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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2016
☐
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________to
_______________.
Commission file number: 000-27145
SPENDSMART NETWORKS, INC.
(f/k/a
The SpendSmart Payments Company)
(Exact Name of Registrant as Specified in its Charter)
Delaware
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33-0756798
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(State or jurisdiction of incorporation
or organization)
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(I.R.S. Employer Identification No.)
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805 Aerovista Pkwy, Suite 205
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San Luis Obispo California
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93401
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(Address and of principal
executive offices)
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(Zip Code)
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Registrant’s telephone number, including area
code: (877)
541-8398
Common Stock, par value $0.001 per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes ☐
No ☒
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Exchange Act.
Yes ☐
No ☒
Indicate by check mark whether the issuer (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act
during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes ☒
No ☐
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit
and post such files). Yes
☒ No
☐
Indicate by check mark if there is no disclosure of delinquent
filers in response to Item 405 of Regulation S-K contained in this
form, and no disclosure will be contained, to the best of
registrant’s knowledge, in definitive proxy information
statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K or any amendment to this Form
10-K.
☐
Indicate by check mark if the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See
definition of “accelerated filer and large accelerated
filer” in Rule 12b(2) of the Exchange Act. (Check
one).
Large accelerated filer ☐
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Accelerated filer ☐
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Non-accelerated filer ☐(1)
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Smaller reporting company ☒
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(1) Do not check if a smaller
reporting company
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes ☐
No ☒
The aggregate market value of the voting and non-voting common
equity on June 30, 2016 held by non-affiliates of the registrant
(based on the average bid and asked price of such stock on such
date of $0.09) was approximately $3,244,891. Shares of common stock
held by each officer of the Company (or of its wholly-owned
subsidiary) and director and by each person who owns 10% or more of
the outstanding common stock of the registrant have been excluded
in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes. Without acknowledging that any
individual director of registrant is an affiliate, all directors
have been included as affiliates with respect to shares owned by
them.
At May 11, 2017, there were 42,575,571 shares outstanding of the
issuer’s common stock, par value $0.001 per
share.
SPENDSMART NETWORKS, INC.
TABLE OF CONTENTS
PART I
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Item 1.
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Business
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1
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Item 1A.
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Risk Factors
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5
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Item 1B.
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Unresolved Staff Comments
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18
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Item 2.
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Properties
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18
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Item 3.
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Legal Proceedings
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18
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Item 4.
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Mine Safety Disclosures
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18
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PART II
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Item 5.
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Market for the Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
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19
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Item 6.
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Selected Financial Data
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20
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Item 7.
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Management's Discussion and Analysis of Financial Condition And
Results of Operations
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20
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Item 7A.
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Qualitive and Quantitative Disclosures About Market
Risk
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24
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Item 8.
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Financial Statements and Supplementary Data
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26
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
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58
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Item 9A.
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Controls and Procedures
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58
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Item 9B.
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Other
Information
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58
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PART III
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Item 10.
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Directors, Executive Officers and Corporate Governance
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59
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Item 11.
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Executive Compensation
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64
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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70
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Item 13.
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Certain Relationships and Related Transactions, and Director
Independence
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72
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Item 14.
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Principal Accounting Fees and Services
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74
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PART IV
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Item 15.
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Exhibits and Financial Statement Schedules
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75
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SIGNATURES
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78
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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form
10-K may contain statements relating to future results of
SpendSmart Networks, Inc. (including certain projections and
business trends) that are “forward-looking statements.”
Our actual results may differ materially from those projected as a
result of certain risks and uncertainties. These risks and
uncertainties include, but are not limited to, without limitation,
statements that express or involve discussions with respect to
predictions, expectations, beliefs, plans, projections, objectives,
assumptions or future events or performance (often, but not always,
using words or phrases such as “expects” or “does
not expect”, “is expected”,
“anticipates” or “does not anticipate”,
“plans”, “estimates” or
“intends”, or stating that certain actions, events or
results “may”, “could”,
“would”, “might” or “will” be
taken, occur or be achieved) are not statements of historical fact
and may be “forward-looking statements.” Such
forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results
or achievements of the Company to be materially different from any
future results or achievements of the Company expressed or implied
by such forward-looking statements. Such factors include, among
others, those set forth herein and those detailed from time to time
in our other Securities and Exchange Commission (“SEC”)
filings. These forward-looking statements are made only as of the
date hereof, and we undertake no obligation to update or revise the
forward-looking statements, whether as a result of new information,
future events or otherwise, except as otherwise required by law.
The Company cautions readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date
made. The Company disclaims any obligation subsequently to revise
any forward-looking statements to reflect events or circumstances
after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events. Also, there can be no
assurance that the Company will be able to raise sufficient capital
to continue as a going concern.
PART I
Item 1 - Business
As used in this Annual Report on Form 10-K, the terms "we", "us",
"our", “SpendSmart”, “SpendSmart Networks,
Inc.”, and the "Company" means SpendSmart Networks, Inc., a
Delaware corporation, its wholly-owned subsidiary SpendSmart
Networks, Inc., a California corporation or their
management.
Current Business & Strategy
We are a national full-service mobile and loyalty marketing agency
that offers a means for small and large business owners alike to
better connect with their consumers and generate sales. We do
business under the name “SMS Masterminds.” The core of
our business involves two licenses which include, among other
things, a proprietary SaaS (software as a service) system,
proprietary marketing and sales training materials and
mobile-responsive website building software.
With our mobile and loyalty marketing programs and proprietary
responsive website building software, we provide proprietary
loyalty systems and a suite of digital engagement and marketing
services that help local merchants build relationships with
consumers and drive revenues. These services are sold, implemented
and supported both internally and by a vast network of certified
digital marketing specialists, aka “Certified
Masterminds,” who drive revenue and consumer relationships
for merchants via loyalty programs, custom mobile-responsive
websites, review generation and management, social media
engagement, mobile marketing, mobile commerce and financial tools,
such as reward systems. We enter into licensing agreements for our
proprietary loyalty and mobile marketing solutions and custom
mobile-responsive website building tools with “Certified
Masterminds” which sell and support the technology in their
respective exclusive markets. We provide extensive training
materials, best practice guides and other resources to our
licensees, including access to a “Mentor,” who is an
existing successful “Mastermind.” In addition to
our introductory training program, our licensees have access to an
online forum and knowledge base, and the ability to interface with
various in house resources for needs related to merchant account
management and support, as well as sales and business
development.
The licensees also utilize digital loyalty tablets provided to
their merchants. The loyalty tablets are proprietary tablet devices
set up in physical retail locations where consumers can enter their
mobile phone number to “opt-in” to receive
notifications from the merchant and participate in the
merchant’s loyalty program.
Our
business strategy consists of delivering and managing:
(i)
Loyalty platforms
a.
Merchant funded
rewards
b.
Loyalty rewards
tablet/kiosk
c.
Proprietary rewards
management system
(ii)
Mobile marketing technology
a.
Text and email
messaging
b.
Customer analytics
and propensity marketing
c.
Patent pending
‘automated engagement’ engine
d.
Text2Win
sweepstakes features
(iii)
Enterprise level loyalty and mobile marketing
consulting
a.
Monthly hands on
reviews by our “Certified Masterminds”
b.
Campaign creation
and optimization
c.
Localized
support
(iv) Proprietary
mobile-responsive website building platform
a.
Software
allowing licensees and merchants to create and administer their
websites
b.
Audits of existing merchant
websites
c.
Integration of social media streams and consumer reviews into
websites
We plan
to pursue these strategies across a
broad range of consumer, business, for-profit and non-profit
organization, and government/municipal sectors. In addition, we
have partnered with various groups to develop strategic
affinity/co-brand opportunities. We expect to continue such
partnership programs with various global for-profit and non-profit
organizations.
Advertising and Marketing Strategies
SpendSmart
develops the loyalty and mobile marketing license through the
acquisition of interested ‘prospects’ or leads
generated through various advertisements placed on web portals
throughout the internet, as well as through referrals from existing
licensees. These lead sources have proven to be a consistent and
reliable channel for interested potential licensees. We intend to
continue to look for new sources of licensee leads, as well as
increase our budget to increase our volume of leads generated. All
other aspects of the business will be promoted through our network
of licensees in North America.
Financial Model
Our
Mobile and Loyalty Marketing and website development
programs provide for
multiple revenue components including set up fees and recurring
license fees, messaging, equipment and marketing services fees and
value added mobile marketing and mobile commerce
services.
We
generate revenues primarily in the form of set up fees, recurring license fees,
messaging, equipment and marketing services fees and value added
mobile marketing and mobile commerce services. License fees are
charged monthly for our support services. Business
development and set-up fees primarily consist of fees for website
development services (including support and unspecified upgrades
and enhancements when and if they are available), training and
professional services that are not essential to
functionality.
We
employ outside consultants to handle overflow development work on
our proprietary software platforms, marketing services, legal and
other specific business functions when needed. While we
intend to restrict the number of new employees we add to our
Company’s workforce, we believe that new personnel will be
necessary in the future in the areas of project management,
software programming, operations, accounting, sales and
administration.
Barriers to Entry
Our
Company has applied for patents in connection with our Mobile and
Loyalty Marketing program and its related uses and planned future
features. We believe that the business processes in connection with
our Mobile and Loyalty Marketing program are original to our
Company; however we may discover that others have patent claims of
which we are currently unaware. Should we be successful in
obtaining the grant of the patents under application and should we
be successful in countering any challenges to their validity that
might emerge, the lifetime of the granted patents would be twenty
years. Should the patent applications in question be approved, it
could give us a cost advantage from the license fees that future
potential competitors would be required to pay as well as revenues
from said license fees. There can be no assurance however that we
will be successful in receiving such a patent or successful in
countering any challenges thereto.
Competitive Business Conditions
The
market for loyalty and mobile marketing services is large, growing
and highly competitive. We have identified a few providers of
loyalty and mobile marketing related products and
services.
Spot On is a provider of a loyalty rewards platform that
utilizes a touchscreen tablet to digitize a punch card type loyalty
program. At this time Spot appears to be privately held, but well
financed. They are based in California. They do not appear at this
time to have any kind of text based marketing component to their
offering, but instead focus on digitizing the punch card experience
and delivering messaging to consumers via email. Spot On does not
at this time have any localized representation or support, instead
they rely on selling and supporting nationally over the phone and
via their website.
BellyCard is a provider of loyalty rewards platforms
directly to merchants utilizing a touchscreen tablet to digitize
the punch card type loyalty program. They claim to have a total of
ten thousand merchants located in the US. They utilize an iPad
device as their touchscreen interface and have robust customer
analytics engine that the merchant can utilize to understand trends
in their business. They do not at this time provide any texting
capability and do not have localized support or sales teams. They
instead rely on national support and an outsourced phone sales
team.
In
summary, while we face potential future competition in our target
market for our products, we currently believe our products offer
distinct features that respond to market needs not well served by
the identified competitors mentioned above. However, many of these
firms have longer operating histories, greater name recognition and
greater financial, technical, and marketing resources than us.
Increased competition from any of these sources could result in our
failure to achieve and maintain an adequate level of customer
demand and market share to support the cost of our
operations.
Pre-Paid Credit Card
On
November 26, 2014, in an effort to reduce expenses as well as focus
its resources on its mobile and loyalty marketing solutions, the
Company decided to begin a wind down of the operations of its
pre-paid credit card product. All credit card related operations
ceased on or about January 26, 2015. The Company will maintain
certain card customer data for five (5) years. The pre-paid card program included our
general-purpose card and our SpendSmart MasterCard Teen Prepaid
Card.
Corporate History
Our
Company was originally incorporated in the State of Colorado on May
14, 1990 as “Snow Eagle Investments, Inc.” and was
inactive from 1990 until 1997. In April 1997, the Company acquired
the assets of 1st Net Technologies,
LLC, a California limited liability company, and the Company
changed its name to “1st Net Technologies, Inc.” and
operated as an Internet commerce and services business. In August
2001, the Company suspended its operations. In September of 2005,
the Company acquired VOS Systems, Inc. (the “VOS
Subsidiary”) as its wholly owned subsidiary and the Company
changed its name to “VOS International, Inc.” and
traded under the symbol “VOSI.OB”. The VOS Subsidiary
operated as a technology company involved in the design,
development, manufacturing, and marketing of consumer electronic
products.
On
October 16, 2007, we sold the VOS Subsidiary and acquired
BillMyParents-CA (at the time both our Colorado parent and
California subsidiary were named IdeaEdge, Inc.). On May 1, 2009,
our Company changed our name from IdeaEdge, Inc. to Socialwise,
Inc., and our stock traded under the symbol “SCLW.OB”.
On May 25, 2011, we changed our name to BillMyParents, Inc. and
beginning June 13, 2011, our stock traded under the symbol
“BMPI.OB.” On February, 15, 2013, we changed our name
to The SpendSmart Payments Company and beginning February 28, 2013,
our stock traded under the symbol “SSPC.OB.”
Effective
as of June 20, 2014, the Company was re-domiciled from Colorado to
Delaware. Effective as of June 20, 2014, we filed an amendment to
our Certificate of Incorporation changing our name to
“SpendSmart Networks, Inc.”
Cautionary Note Regarding Forward-Looking Statements
This
annual report on Form 10-K contains not only historical
information, but also forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended, and are subject to the safe harbor created by those
sections. In addition, we or others on our behalf may make
forward-looking statements from time to time in oral presentations,
including telephone conferences and/or web casts open to the
public, in news releases or reports, on its Internet web site or
otherwise. All statements other than statements of historical
facts included in this report that address activities, events or
developments that we expect, believe or anticipate will or may
occur in the future are forward-looking statements including, in
particular, the statements about our plans, objectives, strategies
and prospects regarding, among other things, our business,
operating results and financial condition. We have identified
some of these forward-looking statements with words like
“believe,” “may,” “could,”
“would,” “might,” “possible,”
“potential,” “project,” “will,”
“should,” “expect,” “intend,”
“plan,” “predict,”
“anticipate,” “estimate,”
“approximate,” “contemplate” and
“continue,” the negative of these words, other words
and terms of similar meaning and the use of future dates.
These forward-looking statements may be contained in this section,
the notes to our financial statements and elsewhere in this report,
including under the heading “Part II. Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations.” Our forward-looking
statements generally relate to:
●
the
status of our development of product and services;
●
our
future operating expenses, anticipated burn rate and whether and
how long our existing cash and cash equivalents will be sufficient
to fund our operations;
●
the
market size and market acceptance of our products and
services;
●
the
effect of new accounting pronouncements and other legislation;
and
●
our
continuing losses.
Forward-looking
statements involve risks and uncertainties. These
uncertainties include factors that affect all businesses as well as
matters specific to us. Some of the factors known to us that
could cause our actual results to differ materially from what we
have anticipated in our forward-looking statements are described
under the heading “Part I. Item 1A. Risk
Factors” below. We caution readers not to place
undue reliance on any forward-looking statement that speaks only as
of the date made and to recognize that forward-looking statements
are predictions of future results, which may not occur as
anticipated. Actual results could differ materially from
those anticipated in the forward-looking statements and from
historical results, due to the risks and uncertainties described
under the heading “Part I. Item 1A. Risk
Factors” below, as well as others that we may consider
immaterial or do not anticipate at this time. Although we
believe that the expectations reflected in our forward-looking
statements are reasonable, we do not know whether our expectations
will prove correct. Our expectations reflected in our
forward-looking statements can be affected by inaccurate
assumptions we might make or by known or unknown risks and
uncertainties, including those described below under the heading
“Part I. Item 1A. Risk
Factors.” The risks and uncertainties described
under the heading “Item 1A.
Risk Factors” below are not exclusive and further
information concerning us and our business, including factors that
potentially could materially affect our operating results or
financial condition, may emerge from time to time. We assume
no obligation to update our forward-looking statements to reflect
actual results or changes in factors or assumptions affecting such
forward-looking statements. We advise you, however, to
consult any further disclosures we make on related subjects in our
quarterly reports on Form 10-Q and current
reports on Form 8-K that we file with or furnish to the
Securities and Exchange Commission
Item 1A – Risk Factors
Investment in our common stock involves a high degree of risk. You
should carefully consider the risks described below together with
all of the other information included in this herein before making
an investment decision. If any of the following risks
actually occur, our business, financial condition or results of
operations could suffer. In that case, the market price of our
common stock could decline, and you may lose all or part of your
investment.
Risks Related to Our Business
OUR FAILURE TO OBTAIN ADDITIONAL ADEQUATE FINANCING WOULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.
We cannot be certain that we will ever generate sufficient revenues
and gross margin to achieve profitability in the
future. Our failure to significantly increase revenues
or to raise additional adequate and necessary financing would
seriously harm our business and operating results. We
have incurred significant costs in building, launching and
marketing our Products as well as in our acquisition of
substantially all of the assets of SMS Masterminds. We anticipate
incurring additional expenses relating to customer account
acquisitions, marketing, and building our infrastructure. If we
fail to achieve sufficient revenues and gross margin with our
Products, or our revenues grow more slowly than anticipated, or if
our operating or capital expenses increased more than is expected
or cannot be reduced in the event of lower revenues, our business
will be materially and adversely affected and an investor could
suffer the loss of a significant portion or all of his investment
in our Company.
WE FACE COMPETITION FROM OTHER MOBILE AND LOYALTY
SYSTEMS.
We will face competition from other companies with similar product
offerings. Many of these companies have longer operating
histories, greater name recognition and substantially greater
financial, technical and marketing resources than
us. Many of these companies also have more extensive
customer bases, broader customer relationships and broader industry
alliances than us, including relationships with many of our
potential customers. Increased competition from any of these
sources could result in our failure to achieve and maintain an
adequate level of customers and market share to support the cost of
our operations.
WE HAVE LIMITED RESOURCES TO DEVELOP OUR PRODUCT
OFFERINGS.
Our ability to successfully access the capital markets at the same
time that our Company has required funding for the development and
marketing of our product offerings is challenging. This
has caused and will likely continue to cause us to restrict funding
of the development of our products and to favor the development of
one product offering over the other based on their relative
estimated potentials for commercial success as evaluated by our
management. We may require additional debt and/or equity
financing to pursue our growth strategy. Given our limited
operating history and existing losses, there can be no assurance
that we will be successful in obtaining additional financing.
Furthermore, the issuance by us of any additional securities
pursuant to any future fundraising activities undertaken by us
would dilute the ownership of existing shareholders and may reduce
the price of our common stock. Furthermore, debt
financing, if available, will require payment of interest and may
involve restrictive covenants that could impose limitations on our
operating flexibility. Our current focus is our Mobile and Loyalty
Marketing program. The failure of this program to be
commercially successful would substantially harm our business and
results of operations. Our failure to successfully
obtain additional future funding may jeopardize our ability to
continue our business and operations. Furthermore, in
the future we may determine that it is in the best interest of our
Company to severely curtail, license, jointly develop with a third
party or sell one of our product offerings, which may be on terms
which limit the revenue potential of the product offering to our
Company.
WE RELY ON THIRD-PARTY SUPPLIERS AND DISTRIBUTORS THAT ARE SPECIFIC
TO OUR BUSINESS SUCH AS CELLULAR SERVICE PROVIDERS, INTERNET
SERVICE PROVIDERS, PROGRAMMERS, AND SOCIAL NETWORKS.
We will be dependent on other companies to provide necessary
products and services in connection with key elements of our
business. Any interruption in our ability to utilize these
services, or comparable quality replacements would severely harm
our business and results of operations. Should any of
these adverse contingencies result, they could substantially harm
our business and results of operations and an investor could suffer
the loss of a significant portion or all of his investment in our
Company.
CHANGES IN LAWS AND REGULATIONS TO WHICH WE ARE SUBJECT, OR TO
WHICH WE MAY BECOME SUBJECT, MAY INCREASE OUR COSTS OF OPERATION,
DECREASE OUR OPERATING REVENUES AND DISRUPT OUR
BUSINESS.
Changes in laws and regulations or the interpretation or
enforcement thereof may occur that could increase our compliance
and other costs of doing business, require significant systems
redevelopment, or render our products or services less profitable
or obsolete, any of which could have an adverse effect on our
results of operations. We could face more stringent Telephone
Consumer Protection Act regulations, as well as more stringent
compliance with which could be expensive and time consuming.
Changes in laws and regulations governing the way our products and
services are sold or in the way those laws and regulations are
interpreted or enforced could adversely affect our ability to
distribute our products and the cost of providing those products
and services. If onerous regulatory requirements were imposed on
the sale of our products and services, the requirements could lead
to a loss of merchants and subscribers, which in turn could
materially and adversely impact our operations. We also face the
risk that our text messaging system will be found to be in
violation of or used in a manner that is a violation of the
Telephone Consumer Protection Act.
THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT MAY
HAVE A SIGNIFICANT ADVERSE IMPACT ON OUR BUSINESS, RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
In July 2010, President Obama signed into law the Dodd-Frank Wall
Street Reform and Consumer Protection Act (“DFA”). The
DFA, as well as regulations promulgated thereunder, could have a
significant adverse impact on the Company’s business, results
of operations and financial condition.
The DFA has resulted in increased scrutiny and oversight of
consumer financial services and products, primarily through the
establishment of the Consumer Financial Protection Bureau
(“CFPB”) within the Federal Reserve. The CFPB has broad
rulemaking and enforcement authority over providers of pre-paid
cards, among other credit providers. The CFPB has the authority to
write regulations under federal consumer financial protection laws,
and to enforce those laws. The CFPB regulations have yet to be
fully promulgated and depending on how the CFPB functions, it could
have a material adverse impact on our business. The impact this new
regulatory regime will have on the Company’s business is
uncertain at this time.
Many provisions of the DFA require the adoption of rules to
implement. In addition, the DFA mandates multiple studies, which
could result in additional legislative or regulatory action.
Therefore, the ultimate consequences of the DFA and its impact on
our Company’s business, results of operations and financial
condition remain uncertain.
WE ARE SUBJECT TO VARIOUS PRIVACY RELATED REGULATIONS, INCLUDING
THE GRAMM-LEACH-BLILEY ACT WHICH MAY INCLUDE AN INCREASED COST OF
COMPLIANCE.
We are subject to various laws, rules and regulations related to
privacy, information security and data protection, including the
Gramm-Leach-Bliley Act, and we could be negatively impacted by
these laws, rules and regulations. The Gramm-Leach-Bliley Act
guidelines require, among other things, that each financial
institution develop, implement and maintain a written,
comprehensive information security program containing safeguards
that are appropriate to the financial institution’s size and
complexity, the nature and scope of the financial
institution’s activities and the sensitivity of any customer
information at issue. Our management believes that we are currently
operating in compliance with these regulations. However, continued
compliance with these laws, rules and regulations regarding the
privacy, security and protection of customer and employee data, or
the implementation of any additional privacy rules and regulations,
could result in higher compliance and technology costs for our
Company.
OUR BUSINESS COULD SUFFER IF THERE IS A DECLINE IN THE USE OF SMS
SERVICES OR THERE ARE ADVERSE DEVELOPMENTS WITH RESPECT TO THE SMS
SERVICES INDUSTRY IN GENERAL.
As the mobile services industry evolves, consumers may find SMS
services to be less attractive than other mobile messaging and
communication services. Consumers might not use SMS services if
less expensive services and technologies are offered. If consumer
acceptance of SMS services as a form of communication does not
continue to develop or develops more slowly than expected or if
there is a shift form of mobile communications it could have a
material adverse effect on our financial position and results of
operations.
A DATA SECURITY BREACH COULD EXPOSE US TO LIABILITY AND PROTRACTED
AND COSTLY LITIGATION, AND COULD ADVERSELY AFFECT OUR REPUTATION
AND OPERATING REVENUES.
We, the banks that issue our cards, network acceptance members
and/or third-party processors receive, transmit and store
confidential customer information in connection with the sale and
use of our prepaid cards. Encryption software and the other
technologies used to provide security for storage, processing and
transmission of confidential customer and other information may not
be effective to protect against data security breaches by third
parties. The risk of unauthorized circumvention of such security
measures has been heightened by advances in computer capabilities
and the increasing sophistication of hackers. Improper access to
our or these third parties’ systems or databases could result
in the theft, publication, deletion or modification of confidential
customer and other information. A data security breach of the
systems on which sensitive cardholder data and account information
are stored could lead to fraudulent activity involving our products
and services, reputational damage and claims or regulatory actions
against us. If we are sued in connection with any data security
breach, we could be involved in protracted and costly litigation.
If unsuccessful in defending that litigation, we might be forced to
pay damages and/or change our business practices or pricing
structure, any of which could have a material adverse effect on our
operating revenues and profitability. We would also likely have to
pay (or indemnify the banks that issue our cards for) fines,
penalties and/or other assessments imposed as a result of any data
security breach. Further, a significant data security breach could
lead to additional regulation, which could impose new and costly
compliance obligations. In addition, a data security breach at the
bank that issues our cards, network acceptance members or
third-party processors could result in significant reputational
harm to us and cause the use and acceptance of our cards to
decline, either of which could have a significant adverse impact on
our operating revenues and future growth prospects.
OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY
TECHNOLOGY SURROUNDING OUR SMS MESSAGING, WEB TOOLS, WEBSITE
BUILDING TOOLS AND PREPAID CARDS IS UNCERTAIN.
Our future success may depend significantly on our ability to
protect our proprietary rights to the intellectual property upon
which our products and services will be based. Any
patents we obtain in the future may be challenged by re-examination
or otherwise invalidated or eventually be found unenforceable. Both
the patent application process and the process of managing patent
disputes can be time consuming and expensive. Competitors may
attempt to challenge or invalidate our patents, or may be able to
design alternative techniques or devices that avoid infringement of
our patents, or develop products with functionalities that are
comparable to ours. In the event a competitor infringes upon our
patent or other intellectual property rights, litigation to enforce
our intellectual property rights or to defend our patents against
challenge, even if successful, could be expensive and time
consuming and could require significant time and attention from our
management. We may not have sufficient resources to enforce our
intellectual property rights or to defend our patents against
challenges from others.
WE ARE DEPENDENT UPON CONSUMER TASTES WITH RESPECT TO PREFERRED
METHODS OF MOBILE COMMUNICATION FOR THE SUCCESS OF OUR PRODUCTS AND
SERVICES.
Our product offerings’ acceptance by consumers and their
consequent generation of revenues will depend upon a variety of
unpredictable factors, including
●
Public taste, which is always
subject to change;
●
The
quantity and popularity of other communication platforms;
and
●
The
fact that the sales methods chosen for the products and services we
market may be ineffective.
For any of these reasons, our programs may be commercially
unsuccessful. If we are unable to market products which
are commercially successful, we may not be able to recoup our
expenses and/or generate sufficient revenues. In the event that we
are unable to generate sufficient revenues, we may not be able to
continue operating as a viable business and an investor could
suffer the loss of a significant portion or all of his investment
in our Company.
THE MOBILE ADVERTISING MARKET MAY DETERIORATE OR DEVELOP MORE
SLOWLY THAN EXPECTED, WHICH COULD HARM OUR BUSINESS.
Advertising on mobile connected devices is an emerging industry
sector. Advertisers have historically spent a smaller portion of
their advertising budgets on mobile media as compared to
traditional advertising methods, such as television, newspapers,
radio and billboards, or internet advertising such banner
ads. Future demand and market acceptance for mobile
advertising is uncertain. Many advertisers still have limited
experience with mobile advertising and may continue to devote
larger portions of their advertising budgets to more traditional
offline or online personal computer-based advertising, instead of
shifting additional advertising resources to mobile advertising. In
addition, our current and potential advertiser clients may
ultimately find mobile advertising to be less effective than
traditional advertising media or marketing methods or other
technologies for promoting their products and services, and they
may even reduce their spending on mobile advertising from current
levels as a result. If the market for mobile advertising
deteriorates, or develops more slowly than expected, we may not be
able to increase our revenue.
SMS MASTERMINDS IS ONE OF THE DEFENDANTS NAMED IN A POTENTIAL
CLASS-ACTION LAWSUIT FILED IN THE UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK RELATING TO ALLEGED VIOLATIONS OF THE
TELEPHONE CONSUMER PROTECTION ACT.
From time to time and in the course of business, we may become
involved in various legal proceedings seeking monetary damages and
other relief. The amount of any ultimate liability from such claims
cannot be determined. On July 8, 2015,
Intellectual Capital Management, LLC d/b/a SMS Masterminds and
SpendSmart Networks, Inc. were named in a potential class-action
lawsuit entitled Peter Marchelos, et al v. Intellectual Capital
Management, et al, filed in the United States District Court
Eastern District of New York relating to alleged violations of the
Telephone Consumer Protection Act of 1991. This litigation involves
the same licensee and merchant as the now resolved and previously
disclosed Telford lawsuit and the same attorneys represent the
plaintiffs in this action. The complaint alleges that SMS
Masterminds sent unsolicited text messages to the plaintiff and
other recipients without the prior express invitation or permission
of the recipients and such plaintiff is now seeking unspecified
monetary damages, injunctive relief, costs and attorneys’
fees. The case is currently stayed. We believe
Plaintiff’s allegations have no merit and will vigorously
defend against Plaintiff’s claims. Litigation is
subject to numerous uncertainties and we are unable to predict the
ultimate outcome of this or any other matter. Moreover, the amount
of any potential liability in connection with this lawsuit will
depend, to a large extent, on whether a class in a class action
lawsuit is certified and, if one is certified, on the scope of the
class, neither of which we can predict at this time. These and any
future lawsuits that we may face regarding these issues could
materially and adversely affect our results of operations, cash
flows and financial condition, cause us to incur significant
expenses and divert the attention of our management and key
personnel from our business operations.
