebrity will select the “winning” story and will publish the title, giving a “written by” title to the celebrity and the co-writer, selling the title for $0.99 with a portion going to a charity. This creates a high value marketing/promotional opportunity for the company with a number of high-profile celebrities participating to promote creative writing and storytelling. StarTales is a cost-effective way to enhance celebrity activation and consumer engagement.

 

Additional In-House Application and Platform Development

 

Led by our in-house team, we will oversee the creation of custom book and game apps to provide an additional window of exploitation for content. Additionally, we have created a number of revolutionary digital formats, which will be utilized as launching platforms for our content and partner content, and licensed to third parties:

 

●

StoryMax provides proprietary blended media experiences to brands, studios and audiences consuming content across digital devices and convergence; and

 

 

	●	Our proprietary PanelFlow technology provides a must-have tool set for the creation, publishing and distribution of eBooks and eComics across the digital landscape; and
	●	Mobile app and online game development will also expand the reach of each proprietary title and provide an additional engagement opportunity for our audience.

 

The Company is a content owner as well as a content creator. Through Carthay Circle Publishing we intend to expand our WOWIO-created content and increase our opportunities to share in sale revenues as a publisher and distribute the digital, audio and print versions of our properties. With our proprietary library of comics, graphic novels and originally developed content, we expect to be able to monetize content through licensing fees, via strategic partnerships, or across our own distribution platforms giving us the ability to generate future revenue across a broad product base.

 

The cross-platform distribution of digital content such as eBooks, eComics, graphic novels and branded digital content channels will be critical to the expansion of the WOWIO user experience, site traffic volume, and repeat and recurring customer base. We have pursued the acquisition of content through artists, content creators, and licensing and distribution partnerships. We will continue to seek out acquisition opportunities including additional content offerings that appeal to users and advertisers, creating licensing and merchandising revenues for content creators such as artists and authors across our digital distribution network.

 

These sources will provide a forum for the cross-platform distribution, audience capture and ongoing monetization of digital media content. All of these proposed activities have been developed and established over the course of the last three years. The Company needs to hire a team to be able to execute on all of these initiatives. The Company anticipates that it will need to hire approximately 7-10 new employees, with expertise in technology development, sales, marketing, content development and publisher relations, over the course of the next 12 months.

 

Market Segments

 

We believe our research indicates that advertisers are recognizing the appeal of the broad-spectrum approach, realizing the need to create an affinity with their “audience” that goes beyond the traditional ad buy.

 

Advertisements that appear on the website are separate revenue streams and are not related to the insertion of ads into eBooks. There have been occasions where an advertiser has requested category-specific ads to appear on the website as well as within the eBooks in a particular category. For example, Adam & Eve received one month of advertising placement on the “Romance” category on the website as part of a larger eBook sponsorship campaign in addition to ads within the eBooks in that category as sponsorships as described above. Generally, however, website advertising revenues are generated from more traditional web advertising networks such as Gorilla Nation, Burst Media and other network ad providers placing ads on webpages independent of the content.

 

Examples of online advertising include remnant banner advertising, direct banner advertising, sponsorship banner advertising, video advertising, as well as search engine results pages, blogs, rich media ads, social network advertising, interstitial ads, online classified advertising, email marketing and others. A 3rd party ad service provider, also called a “network ad server”, delivers many of these types of ads. The Company currently works with a number of ad servers and they offer a blended mix of advertising units. However, WOWIO is in the process of developing and building its own proprietary ad network to generate the most beneficial ad revenues. The Company does not delineate each advertising unit as a separate revenue stream, opting instead to group all of these forms of revenues together under “Website Advertising” in the StudioW division. A description of advertising is included below to provide an understanding of the difference between reach, goal, pricing and formats among and between the various ad units utilized to date.

 

Remnant Banner Advertising

 

This type of advertising runs 100% of the inventory of the sites with no end date, nor impression goal. The very name of remnant deems these types of advertisers to have no care to be targeted and thus the cost per thousand impressions (“CPM”) usually starts very low and is found to be on average $0.50/CPM. If the click-thru ratio does show to be higher than the national average, the CPM can climb as high as $2/CPM. The Company has advertising partners in the network affiliate industry that provide remnant banner ads on all of our websites. We expect revenue from these sources to increase with an increase in traffic on our websites.

 

 

Direct Banner Advertising

 

Revenue generation from direct advertising is considered the upper echelon of online advertising. This type of advertising usually runs for short periods of time into the rotation of remnant advertising with specific targeting (geographical, age, gender, and venue), limited impressions and specific hours and days to run (time/day parting) during the week to maximize click-thru rates. With these exceptions, the CPM usually starts in the $5 range. The opportunity for increased advertising in this category is dependent upon increased website traffic and is established solely by our advertising partners, depending on advertiser availability and demographic targeting. We believe our plans for increased marketing and promotion will help increase traffic on our websites, which may increase our revenues from direct banner advertising.

 

Sponsorship Banner Advertising

 

Unlike direct advertising, sponsorship advertising buys out the entire site for specific periods of time for one cost. Depending on the traffic numbers and the Comscore/Nielsen ratings sponsorship advertising can buy out a whole site for 24 hours for as high as $10,000. The Company has secured direct advertising campaigns over the last three years, providing “site takeover” and “category sponsorship” opportunities to advertisers. The Company intends to increase these advertising opportunities by reaching out to more advertisers after hiring new sales staff.

 

Video Advertising

 

Every video that is shown on the site can be monetized by running pre-rolls, mid-rolls, and post-rolls along with overlays, which are sponsored texts that appear on the bottom of the video. Video advertisers, like traditional banner advertisers, have remnant and direct deals that are similar to banner advertisers. Costs per thousand impressions (“CPM”) for remnant deals usually start around $5/CPM and direct deals start much higher around $15/CPM. Video ads are embedded in video segments across our websites and are an opportunity for us to increase our revenues. We believe increased traffic on our websites will lead to increased revenues from video advertising.

 

eBook Advertising

 

CPM or sponsorship rates will apply as we move forward with advertising on eBooks. Currently advertisers are viewing these buys as CPMs, which will come in at direct rates. We will also broaden our relationships with advertising agencies and brands to create custom “branded entertainment” properties. As advertising is integrated into the content experience, we are sensitive to developing effective methods of incorporating brand messages into content while engaging the sponsor’s target audience.

 

Competition

 

WOWIO operates in the eBook and the digital media advertising market space. This market is fragmented and highly competitive and includes a variety of companies many of which are larger, more established, better funded and possess experienced management. All of the companies in this market compete for the time and attention of readers, viewers, and users principally on the basis of content, quality of service and price. We compete for advertisers in our markets with a variety of companies. Many of these sources of competition emanate from outside the geographic boundaries of a particular market and use technologies that are evolving quite rapidly.

 

The market for publishing services and related services is also highly competitive, fragmented and intense. The principal competitive criteria for the publishing industry are the following: product quality, customer service, suitability of format and subject matter, author reputation, price, timely availability of both new titles and revisions of existing books, digital availability of published products, and timely delivery of products to customers.

 

Market characteristics for the electronic publishing and distribution industry are continuing to evolve, with the following considerations:

 

Cloud-based Access - The requirements for the cloud are rapidly redefining the electronic publishing and distribution sector. There are several characteristics which make the electronic development and distribution of media properties unique and competitive, as follows:

 

	●	Collaboration. Enabling all participants in the composition and production process to work together, seamlessly, from anywhere in the world. This collaboration enables authors and publishers to work with the highest quality people to provide the highest quality content both of which contribute to stronger recognition, sales and reader satisfaction;
	●	Discovery. When developed and delivered in the cloud, the more easily a media property can be indexed and cataloged, the more effectively it can be found, evaluated and acquired or recommended. When media properties are available in the cloud, either in part or in whole, discovery can extend beyond traditional retailers and reach broader potential audiences and expand control and engagement to the author;
	●	Distribution. Media properties are no longer confined to a particular geography or a limited set of retailers. The best works by the best authors will be available around the world, accessible instantly by the widest possible audience. This will increase the competition for readers attention and money as well. Improved quality of content and eBook “files”, and the availability of metadata through search and social channels and a holistic embrace of the cloud to support and author-to-reader engagement are believed to be important competitive factors. This will be a key to long-term author success as new markets are tapped and new sales opportunities introduced; and

 

 

●

Social Network. The digital media platform allows for a connection with the authors to engage with their global audience to achieve their objectives, whatever they may be (e.g. financial success, total readership, etc.).

 

Readers’ Shorter Attention Spans Require Different Structures - We believe information consumption habits between generations are changing. Shorter attention spans among younger readers are leading to a rise in short-form works. These requirements will be met in a number of ways including social reading / authoring communities (e.g. Wattpad); short-form fiction / non-fiction specialists (e.g. Atavist, Byliner, Kindle Singles) and, perhaps most importantly, segments of longer-form works. The Company believes that capitalizing on shorter attention spans and new book structures are going to be critical to long-term author and publisher success.

 

Digital Rights Management (“DRM”) - Although a principal consideration in the past, some industry analysts have noted an increased resistance to and dislike for DRM.

 

We expect competition to continue to intensify as existing and new competitors begin to offer products, services, or systems that compete with our products and services. Our current or future competitors, many of whom have or will have substantially greater financial resources, research and development resources, distribution, marketing, and other capabilities than we have, may apply these resources and capabilities to compete successfully against our products and services.

 

A number of the markets in which we sell our products and services are also served by technologies that currently are more widely accepted than ours. It is uncertain whether our competitors will be able to develop systems compatible with, or that are alternatives to, our proprietary technology or systems. It is also not certain that we will be able to compete successfully against current or future competitors or that competitive pressures faced by us will not materially adversely affect our business, operating results, or financial condition. We do not currently have a significant competitive presence in our markets.

 

Research and Development

 

We spent approximately $250,000 in the last two years on research and development, which entailed exploring and building iOS and Android operating system versions of our system for digital and mobile apps, our ongoing development of the CauseBooks campaign and other custom publishing opportunities, and the development of pitch materials for concepts from our content library. In addition, we expect to spend an additional amount between $100,000 and $500,000 on R&D expenses over the next 12 to 24 months to complete the delivery of or mobile storefront and our mobile ad network as well as a “white-label” platform development. Because a majority of these activities are part of our day-to-day operations and are conducted in-house, the costs related to research and development are not broken out as a separate expense. Research and development costs include an allocation of wages and related employment costs paid to our employees and executives for their time spent on research and development matters.

 

Government Regulation

 

All of our services are subject to federal and state consumer protection laws including laws protecting the privacy of consumer non-public information and regulations prohibiting unfair and deceptive trade practices. In particular, under federal and state financial privacy laws and regulations, we must provide notice to consumers of our policies on sharing non-public information with third parties, must provide advance notice of any changes to our policies and, with limited exceptions, must give consumers the right to prevent sharing of their non-public personal information with unaffiliated third parties. Furthermore, the growth and demand for online commerce could result in more stringent consumer protection laws that impose additional compliance burdens on online companies. These consumer protection laws could result in substantial compliance costs and could interfere with the conduct of our business.

 

Moreover, in many states, there is currently great uncertainty whether or how existing laws governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the internet and commercial online services. These issues may take years to resolve. For example, tax authorities in a number of states, as well as a Congressional advisory commission, are currently reviewing the appropriate tax treatment of companies engaged in online commerce, and new state tax regulations may subject us to additional state sales and income taxes. New legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business or the application of existing laws and regulations to the internet and commercial online services could result in significant additional taxes on our business. These taxes could have an adverse effect on our cash flows and results of operations. Furthermore, there is a possibility that we may be subject to significant fines or other payments for any past failures to comply with these requirements.

 

Employees

 

As of April 14, 2016, we employ 1 full-time employee. We have no labor union contracts and believe relations with our employee are satisfactory.

 

 

ITEM 1A. RISK FACTORS

 

Because we are a “smaller reporting company” as defined in Rule 12b-2 of the Exchange Act, we are not required to provide information required under this item.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

None.

 

ITEM 3. LEGAL PROCEEDINGS

 

On October 7, 2013, Steve Timmerman (“Timmerman”), a former employee, filed a complaint against us and Brian Altounian and his wife (Timmerman v. WOWIO, Brian Altounian and “Jane Doe” Altounian, Superior Court of the State of Washington), seeking past due wages of $57,096, damages and attorney’s fees. The Company has accrued the amount of past due wages in its financial statements. A judgment was entered into on March 18, 2016 for an amount of $162,475, which includes interest of $14,005. The Company accrued the remaining amount of $91,374 and related interest of $8,529 in accounts payable and accrued expenses as of December 31, 2015.

 

On March 18, 2016, CBK Consultants, Inc. (“CBK”) filed a Notice of Motion for Summary Judgment in Lieu of Compliant against us (CBK Consultants, Inc. a/k/a CBK, Inc. v. Wowio, Inc., Supreme Court of the State of New York, County of Nassau), seeking the repayment of $450,000 of principal from a promissory note we given CBK along with $20,000 of interest along with costs and attorney fees. We are scheduled to appear in court on April 22, 2016 and we are currently evaluating our options with respect to the Motion for Summary Judgment.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock is quoted on the OTCBB under the symbol “WWIO.” Only a sporadic and limited market exists for our common stock. There is no assurance that a regular trading market will develop, or if developed, that it will be sustained. The following table sets forth, for the periods indicated, the high and low bid price for our common stock, as reported on the OTCBB. The quotations below reflect inter-dealer prices without retail mark-up, markdown or commissions and may not represent actual transactions.

 

		High				Low
Fiscal year ended December 31, 2015
For the quarter ended December 31, 2015		$	0.0001			$	0.0000
For the quarter ended September 30, 2015		$	0.1299			$	0.0001
For the quarter ended June 30, 2015		$	0.7792			$	0.1299
For the quarter ended March 31, 2015		$	12.3377			$	0.3896
Fiscal year ended December 31, 2014
For the quarter ended December 31, 2014		$	298.7013			$	7.7922
For the quarter ended September 30, 2014		$	1,168.8312			$	129.8701
For the quarter ended June 30, 2014		$	2,597.4026			$	1,168.8312

 

As of April 14, 2016, there were approximately 307 holders of record of the Company’s common stock.

 

Dividends

 

The Company has never declared or paid any cash dividends on its common stock. The Company currently intends to retain future earnings, if any, to finance the expansion of its business. As a result, the Company does not anticipate paying any cash dividends in the foreseeable future.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

None.

 

Sales of Unregistered Securities

 

None.

 

Issuer Purchases of Equity Securities

 

None.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not Applicable.

  

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our results of operations and financial condition for the fiscal years ended December 31, 2015 and 2014 should be read in conjunction with our consolidated financial statements and the notes to those consolidated financial statements that are included elsewhere in this document. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of many factors. See “Cautionary Note Regarding Forward Looking Statements” on page 3. We disclaim any intent to update any forward-looking statements to reflect subsequent actual events or developments.

 

Overview

 

WOWIO, Inc. (“WOWIO”, “we”, “us”, “our” or the “Company”) is a Los Angeles-based digital media company with an eBook distribution platform. The Company owns a proprietary patent that provides for the specific process for inserting ads into eBooks while adding both personalization and an anti-theft identifier, positioning WOWIO as a participant in the growing eBook distribution arena. In addition to its ownership of this patent, the Company has completed the development of a mobile application (“mobile app”) that will allow for the insertion of mobile ads in eBooks read on a mobile device. During the 2nd quarter of 2014, the Company began to focus its efforts primarily in the area of technology development in order to take advantage of the opportunity to exploit its proprietary patent and build additional proprietary technologies in the eBook and mobile ad space. As such, the Company is currently in the early stages of development of a mobile advertising network that will provide WOWIO additional proprietary technology and a unique vertically integrated technology solution that will generate revenues for the company through ad-subsidized eBooks. Management believes that the Company can generate additional revenues by creating an enterprise-level mobile ad delivery platform, utilizing the unique position represented by the patent and other technologies currently being developed.

 

Using our eBook distribution platform as the anchor, the digital media side of our business includes the creation, distribution, marketing, and monetization of “published” material, such as books, comic books, illustrated novels and graphic novels, as well as other digital media productions, including web series, eBooks, eComics, graphic novels and branded entertainment which we provide to digital and traditional media channels, such as film and television. Management believes that its enterprise-level mobile ad delivery platform will offer new revenue opportunities by delivering ads to these digital media products. Our operations are conducted through four main divisions: 1) wowio.com, the eBook distribution platform with a unique pricing model, that takes advantage of our proprietary patent, 2) StudioW digital media, the production entity that creates online and off-line brand-expansion entertainment properties and programs for our content, 3) Carthay Circle Publishing, Inc. which was created to develop our catalog of new and original content to exploit across our various consumer-facing properties, and 4) the technology development group, focused on new revenue-generating technologies.

 

Our business began as a web-based eBook store in 2005, and was re-launched in early 2010 with a new design and new business model that included advertising revenue-generating opportunities. In 2010, as part of our initial focus on digital media content development, we acquired a library of comic books, novels, graphic novels, and screenplays to distribute on our eBook platform as well as to market and promote across other web properties that we also acquired and built in 2010. That same year, we were granted a broad patent that allows for the insertion of advertising into eBooks delivering a new revenue stream for eBook publishers and authors. We believe this patent could provide us with a competitive advantage in the highly competitive eBook distribution market. Since 2010, we have broadened our operational focus to include the services of a digital media studio, which operates as StudioW, and in September 2012, we formed Carthay, a digital publishing entity, for the purpose of identifying and acquiring unpublished content for exploitation and “brand-building” across the digital and traditional media landscape. In the 2nd quarter of 2014, the Company learned that the digital advertising market in general and the mobile advertising market specifically is projected to grow more than any other advertising segment in the United States, per a study conducted and published by eMarketer, dated June, 2014. According to this study, mobile advertising is projected to grow from 6% of overall advertising in 2013 to 26% by 2018, with mobile advertising projected to exceed $58.33 Billion in 2018. Based on these projections, the Company is focusing its efforts on technology development in order to use its proprietary patent and take advantage of projected growth of mobile advertising over the next 5 years.

 

On the digital media side of the business, through wowio.com, we currently distribute both company-owned and 3 ^rd -party-owned eBooks and eComics, generating revenues through eBook and eComics sales transactions. Approximately 87% of the content we distribute through wowio.com is owned by third parties. We currently generate revenues through the insertion of advertising in eBooks. To date, such advertising campaigns have not utilized our proprietary patented technology, but we anticipate such use in the future as we release our mobile app and further develop the enterprise-level ad platform. We currently generate revenues through online advertising on the wowio.com website and we anticipate generating revenues through advertising on our mobile app as well. Through StudioW, we create and produce our own content such as online videos, generating revenues through pre-roll video ads and additional online advertising on our content-oriented websites TheDuck Webcomics, PopGalaxy and our branded YouTube channels. Through Carthay, we intend to publish our own library of material as eBooks and eComics, which we will distribute on our own wowio.com site as well as distribute through other eBook distribution platforms, generating revenues through eBook sales transactions. We intend for approximately 50% of the content from Carthay to be original material created by the Company and approximately 50% to be from third parties. In addition to generating revenues through eBook/eComics sales, we intend to license our content library for exploitation across traditional media outlets such as film and television. We intend to license our patent to other eBook distribution platforms, though we have not yet begun to do so.

 

 

WOWIO owns a library of books and generates income from the retail sales thereof. We typically sell WOWIO-branded eBooks for $0.99 each. We also offer digital content and eBooks provided by third party publishers to consumers for free when advertising campaigns are available. If the eBook or digital content does not contain an advertising campaign, then we offer the eBook to the consumer at a retail price selected by the publisher and the Company receives an allowance for administration and credit card processing charges, for which we hold back approximately 10% - 30% of the retail price. When there has been a sponsorship advertising campaign, we have charged the sponsor between $1.00 and $3.00 a book and we have paid the publisher between $0.25 - $0.50 per book depending on the length of the book and we keep the remaining portion. We anticipate altering these sponsorship fees and publisher royalty fees to be more in line with mobile ad offerings once we release a final version of the mobile app. EBook sales not tied to advertising campaigns are intended to draw traffic to our websites, so that we can profitably sell advertising on our websites, and are also intended to draw publishers, so that we can seek to enter into additional advertising campaigns for the eBooks sold on our websites.

 

EBook sponsorship ad campaigns are ads inserted into eBooks. To date, such ad campaigns have not utilized our patented technology, but we anticipate such use in the future. Currently, advertising campaigns are represented as book “sponsorships” where the ad is presented in the eBook as a digital book cover. These ads are the first two pages of the book and the last page in the file. The digital book covers are personalized with the reader’s name (which the reader has provided to the Company by registering with us to use the site) and include hyperlink connections to the advertiser’s website as well as static copy. This personalization makes every eBook downloaded a unique and original file. The full use of the patent will include this personalization but the selection of the advertisement will be dependent on and matched to the specific user profile of the reader such that all ads will be unique to the reader, will be placed at various locations within the eBook in addition to the front and back eBook cover and will match the reader’s preferences, profile, online behavior, or other unique identifying characteristics.

 

Advertisements that appear on the website and mobile app are separate revenue streams and are not related to the insertion of ads into eBooks. There have been occasions where an advertiser has requested category-specific ads to appear on the website as well as within the eBooks in a particular category. For example, Adam & Eve received one month of advertising placement on the “Romance” category on the website as part of a larger eBook sponsorship campaign in addition to ads within the eBooks in that category as sponsorships as described above. Generally, however, website advertising revenues are generated from more traditional web advertising networks such as Gorilla Nation, Burst Media and other network ad providers placing ads on webpages independent of the content.

 

The revenues we earn have not been adequate to support our operations. We have supplemented our revenue with the proceeds from offerings of our debt and equity securities. Where possible, we have also paid expenses by issuing shares of our common stock to conserve our cash. We expect that our operating expenses will continue to exceed our revenues for at least the next 9 to 12 months, and possibly longer. If we cannot raise the funds necessary to pay our operating expenses, we may be required to severely curtail, or even to cease our operations.

 

The Company owes certain contingency royalty payments, which will affect its enjoyment of revenue and its ability to become profitable. In particular, the Company has outstanding obligations remaining from the initial acquisition agreements of certain properties and owes contingency royalty payments to the sellers. The Company will be required to pay these obligations out of revenues, ranging from 10% to 100% until the acquisition costs are completed. For Wowio.com, we owe a total of approximately $1.5 million to the seller Platinum Studios, payable as a royalty of 20% of related revenue until all purchase price consideration has been satisfied. After we have completed paying the acquisition balance, we will pay Platinum Studios a royalty of 10% of related revenue in perpetuity. For The Duck Webcomics site, we owe a total of approximately $650,000, including a current payable of $150,000, with the remaining $500,000 payable as a royalty of 10% of related revenue until all purchase price consideration has been satisfied. After we have completed paying the acquisition balance, there will be no further obligation owed on this asset. For the Spacedog library, we will pay a royalty of 100% of related revenue, net of direct expenses, for all Spacedog assets acquired until the entire purchase price consideration of $500,000 has been satisfied. After we have paid such contingency royalty in full, there will be no further obligation owed on this asset.

 

As set forth above, all of the Company’s royalty payment obligations, except with respect to the 10% royalty payment which we will owe in perpetuity to Platinum Studios, are finite. The Company did not make any royalty payments during the years ended December 31, 2015 and 2014.

 

WOWIO’s principal place of business is located at 9107 Wilshire Blvd., Suite 450, Beverly Hills, California, 90210.

 

Plan of Operations

 

Our business goals are to increase audience size and procure greater market share in the eBook distribution industry as well as create additional technologies that enhance our Company’s position within that space. On the digital media side of our business, we anticipate possible acquisition opportunities that will enable us to increase our capabilities in the creation, distribution and monetization of traditional content including films, television shows, and books, and digital content such as eBooks, eComics, graphic novels, online video content, casual games, apps and enhanced and blended media formats, utilizing our own proprietary distribution platforms and proprietary ad delivery platforms to generate revenues.

 

Traditional media creators have generally focused on a primary distribution window with subsequent distribution in secondary outlets. Our strategy allows us to work around the limitations of this model’s short time frames and high marketing costs. StudioW utilizes a multi-window, day/date release strategy, giving the consumer repeated, overlapping opportunities to discover the content, thus building a “relationship” with the story, the characters, the universe or the brand.

 

We intend to expand our business through the acquisition of creative properties, the acquisition of synergistic technology platforms and capabilities, the establishment of business-to-business partnerships, the development of our consumer-facing brands, and further technology development that will provide enhanced distribution platforms for creators, target monetization pathways for advertisers, and provide a unique user experience for our audience.

 

 

We have access to creators, content libraries, and various distribution avenues, providing a unique opportunity and monetization path for us to become an entertainment studio that will focus on digital media across platforms and business units within the organization. We intend to generate revenues through original and branded content development, licensing deals, strategic partnerships, app and eBook sales, and online and mobile advertising revenues.

 

The chief initiatives we intend to undertake within the next year in order to accomplish these near-term business goals include: 1) increase our sales staff by 2-4 people to increase the ad-insertion campaigns on the site, which will increase revenues, traffic and transactions; 2) increase our technical staff by 2-4 people and launch the new wowio.com site, the mobile app and other planned technology development by creating apps and other new technology initiatives in the eBook and digital media areas; 3) increase our content development team by 1 or 2 people to develop and create original content to be published through our Carthay label, increasing our library of content by at least 10 to 15 new titles for exploitation; 4) increase our social media team by 1 or 2 to help build brand awareness across all of the WOWIO-owned sites and to support the marketing/sales efforts of Carthay; and 5) increase our marketing and promotional team by 1 or 2 people to support sales efforts across all platforms. We anticipate overhead expenses to support these efforts to increase to approximately $1.2 million to $2.5 million over the next 12 - 18 months.

 

We expect to generate future revenue by licensing both our patent rights and our creative intellectual property. We expect to re-launch a multi-channel eBook delivery platform in a newly-designed wowio.com site during the second quarter of 2016. We also anticipate launching our mobile app across various platforms, including the release of our app on the Android operating system at the same time, and the Apple operating system (iOS) and the Microsoft Windows Mobile platforms during the second half of 2016. We also anticipate releasing an enterprise-level mobile ad delivery platform during the second half of 2016. With this new platform, we expect to increase online visibility by connecting to other related sites through Application Programming Interfaces (APIs) that will allow us to engage with the audience of partner sites. With a broader audience reach and more attractive product offering, our goal is to increase our revenues through increased sales of eBooks and ad revenues generated from the expected higher traffic. Through our Carthay subsidiary, we expect to generate increased revenues as we anticipate higher revenue participation as a publisher, earning 30-50% of revenues as opposed to merely a distributor, earning 10-20% of revenues. Finally, we also anticipate increasing revenues through the licensing of our patent, a process we are beginning to undertake as the advertising community has just started to see the eBook distribution channel as a viable alternative to other content distribution outlets.

 

We are also exploring potential acquisitions of synergistic companies with related product lines or business strategies that could possibly support or enhance our current plan of operations. Our evaluation of these potential acquisition targets would include analysis of their financial information to determine that they would be accretive to our revenue streams and assets. The company engaged in several discussions with acquisition candidates in 2015 although no deals were completed.

 

Critical Accounting Policies

 

General

 

Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We believe that the accounting policies described below are critical to understanding our business, results of operations and financial condition because they involve more significant judgments and estimates used in the preparation of our consolidated financial statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and any changes in the different estimates that could have been used in the accounting estimates that are reasonably likely to occur periodically could materially impact our consolidated financial statements.

 

Our most critical accounting policies and estimates that may materially impact our results of operations include:

 

Revenue Recognition Policy

 

The Company recognizes revenues in accordance with FASB Accounting Standards Codification (“ASC”) Topic 605, which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (4) will be based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments will be provided for in the same period the related sales are recorded. The Company will defer any revenue for which the product has not been delivered or for which services have not been rendered or are subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or services have been rendered or no refund will be required.

 

 

The Company’s primary revenues sources are as follows:

 

eBooks

 

For eBook downloads purchased by the customer directly through the Company’s website, the Company recognizes revenue when the right to download content is granted. The Company evaluates whether it is appropriate to record the gross amount of product sales and related costs or the net amount. Generally, the Company records such revenues on a net basis due to a general lack of indicators that the Company is the primary obligor primarily due to the Company’s lack of ability to determine price. Typically for these sales, the Company’s net revenues consist of a credit card processing fee along with the majority of the advertising fee when there is an advertisement or an ad sponsor. Occasionally, the Company sells download cards to retailers and directly to end customers, which are redeemable on its websites for content downloads over an established time frame. The Company records proceeds from the initial sale of the card to deferred revenue, which is included in accounts payable and accrued expenses in the accompanying balance sheets, and is recognized over the related download period, which approximates the usage period.

 

Advertising

 

Visitor demographics and time spent on a website are the primary drivers behind advertising-based revenue models for internet properties. Website advertising revenue is primarily recognized on a flat-fee basis based on cost per thousand impressions (“CPM”). The Company earns CPM revenue from the display of graphical advertisements on its websites. Revenue from flat-fee services is based on a customer’s period of contractual service and is recognized on a straight-line basis over the term of the contract. At the end of March 2014, the Company signed an insertion order for display advertising across all of the Company’s sites with Akyumen Technologies to advertise Akyumen’s proprietary mobile hardware devices. The insertion order provides that Akyumen provide an aggregate of $150,000 (as amended) during the final three quarters of 2014. As of December 2015 and 2014, the Company received $25,000 and $150,000 in advertising revenues from Akyumen related to this order for advertising.

 

Patent Licensing

 

The Company owns Patent No. 7,848,951, issued by the USPTO on December 7, 2010, protecting the method for insertion of specifically targeted advertisements into eBooks. The scope of our patent covers (i) two methods for providing individuals with a plurality of electronic books containing targeted advertising; and (ii) an apparatus for providing one or more subscribers with a plurality of electronic books containing specifically targeted advertising. The Company intends to pursue patent licensing arrangements with eBook distribution outlets looking to create new revenue streams for eBook downloads. The Company will also pursue any violators who infringe on the patent’s claims, ultimately generating license revenues on a per-book or per-ad basis.

 

Revenue from patent licensing arrangements is recognized when earned, estimable and realizable. The timing of revenue recognition is dependent on the terms of each license agreement and on the timing of sales of licensed products. The Company generally recognizes royalty revenue when it is reported to the Company by its licensees, which is generally one quarter in arrears from the licensees’ sales. For licensing fees that are not determined by the number of licensed units sold, the Company recognizes license fee revenue on a straight-line basis over the life of the license.

 

Creative IP Licensing

 

The Company also generates revenues from the exploitation of WOWIO’s own proprietary content of creative material such as comic books, graphic novels, screenplays, and other published and non-published content. The WOWIO-owned Spacedog library is available for sale on wowio.com and the Company retains 90% of all sales for that content library.

 

The Company’s content also generates nominal revenues from licensing stories/characters/concepts to studios and other producing partners. Licensing deals that may generate revenue for the Company include film option/acquisition fees, television option/acquisition fees, video game licensing, content licensing for apps, apparel and merchandise licensing.

 

Cost of sales includes royalty payments made to the authors of the eBooks included on its websites, which call for royalty payments based on various percentages of revenues earned, less processing fees and in the case of sponsored downloads, a fixed price per download.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. Significant estimates made by management include, among others, fair value of common stock and warrants issued, fair value of beneficial conversion features, fair value of derivative liability and realization of deferred tax assets. The Company bases its estimates on historical experience, knowledge of current conditions and its belief of what could occur in the future considering available information. The Company reviews its estimates on an on-going basis. The actual results experienced by the Company may differ materially and adversely from its estimates. To the extent there are material differences between the estimates and actual results, future results of operations will be affected.

 

 

Fair Value Measurements

 

Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. GAAP establishes a 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. The established fair value hierarchy prioritizes the use of inputs used in valuation methodologies into the following three levels:

 

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and must be used to measure fair value whenever available.

 

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. For example, Level 3 inputs would relate to forecasts of future earnings and cash flows used in a discounted future cash flows method.

 

The Company’s financial instruments consist of cash, accounts payable, accrued expenses, note payable and related party notes payable and convertible notes payable. Except for the convertible notes payable, the carrying value for all such instruments approximates fair value due to the short-term nature of the instruments. The Company cannot determine the estimated fair value of its convertible notes payable as instruments similar to the convertible notes payable could not be found.

 

Beneficial Conversion Features

 

In certain instances, the Company entered into convertible notes that provide for an effective or actual rate of conversion that is below market value, and the embedded beneficial conversion feature (“BCF”) does not qualify for derivative treatment. In these instances, the Company accounts for the value of the BCF as a debt discount, which is then amortized to interest expense over the life of the related debt using the straight-line method which approximates the effective interest method.

 

Stock-Based Compensation

 

All share-based payments, including grants of stock to employees, directors and consultants, are recognized in the consolidated financial statements based upon their fair values.

 

The Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows ASC Topic 505. As such, the value of the applicable stock-based compensation is periodically remeasured and income or expense is recognized during the vesting terms. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is primarily recognized over the term of the consulting agreement. In accordance with FASB guidance, an asset acquired in exchange for the issuance of fully vested, non-forfeitable equity instruments should not be presented or classified as an offset to equity on the grantor’s balance sheet once the equity instrument is granted for accounting purposes.

 

Income Taxes

 

We account for income taxes under the provision of ASC Topic 740. As of December 31, 2015 and December 31, 2014, there were no unrecognized tax benefits included in the consolidated balance sheets that would, if recognized, affect the effective tax rate. Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. We had no accrual for interest or penalties on our consolidated balance sheets at December 31, 2015 and December 31, 2014, respectively, and have not recognized interest and/or penalties in the statements of operations for each of the years then ended. The Company is subject to taxation in the United States, Texas and California.

 

Basic and Diluted Loss per Common Share

 

Basic net loss per common share is computed by dividing net loss attributable to common shareholders for the period by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss attributable to common shareholders for the period by the weighted-average number of common and common equivalent shares, such as warrants, convertible notes payable and convertible preferred stock outstanding during the period.

 

Derivative Liabilities

 

The Company evaluates debt instruments, stock options, stock warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of ASC Topic 815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity . The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date.

 

 

From time to time, the Company has issued notes with embedded conversion features and warrants to purchase common stock. Certain of the embedded conversion features and warrants contain price protection or anti-dilution features that result in these instruments being treated as derivatives. In addition, potentially in the future, the Company may have an insufficient number of available shares of common stock to settle outstanding contracts. Accordingly, the Company has estimated the fair value of these embedded conversion features, warrants, and derivatives related to the potential insufficient number of authorized shares to settle outstanding contracts using Black-Scholes.

 

Results of Operations

 

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

 

The Company has been focusing on establishing a product, customer base and related marketplace. As a result, the Company has only generated minimal amounts of revenue, which, because of their size, can fluctuate without the influence of any specific economic trend. Due to a lack of sufficient operating capital, the Company does not currently have a sales force and does not generate significant revenues. Our net sales decreased by $133,631 or 84% from $159,038 during the year ended December 31, 2014 to $25,407 for the year ended December 31, 2015. Our revenues were from sales of eBooks generated through our website resulting in revenues of $1,573 for the year ended December 31, 2014 compared to $0 for the year ended December 31, 2015; advertising revenue which decreased from $152,111 for the year ended December 31, 2014 to $25,407 for the year ended December 31, 2015 and intellectual property sales which decreased from $5,003 for the year ended December 31, 2014 to $0 for the year ended December 31, 2015. Advertising revenue decreased during the year ended December 31, 2015 mainly due to expiration of the insertion order contract entered into with Akyumen Technologies, Inc. Cost of sales decreased from $34,275 for the year ended December 31, 2014, to $4,178 for the year ended December 31, 2015 due to decline of revenue. Our overall gross profit decreased by $103,534 from a gross profit of $124,763 for the year ended December 31, 2014 to a gross profit of $21,229 for the year ended December 31, 2015.

 

Our total operating expenses were $1,416,561 during the year ended December 31, 2015, a decrease of $981,441 or 41%, as compared to $2,398,002 for the year ended December 31, 2014. General and administrative expenses were $1,220,883 during the year ended December 31, 2015, a decrease of $1,177,119 or 49%, as compared to $2,398,002 for the year ended December 31, 2014. Impairment loss on intangible assets was $195,678 during the year ended December 31, 2015, as compared to $0 for the year ended December 31, 2014. The decrease in general and administrative expenses for the year ended December 31, 2014 resulted primarily from a decrease in consulting and professional fees.