IF MOBILE CONNECTED DEVICES, THEIR OPERATING SYSTEMS OR CONTENT
DISTRIBUTION CHANNELS, INCLUDING THOSE CONTROLLED BY OUR PRIMARY
COMPETITORS, DEVELOP IN WAYS THAT PREVENT OUR ADVERTISING FROM
BEING DELIVERED TO OUR USERS, OUR ABILITY TO GROW OUR BUSINESS WILL
BE IMPAIRED.
Our mobile marketing business model depends upon the continued
compatibility of our mobile advertising platform with most mobile
connected devices, as well as the major operating systems that run
on them. The design of mobile devices and operating systems is
controlled by third parties with whom we do not have any formal
relationships. These parties frequently introduce new devices, and
from time to time they may introduce new operating systems or
modify existing ones.
OUR MOBILE MARKETING SERVICES ARE PROVIDED ON MOBILE COMMUNICATIONS
NETWORKS THAT ARE OWNED AND OPERATED BY THIRD PARTIES WHO WE DO NOT
CONTROL AND THE FAILURE OF ANY OF THESE NETWORKS WOULD ADVERSELY
AFFECT OUR ABILITY TO DELIVER OUR SERVICES TO OUR
CUSTOMERS.
Our mobile marketing and advertising platform is dependent on the
reliability of mobile operators who maintain sophisticated and
complex mobile networks. Such mobile networks have historically,
and particularly in recent years, been subject to both rapid growth
and technological change. If the network of a mobile operator with
which we are integrated should fail, including because of new
technology incompatibility, the degradation of network performance
under the strain of too many mobile consumers using it, or a
general failure from natural disaster or political or regulatory
shut-down, we will not be able provide our services to customers
through such mobile network. This in turn, would impair our
reputation and business, potentially resulting in a material,
adverse effect on our financial results.
THE SUCCESS OF OUR MOBILE MARKETING BUSINESS DEPENDS, IN PART, ON
WIRELESS CARRIERS CONTINUING TO ACCEPT OUR CUSTOMERS' MESSAGES FOR
DELIVERY TO THEIR SUBSCRIBER BASE.
We depend on wireless carriers to deliver our customers' messages
to their subscriber base. Wireless carriers often impose standards
of conduct or practice that significantly exceed current legal
requirements and potentially classify our messages as "spam," even
where we do not agree with that conclusion. In addition, the
wireless carriers use technical and other measures to attempt to
block non-compliant senders from transmitting messages to their
customers; for example, wireless carriers block short codes or
Internet Protocol addresses associated with those senders. There
can be no guarantee that our, or short codes registered to us, will
not be blocked or blacklisted or that we will be able to
successfully remove ourselves from those lists. Although our
services typically require customers to opt-in to a campaign,
minimizing the risk that its customers' messages will be
characterized as spam, blocking of this type could interfere with
its ability to market products and services of its customers and
communicate with end users and could undermine the effectiveness of
our customers' marketing campaigns. To date we have not experienced
any material blocking of our messages by wireless carriers, but any
such blocking could have an adverse effect on our business and
results of operations.
MOBILE CONNECTED DEVICE USERS MAY CHOOSE NOT TO ALLOW ADVERTISING
ON THEIR DEVICES.
The success of our mobile marketing business model depends on our
ability to deliver targeted, highly relevant ads to consumers on
their mobile connected devices. Targeted advertising is done
primarily through analysis of data, much of which is collected on
the basis of user-provided permissions. This data might include a
device's location or data collected when device users view an
advertisement or video or when they click on or otherwise engage
with an advertisement. Users may elect not to allow data sharing
for targeted advertising for a number of reasons, such as privacy
concerns, or pricing mechanisms that may charge the user based upon
the amount or types of data consumed on the device. Users may also
elect to opt out of receiving targeted advertising from our
platform. In addition, the designers of mobile device operating
systems are increasingly promoting features that allow device users
to disable some of the functionality, which may impair or disable
the delivery of ads on their devices, and device manufacturers may
include these features as part of their standard device
specifications. Although we are not aware of any such products that
are widely used in the market today, as has occurred in the online
advertising industry, companies may develop products that enable
users to prevent ads from appearing on their mobile device screens.
If any of these developments were to occur, our ability to deliver
effective advertising campaigns on behalf of our advertiser clients
would suffer, which could hurt our ability to generate
revenue.
WE MAY NOT BE ABLE TO ENHANCE OUR MOBILE MARKETING AND ADVERTISING
PLATFORM TO KEEP PACE WITH TECHNOLOGICAL AND MARKET DEVELOPMENTS,
OR TO REMAIN COMPETITIVE AGAINST POTENTIAL NEW ENTRANTS IN OUR
MARKETS.
The market for mobile marketing and advertising services is
emerging and is characterized by rapid technological change,
evolving industry standards, frequent new product introductions and
short product life cycles. Our current platform or platforms we may
offer in the future may not be acceptable to marketers and
advertisers. To keep pace with technological developments, satisfy
increasing customer requirements and achieve acceptance of our
marketing and advertising campaigns, we will need to enhance our
current mobile marketing solutions and continue to develop and
introduce on a timely basis new, innovative mobile marketing
services offering compatibility, enhanced features and
functionality on a timely basis at competitive prices. Our
inability, for technological or other reasons, to enhance, develop,
introduce and deliver compelling mobile marketing services in a
timely manner, or at all, in response to changing market
conditions, technologies or customer expectations could have a
material adverse effect on our operating results or could result in
our mobile marketing services platform becoming obsolete. Our
ability to compete successfully will depend in large measure on our
ability to maintain a technically skilled development and
engineering staff and to adapt to technological changes and
advances in the industry, including providing for the continued
compatibility of our mobile marketing services platform with
evolving industry standards and protocols. In addition, as we
believe the mobile marketing market is likely to grow
substantially, other companies which are larger and have
significantly more capital to invest than us may emerge as
competitors. New entrants could seek to gain market
share by introducing new technology or reducing pricing. This may
make it more difficult for us to sell our products and services,
and could result in increased pricing pressure, reduced profit
margins, increased sales and marketing expenses or the loss of
market share or expected market share, any of which may
significantly harm our business, operating results and financial
condition.
OUR SALES EFFORTS WITH LICENSEES REQUIRES SIGNIFICANT TIME AND
EXPENSE.
Attracting new licensees requires substantial time and expense, and
we may not be successful in establishing new relationships or in
maintaining or advancing current relationships. Further, it may be
difficult for our licensees to identify, engage and market to
potential merchant clients who do not currently spend on mobile
advertising or are unfamiliar with our current services or
platform. Furthermore, many merchant’s purchasing and design
decisions typically require input from multiple internal
constituencies.
The novelty of our services and our business model often requires
us to spend substantial time and effort educating potential
licensees about our offerings, including providing demonstrations
and comparisons against other available services. This process can
be costly and time-consuming. If we are not successful in
streamlining our sales processes with licensees or successfully
assisting licensees in selling to merchants, our ability to grow
our business may be adversely affected.
IF WE CANNOT INCREASE THE CAPACITY OF OUR MOBILE ADVERTISING
TECHNOLOGY PLATFORM TO MEET MERCHANT OR DEVICE USER DEMAND, OUR
BUSINESS WILL BE HARMED.
We must be able to continue to increase the capacity of our
technology platform in order to support substantial increases in
the number of merchants and device users, to support an increasing
variety of advertising formats and to maintain a stable service
infrastructure and reliable service delivery for our mobile
advertising campaigns. If we are unable to efficiently and
effectively increase the scale of our mobile advertising platform
to support and manage a substantial increase in the number of
merchants and mobile device users, while also maintaining a high
level of performance, the quality of our services could decline and
our reputation and business could be seriously harmed. In addition,
if we are not able to support emerging mobile advertising formats
or services preferred by advertisers, we may be unable to obtain
new advertising clients or may lose existing advertising clients,
and in either case our revenue could decline.
SYSTEM FAILURES COULD SIGNIFICANTLY DISRUPT OUR OPERATIONS AND
CAUSE US TO LOSE ADVERTISER CLIENTS OR ADVERTISING
INVENTORY.
Our success depends on the continuing and uninterrupted performance
of our own internal systems, which are utilized to send messages,
and monitor the performance of advertising campaigns. Our revenue
depends on the technological ability of our platform to deliver
ads. Sustained or repeated system failures that interrupt our
ability to provide services to clients, including technological
failures affecting our ability to deliver ads quickly and
accurately and to process mobile device users' responses to ads,
could significantly reduce the attractiveness of our services to
advertisers and reduce our revenue. Our systems are vulnerable to
damage from a variety of sources, including telecommunications
failures, power outages, malicious human acts and natural
disasters. In addition, any steps we take to increase the
reliability and redundancy of our systems may be expensive and may
not be successful in preventing system failures.
ACTIVITIES OF LICENSEES OR MERCHANTS COULD DAMAGE OUR REPUTATION OR
GIVE RISE TO LEGAL CLAIMS AGAINST US.
A merchant’s promotion of their products and services may not
comply with federal, state and local laws, including, but not
limited to, laws and regulations relating to mobile communications.
Failure of a licensee or merchant to comply with federal, state or
local laws or our policies could damage our reputation and expose
us to liability under these laws. We may also be liable to third
parties for content in the ads it delivers if the artwork, text or
other content involved violates copyrights, trademarks or other
intellectual property rights of third parties or if the content is
defamatory, unfair and deceptive, or otherwise in violation of
applicable laws. Although we generally receive assurance from
licensees that ads are lawful and that they have the right to use
any copyrights, trademarks or other intellectual property included
in a communication, and although we are normally indemnified by the
licensees, a third party or regulatory authority may still file a
claim against us. Any such claims could be costly and
time-consuming to defend and could also hurt our reputation within
the mobile advertising industry. Further, if we are exposed to
legal liability, we could be required to pay substantial fines or
penalties, redesign our business methods, discontinue some of its
services or otherwise expend significant resources.
SOFTWARE AND COMPONENTS THAT WE INCORPORATE INTO OUR MOBILE
ADVERTISING PLATFORM MAY CONTAIN ERRORS OR DEFECTS, WHICH COULD
HARM OUR REPUTATION AND HURT ITS BUSINESS.
We use a combination of custom and third-party software, including
open source software, in building our mobile advertising platform.
Although we test software before incorporating it into our
platform, we cannot guarantee that all of the third-party
technology that we incorporate will not contain errors, bugs or
other defects. We continue to launch enhancements to our mobile
advertising platform, and cannot guarantee any such enhancements
will be free from these kinds of defects. If errors or other
defects occur in technology that we utilize in our mobile
advertising platform, it could result in damage to our reputation
and losses in revenue, and we could be required to spend
significant amounts of additional resources to fix any
problems.
OUR INABILITY TO USE SOFTWARE LICENSED FROM THIRD PARTIES, OR OUR
USE OF OPEN SOURCE SOFTWARE UNDER LICENSE TERMS THAT INTERFERE WITH
OUR PROPRIETARY RIGHTS, COULD DISRUPT OUR BUSINESS.
Our technology platform incorporates software licensed from third
parties, including some software, known as open source software,
which we use without charge. Although we monitor our use of open
source software, U.S. or foreign courts have not interpreted the
terms of many open source licenses to which we are subject, and
there is a risk that such licenses could be construed in a manner
that imposes unanticipated conditions or restrictions on our
ability to provide our platform to our clients. In the future, we
could be required to seek licenses from third parties in order to
continue offering our platform, which licenses may not be available
on terms that are acceptable to us, or at all. Alternatively, we
may need to re-engineer our platform or discontinue use of portions
of the functionality provided by our platform. In addition, the
terms of open source software licenses may require us to provide
software that we develop to others on unfavorable license terms.
Our inability to use third-party software could result in
disruptions to our business, or delays in the development of future
offerings or enhancements of existing offerings, which could impair
our business.
IF OUR MOBILE MARKETING AND ADVERTISING SERVICES PLATFORM DOES NOT
SCALE AS ANTICIPATED, OUR BUSINESS WILL BE HARMED.
We must be able to continue to scale to support potential ongoing
substantial increases in the number of users in our actual
commercial environment, and maintain a stable service
infrastructure and reliable service delivery for our mobile
marketing and advertising campaigns. In addition, we must continue
to expand our service infrastructure to handle growth in customers
and usage. If our mobile marketing services platform does not
efficiently and effectively scale to support and manage a
substantial increase in the number of users while maintaining a
high level of performance, the quality of our services could
decline and our business will be seriously harmed. In addition, if
we are unable to secure data center space with appropriate power,
cooling and bandwidth capacity, we may not be able to efficiently
and effectively scale our business to manage the addition of new
customers and overall mobile marketing campaigns.
IF A PORTION OF OUR BUSINESS MODEL IS DEEMED TO BE A FRANCHISE OUR
BUSINESS COULD BE INTERUPTED.
Although our business model related to the Mobile and Loyalty
Program is based upon a license, we cannot guarantee that any
state’s franchise department will not find our model to be a
franchise and require a transition to said model with possible
associated penalties, fees, costs, and business delays and
interruptions.
OUR BUSINESS PRACTICES WITH RESPECT TO DATA MAY GIVE RISE TO
LIABILITIES OR REPUTATIONAL HARM AS A RESULT OF GOVERNMENTAL
REGULATION, LEGAL REQUIREMENTS OR INDUSTRY STANDARDS RELATING TO
CONSUMER PRIVACY AND DATA PROTECTION.
In the course of providing services, we transmit and store
information related to mobile devices and the ads we place with
that user's consent. Federal, state and international laws and
regulations govern the collection, use, retention, sharing and
security of data that we collect across our mobile marketing
platform. We strive to comply with all applicable laws,
regulations, policies and legal obligations relating to privacy and
data protection. However, it is possible that these requirements
may be interpreted and applied in a manner that is inconsistent
from one jurisdiction to another and may conflict with other rules
or our practices. Any failure, or perceived failure, by us to
comply with U.S. federal, state, or international laws, including
laws and regulations regulating privacy or consumer protection,
could result in proceedings or actions against us by governmental
entities or others. From time to time, there are several ongoing
lawsuits filed against companies in our industry alleging various
violations of privacy-related laws. These proceedings could hurt
our reputation, force us to spend significant amounts in defense of
these proceedings, distract our management, increase our costs of
doing business, adversely affect the demand for our services and
ultimately result in the imposition of monetary
liability.
The regulatory framework for privacy issues worldwide is evolving,
and various government and consumer agencies and public advocacy
groups have called for new regulation and changes in industry
practices, including some directed at the mobile industry in
particular. It is possible that new laws and regulations will be
adopted in the United States and internationally, or existing laws
and regulations may be interpreted in new ways, that would affect
our business, particularly with regard to location-based services,
collection or use of data to target ads and communication with
consumers via mobile devices.
The U.S. government, including the Federal Trade Commission, or
FTC, and the Department of Commerce, has announced that it is
reviewing the need for greater regulation of the collection of
consumer information, including regulation aimed at restricting
some targeted advertising practices. The FTC has also proposed
revisions to the Children's Online Privacy Protection Act, or
COPPA, that could, if adopted, create greater compliance burdens on
us. COPPA imposes a number of obligations, such as obtaining
parental permission on website operators to the extent they collect
certain information from children who are under 13 years old. The
proposed changes would broaden the applicability of COPPA,
including the types of information that would be subject to these
regulations, and could apply to information that we or our clients
collect through mobile devices or apps that is not currently
subject to COPPA.
If we expand our operations globally, compliance with regulations
that differ from country to country may also impose substantial
burdens on its business. In particular, the European Union has
traditionally taken a broader view as to what is considered
personal information and has imposed greater obligations under data
privacy regulations. In addition, individual EU member countries
have had discretion with respect to their interpretation and
implementation of the regulations, which has resulted in variation
of privacy standards from country to country. In January 2012, the
European Commission announced significant proposed reforms to its
existing data protection legal framework, including changes in
obligations of data controllers and processors, the rights of data
subjects and data security and breach notification requirements.
The EU proposals, if implemented, may result in a greater
compliance burden if SMS Masterminds delivers ads to mobile device
users in Europe. Complying with any new regulatory requirements
could force us to incur substantial costs or require us to change
our business practices in a manner that could compromise our
ability to effectively pursue its growth strategy.
In addition to compliance with government regulations, we
voluntarily participate in several trade associations and industry
self-regulatory groups that promulgate best practices or codes of
conduct addressing the provision of location-based services,
delivery of promotional content to mobile devices, and tracking of
device users or devices for the purpose of delivering targeted
advertising. We could be adversely affected by changes to these
guidelines and codes in ways that are inconsistent with our
practices or in conflict with the laws and regulations of U.S. or
international regulatory authorities. If we are perceived as not
operating in accordance with industry best practices or any such
guidelines or codes with regard to privacy, our reputation may
suffer and we could lose relationships with advertiser or developer
partners.
WE DEPEND ON THIRD PARTY PROVIDERS FOR A RELIABLE INTERNET
INFRASTRUCTURE AND THE FAILURE OF THESE THIRD PARTIES, OR THE
INTERNET IN GENERAL, FOR ANY REASON WOULD SIGNIFICANTLY IMPAIR OUR
ABILITY TO CONDUCT OUR BUSINESS.
We outsource all of our data center facility management to third
parties who host the actual servers and provide power and security
in multiple data centers in each geographic location. These third
party facilities require uninterrupted access to the
Internet. If the operation of our servers are
interrupted for any reason, including natural disaster, financial
insolvency of a third party provider, or malicious electronic
intrusion into the data center, our business would be significantly
damaged. As has occurred with many Internet-based
businesses, on occasion in the past, we have been subject to
"denial-of-service" attacks in which unknown individuals bombarded
its computer servers with requests for data, thereby degrading the
servers' performance. While we have historically been successful in
relatively quickly identifying and neutralizing these attacks, we
cannot be certain that we will be able to do so in the future. If
either a third party facility failed, or our ability to access the
Internet was interfered with because of the failure of Internet
equipment in general or we become subject to malicious attacks of
computer intruders, our business and operating results will be
materially adversely affected.
Financial Risks
OUR FINANCIAL STATEMENTS HAVE BEEN PREPARED ASSUMING THAT OUR
COMPANY WILL CONTINUE AS A GOING CONCERN.
The factors described herein raise substantial doubt about our
ability to continue as a going concern. Our financial statements do
not include any adjustments that might result from this
uncertainty. The report of our independent registered public
accounting firm included an explanatory paragraph expressing
substantial doubt about our ability to continue as a going concern
in their audit report for the years ended December 31, 2016 and
2015. If we cannot generate the required revenues
and gross margin to achieve profitability or obtain additional
capital on acceptable terms, we will need to substantially revise
our business plan or cease operations and an investor could suffer
the loss of a significant portion or all of his investment in our
Company.
CURRENT MACRO-ECONOMIC CONDITIONS COULD ADVERSELY AFFECT THE
FINANCIAL VIABILITY OF OUR COMPANY.
Continuing recessionary conditions in the global economy threaten
to cause further tightening of the credit and equity markets and
more stringent lending and investing standards. The persistence of
these conditions could have a material adverse effect on our access
to further needed capital. In addition, further deterioration in
the economy could adversely affect our corporate results, which
could adversely affect our financial condition and
operations.
WE DO NOT EXPECT TO PAY DIVIDENDS FOR THE FORESEEABLE FUTURE, AND
WE MAY NEVER PAY DIVIDENDS AND, CONSEQUENTLY, THE ONLY OPPORTUNITY
FOR INVESTORS TO ACHIEVE A RETURN ON THEIR INVESTMENT IS IF A
TRADING MARKET DEVELOPS AND INVESTORS ARE ABLE TO SELL THEIR SHARES
FOR A PROFIT OR IF OUR BUSINESS IS SOLD AT A PRICE THAT ENABLES
INVESTORS TO RECOGNIZE A PROFIT.
We currently intend to retain any future earnings to support the
development and expansion of our business and do not anticipate
paying cash dividends for the foreseeable future. Our payment of
any future dividends will be at the discretion of our Board of
Directors after taking into account various factors, including but
not limited to our financial condition, operating results, cash
needs, growth plans and the terms of any credit agreements that we
may be a party to at the time. In addition, our ability to pay
dividends on our common stock may be limited by state law.
Accordingly, we cannot assure investors any return on their
investment, other than in connection with a sale of their shares or
a sale of our business. At the present time there is a limited
trading market for our shares. Therefore, holders of our securities
may be unable to sell them. We cannot assure investors that an
active trading market will develop or that any third party will
offer to purchase our business on acceptable terms and at a price
that would enable our investors to recognize a profit.
OUR NET OPERATING LOSS (“NOL”) CARRY-FORWARD MAY BE
LIMITED.
We have recorded a valuation allowance amounting to our entire net
deferred tax asset balance due to our lack of a history of
earnings, possible statutory limitations on the use of tax loss
carry-forwards generated in the past and the future expiration of
our NOL. This gives rise to uncertainty as to whether
the net deferred tax asset is realizable. Internal
Revenue Code Section 382, and similar California rules, place a
limitation on the amount of taxable income that can be offset by
carry-forwards after a change in control (generally greater than a
50% change in ownership). As a result of these
provisions, it is likely that given our acquisition of The
SpendSmart Payments Company-CA, future utilization of the NOL will
be severely limited. Our inability to use our
Company’s historical NOL, or the full amount of the NOL,
would limit our ability to offset any future tax liabilities with
our NOL.
Corporate and Other Risks
LIMITATIONS ON DIRECTOR AND OFFICER LIABILITY AND INDEMNIFICATION
OF OUR COMPANY’S OFFICERS AND DIRECTORS BY US MAY DISCOURAGE
STOCKHOLDERS FROM BRINGING SUIT AGAINST AN OFFICER OR
DIRECTOR.
Our Company’s articles of incorporation and bylaws provide,
with certain exceptions as permitted by governing state law, that a
director or officer shall not be personally liable to us or our
stockholders for breach of fiduciary duty as a director, except for
acts or omissions which involve intentional misconduct, fraud or
knowing violation of law, or unlawful payments of dividends. These
provisions may discourage stockholders from bringing suit against a
director for breach of fiduciary duty and may reduce the likelihood
of derivative litigation brought by stockholders on our behalf
against a director.
WE ARE RESPONSIBLE FOR THE INDEMNIFICATION OF OUR OFFICERS AND
DIRECTORS.
Should our officers and/or directors require us to contribute to
their defense, we may be required to spend significant amounts of
our capital. Our articles of incorporation and bylaws as well as an
indemnification agreement also provide for the indemnification of
our directors, officers, employees, and agents, under certain
circumstances, against attorney's fees and other expenses incurred
by them in any litigation to which they become a party arising from
their association with or activities on behalf of our Company. This
indemnification policy could result in substantial expenditures,
which we may be unable to recoup. If these expenditures are
significant, or involve issues which result in significant
liability for our key personnel, we may be unable to continue
operating as a going concern.
OUR EMPLOYEES, EXECUTIVE OFFICERS, DIRECTORS AND INSIDER
STOCKHOLDERS BENEFICIALLY OWN OR CONTROL A SUBSTANTIAL PORTION OF
OUR OUTSTANDING COMMON STOCK, WHICH MAY LIMIT YOUR ABILITY AND THE
ABILITY OF OUR OTHER STOCKHOLDERS, WHETHER ACTING ALONE OR
TOGETHER, TO PROPOSE OR DIRECT THE MANAGEMENT OR OVERALL DIRECTION
OF OUR COMPANY.
Additionally, this concentration of ownership could discourage or
prevent a potential takeover of our Company that might otherwise
result in an investor receiving a premium over the market price for
his shares. A substantial number of our outstanding shares of
common stock is beneficially owned and controlled by a group of
insiders, including our employees, directors and executive
officers. Accordingly, our employees, directors, executive officers
and insider shareholders may have the power to control the election
of our directors and the approval of actions for which the approval
of our stockholders is required. If you acquire shares of our
common stock, you may have no effective voice in the management of
our Company. Such concentrated control of our Company
may adversely affect the price of our common stock. Our principal
stockholders may be able to control matters requiring approval by
our stockholders, including the election of directors, mergers or
other business combinations. Such concentrated control may also
make it difficult for our stockholders to receive a premium for
their shares of our common stock in the event we merge with a third
party or enter into different transactions which require
stockholder approval. These provisions could also limit the price
that investors might be willing to pay in the future for shares of
our common stock.
WE ARE DEPENDENT FOR OUR SUCCESS ON A FEW KEY
EMPLOYEES.
Our inability to retain those employees would impede our business
plan and growth strategies, which would have a negative impact on
our business and the value of your investment. Our success depends
on the skills, experience and performance of key members of our
Company. Each of those individuals may voluntarily
terminate his employment with our Company at any time. Were we to
lose one or more of these key employees, we would be forced to
expend significant time and money in the pursuit of a replacement,
which would result in both a delay in the implementation of our
business plan and the diversion of limited working capital. We do
not maintain a key man insurance policy on any of our key
employees.
SHOULD WE BE SUCCESSFUL IN TRANSITIONING TO A COMPANY GENERATING
SIGNIFICANT REVENUES, WE MAY NOT BE ABLE TO MANAGE OUR GROWTH
EFFECTIVELY, WHICH COULD ADVERSELY AFFECT OUR OPERATIONS AND
FINANCIAL PERFORMANCE.
The ability to manage and operate our business as we execute our
growth strategy will require effective planning. Significant rapid
growth could strain our internal resources, leading to a lower
quality of customer service, reporting problems and delays in
meeting important deadlines resulting in loss of market share and
other problems that could adversely affect our financial
performance. Our efforts to grow could place a significant strain
on our personnel, management systems, infrastructure and other
resources. If we do not manage our growth effectively, our
operations could be adversely affected, resulting in slower growth
and a failure to achieve or sustain profitability.
Capital Market Risks
OUR COMMON STOCK IS THINLY TRADED, SO YOU MAY BE UNABLE TO SELL AT
OR NEAR ASK PRICES OR AT ALL IF YOU NEED TO SELL YOUR SHARES TO
RAISE MONEY OR OTHERWISE DESIRE TO LIQUIDATE YOUR
SHARES.
There is limited market activity in our stock and we may be too
small to attract the interest of many brokerage firms and analysts.
We cannot give you any assurance that a broader or more active
public trading market for our common stock will develop or be
sustained. While we are trading on OTCQB, the trading volume we
will develop may be limited by the fact that many major
institutional investment funds, including mutual funds, as well as
individual investors follow a policy of not investing in
over-the-counter stocks and certain major brokerage firms restrict
their brokers from recommending over-the-counter stocks because
they are considered speculative, volatile, thinly traded and the
market price of the common stock may not accurately reflect the
underlying value of our Company. The market price of our
common stock could be subject to wide fluctuations in response to
quarterly variations in our revenues and operating expenses,
announcements of new products or services by us, significant sales
of our common stock, including “short” sales, the
operating and stock price performance of other companies that
investors may deem comparable to us, and news reports relating to
trends in our markets or general economic conditions.
THE
APPLICATION OF THE “PENNY STOCK” RULES TO OUR COMMON
STOCK COULD LIMIT THE TRADING AND LIQUIDITY OF THE COMMON STOCK,
ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK AND INCREASE
YOUR TRANSACTION COSTS TO SELL THOSE SHARES.
As long as the trading price of our common stock is below $5 per
share, our common stock will be subject to the “penny
stock” rules, unless we otherwise qualify for an exemption
from the “penny stock” definition. The “penny
stock” rules impose additional sales practice requirements on
certain broker-dealers who sell securities to persons other than
established customers and accredited investors (generally those
with a net worth in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 together with their spouse). These
regulations, if they apply, require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule
explaining the penny stock market and the associated risks. Under
these regulations, certain brokers who recommend such securities to
persons other than established customers or certain accredited
investors must make a special written suitability determination
regarding such a purchaser and receive such purchaser’s
written agreement to a transaction prior to sale. The Financial
Industry Regulatory Authority, or FINRA, has adopted sales practice
requirements which may also limit a stockholder's ability to buy
and sell our stock. In addition to the "penny stock" rules
described above, FINRA has adopted rules that require that in
recommending an investment to a customer, a broker-dealer must have
reasonable grounds for believing that the investment is suitable
for that customer. Prior to recommending speculative low priced
securities to their non-institutional customers, broker-dealers
must make reasonable efforts to obtain information about the
customer's financial status, tax status, investment objectives and
other information. These regulations may have the effect of
limiting the trading activity of our common stock, reducing the
liquidity of an investment in our common stock and increasing the
transaction costs for sales and purchases of our common stock as
compared to other securities. The stock market in general and the
market prices for penny stock companies in particular, have
experienced volatility that often has been unrelated to the
operating performance of such companies. These broad market and
industry fluctuations may adversely affect the price of our stock,
regardless of our operating performance. Stockholders
should be aware that, according to SEC Release No. 34-29093, the
market for penny stocks has suffered in recent years from patterns
of fraud and abuse. Such patterns include 1) control of the market
for the security by one or a few broker-dealers that are often
related to the promoter or issuer; 2) manipulation of prices
through prearranged matching of purchases and sales and false and
misleading press releases; 3) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by
inexperienced sales persons; 4) excessive and undisclosed bid-ask
differential and markups by selling broker-dealers; and 5) the
wholesale dumping of the same securities by promoters and
broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices
and with consequent investor losses. The occurrence of these
patterns or practices as well as the regulatory disclosure
requirements set forth above could increase the volatility of our
share price, may limit investors’ ability to buy and sell our
securities and have an adverse effect on the market price for our
shares of common stock.