 

Other expenses decreased by $677,646 from $1,553,244 for the year ended December 31, 2014, to $875,598 for the year ended December 31, 2015. Loss from a change in fair value of derivative liabilities of $227,000 for the year ended December 31, 2014, as compared to gain from a change in fair value of derivative liabilities of $987,000 for the year ended December 31, 2015. Loss on extinguishment of debt of $395,000 for the year ended December 31, 2014, as compared to $623,000 for the year ended December 31, 2015. Interest expense of $931,244 for the year ended December 31, 2014, as compared to $1,264,668 for the year ended December 31, 2015. Other income of $0 for the year ended December 31, 2014, as compared to $9,790 for the year ended December 31, 2015. Gain on settlement of accrued expense of $0 for the year ended December 31, 2014, as compared to $106,654 for the year ended December 31, 2015. Loss on legal settlement of $0 for the year ended December 31, 2014, as compared to $91,374 for the year ended December 31, 2015.

 

There was no income tax benefit or provision during the years ended December 31, 2015 and 2014.

 

Liquidity and Capital Resources

 

We had cash of $13,633 and $552 at December 31, 2015 and December 31, 2014, respectively.

 

We used cash of $122,189 in our operating activities during the year ended December 31, 2015. Non-cash adjustments included $311,174 related to amortization of prepaid consulting, $623,000 related to loss on debt extinguishment, $403,004 related to amortization of debt discount and debt issuance costs, the change in fair value of derivatives of $(987,000), $333,500 in excess interest expense of derivative liabilities, $250,000 interest expense added to derivative liabilities, $130,060 interest expense added to debt principal, gain on settlement of accrued expenses of 106,654, impairment loss on intangible assets of $195,678 and $271,625 related to the fair value of common stock and preferred stock issued for services. Changes in operating assets and liabilities consist of an increase in accounts payable and accrued expenses of $439,829 and a decrease in related party payables of $284,043, an increase in acquisition related liabilities of $1,682 and a decrease in prepaid consulting and other current assets of $1,200. We used cash of $895,111 in our operating activities during the year ended December 31, 2014. Non-cash adjustments included $634,310 related to amortization of prepaid consulting, $613,936 related to loss on debt extinguishment, $187,819 related to amortization of debt discount and debt issuance costs, the change in fair value of derivatives of $227,000, and $749,807 related to the fair value of common stock issued for services, offset by interest earned on notes receivables of $18,207. Changes in operating assets and liabilities consist of an increase in accounts payable and accrued expenses of $628,805 and a decrease in related party payables of $29,653, a decrease in acquisition related liabilities of $74,446 and an increase in prepaid consulting and other current assets of $12,001.

 

We had cash provided by investing activities of $0 and $4,900 during the year ended December 31, 2015 and 2014, respectively. Cash from investing activities during the years ended December 31, 2015 and 2014 reflect proceeds from repayments of notes receivable of $0 and $4,900, respectively.

 

 

Our financing activities provided cash of $135,270 during the year ended December 31, 2015 compared to $889,820 during the same period in 2014. Cash provided by financing activities during the year ended December 31, 2015, reflect net proceeds from the issuance of preferred stock treated as derivative liabilities of $24,000, net proceeds from the issuance of convertible notes payable of $156,500, offset by principal payments on notes payable of $45,230. Cash provided by financing activities during the year ended December 31, 2014, reflect net proceeds from the issuance of notes and convertible notes payable of $1,068,090, net proceeds from the sale of common stock of $115,000, offset by principal payments on notes payable and the revolving loan of $293,270.

 

As of December 31, 2015, we had an accumulated deficit of approximately $30,800,000. Management anticipates that future operating results will continue to be subject to many of the expenses, delays and risks inherent in the establishment of an early stage business enterprise, many of which we cannot control.

 

Going Concern

 

Our consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We cannot provide assurance that we will obtain sufficient funding from financing or operating activities to support continued operations or business deployment.

 

Since our inception we have reported net losses, including losses of $2,270,930 and $3,826,483 during the years ended December 31, 2015 and 2014, respectively. We expect that we will report net losses into the near future, until we are able to generate meaningful revenues from operations. At December 31, 2015, our accumulated deficit was approximately $30.8 million. These matters raise substantial doubt about the Company’s ability to continue as a going concern.

 

The Company’s continuation as a going concern is dependent on its ability to obtain additional financing to fund operations, implement its business model, and ultimately, to attain profitable operations. The Company will need to secure additional funds through various means, including equity and debt financing, funding from a licensing arrangement or any similar financing. There can be no assurance that the Company will be able to obtain additional debt or equity financing, if and when needed, on terms acceptable to the Company. Any additional equity or debt financing may involve substantial dilution to the Company’s stockholders, restrictive covenants or high interest costs. The Company’s long-term liquidity also depends upon its ability to generate revenues from the sale of its products and achieve profitability. The failure to achieve these goals could have a material adverse effect on the execution of the Company’s business plan, operating results and financial condition. The Company intends to raise additional financing.

 

The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Reports of Independent Registered Public Accounting Firms		F-1
Consolidated Balance Sheets		F-3
Consolidated Statements of Operations		F-4
Consolidated Statements of Stockholders’ Deficit		F-5
Consolidated Statements of Cash Flows		F-6
Notes to Consolidated Financial Statements		F-7

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors

Wowio, Inc.

 

We have audited the accompanying consolidated balance sheet of Wowio, Inc. and subsidiary (the “Company”) as of December 31, 2014, and the related consolidated statements of operations, stockholders’ deficit and cash flows for the year ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit on its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wowio, Inc. and subsidiaries as of December 31, 2014, and the results of its operations and its cash flows for the year ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As more fully described in Note 3, since inception, the Company has had recurring operating losses, negative operating cash flows and, at December 31, 2014, had negative working capital. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Hartley Moore Accountancy Corporation
Hartley Moore Accountancy Corporation
Irvine, California April 14, 2015

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors

Wowio, Inc.

 

We have audited the accompanying consolidated balance sheet of Wowio, Inc. and subsidiary (the “Company”) as of December 31, 2015, and the related statements of operations, stockholders’ deficit, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2015, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 3 to the consolidated financial statements, since inception, the Company has had recurring operating losses, negative operating cash flows and, at December 31, 2015, had negative working capital. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ HALL & COMPANY Certified Public Accountants and Consultants

 

Irvine, CA

April 14, 2016

 

 

WOWIO, INC.

CONSOLIDATED BALANCE SHEETS

 

		December 31,				December 31,
		2015				2014
Assets
Current Assets
Cash		$	13,633			$	552
Current portion of prepaid consulting and other current assets			169,878				312,274
Total Current Assets			183,511				312,826
Prepaid consulting and other assets, net of current portion			-				167,578
Note receivable and accrued interest			-				195,678
Total Assets		$	183,511			$	676,082
Liabilities and Stockholders’ Deficit
Current Liabilities:
Accounts payable and accrued expenses		$	1,490,268			$	1,287,413
Acquisition related liabilities			232,853				231,171
Related party payables			677				677
Accrued compensation and related costs			768,248				597,372
Revolving loan			50,000				50,000
Notes payable – related parties			100,902				100,902
Notes payable, net of debt discount of $0 and $15,131			865,000				1,016,099
Derivative liabilities			1,191,000				992,000
Convertible notes payable, net of debt discount of $12,474 and $180,040			540,286				160,575
Total Current Liabilities			5,239,234				4,436,209
Long-term portion of accounts payable and accrued expenses			63,530				-
Total Liabilities			5,302,764				4,436,209
Commitments and contingencies			-				-
Stockholders’ Deficit:
Series A preferred stock, $0.0001 par value;
5,000,000 shares authorized; 4,750,000 and 500,000 shares issued and outstanding, respectively			475				50
Series B preferred stock, $0.0001 par value;
2,000,000 shares authorized; 0 shares issued and outstanding			-				-
Series D preferred stock, $0.00001 par value;
4 shares authorized; 4 and 0 shares issued and outstanding, respectively			-				-
Common stock, $0.00001 par value;
20,000,000,000 and 500,000,000 shares authorized; 484,670,610 and 32,285 shares issued and outstanding, respectively			4,847				-
Additional paid in capital			25,631,763				24,725,231
Accumulated deficit			(30,756,338	)			(28,485,408	)
Total stockholders’ deficit			(5,119,253	)			(3,760,127	)
Total Liabilities and Stockholders’ Deficit		$	183,511			$	676,082

 

See accompanying notes to consolidated financial statements

 

 

WOWIO, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS 

 

		For the Year Ended				For the Year Ended
		December 31,				December 31,
		2015				2014
Net sales		$	25,407			$	159,038
Cost of sales			4,178				34,275
Gross profit			21,229				124,763
Operating expenses:
General and administrative			1,220,883				2,398,002
Impairment loss on intangible assets			195,678				-
Total operating expenses			1,416,561				2,398,002
Operating loss			(1,395,332	)			(2,273,239	)
Other income (expense):
Other income			9,790				-
Interest expense, net			(1,264,668	)			(931,244	)
Gain on settlement of accrued expense			106,654				-
Change in fair value of derivatives liabilities			987,000				(227,000	)
Loss on legal settlement			(91,374	)
Loss on extinguishment of debt			(623,000	)			(395,000	)
Other expense, net			(875,598	)			(1,553,244	)
Loss before provision for income tax			(2,270,930	)			(3,826,483	)
Provision for income tax			-				-
Net loss			(2,270,930	)		$	(3,826,483	)
Basic and diluted net loss per common share		$	(0.01	)		$	(178.85	)
Weighted-average number of common shares outstanding - basic and diluted			177,043,426				21,395

 

See accompanying notes to consolidated financial statements

 

 

WOWIO, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

For The Years Ended December 31, 2015 and 2014

 

		Preferred Series A								Preferred Series D								Common stock								Additional Paid in				Accumulated				Total Stockholders'
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Deficit				Deficit
Balance as of December 31, 2013			500,000			$	50				-			$	-				17,142			$	-			$	22,015,748			$	(24,658,925	)		$	(2,643,127	)
Common stock issued for cash			-				-				-				-				769				-				115,000				-				115,000
Conversion of convertible notes payable and accrued interest into common stock, net			-				-				-				-				7,449				-				1,014,864				-				1,014,864
Common stock issued for exercise of warrants			-				-				-				-				118				-				22,922				-				22,922
Estimated relative fair value of beneficial conversion features and relative fair value of warrants issued with debt extinguishment			-				-				-				-				-				-				29,990				-				29,990
Loss on default and extension																			2,000				-				408,000								408,000
Common stock issued for services			-				-				-				-				3,530				-				917,271				-				917,271
Common stock issued for debt - employees			-				-				-				-				769				-				343,936				-				343,936
Common stock issued for services - employees			-				-				-				-				508				-				72,500								72,500
Reclass of derivative liabilities for conversions of debt																			-				-				74,000								74,000
Initial recording of derivative liability			-				-				-				-				-				-				(289,000	)			-				(289,000	)
Net loss			-				-				-				-				-				-				-				(3,826,483	)			(3,826,483	)
Balance as of December 31, 2014			500,000				50				-				-				32,285				-				24,725,231				(28,485,408	)			(3,760,127	)
Conversion of convertible notes payable and accrued interest into common stock			-				-				-				-				484,634,780				4,847				260,165				-				265,012
Common stock issued for service			-				-				-				-				3,545				-				31,500				-				31,500
Preferred stock issued for services			250,000				25				-				-				-				-				1,100								1,125
Preferred stock issued for settlement of accrued wages including contributed capital of $39,792			4,000,000				400				4				-				-				-				112,767								113,167
Reclass of derivative liabilities for conversions of debt			-				-				-				-				-				-				501,000								501,000
Net loss			-				-				-				-				-				-				-				(2,270,930	)			(2,270,930	)
Balance as of December 31, 2015			4,750,000			$	475				4			$	-				484,670,610			$	4,847			$	25,631,763			$	(30,756,338	)		$	(5,119,253	)

 

See accompanying notes to consolidated financial statements

 

 

WOWIO, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		December 31,
		2015				2014
Cash Flows from Operating Activities
Net loss			(2,270,930	)			(3,826,483	)
Adjustments to reconcile net loss to net cash used in operating activities
Interest earned on note receivable			-				(18,207	)
Estimated fair value of preferred stock and common issued for services			271,625				749,807
Change in fair value of derivative liabilities			(987,000	)			227,000
Excess interest expense of derivative instruments			333,500				-
Interest Expense added to derivative liabilities			250,000				-
Interest Expense added to debt principal			130,060
Gain on settlement of accrued expenses			(106,654	)			-
Amortization of prepaid consulting			311,174				634,310
Impairment loss on intangible assets			195,678				-
Loss on extinguishment of debt			623,000				613,936
Amortization of debt discount and debt issuance costs			403,004				187,819
Changes in operating assets and liabilities:
Prepaid consulting and other assets			(1,200	)			12,001
Accounts payable and accrued expenses			439,829				628,805
Related party payables			-				(29,653	)
Accrued compensation and related costs			284,043				-
Acquisition related liabilities			1,682				(74,446	)
Net cash used by operating activities			(122,189	)			(895,111	)
Cash Flows from Investing Activities
Proceeds from repayment of notes receivable			-				4,900
Net cash provided by investing activities			-				4,900
Cash Flows from Financing Activities
Principal payments on revolving loan			-				(250,000	)
Principal payments on notes payable			(45,230	)			(43,270	)
Proceeds from the issuance of notes payable			-				802,340
Proceeds from the issuance of convertible notes payable			156,500				265,750
Proceeds from the issuance of preferred stock treated as derivative liabilities			24,000				-
Proceeds from the issuance of common stock			-				115,000
Net cash provided by financing activities			135,270				889,820
Net change in cash			13,081				(391	)
Cash at beginning of period			552				943
Cash, end of period		$	13,633			$	552
Supplemental disclosure of cash flow information:
Cash paid for income taxes		$	-			$	-
Cash paid for interest		$	-			$	-
Supplemental disclosure of non-cash investing and financing activities:
Exercise of warrant in settlement of notes/accounts payable		$	-			$	22,922
Common and preferred stock recorded as prepaid consulting for services		$	-			$	239,964
Reclass of derivative liabilities to equity for conversions of debt		$	501,000			$	-
Reassignment of amounts from note payable to convertible notes		$	111,300			$	-
Conversion of debt and accrued interest for shares of common stock		$	265,012			$	1,014,864
Debt issuance costs and debt discounts		$	583,500			$	-
Settlement of accrued expenses through issuance of shares of preferred and common stock		$	113,167			$	343,936
Issuance of convertible debt for settlement of accrued expense		$	40,000			$	-
Reclassification of additional paid in capital to derivative liability		$	-			$	74,000
Initial recording of derivative liability		$	-			$	289,000
Debt discount associated with derivative liabilities		$	236,328			$	261,750
Transfer of debt and accrued interest between private parties		$	-			$	110,947

 

See accompanying notes to consolidated financial statements

 

WOWIO, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

For The Years Ended December 31, 2015 and 2014

 

NOTE 1 - DESCRIPTION OF BUSINESS

 

Organization

 

Wowio, LLC was formed on June 29, 2009 under the laws of Texas (“Wowio Texas”). On July 16, 2010, the Company converted to a C-corporation under the laws of Texas. Wowio, Inc. and its wholly owned subsidiary Carthay Circle Publishing (collectively, the “Company”, “we”, “our”, “Wowio”) is an emerging company in the creation, production, distribution and monetization of digital entertainment. We specialize in creating custom brand strategies to develop, produce, distribute and promote entertainment properties across multiple product lines and distribution channels, including our own websites, traditional media, social media and emerging technologies.

 

The Company operates in a rapidly changing technological and digital entertainment market and its activities are subject to significant risks and uncertainties, including failing to secure additional funding to further exploit the Company’s current technology and digital entertainment properties.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

This summary of significant accounting policies is presented to assist the reader in understanding and evaluating the Company’s consolidated financial statements. The consolidated financial statements and notes are the representations of the Company’s management, who are responsible for their integrity and objectivity. The accounting policies conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently applied in the preparation of the consolidated financial statements.

 

Basis of Presentation

 

These consolidated financial statements have been prepared using the basis of U.S. GAAP. The consolidated financial statements as of December 31, 2015 and December 31, 2014 reflect all adjustments which, in the opinion of management, are necessary to fairly state the Company’s financial position and the results of its operations for the periods presented in accordance with U.S. GAAP. All adjustments are of a normal recurring nature.

 

Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. On July 9, 2015, the FASB approved amendments deferring the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date and permitting early adoption of the standard, but not before the original effective date or for reporting periods beginning after December 15, 2016. The Company has not yet selected a transition method and is currently assessing the impact the

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern” . The amendments in this update provide guidance in U.S. GAAP about management’s responsibilities to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The main provision of the amendments are for an entity’s management, in connection with the preparation of financial statements, to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management’s evaluation should be based on relevant conditions and events that are known or reasonably knowable at the date the consolidated financial statements are issued. When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, the entity should disclose information that enables users of the consolidated financial statements to understand all of the following: (1) principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans); (2) management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations; and (3) management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern or management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. The amendments in this update are effective for interim and annual reporting periods after December 15, 2016 and early application is permitted. The Company is currently assessing this guidance for future implementation.

 

In April 2015, the FASB issued Accounting Standard Update (“ASU”) 2015-03, Simplifying the Presentation of Debt Issuance Costs. This update requires capitalized debt issuance costs to be classified as a reduction to the carrying value of debt rather than a deferred charge, as is currently required. This update will be effective for the Company for all annual and interim periods beginning after December 15, 2015 and is required to be adopted retroactively for all periods presented, and early adoption is permitted. The Company is currently evaluating the expected impact of this new accounting standard on its consolidated financial statements.

 

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Wowio, Inc. and its wholly-owned subsidiary Carthay Circle Publishing. All intercompany balances and transactions have been eliminated in consolidation.

 

Revenue Recognition and Deferred Revenue

 

The Company recognizes revenues in accordance with FASB Accounting Standards Codification (“ASC”) Topic 605, which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (4) will be based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments will be provided for in the same period the related sales are recorded. The Company will defer any revenue for which the product has not been delivered or for which services have not been rendered or are subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or services have been rendered or no refund will be required.

 

The Company’s primary revenues streams are as follows:

 

eBooks

 

For eBook downloads purchased by the customer directly through the Company’s website, the Company recognizes revenue when the right to download content is granted. The Company evaluates whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned. Generally, the Company records such revenues on a net basis due to a general lack of indicators that the Company is the primary obligor primarily due to the Company’s lack of ability to determine price. Typically for these sales, the Company’s net revenues consist of a credit card processing fee along with the majority of the advertising fee when there is an ad sponsor.

 

Occasionally, the Company sells download cards to retailers and directly to end customers, which are redeemable on its websites for content downloads over an established time frame. The Company records proceeds from the initial sale of the card to deferred revenue, which is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets, and is recognized as revenue over the related download period, which approximates the usage period.

 

Advertising

 

Visitor demographics and time spent on a website are the primary drivers behind advertising-based revenue models for internet properties. Website advertising revenue is primarily recognized on a flat-fee basis based on cost per thousand impressions (“CPM”). The Company earns CPM revenue from the display of graphical advertisements on its websites. Revenue from flat-fee services is based on a customer’s period of contractual service and is recognized on a straight-line basis over the term of the contract. Proceeds from such contracts are deferred and are included in revenue on a pro-rata basis over the term of the related agreements.

 

Patent Licensing

 

The Company owns Patent No. 7,848,951, issued by the USPTO on December 7, 2010, protecting the insertion of ads into eBooks. The Company intends to pursue patent licensing arrangements with eBook distribution outlets looking to create new revenue streams for eBook downloads. The Company will also pursue any violators who infringe on the patent’s claims, ultimately generating license revenues on a per-book or per-ad basis.

 

Revenue from patent licensing arrangements is recognized when earned, estimable and realizable. The timing of revenue recognition is dependent on the terms of each license agreement and on the timing of sales of licensed products. The Company generally recognizes royalty revenue when it is reported to the Company by its licensees, which is generally one quarter in arrears from the licensees’ sales. For licensing fees that are not determined by the number of licensed units sold, the Company recognizes license fee revenue on a straight-line basis over the life of the license.

 

Creative IP Licensing

 

Revenues are also generated by the exploitation of WOWIO’s own proprietary content of creative material such as comic books, graphic novels, screenplays, and other published and non-published content. The WOWIO-owned Spacedog library is available for sale on wowio.com and the Company retains 90% of all retail sales for that content library.

 

The Company’s content also generates revenues from licensing stories/characters/concepts to studios and other producing partners. Licensing deals that may generate revenue for the Company include film option/acquisition fees, television option/acquisition fees, video game licensing, content licensing for apps, apparel and merchandise licensing.

 

 

Concentrations of Credit Risk

 

A financial instrument which potentially subjects the Company to concentrations of credit risk is cash. The Company places its cash with financial institutions deemed by management to be of high credit quality. The Federal Deposit Insurance Corporation (“FDIC”) provides basic deposit coverage with limits up to $250,000 per owner. At December 31, 2015 and 2014, there were no uninsured amounts.

 

During the years ended December 31, 2015 and 2014, one customer accounted for approximately 98% and 94% of revenues respectively (see Note 9)

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting periods.

 

Significant estimates made by management include, among others, fair value of common stock and preferred stock issued, fair value of beneficial conversion features, fair value of derivative liabilities, recoverability of long-living assets and realization of deferred tax assets. The Company bases its estimates on historical experience, knowledge of current conditions and belief of what could occur in the future considering available information. The Company reviews its estimates on an on-going basis. The actual results experienced by the Company may differ materially and adversely from its estimates. To the extent there are material differences between the estimates and actual results, future results of operations will be affected.

 

Fair Value Measurements

 

Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. U.S. GAAP establishes a 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. The established fair value hierarchy prioritizes the use of inputs used in valuation methodologies into the following three levels:

 

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and must be used to measure fair value whenever available.

 

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. For example, level 3 inputs would relate to forecasts of future earnings and cash flows used in a discounted future cash flows method.

 

The Company’s financial instruments consist of cash, accounts payable, accrued expenses, notes payable, convertible notes payable and related party notes payable. The Company cannot determine the estimated fair value of its convertible notes payable as instruments similar to the convertible notes payable could not be found. Other than for convertible notes payable, the carrying value for all such instruments approximates fair value due to the short-term nature of the instruments.

 

The Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative convertible notes, preferred stock and warrant liabilities at every reporting period and recognizes gains or losses in the statements of operations that are attributable to the change in the fair value of the derivative convertible notes, preferred stock and warrant liabilities.

 

Beneficial Conversion Features

 

In certain instances, the Company has entered into convertible notes that provide for an effective or actual rate of conversion that is below market value, and the embedded beneficial conversion feature (“BCF”) does not qualify for derivative treatment. In these instances, the Company accounts for the value of the BCF as a debt discount, which is then amortized to interest expense over the life of the related debt using the straight-line method, which approximates the effective interest method.

 

Advertising Expense

 

The Company expenses marketing, promotions and advertising costs as incurred. For the years ended December 31, 2015 and 2014, such costs totaled $1,615 and $96,670, respectively. Such costs are included in general and administrative expense in the accompanying consolidated statements of operations.

 

 

Stock-Based Compensation

 

All share-based payments, including grants of stock to employees, directors and consultants, are recognized in the consolidated financial statements based upon their estimated fair values.

 

The Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows ASC Topic 505. As such, the value of the applicable stock-based compensation is periodically re-measured and income or expense is recognized during their vesting terms. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is primarily recognized over the term of the consulting agreement. In accordance with FASB guidance, an asset acquired in exchange for the issuance of fully vested, non-forfeitable equity instruments should not be presented or classified as an offset to equity on the grantor’s balance sheet once the equity instrument is granted for accounting purposes.

 

Income Taxes

 

The Company accounts for income taxes under the provision of ASC 740. As of December 31, 2015 and 2014, there were no unrecognized tax benefits included in the consolidated balance sheets that would, if recognized, affect the effective tax rate. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties on its consolidated balance sheets as of December 31, 2015 and 2014 and has not recognized interest and/or penalties in the consolidated statements of operations for the years ended December 31, 2015 and 2014. The Company is subject to taxation in the United States, Texas and California.

 

Basic and Diluted Loss per Common Share

 

Basic net loss per common share is computed by dividing net loss attributable to common stockholders for the period by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders for the period by the weighted-average number of common and common equivalent shares, such as warrants outstanding during the period. Common stock equivalents from warrants, preferred stock and convertible notes payable were 12,003,953,065 and 94,497 for the years ended December 31, 2015 and 2014, respectively, and are excluded from the calculation of diluted net loss per share for all periods presented because the effect is anti-dilutive.

 

Derivative Liabilities

 

The Company evaluates debt instruments, preferred stock, stock options, stock warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of ASC Topic 815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity. The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date.

 

Certain of the Company’s embedded conversion features on debt, preferred stock and warrants with potentially insufficient authorized shares to settle outstanding contracts in the future are treated as derivatives for accounting purposes. The Company estimates the fair value of these embedded conversion features and warrants with potentially insufficient authorized shares to settle outstanding contracts in the future using the Black-Scholes Merton option pricing model (“Black-Scholes”) (see Note 7). Based on these provisions, the Company has classified all conversion features and warrants as derivative liabilities at December 31, 2015 and 2014.

 

NOTE 3 - GOING CONCERN

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company’s revenues since inception have been nominal. Additionally, since inception, the Company has had recurring operating losses and negative operating cash flows and at December 31, 2015 and 2014, had negative working capital. These factors raise substantial doubt about the Company’s ability to continue as a going concern. 

 

The Company’s continuation as a going concern is dependent on its ability to obtain additional financing to fund operations, implement its business model, and ultimately, to attain profitable operations. The Company will need to secure additional funds through various means, including equity and debt financing, funding from a licensing arrangement or any similar financing. There can be no assurance that the Company will be able to obtain additional debt or equity financing, if and when needed, on terms acceptable to the Company, or at all. Any additional equity or debt financing may involve substantial dilution to the Company’s stockholders, restrictive covenants or high interest costs. The Company’s long-term liquidity also depends upon its ability to generate revenues from the sale of its products and achieve profitability. The failure to achieve these goals could have a material adverse effect on the execution of the Company’s business plan, operating results and financial condition. The Company intends to raise additional financing.

 

The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

 

NOTE 4 - INTANGIBLE ASSET

 

On October 13, 2010, the Company entered into a secured note receivable with Top Cow Productions (“TCP”) for $175,000. Terms of the note required interest at the rate of 10% per annum and equal monthly installments of principal over twelve months beginning in May 2011 through April 2012. The note was secured by certain assets of TCP and individually by two owners of TCP. As of December 31, 2015 and 2014, the balance of the note receivable was $0 and $195,678, respectively, including accrued interest receivable of approximately $0 and $62,678, respectively.

 

	·	The Company held a security interest in the assets of TCP;
	·	The Company received payments of $5,500 from TCP during 2013 and $4,900 during 2014; and
	·	In 2013, the Company entered into an agreement with TCP in which TCP provided to the Company certain assets, including ownership of two separate 4 book comic book series and screenplay. The Company receives 70% of the future net revenues derived from these assets, with TCP retaining the remaining 30% as a participation fee.
	·	In January 2015, TCP provided the Company a feature film script, and fulfilled its obligations under the note receivable.

 

The Company has capitalized the costs of bringing this production to market in accordance with ASC 926, “Entertainment – Films.” Due to lack of development of the feature film script, the Company recorded an impairment loss on intangible assets of $195,678 as the carrying value of the intangible assets was determined to be unrecoverable as of December 31, 2015.

 

NOTE 5 - ACQUISITIONS

 

Wowio, LLC

 

On June 29, 2009, Wowio Texas entered into a securities purchase agreement (the “Agreement”) with Platinum Studios, Inc. (“Platinum”) pursuant to which Platinum agreed to transfer to the Company, all of the membership interests of Wowio, LLC (a Pennsylvania Limited Liability Company and wholly owned subsidiary of Platinum) (“Wowio Penn”) in exchange for total consideration of $3,150,000, comprised of assumed liabilities of approximately $1,636,000 (of which $82,853 was still outstanding as of December 31, 2015 and December 31, 2014), including $794,518 of amounts owed to Brian Altounian (which was fully paid or settled as of December 31, 2014) the Company’s former CEO, and an additional $1,514,000 to be paid via royalty at a rate of 20% of gross revenues generated from acquired assets. Subsequent to the $1,514,000 being satisfied, such royalty rate shall reduce to 10% of net revenues generated in perpetuity.

 

Drunk Duck

 

On May 5, 2010, Wowio Texas entered into an asset purchase agreement with Platinum pursuant to which Platinum agreed to transfer to the Company, all of the ownership interests in the assets, including related websites, of Drunk Duck (the “Duck”) in exchange for total consideration of $1,000,000 in cash of which $350,000 of such amount had been previously paid, $150,000 was due from July 2010 – October 2010 and $500,000 is to be paid in quarterly installments equal to a minimum of 10% of net revenue derived from the purchased assets. As a security interest, Platinum retained a 10% ownership position in the assets, which is being reduced proportionately, as payments are made to Platinum. As of December 31, 2015, Platinum retained ownership of 6.5% of the assets, as a result of amounts owed to Platinum under the purchase agreement. The $150,000 initially due from July 2010 to October 2010 remains outstanding as of December 31, 2015 and 2014.

 

Spacedog Entertainment, Inc.

 

Effective May 15, 2010, Wowio Texas entered into a securities purchase agreement with Spacedog Entertainment, Inc. (a New York corporation) (“SDE”) pursuant to which SDE agreed to transfer to Wowio, Inc., all of the common stock of SDE in exchange for total consideration of $1,650,000, comprised of $107,000 in cash, 1,187 shares of common stock (valued at $1,543,000 - based on the estimated fair value on the measurement date) and an additional $1,000,000 to be paid via royalty at a rate of 100% of gross revenues generated from SDE assets. Subsequent to the $1,000,000 being satisfied, the seller shall no longer be entitled to receive any further royalties. In accordance with the agreement, the Company neither assumed nor became responsible, in any way, for any liabilities, debts or other obligations of SDE.

 

NOTE 6 - NOTES PAYABLE

 

Revolving Loan

 

In connection with a credit agreement (“Revolving Loan”) with TCA Global Credit Master Fund, LP (“TCA”), the Company issued a series of three warrants to TCA (“TCA Warrants”), each to purchase 184,157 shares of common stock, or 1% of the issued and outstanding common stock of the Company at September 21, 2012. Each warrant had an exercise price of $0.01 per share. Each of the TCA Warrants was immediately exercisable upon issuance and had terms of six months, nine months and twelve months, respectively. Each of the TCA Warrants had a mandatory redemption clause, which obligated the Company to redeem the warrant in full by payment of $30,000 each if not exercised by the respective redemption dates through September 21, 2013. The Company recorded $90,000 in accounts payable and accrued expenses with a corresponding reduction to additional paid-in capital related to TCA Warrants in connection with its mandatory redemption clause, with $60,000 still outstanding as of December 31, 2015 and 2014.

 

 

The Revolving Loan contains various covenants, certain of which the Company was not in compliance with at December 31, 2015. The amount of principal due as of December 31, 2015 and 2014 was $50,000, and $60,000 in warrant liabilities. Accrued interest and fees related to the Revolving Loan of $27,797 and $18,797 is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets as of December 31, 2015 and 2014, respectively.

 

Notes Payable – Related Parties

 

During 2011, the Company issued an aggregate of $157,355 of notes payable to employees in lieu of compensation due. The notes matured in December 2012, are now due on demand and accrue interest at a rate of 2.25% per year. The amount of principal due at December 31, 2015 and 2014 was $100,902. In August 2014, $11,668 in principal and $655 in interest was satisfied by a third party for shares of the Company's common stock (See Note 8). Accrued interest of $18,257 and $7,458 is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets as of December 31, 2015 and 2014, respectively.

 

On January 17, 2012 and June 15, 2012, the Company issued $10,000 and $1,000, respectively, of notes payable to one employee. The notes matured on June 15, 2013 and accrue interest of 8% per year. In August 2014, the outstanding principal of $10,000 and interest of $1,961 was satisfied by a third party for shares of the Company's common stock (See Note 8). There were no amounts due at December 31, 2014.

 

Notes Payable

 

Notes payable consist of the following at:

 

		December 31, 2015				December 31, 2014
Secured note payable to an individual, 15 % interest rate, entered into in December 2011, due on demand, as amended			15,000				100,000
Secured note payable to an individual, 12% interest rate, entered into in September 2013, due on demand with default interest of 17%, 50% satisfied by a third party in 2014			25,000				25,000
Note payable to an individual, 12% interest rate, entered into in November 2013, due on demand with default interest of 17%, 50% satisfied by a third party in 2014			50,000				50,000
Note payable to an individual, flat interest of $20,000, entered into in April 2014, due on demand			450,000				450,000
Note payable to an individual, non-interest bearing, entered into in August 2014, was paid off in January 2016			35,000				35,000
Notes payable to various individuals, 12% interest rate, entered into from August 2013 to January 2014, due on demand			5,000				16,000
Secured note payable to an individual, 12% interest rate, entered into in January 2014, was paid off in January 2016			260,000				299,366
Note payable to an individual, 8% interest rate, entered into in November 2014, due on demand			20,000				20,000
Note payable to an individual, 8% interest rate, entered into in October 2014, was paid off in January 2016, net of discount of $0 and $6,667, respectively			5,000				3,333
Note payable to an individual, flat interest of $9,000, entered into in December 2014, due on demand, net of discount of $0 and $7,830, respectively			-				17,400
		$	865,000			$	1,016,099
Less current portion			(865,000	)			(1,016,099	)

 

On December 20, 2011, the Company issued a 10% senior secured promissory note (“Secured Note”) to an individual in the amount of $100,000 and was initially due in December 2012. The Secured Note is secured by all of the Company’s acquired intangible assets. On February 14, 2013, the Company entered into a waiver and amendment #1 agreement to the Secured Note, extending the maturity date from December 20, 2012 to June 20, 2013. In February 2014, the Company entered into a waiver and amendment #2 to this Secured Note extending the maturity date from June 20, 2013 to June 20, 2015. In February 2015, $25,000 of the note was transferred to a third party as a convertible note. In March 2015, additional $25,000 of the note was assigned to a third party as a convertible note. In April 2015, $35,000 of the note was transferred to a third party as a convertible note. See note 7 for discussion of loss on debt extinguishment.

 

In January 2014, the Company issued a secured promissory note to an individual in the amount of $300,000. The note bears interest at 12% annually, with interest of $60,647 as of December 31, 2015, due on demand. During year ended December 31, 2015, $20,000 of the note was assigned to a third party as convertible notes. See note 7 for discussion of loss an debt extinguishment.

 

In connection with this note, the Company issued the holder of the note a warrant to purchase 25,000 shares of the Company’s Series A Preferred Stock at a price of $1.50 per share with an expiration date of January 2017. The relative fair value of the warrant of $15,190 was treated as a discount and was amortized over the life of the note. During the year ended December 31, 2015 and 2014, the Company amortized $634 and $14,556 respectively to interest expense in the accompanying consolidated statement of operations.

 

 

In April 2014, the Company issued a promissory note to an individual in the amount of $450,000. The note bears flat interest of $20,000 and was due in July 2014. In October 2014, the Company issued 1,538 shares of common stock to extend the due date of this promissory note, along with two other notes to this individual, to January 2015 and March 2015. The estimated fair value of the 1,538 shares of common stock of $170,000 was computed based on stock price of $111 per share in accordance with the terms of the agreement and was treated as a loss on debt extinguishment in accordance with relevant accounting guidance.

 

In June 2014, the Company amended certain notes payable to allow the note holders to convert any unpaid principal and accrued interest into shares of the Company’s common stock at a conversion price of $0.50 per share, which was above the current market price of $0.01 per share. Accordingly, the Company recorded a beneficial conversion feature of $200,031 to be amortized over the life of the related notes payable. As of December 31, 2015 and 2014, an aggregate of $0 and $212,000 in principal and $0 and $19,539 in accrued interest were converted into 0 and 356 shares of the Company’s common stock. The Company charged $0 and $200,031 to interest expense during the year ended December 31, 2015 and 2014 in the accompanying consolidated statement of operations related to the amortization of the beneficial conversion feature.

 

In October 2014, the Company issued a secured promissory note to an individual in the amount of $10,000. The note bears interest at 8% annually, with interest of $745 as of December 31, 2015, due on demand. During year ended December 31, 2015, $5,000 of the note was assigned to a third party as convertible notes.

 

During the year ended December 31, 2015 and 2014, the Company recorded the relative fair value of warrants and beneficial conversion features of $0 and $48,990, respectively, as debt discount to be amortized over the life of the respective debt instrument. During the year ended December 31, 2015 and 2014, the Company amortized $15,131 and $33,859, respectively, of debt discount to interest expense related to the Company’s notes payable in the accompanying consolidated statements of operations.