WE MAY NOT BE ABLE TO ATTRACT THE ATTENTION OF MAJOR BROKERAGE
FIRMS, WHICH COULD HAVE A MATERIAL ADVERSE IMPACT ON THE MARKET
VALUE OF OUR COMMON STOCK.
Security analysts of major brokerage firms may not provide coverage
of our common stock since there is no incentive to brokerage firms
to recommend the purchase of our common stock. The absence of such
coverage limits the likelihood that an active market will develop
for our common stock. It will also likely make it more difficult to
attract new investors at times when we require additional
capital.
WE MAY BE UNABLE TO LIST OUR COMMON STOCK ON NASDAQ OR ON ANY
SECURITIES EXCHANGE.
Although we intend to apply to list our common stock on NASDAQ in
the future, we cannot assure you that we will be able to meet the
initial listing standards, including the minimum per share price
and minimum capitalization requirements, or that we will be able to
maintain a listing of our common stock on this trading. Until such
time as we qualify for listing on NASDAQ or another national
securities exchange, our common stock will continue to trade on
OTCQB or another over-the-counter quotation system where an
investor may find it more difficult to dispose of shares or obtain
accurate quotations as to the market value of our common stock. In
addition, rules promulgated by the SEC impose various practice
requirements on broker-dealers who sell securities that fail to
meet certain criteria set forth in those rules to persons other
than established customers and accredited
investors. Consequently, these rules may deter
broker-dealers from recommending or selling our common stock, which
may further affect the liquidity of our common stock. It would also
make it more difficult for us to raise additional
capital.
FUTURE SALES OF OUR EQUITY SECURITIES COULD PUT DOWNWARD SELLING
PRESSURE ON OUR SECURITIES, AND ADVERSELY AFFECT THE STOCK
PRICE.
There is a risk that this downward pressure may make it impossible
for an investor to sell his or her securities at any reasonable
price, if at all. Future sales of substantial amounts of our equity
securities in the public market, or the perception that such sales
could occur, could put downward selling pressure on our securities,
and adversely affect the market price of our common
stock.
Item 1B. – Unresolved Staff
Comments.
Not applicable.
Item 2 –Properties
Our corporate offices are located in San Luis Obispo, CA, where we
lease approximately 7,500 square feet of office space in two
locations. The building that we lease at 805 Aerovista Parkway is
owned by Alexander P Minicucci Trust, which was a related party
transaction due to the trust being controlled by the Company's
former chief executive officer. The total monthly payment for both
locations is approximately, $15,678 including association and
common area maintenance charges.
Item 3 – Legal Proceedings
On July 8, 2015, Intellectual Capital Management, LLC dba SMS
Masterminds and SpendSmart Networks, Inc. were named in a potential
class-action lawsuit entitled Peter Marchelos, et al v.
Intellectual Capital Management, et al, filed in the United States
District Court Eastern District of New York relating to alleged
violations of the Telephone Consumer Protection Act of 1991. This
litigation involves the same licensee and merchant as a previous
lawsuit and the same attorneys represent the plaintiffs in this
action. The claim of one of the two plaintiffs was resolved for
$1,701. The Company believes the Plaintiff’s allegations have
no merit. There are no other legal claims currently pending
or threatened against us that in the opinion of our management
would be likely to have a material adverse effect on our financial
position, results of operations or cash flows.
Item 4 – Mine Safety Disclosures
Not
applicable.
Part II
Item 5 – Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
Our
common stock trades publicly on the OTCQB under the symbol
"SSPC.OB" The OTCQB is a regulated quotation service that displays
real-time quotes, last-sale prices and volume information in
over-the-counter equity securities. The OTCQB securities are traded
by a community of market makers that enter quotes and trade
reports. This market is extremely limited and any prices quoted may
not be a reliable indication of the value of our common stock. The
following table sets forth the high and low bid prices per share of
our common stock by the OTCQB for the periods indicated as reported
on the OTCQB.
|
High
|
Low
|
|
|
|
Year ended December 31, 2016
|
|
|
First
Quarter
|
$0.16
|
$0.10
|
Second
Quarter
|
$0.20
|
$0.07
|
Third
Quarter
|
$0.11
|
$0.04
|
Fourth
Quarter
|
$0.06
|
$0.01
|
|
|
|
Year
ended December 31, 2015
|
|
|
First
Quarter
|
$1.17
|
$0.71
|
Second
Quarter
|
$0.80
|
$0.55
|
Third
Quarter
|
$0.70
|
$0.43
|
Fourth
Quarter
|
$0.50
|
$0.14
|
On July
23, 2012 our stock was moved from the OTC Bulletin Board to the
OTCQB. The quotes represent inter-dealer prices, without adjustment
for retail mark-up, markdown or commission and may not represent
actual transactions. The trading volume of our securities
fluctuates and may be limited during certain periods. As a result
of these volume fluctuations, the liquidity of an investment in our
securities may be adversely affected.
Holders of Record
As of
May 5, 2017, 42,075,571 shares of our common stock were issued and
outstanding, and held by approximately 2,000
stockholders.
Transfer Agent
Our
transfer agent is TranShare Corporation, 4626 South Broadway,
Englewood, CO 80113, Telephone (303) 662-1112.
Dividends
We have
never declared or paid any cash dividends on our common stock. For
the foreseeable future, we intend to retain any earnings to finance
the development and expansion of our business, and we do not
anticipate paying any cash dividends on our common stock. Any
future determination to pay dividends will be at the discretion of
our Board of Directors.
Securities Authorized for Issuance under Equity Compensation
Plans
The
table below sets forth information as of December 31, 2016 with
respect to compensation plans under which our common stock is
authorized for issuance.
On
January 8, 2013, our Board of Directors approved the adoption of
our 2013 Equity Incentive Plan (the “2013 Plan”). The
2013 Plan was approved by our shareholders on February 15, 2013.
The 2013 Plan provides for granting of stock-based awards
including: incentive stock options, non-statutory stock options,
stock bonuses and rights to acquire restricted stock. The total
number of shares of common stock that may be issued pursuant to
stock awards under the 2013 Plan shall not exceed in the aggregate
10,000,000 shares of the common stock of our Company. On August 4,
2011, our Board of Directors approved the adoption of the
SpendSmart Networks, Inc. 2011 Equity Incentive Plan (the
“2011 Plan”). The 2011 Plan has been approved by our
shareholders. The 2011 Plan provides for granting of stock-based
awards including: incentive stock options, non-statutory stock
options, stock bonuses and rights to acquire restricted stock. The
total number of shares of common stock that may be issued pursuant
to stock awards under the 2011 Plan shall not exceed in the
aggregate 1,666,667 shares of the common stock of our Company. We
also have a stockholder-approved Plan (the IdeaEdge, Inc. 2007
Equity Incentive Plan - the “2007 Plan”, previously
approved by our shareholders). The 2007 Plan has similar provisions
and purposes as the 2011 Plan. The total number of shares of common
stock that may be issued pursuant to stock awards under the 2007
Plan shall not exceed in the aggregate 266,666 shares of the common
stock of our Company. The table below sets forth information as of
December 31, 2016 with respect to our 2007 Plan, 2011 Plan, and
2013 Plan:
Equity
compensation plans approved by shareholders (2007
Plan)
|
-
|
-
|
266,666
|
Equity
compensation plans subject to approval by shareholders (2011
Plan)
|
333,333
|
7.35
|
1,333,334
|
Equity
compensation plan approved by shareholders (2013 Plan)
|
1,557,750
|
1.16
|
8,442,250
|
Total
|
1,891,083
|
2.25
|
10,042,250
|
Item 6 – Selected Consolidated Financial Data
Disclosure
not required as a result of our Company’s status as a smaller
reporting company.
Item 7 - Management’s Discussion and Analysis of Financial
Condition and Results of Operations
This Management’s Discussion and Analysis provides material
historical and prospective disclosures intended to enable investors
and other users to assess our financial condition and results of
operations. The discussion should be read in conjunction with our
consolidated financial statements and the notes presented herein.
In addition to historical information, the following
Management’s Discussion and Analysis of Financial Condition
and Results of Operations contain forward-looking statements that
involve risks and uncertainties. Our actual results could differ
significantly from those anticipated in these forward-looking
statements as a result of certain factors discussed in this report.
See “FORWARD LOOKING STATEMENTS” paragraph above and
Part I. Item 1. Business-Cautionary Note Regarding Forward-Looking
Statements.
Overview and Financial Condition
Discussions with respect to our Company’s operations
included herein refer to our operating subsidiary, SpendSmart
Networks, Inc.-CA and the consolidated results of the company. The
Company purchased SpendSmart Networks, Inc.-CA on October 16, 2007.
On February 11, 2014, we
acquired substantially all of
the assets of Intellectual Capital Management, LC, dba “SMS
Masterminds”. As a result
of the SMS Masterminds asset acquisition, the company is a
national full-service mobile and loyalty marketing agency that
offers a means for small and large business owners alike to better
connect with their consumers. Through our mobile and loyalty
marketing programs and proprietary website building software, the
company provides proprietary loyalty systems and a suite of digital
engagement and marketing services that help local merchants build
relationships with consumers and drive revenues. These
services are sold,
implemented and supported both internally and by a vast network of
certified digital marketing specialists, aka “Certified
Masterminds,” who drive revenue and consumer relationships
for merchants via loyalty programs, custom websites, social media
engagement, mobile marketing, mobile commerce and financial tools,
such as reward systems. We enter into licensing agreements for our
proprietary loyalty and mobile marketing solutions and custom
website building tools with “Certified Masterminds”
which sell and support the technology in their respective markets.
We provide training materials, best practice guides and other
resources to our licensees. The licensees also utilize loyalty
kiosks provided to their merchants. The loyalty kiosks are tablet
devices set up in physical retail locations where Consumers can
enter their mobile phone number to “opt-in” to receive
notifications from the merchant.
We generate revenues primarily in the form of set up fees,
recurring license fees, messaging, equipment and marketing services
fees and value added mobile marketing and mobile commerce services.
License fees are charged monthly for our support services. Set-up
fees primarily consist of fees for website development services
(including support and unspecified upgrades and enhancements when
and if they are available), training and professional services that
are not essential to functionality.
In November 2014, we began winding down our prepaid card product
offerings and completed that process in January 2015.
Comparison of Results of Operations for the Years Ended December
31, 2016 and December 31, 2015
The Company had total revenues of $5,795,604 for the year ended
December 31, 2016 and $5,588,002 for the year ended December 31,
2015.
Our revenues increased $207,602 or 3.7% over the prior year due to
a slight increase in licensing sales.
Comparison of Operating Expenses for the Years Ended December 31,
2016 and December 31, 2015
In order to better represent our financial results and to make them
comparable to leading companies in the mobile marketing industry,
we have classified our operating expenses into four major
categories: (1) selling and marketing; (2) personnel related; (3)
operations; and (4) general and administrative expenses. We do not
allocate common expenses to any of these expense
categories.
Selling and marketing expenses
Selling and marketing expenses for the year ended December 31, 2016
totaled $595,031 and $582,042 for the year ended December 31, 2015.
This was an increase of $12,989 from 2015 to 2016. Our increased
costs were the result of increasing our market presence in new
territories as well as increasing marketing spend to bring more
brand awareness to our products.
Personnel related expenses
Personnel related expenses totaled $4,729,399 during the year ended
December 31, 2016 and $6,426,273 for the year ended December 31,
2015. This amounted to a decrease of $1,696,874 or a 26.4% decrease
from 2015 to 2016. Overall decreases in personnel related
expenses reflected the 10% decrease in salaries along with lower
stock based compensation expense (lower option and warrant grants
made to directors and executive officers). Other personnel related
expenses include employer taxes, employee benefits and other
employee related costs.
Processing expenses
Processing expenses totaled $1,140,068
for the year ended December 31, 2016 and $1,465,576 for the year
ended December 31, 2015. This resulted in a decrease of $325,508 or
a 22.2% decrease compared to 2015. Decreases in processing
expenses were the result of our lower subscription server
costs.
Amortization of intangible assets
Amortization
of intangible assets totaled $192,503 for the year ended December
31, 2016 and $337,879 for the year ended December 31, 2015,
respectively. This resulted in a decrease of $145,376 from 2015 to
2016.
General and administrative expenses
General and administrative expenses totaled $2,126,631 for the year
ended December 31, 2016 and $3,463,405 for the year ended December
31, 2015. This resulted in a decrease of $1,336,774 or 38.6% from
2015 to 2016. We had decreases in investor relations
consulting, depreciation, legal and travel expense during the year
offset by increases in insurance expenses.
Bad debt expense
Bad
debt expenses totaled $552,725 for the year ended December 31, 2016
and $1,417,952 for the year ended December 31, 2015. We recorded
bad debt write offs due to non-performing accounts in our
receivables as well as our notes receivable. The Company is no longer entering into notes with
its customers.
Impairment on intangible assets and software development
costs
Impairment
expenses totaled $1,697,188 for the year ended December 31, 2016
and $1,189,246 for the year ended December 31, 2015. We recorded
impairment expense on our intangible assets of $922,688 related to
our SMS technology assets, $718,116 related to our SMS software
development, $38,853 related to trademarks, and $17,531 related to
our TechXpress technology assets for the year ended December 31,
2016. We recorded impairment expense on our intangible assets of
$1,083,875 related to our SMS customer base and $105,371 related to
our TechXpress customer base for the year ended December 31,
2015.
Impairment on goodwill
Impairment
expenses related to our goodwill totaled $3,202,276 for the year
ended December 31, 2015. We recorded impairment expense due to the
goodwill impairment analysis that was done at December 31,
2015. As of December 31, 2015, goodwill was
$0.
Earn-out liability expense
The
change in fair value of Earn-out liability expenses totaled $0 for
the year ended December 31, 2016 and $594,216 for the year ended
December 31, 2015. We recorded the change in earn-out liability due
to our updated operating assumptions in the underlying valuation
related to the SMS acquisition.
Comparison of Non-operating Income and Expense for the Years Ended
December 31, 2016 and December 31, 2015
For the years ended December 31, 2016 and 2015, net interest income
totaled $38,782 and $140,276, respectively. This was due to the
lowered remaining balances on our financed accounts.
For the years ended December 31, 2016 and 2015, interest expense
totaled $180,704 and $143,663, respectively. This related to our
convertible notes and our notes payable financings during
2016.
For the years ended December 31, 2016 and 2015, amortization of
debt discount totaled $399,367 and $456,475, respectively. The
decrease was due to the convertible notes financings during the
year ended December 31, 2016.
For the years ended December 31, 2016 and 2015, we recognized a
loss on extinguishment of debt of $473,721 and $0, respectively.
This increase was due to the convertible notes modifications
completed in 2016.
For the year ended December 31, 2016 and 2015, tender offer expense
totaled $3,560,958 and $0, respectively. This increase was due to
the inducement given to exercise warrants in 2016.
During the year ended December 31,
2016, we recognized a gain from the change in the fair value of
derivative liabilities of $2,975,316 and a gain of $457,811 in
2015. These derivative liabilities are the fair value of warrants
issued in fiscal 2010 with anti-dilution privileges, warrants
issued in fiscal 2012 with certain registration privileges,
warrants issued in 2016 with
provisions that adjust conversion or exercise price, and the fair
value of the bifurcated conversion options in convertible notes
issued in 2015.
Comparison of Net Loss and Net Loss per Share for the Years Ended
December 31, 2016 and December 31, 2015
For the years ended December 31, 2016 and 2015, our net loss was
$6,838,593 and $11,904,482, respectively. Our basic and diluted net
loss per share was $0.18 and $0.63 for the twelve months ended
December 31, 2016 and December 31, 2015, respectively. Common stock
equivalents and outstanding options and warrants were not included
in the calculations due to their effect being
anti-dilutive.
Comparison of Liquidity and Capital Resources for the Years Ended
December 31, 2016 and December 31, 2015
We have primarily financed our operations to date through the sale
of unregistered equity. At December 31, 2016, our total current
assets were $418,642. Total current liabilities were $5,826,997,
long-term liabilities were $0, and our stockholders’ deficit
totaled $4,975,818.
We may
raise additional funding through the sale of unregistered common
stock and warrants although there can be no assurance that we will
be successful in raising such funds. This description of our recent
financing and our future plans does not constitute an offer to sell
or the solicitation of an offer to buy our securities, nor shall
such securities be offered or sold in the United States absent
registration or an applicable exemption from the registration
requirements and certificates evidencing such shares contain a
legend stating the same.
We had a decrease in cash for the year of $395,818. During
the year, we raised approximately $380,000 from our convertible
notes financings and raised an additional $1,179,000 in 2016
related to our Tender Offer financing. We had significant cash
outlays relating to repayment of debt, costs to handle our
increased licensee base, and increased software development costs
to improve our technology related to new product
offerings. Our cash and cash
equivalents balance at December 31, 2016 totaled
$74,523.
Going Concern
As noted above (and by our independent registered public accounting
firm in their report on our consolidated financial statements as of
and for the two-year period ended December 31, 2016), there exists
substantial doubt about our ability to continue as a going concern.
Our consolidated financial statements do not contain any
adjustments related to the outcome of this
uncertainty.
As of December 31, 2016, the Company’s audited consolidated
financial statements included an opinion containing an explanatory
paragraph as to the uncertainty of the Company’s ability to
continue as a going concern. The Company has continued to incur net
losses through December 31, 2016 and have yet to establish
profitable operations. These factors among others create a
substantial doubt about our ability to continue as a going concern.
The Company’s audited consolidated financial statements as of
and for the periods ended December 31, 2016 do not contain any
adjustments for this uncertainty.
The Company currently plans to raise additional required capital
through the sale of shares of the Company’s preferred or
common stock. All additional amounts raised will be used for our
future investing and operating cash flow needs. However, there can
be no assurance that we will be successful in consummating such
financing. This description of our future plans for financing does
not constitute an offer to sell or the solicitation of an offer to
buy our securities.
Contractual Obligations
With the exception of employment agreements, lease agreements, and
the endorsement agreement described elsewhere herein, we have no
outstanding contractual obligations through the date of this report
that are not cancellable at our Company’s
option.
Critical Accounting Policies Involving Management Estimates and
Assumptions
Management’s discussion and analysis of our financial
condition and results of operations are based upon our consolidated
financial statements which are prepared in accordance with
accounting principles that are generally accepted in the
United States. The preparation of
these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets and
liabilities, related disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
period. We continually evaluate our estimates and judgments and we
base our estimates and judgments on historical experience and other
factors that we believe to be reasonable under the circumstances.
Materially different results can occur as circumstances change and
additional information becomes known.
In preparing our consolidated financial statements in conformity
with accounting principles generally accepted in the United States
of America, we must make a variety of estimates that affect the
reported amounts and related disclosures. We have identified the
following accounting policies that we believe require application
of management’s most subjective judgments, often requiring
the need to make estimates about the effect of matters that are
inherently uncertain and may change in subsequent periods. Our
significant accounting policies are described in more detail in the
notes to consolidated financial statements included elsewhere in
this filing. If actual results differ significantly from our
estimates and projections, there could be a material effect on our
financial statements.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires our management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
materially from those estimates.
Revenue Recognition
The Company generates revenues primarily in the form of set up
fees, license fees, messaging, equipment and marketing services
fees and value added mobile marketing and mobile commerce
services. License fees are charged monthly for support
services. Set-up fees primarily consist of fees for
website development services (including support and unspecified
upgrades and enhancements when and if they are available), training
and professional services that are not essential to functionality.
The Company offers two licenses consisting of our Engage license
and our Thrive license. The Company now offers both
licenses in a combined package known as the Customer Loyalty System
License (“CLS”).
We
recognize revenues when all of the following conditions are
met:
●
there
is persuasive evidence of an arrangement;
●
the
products or services have been delivered to the
customer;
●
the
amount of fees to be paid by the customer is fixed or determinable;
and
●
the
collection of the related fees is probable.
Signed
agreements are used as evidence of an arrangement. Electronic
delivery occurs when we provide the customer with access to the
software via a username and password. We assess whether a fee is
fixed or determinable at the outset of the arrangement, primarily
based on the payment terms associated with the transaction.
The
Company offered extended payment terms in 2014 and 2015 with
regards to the setup fee with typical terms of payment due between
one and three years from delivery of license. The Company no longer
offers extended payment terms. We assess collectability of
the set-up fee based on a number of factors such as collection
history and creditworthiness of the customer. If we determine that
collectability is not probable, revenue is deferred until
collectability becomes probable, generally upon receipt of
cash.
License
arrangements may also include set-up fees such as website
development, delivery of tablets, professional services and
training services, which are typically delivered within 30-60 days
of the contract term. In determining whether set-up fee revenues
should be accounted for separately from license revenues, we
evaluate whether the set-up fees are considered essential to the
functionality of the license using factors such as the nature of
our products; whether they are ready for use by the customer upon
receipt; the nature of our implementation services, which typically
do not involve significant customization to or development of the
underlying software code; the availability of services from other
vendors; whether the timing of payments for license revenues is
coincident with performance of services; and whether milestones or
acceptance criteria exist that affect the realizability of the
license fee. Substantially all of our set-up fee arrangements are
recognized as the services are performed. Payments received in
advance of services performed are deferred and recognized when the
related services are performed.
We do
not offer refunds and therefore have not recorded any sales return
allowance for any of the periods presented. Upon a periodic review
of outstanding accounts receivable under the extended payment
terms, amounts that are not being paid timely are deemed to be
uncollectible and are written off against the allowance for
doubtful accounts.
Deferred
revenue consists substantially of amounts invoiced in advance of
revenue recognition for our products and services described above.
We recognize deferred revenue as revenue only when the revenue
recognition criteria are met.
Stock Based Compensation
We account for stock based compensation arrangements through the
measurement and recognition of compensation expense for all stock
based payment awards to employees and directors based on estimated
fair values. We use the Black-Scholes option valuation model to
estimate the fair value of our stock options and warrants at the
date of grant. The Black-Scholes option valuation model requires
the input of subjective assumptions to calculate the value of
options and warrants. We use historical company data among other
information to estimate the expected price volatility and the
expected forfeiture rate and not comparable company information,
due to the lack of comparable publicly traded companies that exist
in our industry.
Derivatives
We account for certain of our outstanding warrants as derivative
liabilities. These derivative liabilities are ineligible for equity
classification due to provisions of the instruments that may result
in an adjustment to their conversion or exercise prices. The fair
value of these liabilities is estimated using option pricing models
that are based on the individual characteristics of our warrants,
preferred and common stock, the derivative liability on the
valuation date as well as assumptions for volatility, remaining
expected life, risk-free interest rate and, in some cases, credit
spread.
Recent Accounting Pronouncements
On
May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts
with Customers, as amended, (Topic 606), with an effective date for
annual reporting periods beginning after December 15, 2017,
including interim periods within that reporting period. Earlier
application is permitted only as of annual reporting periods
beginning after December 15, 2016. The Company is evaluating the
impact, if any, the pronouncement will have on both historical and
future financial positions and results of operations, with an
expected completion date of June 30,
2017.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial
Statements—Going Concern (“ASU
2014-15), which states
management should evaluate whether there are conditions or events,
considered in the aggregate, that raise a substantial doubt about
the entity’s ability to continue as a going concern within
one year after the date that the financial statements are issued.
Management’s evaluation should be based on relevant
conditions and events that are known and likely to occur at the
date that the financial statements are issued. ASU 2014-15 as
required was adopted in the fourth quarter of
2016.
In
February 2016, the FASB issued ASU 2016-02, Leases which amended
guidance for lease arrangements in order to increase transparency
and comparability by providing additional information to users of
financial statements regarding an entity's leasing activities. The
revised guidance seeks to achieve this objective by requiring
reporting entities to recognize lease assets and lease liabilities
on the balance sheet for substantially all lease arrangements. The
guidance, which is required to be adopted in the first quarter of
2019, will be applied on a modified retrospective basis beginning
with the earliest period presented. Early adoption is permitted. We
are currently evaluating the impact of adopting this guidance on
our consolidated financial statements.
In March 2016, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2016-09 - Compensation - Stock Compensation,
which simplifies the accounting for the tax effects related to
stock based compensation, including adjustments to how excess tax
benefits and a company’s payments for tax withholdings should
be classified, amongst other items. ASU 2016-09 is effective
for financial statements issued for fiscal years beginning after
December 15, 2016, and interim periods within those fiscal
years. Early adoption is permitted. We do not expect this to have a
material effect on our consolidated financial
statements.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments
– Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments" (ASU 2016-13), that requires entities to use
a new impairment model based on expected losses. Under this new
model an entity would recognize an impairment allowance equal to
its current estimate of credit losses on financial assets measured
at amortized cost. ASU 2016-13 is effective for us beginning
January 1, 2020 with early adoption permitted January 1, 2019.
Credit losses under the new model will consider relevant
information about past events, current conditions and reasonable
and supportable forecasts, resulting in recognition of lifetime
expected credit losses. We are currently evaluating the impact of
adopting this guidance on our consolidated financial
statements.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of December
31, 2016.
SPENDSMART NETWORKS, INC.
Index
Item 8 – Financial Statements
|
Page
|
|
|
Report of Independent Registered Public Accounting
Firm
|
28
|
|
|
Consolidated Balance Sheets at December 31, 2016 and
2015
|
29
|
|
|
Consolidated Statements of Operations for the years ended December
31, 2016 and 2015
|
30
|
|
|
Consolidated Statements of Changes in Stockholders’ Deficit
for the years ended December 31, 2016 and 2015
|
31
|
|
|
Consolidated Statements of Cash Flows for the years ended December
31, 2016 and 2015
|
32
|
|
|
Notes to Consolidated Financial Statements
|
33
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The Board of Directors and Stockholders of
SpendSmart Networks, Inc.
We have audited the accompanying consolidated balance sheets of
SpendSmart Networks, Inc. (the “Company") as of December 31,
2016 and 2015 and the related consolidated statements of
operations, changes in stockholders’ deficit, and cash flows
for each of the years then ended. The financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of SpendSmart Networks, Inc. as of December 31, 2016 and
2015, and the consolidated results of their operations and their
cash flows for each of the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the consolidated financial
statements, the Company has recurring net losses since inception
and has yet to establish a profitable operation. These factors
among others raise substantial doubt about its ability to continue
as a going concern. Management’s plans in regard to these
matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ EisnerAmper LLP
Iselin, New Jersey
May 16, 2017
SPENDSMART NETWORKS, INC.
|
|||
Consolidated Balance Sheets
|
|
December 31,
|
December 31,
|
|
2016
|
2015
|
ASSETS
|
|
|
Current
assets:
|
|
|
Cash
and cash equivalents
|
$74,523
|
$470,341
|
Accounts
receivable, net of allowance for doubtful accounts of $629,461 at
December 31, 2016 and $295,759 at December 31, 2015
|
292,368
|
141,830
|
Customer short-term
notes receivable, net of allowance for doubtful accounts of
$767,138 at December 31, 2016, and $632,422 at December
31, 2015
|
26,850
|
276,168
|
Other current
assets
|
24,901
|
11,100
|
Total
current assets
|
418,642
|
899,439
|
|
|
|
Long-term
assets:
|
|
|
Customer long-term
notes receivable, net of allowance for doubtful accounts of
$399,401 at December 31, 2016, and $461,702 at December 31,
2015
|
15,264
|
199,669
|
Property and
equipment, net of accumulated depreciation of $1,396,223 on
December 31, 2016 and $1,035,960 on December 31, 2015
|
-
|
896,146
|
Intangible assets,
net of accumulated amortization of $819,082 on December 31, 2016
and $626,579 on December 31, 2015
|
399,000
|
1,570,575
|
Other
assets
|
18,273
|
18,274
|
|
|
|
TOTAL
ASSETS
|
$851,179
|
$3,584,103
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
Current
liabilities:
|
|
|
Convertible
notes
|
$1,494,174
|
$1,817,320
|
Notes
payable
|
-
|
70,262
|
Notes payable,
former CEO
|
65,000
|
100,000
|
Accounts payable
and accrued liabilities
|
1,997,667
|
1,867,233
|
Accrued interest
payable
|
66,242
|
23,090
|
Deferred
revenue
|
748,774
|
751,912
|
Deferred
acquisition related payable
|
-
|
10,000
|
Cash received in
connection with tender offer
|
-
|
661,424
|
Derivative
liabilities - conversion option
|
88,242
|
179
|
Derivative
liabilities - warrants
|
1,366,898
|
-
|
Total current
liabilities
|
5,826,997
|
5,301,420
|
|
|
|
Stockholders'
deficit:
|
|
|
Series C Preferred;
$0.001 par value; 4,299,081 shares authorized; 3,443,061 and
3,700,729 shares issued and outstanding as of December 31, 2016
and December 31, 2015, respectively
|
3,444
|
3,701
|
Common stock;
$0.001 par value; 300,000,000 shares authorized; 41,975,571 and
20,458,761 shares issued and outstanding as of December 31, 2016
and December 31, 2015, respectively
|
41,976
|
20,459
|
Additional paid-in
capital
|
94,438,312
|
90,879,480
|
Accumulated
deficit
|
(99,459,550)
|
(92,620,957)
|
Total stockholders'
deficit
|
(4,975,818)
|
(1,717,317)
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
$851,179
|
$3,584,103
|
See accompanying notes to consolidated financial
statements.