 

Accrued interest related to notes payable of $153,786 and $101,537 is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets as of December 31, 2015 and 2014, respectively.

 

Convertible Notes Payable

 

Convertible notes payable consist of the following at:

 

		December 31, 2015				December 31, 2014
Secured convertible note, 8% interest rate, entered into on June 9, 2014, fully converted into common stock			—				—
Secured convertible note, 10% interest rate, entered into on August 1, 2014, due on demand, net of debt discount of $0 and 32,083, respectively			—				22,917
Secured convertible note, 10% interest rate, entered into on August 26, 2014, due on demand, 20% default interest rate, net of debt discount of $0 and $37,102, respectively			57,973				17,898
Secured convertible note, 12% interest rate, entered into on August 29, 2014, due on demand, 24% default interest rate, net of debt discount of $0 and 23,333, respectively			26,728				11,667
Convertible notes, interest rates of 8% to 12%, entered into in September 2014, due on demand			31,500				31,500
Secured convertible note, 8% interest rate, entered into on November 18, 2014, due on demand, 20% default interest rate			3,135				20,500
Secured convertible note, 8% interest rate, entered into on November 18, 2014, due on demand, 24% default interest rate, net of debt discount of $0 and $18,812, respectively			23,650				2,688
Secured convertible note, entered into on November 5, 2014, fully converted into common stock, net of debt discount of $5,812 as of December 31, 2014			—				1,738
Secured convertible note, 8% interest rate, entered into on December 15, 2014, due on demand, 24% default interest rate, net of debt discount of $0 and $38,333, respectively			37,758				11,667
Secured convertible note, 8% interest rate, entered into on December 15, 2014, due on demand, 24% default interest rate			44,000				40,000
Secured convertible note, 12% interest rate, entered into on January 7, 2015, due on demand, 22% default interest rate, net of debt discount of $0			69,908				—
Secured convertible note, 0% interest rate, entered into on February 19, 2015, due on demand, net of debt discount of $0			2,500				—
Secured convertible note, 8% interest rate, entered into on February 4, 2015, due on demand, net of debt discount of $8,134			8,507				—
Secured convertible note, 12% interest rate, entered into on February 20, 2015, due on demand, net of debt discount of $0			45,750				—
Secured convertible note, 12% interest rate, entered into on March 16, 2015, due on demand, net of debt discount of $0			45,750				—
Secured convertible note, 12% interest rate, entered into on March 16, 2015, due on demand			376				—
Secured convertible note, 10% interest rate, entered into on April 20, 2015, due on demand			43,591				—
Secured convertible note, 12% interest rate, entered into on April 20, 2015, due on demand, net of debt discount of $0			70,500				—
Secured convertible note, 12% interest rate, entered into on May 1, 2015, due on demand, net of debt discount of $2,778			23,722				—
Secured convertible note, 8% interest rate, entered into on May 16, 2015, due May 16, 2016, net of debt discount of $1,563			4,938				—
		$	540,286			$	160,575
Less current portion			(540,286	)			(160,575	)
		$				$

 

 

In January 2014, holders of certain convertible notes payable converted $220,000 in principal and $35,931 of accrued and unpaid interest into 985 shares of the Company’s common stock.

 

In April 2014, the holder of the remaining convertible notes payable converted $200,000 in principal and $41,943 of accrued and unpaid interest into 1,390 shares of the Company’s common stock. Subsequently, in August 2014, the note holder reversed his decision and chose to receive his accrued and unpaid interest in cash. As a result, the Company issued the note holder a note payable for approximately $42,000 and cancelled the 236 common shares previously issued (See Note 8).

 

During the year ended December 31, 2015, various holders of convertible notes payable converted $257,691 in principal and $7,321 of accrued and unpaid interest into 484,634,780 shares of the Company’s common stock.

 

In June 2014, the Company entered into a convertible promissory note in the principal amount of $37,500 that bore interest at 8%, was due March 2015, which allowed the lender to convert the unpaid principal and accrued interest into shares of the Company’s common stock at a variable conversion price (as defined) after 180 days. In December 2014, note holder converted $12,935 in principal into 2,098 shares of the Company’s common stock. In January 2015, note holder converted remaining balance of $24,565 in principal and $500 in accrued interest into 8,346 shares of the Company’s common stock.

 

During the year ended December 31, 2015 and 2014, the Company entered into an aggregate of approximately $327,500 and $409,594, respectively (net cash of $156,500 and $265,750, respectively) in convertible promissory notes bearing interest at rates between 8% and 12%, due on various dates, net of fees approximating $20,500. The convertible notes allow the lender to convert the unpaid principal and accrued interest into shares of the Company’s common stock at a variable conversion price (as defined). Certain of these convertible notes allow the lender to determine the timing of conversion, and as such the embedded conversion feature resulted in a derivative liability and a corresponding debt discount in the amount of $217,500 and $251,750 to be recorded (See Note 7). The Company is amortizing the debt discount over the life of the corresponding convertible promissory notes. The amortization of the debt discount for these derivative instruments was $214,284 and $71,710 for the year ended December 31, 2015 and 2014. In connection with the conversion of debt that were treated as derivative instruments, the Company reclassified $501,000 and $74,000 to additional paid-in capital during the year ended December 31, 2015 and 2014.

 

During the year ended December 31, 2015, the Company was in default on certain convertible notes. Pursuant to the default provisions contained in the respective note agreements, the Company recorded an aggregate of additional interest expense of $130,060, which was added to the outstanding principal balance.

 

Accrued interest related to convertible notes payable of $62,985 and $8,768 is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets as of December 31, 2015 and 2014, respectively.

 

As of December 31, 2015, the Revolving Loan and a number of the outstanding related party notes payable, notes payable and convertible notes payable balances are delinquent. The Company is in negotiations with the note holders to amend the terms of the notes.

 

NOTE 7 - DERIVATIVE LIABILITIES

 

The Company applies the accounting standard that provides guidance for determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity’s own stock. The standard applies to any freestanding financial instrument or embedded features that have the characteristics of a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock.

 

From time to time, the Company has issued notes and preferred stock with embedded conversion features and warrants to purchase common stock. Certain of the embedded conversion features and warrants contain price protection or anti-dilution features that result in these instruments being treated as derivatives. In addition, potentially in the future, the Company may have an insufficient number of available shares of common stock to settle outstanding contracts. Accordingly, the Company has estimated the fair value of these embedded conversion features, warrants, and derivatives related to the insufficient number of authorized shares to settle outstanding contracts using Black-Scholes with the following assumptions:

 

Expected volatility is based primarily on historical volatility. Historical volatility was computed using weekly pricing observations for recent periods. We believe this method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants and embedded conversion features.

 

We currently have no reason to believe that future volatility over the expected remaining life of these warrants and embedded conversion features is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants and embedded conversion features. The risk-free interest rate is based on U.S. Treasury securities consistent with the remaining term of the warrants and embedded conversion features.

 

During the year ended December 31, 2015 and 2014, the Company issued an aggregate of $327,500 and $409,594, respectively in principal of convertible notes payable (includes reassignments of debt) at interest rates between 8% and 12% (See Note 6). Such convertible notes contained embedded conversion features in the Company’s own stock and have resulted in an initial derivative liability value of $1,687,000 and $839,000 for the year ended December 31, 2015 and 2014, respectively, which consisted of $623,000 and $225,000, respectively of loss on debt extinguishment, $263,000 and $0, respectively related to the fair value of preferred stock, $0 and $289,000, respectively of settlement of outstanding contracts due to insufficient number of authorized shares, $217,500 and $261,750, respectively of debt discount and $583,500 and $63,250, respectively of excess interest expense.

 

 

During years ended December 31, 2015 and 2014, the Company recorded gain (loss) of $987,000 and ($227,000) related to the change in fair value of the warrants and embedded conversion features which is included in change in fair value of derivative liabilities in the accompanying consolidated statements of operations.

 

The following table presents our warrants and embedded conversion features which have no observable market data and are derived using Black-Scholes measured at fair value on a recurring basis, using Level 3 inputs, as of December 31, 2015 and 2014:

		For the Year Ended December 31, 2015				For the Year Ended December 31, 2014
Annual dividend yield			0-8	%			0	%
Expected life (years)			0.01 – 3.30				0.01 – 4.55
Risk-free interest rate			0.16% – 1.31	%			0.11% – 1.79	%
Expected volatility			365.83%-631.31	%			77.92%-361.69	%

 

The level 3 carrying value as of December 31, 2015 and 2014:

 

		December 31, 2015				December 31, 2014
Embedded Conversion Features		$	1,191,000			$	992,000
Warrants			—				—
		$	1,191,000			$	992,000
Change in fair value		$	(987,000	)		$	227,000	)

 

The following table presents the changes in fair value of our warrants and embedded conversion features measured at fair value on a recurring basis for year ended December 31, 2015 and 2014:

 

Balance as of January 1, 2014		$	-
Issuance of warrants and embedded conversion features			839,000
Extinguishment of derivatives			(74,000	)
Change in fair value			227,000
Balance as of December 31, 2014			992,000
Issuance of warrants and embedded conversion features			1,687,000
Extinguishment of derivatives			(501,000	)
Change in fair value			(987,000	)
Balance as of December 31, 2015		$	1,191,000

 

NOTE 8 - STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

On March 9, 2012 and amended on September 10, 2012, the Company designated and determined the rights and preferences of 5,000,000 shares of Series A preferred stock (“Series A”) with a par value of $0.0001. The Company is authorized to issue 5,000,000 shares of Series A. The holders of Series A are entitled to receive dividends in preference to dividends on common stock and are entitled to vote together with the holders of common stock with a voting right equivalent to 50 votes of common stock for each share of Series A held. In the event of liquidation, the holders of Series A shall be issued one share of common stock for every 50 shares of Series A.

 

On June 19, 2012, the Company issued 85,000 shares of Series A in connection with a consulting agreement entered into with a director. The value of the shares was $255,000 (based on the fair value of the Series A on the measurement date) and was recorded as prepaid consulting to be amortized over the service period of twelve months in accordance with the terms of the contract. On October 31, 2012, the Company modified the terms of the consulting agreement to extend the service period for an additional four years or a total of fifty-five months. During the years ended December 31, 2015 and 2014, the Company amortized $29,219 in general and administrative expense in the accompanying consolidated statements of operations.

 

On April 2, 2012, the Company designated and determined the rights and preferences of 2,000,000 shares of Series B preferred stock (“Series B”) with a par value of $0.0001. The Company is authorized to issue 2,000,000 shares of Series B. The holders of Series B are entitled to receive dividends in preference to any dividends on common stock and are entitled to vote together with the holders of common stock with a voting right equivalent to 300 votes of common stock for each share of Series B held. In the event that two or more shareholders who combined own more than 20% of the outstanding common stock enter into an agreement for the purpose of acquiring, holding, voting or disposing of any voting securities of the Company, then the holders of Series B, as a class, shall be issued three shares of common stock for every share of common stock outstanding. In the event of liquidation, the holders of Series B shall be issued one share of common stock for every 300 shares of Series B.

 

 

On January 27, 2015, the Company issued the former CEO 4,000,000 shares of Series A Preferred Stock of the Company as settlement for $40,000 of accrued wages, which were valued based on the market price of the equivalent number of common shares on the date of issuance of $0.0026 per share, which resulted in a gain on settlement of accrued wages of $39,792, which was recorded as contributed capital in the accompanying consolidated statement of stockholders’ deficit for the year ended December 31, 2015.

 

On February 6, 2015, the Company issued a consultant 250,000 shares of Series A Preferred Stock of the Company for service provided. The shares were valued based on the market price of the equivalent number of common shares on date of issuance of $0.0045 per share or $1,125.

 

On May 11, 2015, the Board of Directors of the Company approved the creation of Series C, D, E and F shares of Preferred Stock.

 

The Company is authorized to issue 5,300 shares of Series C Preferred Stock (“Series C”) par value of $0.0001 per share. The Series C will, with respect to dividends and liquidation, winding up or dissolution, rank: (a) senior with respect to dividends and pari passu in right of liquidation with the common stock, par value $0.0001 per share; (b) junior to the Series A and B Preferred Stock; (c) senior to any future designation of preferred stock; (d) junior to all existing and future indebtedness of the Company. Commencing on date of issuance, holders of Series C will be entitled to receive dividends on each outstanding share of Series C, which will accrue in shares of Series C at a rate equal to 8% per annum from the issuance date. The Conversion price of the Series C shall mean the lower of (i) $0.004 per share of common stock, or (ii) 70% of the lowest VWAP in the 10 trading days prior to the date of the conversion notice. The Series C PS may be converted at any time after the earlier to occur of the (i) six-month anniversary of the issuance date or (ii) an effective registration statement covering the shares of common stock to be issued pursuant to the conversion notice.

 

On May 11, 2015, the Company issued a consultant an aggregate of 300 shares of Series C of the Company for service provided. Due to the embedded conversion feature of the Series C, the Company computed the estimated fair value of the derivative instrument and recorded the initial fair value of $28,000 as a derivative liability on date of issuance (see Note 7). The value of the Series C, E, F shares is included in derivative liabilities in the accompanying balance sheet.

 

The Company is authorized to issue 4 shares of Series D Preferred Stock (“Series D”) par value of $0.00001 per share. If at least one share of Series D Preferred Stock is issued and outstanding, then the total aggregate issued shares of Series D Preferred Stock at any given time, regardless of their number, shall have voting rights equal to four times the sum of: (i) the total number of shares of Common Stock which are issued and outstanding at the time of voting, plus (ii) the total number of shares of Series A, Series, B, Series C, Series E, and Series F Preferred Stock which are issued and outstanding at the time of voting divided by (iii) the number of shares of Series D Preferred Stock issued and outstanding at the time of voting.

 

On May 11, 2015, the Company issued 4 shares of Series D as settlement for $73,167 of accrued wages to Brian Altounian, the Company’s former Chief Executive Officer and Chairman and a beneficial shareholder. No solicitation was made in connection with these transactions and no underwriting discounts were made or given. The Company believes that the issuance of the Series D was a transaction not involving a public offering and was exempt from registration with the Securities and Exchange Commission pursuant to Rule 4(2) of the Securities Act of 1933. Mr. Altounian effectively controls the Company by virtue of the voting rights associated with the Series D Preferred Stock. The valuation of the 4 shares of Series D was $73,167 and was obtained from a valuation specialist, which applied a control premium percentage to the market capitalization value of the Company on the valuation date.

 

The Company is authorized to issue 10,000,000 shares of Series E Preferred Stock (“Series E”) par value of $0.00001 per share. The holders of Series E are entitled to receive dividends in preference to dividends on common stock. Each share of Series E shall be convertible at par value $0.00001 per share (the “Series E Preferred”), at any time, and/or from time to time, into the number of shares of the Company’s common stock, par value $0.00001 per share equal to the fixed price of the Series E of $2.50 per share, divided by the par value of the Series E, subject to adjustment as may be determined by the Board of Directors from time to time (the “Conversion Rate”). Upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, before any distribution or payment shall be made to the holders of any stock ranking junior to the Series E, the holders of the Series E shall be entitled to be paid out of the assets of the Company an amount equal to $1.00 per share or, in the event of an aggregate subscription by a single subscriber for Series E in excess of $100,000, $0.997 per share (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) (the “Preference Value”), plus all declared but unpaid dividends, for each share of Series E held by them. After the payment of the full applicable Preference Value of each share of the Series E as set forth herein, the remaining assets of the Company legally available for distribution, if any, shall be distributed ratably to the holders of the Company’s Common Stock. Each share of Series E shall have ten votes for any election or other vote placed before the shareholders of the Company. Shares of Series E are anti-dilutive to reverse splits. The conversion rate of shares of Series E, however, would increase proportionately in the case of forward splits, and may not be diluted by a reverse split following a forward split. The value of the Series C, E, F shares is included in derivative liabilities in the accompanying balance sheet.

 

On May 11, 2015, the Company issued a consultant 40,000 shares of Series E of the Company for service provided. Each share of Series E preferred stock can be converted into approximately 6.4  shares of common stock. Due to the embedded conversion feature of the Series E, the Company computed the estimated fair value of the derivative instrument and recorded the initial fair value of $88,000 as a derivative liability on date of issuance (see Note 7).

 

 

The Company is authorized to issue 10,000,000 shares of Series F Preferred Stock (“Series F”) par value of $0.00001 per share. The holders of Series F are entitled to receive dividends in preference to dividends on common stock. Each share of Series F shall be convertible, at any time, and/or from time to time, into 500 shares of the Company’s common stock, par value $0.00001 per share (the “Common Stock”). Such conversion shall be deemed to be effective on the business day (the “Conversion Date”) following the receipt by the Corporation of written notice from the holder of the Series C Preferred Stock of the holder’s intention to convert the shares of Series C Stock, together with the holder’s stock certificate or certificates evidencing the Series C Preferred Stock to be converted. Upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, before any distribution or payment shall be made to the holders of any stock ranking junior to the Series F, the holders of the Series F shall be entitled to be paid out of the assets of the Company an amount equal to $1.00 per share or, in the event of an aggregate subscription by a single subscriber for Series F in excess of $100,000, $0.997 per share (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) (the “Preference Value”), plus all declared but unpaid dividends, for each share of Series F held by them. After the payment of the full applicable Preference Value of each share of the Series F as set forth herein, the remaining assets of the Company legally available for distribution, if any, shall be distributed ratably to the holders of the Company’s Common Stock. Each share of Series F shall have one vote for any election or other vote placed before the shareholders of the Company. Shares of Series F are anti-dilutive to reverse splits. The conversion rate of shares of Series F, however, would increase proportionately in the case of forward splits, and may not be diluted by a reverse split following a forward split.

 

On June 29, 2015, the Company issued 1,600 shares of Series F of the Company for cash proceeds of $4,000. Due to the embedded conversion feature of the Series F, the Company computed the estimated fair value of the derivative instrument and recorded the initial fair value of $103,000 as a derivative liability on date of issuance (see Note 7). The value of the Series C, E, F shares is included in derivative liabilities in the accompanying balance sheet.