Consolidated
Statements of Operations
|
||
|
||
|
|
|
|
For the years ended December 31,
|
|
|
2016
|
2015
|
Revenues:
|
|
|
Mobile Marketing /
Licensing
|
$5,795,604
|
$5,588,002
|
Total
revenues
|
5,795,604
|
5,588,002
|
|
|
|
Operating
expenses:
|
|
|
Selling and
marketing
|
595,031
|
582,042
|
Personnel
related
|
1,140,068
|
6,426,273
|
Mobile Platform
Processing
|
1,211,284
|
1,465,576
|
Amortization of
intangible assets
|
192,503
|
337,879
|
General
and administrative
|
2,126,631
|
3,463,405
|
Bad
debt
|
552,725
|
1,417,952
|
Impairment on
software development assets
|
718,116
|
-
|
Impairment
on intangible assets
|
979,072
|
1,189,246
|
Impairment on
goodwill
|
-
|
3,202,276
|
Change in fair
value of earn-out liability
|
-
|
(594,216)
|
Total
operating expenses
|
11,033,545
|
17,490,433
|
|
|
|
Loss
from operations
|
(5,237,941)
|
(11,902,431)
|
|
|
|
Non-operating
income (expense):
|
|
|
Interest
income
|
38,782
|
140,276
|
Interest
expense
|
(180,704)
|
(143,663)
|
Amortization of
debt discount
|
(399,367)
|
(456,475)
|
Loss on
extinguishment of debt
|
(473,721)
|
-
|
Inducement for
exercise of warrants
|
(3,560,958)
|
-
|
Change
in fair value of derivatives
|
2,975,316
|
457,811
|
Total
non-operating income (loss)
|
(1,600,652)
|
(2,051)
|
|
|
|
Net
loss
|
$(6,838,593)
|
$(11,904,482)
|
|
|
|
Basic
and diluted net loss per share
|
$(0.18)
|
$(0.63)
|
|
|
|
Basic
and diluted weighted average common shares outstanding used in
computing net loss per share
|
37,765,036
|
18,972,053
|
See
accompanying notes to consolidated financial
statements.
SPENDSMART NETWORKS,
INC.
Statements of Changes in Stockholders'
Deficit
For the years
ended December 31, 2016 and 2015
|
|
|
|
|
|||||
|
Series C
Preferred
Stock |
Series A
Preferred
Stock |
Common Stock
|
Additional
Paid-In |
Accumulated
|
Total
Stockholders' |
|||
|
Shares
|
Par Value
|
Shares
|
Par Value
|
Shares
|
Par Value
|
Capital
|
Deficit
|
Deficit
|
Balance as of December 31, 2014
|
3,757,229
|
$3,757
|
-
|
$-
|
18,435,239
|
$18,435
|
$88,064,205
|
$(80,716,475)
|
$7,369,922
|
Conversions
of preferred stock to common stock
|
(56,500)
|
(56)
|
-
|
-
|
226,000
|
226
|
(170)
|
-
|
-
|
Warrant
conversions
|
-
|
-
|
-
|
-
|
750,000
|
750
|
126,750
|
-
|
127,500
|
Warrants
issued in conjunction with convertible notes
|
-
|
-
|
|
|
-
|
-
|
386,118
|
-
|
386,118
|
Issuance
of common stock for services
|
-
|
-
|
-
|
-
|
1,047,522
|
1,048
|
495,240
|
-
|
496,288
|
Stock
based compensation from stock options and warrants
|
-
|
-
|
-
|
-
|
-
|
-
|
1,807,337
|
-
|
1,807,337
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(11,904,482)
|
(11,904,482)
|
Balance as of December 31, 2015
|
3,700,729
|
$3,701
|
-
|
$-
|
20,458,761
|
$20,459
|
$90,879,480
|
$(92,620,957)
|
$(1,717,317)
|
Conversions
of preferred stock to common stock
|
(257,668)
|
(257)
|
-
|
-
|
1,546,008
|
1,546
|
(1,289)
|
-
|
-
|
Warrant
exercises
|
-
|
-
|
-
|
-
|
17,895,859
|
17,896
|
2,308,566
|
|
2,326,462
|
Notes
converted
|
-
|
-
|
-
|
-
|
1,563,677
|
1,564
|
102,346
|
-
|
103,910
|
Issuance
of common stock for interest
|
-
|
-
|
-
|
-
|
511,266
|
511
|
20,989
|
|
21,500
|
Warrant
modification
|
-
|
-
|
-
|
-
|
-
|
-
|
43,897
|
-
|
43,897
|
Stock
based compensation from stock options and warrants
|
-
|
-
|
-
|
-
|
-
|
-
|
1,084,323
|
-
|
1,084,323
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(6,838,593)
|
(6,838,593)
|
Balance as of December 31, 2016
|
3,443,061
|
$3,444
|
-
|
$-
|
41,975,571
|
$41,976
|
$94,438,312
|
$(99,459,550)
|
$(4,975,818)
|
See accompanying notes to unaudited condensed consolidated
financial statements.
SPENDSMART NETWORKS, INC.
|
|||
Consolidated Statements of Cash Flows
|
|||
|
|
For
the years ended
|
|
|
December 31,
|
|
|
2016
|
2015
|
Cash
flows from operating activities:
|
|
|
Net
loss
|
$(6,838,593)
|
$(11,904,482)
|
Adjustments
to reconcile net loss to net cash used in operating
activities
|
|
|
Depreciation
expense
|
469,987
|
902,517
|
Amortization
of intangible asset
|
192,503
|
337,879
|
Amortization of
debt discount
|
399,367
|
456,475
|
Stock-based
compensation
|
1,084,323
|
1,807,337
|
Issuance of common
stock for services and interest
|
125,410
|
496,288
|
Change in fair
value of derivatives
|
(2,975,316)
|
(457,811)
|
Accrued interest
income on notes receivable from third party
|
-
|
(27,339)
|
Accrued interest
expenses on notes payable
|
50,087
|
23,090
|
Impairment of
software development assets
|
718,116
|
-
|
Impairment of
goodwill
|
-
|
3,202,276
|
Impairment of
intangible assets
|
979,072
|
1,189,246
|
Change
in earn-out liability
|
-
|
(594,216)
|
Inducement
for exercise of warrants
|
3,560,958
|
-
|
Loss
on extinguishment of debt
|
473,721
|
-
|
Provision
for bad debt
|
592,914
|
2,111,418
|
Changes
in operating assets and liabilities:
|
|
|
Accounts
receivable
|
(565,735)
|
(427,671)
|
Customer
short-term notes receivable
|
72,002
|
(598,385)
|
Customer
long-term notes receivable
|
184,004
|
(72,074)
|
Deferred
revenue
|
(3,138)
|
(39,792)
|
Prepaid
insurance
|
(13,801)
|
(5,010)
|
Other
assets
|
-
|
11,726
|
Accounts
payable and accrued liabilities
|
(146,268)
|
806,323
|
Net
cash used in operating activities
|
(1,347,851)
|
(2,782,205)
|
|
|
|
Cash
flows from investing activities:
|
|
|
Proceeds
from short-term notes receivable from third party
|
-
|
121,000
|
Software
development costs
|
(291,957)
|
(912,212)
|
Purchase
of property and equipment
|
-
|
(305,326)
|
Net
cash used in investing activities
|
(291,957)
|
(1,096,538)
|
|
|
|
Cash
flows from financing activities:
|
|
|
Net
proceeds from warrant exercises related to tender
offer
|
1,179,252
|
-
|
Net
proceeds from liabilities related to tender offer
|
-
|
661,424
|
Payment
of deferred acquisition payable-Intellectual Capital Mgmt,
LLC
|
(10,000)
|
(10,000)
|
Net
proceeds from warrant conversions
|
-
|
127,500
|
Proceeds
from issuance of notes
|
-
|
200,000
|
Proceeds
from issuance of related party financing
|
-
|
100,000
|
Repayment
of notes payable
|
(70,262)
|
(129,738)
|
Repayment
of notes to former CFO
|
(35,000)
|
-
|
Repayment
of convertible notes
|
(200,000)
|
-
|
Proceeds
from issuance of convertible debt
|
380,000
|
2,157,743
|
Net
cash provided by financing activities
|
1,243,990
|
3,106,929
|
|
|
|
Net decrease in cash and cash equivalents
|
(395,818)
|
(771,814)
|
|
|
|
Cash and cash equivalents at beginning of the period
|
470,341
|
1,242,155
|
Cash and cash equivalents at end of the period
|
$74,523
|
$470,341
|
|
|
|
Non-cash Investing and Financing Activities:
|
|
|
The Company had
conversions of 56,500 shares of Series C preferred stock into
226,000 shares of common stock during the year ended December 31,
2015.
|
||
The Company issued
1,438,340 warrants in connection with convertible debt during the
year ended December 31, 2015.
|
||
The Company issued
26,479,217 warrants in connection with the exercise of tender offer
warrants during the year ended December 31,
2016.
|
||
The
Company had a debt discount of $730,520 in connection with
convertible debt during the year ended December 31,
2015.
|
||
The Company had a
debt discount of $81,527 in connection with convertible debt during
the year ended December 31, 2016.
|
||
The Company issued
17,895,859 shares of Common Stock in connection with the exercise
of tender offer warrants during the year ended December 31,
2016.
|
||
The Company had
conversions of 257,668 shares of Series C preferred stock into
1,546,008 shares of common stock during the year ended December 31,
2016.
|
See accompanying notes to the consolidated financial
statements.
SPENDSMART NETWORKS, INC.
Notes to Consolidated Financial Statements
1.
Basis of Presentation and Going Concern
The Company is a Delaware corporation. Through the subsidiary
incorporated in the state of California, SpendSmart Networks, Inc.
(“SpendSmart-CA”), the Company provides proprietary
loyalty systems and a suite of digital engagement and marketing
servers through our Mobile and Loyalty Marketing programs
and proprietary website building software that help local merchants
build relationships with consumers and drive revenues. The Company is a publicly traded company trading
on the OTC Bulletin Board under the symbol “SSPC.” The
accompanying audited consolidated financial statements include the
accounts of the Company and SpendSmart-CA as of December 31, 2016
and 2015 and for the years then ended, and have been prepared in
accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”). All
intercompany balances and transactions have been
eliminated.
As of December 31, 2016, the Company’s audited consolidated
financial statements included an opinion containing an explanatory
paragraph as to the uncertainty of the Company’s ability to
continue as a going concern. The Company has continued to incur net
losses through December 31, 2016 and have yet to establish
profitable operations. These factors among others create a
substantial doubt about our ability to continue as a going concern.
The Company’s audited consolidated financial statements as of
and for the periods ended December 31, 2016 do not contain any
adjustments for this uncertainty.
The Company currently plans to raise additional required capital
through the sale of shares of the Company’s preferred or
common stock. All additional amounts raised will be used for our
future investing and operating cash flow needs. However there can
be no assurance that we will be successful in consummating such
financing. This description of our future plans for financing does
not constitute an offer to sell or the solicitation of an offer to
buy our securities.
2. Reclassification
Certain
reclassifications were made to the 2015 financial statement
presentation to conform to the 2016 financial statement
presentation. These reclassifications relate to balances from
discontinued operations.
3. Summary of Significant Accounting Policies
Loans Receivable and Accounts Receivable
The Company extended credit to its customers in the normal course
of business and performs ongoing credit evaluations of its
customers. Loans and accounts receivable are stated at amounts due
from customers net of an allowance for doubtful accounts. Accounts
that are outstanding longer than the contractual payment terms are
considered past due. The Company determines its allowance for
doubtful accounts by considering a number of factors, including the
length of time loan and accounts receivable are past due and the
customer's current ability to pay its obligation to the Company.
The Company writes off loans and accounts receivable when they
become uncollectible. The Company is no longer entering into notes
with its customers.
Use of Estimates
The preparation of the consolidated financial statements in
conformity with US GAAP requires our management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities,
fair value of financial instruments, at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could materially differ from those estimates.
Significant estimates inherent in the preparation of the
accompanying consolidated financial statements include
recoverability and useful lives of intangible assets, the valuation
allowance related to the Company's deferred tax assets, the
allowance for doubtful accounts related and notes and accounts
receivable and the fair value of stock options and warrants granted
to employees, consultants, directors, investors and placement
agents.
Revenue Recognition
The Company generates revenues primarily in the form of set up
fees, license fees, messaging, equipment and marketing services
fees and value added mobile marketing and mobile commerce
services. License fees are charged monthly for support
services. Set-up fees primarily consist of fees for
website development services (including support and unspecified
upgrades and enhancements when and if they are available), training
and professional services that are not essential to functionality.
The Company offers two licenses consisting of our Engage license
and our Thrive license. The Company now offers both licenses
in a combined package known as the Customer Loyalty System License
(“CLS”).
We recognize revenues when all of the following conditions are
met:
●
there
is persuasive evidence of an arrangement;
●
the
products or services have been delivered to the customer;
●
the
amount of fees to be paid by the customer is fixed or determinable;
and
●
the
collection of the related fees is probable.
Signed agreements are used as evidence of an arrangement.
Electronic delivery occurs when we provide the customer with access
to the software. We assess whether a fee is fixed or determinable
at the outset of the arrangement, primarily based on the payment
terms associated with the transaction. The Company offered extended
payment terms in 2014 and 2015 with regards to the setup fee with
typical terms of payment due between one and three years from
delivery of license. The Company no longer offers extended payment
terms. We assess collectability of the set-up fee based on a number
of factors such as collection history and creditworthiness of the
customer. If we determine that collectability is not probable,
revenue is deferred until collectability becomes probable,
generally upon receipt of cash.
License arrangements may also include set-up fees such as website
development, delivery of tablets, professional services and
training services, which are typically delivered within 30-60 days
of the contract term. In determining whether set-up fee revenues
should be accounted for separately from license revenues, we
evaluate whether the set-up fees are considered essential to the
functionality of the license using factors such as the nature of
our products; whether they are ready for use by the customer upon
receipt; the nature of our implementation services, which typically
do not involve significant customization to or development of the
underlying software code; the availability of services from other
vendors; whether the timing of payments for license revenues is
coincident with performance of services; and whether milestones or
acceptance criteria exist that affect the realizability of the
license fee. Substantially all of our set-up fee arrangements are
recognized as the services are performed. Payments received in
advance of services performed are deferred and recognized when the
related services are performed.
We do not offer refunds and therefore have not recorded any sales
return allowance for any of the periods presented. Upon a periodic
review of outstanding accounts and notes receivable, amounts that
are deemed to be uncollectible are written off against the
allowance for doubtful accounts.
Deferred revenue consists substantially of amounts invoiced in
advance of revenue recognition for our products and services
described above. We recognize deferred revenue as revenue only when
the revenue recognition criteria are met.
Debt discount and issuance costs
Debt issuance costs, including the value of warrants issued in
connection with debt financing and fees or costs paid to lender,
are presented in the consolidated balance sheets as a direct
deduction from the carrying amount of that debt.
The Company amortizes the discount to interest expense over the
term of the respective debt using the effective interest
method.
Cash and cash equivalents
The Company considers all investments with an original maturity of
three months or less to be cash equivalents. Cash equivalents
primarily represent funds invested in money market funds, bank
certificates of deposit and U.S. government debt securities whose
cost equals fair market value.
From time to time, the Company has maintained bank balances in
excess of insurance limits established by the Federal Deposit
Insurance Corporation. The Company has not experienced any losses
with respect to cash. Management believes the Company is not
exposed to any significant credit risk with respect to its cash and
cash equivalents.
Property and Equipment
Property and equipment (including
kiosks) had been recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the related
assets (generally three to five years). Costs incurred for
maintenance and repairs are expensed as incurred and expenditures
for major replacements and improvements are capitalized and
depreciated over their estimated remaining useful lives.
Depreciation expense for the years ended December 31, 2016 and2015
was $0 and $628,999, respectively. The Company accelerated the
depreciation in the amount of approximately $496,000 on the kiosks,
which have seven inch screens, to reduce their net book value to
zero due to technological obsolescence in 2015. In the fourth
quarter 2015, they were replaced by new ten inch screens and some
new seven inch screens which will be able to run offline from wifi,
have faster processors and ultra-sharp screens, and have licensee
reporting tools. Currently the Company sells the equipment to the
customer. Therefore the cost of equipment is included in operating
expenses and not capitalized as property and
equipment.
Software Capitalization
The Company accounts for computer software used in the business in
accordance with ASC 350 “Intangibles-Goodwill and
Other”. ASC 350 requires computer software costs associated
with internal use software to be charged to operations as incurred
until certain capitalization criteria are met. Costs incurred
during the preliminary project stage and the post-implementation
stages are expensed as incurred. Certain qualifying costs incurred
during the application development stage are capitalized as
property, equipment and software. These costs generally consist of
internal labor during configuration, coding, and testing
activities. Capitalization begins when (i) the preliminary project
stage is complete, (ii) management with the relevant authority
authorizes and commits to the funding of the software project, and
(iii) it is probable both that the project will be completed and
that the software will be used to perform the function intended. We
capitalized $291,957 and $912,212 in software for the years ended
December 31, 2016 and 2015, respectively. Software depreciation
expense for the years ended December 31, 2016 and 2015 was $469,987
and $273,517, respectively. We recorded impairment expense
of $718,116 related to our SMS software for the year ended December
31, 2016.
Valuation of Long-Lived Assets
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets
are less than the assets’ carrying amount. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amounts of the assets
exceed the estimated fair value of the assets. We recorded
impairment expense on our intangible assets of $922,688 related to
our SMS technology assets, $38,853 related to trademarks, and
$17,531 related to our TechXpress technology assets for the year
ended December 31, 2016. We conducted
an impairment analysis on our intangible assets and goodwill and
determined that we had an impairment related to our intangible
assets of $1,189,246 and on our goodwill of $3,202,276 at
December 31, 2015
Income Tax Expense Estimates and Policies
As part of the income tax provision process of preparing the
Company’s financial statements, the Company is required to
estimate the Company’s provision for income taxes. This
process involves estimating our current tax liabilities together
with assessing temporary differences resulting from differing
treatments of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities.
Management then assesses the likelihood that the Company deferred
tax assets will be recovered from future taxable income and to the
extent believed that recovery is not likely, a valuation allowance
is established. Further, to the extent a valuation allowance is
established and changes occur to this allowance in a financial
accounting period, such changes are recognized in the
Company’s tax provision in the Company’s consolidated
statement of operations. The Company’s use of judgment in
making estimates to determine the Company’s provision for
income taxes, deferred tax assets and liabilities and any valuation
allowance is recorded against our net deferred tax
assets.
There are various factors that may cause these tax assumptions to
change in the near term, and the Company may have to record a
future valuation allowance against our deferred tax assets. The
Company recognizes the benefit of an uncertain tax position taken
or expected to be taken on the Company’s income tax returns
if it is “more likely than not” that such tax position
will be sustained based on its technical merits.
Stock Based Compensation
The Company accounts for stock based compensation arrangements
through the measurement and recognition of compensation expense for
all stock based payment awards to employees and directors based on
estimated fair values. The Company uses the Black-Scholes option
valuation model to estimate the fair value of the Company’s
stock options and warrants at the date of grant. The Black-Scholes
option valuation model requires the input of subjective assumptions
to calculate the value of options and warrants. The Company uses
historical company data among other information to estimate the
expected price volatility and the expected forfeiture
rate.
Derivatives – Warrant Liability
The Company accounts for the common stock warrants granted and
still outstanding as of December 31, 2016 in connection with
certain financing transactions (“Transactions”) in
accordance with the guidance contained in ASC 815-40-15-7D,
"Contracts in Entity's Own Equity" whereby under that provision
they do not meet the criteria for equity treatment and must be
recorded as a liability. Accordingly, the Company classifies the
warrant instrument as a liability at its fair value and adjusts the
instrument to fair value at each reporting period. This liability
is subject to re-measurement at each balance sheet date until
exercised, and any change in fair value is recognized in the
Company's statements of operations. The fair value of the warrants
issued by the Company in connection with the transactions has been
estimated using a Monte Carlo simulation.
The Company accounts for certain of its outstanding warrants issued
in fiscal 2010, 2012 and 2013 (“2010 Warrants,”
“2012 Warrants” and “2013 Warrants, respectively)
as derivative liabilities. These warrants were determined to be
ineligible for equity classification due to provisions of the
respective instruments that may result in an adjustment to their
conversion or exercise prices. The Company recognized a gain of $0
and $47,209 in the fair value of derivatives for the years ended
December 31, 2016 and 2015, respectively. These derivative
liabilities which arose from the issuance of these warrants
resulted in an ending balance of derivative liabilities of $0 at
December 31, 2015, and expired in 2016.
The Company accounts for certain of its outstanding warrants issued
in fiscal 2016 (“2016 Warrants”) as derivative
liabilities. The 2016 Warrants were determined to be ineligible for
equity classification due to provisions of the respective
instruments that may result in an adjustment to their conversion or
exercise prices. The Company recognized a gain of $2,732,444 in the
fair value of these derivatives for the year ended December 31,
2016. These derivative liabilities which arose from the issuance of
the 2016 Warrants resulted in an ending balance of derivative
liabilities of $1,366,898 as of December 31,
2016.
Derivatives - Bifurcated Conversion Option in Convertible
Notes
The Company issued Convertible Notes with features that are either
(i) not afforded equity classification, (ii) embody risks not
clearly and closely related to host contracts, or (iii) may be
net-cash settled by the counterparty. As required by ASC
815, Accounting for Derivative
Financial Instruments and Hedging Activities, in certain instances, these instruments are
required to be carried as derivative liabilities, at fair value, in
our financial statements.
The Convertible Notes issued during the years ended December 31,
2016 and 2015 are subject to anti-dilution adjustments that allow
for the reduction in the Conversion Price, as defined in the
agreement, in the event the Company subsequently issues equity
securities including Common Stock or any security convertible or
exchangeable for shares of Common Stock for a price less than the
current conversion price. The Company bifurcated and accounted for
the conversion option in accordance with ASC 815 as a derivative
liability, since this conversion feature is not considered to
be indexed to the Company’s own stock.
The Company’s derivative liability has been measured at fair
value at December 31, 2016 using a Monte-Carlo Simulation. Inputs
into the model require estimates, including such items as estimated
volatility of the Company’s stock, estimated probabilities of
additional financing, risk-free interest rate, and the estimated
life of the financial instruments being fair valued. In addition,
since the conversion price contains an anti-dilution adjustment,
the probability that the Conversion Price of the Notes would
decrease as the share price decreased was also incorporated into
the valuation calculation.
The Company recognized a gain of $242,231 and a gain of $410,602 in
the fair value of conversion option derivatives for the year ended
December 31, 2016 and 2015, respectively. These derivative
liabilities resulted in an ending balance of conversion option
derivative liabilities of $88,242 and $179 as of December 31, 2016
and December 31, 2015, respectively.
Subsequent changes to the fair value of the derivative liabilities
will continue to require adjustments to their carrying value that
will be recorded as other income (in the event that their value
decreases) or as other expense (in the event that their value
increases). In general (all other factors being equal), the Company
will record income when the market value of the Company’s
common stock decreases and will record expense when the value of
the Company’s stock increases. The fair value of these
liabilities is estimated using Monte Carlo pricing models that are
based on the individual characteristics of the Company’s
warrants, preferred and common stock, as well as assumptions for
volatility, remaining expected life, risk-free interest rate and,
in some cases, credit spread.
Net Loss per Share
The Company calculates basic earnings per share (“EPS”)
by dividing the Company’s net loss applicable to common
shareholders by the weighted average number of common shares
outstanding for the period, without considering common stock
equivalents. Diluted EPS is computed by dividing net income or net
loss applicable to common shareholders by the weighted average
number of common shares outstanding for the period and the weighted
average number of dilutive common stock equivalents, such as
options and warrants. Options and warrants are only included in the
calculation of diluted EPS when their effect is
dilutive.
Fair value of assets and liabilities
Fair value is defined as the price that would be received from
selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
When determining the fair value for applicable assets and
liabilities, we consider the principal or most advantageous market
in which we would transact and we consider assumptions market
participants would use when pricing the asset or liability, such as
inherent risk, transfer restrictions, and risk of nonperformance.
This guidance also establishes a fair value hierarchy to prioritize
inputs used in measuring fair value as follows:
|
●
|
Level
1: Observable inputs such as quoted prices in active
markets;
|
|
●
|
Level
2: Inputs, other than quoted prices in active markets, that are
observable either directly or indirectly; and
|
|
●
|
Level
3: Unobservable inputs in which there is little or no market data,
which require the reporting entity to develop its own
assumptions.
|
The Company’s financial instruments are cash and cash
equivalents, accounts payable, and derivative liabilities. The
recorded values of cash equivalents and accounts payable
approximate their fair values based on their short-term nature. The
fair value of derivative liabilities is estimated using option
pricing models that are based on the individual characteristics of
our warrants, preferred and common stock, the derivative liability
on the valuation date as well as assumptions for volatility,
remaining expected life, risk-free interest rate and, in some
cases, credit spread. The derivative liabilities are the only Level
3 fair value measures.
A
summary of quantitative information with respect to valuation
methodology and significant unobservable inputs used for the
Company’s warrant derivative liabilities that are categorized
within Level 3 of the fair value hierarchy as of December 31, 2016
and 2015 is as follows:
Date
of Valuation
|
December 31,
2016
|
December 31,
2015
|
Stock
Price
|
0.02
|
0.15
|
Volatility
(Annual)
|
140%
|
66%
|
Number
of assumed financings
|
1
|
1
|
Total
shares outstanding
|
41,975,571
|
20,458,761
|
Strike
Price
|
0.01
|
0.75
|
Risk-free
Rate
|
1.34%
|
0.96%
|
Maturity
Date
|
7/15/2019
|
7/15/2019
|
Expected
Life
|
N/A
|
N/A
|
A summary of quantitative information with respect to valuation
methodology and significant unobservable inputs used for the
Company’s conversion option derivative that are categorized
within Level 3 of the fair value hierarchy as of December 31, 2016
is as follows:
Date
of Valuation
|
December 31,
2016
|
December 31,
2015
|
Stock
Price
|
0.02
|
0.15
|
Volatility
(Annual)
|
140%
|
66%
|
Strike
Price
|
N/A
|
0.75
|
Risk-free
Rate
|
1.40%
|
1.40%
|
Maturity
Date
|
5/5/2017
|
6/26/2016
|
At December 31, 2016 and 2015, the estimated fair values of the
liabilities measured on a recurring basis are as
follows:
|
|
Fair
Value Measurements at
|
||
|
Carrying
|
December
31, 2016:
|
||
|
Value
|
Level
1
|
Level
2
|
Level
3
|
Financial
Assets
|
|
|
|
|
Earn-out
liability
|
$-
|
$-
|
$-
|
$-
|
Warrant
derivative liability
|
1,366,898
|
-
|
-
|
1,366,898
|
Conversion
option derivative liability
|
88,242
|
-
|
-
|
88,242
|
Total
|
$1,455,140
|
$-
|
$-
|
$1,455,140
|
|
|
|
|
|
|
|
Fair
Value Measurements at
|
||
|
Carrying
|
December
31, 2015:
|
||
|
Value
|
Level
1
|
Level
2
|
Level
3
|
Financial
Assets
|
|
|
|
|
Earn-out
liability
|
$-
|
$-
|
$-
|
$-
|
Conversion
option derivative liability
|
179
|
-
|
-
|
179
|
Total
|
$179
|
$-
|
$-
|
$179
|
The
following tables present the activity for Level 3 liabilities for
the years ended December 31, 2016 and 2015:
|
Fair
Value Measurement Using
|
|
|
Significant
Unobservable Inputs
|
|
|
(Level
3)
|
|
|
Warrant
Derivative Liability
|
Conversion
Option Derivative Liability
|
Beginning
balance at December 31, 2015
|
$-
|
$179
|
Additions
during the year
|
4,099,344
|
330,933
|
Total
(gains) or losses included in net loss
|
(2,732,446)
|
(242,870)
|
Transfers
in and/or out of Level 3
|
-
|
-
|
Ending
balance at December 31, 2016
|
$1,366,898
|
$88,242
|
|
Fair
Value Measurement Using
|
|
|
Significant
Unobservable Inputs
|
|
|
(Level
3)
|
|
|
Warrant
Derivative Liability
|
Conversion
Option Derivative Liability
|
Beginning
balance at December 31, 2014
|
$47,209
|
$-
|
Additions
during the year
|
-
|
410,781
|
Total
(gains) or losses included in net loss
|
(47,209)
|
(410,602)
|
Transfers
in and/or out of Level 3
|
-
|
-
|
Ending
balance at December 31, 2015
|
$-
|
$179
|
Changes
in fair value of our Level 3 earn-out liability for the years ended
December 31, 2016 and 2015 were as follows:
Fair Value Measurements Using Level 3
Inputs
|
||||
|
|
|
|
|
|
Warrant
|
Conversion
|
Earn-out
|
|
|
Derivative
Liability
|
Option
Derivative Liability
|
Liability
|
Total
|
Balance
- December 31, 2015
|
$-
|
179
|
-
|
$179
|
Additions
during the period
|
4,099,344
|
330,933
|
-
|
4,430,277
|
Total
(gains) or losses include in net loss
|
(2,732,446)
|
(242,870)
|
-
|
(2,975,316)
|
Balance
- December 31, 2016
|
$1,366,898
|
88,242
|
-
|
$1,455,140
|
Advertising
The Company expenses advertising costs as incurred. The Company has
no existing arrangements under which we provide or receive
advertising services from others for any consideration other than
cash. Advertising expenses totaled $208,530 and $320,044 for the
years ended December 31, 2016 and 2015, respectively.
Litigation
From time to time, the Company may become involved in litigation
and other legal actions. The Company estimates the range of
liability related to any pending litigation where the amount and
range of loss can be estimated. The Company records its best
estimate of a loss when the loss is considered probable. Where a
liability is probable and there is a range of estimated loss with
no best estimate in the range, the Company records a charge equal
to at least the minimum estimated liability for a loss contingency
when both of the following conditions are met: (i) information
available prior to issuance of the financial statements indicates
that it is probable that an asset had been impaired or a liability
had been incurred at the date of the financial statements and (ii)
the range of loss can be reasonably estimated.
On July 8, 2015, Intellectual Capital Management, LLC dba SMS
Masterminds and SpendSmart Networks, Inc. were named in a potential
class-action lawsuit entitled Peter Marchelos, et al v.
Intellectual Capital Management, et al, filed in the United States
District Court Eastern District of New York relating to alleged
violations of the Telephone Consumer Protection Act of 1991. This
litigation involves the same licensee and merchant as a previous
lawsuit and the same attorneys represent the plaintiffs in this
action. The claim of one of the two plaintiffs was resolved for
$1,701. The Company believes the Plaintiff’s allegations have
no merit. There are no other legal claims currently pending
or threatened against us that in the opinion of our management
would be likely to have a material adverse effect on our financial
position, results of operations or cash flows.
Earn Out
The Company agreed to pay the sellers an earn-out payment relating
to fifteen percent of the earnings generated by SMS Masterminds
after the acquisition and an additional earn-out payment tied to
the EBITDA of the Company after the acquisition of SMS Masterminds,
of up to $2,000,000 in aggregate. The Company paid $0
during the years ended December 31, 2016 and 2015 related to this
earn-out agreement.
The
change in fair value of Earn-out liability expenses totaled $0 for
the year ended December 31, 2016 and $594,216 for the year ended
December 31, 2015. We recorded the change in earn-out liability due
to our updated operating assumptions in the underlying valuation
related to the SMS acquisition.
The
Company agreed to pay the sellers a guaranteed payment of $400,000
of which $390,000 had been paid as of December 31, 2015 and $10,000
was paid in January, 2016. As of December 31, 2016, the remaining
balance was $0.
Goodwill
The Company accounted for goodwill under ASC 350 “Intangibles
– Goodwill and Other” (“ASC 350”). ASC 350
requires an evaluation of impairment by assessing qualitative
factors, and if necessary, applying a fair-value based test. The
goodwill impairment test requires qualitative analysis to determine
whether is it more likely than not that the fair value of a
reporting unit is less than the carrying amount, including
goodwill. An indication of impairment through analysis of these
qualitative factors initiates a two-step process, which requires
management to make judgments in determining what assumptions to use
in the calculation. The first step of the process consists of
estimating the fair value of the Company’s reporting units
based on discounted cash flow models using revenue and profit
forecasts and comparing the estimated fair values with the carrying
values of the Company’s reporting units which include the
goodwill. If the estimated fair values are less than the carrying
values, a second step is performed to compute the amount of the
impairment by determining an “implied fair value” of
goodwill. The determination of the Company’s “implied
fair value” requires the Company to allocate the estimated
fair value to the assets and liabilities of the reporting unit. Any
unallocated fair value represents the “implied fair
value” of goodwill, which is compared to the corresponding
carrying value. The Company tested goodwill impairment
at December 31, 2015 and concluded that goodwill was fully
impaired. Goodwill was written down in the amount of $3,202,276 in
2015.
Intangible assets
Intangible assets consist of intellectual property/technology,
customer lists, and trade-name/marks acquired in business
combinations under the purchase method of accounting are recorded
at fair value net of accumulated amortization since the acquisition
date. Amortization is calculated using the straight line method
over the estimated useful lives at the following annual
rates:
|
Useful Lives
|
IP/technology
|
10
|
Trade-name/marks
|
10
|
|
December
31,
2016
|
December
31,
2015
|
Intangible assets beginning balance
|
1,570,575
|
3,097,700
|
Amortization
|
(192,503)
|
(337,879)
|
Impairment
|
(979,072)
|
(1,189,246)
|
Intangible assets ending balance
|
399,000
|
1,570,575
|
The Company reviews its finite-lived intangible assets for
impairment whenever events or changes in circumstances indicate
that the carrying amount of finite-lived intangible asset may not
be recoverable. Recoverability of a finite-lived intangible asset
is measured by a comparison of its carrying amount to the
undiscounted future cash flows expected to be generated by the
asset. If the asset is considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying
amount of the asset exceeds the fair value of the asset, which is
determined based on discounted cash flows.
The
Company evaluates the recoverability of identifiable intangible
assets whenever events or changes in circumstances indicate that an
intangible asset’s carrying amount may not be recoverable.
Such circumstances could include, but are not limited to (1) a
significant decrease in the market value of an asset, (2) a
significant adverse change in the extent or manner in which an
asset is used, or (3) an accumulation of costs significantly in
excess of the amount originally expected for the acquisition of an
asset. The Company measures the carrying amount of the asset
against the estimated undiscounted future cash flows associated
with it. Should the sum of the expected future net cash flows be
less than the carrying value of the asset being evaluated, an
impairment loss would be recognized. The impairment loss would be
calculated as the amount by which the carrying value of the asset
exceeds its fair value. The fair value is measured based on quoted
market prices, if available. If quoted market prices are not
available, the estimate of fair value is based on various valuation
techniques, including the discounted value of estimated future cash
flows. The evaluation of asset impairment requires the Company to
make assumptions about future cash flows over the life of the asset
being evaluated. These assumptions require significant judgment and
actual results may differ from assumed and estimated amounts.
During the year ended December 31, 2016, the Company recorded an
impairment loss of $979,072 related to an intangible
asset.
Recently
Issued Accounting Pronouncements
On May 28, 2014, the FASB issued ASU 2014-09, Revenue from
Contracts with Customers, as amended, (Topic 606), with an
effective date for annual reporting periods beginning after
December 15, 2017, including interim periods within that reporting
period. Earlier application is permitted only as of annual
reporting periods beginning after December 15, 2016. The Company is
evaluating the impact, if any, the pronouncement will have on both
historical and future financial positions and results of
operations, with an expected completion date of June 30,
2017.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial
Statements—Going Concern (“ASU
2014-15), which states
management should evaluate whether there are conditions or events,
considered in the aggregate, that raise a substantial doubt about
the entity’s ability to continue as a going concern within
one year after the date that the financial statements are issued.
Management’s evaluation should be based on relevant
conditions and events that are known and likely to occur at the
date that the financial statements are issued. ASU 2014-15 as
required was adopted in the fourth quarter 2016.
In February 2016, the FASB issued ASU 2016-02, Leases which amended
guidance for lease arrangements in order to increase transparency
and comparability by providing additional information to users of
financial statements regarding an entity's leasing activities. The
revised guidance seeks to achieve this objective by requiring
reporting entities to recognize lease assets and lease liabilities
on the balance sheet for substantially all lease arrangements. The
guidance, which is required to be adopted in the first quarter of
2019, will be applied on a modified retrospective basis beginning
with the earliest period presented. Early adoption is permitted. We
are currently evaluating the impact of adopting this guidance on
our consolidated financial statements.
In March 2016, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2016-09 - Compensation - Stock Compensation,
which simplifies the accounting for the tax effects related to
stock based compensation, including adjustments to how excess tax
benefits and a company’s payments for tax withholdings should
be classified, amongst other items. ASU 2016-09 is effective
for financial statements issued for fiscal years beginning after
December 15, 2016, and interim periods within those fiscal
years. Early adoption is permitted. We do not expect this to have a
material impact on our consolidated financial
statements.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments
– Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments" (ASU 2016-13), that requires entities to use
a new impairment model based on expected losses. Under this new
model an entity would recognize an impairment allowance equal to
its current estimate of credit losses on financial assets measured
at amortized cost. ASU 2016-13 is effective for us beginning
January 1, 2020 with early adoption permitted January 1, 2019.
Credit losses under the new model will consider relevant
information about past events, current conditions and reasonable
and supportable forecasts, resulting in recognition of lifetime
expected credit losses. We are currently evaluating the impact of
adopting this guidance on our consolidated financial
statements.
Segments
The
Company operates in one reportable segment. Accordingly, no segment
disclosures have been presented herein.
4. Accounts Receivable, Short-Term and Long-Term Notes
Receivable
Management reviews accounts receivable, short-term and long-term notes receivable on a monthly basis to determine if any receivables are potentially uncollectible. An allowance for doubtful accounts is determined based on a combination of historical experience, length of time outstanding, customer credit worthiness, and current economic trends. As of December 31, 2016, the Company had recorded an allowance for doubtful accounts of $1,796,000. We recorded a bad debt expense of $552,725 during the year ended December 31, 2016 and wrote off uncollectable accounts during the year ended December 31, 2016 in the amount of $147,408, all of which were fully reserved. As of December 31, 2015, the Company had recorded an allowance for doubtful accounts of $1,389,883.
Notes
receivable aged over 60 days past due are considered delinquent and
notes receivable aged over 90 days past due with known collection
issues are placed on non-accrual status. Interest revenue is not
recognized on notes receivable while on non-accrual status. Cash
payments received on non-accrual receivables are applied towards
the principal. When notes receivable on non-accrual status are
again less than 60 days past due, recognition of interest revenue
for notes receivable is resumed. We charge interest rates on our
notes receivable averaging 13% which approximates a fair value. We
recorded approximately $38,782 in interest income for the year
ended December 31, 2016.
Based
upon the Company's methodology, the notes receivable balances with
reserves and the reserves associated with those balances are as
follows:
|
December 31, 2015
|
|||||
|
Gross
|
Reserve
|
Net
|
|||
|
Current
|
Long-Term
|
Current
|
Long-Term
|
Current
|
Long-Term
|
Customer
Notes Receivable
|
908,590
|
661,371
|
632,422
|
461,702
|
276,168
|
199,669
|
Accounts
Receivable
|
437,589
|
-
|
295,759
|
-
|
141,830
|
-
|
|
December 31, 2016
|
|||||
|
Gross
|
Reserve
|
Net
|
|||
|
Current
|
Long-Term
|
Current
|
Long-Term
|
Current
|
Long-Term
|
Customer
Notes Receivable
|
793,988
|
414,665
|
767,138
|
399,401
|
26,850
|
15,264
|
Accounts
Receivable
|
921,829
|
-
|
529,461
|
-
|
292,368
|
-
|
The
roll forward of the allowance for doubtful accounts related to
notes receivable and accounts receivable is as
follows:
|
Notes Receivable Reserve
|
Accounts
|
|
|
Current
|
Long-Term
|
Receivable Reserve
|
Balance
at December 31, 2014
|
286,571
|
349,954
|
188,527
|
Incremental
Provision
|
796,063
|
551,256
|
441,627
|
Recoveries
|
-
|
-
|
-
|
Charge
offs
|
(450,212)
|
(439,508)
|
(334,395)
|
Balance
at December 31, 2015
|
632,422
|
461,702
|
295,759
|
|
Notes
Receivable Reserve
|
Accounts
|
|
|
Current
|
Long-Term
|
Receivable Reserve
|
Balance
at December 31, 2015
|
$632,422
|
$461,702
|
$295,759
|
Incremental
Provision
|
177,316
|
401
|
415,197
|
Recoveries
|
-
|
-
|
-
|
Charge
offs
|
(42,600)
|
(62,702)
|
(81,495)
|
Balance
at December 31, 2016
|
$767,138
|
$399,401
|
$629,461
|
5. Short Term Note Receivable
The
Company issued a Secured Convertible Promissory Note (the
“Note”) in the principal amount of $410,000 to a third
party in September 2014. The Note bears interest at the rate of
5.25% per annum and matured in four months. For the years ended
December 31, 2016 and December 31, 2015, the Company has recorded
$0 and $27,380 of interest income from this Note. $130,000 of the
principal amount was paid in 2015. The remaining balance of
$322,430 was written off during the year ended December 31, 2015,
which was made up of $280,000 in principal and $42,430 in
interest.
6. Convertible Promissory Notes
On November 30, 2016, the Company issued a Convertible Promissory
Note to the Daniel Jonathan Blech Trust DTD 9/01/2005 in the amount
of $100,000. Mr. Blech, a member of the Company’s board of
directors, is the trustee. The Convertible Promissory Note bears
interest at the rate of 9% has six-month maturity date, and a
voluntary conversion into an upcoming financing in the event the
Company closes the financing and receives gross proceeds totaling
at least $200,000. The conversion rate will be at the same terms of
the financing. We recorded $2,250 in interest expense for the year
ended December 31, 2016.
On
November 7, 2016, the Company issued a Convertible Promissory Note
to the Daniel Jonathan Blech Trust DTD 9/01/2005 in the amount of
$100,000. Mr. Blech, a member of the board of directors, is the
trustee. The Convertible Promissory Note bears an interest at the
rate of 9%, has a six month maturity date, and a voluntary
conversion into an upcoming financing in the event the Company
closes the financing and receives gross proceeds totaling at least
$200,000. The conversion rate will be at the same terms of the
financing. We recorded $2,817 in interest expense for the year
ended December 31, 2016.
On July
19, 2016, the Company issued the following Convertible Promissory
Notes: Joe Proto ($40,000), John Eyler ($40,000), Francis J. Liddy
($20,000), Isaac Blech ($40,000), and Transpac Investments Ltd.
($40,000). All of the individuals listed are members of the board
of directors. The Convertible Promissory Notes bear interest at the
rate of 9%, have a six month maturity date, and a mandatory
conversion into an upcoming financing in the event the Company
closes the financing and receives gross proceeds totaling at least
$200,000. The conversion rate will be at the same terms of the
financing. We recorded $7,283 in interest expense for the year
ended December 31, 2016.
During the year ended December 31, 2015, the Company closed on a
private offering and issued and six 9% Convertible Promissory Notes
with principal amounts of $300,000, $262,500, $275,000, $75,000,
50,000, and $150,0000 (the “Notes”) and warrants to
purchase 400,002, 350,002, 366,667, 66,667, 100,001, and 200,001
shares of the Company’s common stock (the
“Warrant”), respectively. The Company also agreed to
provide piggy-back registration rights to the holders of the Units.
The Notes have a term of twelve (12) months, pay interest
semi-annually at 9% per annum and can be voluntarily converted by
the holder into shares of common stock at an exercise price of
$0.75 per share, subject to adjustments for stock dividends,
splits, combinations and similar events as described in the Notes.
In addition, if the Company issues or sells common stock at a price
below the conversion price then in effect, the conversion price of
the Notes shall be adjusted downward to such price but in no event
shall the conversion price be reduced to a price less than $0.50
per share. The Warrants have an exercise price of $0.75 per share
and have a term of four years. The holders of the Warrants may
exercise the Warrants on a cashless basis for as long as the shares
of common stock underlying the Warrants are not registered on an
effective registration statement. The relative fair value
ascribed to the 1,483,340 warrants issued was approximately
$337,118 and was recorded to additional paid-in capital. The
embedded conversion feature was bifurcated and accounted for as a
derivative liability at approximately $393,000 on the day of
issuance. The remaining proceeds were allocated based on
the relative fair value of the debt and the warrant, and
accordingly, approximately $730,520 of debt discount was recorded
and was amortized over the initial term of the debt using the
effective interest method. These notes were modified in second
quarter 2016 and again in fourth quarter 2016. See below for
further discussion.
During the second quarter 2016, the Company amended four of the
outstanding 9% Convertible Promissory Notes with principal amounts
of $275,000, $75,000, 50,000, and $150,000 as follows: the maturity
dates were extended to November 5, 2016, September 2, 2016,
November 22, 2016, and September 26, 2016, respectively; the
conversion price was lowered to $0.15 per share, the provision
limiting the conversion price adjustment to that of the Series C
Preferred Stock was removed, and an option to be repaid prior to
the maturity date in the event the Company raises capital in excess
of three million dollars was added. The Company also amended the
warrant issued in conjunction with the Convertible Promissory Note
reducing the exercise price to $0.15 and issued new warrants to
purchase 666,669 shares of the Company's common stock with a $0.15
exercise price and a three year expiration. According to
FASB ASC 470-50, the modification is accounted for as a debt
extinguishment, whereby the new debt instrument is initially
recorded at fair value, and that amount is used to determine the
debt extinguishment gain or loss to be recognized and the effective
rate of the new instrument. We recognized a loss on the
extinguishment of debt of $415,689 for the year ended December 31,
2016.
During
the fourth quarter 2016, the Company amended six of the outstanding
9% Convertible Promissory Notes with principal amounts of $300,000,
$262,500, $275,000, $75,000, $50,000, and $150,000 as follows: the
maturity dates were extended to May 5, 2017; the interest rate for
the extension period was increased to 15%; the conversion price was
changed to the per share price at the time of the next financing of
$2,000,000 or greater. According to FASB ASC 470-50, the
modification is accounted for as a debt extinguishment, whereby the
new debt instrument is initially recorded at fair value, and that
amount is used to determine the debt extinguishment gain or loss to
be recognized and the effective rate of the new instrument. We
recognized a loss on the extinguishment of debt of $58,032 for the
year ended December 31, 2016.
On July 15, 2015, the Company issued a Convertible Promissory
Note in the principal amount of $400,000 inclusive of interest. The
Note is for a term of six months. The Note bears interest at twelve
percent per annum. The Note is secured by the assets of the
Company. The Note may be converted into shares of the
Company’s common stock at $0.75 per share. The Company also
issued the holder warrants to purchase 500,000 shares of the
Company’s common stock. The proceeds were allocated based on
the relative fair value of the debt and the warrant. The warrants
have an exercise price of $0.75 per share and have a term of two
years. The relative fair value ascribed to the 500,000 warrants
issued was approximately $49,000 and was recorded to additional
paid-in capital. This amount will be amortized over the term of the
debt using the effective interest rate method. As part of the
closing of the Tender Offer, $200,000 of these notes converted into
1,333,334 shares of common stock and the investor received common
stock and 1,333,333 warrants with a three year term at an exercise
price of $0.15. The remaining $200,000 of notes was paid in
February 2016.
During the year ended December 31, 2015, the Company issued
Convertible Promissory Notes to investors in the principal amount
of $150,000, $150,000, $287,333, and $48,000. The Notes feature a
mandatory conversion feature obligating the holder to participate
and apply the principal and interest into a “Qualified
Financing” meaning a financing taking place prior to January
31, 2016, wherein the Company receives gross proceeds totaling at
least $1,000,000. In the event the entire principal plus accrued
interest under this Note is not eligible for conversion into a
Qualified Financing, then any remaining balance of this Note shall
be converted into restricted common stock at the price of the
Qualified Financing and Holder shall receive three (3) times any
warrant coverage provided for in the Qualified Financing. The Notes
bear interest at nine percent per annum and has a maturity date of
six months. The embedded conversion feature of the note was
bifurcated and accounted for as a derivative liability at
approximately $17,379 on the day of issuance. As part of the
closing of the Tender Offer, these notes converted into 4,291,679
shares of common stock and the investors received 12,875,037
warrants with a three year term at an exercise price of
$0.15.
7. Notes Payable
On
August 26, 2015, the Company entered into a Business Promissory
Note and Security Agreement with Bank of Lake Mills for the
principal sum of $200,000 and a daily interest rate of 0.22%. The
Note is for a term of six months with a weekly repayment schedule
ending February 22, 2016. The Note included standard
representations and warranties. The Note was secured by certain
assets of the Company as well as a personal guarantee by Alex
Minicucci, our then CEO. The total repayment amount including
interest and principal is $244,637 and was to be paid pro-rata
weekly ending February 22, 2016. For the year ended December 31,
2015, we recorded interest expense related to the note of $39,585.
For the year ended December 31, 2015, we have paid approximately
$129,738 in principal repayments related to the Note. For the year
ended December 31, 2016, we paid approximately $70,262 in principal
repayments related to the Note. As of February 25, 2016, the note
has been fully repaid.
8. Due to Related Party
On August 14, 2015 and September 28, 2015, the Company entered into
Loan Agreements with Alex Minicucci for the principal sum of
$65,000 and $35,000, respectively. The Loans were to be paid off by
December 31, 2016 and include an interest rate of 7%. For the years
ended December 31, 2016 and 2015, we recorded interest expense
related to the loans of $4,756 and $3,034. The $35,000 loan has
been repaid during 2016 and the Company extended the terms related
to the $65,000 loan to May 10, 2017.
9. Common Stock and Warrants
Common stock
During the year ended December 31, 2016, the company issued
17,895,859 shares of common stock upon warrant exercises related to
the tender offer. The Company issued 1,563,677 shares of common
stock related to services rendered and recognized expense of
$103,910 and issued 511,266 shares of common stock related to
interest due and recognized expense of $21,500. 257,668 shares of
Series C Stock converted to 1,546,008 shares of common shares
during the year ended December 31, 2016.
During
the year ended December 31, 2015, the company issued 1,047,522
shares of common stock and the Company recognized expense of
$496,288 for services rendered and interest.
Tender Offer and Debt Conversion
Between December 11, 2015 and February 3, 2016, the Company entered
into agreements with investors, pursuant to which on February 3,
2016, warrant holders exercised 12,270,846 Warrants to purchase an
aggregate of 12,270,846 shares of our common stock for gross
proceeds of $1.84 million. The Company issued new warrants to
purchase an aggregate of 26,479,217 shares of common stock at an
exercise price of $0.15 per share, in consideration for the
immediate exercise of the warrants. In August, 2016, the exercise
price on 13,209,609 of these warrants was reduced to $0.01, as the
Company had not met its six-month targets related to these
warrants. In January, 2017, the exercise price on 13,209,608 of
these warrants was reduced to $.01, as the Company had not met its
twelve-month target related to these warrants. The following
paragraph discusses the accounting treatment related to this
reduction.
The Warrants have a cash settlement feature; as a result, they were
classified as a derivative liability and recorded at fair value.
Fair value of the Warrants, in the total amount of $3,918,924 was
calculated using the Monte-Carlo model, using the following
assumptions: 68.7% expected volatility, a risk-free interest rate
of 0.91%, estimated life of 3 years and no dividend yield. The fair
value of the common stock was $0.148. The transaction was accounted
for as an inducement. ASC 470-20-40 addresses the accounting for
altered conversion privileges, including the issuance of warrants
or other securities (not provided for in the original conversion
terms) to induce conversion. As a result of this transaction, the
Company recognized an inducement expense of $3,560,958 equal to the
fair value of all securities and other consideration transferred in
the transaction in excess of the fair value of securities issuable
pursuant to the original conversion terms, as of the date of the
conversion.
In connection with the tender offer, investors converted $843,751
in Convertible Notes at a conversion price of $0.15 per share into
5,625,013 shares of our common stock during 2016.
10. Convertible Preferred Stock
|
Series A Preferred Stock
At December 31, 2016 and 2015 we had 0 shares of Series A
Cumulative Convertible Preferred Stock (the “Series A
Stock”) outstanding.
Series B Preferred Stock
At December 31, 2016 and 2015 we had 0 shares of Series B
convertible preferred stock (“Series B Stock”)
outstanding.
Series C Convertible Preferred Stock
At December 31, 2016 and 2015, we had 3,443,061 and 3,700,729
shares, respectively, of Series C convertible preferred stock
(“Series C Stock”) outstanding that were issued to
investors for $3.00 per share. We issued 4,299,081 shares of Series
C Stock and had conversions of 56,500 shares for the year ended
December 31, 2015. For the year ended December 31, 2016, we had
conversions of 257,668 shares.
Number of Shares: The number of
shares of Series C Preferred Stock designated as Series C Preferred
Stock is 4,299,081 (which shall not be subject to increase without
the written consent of all of the holders of the Series C Preferred
Stock or as otherwise set forth in the Certificate of
Designation.
Stated Value: The initial
Stated Value of each share of Series C Preferred Stock is $3.00 (as
adjusted pursuant to the Certificate of
Designation).
Voluntary Conversion: The
Series C Preferred Stock shall be convertible at the option of the
holder, into common stock at the applicable conversion price of
$0.75 per share, subject to adjustments for stock dividends,
splits, combinations and similar events as described in the form of
Certificate of Designations. In addition, the Company has the right
to require the holders to convert to common stock under certain
enumerated circumstances.
Mandatory Conversion: At the
Company’s sole option, each outstanding share of Series C
Preferred Stock may be converted into shares of Common Stock at the
applicable conversion price immediately prior to the close of
business on the date that the volume weighted average price of the
Common Stock, based on the closing price on the or any other market
or exchange where the same is traded, shall exceed $4.00 per share
for any 30 consecutive trading days anytime from the Original Issue
Date with an average daily trading volume of 100,000 shares (such
numbers shall be proportionally adjusted for dividends, stock
splits, Common Stock combinations and recapitalizations involving
the Common Stock).
Voting Rights: Except as
described in the Certificate of Designations, holders of the Series
C Preferred Stock will vote together with holders of the Company
common stock on all matters, on an as-converted to common stock
basis, and not as a separate class or series (subject to limited
exceptions).
Liquidation Preferences: In the
event of any liquidation or winding up of the Company prior to and
in preference to any Junior Securities (including common stock),
the holders of the Series C Preferred Stock will be entitled to
receive in preference to the holders of the Company common stock a
per share amount equal to the Stated Value (as adjusted pursuant to
the Certificate of Designations).
11. Net Loss per Share
Applicable to Common Stockholders
Options,
warrants, and convertible debt outstanding were all considered
anti-dilutive for the year ended December 31, 2016 and 2015 due to
net losses.
The
following securities were not included in the diluted net loss per
share calculation because their effect was anti-dilutive as of the
periods presented:
|
For the
year ended
|
|
|
December
31,
|
|
|
2016
|
2015
|
Common
stock options
|
26,865,017
|
10,337,113
|
Investor
warrants
|
37,836,680
|
23,752,410
|
Compensation
warrants
|
1,981,667
|
2,645,000
|
Excluded
potentially dilutive securities
|
66,683,364
|
36,734,523
|
|
12. Stockholder’s equity
|
Stock options
In March 2016, our Company granted options to purchase up to
3,517,067 shares of our common stock to members of our Board of
Directors. The options vest immediately; have an exercise price of
$0.12 per share; and expire five years after the date of
grant. The fair value at grant date of these options was
$246,141 and the entire amount was expensed in 2016.
In March 2016, our Company granted options to purchase up to
1,459,326 shares of our common stock to four employees. The options
vest over four years; have an exercise price of $0.12 per share;
and expire five years after the date of grant. The fair
value at grant date of these options was $112,147 and $48,145 was
expensed in 2016.
In March 2016, our Company granted options to purchase up to
1,859,623 shares of our common stock to thirty-three employees. The
options vest immediately; have an exercise price of $0.11 per
share; and expire five years after the date of
grant. The fair value at grant date of these options was
$142,006 and the entire amount was expensed in 2016.
In May 2016, our Company granted options to purchase up to 264,000
shares of our common stock to Frank Liddy. The options vest
immediately; have an exercise price of $0.08 per share; and expire
five years after the date of grant. The fair value at
grant date of these options was $20,256 and the entire amount was
expensed in 2016.
In May 2016, our Company granted options to purchase up to 450,000
shares of our common stock to two employees. The options vest over
two years; have an exercise price of $0.06 per share; and expire
five years after the date of grant. The fair value at
grant date of these options was $17,979 and $8,088 was expensed in
2016.
In June 2016, our Company granted options to purchase up to
2,104,751 shares of our common stock to thirty-two employees. The
options vest immediately; have an exercise price of $0.09 per
share; and expire five years after the date of
grant. The fair value at grant date of these options was
$151,431 and the entire amount was expensed in 2016.
Effective July 22, 2016, the Company cancelled the following stock
and stock options granted to its board of directors on March 21,
2016: (a) Joseph Proto, 350,000 restricted shares of common stock;
(b) John Eyler, options to purchase 464,331 shares of common stock;
(c) Pat Kolenik 350,000 restricted shares of common stock; (d)
Chris Leong, options to purchase 464,331 shares of common stock,
and (e) Isaac Blech, options to purchase 663,330 shares of common
stock.
In September 2016, our Company granted options to purchase up to
2,674,940 shares of our common stock to twenty-five employees. The
options vest immediately; have an exercise price of $0.06 per
share; and expire five years after the date of
grant. The fair value at grant date of these options was
$139,316 and the entire amount was expensed in 2016.
In December 2016, our Company granted options to purchase up to
7,371,357 shares of our common stock to twenty-two employees. The
options vest immediately; have an exercise price of $0.02 per
share; and expire five years after the date of
grant. The fair value at grant date of these options was
$131,947 and the entire amount was expensed in 2016.
In 2016, we expensed $222,357, related to the issuance of options
from 2014 and 2015, that continued to vest in 2016.
For the year ended December 31, 2015, we issued 3,666,476 options,
as follows. During first quarter, 2015, our Company
granted options to purchase up to 165,000 shares of our common
stock to five employees. The options vest over four years; have
exercise prices of $.90 to $.95 per share; and expire five years
after the date of grant. The fair value at grant date of
these options was $101,759. The amount expensed in 2015 was $21,564
and the amount expensed in 2016 was 16,142.
On March 5, 2015, our Company granted options to purchase up to
360,000 shares of our common stock to members of our Board of
Directors. The options vest immediately; have an exercise price of
$0.92 per share; and expire five years after the date of
grant. Each of the following Board members received
45,000 options each related to this issuance: Joe Proto,
Isaac Blech, Alex Minicucci, Cary Sucoff, Patrick Kolenik, Chris
Leong, Jerold Rubinstein, and Mike McCoy. The fair value
at grant date of these options was $208,974 and the entire amount
was expensed in 2015.