 

In July, 2015, the Company issued two individuals an aggregate of 8,000 shares of Series F of the Company for cash proceeds of $20,000. Due to the embedded conversion feature of the Series F, the Company computed the estimated fair value of the derivative instrument and recorded the initial fair value of $44,000 as a derivative liability on date of issuance (see Note 7). The value of the Series C, E, F shares is included in derivative liabilities in the accompanying balance sheet.

 

Common Stock

 

On March 20, 2015 the Board of Directors of the Company unanimously adopted resolutions approving an increase in the number of authorized shares of our common stock, par value $0.0001 per share, to a total of 4,000,000,000 authorized shares.

 

On May 18, 2015, the Board of Directors of the Company amended its Certificate of Formation to:

	·	increase the authorized common stock from four billion to five billion;
	·	adjust the par value of the common stock to $0.00001; and
	·	set the par value of additional designations of preferred stock to $0.00001.

 

On August 20, 2015, the Board of Directors of the Company amended its Certificate of Foundation to increase the authorized common stock from 5 billion to 20 billion shares.

 

On June 19, 2012, the Company issued an aggregate of 385 shares of common stock at $3,900.00 per share in connection with a consulting agreement entered into with a director. The value of the shares was $1,500,000 (based on the fair value of the common stock on the measurement date) and was recorded as prepaid consulting to be amortized over the service period of twelve months in accordance with the terms of the contract. On October 31, 2012, the Company modified the terms of the consulting agreement to extend the service period for an additional four years or a total of fifty-five months. During the years ended December 31, 2015 and 2014, the Company amortized $128,906 and $171,875, respectively, in general and administrative expense in the accompanying consolidated statements of operations.

 

On January 31, 2013, the Company entered into an agreement with a consultant to provide certain services, including financial management and strategy, establishing strategic partnerships, sales and marketing, business development services, and ongoing strategic business consulting as requested by the Company for a period of one year. In exchange, the Company issued the consultant 246 shares of common stock. The value of the shares was $640,000, which was computed based on 246 shares at $2,600 per share price. In accordance with relevant accounting guidance, the value of the non-forfeitable shares of common stock was recorded as prepaid consulting to be amortized over the service period of twelve months. The Company amortized $0 and $53,333, respectively, in general and administrative expenses in the accompanying consolidated statements of operations for the years ended December 31, 2015 and 2014.

 

On February 15, 2013, the Company entered into an agreement with a consultant to provide strategic planning services, business development introductions, and other consulting services to the Company for a period of one year. In exchange, the Company issued the consultant 769 shares of common stock. The value of the shares was $2,000,000, which was computed based on 769 shares at a $2,600.00 per share price. In accordance with relevant accounting guidance, the value of the non-forfeitable shares of common stock was recorded as prepaid consulting to be amortized over the service period of twelve months. The Company amortized $0 and $250,000, respectively, in general and administrative expenses in the accompanying consolidated statement of operations for the years ended December 31, 2015 and 2014.

 

 

In May 2013, the Company entered into an agreement with a consultant to provide and arrange investor meetings to communicate key Company fundamentals, technical aspects and operations to potential retail investors and financial advisors, registered representatives and money managers. In exchange, the Company agreed to pay consultant a monthly fee of $8,500 and issue the consultant 38 shares of common stock. Both parties agreed that the consulting services would begin after the Company’s stock is available to retail investors. During June 2014, the Company issued the consultant the 38 shares of common stock with a value of $45,000 based on the current market price and capitalized this amount as part of prepaid consulting and other assets. The Company amortized $19,418 and $25,582 to general and administrative expenses in the accompanying consolidated statement of operations for the year ended December 31, 2015 and 2014.

 

In June 2014, the Company entered into an agreement with a consultant to provide business development and strategic business advisory services. In exchange, the Company agreed to pay consultant a monthly fee of $7,500 and issue the consultant 13 shares of common stock. During June 2014, the Company issued the consultant the 13 shares of common stock (see note 8) with a value of $14,964 based on the current market price and capitalized this amount as part of prepaid consulting and other assets. The Company amortized $6,662 and $8,302 to general and administrative expenses in the accompanying consolidated statement of operations for the year ended December 31, 2015 and 2014.

 

In October 2014, the Company entered into an agreement with a consultant to provide business development and strategic business advisory services. In exchange, the Company agreed to issue the consultant an aggregate of 6,154 shares of common stock. The shares are to be issued on October 6, 2014, January 1, 2015, April 1, 2015 and July 1, 2015 of 1,538 shares each. The initial 1,538 shares of common stock (see note 8) with a value of $180,000 based on the current market price $117.04 per share was capitalized as part of prepaid consulting and other assets. The Company amortized $84,000 and $96,000 to general and administrative expenses in the accompanying consolidated statement of operations for the year ended December 31, 2015 and 2014.

  

In January 2014, holders of certain convertible notes payable converted $220,000 in principal and $35,931 of accrued and unpaid interest into 984 shares of the Company’s common stock (See Note 6).

 

In March 2014, the Company issued 19 shares of common stock, at a price of $1,315.79 per share, for cash proceeds of $25,000 to a third party investor. Subsequently, in April 2014, the Company issued an additional 19 shares of common stock, at a price of $1,315.79 per share, for additional cash proceeds of $25,000 to the same third party investor.

 

In April 2014, the holder of certain convertible notes payable converted $200,000 in principal and $41,943 of accrued and unpaid interest into 1,390 shares of the Company’s common stock (See Note 6). Subsequently, in August 2014, the note holder reversed his decision and chose to receive his accrued and unpaid interest in cash. As a result, the Company issued the note holder a note payable for approximately $42,000 and cancelled the 236 common shares previously issued (See Note 6).

 

In June 2014, the holder of certain notes payable converted $212,000 in principal and $19,539 of accrued and unpaid interest into 356 shares of the Company’s common stock (See Note 6). Based on the fair value of the common stock on the measurement date, the Company recorded an additional $185,231 of interest expense due to the fair value of the shares being in excess of the amount of debt converted.

 

In July 2014, the Company issued 58 shares of common stock, at a price of $517.24 per share for cash proceeds of $30,000 to a third party investor.

 

In July and September 2014, the Company issued a total of 508 shares of common stock to employees as compensation for continuing to support the Company’s efforts. The Company recorded $72,500 of compensation expense based on the fair value of the shares on the measurement date in the consolidated statement of operations for the year ended December 31, 2014.

 

In August 2014, the holder of certain notes payable converted $21,668 in principal and $3,666 in accrued interest into 195 shares of the Company’s common stock (see Note 6). Based on the fair value of the common stock on the measurement date, the Company recorded an additional $63,335 of interest expense due to the fair value of the shares being in excess of the amount of debt converted.

 

In August 2014, the Company settled $343,936 in accrued expenses owed to its Chief Executive Officer by issuing him 1,000,000 shares of the Company’s common stock based on the fair value of the shares on the measurement date.

 

During October 2014, the Company issued an aggregate of 673 shares of its common stock, at a price of $52.01 per share for cash proceeds of $35,000 to two different third party investors.

 

During October 2014, the Company issued 1,538 shares of its common stock to an individual to extend the due dates of an aggregate of $600,000 in notes payable to January 2015 and March 2015 (see Note 6).

 

During October 2014, the Company issued and aggregate of 462 shares of its common stock to a third party investor in connection with the default provision associated with the note agreement. The Company recorded the aggregate amount of $238,000 as interest expense in the accompanying consolidated statement of operations (see Note 6).

 

 

During October, November and December 2014, the holders of certain notes payable converted $53,494 in principal and accrued and unpaid interest into 4,760 shares of the Company’s common stock (See Note 6).

 

During the year ended December 31, 2014, the Company issued an aggregate of 1,941 shares of its common stock to various individuals for consulting and other services rendered and for the conversion of various amounts due approximating to $677,000.

 

During year ended December 31, 2015, various holders of convertible note payable converted $257,691 in principal and $7,320 of accrued and unpaid interest into 484,634,780 shares of the Company’s common stock (see Note 6).

 

During the year ended December 31, 2015, the Company issued an aggregate of 3,545 shares of its common stock to various individuals for consulting and other services rendered in the aggregate amount of $31,500.

 

Reverse Stock Splits

 

In January 2014, the Company effected a one-for-ten reverse stock split of the Company’s outstanding shares of common stock (effective January 21, 2014) and of the Company’s outstanding shares of Series A Preferred Stock (effective January 22, 2014). The accompanying consolidated financial statements have been updated to reflect the effect of these reverse stock splits.

 

On June 3, 2015, the board of directors of the Company approved a 1,300 to 1 reverse stock split of shares of common stock. The reverse stock split was approved by the Financial Industry Regulatory Authority on July 7, 2015. All fractional shares were rounded up, shares of common stock and per share data issued prior to July 2015, have been retroactively restated to reflect the impact of the reverse stock split for all periods presented.

 

Warrants

 

The following represents a summary of all common stock warrant activity:

  

		Outstanding Common Stock Warrants
		Number of  Shares				Weighted Average  Exercise Price				Aggregate  Intrinsic  Value (1)
Outstanding at December 31, 2013			938			$	208			$	2,250,002
Grants			—				—
Exercised			(118	)			195
Cancelled/Expired			—				—
Outstanding at December 31, 2014			821			$	208			$	163,297
Grants			—				—
Exercised			—				—
Cancelled/Expired			—				—
Outstanding and exercisable at December 31, 2015 (2)			821			$	208			$	-

 

	(1)	Represents the difference between the exercise price and the estimated fair value of the Company’s common stock at the end of the reporting period.
	(2)	The common stock warrants outstanding and exercisable as of December 31, 2015 and 2014 have a weighted-average contractual remaining life of 2.9 years and 3.9 years, respectively.

 

In January 2014, the Company issued a Secured Promissory Note to an individual in the amount of $300,000 (See Note 6). In connection with this note, the Company issued a warrant to purchase 25,000 shares of the Company’s Series A Preferred Stock at a price of $1.50 per share with an expiration date of January 2017. As of December 31, 2015 and 2014, all of these preferred stock warrants are outstanding.

 

In February 2014, the Company entered into a waiver and amendment #2 to a secured note (See Note 6), at which time the note holder used $22,922 in accrued and unpaid interest on the secured note to exercise warrants to purchase 118 shares of the Company’s common stock.

 

NOTE 9 - RELATED PARTY TRANSACTIONS

 

The Company was party to a management fee agreement with Alliance Acquisition Corp. (“Alliance”). At December 31, 2015, Brian Altounian (“Altounian”), former CEO, owned approximately 34% of Alliance. Alliance provided the Company with general business support services, including, but not limited to, the following: providing executive and administrative level support, general office support, investor relations assistance, human resource assistance, financial and accounting assistance, legal support, office equipment and office space. From time to time Alliance would advance the Company capital and pay expenses on behalf of the Company. Additionally, from time to time, the Company would advance Alliance capital and pay expenses on behalf of Alliance. The monthly fee was $5,000 for the period from November 2011 through June 2013. Based on the decline in business and required support by the Company, the management fee was terminated effective July 1, 2013.

 

 

The following table summarizes the activity between the Company and Alliance:

 

Management fee payable – December 31, 2013		$	30,330
Management fee			—
Advances to/payments on behalf of the Company			—
Payments to/on behalf of Alliance			(29,653	)
Management fee payable - December 31, 2014		$	677
Management fee			—
Advances to/payments on behalf of the Company			—
Payments to/on behalf of Alliance			—
Management fee payable - December 31, 2015		$	677

 

Alliance and Altounian have ownership interests in Akyumen Technologies, Corp. (“Akyumen”). At December 31, 2015 and December 31, 2014, Alliance and Altounian owned less than 1% of Akyumen individually and collectively. During the year ended December 31, 2015, Akyumen provided certain software development and technology related services to the Company for $250,000. Such costs were expensed to general and administrative expense in the accompanying consolidated statement of operations. In addition, Akyumen engaged the Company for an advertising campaign on the Company’s websites. The advertising campaign was for $150,000 for the period April 1, 2014 through June 30, 2015. The Company recorded $25,000 and $150,000 in advertising revenue for the years ended December 31, 2015 and 2014, respectively in the accompanying consolidated statements of operations.

 

During the year ended December 31, 2015, the Company received $100,000 from Akyumen as an advance on a potential future investment into the Company. Such amounts are due on demand and are non-interest bearing, if the potential investment is not consummated. During the period from January 1, 2016 through April 13, 2016, Akyumen advanced on additional $514,000.

 

On January 27, 2015, the Company issued the former CEO 4,000,000 shares of Series A Preferred Stock of the Company as settlement for $40,000 of accrued wages, which were valued based on the market price of the equivalent number of common shares on the date of issuance of $0.0026 per share, which resulted in a gain on settlement of accrued wages of $39,792, which was recorded as contributed capital in the accompanying consolidated statement of stockholders’ deficit for the year ended December 31, 2015.

 

On May 11, 2015, the Company issued 4 shares of Series D as settlement for $73,167 of accrued wages to Former CEO (see Note 8).

 

In June 2014, the Company entered into an agreement with a Mr. Robert Estareja to provide business development and strategic business advisory services. In exchange, the Company agreed to pay Mr. Robert Estareja a monthly fee of $7,500 and issue the consultant 13 shares of common stock. During June 2014, the Company issued the Mr. Robert Estareja the 13 shares of common stock (see note 8) with a value of $14,964 based on the current market price and capitalized this amount as part of prepaid consulting and other assets. The Company amortized $6,662 and $8,302 to general and administrative expenses in the accompanying consolidated statements of operations for the years ended December 31, 2015 and 2014, respectively.

  

NOTE 10 - COMMITMENTS AND CONTINGENCIES

 

Royalties

 

In connection with certain of the Company’s acquisitions, the Company has entered into various royalty agreements (see Note 5). Royalty payments related to acquisitions range from 10% to 100% of related revenue, as summarized below:

 

	·	Wowio, LLC - 20% of related revenue until all purchase price consideration has been satisfied, then 10% of related revenue through perpetuity.
	·	Duck - 10% of related revenue until all purchase price consideration has been satisfied, with no subsequent royalty amounts due.

 

·

SDE - 100% of related revenue until all purchase price consideration has been satisfied, with no subsequent royalty amounts due.

 

Additionally, the Company enters into royalty agreements with the authors of the eBooks included on its websites, which call for royalty payments based on various percentages of revenues earned, less processing fees and in the case of Sponsored Downloads, a fixed price per download.

 

Employment Agreements

 

On September 15, 2015, the Company entered into an employment agreement with Mr. Robert Estareja as Chief Executive Officer, which expires in September 2017, with an automatic renewal period of two years unless otherwise terminated. The employment agreement requires annual base salary payments of $300,000 per year. In addition, the executive is entitled to bonuses in amounts based on various factors, including but not limited to the Company’s financial performance, amount of financing received and producer fee credits. Pursuant to the agreement, if the executive is terminated without cause, he is entitled to receive an amount equal to six months of his annual base salary.

 

On September 15, 2015, the Company entered into an employment agreement with Mr. Brian Altounian as Executive, which expires in September 2017, with an automatic renewal period of two years unless otherwise terminated. Mr. Altounian will serve as the chairman of the Board of Directors of the Company and provide advisory services to the CEO. The employment agreement requires annual base salary payments of $180,000 per year. In addition, the executive is entitled to bonuses solely at the discretion of the Board of Directors. Pursuant to the agreement, if the executive is terminated without cause, he is entitled to receive an amount equal to six months of his annual base salary.

 

 

Indemnities and Guarantees

 

During the normal course of business, the Company has made certain indemnities and guarantees under which the Company may be required to make payments in relation to certain transactions. These indemnities include certain agreements with its officers under which the Company may be required to indemnify such person for liabilities arising out of their employment relationship. In connection with the Company’s acquisitions, the parties have agreed to indemnify each other from claims relating to the acquisition agreements. In connection with the Company’s publisher agreements, the parties have agreed to indemnify each other from certain claims relating to the agreements. The duration of these indemnities and guarantees varies, and in certain cases, is indefinite. The majority of these indemnities and guarantees do not provide for any limitation of the maximum potential future payments we may be obligated to make. Historically, the Company has not been obligated to make significant payments for these obligations and no liability has been recorded for these indemnities and guarantees in the accompanying consolidated balance sheets.

 

Legal

 

In October 2013, a former employee filed a complaint against the Company and its CEO, seeking past due wages of $57,096, damages and attorney’s fees. The Company has accrued the amount of past due wages in its consolidated financial statements. A judgment was entered into on March 18, 2016 for an amount of $162,475, which includes interest of $14,005. The Company accrued the remaining amount of $91,374 and related interest of $8,529 in accounts payable and accrued expenses as of December 31, 2015.

 

On March 18, 2016, CBK Consultants, Inc. (“CBK”) filed a Notice of Motion for Summary Judgment in Lieu of Compliant against us (CBK Consultants, Inc. a/k/a CBK, Inc. v. Wowio, Inc., Supreme Court of the State of New York, County of Nassau), seeking the repayment of $450,000 of principal from a promissory note we given CBK along with $20,000 of interest along with costs and attorney fees. The Company has accrued such costs and they are included in notes payable and accrued expenses.

 

In the normal course of business, the Company may become involved in various legal proceedings. The Company knows of no pending or threatened legal proceeding to which the Company is or will be a party that, if successful, might result in material adverse change in the Company’s business, properties or financial condition.

 

NOTE 11 - INCOME TAXES

 

The Company is subject to taxation in the United States and California. The Company does not have any income tax provision for the years ended December 31, 2015 and 2014 due to current and historical losses.

 

The provision for income taxes using the statutory federal income tax rate of 34% as compared to the Company’s effective tax rate is summarized as follows:

 

		December 31,
		2015				2014
Federal tax benefit at statutory rate		$	(560,000	)		$	(1,301,000	)
State tax benefit, net			-				-
Common stock issued for services			11,000				25,000
Loss on extinguishment of debt			212,000				134,000
Other differences			1,000				4,000
Change in valuation allowance			336,000				1,138,000
Provision for income taxes		$	-			$	-

 

At December 31, 2015 and 2014, the Company had a net deferred tax asset of approximately $9,306,816 and $8,973,000, respectively. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these assets, a full valuation allowance has been established to offset the net deferred tax asset. Additionally, the future utilization of the Company’s net operating loss to offset future taxable income may be subject to an annual limitation, pursuant to Internal Revenue Code Section 382, as a result of ownership changes that may have occurred previously or that could occur in the future. The Company has not performed a Section 382 analysis to determine the limitation of the net operating loss and research and development credit carry forwards.