In May 2015, our Company granted options to purchase up to 75,000
shares of our common stock to Bruce Neuschwander. The options vest
over four years; have an exercise price of $0.65; and expire five
years after the date of grant. The fair value at grant
date of this option was $31,622. The amount expensed in 2015 was
$10,794 and the amount expensed in 2016 was $3,763.
On October 1, 2015, our Company granted options to purchase up to
1,358,696 shares of our common stock to Jerold
Rubinstein. The options vest immediately; have an
exercise price of $.46 per share; and expire five years after the
date of grant. The fair value at grant date of these
options was $410,559 and the entire amount was expensed in
2015.
In November 2015, the Company repriced the 1,358,696 previously
issued options to Jerold Rubinstein. The replacement stock options
have an exercise price equal to $0.17 and a term of 4.8 years.
The cancellation and reissuance of these stock options was treated
as a modification under ASC 718 and, accordingly, total stock-based
compensation expense related to these awards increased $35,713,
which was recognized in 2015.
In December, 2015, our Company granted options to purchase up to
278,500 shares of our common stock to four employees. The options
vest immediately; have an exercise price of $.14 per share; and
expire five years after the date of grant. The fair
value at grant date of these options was $26,792 and the entire
amount was expensed in 2015.
In December, 2015, our Company granted options to purchase up to
70,584 shares of our common stock to five employees. The options
vest immediately; have an exercise price of $.75 per share; and
expire five years after the date of grant. The fair
value at grant date of these options was $3,876 and the entire
amount was expensed in 2015.
Stock option activity during the following periods was as
follows:
|
For the
year ended
|
|
|
December
31,
|
|
|
2016
|
2015
|
Beginning
balance outstanding
|
10,337,113
|
8,807,667
|
Options
issued during the year
|
19,701,064
|
2,307,780
|
Options
forfeited during the year
|
(1,011,800)
|
-
|
Options
cancelled during the year
|
(1,591,992)
|
-
|
Options
expired during the year
|
(569,368)
|
(778,334)
|
Ending
balance outstanding
|
26,865,017
|
10,337,113
|
Warrants
The Company issued warrants to purchase shares of the
Company’s common stock to investors in connection with the
issuances of restricted shares of common stock during the years
ended December 31, 2016 and 2015 (the value of which was offset
against the proceeds of the issuance of common stock and not
charged to operations). Outstanding warrants from all sources have
terms ranging from two to five and a half years.
For the year ended December 31, 2016, we did not issue any warrants
to advisors, consultants and in connection with the purchase of
intellectual property. Warrants to purchase up to
2,204,100 shares of common stock have expired. Warrants
to purchase up to 1,981,667 shares of common stock remain
outstanding at December 31, 2016, of which 1,981,667 have
vested.
For the year ended December 31, 2016, we issued 27,895,890 warrants
to investors, of which 26,479,217 related to the Tender Offer above
and 1,416,673 related to the Convertible Notes amendments above.
1,540,767 warrants expired and 12,270,853 warrants were exercised
for the year ended December 31, 2016.
In
recompense for services performed on our behalf, we issued warrants
to purchase up to 750,000 shares of our common stock during the
year ended December 31, 2015, to Siskey Capital at an exercise
price of $.75. 187,500 of those warrants vested immediately. On
December 1, 2015, these warrants were repriced to an exercise price
of $.17 and exercised on December 2, 2015, resulting in gross
proceeds to the company of $127,500.
Through December 31, 2015, we have also issued warrants to purchase
up to 22,835,951 shares of our common stock to investors (and as
compensation to third parties in connection with investments)
related to the sale of our common stock, 26,397,410 of which remain
outstanding net of exercises, cancellations and expirations (all of
which are fully vested).
On October 1, 2015, we issued 750,000 warrants to Siskey Capital
for consulting services as noted above. 187,500 of those warrants
vested immediately. Those 187,500 warrants were repriced on
December 1, 2015 and the remaining 562,500 warrants were vested on
December 1, 2015, with the full 750,000 warrants exercised on
December 2, 2015. Warrants to purchase up to 118,858
shares of common stock have expired. Warrants to
purchase up to 2,645,000 shares of common stock remain outstanding
at December 31, 2015, of which 2,645,000 have vested.
For the year ended December 31, 2015, we issued 1,983,340 warrants
to new investors and 150,994 warrants had expired.
Warrant activity (including warrants issued to investors and for
consulting and advisory services) for the years ended December 31,
2016 and 2015 was as follows:
|
For the
twelve months ended
|
|
|
December
31,
|
|
|
2016
|
2015
|
Beginning
balance outstanding
|
26,397,410
|
23,933,922
|
Warrants
issued during the year
|
|
|
For
consulting and advisory services
|
-
|
1,500,000
|
In
connection with sales of common, preferred stock, and
notes
|
27,895,890
|
1,983,340
|
Warrants
expired or cancelled during the year
|
(2,204,100)
|
(269,852)
|
Warrants
exercised
|
(12,270,853)
|
(750,000)
|
Ending
balance outstanding
|
39,818,347
|
26,397,410
|
The numbers and exercise prices of all options and warrants
outstanding at December 31, 2016 was as follows:
Shares
Issuable
|
Weighted
Average Exercise Price
|
Expiration
Fiscal Period
|
34,749
|
7.99
|
1st Qtr,
2017
|
1,349,183
|
6.90
|
2nd Qtr,
2017
|
536,500
|
1.14
|
3rd Qtr,
2017
|
1,162,088
|
6.45
|
4th Qtr,
2017
|
10,000
|
6.60
|
1st Qtr,
2018
|
750,000
|
0.25
|
4th Qtr,
2018
|
37,504,567
|
0.37
|
1st Qtr,
2019
|
1,850,007
|
0.44
|
2nd Qtr,
2019
|
1,309,002
|
0.92
|
3rd Qtr,
2019
|
2,603,000
|
1.15
|
4th Qtr,
2019
|
480,000
|
0.92
|
1st Qtr,
2020
|
1,704,446
|
0.19
|
4th Qtr,
2020
|
4,785,376
|
0.12
|
1st Qtr,
2021
|
2,469,995
|
0.09
|
2nd Qtr,
2021
|
2,629,760
|
0.06
|
3rd Qtr,
2021
|
7,371,357
|
0.02
|
4th Qtr,
2021
|
133,334
|
7.05
|
4th Qtr,
2022
|
66,683,364
|
0.59
|
|
Stock based compensation
Results of operations for the years ended December 31, 2016 and
2015 include stock based compensation costs totaling $1,084,323 and
$1,807,337, respectively.
For purposes of accounting for stock based compensation, the fair
value of each option and warrant award is estimated on the date of
grant using the Black-Scholes-Merton option pricing formula.
Compensation expense is recognized upon actual vesting of the
options. The following weighted average assumptions were utilized
for the calculations during the year ended December 31, 2016 and
2015:
|
For the
years ended
|
|
|
December
31,
|
|
|
2016
|
2015
|
Expected
life (in years)
|
2.60
years
|
2.61
years
|
Weighted
average volatility
|
167.74%
|
98.05%
|
Forfeiture
rate
|
21.92%
|
10.27%
|
Risk-free
interest rate
|
1.05%
|
0.95%
|
Expected
dividend rate
|
0.00%
|
0.00%
|
The weighted average expected option and warrant term for employee
stock options granted reflects the application of the simplified
method set out in SEC Staff Accounting Bulletin No. 107,
Share-Based
Payment (SAB 107). The
simplified method defines the life as the average of the
contractual term of the options and the weighted average vesting
period for all options. The Company utilized this approach as its
historical share option exercise experience does not provide a
reasonable basis upon which to estimate an expected term. Expected
volatilities are based on the historical volatility of the
Company’s stock. The Company estimated the forfeiture rate
based on our expectation for future forfeitures and (for the
purpose of computing stock based compensation given the contractual
vesting of the Company’s options and warrants outstanding)
the Company assumes that all options and warrants will vest. The
risk-free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield in effect at or near the
time of grant. The Company has never declared or paid dividends and
have no plans to do so in the foreseeable
future.
As of December 31, 2016, $696,544 of total unrecognized
compensation cost related to unvested stock based compensation
arrangements is expected to be recognized over a weighted-average
period of 16.3 months. The following table summarizes option
activity in connection with stock options and warrants (which
resulted in stock based compensation charges) as of and for the
years ended December 31, 2016 and 2015:
|
|
Weighted
|
Weighted
|
|
|
|
Average
|
Average
Remaining
|
Aggregate
|
|
|
Exercise
|
Contractual
|
Instrinsic
|
|
Shares
|
Price
|
Term
|
Value
|
Outstanding
at December 31, 2015
|
12,982,113
|
$1.97
|
|
|
Granted
|
19,701,064
|
0.07
|
|
|
Cancelled
|
(2,883,792)
|
(0.29)
|
|
|
Forfeited
|
(952,701)
|
(6.70)
|
|
|
Exercised
|
-
|
-
|
|
|
Outstanding
at December 31, 2016
|
28,849,184
|
$0.68
|
45.8
months
|
$-
|
|
|
|
|
|
Exercisable
|
26,735,358
|
$0.71
|
45.7
months
|
$-
|
|
|
Weighted
|
Weighted
|
|
|
|
Average
|
Average
Remaining
|
Aggregate
|
|
|
Exercise
|
Contractual
|
Instrinsic
|
|
Shares
|
Price
|
Term
|
Value
|
Outstanding
at December 31, 2014
|
10,821,525
|
$2.44
|
|
|
Granted
|
3,807,780
|
0.31
|
|
|
Cancelled
|
(775,834)
|
(0.92)
|
|
|
Expired
|
(118,858)
|
(7.24)
|
|
|
Exercised
|
(750,000)
|
(0.17)
|
|
|
Outstanding
at December 31, 2015
|
12,982,113
|
$1.98
|
39.9
months
|
$-
|
|
|
|
|
|
Exercisable
|
11,711,738
|
$2.06
|
39.6
months
|
$-
|
Additional disclosure concerning options and warrants is as
follows:
|
For the
Year Ended
|
|
|
December
31,
|
December
31,
|
|
2016
|
2015
|
Weighted
average grant date fair value of options and warrants
granted
|
$0.05
|
$0.18
|
Aggregate
intrinsic value of options and warrants exercised
|
-
|
-
|
Weighted
average fair value of options and warrants vested
|
0.43
|
0.66
|
The range of exercise prices for options and warrants granted and
outstanding (which resulted in stock based compensation charges)
was as follows at December 31, 2016 and 2015:
Exercise
|
Number
of Options and Warrants
|
|
Price
|
December
31,
|
December
31,
|
Range
|
2016
|
2015
|
$.01 - .74 $
|
19,643,684
|
2,462,196
|
$.75 - 1.20 $
|
7,529,000
|
7,878,584
|
$1.21 - 3.00 $
|
114,000
|
218,000
|
$3.01 - 4.50 $
|
-
|
-
|
$4.51 - 12.00 $
|
1,560,000
|
2,423,333
|
|
28,846,684
|
12,982,113
|
A summary of the activity of our non-vested options and warrants
for the following periods:
|
For the
year ended
|
|
|
December
31,
|
|
|
2016
|
2015
|
Non-vested
outstanding, beginning
|
1,270,375
|
3,285,639
|
Granted
|
19,701,064
|
3,807,780
|
Vested
|
(17,238,203)
|
(5,279,016)
|
Forfeited
|
(825,915)
|
|
Cancelled
|
(795,995)
|
(544,028)
|
Non-vested
outstanding, ending
|
2,111,326
|
1,270,375
|
Common Shares Reserved for Future Issuance
The following table summarizes shares of our common stock reserved
for future issuance at December 31, 2016:
|
December 31,
|
December 31,
|
|
2016
|
2015
|
Stock
options outstanding
|
26,865,017
|
10,337,113
|
Stock
options available for future grant
|
9,437,000
|
9,437,000
|
Warrants
|
39,818,347
|
26,397,410
|
Total
common shares reserved for future issuance
|
76,120,364
|
46,171,523
|
13.
Income taxes
Deferred tax assets
at December 31, 2016 and 2015 consisted of the
following:
|
Dec.
31, 2016
|
Dec.
31, 2015
|
|
|
|
Deferred
tax asset
|
|
|
Net
operating loss carryovers
|
29,294,157
|
26,991,694
|
Accrued
Payroll
|
26,400
|
32,400
|
Sharebased
Compensation
|
2,734,156
|
2,292,027
|
Charitable
Contribution
|
4,700
|
4,700
|
Amortization
|
1,954,508
|
1,584,975
|
Depreciation
|
768,381
|
258,828
|
Allowance
for Doubtful Account
|
687,104
|
555,953
|
Total
deferred tax assets
|
36,209,406
|
31,720,577
|
Valuation
allowance
|
(36,209,406)
|
(31,720,577)
|
Deferred tax asset,
net of allowance
|
—
|
—
|
As of
December 31, 2016 and 2015, the Company had federal and state net
operating loss carryovers of approximately $75.3 million and $73.5
million, which will begin to expire in 2029. The net operating loss
carryover may be subject to limitation under Internal Revenue Code
section 382, should there be a greater than 50% ownership change as
determined under the regulations.
In
assessing the realization of deferred tax assets, management
considers whether it is more likely than not that some portion or
all of the deferred tax assets will be realized. The ultimate
realization of deferred tax assets is dependent upon the generation
of future taxable income during the period in which those temporary
differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable
income and taxing strategies in making this assessment. The Company
has determined that, based on objective evidence currently
available, it is more likely than not that the deferred tax assets
will not be realized in future periods. Accordingly, the Company
has provided a valuation allowance for the full amount of the
deferred tax assets at December 31, 2016 and 2015.
The
valuation allowance increased by $4,488,829 and $4,700,682 in 2016
and 2015, respectively, due to the increase in deferred tax assets,
primarily due to net operating loss carryforwards.
A reconciliation of the expected tax benefit computed at the U.S.
federal and state statutory income tax rates to our tax benefit is
as follows:
|
For the years ended
|
|
|
December 31,
|
|
|
2016
|
2015
|
Statutory
federal income tax rate
|
-34.0%
|
-34.0%
|
State
taxes, net of federal tax benefit
|
-5.0%
|
-5.0%
|
Valuation
Allowance
|
39.0%
|
39.0%
|
Income
tax provision (benefit)
|
0.0%
|
0.0%
|
We file income tax returns in the U.S. and in the state of
California with varying statutes of limitations. Our policy is to
recognize interest expense and penalties related to income tax
matters as a component of our provision for income taxes. There
were no accrued interest and penalties associated with uncertain
tax positions as of December 31, 2016. The majority of our
operations are in California and the Company believes it has no tax
positions which could more-likely-than not be challenged by tax
authorities. We have no unrecognized tax benefits and thus no
interest or penalties included in the financial
statements.
14.
Commitments
We currently lease space in two locations in San Luis Obispo,
California. The building that we lease at 805 Aerovista
Parkway is owned by Alexander P Minicucci Trust, which is a related
party transaction due to the trust being controlled by the
Company's former chief strategy officer. Rent expense was $188,746
and $169,511 for the years ended December 31, 2016 and 2015,
respectively. Future rental commitments under contract total
$193,073 as of December 31, 2016.
15.
Employee benefit plan
We have an employee savings plan (the “Plan”) pursuant
to Section 401(k) of the Internal Revenue Code (the
“Code”), covering all of our employees. Participants in
the Plan may contribute a percentage of compensation, but not in
excess of the maximum allowed under the Code. Our Company may make
contributions at the discretion of its Board of Directors. During
the years ended December 31, 2016 and 2015, we made contributions
to the Plan totaling $0 and $83,359, respectively.
16.
Subsequent events
On January 9, 2017, the Company issued a Convertible Promissory
Note to Isaac Blech, a member of the Company’s board of
directors, in the sum of $22,000. The Convertible Promissory Notes
bear interest at the rate of 9%, has a six month maturity date, and
a voluntary conversion into an upcoming financing in the event the
Company closes a financing and receives gross proceeds totaling at
least $200,000. The conversion rate will be at the same terms of
the financing.
On January 23, 2017, the Company issued a Convertible Promissory
Note to Isaac Blech, a member of the Company’s board of
directors, in the sum of $100,000. The Convertible Promissory Notes
bear interest at the rate of 9%, has a six month maturity date, and
a voluntary conversion into an upcoming financing in the event the
Company closes a financing and receives gross proceeds totaling at
least $200,000. The conversion rate will be at the same terms of
the financing.
On February 2, 2017, the Company issued a Convertible Promissory
Note to the Daniel Jonathan Blech Trust DTD 9/01/2005 in the amount
of $62,000. Mr. Blech, a member of the Company’s board of
directors, is the trustee. The Convertible Promissory Note bears
interest at the rate of 9% has six-month maturity date, and a
voluntary conversion into an upcoming financing in the event the
Company closes the financing and receives gross proceeds totaling
at least $200,000. The conversion rate will be at the same terms of
the financing.
On February 27, 2017, the Company issued a Convertible Promissory
Note to the Daniel Jonathan Blech Trust DTD 9/01/2005 in the amount
of $45,000. Mr. Blech, a member of the Company’s board of
directors, is the trustee. The Convertible Promissory Note bears
interest at the rate of 9% has six-month maturity date, and a
voluntary conversion into an upcoming financing in the event the
Company closes the financing and receives gross proceeds totaling
at least $200,000. The conversion rate will be at the same terms of
the financing.
On March 24, 2017, the Company issued a Convertible Promissory Note
to the Daniel Jonathan Blech Trust DTD 9/01/2005 in the amount of
$90,000. Mr. Blech, a member of the Company’s board of
directors, is the trustee. The Convertible Promissory Note bears
interest at the rate of 9% has six-month maturity date, and a
voluntary conversion into an upcoming financing in the event the
Company closes the financing and receives gross proceeds totaling
at least $200,000. The conversion rate will be at the same terms of
the financing.
On April 18, 2017, the Company issued a Convertible Promissory Note
to the Daniel Jonathan Blech Trust DTD 9/01/2005 in the amount of
$45,000. Mr. Blech, a member of the Company’s board of
directors, is the trustee. The Convertible Promissory Note bears
interest at the rate of 9% has six-month maturity date, and a
voluntary conversion into an upcoming financing in the event the
Company closes the financing and receives gross proceeds totaling
at least $200,000. The conversion rate will be at the same terms of
the financing.
The
company was served with a lawsuit in February 2017 alleging breach
of contract by Bryan Sarlitt. The action relates to the acquisition
of TechXpress in 2014 and additional compensation that Mr. Sarlitt
is claiming. The Company believes the Plaintiff's allegations
have no merit. There are no other legal claims currently
pending or threatened against us that in the opinion of our
management would be likely to have a material adverse effect on out
financial position, results of operations or cash
flows.
On May
3, 2017, the Company amended one May 5, 2015 9% Convertible
Promissory Note with a principal amount of $275,000 as follows: the
maturity date was extended to July 7, 2017 and in the event the
borrower completes an asset sale or capital raise of more than
$275,000, then the Notes shall automatically immediately become due
and payable.
On May
15, 2017, the Company amended one May 5, 2015 9% Convertible
Promissory Note with a principal amount of $262,500 as follows: the
maturity date was extended to July 7, 2017 and in the event the
borrower completes an asset sale or capital raise of more than
$275,000, then the Notes shall automatically immediately become due
and payable.
Item 9 - Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure
None.
Item 9A - Controls and Procedures
(a)
Evaluation of disclosure controls and procedures.
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Securities
and Exchange Commission Act of 1934 reports is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms and that
such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow for timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives,
and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. As
required by Securities and Exchange Commission Rule 13a-15(e) and
15d-15(e), we carried out an evaluation, under the supervision and
with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report.
Based on the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures were not operating effectively as of December 31, 2016.
Our disclosure controls and procedures were not effective because
of the “material weakness” described
below.
(b)
Management’s annual report on internal control over financial
reporting.
SEC rules implementing Section 404 of the Sarbanes-Oxley Act
of 2002 require our 2016 Annual Report on Form 10-K to contain
management’s report regarding the effectiveness of internal
control over financial reporting. As a basis for our report, we
tested and evaluated the design, documentation, and operating
effectiveness of our internal control.
Management is responsible for establishing and maintaining
effective internal control over financial reporting, as defined in
Rule 13a-15(f) under the Exchange Act, of SpendSmart
Networks, Inc. and its subsidiaries. The Company’s internal
control over financial reporting consists of policies and
procedures that are designed and operated to provide reasonable
assurance about the reliability of the Company’s financial
reporting and its process for preparing financial statements in
accordance with generally accepted accounting principles
(“GAAP”). There are inherent limitations in
the effectiveness of any system of internal control, including the
possibility of human error and the circumvention or overriding of
controls. Accordingly, even effective internal controls can provide
only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, the
effectiveness of internal control may vary over time.
Based
on management's evaluation as of December 31, 2016, our management
identified the material weaknesses set forth below in our internal
control over financial reporting:
(i)
The
Company's process for internally reporting material information in
a systematic manner to allow for timely filing of material
information is ineffective, due to its inherent limitations from
being a small company, and there exist material weaknesses in
internal control over financial reporting that contribute to the
weaknesses in our disclosure controls and procedures. These
weaknesses include:
●
insufficient
segregation of duties and oversight of work performed in our
finance and accounting function due to limited personnel;
and
●
lack
of controls in place to ensure that all material transactions and
developments impacting the financial statements are reflected and
financial reporting is produced timely.
(c)
Changes in internal control over financial reporting.
There
have been no changes in the Company’s internal control over
financial reporting that occurred during the year ended December
31, 2016 that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over
financial reporting.
Our
company's management concluded that in light of the material
weaknesses described above, our company did not maintain effective
internal control over financial reporting as of December 31, 2016
based on the criteria set forth in Internal
Control—Integrated Framework (2013) issued by the
COSO.
This Report on Form 10-K does not include an attestation report of
the Company’s independent public accounting firm regarding
internal control over financial reporting. Management’s
report was not subject to attestation by the Company’s
independent public accounting firm pursuant to permanent
rules of the Securities and Exchange Commission that permit
the Company to provide only management’s report in this
Transition Report on Form 10-K.
Item 10 – Directors, Executive Officers and Corporate
Governance
Term of
Office
Our
directors are elected by our stockholders to a term of one year and
to serve until their successor is duly elected and qualified, or
until their death, resignation or removal. Each of our officers is
appointed by our Board of Directors to a term of one year and
serves until their successor is duly elected and qualified, or
until their death, resignation or removal from office.
Our
current Board of Directors consists of eight
directors.
The following table sets forth certain information regarding our
executive officers and directors as of the date of this Annual
Report:
Name
|
Age
|
Position
|
|
Luke
Wallace
|
32
|
Chief
Executive Officer
|
|
Joseph
Proto
|
60
|
Director
|
|
Isaac
Blech
|
67
|
Director
|
|
Patrick
M. Kolenik
|
67
|
Director
|
|
Ka Cheong Christopher Leong
|
|
73
|
Director
|
Francis
J Liddy
|
|
49
|
Director
|
John Eyler, Jr.
|
|
68
|
Director
|
Brett
Schnell
|
|
49
|
Chief
Financial Officer
|
Mr. Isaac Blech was appointed to the Board of Directors on
March 10, 2011. He currently serves on the Board of Directors of
Contrafect Corp., a biotech company specializing in novel methods
to treat infectious disease; Cerecor, Inc., a biopharmaceutical
company focused on activity in the human brain; Medgenics, Inc., a
company that has developed a novel technology for the manufacture
and delivery of therapeutic proteins; and Premier Alliance Group,
Inc. (PIMO), a public company that provides business and technology
consulting services to primarily Fortune 500 companies. Previously,
Mr. Blech was an investor, advisor and director in a number of
well-known companies, primarily focused in
biotechnology.
Mr.
Blech is the owner of 1,500,000 shares of our Company’s
common stock and warrants to purchase up to an additional 1,337,500
million shares of our Company’s common stock. Mr. Blech has
been a successful investor and a member of a number of Boards of
Directors. We believe Mr. Blech’s past experience will be a
tremendous benefit to our Company. Included among Mr. Blech’s
more notable successes were:
●
Celgene Corporation
– Mr. Blech was a founding shareholder of Celgene in 1986.
Celgene has introduced two major cancer drugs and has a stock
market valuation (as of September 6, 2011) of approximately $27
billion.
●
ICOS Corporation
– Mr. Blech was a founding shareholder and member of the
Board of Directors of ICOS beginning in 1991. ICOS discovered the
drug Cialis and was later acquired by Eli Lilly for over $2
billion.
●
Nova Pharmaceutical
Corporation – Mr. Blech was a founding shareholder and member
of the Board of Directors of Nova from 1982 to 1990. Nova developed
a treatment for brain cancer and subsequently merged with Scios
Corporation which was later purchased for $2 billion by Johnson and
Johnson.
●
Pathogeneses
Corporation – Mr. Blech was a founding shareholder and member
of the Board of Directors of Pathogeneses from 1992 to 1997.
Pathogeneses created TOBI for the treatment of cystic fibrosis and
was later acquired by Chiron Corp for $660 million.
●
Genetic Systems
Corporation – Mr. Blech was a founding shareholder and member
of the Board of Directors of GSC from 1981 to 1986. GSC developed
the first inexpensive and accurate test to diagnose chlamydia and
was later acquired by Bristol Myers for approximately $300
million.
Mr. Joseph Proto was appointed to our Board of Directors on
January 26, 2012 and was appointed Chairman of the Board of
Directors on November 28, 2013, replacing Mike McCoy. Mr. Proto is
a seasoned and successful senior executive and entrepreneur with
three decades in the billing and payments industry. Mr. Proto is
currently the Chairman and Chief Executive Officer of electronic
billing company Transactis Inc. He founded REMITCO, a remittance
processing company where he also served as President for 11 years,
which was acquired in 2000 by First Data Corp. Mr. Proto also
founded Financial Telesis (CashFlex), a payment processor to 65 of
the top 100 banks in the U.S., which was acquired by
CoreStates/Wachovia and is now a part of Wells Fargo. In 2004, Mr.
Proto co-founded Windham Ventures, an investment company focusing
on financial technology and life sciences companies, where he
currently serves as a founding partner.
Mr. Patrick M. Kolenik was appointed to our Board of
Directors on August 30, 2011. Mr. Kolenik has over forty years of
securities industry experience. Mr. Kolenik was the Chief Executive
Officer of Sherwood Securities Corp. where he was involved with
more than 200 successful public and private financings. Since 2003,
Mr. Kolenik has been a consultant to both public and private
companies through his company PK Advisors. Mr. Kolenik currently
serves on the Board of Directors of root9B Technologies, a public
company that provides business and technology consulting services.
Mr. Kolenik has advised our Company since May 2009 in the area of
investment banking and capital markets.
Dr. Ka
Cheong Christopher Leong was appointed to our board on
October 29, 2012. Dr. Leong is a co-founder and the President of
Transpac Capital, a venture capital firm based in Singapore.
Transpac was formed in 1989 through the amalgamation of
Techno-Ventures Hong Kong, which Dr. Leong co-founded in 1986, and
Transtech Capital Management of Singapore, both pioneers of venture
capital in their respective countries. Prior to his venture capital
career, Dr. Leong was the CEO of Amoy Canning Corporation Limited,
a food and packaging conglomerate listed on the stock exchange of
Hong Kong. Prior to Amoy he founded Convenience Foods Limited in
Hong Kong, which he sold to RJR Nabisco. Prior to his industrial
career, Dr. Leong was a Senior Scientist at American Science and
Engineering in Cambridge, MA. Dr. Leong has been a chairman of the
Hong Kong Venture Capital Association, and is one of the founding
inductees to the Singapore Venture Capital Hall of Fame in 2010 for
his pioneering work in venture capital. Dr. Leong obtained a BS and
a PhD degree from Massachusetts Institute of Technology, Cambridge,
MA.
Mr. John Eyler was appointed to
our board on November 25, 2014. Mr. Eyler retired from Toys "R" Us,
Inc. as President and Chief Executive Officer in July, 2005. Mr.
Eyler joined Toys "R" Us in January, 2000 and served as Chairman of
the Board of Directors as well as Chairman of the Toys "R" Us
Childrens fund from 2001 to 2005. Mr. Eyler was Chairman and Chief
Executive Officer of FAO Schwarz from 1992 to 2000 and spent his
entire career prior to that in retailing including becoming
Chairman and Chief Executive Officer of May D & F, a department
store in Denver Colorado at the age of 32. He served on the Board
of the Andre Agassi Charitable Foundation for eight years, was a
member of the NYC 2012 Board and a Board member of the Donna Karan
Corporation from 1999 to 2001. For the past five years Mr. Eyler
has served as President of Titan Sculpture Inc. which represents
Roberto Santo's sculptures and paintings globally. He is an
Advisory Board member of the College of the Environment at the
University of Washington, and manages a charitable foundation
created upon his retirement with a primary focus on improving the
lives of children. A graduate of the University of Washington in
1969 with a degree in Finance, Mr. Eyler received an MBA from the
Harvard Graduate School of Business in 1971.
Mr. Frank Liddy was appointed to the Board of Directors in
May 2016. He is currently head of strategic partnerships at
Paydiant, recently acquired by PayPal, where he empowers banks,
retailers and strategic partners to achieve their growth objectives
by creating great consumer experiences on Paydiant's open platform
for mobile commerce. Mr. Liddy has more than twenty years of
experience as an operator, advisor and investor in the fintech
community. Mr. Liddy joined Paydiant from the consultancy firm
Capco (now part of FIS Global) and previously held key leadership
positions at Citigroup, KPMG Consulting and Unisys.