 

Significant components of the Company’s deferred tax assets are as follows:

 

		December 31,
		2015				2014
Deferred tax assets:
Federal and state net operating loss carryforwards		$	8,224,000			$	7,584,000
Stock-based compensation			-				-
California franchise tax			(82,000	)			(105,000	)
Differences in tax basis			856,000				1,285,000
Accrued expenses and other			309,000				209,000
Total deferred tax assets			9,307,0000				8,973,000
Less valuation allowance			(9,307,000	)			(8,973,000	)
Net deferred income tax asset		$	-			$	-

 

 

Realization of the deferred tax assets is dependent upon the generation of future taxable income, the amount and timing of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by approximately $336,000 and $1,434,000 in 2015 and 2014, respectively.

 

As of December 31, 2015, the Company has net operating loss carry forwards to offset future federal taxable income of approximately $18,819,000 and state taxable income of approximately $20,644,000, which begin to expire in 2029.

   

NOTE 12 – WITHHELD PAYROLL TAXES

 

Since its inception, the Company made several payments to employees for wages that were net of state and federal income taxes. Due to cash constraints, the Company has not yet remitted all of these withheld amounts to the appropriate government agency. Accordingly, the Company has recorded $358,477 and $345,214, related to this obligation in accrued compensation and related costs in the accompanying consolidated balance sheets as of December 31, 2015 and 2014, respectively, including estimated penalties and interest.

 

NOTE 13 - SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events after the consolidated balance sheet date and based upon its evaluation, management has determined that no subsequent events have occurred that would require recognition in the accompanying consolidated financial statements or disclosure in the notes thereto other than as disclosed in the accompanying notes.

 

On July 24, 2015, the Company issued to certain officers and directors of the Company, an aggregate of 1,000,000,000 restricted shares of common stock. The shares were issued for settlement of accrued wages of an aggregate of $20,000 in outstanding obligations held on the books and records of the Company. The Company has the right, but not the obligation, to repurchase 100% of the shares prior to July 31, 2016, and 50% of the shares from August 31, 2016 until July 31, 2017 at the conversion price of $0.00002 per share. On January 15, 2016, the Company determined that such transaction was documented based on post-split shares and a pre-split common stock valuation, which was not the intent of the Company. Accordingly, such transaction has been rescinded and reissued. The shares have been excluded from the number of shares outstanding for all period presented. No solicitation was made and no underwriting discounts were given or paid in connection with this transaction. The Company believes that the issuance of shares pursuant to the agreement are exempt from registration with the Securities and Exchange Commission pursuant to Section 4(2) of the Securities Act of 1933.

 

In January 2016, the Company paid off various notes payable in the total principal amount of $300,000, and a convertible note in principal amount of $2,500.

 

In January, March and April 2016, various convertible note holders converted total of $8,506 in principal into 201,610,167 shares of common stock.

 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

On June 17, 2014, we engaged Hartley Moore Accountancy Corporation (“HM”) as our independent registered accounting firm. During our two most recent fiscal years and the subsequent interim period through the engagement of HM, we did not consult with HM on (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that may be rendered on our financial statements, and HM did not provide either a written report or oral advice to us that was an important factor considered by us in reaching a decision as to any accounting, auditing, or financial reporting issue; or (ii) the subject of any disagreement, as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions, or a reportable event within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.

 

In connection with the reorganization of Hartley Moore Accountancy Corporation (the "Former Auditor") its audit partners joined Hall and Company, Inc. ("Hall"). The Former Auditor resigned as independent registered public accounting firm of the Company, effective February 15, 2016. The Former Auditor has been the Company's auditor since June 17, 2014. As a result of the above, the Board of Directors of the Company, on February 15, 2016, approved the resignation of the Former Auditor effective February 15, 2016, and the engagement of Hall as the Company's independent registered public accounting firm for the fiscal year ended December 31, 2015 effective February 15, 2016. The change in accountants did not result from any dissatisfaction with the quality of professional services rendered by the Former Auditor. The Company has not consulted with Hall for the fiscal year ended December 15, 2015, and the interim period ending February 15, 2016 regarding the application of accounting principles to any contemplated or completed transactions nor the type of audit opinion that might be rendered on the Company's financial statements, and neither written or oral advice was provided that would be an important factor considered by the Company in reaching a decision as to accounting, auditing or financial reporting issues. There were no matters that were either the subject of a disagreement (as defined in paragraph 304(a)(1)(iv) of Regulation S-K) or a reportable event (as described in paragraph 304(a)(1)(v) of Regulation S-K).

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

 

As of the end of the period covered by this Annual Report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer (principal executive and financial officer), of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our Chief Executive Officer concluded that the Company’s disclosure controls and procedures are not effective to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and which also are not effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer, to allow timely decisions regarding required disclosure.

 

Management’s Report on Internal Control over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting of the Company. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

 

Management, with the participation of our Chief Executive Officer, have evaluated the effectiveness of our internal control over financial reporting as of December 31, 2015 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that, as of December 31, 2015, our internal control over financial reporting is not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

 

We have identified the following factors that have led management to determine that material weaknesses exist in our internal control over financial reporting as of December 31, 2015:

 

	1.	We had not effectively implemented comprehensive entity-level internal controls.
	2.	We did not have a sufficient complement of personnel with appropriate training and experience in accounting principles generally accepted in the United States of America, or GAAP.

 

 

	3.	We did not adequately segregate the duties of different personnel within our accounting group due to an insufficient complement of staff.
	4.	We did not implement financial controls that were properly designed to meet the control objectives or address all risks of the processes or the applicable assertions of the significant accounts.

 

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to permanent rules of the SEC that permit the Company to provide only management’s report in this annual report.

 

Changes in internal controls

 

Except as noted above, there have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 under the Exchange Act that occurred during the quarter ended December 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None

 

 

PART III

 

ITEM 10. DIRECTORS, OFFICERS AND CORPORATE GOVERNANCE.

 

The following table sets forth the names, ages and positions of our directors and executive officers. Each director serves until he or she is removed or resigns, or a successor is elected. Officers serve at the discretion of the Board and subject to any employment agreements as set forth below.

 

Name		Age		Position
Brian Altounian		52		Treasurer and Chairman of Board of Directors
Robert H. Estareja		51		Chief Executive Officer, President
Zachary Pennington		40		Director

 

Biographical information for our directors and executive officers is as follows:

 

Brian Altounian. Brian Altounian has served as our President , Chief Executive Officer, and Chairman of the board of directors since June 11, 2010 and as President since July 1, 2009. On September 16, 2015, Mr. Altounian resigned from his position as our Chief Executive Officer. Since July 2009, Mr. Altounian has also served as a director and Chief Executive Officer of Alliance Acquisitions, Inc. (“Alliance”). Mr. Altounian devotes approximately 5% of his business time to Alliance, and 95% of this business time to the Company. Alliance provides management consulting advisory services to a small number (5) of startup companies. Mr. Altounian, through Alliance, provides those advisory services on an as-needed basis. Mr. Altounian’s background includes business development, finance, operations and administration. He has applied these skills to a variety of start-up companies, Fortune 100 companies, and public and private organizations. From January 2006 through June 30, 2009, he was Chief Operating Officer and President of Platinum Studios, Inc. (OTCBB: PDOS), a publicly traded entertainment company that controls an international library of comic book characters, which it adapts, produces and licenses for all forms of media. Mr. Altounian sat on the board of directors of Platinum Studios from November 2007 through May 15, 2011.

 

Mr. Altounian’s expertise is in the area of developing corporate infrastructure, and preparing early-stage companies to access capital through the public and private equity markets. He has held management positions including Director, Vice President, President, and Chief Executive Officer, and has served on the Boards of Cereplast, Inc. (OTCBB: CERP) from September 2005 through January 22, 2008, Machine Talker (OTCBB: MACH) from June 2004 through July 10, 2006 and was Chairman of the Board of XsunX, Inc. (OTCBB: XSNX) from September 30, 2003 through June 30, 2006. He has played an active role in a number of early-stage technology companies that have progressed to the public markets, including OriginOil, Inc. (OTCBB: OOIL), BioSolar, Inc. (OTCBB: BSRC), Warp9, Inc. (OTCBB: WNYN), and Carbon Sciences, Inc. (OTCBB: CABN). In addition to his experience with startup technology and intellectual property companies, Mr. Altounian has worked in the entertainment industry with management and executive-level positions in the areas of finance, administration, operations and business development. Mr. Altounian has served as Executive Producer of a number of films, including the documentary feature film, LOST IN WOONSOCKET and the independent feature film, AUDREY. He was also the company representative for comic-book-based entertainment company Platinum Studios on the feature film COWBOYS AND ALIENS. In addition to his work with film, he has worked on numerous television series including The National Geographic Television Specials for NBC, a number of children’s series for Nickelodeon and Disney Channel and countless other national documentary series for PBS Affiliate, WQED in Pittsburgh. He is an advisor to a new film studio, Nova FilmHouse and he is a Consulting Producer on a web-based series entitled ANNIE TAKES OFF. Mr. Altounian also serves as a Producer on a number of WOWIO-owned properties currently in development. Mr. Altounian holds an MBA from Pepperdine University and an undergraduate degree from UCLA. The Company believes Mr. Altounian’s participation in management and on the board of directors is valuable because of his knowledge of the content licensing business, the entertainment industry and the technology industry and his experience as a public company executive and director.

 

Zachary Pennington. Zachary Pennington has been a member of our board of directors since February 1, 2012. From November 2011 through March 2012, Mr. Pennington operated as our Chief Creative Officer. He is a multiple award-winning designer and art director who has spent the last two decades designing projects for both the entertainment and internet industries and has worked on projects for almost every major studio in Hollywood. Immediately prior to his formal positions at WOWIO, he oversaw the Company’s creative direction as one of the co-founders of Alliance Acquisitions from July 2009 through November 2011. Prior to Alliance Acquisitions, from July 2006 through July 2009, he was Vice President and Creative Director for Platinum Studios, Inc. (OTCBB: PDOS), where he was responsible for all creative elements including: product design, branding, A/V materials, investor presentations, and newsletter/corporate communications. Prior to that, Mr. Pennington was Senior Art Director at The Cimarron Group, an advertising agency serving the entertainment industry. Mr. Pennington’s packaging designs have earned him acclaim and numerous awards. His work includes home entertainment campaigns for Rocky 1-5, The Omen 1-5, X-Men 1, 2 and 3, Minority Report, Casino, Dune, The Bourne Supremacy, Million Dollar Baby, Platoon, The Terminator, The Devil Wears Prada, Star Wars, and multi-award-winning campaigns for The Texas Chainsaw Massacre and Titanic. The Company believes that Mr. Pennington’s knowledge of operations within a creative environment and with entertainment content and design make him an expert in guiding creative direction at the Company as a member of the Company’s board of directors.

 

 

Robert H. Estareja. Robert H. Estareja has served as our President since February 1, 2015. On September 16, 2015, Robert Estareja replaced Brian Altounian as our Chief Executive Officer. Mr. Estareja has been the principal of Navitus Holdings Inc., a boutique mergers & acquisitions, corporate finance advisory firm from April 2010 to present. He is highly skilled at developing acquisition programs to increase revenue and build assets. His success comes from being professional and intuitive with the goal of “adding value” to his clients. Being an effective negotiator and closer has accomplished several financial goals for his clientele. Robert has been in the investment banking world for over 28 years with an emphasis on Mergers & Acquisitions and corporate finance, where he has participated in numerous deals ranging from small structured finance transactions to micro-cap mergers and acquisitions. Robert has been a trusted advisor to CEOs and CFOs of large and small cap companies as well as start-up and emerging businesses around the globe while forging a prominent reputation based on honesty, integrity and mutual respect. He brings a solid base of established personal contacts with major banks, insurance companies, pension funds, venture capitalists and wealthy private investors. Mr. Estareja was an advisor to a diversified, international investment management group with over $13 billion assets under management, where he spearheaded the group’s technology investments, strategic relationships and corporate development activities, a REIT that has over $3 billion in assets and a diversified insurance enterprise with over $1.3 billion in assets where he was engaged to increase revenues and build assets through mergers & acquisitions.

 

Family Relationships

 

There are no family relationships among our directors and executive officers.

 

Involvement in Certain Legal Proceedings

 

Except as set forth below, to the best of our knowledge, during the past ten years, none of the following occurred with respect to a present or former director, executive officer, or employee: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities; and (4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated:

 

On January 6, 2015, Mr. Altounian received a notice from California Department of Corporation to desist and refrain from offering and selling securities of Alliance Acquisitions, Inc. in the state of California, which includes an untrue statement of material fact or omits to state a material fact necessary in order to make the statement not misleading.

 

Board Leadership Structure and Role in Risk Oversight

 

Our Board of Directors is primarily responsible for overseeing our risk management processes on behalf of the Company. The Board of Directors receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding the Company’s assessment of risks. The Board of Directors focuses on the most significant risks facing our Company and our Company’s general risk management strategy, and also ensures that risks undertaken by the Company are consistent with the board’s appetite for risk. While the board oversees the Company’s risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that our board leadership structure supports this approach.

 

Board Committees

 

We currently do not maintain any committees of the Board of Directors. Given our size and the development of our business to date, we believe that the board through its meetings can perform all of the duties and responsibilities which might be contemplated by a committee.

 

Code of Ethics

 

We have not adopted a Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions because of the small number of persons involved in the management of the Company.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires our executive officers and directors and person who own more than 10% of our common stock to file reports regarding ownership of and any transactions in our securities with the Securities and Exchange Commission and to provide us with copies of those filings. To our knowledge, based solely upon our review of the copies of such reports furnished to us, during the fiscal year ended December 31, 2015, all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners were complied with.

 

ITEM 11. EXECUTIVE COMPENSATION

 

EXECUTIVE COMPENSATION

 

The following table sets forth information concerning the total compensation paid during the years ended December 31, 2015 and 2014, for (i) our Chief Executive Officer, Robert H. Estareja, and (ii) our two most highly compensated executive officers who were serving as executive officers at the end of the fiscal year ended December 31, 2015 (collectively, our “Named Executive Officers”).

 

 

SUMMARY COMPENSATION TABLE

Name & Position		Fiscal Year		Salary ($)				Bonus ($)				Stock Awards($)				All Other Compensation ($)				Total ($)
Robert H. Estareja (1)		2015			20,000				-				1,125				-				21,125
Chief Executive Officer		2014			-				-				-				-				-
Brian Altounian (2)		2015			120,311				-				113,167	(7)			-				233,478
Former Chief Executive Officer		2014			193,474				-				343,936	(5)			9,600	(4)			547,010
Jacob Morris (3)		2015			-				-				-				-				-
Former Chief Operating Officer		2014			147,792				-				65,000	(6)			-				212,792

 

(1) On September 16, 2015, Robert Estareja replaced Brian Altounian as our Chief Executive Officer. His base salary is $300,000 per year.

 

(2) Mr. Altounian was appointed as our Chief Executive Officer on June 11, 2010. His base salary is $300,000 per year (as amended). These amounts represent the portion of his base salary that was paid during the 2014 and 2013 fiscal years. The remaining amounts payable under Mr. Altounian’s employment agreement were accrued. The Company currently has no plans or arrangements with respect to when and how such accrued compensation will be paid. On September 16, 2015, Mr. Altounian resigned from his position as our Chief Executive Officer.

 

  (3) Mr. Morris was appointed as our Chief Operating Officer on February 1, 2012. His base salary is $120,000 per year. This represents the portion of his base salary that was paid during the 2014 and 2013 fiscal years. The remaining amounts payable under Mr. Morris’s employment agreement were accrued. The Company currently has no plans or arrangements with respect to when and how such accrued compensation will be paid. On January 5, 2015, our Board of Directors accepted the resignation of Jacob Morris from his position as our Chief Operating Officer.

  

(4) Represents amounts paid by the Company on behalf of Mr. Altounian for car allowance and health insurance premiums.

 

(5) Represents 769 shares of common stock to Mr. Altounian for accrued compensation in the amount of $343,936.

 

(6) Represents 500 shares of common stock valued at $130 per share. See note 8 to the accompanying consolidated financial statements.

 

(7) Represents 4,000,000 shares of Series A Preferred Stock for accrued compensation in the amount of $40,000 and 4 shares of Series D Preferred Stock for accrued compensation in the amount of $73,167.

 

NARRATIVE DISCLOSURE TO SUMMARY COMPENSATION TABLE

 

Employment Agreement with Robert Estareja .

 

On September 15, 2015, we entered into an employment agreement with Mr. Estareja as our Chief Executive Officer. Unless otherwise terminated, the employment agreement will renew for an additional two-year period following the expiration of the initial two year period. Pursuant to the employment arrangement, Mr. Estareja is entitled to an annual salary of $300,000. Mr. Estareja is eligible to earn a performance bonus in the amount of 25% of his base salary. The bonus is only paid if the aggregate amount of the annual bonuses to be paid to all executives does not exceed 25% of the Company’s net profits for such calendar year. He is also entitled to a portion of any producer or executive fee, if any, that is earned through the production or sale of works developed by the Company (a “Producer Fee Pool Bonus”) so long as he remains employed through December 31st of the year in which the bonus is earned. For the years ended December 31, 2015 and 2014, we paid $0 on behalf of Mr. Estareja for health insurance premiums. In 2015 we provided Mr. Estareja with an automobile allowance of up to $800 per month. If Mr. Estareja’s employment is terminated without cause, we are required to pay him a severance payment equal to six months of his base salary. The agreement includes standard confidentiality and non-disclosure provisions, provisions relating to the assignment to us of patents and inventions and non-solicitation provisions.

 

Employment Agreement with Brian Altounian.

 

Mr. Altounian has been employed with us since July 2009. On September 15, 2015, Mr. Altounian resigned as the Company’s Chief Executive Officer but remained on the Board of Directors as its Chairman. The Company entered into a revised employment agreement with Mr. Altounian as its Chairman with an annual salary of $180,000. Mr. Altounian’s revised employment agreement eliminated performance bonuses, employment benefits and auto allowances.

 

On March 15, 2012, we entered into an employment agreement with Mr. Altounian as our Chief Executive Officer. Pursuant to the CEO employment arrangement, Mr. Altounian was entitled to an annual salary of $200,000 that shall be increased to $225,000 if the Company obtained financing of more than $2,500,000. Mr. Altounian was eligible to earn a performance bonus in the amount of 25% of his base salary. The bonus was only paid if the aggregate amount of the annual bonuses to be paid to all executives does not exceed 25% of the Company’s net profits for such calendar year. He was also entitled to a portion of any producer or executive fee, if any, that was earned through the production or sale of works developed by the Company (a “Producer Fee Pool Bonus”) so long as he remains employed through December 31st of the year in which the bonus was earned. For the years ended December 31, 2015 and 2014, we paid $0 on behalf of Mr. Altounian for health insurance premiums. In 2015 and in 2014, we provided Mr. Altounian with an automobile allowance of up to $800 per month until September 15, after which, this allowance was terminated.