Mr. Luke Wallace was appointed the Chief Executive Officer
of the Company in April 2016. As Co-Founder and CEO, Mr. Wallace
has worked to build SMS Masterminds. Mr. Wallace currently oversees
all elements of strategy and execution for the Company by leading
the executive team and all Company initiatives. Prior to SMS
Masterminds, Luke served as VP of IT Services at TechXpress, Inc.
and Director of Broadband Services at DigitalPutty, Inc. Mr.
Wallace earned a B.S. in Business Management from Cal Poly, San
Luis Obispo with a concentration in Management and Information
Technology.
Mr. Brett Schnell was appointed the Chief Financial Officer
of the Company on March 4, 2016. Prior to this Mr. Schnell
had been the Company’s Corporate Controller from October 2012
to March 2016. From 2011 to 2012, Mr. Schnell provided
financial consulting services to clients in the banking, insurance,
financial services, and SaaS industries. From 2009 to 2011,
Mr. Schnell was the Finance Director of Fairview Northland Medical
Center (part of the greater Minneapolis Fairview Health System),
responsible for reporting, budgeting, forecasting, strategy,
long-term planning, and treasury management. Prior to his
tenure at Fairview Northland Medical Center, Mr. Schnell was
employed at Ameriprise Financial Services, Inc. from 1991 to 2009
in several senior finance roles in the banking, trust, client
service, corporate controllership, and domestic and international
treasury divisions, providing leadership to multiple acquisitions,
new entity startups and the corporate spin off from American
Express. In addition, Mr. Schnell served in financial
consulting roles with Wells Fargo, General Mills, and several
startups. Mr. Schnell has a Bachelor of Business
Administration degree in Accounting from Iowa State University and
a Master of Business Administration degree from the University of
St Thomas. Mr. Schnell is also a Certified Public Accountant,
Certified Management Accountant, and Certified Treasury
Professional.
In
evaluating director nominees, our Company considers the following
factors:
●
The
appropriate size of the Board;
●
Our
needs with respect to the particular talents and experience of our
directors;
●
The
knowledge, skills and experience of nominees;
●
Experience
with accounting rules and practices; and
●
The
nominees’ other commitments.
Our
Company’s goal is to assemble a Board of Directors that
brings our Company a variety of perspectives and skills derived
from high quality business, professional and personal experience.
Other than the foregoing, there are no
stated minimum criteria for director nominees.
Specific
talents and qualifications that we considered for the members of
our Company’s Board of Directors are as follows:
●
Mr. Blech is the
owner of a significant number of shares of our Company’s
common stock and warrants to purchase additional shares of our
Company’s common stock. Mr. Blech has been a successful
investor and a member of a number of Boards of Directors. We
believe Mr. Blech’s past experience will be a tremendous
benefit to our Company. Included among Mr. Blech’s more
notable successes were:
o
Celgene Corporation
– Mr. Blech was a founding shareholder of Celgene in 1986.
Celgene has introduced two major cancer drugs and had a stock
market valuation (as of March 8, 2011) of approximately $25
billion.
o
ICOS Corporation
– Mr. Blech was a founding shareholder and member of the
Board of Directors of ICOS beginning in 1991. ICOS discovered the
drug Cialis and was later acquired by Eli Lilly for over $2
billion.
o
Nova Pharmaceutical
Corporation – Mr. Blech was a founding shareholder and member
of the Board of Directors of Nova from 1982 to 1990. Nova developed
a treatment for brain cancer and subsequently merged with Scios
Corporation which was later purchased for $2 billion by Johnson and
Johnson.
o
Pathogeneses
Corporation – Mr. Blech was a founding shareholder and member
of the Board of Directors of Pathogeneses from 1992 to 1997.
Pathogeneses created TOBI for the treatment of cystic fibrosis and
was later acquired by Chiron Corp for $660 million.
o
Genetic Systems
Corporation – Mr. Blech was a founding shareholder and member
of the Board of Directors of GSC from 1981 to 1986. GSC developed
the first inexpensive and accurate test to diagnose chlamydia and
was later acquired by Bristol Myers for approximately $300
million.
●
Mr. Proto is a
seasoned and successful senior executive and entrepreneur with
three decades in the billing and payments industry. Mr. Proto is
currently the Chairman and Chief Executive Officer of electronic
billing company Transactis Inc. Mr. Proto also founded REMITCO, a
remittance processing company, which was acquired in 2000 by First
Data Corp., and Financial Telesis (CashFlex), a payment processor
to 65 of the top 100 banks in the U.S., which was acquired by
CoreStates/Wachovia and is now a part of Wells Fargo. In 2004, Mr.
Proto co-founded Windham Ventures, an investment company focusing
on financial technology and life sciences companies, where he
currently serves as a founding partner.
●
Mr. Kolenik’s
vast securities industry history and work as a consultant to both
public and private companies allows us to benefit from wisdom he
has accrued from many varied companies and situations. Mr.
Kolenik’s other public and private company Board service has
been valuable as he has been a Company interface to our investors
and potential investors since 2009 (prior to his appointment to the
Board). We expect to further benefit from his expertise, now as a
recently added member of our Board of Directors.
●
Dr. Leong is a
co-founder and the President of Transpac Capital, a venture capital
firm based in Singapore. Transpac was formed in 1989 through the
amalgamation of Techno-Ventures Hong Kong, which Dr. Leong
co-founded in 1986, and Transtech Capital Management of Singapore,
both pioneers of venture capital in their respective countries.
Prior to his venture capital career, Dr. Leong was the CEO of Amoy
Canning Corporation Limited, a food and packaging conglomerate
listed on the stock exchange of Hong Kong. Prior to Amoy he founded
Convenience Foods Limited in Hong Kong, which he sold to RJR
Nabisco.
There
are no family relationships among members of our management or our
Board of Directors.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires
our directors, executive officers and beneficial owners of more
than 10% of a registered class of our equity securities to file
with the Securities and Exchange Commission initial reports of
ownership and reports of changes in ownership of our common stock
and other equity securities. Directors, executive officers and
greater than 10% beneficial owners are required by SEC regulations
to furnish to us copies of all Section 16(a) reports they
file.
Based
solely on our review of the reports, we believe that all required
Section 16(a) reports were timely filed during our last fiscal
year. None of our directors, executive officers or greater than 10%
beneficial owners filed any Form 5s.
Code of Business Conduct and Ethics
We have
adopted a Code of Business Conduct and Ethics that applies to,
among other persons, our principal executive officer, principal
financial officer, principal accounting officer or controller, and
persons performing similar functions. Our Code of Business Conduct
and Ethics is available, free of charge, to any stockholder upon
written request to our Corporate Secretary at SpendSmart Networks,
Inc., 805 Aerovista Parkway, Suite 205, San Luis Obispo, California
93401.
Involvement in Certain Legal Proceedings
To the
best of our knowledge, except as disclosed below, none of our
directors or executive officers has, during the past ten years,
involved in any of the items below that the Company deems material
to their service on behalf of the Company:
●
|
been convicted in a criminal proceeding or been subject to a
pending criminal proceeding (excluding traffic violations and other
minor offenses);
|
●
|
had any bankruptcy petition filed by or against the business or
property of the person, or of any partnership, corporation or
business association of which he was a general partner or executive
officer, either at the time of the bankruptcy filing or within two
years prior to that time;
|
●
|
been subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent
jurisdiction or federal or state authority, permanently or
temporarily enjoining, barring, suspending or otherwise limiting,
his involvement in any type of business, securities, futures,
commodities, investment, banking, savings and loan, or insurance
activities, or to be associated with persons engaged in any such
activity;
|
●
|
been found by a court of competent jurisdiction in a civil action
or by the SEC or the Commodity Futures Trading Commission to have
violated a federal or state securities or commodities law, and the
judgment has not been reversed, suspended, or vacated;
|
●
|
been the subject of, or a party to, any federal or state judicial
or administrative order, judgment, decree, or finding, not
subsequently reversed, suspended or vacated (not including any
settlement of a civil proceeding among private litigants), relating
to an alleged violation of any federal or state securities or
commodities law or regulation, any law or regulation respecting
financial institutions or insurance companies including, but not
limited to, a temporary or permanent injunction, order of
disgorgement or restitution, civil money penalty or temporary or
permanent cease-and-desist order, or removal or prohibition order,
or any law or regulation prohibiting mail or wire fraud or fraud in
connection with any business entity; or
|
●
|
been the subject of, or a party to, any sanction or order, not
subsequently reversed, suspended or vacated, of any self-regulatory
organization (as defined in Section 3(a)(26) of the Securities
Exchange Act of 1934, as amended (“Exchange Act”)), any
registered entity (as defined in Section 1(a)(29) of the Commodity
Exchange Act), or any equivalent exchange, association, entity or
organization that has disciplinary authority over its members or
persons associated with a member.
|
Brett Schnell, our Company CFO, had a Chapter 7 Bankruptcy filed in
the state of Minnesota on June 22, 2011 and subsequently discharged
on October 4, 2011. Except as set forth in our discussion below in
“Certain Relationships and Related Transactions,” none
of our directors or executive officers has been involved in any
transactions with us or any of our directors, executive officers,
affiliates or associates which are required to be disclosed
pursuant to the rules and regulations of the
Commission.
Corporate Governance
The business and affairs of the company are managed under the
direction of our board. In the fiscal year ended December 31, 2016,
we held four special board meetings. Each of our directors has
attended all meetings either in person or via telephone
conference.
Item 11. Executive Compensation
Our
Company’s Management’s objectives are to attract and
retain highly competent executives and to compensate them based
upon a pay-for-performance mentality. Our current plan relies on
goals and objectives agreed upon among the existing executive
(officer and non-officer) group and our Company’s Board of
Directors. The achievement of such goals and objectives constitute
requirements for continued employment, advancement with our Company
and receipt of incentive bonus payments.
With
the intent to increasestockholder value, we have designed our
executive compensation policies and practices to reward our
Company’s executives based on:
●
Company
performance;
●
Individual
performance; and
●
The demonstration
of leadership, team building skills and high ethical
standards.
We
include equity as a component in our overall compensation to align
the long-term interests of our executives with those of our
stockholders.
Overall,
we seek to employ executives that were not only qualified to
fulfill the roles of the positions we require at the time of their
hire, but who also have prior experience and demonstrated
capabilities to function in a far larger and complex entity than
where our Company is currently. We believe it is critical that our
executives be able to work in an environment without the support of
staff subordinates which usually accompany a larger and more
seasoned company. Further, along with and given the benefit of
maintaining continuity within the executive team, we highly desire
executives that can adapt to what we hope will be a rapidly growing
company. Our executives must be able to not only fill many roles
within their areas of expertise, but also to oversee other areas
that may be outside their specialty. Accordingly, we highly value
the trait of adaptability.
In
order to attract the type of talented executive we seek, we have
found that these individuals value the potential large future
rewards that come from long-term compensation arrangements in the
form of stock ownership and stock option arrangements over current
cash compensation. Also, given the current early stage nature of
our business and the accompanying premium we must place on cash,
this allocation of compensation also currently benefits our
Company. Accordingly, we have structured our compensation
arrangements accordingly.
On March 21, 2016, our Company granted options to purchase up to
1,459,326 shares of our common stock to the following employees:
Alex Minicucci in the amount of 464,331, Luke Wallace in the amount
of 397,998, Tim Boris in the amount of 397,998, and Brett Schnell
in the amount of 198,999. The options vest over four years; have an
exercise price of $0.12 per share; and expire five years after the
date of grant. The fair value at grant date of these options was
$140,095 and the amount expensed in 2016 was $48,145.
On March 31, 2016, our Company granted options to purchase up to
1,006,666 shares of our common stock to the following employees:
Alex Minicucci in the amount of 750,000, Luke Wallace in the amount
of 133,333, Tim Boris in the amount of 80,000, and Brett Schnell in
the amount of 43,333. The options vest immediately; have an
exercise price of $0.11 per share; and expire five years after the
date of grant. The fair value at grant date of these options was
$76,872 and the entire amount was expensed in 2016.
On June 30, 2016, our Company granted options to purchase up to
1,259,206 shares of our common stock to the following employees:
Alex Minicucci in the amount of 938,151, Luke Wallace in the amount
of 166,782, Tim Boris in the amount of 100,069, and Brett Schnell
in the amount of 54,204. The options vest immediately; have an
exercise price of $0.09 per share; and expire five years after the
date of grant. The fair value at grant date of these options was
$90,596 and the entire amount was expensed in 2016.
On September 30, 2016, our Company granted options to purchase up
to 1,739,632 shares of our common stock to the following employees:
Alex Minicucci in the amount of 1,296,083, Luke Wallace in the
amount of 230,415, Tim Boris in the amount of 138,249, and Brett
Schnell in the amount of 74,885. The options vest immediately; have
an exercise price of $0.06 per share; and expire five years after
the date of grant. The fair value at grant date of these options
was $90,604 and the entire amount was expensed in
2016.
On December 31, 2016, our Company granted options to purchase up to
5,061,453 shares of our common stock to the following employees:
Alex Minicucci in the amount of 3,770,950, Luke Wallace in the
amount of 670,391, Tim Boris in the amount of 402,235, and Brett
Schnell in the amount of 217,877. The options vest immediately;
have an exercise price of $0.02 per share; and expire five years
after the date of grant. The fair value at grant date of these
options was $90,600 and the entire amount was expensed in
2016.
On March 5, 2015, our Company granted options to purchase up to
360,000 shares of our common stock to members of our Board of
Directors. The options vest immediately; have an exercise price of
$0.92 per share; and expire five years after the date of
grant. Each of the following Board members received
45,000 options each related to this issuance: Joe Proto,
Isaac Blech, Alex Minicucci, John Eyler, Cary Sucoff, Patrick
Kolenik, Chris Leong, and Jerold Rubinstein. The fair
value at grant date of these options was $208,974 and the entire
amount was expensed in 2015.
On December 31, 2015, our Company granted options to purchase up to
52,084 shares of our common stock to the following employees: Alex
Minicucci in the amount of 33,750, Luke Wallace in the amount of
15,000, and Bruce Neuschwander in the amount of 3,334. The options
vest immediately; have an exercise price of $.75 per share; and
expire five years after the date of grant. The fair value at grant
date of these options was $2,860 and the entire amount was expensed
in 2015.
On December 31, 2015, our Company granted options to purchase up to
229,557 shares of our common stock to the following employees: Alex
Minicucci in the amount of 194,907, Luke Wallace in the amount of
34,650. The options vest immediately; have an exercise price of
$.14 per share; and expire five years after the date of grant. The
fair value at grant date of these options was $22,083 and the
entire amount was expensed in 2015.
Effective October 28, 2013, the Company entered into an advisory
agreement (the “Chord Agreement”)
with Chord Advisors, LLC
(“Chord”).
Pursuant to the Chord Agreement, Chord provided the Company with
comprehensive outsourced accounting solutions. The Company paid
Chord $7,500 per month. The Company has also agreed to issue Chord
a vested stock option to purchase five thousand shares of common
stock at an exercise price of $2.00 per share. The Agreement was
terminated with the resignation of David Horin as the
Company’s Chief Financial Officer on May 14, 2015. The
Company retained Bruce Neuschwander to serve as its Chief Financial
Officer effective May 19, 2015. Mr. Neuschwander was paid an annual
salary of $150,000. The Company may terminate the employment for
cause without notice and may terminate the employment without cause
with thirty days notice. The agreement entitles Mr. Neuschwander to
the usual and customary benefits of an employee and also contains
the usual and customary restrictive covenants (including
non-competition, non-solicitation and confidentiality). Mr.
Neuschwander was granted options to purchase up to 75,000 shares of
the Company’s common stock at an exercise price of $0.65 per
share, said options vest over two years and have a term of five
years. Mr. Neuschwander resigned from the Company effective
February 24, 2016.
Elements of Executive Compensation
Executive
compensation consists of the following elements:
●
Base
salary;
●
Annual incentive
bonuses; and
●
Long-term
incentives.
Base Salary. The base
salary for each executive is initially established through
negotiation at the time the executive is hired, taking into account
the scope of responsibilities, qualifications, experience, prior
salary and competitive salary information within our industry.
Year-to-year adjustments to each executive officer’s base
salary are determined by an assessment of the sustained performance
against individual goals, including leadership skills and the
achievement of high ethical standards, the individual’s
impact on the Company’s business and financial results,
current salary in relation to the salary range designated for the
job, experience, demonstrated potential for advancement, and an
assessment against base salaries paid to executives for comparable
jobs in the marketplace.
Annual Incentive Bonuses. Our Company’s bonus plan’s
year begins on January 1st and runs through
December 31st. Payments under
future executive bonus plans that may be instituted will be based
on achieving both personal and corporate goals. Personal goals will
support our overall corporate goals and, wherever possible, contain
quantitative components. An executive officer’s success or
failure in meeting some or all of these personal goals will affect
the individual’s bonus amount. Corporate goals will consist
of specific financial targets for the Company. We believe that
offering significant potential income in the form of bonuses will
allow us to attract and retain executives and to align their
interests with those of our stockholders.
Long-Term Incentives.
Our long-term incentives consist of our Company’s Common
Stock and stock option awards. The objective of these awards is to
align the longer-term interests of our stockholders and our
executive officers and to complement incentives tied to annual
performance.
401(k) and Other Benefits. During the years ended December
31, 2016, and 2015, our executive officers were eligible to receive
certain benefits available to all our employees on the same terms,
including medical and dental insurance. During the year, we also
maintained a tax-qualified 401(k) Plan, which provides for
broad-based employee participation. Under the 401(k) Plan, all
employees were eligible to receive matching contributions from the
Company of 100% of employee contributions up to a maximum of 4% of
the employees’ salaries, per year, through December 31, 2015.
We stopped the matching contributions from the Company effective
January 1, 2016. We do not provide defined benefit pension plans or
defined contribution retirement plans to our executives or other
employees. We believe that the 401(k) Plan and medical and dental
insurance benefits allow us to remain competitive for employee
talent, and we believe that the availability of these benefit
programs generally enhances employee productivity and
retention.
Employment Agreements
Our
Company entered into employment agreements with Alex Minicucci (our
former Chief Executive Officer), and Luke Wallace, (our Chief
Executive Officer). A summary of the material terms of these
employment agreements is as follows:
Alex Minicucci, former Chief Executive Officer: On February 11, 2014, in connection with the
appointment of Mr. Minicucci as our Chief Operating Officer, the
Company and Mr. Minicucci entered into an employment agreement (the
“Minicucci Employment Agreement”). The Minicucci
Employment Agreement has an initial term of three years. The
Minicucci Employment Agreement provides for the payment of a base
salary of $375,000 per year (subject to discretionary increases by
the Board). The Minicucci Employment Agreement provides that Mr.
Minicucci is entitled to usual and customary benefits and also
contains usual and customary restrictive covenants (including
non-competition, non-solicitation and confidentiality). On August
1, 2014, we amended Mr. Minicucci’s employment agreement to
provide that that Mr. Minicucci’s Base Salary shall be
increased to $450,000 per year. On December 11, 2015, we amended
Mr. Minicucci’s employment agreement to provide that Mr.
Minicucci’s Base Salary shall be decreased to $225,000 per
year from November 24, 2015 through November 24, 2016. Effective
March 24, 2016, Mr. Minicucci resigned as Chief Executive Officer
of the Company.
Luke Wallace, Chief Executive Officer: On February 11, 2014, in connection with the
appointment of Mr. Wallace as our Chief Operating Officer, the
Company and Mr. Wallace entered into an employment agreement (the
“Wallace Employment Agreement”). The Wallace Employment
Agreement has an initial term of three years. The Wallace
Employment Agreement provides for the payment of a base salary of
$200,000 per year (subject to discretionary increases by the
Board). The Wallace Employment Agreement provides that Mr. Wallace
is entitled to usual and customary benefits and also contains usual
and customary restrictive covenants (including non-competition,
non-solicitation and confidentiality). On December 11, 2015, we
amended Mr. Wallace’s employment agreement to provide that
Mr. Wallace’s Base Salary shall be decreased to $160,000 per
year from November 24, 2015 through November 24,
2016.
The Impact of Tax and Accounting Treatments on Elements of
Compensation
We have
elected to award non-qualified and incentive stock options to all
grantees of our Company’s stock options that remain
outstanding as of the date of this report. All other options or
warrants granted to advisors, Directors and consultants were
non-qualified options or warrants in order to allow our Company to
take advantage of the more favorable tax advantages associated with
non-qualified stock options or warrants.
Internal
Revenue Code Section 162(m) precludes the Company from deducting
certain forms of non-performance-based compensation in excess of
$1,000,000 to named executive officers. However, since stock-based
awards comprise a significant portion of total compensation, the
Board of Directors has taken appropriate steps to preserve
deductibility for such awards in the future, when
appropriate.
The Level of Salary and Bonus in Proportion to Total
Compensation
Because
of the commonality of interests among our executives and our
stockholders in achieving the sustained, long-term growth of the
value of our stock, we seek to keep cash compensation in line with
market conditions and, if justified by the Company’s
financial performance, place emphasis on the ownership of Company
stock and use of stock options as a means of obtaining
significantly better than average compensation. Our efforts to keep
cash compensation in line with market conditions to date have been
informal and based primarily on discussions with business
colleagues in the local marketplace, consultation with a local
benefits consulting firm and the review of widely available
comparative salary data. We also based our conclusions that our
cash compensation was in line with market conditions based on our
executives’ prior employment histories with other similar
sized companies, in similar responsible positions. We have not
engaged in a practice of formal benchmarking of our executive
compensation, but expect to formalize our compensation practices in
the future should we be successful in growing our business. Part of
such formalization may take the form of benchmarking. Because of
the significant equity stake or equity incentives that our
executives maintain in our Company, we believe their cash
compensation and benefits received are modest in comparison to
similar sized public companies.
Other Compensation
We
intend to continue to maintain our current benefits for our
executives, including medical and dental insurance coverage and the
ability to contribute to a 401(k) retirement plan; however, our
Board of Directors may in its discretion revise, amend or add to
the executive’s benefits if it deems it advisable. The
benefits currently available to the executives are also available
to our other employees.
Compensation Committee
The
Company has established a compensation committee, which is
comprised of independent directors (Mr. Joseph Proto, Mr. John
Eyler and Mr. Pat Kolenik). The compensation committee will have
the responsibility for evaluating making recommendations to the
Board of Directors regarding the compensation payable to our
executive officers, including our named executive
officers.
SUMMARY COMPENSATION TABLE
The
following table provides information regarding the compensation
awarded to, earned by, or paid to our executives during the years
ended December 31, 2016 and 2015.
|
|
Salary
|
Bonus
|
Stock
Awards
|
Option and Warrant
Awards
|
Non-equity
Incentive
|
Change in Pension
Value and Non-Qual. Deferred Comp. Earnings
|
All
Other Comp.(1)(3)
|
Total
|
Position
|
Year
|
($)
|
($)
|
($)(2)
|
($)(2)
|
($)
|
($)
|
($)
|
($)
|
|
|
|
|
|
|
|
|
|
|
Luke Wallace (4)
|
2016
|
183,450
|
-
|
-
|
20,471
|
-
|
-
|
-
|
203,921
|
Chief Executive Officer |
2015
|
198,452
|
-
|
-
|
43,043
|
-
|
-
|
7,067
|
248,562
|
|
|
|
|
|
|
|
|
|
|
William Hernandez
(5)
|
2016
|
10,000
|
-
|
-
|
-
|
-
|
-
|
-
|
10,000
|
Former President and Director |
2015
|
112,583
|
-
|
-
|
262,420
|
-
|
-
|
4,503
|
379,506
|
|
|
|
|
|
|
|
|
|
|
Alex Minicucci (6)
|
2016
|
268,502
|
-
|
-
|
204,564
|
-
|
-
|
-
|
473,066
|
Former Chief Executive Officer and Director |
2015
|
417,411
|
-
|
-
|
104,336
|
-
|
-
|
9,788
|
531,535
|
|
|
|
|
|
|
|
|
|
|
Tim Boris (7)
|
2016
|
228,002
|
-
|
-
|
24,356
|
-
|
-
|
-
|
252,358
|
Former
President |
2015
|
190,000
|
-
|
-
|
9,479
|
-
|
-
|
-
|
199,479
|
|
|
|
|
|
|
|
|
|
|
Brett Schnell (8)
|
2016
|
119,043
|
-
|
-
|
13,499
|
-
|
-
|
-
|
132,542
|
Chief Financial Officer/Treasurer |
2015
|
130,000
|
-
|
-
|
12,435
|
-
|
-
|
-
|
142,435
|
|
|
|
|
|
|
|
|
|
|
Bruce Neuschwander (9)
|
2016
|
61,413
|
-
|
-
|
-
|
-
|
-
|
-
|
61,413
|
Former Chief Financial Officer/Treasurer |
2015
|
82,744
|
-
|
-
|
10,977
|
-
|
-
|
-
|
93,721
|
(1)
Our
Company made group life, health, hospitalization and medical plans
available for its employees, including the officers listed
herein.
(2)
Refer
to “Stock based compensation,” in the accompanying
Notes to Consolidated Financial Statements included in this Annual
Report on Form 10-K for the relevant assumptions used to determine
the valuation of our option/warrant awards.
(3)
Amounts
shown include matching contributions to the officers’ 401(k)
retirement plans for all years presented.)
(4)
Mr.
Wallace was appointed as our Chief Operating Officer on February
11, 2014. Effective April 19, 2016, Mr. Wallace was appointed Chief
Executive Officer of the Company.
(5)
Mr.
Hernandez was appointed as our President on November 12, 2012 and
appointed as a Director on January 8, 2013. On December 31, 2014,
Mr. Hernandez resigned from his position as a Director and on
January 26, 2015, resigned from the Company.
(6)
Mr. Minicucci was appointed as our Chief Executive Officer and
Director on February 11, 2014. On March 24, 2016, Mr. Minicucci
resigned from his position as Chief Executive Officer and as a
Director and was appointed to the position of Chief Strategy
Officer of the Company. On February 11, 2017, Mr. Minicucci
resigned from the Company.
(7)
Mr. Boris was appointed as our President on April 14, 2016. On
March 24, 2017, Mr. Boris resigned from his position as President
of the Company.
(8)
Mr. Schnell was appointed as our Chief Financial Officer on March
4, 2016.
(9)
Mr. Neuschwander was appointed as our Chief Financial Officer on
May 19, 2015. On February 24, 2016, Mr. Neuschwander resigned from
his position as Chief Financial Officer of the
Company.
The
above amounts with respect to compensation from option awards
equaled the amounts that were recognized as compensation expense in
our financial statements for the years ended December 31, 2016 and
2015. The option award amounts were calculated in accordance with
generally accepted accounting principles concerning share-based
payments.
No
options or warrants have been exercised by any of the grantees
through the date of this Annual Report. We have recognized the
aggregate grant date fair value of option awards issued in our
accompanying statements of operations, computed in accordance with
FASB Accounting Stands Codification Topic 718.
None of
our directors, executives or employees participates in or has
account balances in qualified or non-qualified defined benefit
plans sponsored by our Company. None of our named executive
officers participate in or have account balances in non-qualified
defined contribution plans or other deferred compensation plans
maintained by our Company.
Outstanding Equity Awards at December 31, 2016
The
following table provides information regarding all outstanding
equity awards (all in the form of stock options or warrants) to
named executives as of December 31, 2016:
Name
|
Number
of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
Number
of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
Option Exercise Price
($)
|
Option Expiration Date
|
Alex Minicucci
|
45,000
|
-
|
0.87
|
3/19/2019
|
|
350,000
|
-
|
1.15
|
3/21/2019
|
45,000
|
-
|
0.92
|
3/15/2020
|
|
|
|
|
|
|
|
194,907
|
-
|
0.14
|
12/31/2020
|
|
33,750
|
-
|
0.75
|
12/31/2020
|
|
464,331
|
-
|
0.12
|
3/21/2021
|
|
750,000
|
-
|
0.11
|
3/31/2021
|
|
938,151
|
-
|
0.09
|
6/30/2021
|
|
1,296,083
|
-
|
0.06
|
9/30/2021
|
|
3,770,950
|
-
|
0.02
|
12/31/2021
|
|
|
|
|
|
Luke Wallace
|
150,000
|
-
|
1.14
|
3/19/2019
|
|
100,000
|
-
|
1.15
|
10/9/2019
|
|
34,650
|
-
|
0.14
|
12/31/2020
|
|
15,000
|
-
|
0.75
|
12/31/2020
|
|
397,998
|
-
|
0.12
|
3/21/2021
|
|
133,333
|
-
|
0.11
|
3/31/2021
|
|
166,782
|
-
|
0.09
|
6/30/2021
|
|
230,415
|
-
|
0.06
|
9/30/2021
|
|
670,391
|
-
|
0.02
|
12/31/2021
|
|
|
|
|
|
Tim Boris
|
100,000
|
-
|
0.90
|
2/21/2020
|
|
20,790
|
-
|
0.14
|
12/31/2020
|
12,000
|
-
|
0.75
|
12/31/2020
|
|
397,998
|
-
|
0.12
|
3/21/2021
|
|
80,000
|
-
|
0.11
|
3/31/2021
|
|
100,069
|
-
|
0.09
|
6/30/2021
|
|
|
138,249
|
-
|
0.06
|
9/30/2021
|
|
402,235
|
-
|
0.02
|
12/31/2021
|
|
|
|
|
|
Brett Schnell
|
150,000
|
-
|
1.14
|
3/19/2019
|
|
25,000
|
-
|
1.15
|
11/18/2019
|
198,999
|
-
|
0.12
|
3/21/2021
|
|
43,333
|
-
|
0.11
|
3/31/2021
|
|
54,204
|
-
|
0.09
|
6/30/2021
|
|
74,885
|
-
|
0.06
|
9/30/2021
|
|
|
217,877
|
-
|
0.02
|
12/31/2021
|
Director Compensation
Our
directors were compensated for their service on our Board of
Directors with warrants to purchase common stock as outlined above.