 

 

 

On August 22, 2014, the Company entered into an amendment to its employment agreement, dated March 15, 2012, with Mr. Altounian. Pursuant to the amendment, Mr. Altounian’s base salary was increased from $200,000 to $300,000.

 

On August 25, 2014, the Company issued 769 shares of common stock to Mr. Altounian for accrued compensation in the amount of $343,936.

 

On January 27, 2015, the Company issued 4,000,000 shares of Series A Preferred Stock for accrued compensation in the amount of $40,000.

 

On May 11, 2015, the Company issued 4 shares of Series D Preferred Stock for accrued compensation in the amount of $73,167.

 

Employment Agreement with Jacob Morris.

 

Prior to his resignation Mr. Morris had been employed with us since September 1, 2011. On March 29, 2012, we entered into a one year employment agreement with Mr. Morris as our Chief Operating Officer. Mr. Morris’s employment agreement provided an annual salary of $120,000 that was to be increased to $137,500 if the Company obtained financing of more than $2,500,000. Mr. Morris was eligible to earn a performance bonus in the amount of 10% of his base salary. The bonus was to only paid if the aggregate amount of the annual bonuses to be paid to all executive does not exceed 25% of the Company’s net profits for such calendar year. Mr. Morris was also entitled to a Producer Fee Pool Bonus so long as he remains employed through December 31 of the year in which the bonus is earned. If Mr. Morris’ employment was terminated without cause, we were required to pay him a severance payment equal to his monthly base salary for a period beginning on his termination date and ending on the earlier of April 1, 2013 or the sixth-month anniversary of his termination date. In 2012, we paid $1,205 on behalf of Mr. Morris for health insurance premiums.

 

In July and September 2014, the Company issued Mr. Morris a total of 508 shares of common stock as compensation in amount of $72,500 for continuing to support the Company’s efforts.

 

On January 5, 2015, our Board of Directors accepted the resignation of Jacob Morris from his position as our Chief Operating Officer.

 

DIRECTOR COMPENSATION

 

We do not pay our directors cash fees for serving on our board of directors (the “Board”).

 

The following table sets forth director compensation for the year ended December 31, 2015 (excluding compensation to our executive officers set forth in the summary compensation table above).

 

Name (a)

Fees Earned or Paid in Cash ($) (b)

Stock Awards ($) (c)

Option Awards ($) (d)

Non-Equity Incentive Plan Compensation ($) (e)

Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) (f)

All Other Compensation ($) (g)

Total ($) (h)

Brian Altounian

-

-

-

-

-

-

-

Zachary Pennington

-

-

-

-

-

-

-

 

On October 31, 2012, we entered into an Amended and Restated Board of Directors Services Agreement with Zachary Pennington (the “Services Agreement”). Pursuant to the terms of the Services Agreement, the Company issued 85,000 shares of Series A Preferred Stock and 385 shares of common stock to Mr. Pennington for his services as a director. Mr. Pennington shall remain on the Board of Directors for at least the greater of any period of time: (a) specified in any other agreement or contract defining Mr. Pennington’s role as a member of the Board of Directors; (b) a period of 4 years from the date of the Services Agreement; or (c) so long as Mr. Pennington owns, directly or indirectly, at least 10% of the issued or outstanding equity stock in the Company. If Mr. Pennington resigns or is terminated as a director, all of his shares of Series A Preferred Stock shall be converted into shares of the Company’s common stock. On June 21, 2012, we issued 385 shares of common stock valued at $3,900 per share and 85,000 shares of Series A Preferred Stock valued at $3.00 per share to Zach Pennington as compensation for past performance and for Board services from June 30, 2012 to June 30, 2013 and in October 2012, this Board Agreement was extended to cover services through October 31, 2016.

 

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

  

The following table presents information regarding the beneficial ownership of all shares of our common stock and preferred stock as of April 14, 2016 by:

 

	●	Each person who beneficially owns more than five percent of the outstanding shares of our common stock;
	●	Each person who beneficially owns outstanding shares of our preferred stock;
	●	Each director;
	●	Each named executive officer; and
	●	All directors and officers as a group.

 

Name of Beneficial Owner(1)(2)		Number of Shares of Preferred Stock Beneficially Owned(3)				Number of Shares of Common Stock Beneficially Owned				Total Number of Shares Beneficially Owned (2)				Percentage Owned of Preferred Stock				Percentage Owned of Common Stock				Total Percentage Owned (%) (2)
Brian Altounian (4)			4,330,004				750,006,228				750,009,559				91.2	%			44.5	%			44.5	%
Zach Pennington (5)			85,000				778				843				1.8	%			0.0	%			0.0	%
Robert H. Estareja (6)			250,000				250,001,671				250,001,863				5.3	%			14.8	%			14.8	%
All directors and named executive officers as a group 3 individuals)			4,665,004				1,000,008,677				1,000,012,265				98.2	%			59.3	%			59.3	%

 

*Less than 1%

 

(1) Except as otherwise indicated, the address of the beneficial owner is c/o WOWIO, Inc., 9107 Wilshire Blvd., Suite 450, Beverly Hills, California, 90210.

 

(2) Except as specifically indicated in the footnotes to this table, the persons named in this table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options, warrants or rights held by that person that are currently exercisable or convertible or exercisable, convertible or issuable within 60 days of April 14, 2016, are deemed outstanding. Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person. Applicable percentage ownership in the following table is based on 1,686,280,777 shares of common stock outstanding as of April 14, 2016 plus, for each individual, any securities that individual has the right to acquire within 60 days of April 14, 2016.

 

(3) The Series A Preferred Stock votes as a single class with the common stock and entitles the holders to 50 votes for each share of Series A Preferred Stock. If all holders of Series A Preferred Stock consent to any sale, transfer, exchange, distribution or other conveyance whether with or without consideration (a “Transfer”), then the Series A Preferred Stock converts at a rate of 1 share of Series A Preferred Stock equaling 0.00154 shares of common stock (post-split) (2 pre-split). Any Transfer conducted without the consent of all the holders of Series A Preferred Stock, then the Series A Preferred Stock converts at a rate of 1 share of Series A Preferred Stock equaling 0.00077 share of common stock (post-split) (1 pre-split).

 

(4) Brian Altounian is the trustee of several trusts and is deemed the beneficial owner of the shares owned by the trusts. Mr.Altounian is deemed the beneficial owner of shares of common stock and has sole or shared power to vote or to direct the vote and to dispose or direct disposition of these shares, which includes: (i) 500,000,770 shares of common stock held by Mr. Altounian, (ii) 3,331 shares of common stock issuable upon conversion of 4,330,000 shares of Series A Preferred Stock held by Mr. Altounian, (iii) 3,265 shares of common stock held by The Brian Kenneth and Lora Ball Altounian, Altounian Family Trust dated November 17, 2010 (the “Altounian Family Trust”) for which he serves as a trustee, (iv) 977 shares of common stock held by Alliance Acquisitions, Inc., a company in which Mr. Altounian owns 35% and over which shares Mr. Altounian has shared voting and investment control; (v) 250,000,000 shares of common stock held by Lora Altounian, (vi) 608 shares of common stock held by Gabrielle Altounian, and (vii) 608 shares of common stock held by Jordan Altounian. Mr. Altounian also owns 4 shares Series D Preferred Stock. If at least one share of Series D Preferred Stock is issued and outstanding, then the total aggregate issued shares of Series D Preferred Stock at any given time, regardless of their number, shall have voting rights equal to four times the sum of: (a) the total number of shares of Common Stock which are issued and outstanding at the time of voting, plus (b) the total number of shares of Series A, Series, B, Series C, Series E, and Series F Preferred Stock which are issued and outstanding at the time of voting divided by (c) the number of shares of Series D Preferred Stock issued and outstanding at the time of voting.

 

(5) Zach Pennington is the beneficial owner of 843 shares of common stock, which consists of 778 issued and outstanding shares of common stock, and 65 shares of common stock issuable upon conversion of 85,000 shares of Series A Preferred Stock.

 

(6) Robert H. Estareja is the beneficial owner of 250,001,863 shares of common stock, which consists of 250,001,671 issued and outstanding shares of common stock, and 192 shares of common stock issuable upon conversion of 250,000 shares of Series A Preferred Stock.

  

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Transactions with Related Persons

 

The following describes all transactions since January 1, 2014 and all proposed transactions in which we are, or we will be, a participant and the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets at year end for the last two completed fiscal years and in which any related person had or will have a direct or indirect material interest.

 

Please see the discussions included in the section of this report titled “Executive Compensation” and “Director Compensation” for information relating to shares of our common stock and our Series A Preferred Stock issued to our officers and directors as compensation.

 

Certain of our current officers and directors have employment agreements or services agreements with us. See the section of this report titled “Executive Compensation” and “Director Compensation” for a discussion of these agreements.

 

On June 29, 2009, the Company (then known as WOWIO, LLC, a Texas limited liability company) purchased from Platinum Studios, Inc. (“Platinum Studios”) 100% of the membership interests of WOWIO, LLC (a Pennsylvania limited liability company) (“WOWIO Penn”), and thereby, all assets, technology, patent claims, and business of WOWIO Penn, including the Wowio.com website, in exchange for total consideration of $3,150,000, comprised of assumed liabilities of approximately $1,636,000, including $794,518 of amounts owed to Brian Altounian, the Company’s former CEO, and an additional $1,514,000 to be paid via royalty at a rate of 20% of gross revenues generated from acquired assets. No such royalty payments have been made or due to date. After we have completed paying the acquisition balance, we will pay Platinum Studios a royalty of 10% of related revenue in perpetuity. Brian Altounian, the Company’s former Chief Executive Officer, was Chief Operating Officer and President of Platinum from January 2006 through May, 2011. With respect to the $794,518 of amounts owed to Brian Altounian assumed in connection with the acquisition, the maximum principal amount owed to Mr. Altounian since January 1, 2011 was $211,442 as of January 1, 2011. As of January 3, 2014, the amount owed to Mr. Altounian is $68,272. Since the acquisition, the Company has been making occasional, irregular payments to Mr. Altounian. No note or other written agreement has been entered into with respect to the outstanding amount due. The amount due is non-interest bearing, and is subject to no regular schedule of payments. The Company makes payments when it has available funds.

 

On May 5, 2010, the Company (then known as WOWIO, LLC, a Texas limited liability company) purchased from Platinum Studios all of the ownership interests in the assets, including related websites, of Drunk Duck (the “Duck”) in exchange for total consideration of $1,000,000 in cash of which $350,000 of such amount had been previously paid, $150,000 was due from July 2010 - October 2010 and $500,000 is to be paid in quarterly installments equal to a minimum of 10% of net revenue derived from the purchased assets. The Company has not made payment of the $150,000 due from July 2010 to October 2010. In addition, with respect to the payments of 10% of net revenue, no such payments have been owed or due to date.

 

 

The Company has notes payable to related parties of $100,902 as of December 31, 2015, consisting of 8 notes issued to 7 former employees for accrued compensation. These notes carry an interest rate between 2.25% and 8.0% and were due between April 2012 and December 2012. These notes are in default.

 

Director Independence

 

We are not currently listed on any national securities exchange that has a requirement that the board of directors be independent. At this time we do not have an “independent director” as that term is defined under the rules of the NASDAQ Capital Market.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The following is a summary of fees billed or expected to be billed for professional services rendered by Hall & Company CPAs & Consultants, Inc, our current registered public accounting firm, and Hartley Moore Accountancy Corporation (“HM”), our former registered independent public accounting firm, for the years ended December 31, 2015 and 2014:

 

Fees		December 31, 2015				December 31, 2014
Audit fees		$	44,500			$	36,750
Audit – related fees			-				-
Tax fees			-				-
All other fees			-				-
Total		$	44,500			$	36,750

 

Audit fees. Audit fees represent fees for professional services performed for the audit of our annual financial statements and the review of our quarterly financial statements, as well as services that are normally provided in connection with statutory and regulatory filings or engagements.

 

Audit-related fees. Audit-related fees represent fees for assurance and related services performed that are reasonably related to the performance of the audit or review of our financial statements, including fees related to consents for registration statements.

 

Tax Fees. No tax compliance services.

 

All other fees. No other fees for 2014 or 2015.

 

 

PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

Exhibit No.		Description
3.1		Certificate of Formation and amendments thereto (1)
3.2		Certificate of Amendment to Certificate of Formation (2)
3.3		Certificate of Amendment to Certificate of Designation of Series A Preferred Stock (2)
3.4		Bylaws (1)
10.1		Executive Employment Agreement between WOWIO, Inc., d.ba. StudioW and Brian Altounian dated as of March 15, 2012. (1)
10.2		Executive Employment Agreement between WOWIO, Inc., d.ba. StudioW and Jacob Morris dated as of March 29, 2012. (3)
10.3		Executive Employment Agreement between WOWIO, Inc., d.ba. StudioW and Linda Engelspien dated as of March 29, 2012. (3)
10.4		Credit Agreement between WOWIO, Inc. and TCA GLOBAL CREDIT MASTER FUND, LP dated as of August 31, 2012 effective as of September 21, 2012. (1)
10.5		Revolving Note between WOWIO, Inc. and TCA GLOBAL CREDIT MASTER FUND, LP dated as of August 31, 2012 effective as of September 21, 2012. (1)
10.6		Security Agreement between WOWIO, Inc. and TCA GLOBAL CREDIT MASTER FUND, LP dated as of August 31, 2012 effective as of September 21, 2012. (1)
10.7		Redeemable Warrant No. 1 to Purchase Common Stock issued pursuant to a Credit Agreement between WOWIO, Inc. and TCA GLOBAL CREDIT MASTER FUND, LP dated as of August 31, 2012 effective as of September 21, 2012. (1)
10.8		Redeemable Warrant No. 2 to Purchase Common Stock issued pursuant to a Credit Agreement between WOWIO, Inc. and TCA GLOBAL CREDIT MASTER FUND, LP dated as of August 31, 2012 effective as of September 21,2012. (1)
10.9		Redeemable Warrant No. 3 to Purchase Common Stock issued pursuant to a Credit Agreement between WOWIO, Inc. and TCA GLOBAL CREDIT MASTER FUND, LP dated as of August 31, 2012 effective as of September 21, 2012. (1)
10.10		Service Agreement, dated November 1, 2011, between WOWIO, Inc. and Alliance Acquisitions, Inc. (4)

  

10.11		Master Services Agreement by and between GHH Commerce, LLC and WOWIO, Inc. dated as of November 6, 2012 (3)
10.12		Advertising Publishing Agreement by and between Wowio, Inc. and GHH Commerce dated as of November 26, 2012. (3)
10.13		Advertising Agreement by and between Wowio, Inc. and GHH Commerce dated as of November 26, 2012. (3)
10.14		Amended and Restated Board Services Agreement between Wowio, Inc. and Zachary Pennington, dated as of October 31, 2012. (3)
10.15		Consulting Agreement, dated January 31, 2013 between Wowio, Inc. and Arthur Schwerzel (4)
10.16		Consulting Agreement, dated February 15, 2013 between Wowio, Inc. and Stern & Co. (4)
10.17		Warrant, dated December 15, 2010 (4)
10.18		Warrant, dated December 16, 2010 (4)
10.19		Warrant, dated April 17, 2012 (4)
10.20		Warrant, dated February 9, 2012 (4)
10.21		Warrant, dated December 20, 2011 (4)
10.22		Accounts Receivable Lending Agreement and Promissory Note, dated March 17, 2013 (4)

 

 

10.23		Senior Convertible Promissory Note, dated May 25, 2012 (4)
10.24		Senior Promissory Note, dated December 20, 2011 (4)
10.25		Senior Promissory Note, dated July 13, 2012 (4)
10.26		Senior Promissory Note, dated March 8, 2012 (4)
10.27		Senior Convertible Promissory Note, dated June 18, 2012 (4)
10.28		Waiver and Amendment #1 to Senior Promissory Note, dated February 14, 2013, between Wowio, Inc. and David McCarthy (4)
10.29		Purchase Agreement, dated December 12, 2012, between WOWIO, Inc. and Roger Mincheff (5)
10.30		Senior Promissory Note, dated September 10, 2013 (5)
10.31		Senior Promissory Note, dated August 30, 2013 (5)
10.32		First Amendment to Credit Agreement dated November 19, 2013 (6)
10.33		Replacement, Amended and Restated Note (6)
10.34		Employment Agreement between WOWIO, Inc., d.ba. StudioW and Brian Altounian dated as of September 15, 2015*
10.35		Employment Agreement between WOWIO, Inc., d.ba. StudioW and Robert H. Estareja dated as of September 15, 2015*
21.1		List of Subsidiaries (1)
31.1		Certification of chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2		Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1		Certification of principal executive and financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101.INS		XBRL Instance Document*
101.SCH		XBRL Taxonomy Extension Schema Document*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB		XBRL Taxonomy Extension Label Linkbase Document*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

 

* Filed herewith.

 

(1) Filed as exhibit to S-1 filed on October 22, 2012 and incorporated herein by reference.

(2) Filed as exhibit to 8-K filed on January 23, 2014 and incorporated herein by reference.

(3) Filed as exhibit to S-1/A filed on February 8, 2013 and incorporated herein by reference.

(4) Filed as exhibit to S-1/A filed on August 5, 2013 and incorporated herein by reference.

(5) Filed as exhibit to S-1/A filed on October 7, 2013 and incorporated herein by reference.

(6) Filed as exhibit to S-1/A filed on December 23, 2013 and incorporated herein by reference.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

	WOWIO, INC.
Dated: April 14, 2016	By:	/s/ Robert H. Estareja
		Robert H. Estareja
		Chief Executive Officer (principal executive, financial and accounting officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

SIGNATURE		TITLE		DATE
/s/ Robert H. Estareja		Chief Executive Officer		April 14, 2016
Robert H. Estareja		(principal executive, financial and accounting officer)
/s/ Brian Altounian		Chairman		April 14, 2016
Brian Altounian
/s/ Zachary Pennington		Director		April 14, 2016
Zachary Pennington