The following table provides information regarding our non-employee
director compensation for the year ended December 31,
2016:
|
Fees
|
|
|
Non-Equity
|
Non-qualified
|
|
|
|
Earned
|
|
|
Incentive
|
Deferred
|
All
|
|
|
Or
Paid
|
Stock
|
Option
|
Plan
|
Compensation
|
Other
|
|
|
In
Cash
|
Awards
|
Awards
|
Compensation
|
Earnings
|
Compensation
|
Total
|
Position
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
Isaac
Blech
|
21,000
|
-
|
-
|
-
|
-
|
-
|
21,000
|
Patrick
Kolenik
|
13,000
|
-
|
-
|
-
|
-
|
-
|
13,000
|
Cary
Sucoff
|
17,000
|
-
|
-
|
-
|
-
|
-
|
17,000
|
Jerold
Rubinstein
|
26,500
|
-
|
-
|
-
|
-
|
-
|
26,500
|
Joseph
Proto
|
20,000
|
-
|
-
|
-
|
-
|
-
|
20,000
|
John Eyler,
Jr.
|
10,000
|
-
|
-
|
-
|
-
|
-
|
10,000
|
Ka
Cheong Christopher Leong
|
13,000
|
-
|
-
|
-
|
-
|
-
|
13,000
|
Frank
Liddy
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
As of May 1, 2017 (the
“SO Date”), we had 42,075,571 shares of common stock outstanding. Options and
warrants exercisable or convertible as of the SO Date or within
sixty (60) days thereafter are used in determining each
individual’s percentage of shares beneficially owned on the
table below. The following table sets forth as of the SO Date,
information regarding the beneficial ownership of our common stock
with respect to (i) our officers and directors; (ii) by all
directors and executive officers as a group; and (iii) all persons
which the Company, pursuant to filings with the Securities and
Exchange Commission (the “SEC”) and our stock transfer
record by each person or group known by our management to own more
than 5% of the outstanding shares of our common stock. Under the
rules of the Securities and Exchange Commission, a person (or group
of persons) is deemed to be a “beneficial owner” of a
security if he or she, directly or indirectly, has or shares the
power to vote or to direct the voting of such security, or the
power to dispose of or to direct the disposition of such security.
Accordingly, more than one person may be deemed to be a beneficial
owner of the same security. A person is also deemed to be a
beneficial owner of any security, which that person has the right
to acquire within sixty (60) days, such as our Series C Preferred
stock, warrants or options to purchase shares of our common stock.
Unless otherwise noted, each person has sole voting and investment
power over the shares indicated below subject to applicable
community property law.
Name and Address of
Beneficial Owner (1)
|
Amount
and Nature of Beneficial
Ownership
|
Percentage
of
Class Beneficially
Owned
|
Officers
and Directors
|
|
|
Michael McCoy
(2)
|
953,334
|
1.54%
|
Alex Minicucci
(3)
|
4,730,000
|
7.65%
|
Isaac Blech
(4)
|
3,722,500
|
6.02%
|
Cary Sucoff
(5)
|
683,928
|
1.11%
|
Patrick Kolenik
(6)
|
483,466
|
0.78%
|
William Hernandez
(7)
|
565,743
|
0.91%
|
Jerold Rubinstein
(8)
|
83,898
|
0.14%
|
Joseph Proto
(9)
|
1,209,640
|
1.96%
|
Ka Cheong Christopher Leong (10)
|
2,845,001
|
4.60%
|
David Horin
(11)
|
5,000
|
0.01%
|
|
|
|
All
directors and executive officers as a group
|
15,282,510
|
24.72%
|
(11
persons)
|
|
|
|
___________________________________________________
|
|
|
|
|
|
|
|
|
(1)
|
Unless otherwise noted, the address is c/o The SpendSmart Payments
Company 2680 Berkshire Parkway, Suite 130, Des Moines, Iowa
50325.
|
||||||||
(2)
|
Amounts include shares of common stock that would result from the
exercise of outstanding vested options to purchase 953,334 shares
of our common stock.
|
||||||||
(3)
|
Amounts include shares of common stock that would result from the
exercise of outstanding vested options to purchase 132,500 shares
of our common stock.
|
||||||||
(4)
|
Amounts include shares of common stock that would result from the
exercise of the vested outstanding options and warrants to purchase
2,222,500 shares of our common stock.
|
||||||||
(5)
|
Amounts include shares of common stock that would result from the
exercise of vested outstanding options and warrants to purchase
509,580 shares of our common stock.
|
||||||||
(6)
|
Amounts include shares of common stock that would result from the
exercise of vested outstanding options and warrants to purchase
415,133 shares of our common stock.
|
||||||||
(7)
|
Amounts include shares of common stock that would result from the
exercise of the vested outstanding options to purchase
539,075 shares of our common
stock.
|
||||||||
(8)
|
Amounts include shares of common stock that would result from the
exercise of the vested outstanding warrant to purchase
83,898 shares of our common
stock.
|
||||||||
(9)
|
Amounts include shares of common stock that would result from the
exercise of the vested outstanding options and warrants to purchase
904,174 shares of our common
stock.
|
||||||||
(10)
|
Amounts include shares of common stock that would result from the
exercise of the vested outstanding warrants/options to purchase
4,982,694 shares of our common
stock.
|
||||||||
(11)
|
Amounts include shares of common stock that would result from the
exercise of the vested outstanding warrants/options to purchase
5,000 shares of our common
stock.
|
Item 13 – Certain Relationships and Related Transactions, and
Director Independence
Related Party Transactions. Our Company closely reviews
transactions between the Company and persons or entities considered
to be related parties (collectively “related parties”).
Our Company considers entities to be related parties where an
executive officer, director or a 5% or more beneficial owner of our
common stock (or an immediate family member of these persons) has a
direct or indirect material interest. Transactions of this nature
require the approval of our management and our Board of Directors.
We believe such transactions were at terms comparable to those we
could have obtained from unaffiliated third parties. Since January
1, 2012, we have not had any transactions in which any of our
related parties had or will have a direct or indirect material
interest, nor are any such transactions currently proposed, except
as noted below.
On January 9, 2017, the Company issued a Convertible Promissory
Note to Isaac Blech, a member of the Company’s board of
directors, in the sum of $22,000. The Convertible Promissory Notes
bear interest at the rate of 9%, has a six month maturity date, and
a voluntary conversion into an upcoming financing in the event the
Company closes a financing and receives gross proceeds totaling at
least $200,000. The conversion rate will be at the same terms of
the financing.
On January 23, 2017, the Company issued a Convertible Promissory
Note to Isaac Blech, a member of the Company’s board of
directors, in the sum of $100,000. The Convertible Promissory Notes
bear interest at the rate of 9%, has a six month maturity date, and
a voluntary conversion into an upcoming financing in the event the
Company closes a financing and receives gross proceeds totaling at
least $200,000. The conversion rate will be at the same terms of
the financing.
On February 2, 2017, the Company issued a Convertible Promissory
Note to the Daniel Jonathan Blech Trust DTD 9/01/2005 in the amount
of $62,000. Mr. Blech, a member of the Company’s board of
directors, is the trustee. The Convertible Promissory Note bears
interest at the rate of 9% has six-month maturity date, and a
voluntary conversion into an upcoming financing in the event the
Company closes the financing and receives gross proceeds totaling
at least $200,000. The conversion rate will be at the same terms of
the financing.
On February 27, 2017, the Company issued a Convertible Promissory
Note to the Daniel Jonathan Blech Trust DTD 9/01/2005 in the amount
of $45,000. Mr. Blech, a member of the Company’s board of
directors, is the trustee. The Convertible Promissory Note bears
interest at the rate of 9% has six-month maturity date, and a
voluntary conversion into an upcoming financing in the event the
Company closes the financing and receives gross proceeds totaling
at least $200,000. The conversion rate will be at the same terms of
the financing.
On March 24, 2017, the Company issued a Convertible Promissory Note
to the Daniel Jonathan Blech Trust DTD 9/01/2005 in the amount of
$90,000. Mr. Blech, a member of the Company’s board of
directors, is the trustee. The Convertible Promissory Note bears
interest at the rate of 9% has six-month maturity date, and a
voluntary conversion into an upcoming financing in the event the
Company closes the financing and receives gross proceeds totaling
at least $200,000. The conversion rate will be at the same terms of
the financing.
On April 18, 2017, the Company issued a Convertible Promissory Note
to the Daniel Jonathan Blech Trust DTD 9/01/2005 in the amount of
$45,000. Mr. Blech, a member of the Company’s board of
directors, is the trustee. The Convertible Promissory Note bears
interest at the rate of 9% has six-month maturity date, and a
voluntary conversion into an upcoming financing in the event the
Company closes the financing and receives gross proceeds totaling
at least $200,000. The conversion rate will be at the same terms of
the financing.
On November 30, 2016, the Company issued a Convertible Promissory
Note to the Daniel Jonathan Blech Trust DTD 9/01/2005 in the amount
of $100,000. Mr. Blech, a member of the Company’s board of
directors, is the trustee. The Convertible Promissory Note bears
interest at the rate of 9% has six-month maturity date, and a
voluntary conversion into an upcoming financing in the event the
Company closes the financing and receives gross proceeds totaling
at least $200,000. The conversion rate will be at the same terms of
the financing.
On
November 7, 2016, the Company issued a Convertible Promissory Note
to the Daniel Jonathan Blech Trust DTD 9/01/2005 in the amount of
$100,000. Mr. Blech, a member of the board of directors, is the
trustee. The Convertible Promissory Note bears an interest at the
rate of 9%, has a six month maturity date, and a voluntary
conversion into an upcoming financing in the event the Company
closes the financing and receives gross proceeds totaling at least
$200,000. The conversion rate will be at the same terms of the
financing.
On July 19, 2016, the Company issued the following Convertible
Promissory Notes: Joe Proto ($40,000), John Eyler ($40,000),
Francis J. Liddy ($20,000), Isaac Blech ($40,000), and Transpac
Investments Ltd. ($40,000). All of the individuals listed are
members of the board of directors. The Convertible Promissory Notes
bear interest at the rate of 9%, have a six month maturity date,
and a mandatory conversion into an upcoming financing in the event
the Company closes the financing and receives gross proceeds
totaling at least $200,000. The conversion rate will be at the same
terms of the financing. Mr. Proto, Mr. Eyler, Jr., Mr. Liddy, and
Mr. Blech are all Directors of the Company. Dr. Ka Cheong Christopher Leong, our Director, is
the co-founder and President of Transpac).
On November 16, 2015, the Company issued a Convertible Promissory
Note to an investor, Windham-BMP Investment I, LLC, in the
principal amount of $48,000. The Note features a mandatory
conversion feature obligating the holder to participate and apply
the principal and interest into a “Qualified Financing”
meaning a financing taking place prior to January 31, 2016, wherein
the Company receives gross proceeds totaling at least $1,000,000.
In the event the entire principal plus accrued interest under this
Note is not eligible for conversion into a Qualified Financing,
then any remaining balance of this Note shall be converted into
restricted common stock at the price of the Qualified Financing and
Holder shall receive three (3) times any warrant coverage provided
for in the Qualified Financing. The Note bears interest at nine
percent per annum and has a maturity date of six months. Mr. Proto
and Mr. Eyler, Jr., our Directors, are general parter’s of
Windham.
On November 13, 2015, the Company issued Convertible Promissory
Notes to four investors; Isaac Blech in the principal amount of
$34,000, West Charitable Remainder Unitrust in the principal amount
of $80,000, River Charitable Remainder Trust in the principal
amount of $53,333, and Liberty Charitable Remainder Trust in the
principal amount of $40,000. The Notes feature a mandatory
conversion feature obligating the holder to participate and apply
the principal and interest into a “Qualified Financing”
meaning a financing taking place prior to January 31, 2016, wherein
the Company receives gross proceeds totaling at least $1,000,000.
In the event the entire principal plus accrued interest under this
Note is not eligible for conversion into a Qualified Financing,
then any remaining balance of this Note shall be converted into
restricted common stock at the price of the Qualified Financing and
Holder shall receive three (3) times any warrant coverage provided
for in the Qualified Financing. The Notes bears interest at nine
percent per annum and has a maturity date of six months. Mr. Blech,
our Director, has controlling interest inthe aforementioned
Trusts.
On July 15, 2015, the Company issued a Convertible Promissory Note
in the principal amount of $400,000 inclusive of interest to
Techno-Ventures. The Note is for a term of six months. The Note
bears interest at twelve percent per annum. The Note is secured by
the assets of the Company. The Note may be converted into shares of
the Company’s common stock at $0.75 per share. The Company
also issued the holder warrants to purchase 500,000 shares of the
Company’s common stock. The proceeds were allocated based on
the relative fair value of the debt and the warrant. The warrants
have an exercise price of $0.75 per share and have a term of two
years. The relative fair value ascribed to the 500,000 warrants
issued was approximately $49,000 and was recorded to additional
paid-in capital. This amount will be amortized over the term of the
debt using the effective interest rate method. Dr. Ka Cheong
Chrisopher Leong, our Director, is the co-founder and President of
Techno-Ventures.
On June 26, 2015 the Company issued and sold 3.0 units (the
“Units”) to Alex Minicucci with each such Unit
consisting of a 9% Convertible Promissory Note with the principal
face value of $50,000 (the “Notes”) and a warrant to
purchase 66,667 shares of the Company’s common stock (the
“Warrant”). The Company also agreed to provide
piggy-back registration rights to the holders of the Units. The
Notes have a term of twelve (12) months, pay interest semi-annually
at 9% per annum and can be voluntarily converted by the holder into
shares of common stock at an exercise price of $0.75 per share,
subject to adjustments for stock dividends, splits, combinations
and similar events as described in the Notes. In addition, if the
Company issues or sells common stock at a price below the
conversion price then in effect, the conversion price of the Notes
shall be adjusted downward to such price but in no event shall the
conversion price be reduced to a price less than $0.50 per share.
The Warrants have an exercise price of $.75 per share and have a
term of four years. The holders of the Warrants may exercise the
Warrants on a cashless basis for as long as the shares of common
stock underlying the Warrants are not registered on an effective
registration statement. Mr. Minicucci was our former CEO and
Director.
The building that we lease at 805 Aerovista Parkway is owned by
Alexander P Minicucci Trust, which is a related party transaction
due to the trust being controlled by the Company's former chief
executive officer. The Company assumed the lease at or near the
time of the asset purchase agreement between the Company and SMS
Masterminds/Intellectual Capital at which time the office became
the company's corporate headquarters. Mr. Minicucci was our former CEO and
Director.
On March 6, 2014, the Company conducted and closed an offering of
its Series C Convertible Preferred Stock. Windham-BMP Investment I,
LLC (“Windham”) purchased an aggregate of 55,533 shares
of Series C Preferred Stock and warrants to purchase 222,132 shares
of common stock at an exercise price of $1.10 per share for an
aggregate purchase price of $166,599. Mr. Proto, our Chairman, is a
general partner of Windham. In addition, Transpac Investments
Limited (“Transpac”) purchased an aggregate of 250,000
shares of Series C Preferred Stock and warrants to purchase
1,000,000 shares of common stock at an exercise price of $1.10 per
share for an aggregate purchase price of $750,000. Dr. Ka Cheong
Christopher Leong, our Director, is the co-founder and President of
Transpac.
Director Independence. Because
our common stock is not currently listed on a national securities
exchange, we have used the definition of “independence”
of The NASDAQ Stock Market to make this determination. NASDAQ
Listing Rule 5605(a)(2) provides that an “independent
director” is a person other than an officer or employee of
the company or any other individual having a relationship which, in
the opinion of the Company’s Board of Directors, would
interfere with the exercise of independent judgment in carrying out
the responsibilities of a director. The NASDAQ listing rules
provide that a director cannot be considered independent
if:
●
the director is,
or at any time during the past three years was, an employee of the
company;
●
the director or a
family member of the director accepted any compensation from the
company in excess of $120,000 during any period of 12 consecutive
months within the three years preceding the independence
determination (subject to certain exclusions, including, among
other things, compensation for board or board committee
service);
●
a family member of
the director is, or at any time during the past three years was, an
executive officer of the company;
●
the director or a
family member of the director is a partner in, controlling
stockholder of, or an executive officer of an entity to which the
company made, or from which the company received, payments in the
current or any of the past three fiscal years that exceed 5% of the
recipient’s consolidated gross revenue for that year or
$200,000, whichever is greater (subject to certain
exclusions);
●
the director or a
family member of the director is employed as an executive officer
of an entity where, at any time during the past three years, any of
the executive officers of the company served on the compensation
committee of such other entity; or
●
the director or a
family member of the director is a current partner of the
company’s outside auditor, or at any time during the past
three years was a partner or employee of the company’s
outside auditor, and who worked on the company’s
audit.
Messrs.
Blech, Proto, Kolenik, Rubinstein, Eyler, Liddy, and Leong are the
only members of the Board of Directors that are considered
independent.
Item 14 – Principal Accountant Fees and Services
Principal Accountant Fees and Services
(1)
Audit
Fees
Our
audit fees for our 10-K for the year ended December 31, 2016 was
$73,500 and the March 31, 2016, June 30, 2016, and September 30,
2016 10Q’s were $12,600 each.
Our
audit fees for our 10-K for the year ended December 31, 2015 was
$93,250 and the March 31, 2015, June 30, 2015, and September 30,
2015 10Q’s were $11,550 each.
|
For the
Twelve
|
|
|
Months
Ended
|
|
|
December
31,
|
December
31,
|
|
2016
|
2015
|
Audit
Fees
|
$111,300
|
$129,900
|
(2) Audit-Related
Fees
There
were no fees billed in 2016 and 2015 for assurance and related
services by EisnerAmper LLP that are reasonably related to the
performance of the audit or review of the registrant's financial
statements and are not reported under item (1).
(3) Tax
Fees
No fees
were billed for professional services rendered by EisnerAmper LLP
for tax compliance, tax advice, and tax planning for the years
ended December 31, 2016 and 2015.
(4) All
Other Fees
No
aggregate fees were billed for professional services provided by
EisnerAmper LLP, other than the services reported in items (1)
through (3) for the years ended December 31, 2016 and
2015.
(5) Audit
Committee
The
registrants Audit Committee approved EisnerAmper LLP’s
performance of services on for the audit of the registrant’s
annual financial statements for the years ended December 31, 2016
and 2015.
Item 15 – Exhibits, Financial Statement
Schedules
Exhibit
No.
|
Description
|
2.1
|
Share Exchange Agreement with IdeaEdge, Inc., a California
corporation (1)
|
2.2
|
Purchase Agreement for VOS Systems, Inc. by Allan Ligi
(1)
|
3.1
|
Amended and Restated Articles of Incorporation (2)
|
3.1a
|
Amendment to Amended and Restated Articles of Incorporation
(13)
|
3.2
|
Bylaws
(3)
|
3.3
|
Certificate
of Designations for the Series A Cumulative Convertible Preferred
Stock (4)
|
10.2
|
2007 Equity Incentive Plan (1)
|
10.10
|
Change
of Control Agreement with Jonathan Shultz dated August 11,
2008(5)
|
10.25
|
Investor
relations agreement dated February 12, 2010 (6)
|
10.26
|
Stock
contribution and disposition restriction agreement with Chris
Nicolaidis dated February 11, 2010 (6)
|
10.27
|
Investor
relations agreement with Kay Holdings, Inc. dated May 10, 2010
(7)
|
10.28
|
Agreement
with Equity Source Partners, LLC dated April 30, 2010
(7)
|
10.30
|
Investor
relations agreement with Two Eight, Inc. dated April 7, 2010
(7)
|
10.31
|
Financial
Advisory Services agreement with Iroquois Master Fund Ltd. dated
June 24, 2010 (8)
|
10.32
|
Investor
Relations Agreement with Kay Holdings, Inc. dated December 29,
2010(9)
|
10.33
|
Subscription
Agreement dated January 19, 2011(10)
|
10.34
|
Common
Stock Purchase Warrant dated January 19, 2011(10)
|
10.35
|
Registration
Rights Agreement dated January 19, 2011(10)
|
10.39
|
Employment
agreement between the Company and James Collas dated January 31,
2011 (11)
|
10.40
|
Employment
agreement between the Company and Jonathan Shultz dated January 31,
2011(11)
|
10.43
|
Agreement
and Release between the Company and James P. Collas dated April 26,
2011 (12)
|
10.46
|
Warrant
Agreement with Mark Sandson dated July 19, 2011 (14)
|
10.47
|
Stock
Option Modification Agreement with Jonathan Shultz dated July 19,
2011 (14)
|
10.48
|
Form of
Warrant Agreement with named members of Company’s Board of
Directors dated August 4, 2011(15)
|
10.49
|
Stock
Option Agreement with Jonathan Shultz dated August 4,
2011(15)
|
10.50
|
Investor
Relations Agreement with SPN Investments, Inc. dated August 5,
2011(15)
|
10.51
|
Employment
Agreement with Michael R. McCoy dated September 19, 2011
(16)
|
10.52
|
Stock
Option Agreement with Michael R. McCoy dated September 19, 2011
(16)
|
10.53
|
Warrant
Agreement with Patrick Kolenik dated September 19, 2011
(16)
|
10.54
|
Form of
Common Stock Purchase Warrant dated October 21,
2011(17)
|
10.55
|
Form of
Subscription Agreement dated October 21, 2011 (17)
|
10.56
|
Form of
Registration Rights Agreement dated October 21, 2011
(17)
|
10.57
|
Warrant
Agreement with Isaac Blech dated November 1, 2011 (18)
|
10.58
|
Form of
Common Stock Purchase Warrant dated November 21,
2011(19)
|
10.59
|
Form of
Subscription Agreement dated November 21, 2011 (19)
|
10.60
|
Form of
Registration Rights Agreement dated November 21,
2011(19)
|
10.61
|
Employment
Agreement with Evan Jones dated May 1, 2011 (20)
|
10.62
|
Warrant
Agreement with Robert DeSantis dated March 26, 2012
(21)
|
10.63
|
Amended
Employment Agreement with Michael R. McCoy dated July 24, 2012
(22)
|
10.64
|
Stock
Option Agreement with Michael R. McCoy dated July 24, 2012
(22)
|
10.65
|
Warrant
Agreement with Isaac Blech dated July 23, 2012 (22)
|
10.67
|
Warrant
Agreement with Cary Sucoff dated July 23, 2012 (22)
|
10.68
|
Warrant
Agreement with Joseph Proto dated July 23, 2012 (22)
|
10.69
|
Warrant
Agreement with Patrick Kolenik dated July 23, 2012
(22)
|
10.70
|
Warrant
Agreement with Jesse Itzler dated July 23, 2012 (22)
|
10.71
|
Warrant
Agreement with Dr. Ka Cheong
Christopher Leong dated October 29, 2012 (23)
|
10.72
|
Employment
Agreement with William Hernandez dated November 12, 2012
(24)
|
10.73
|
Form of
Subscription Agreement (25)
|
10.74
|
Form of
Common Stock Purchase Warrant (25)
|
10.75
10.76
10.77
10.78
10.79
10.80
10.81
10.82
10.82
10.83
10.84
10.85
10.86
10.87
10.88
10.89
10.90
10.91
10.92
|
Form of
Registration Rights Agreement (25)
Employment
Agreement with Kim Petry dated February 19, 2013 (26)
Form of
Registration Rights Agreement dated March 20, 2013
(27)
Form of
Asset Purchase Agreement dated October 15, 2013 (28)
Employment
Agreement with Alex Minicucci dated February 11, 2014
(29)
Form of
Subscription Agreement (30)
Form of
Subscription Agreement (31)
Form of
Subscription Agreement (32)
Form of
Subscription Agreement (33)
Form of
Private Offering (34)
Form of
Private Offering (35)
Form of
Private Offering (36)
Form of
Private Offering (37)
Form of
Private Offering (38)
Form of
Private Offering (39)
Form of
Promissory Note (40)
Form of
Promissory Note (41)
Form of
Promissory Note (42)
Form of
Promissory Note (43)
|
11.1
|
Statement
re Computation of Per Share Earnings (20)
|
14.1
|
Code of
Business Conduct and Ethics (21)
|
21.1*
|
Listing
of Subsidiaries (20)
|
24.1
|
Power
of Attorney (contained in the signature page to this Transition
Report on Form 10-K)
|
31.1*
|
Certification
pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange
Act, as amended, by Chief Executive Officer
|
31.2*
|
Certification
pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange
Act, as amended, by Chief Financial Officer
|
32.1*
|
Certification
pursuant to 18 U.S.C. §1350 by Chief Executive
Officer
|
32.2*
|
Certification
pursuant to 18 U.S.C. §1350 by Chief Financial
Officer
|
*
|
Filed
as an exhibit to this report
|
(1)
|
Incorporated by reference from the registrant’s Definitive
Proxy Statement filed on September 21, 2007
|
(2)
|
Incorporated
herein by reference to the registrant's Form 8-K filed on October
22, 2007
|
(3)
|
Incorporated
herein by reference to the registrant’s Form 8-K filed on
September 22, 2005
|
(4)
|
Incorporated
herein by reference to the registrant’s Form 8-K filed on
June 11, 2008
|
(5)
|
Incorporated
herein by reference to the registrant’s Form 10-QSB filed on
August 14, 2008
|
(6)
|
Incorporated
herein by reference to the registrant’s Form 10-Q filed on
February 12, 2010
|
(7)
|
Incorporated
herein by reference to the registrant’s Form 10-Q filed on
May 14, 2010
|
(8)
|
Incorporated
herein by reference to the registrant’s Form 10-Q filed on
August 12, 2010
|
(9)
|
Incorporated
herein by reference to the registrant’s Form 10-K filed on
December 29, 2010
|
(10)
|
Incorporated
herein by reference to the registrant’s Form 8-K filed on
January 19, 2011
|
(11)
|
Incorporated
herein by reference to the registrant’s Form 10-Q filed on
February 1, 2011
|
(12)
|
Incorporated
herein by reference to the registrant’s Form 8-K filed on
April 26, 2011
|
(13)
|
Incorporated
herein by reference to the registrant’s Form 8-K filed on May
13, 2011
|
(14)
|
Incorporated
herein by reference to the registrant’s Form 8-K filed on
July 21, 2011
|
(15)
|
Incorporated
herein by reference to the registrant’s Form 10-Q filed on
August 10, 2011
|
(16)
|
Incorporated
herein by reference to the registrant’s Form 8-K filed on
September 22, 2011
|
(17)
|
Incorporated
herein by reference to the registrant’s Form 8-K filed on
October 25, 2011
|
(18)
|
Incorporated
herein by reference to the registrant’s Form 8-K filed on
November 4, 2011
|
(19)
|
Incorporated
herein by reference to the registrant’s Form 8-K filed on
November 25, 2011
|
(20)
|
Included
within the financial statements filed in this Transition Report on
Form 10-K
|
(21)
|
Incorporated
herein by reference to the registrant’s Form 8-K filed on
November 10, 2005
|
(20)
|
Incorporated
by reference to the registrant’s form 10-K filed on December
21, 2011
|
(21)
|
Incorporated
herein by reference to the registrant’s Form 8-K filed on
April 4, 2012
|
(22)
|
Incorporated
herein by reference to the registrant’s Form 8-K filed on
July 27, 2012
|
(23)
|
Incorporated
herein by reference to the registrant’s Form 8-K filed on
November 1, 2012
|
(24)
|
Incorporated
herein by reference to the registrant’s Form 8-K filed on
November 16, 2012
|
(25)
(26)
(27)
(28)
(29)
(30)
(31)
(32)
(33)
(34)
(35)
(36)
(37)
(38)
(39)
(40)
(41)
(42)
(43)
|
Incorporated
herein by reference to the registrant’s Form 8-K filed on
December 6, 2012
Incorporated
herein by reference to the registrant’s Form 8-K filed on
February 21, 2013
Incorporated
herein by reference to the registrant’s Form 8-K filed on
March 26, 2013
Incorporated
herein by reference to the registrant’s Form 8-K filed on
October 16, 2013
Incorporated
herein by reference to the registrant’s Form 8-K filed on
February 14, 2014
Incorporated
herein by reference to the registrant’s Form 8-K filed on
February 14, 2014
Incorporated
herein by reference to the registrant’s Form 8-K filed on
February 27, 2014
Incorporated
herein by reference to the registrant’s Form 8-K filed on
March 6, 2014
Incorporated
herein by reference to the registrant’s Form 8-K filed on
March 4, 2014
Incorporated
herein by reference to the registrant’s Form 8-K filed on
April 2, 2015
Incorporated
herein by reference to the registrant’s Form 8-K filed on May
6, 2015
Incorporated
herein by reference to the registrant’s Form 8-K filed on May
26, 2015
Incorporated
herein by reference to the registrant’s Form 8-K filed on
June 4, 2015
Incorporated
herein by reference to the registrant’s Form 8-K filed on
July 2, 2015
Incorporated
herein by reference to the registrant’s Form 8-K filed on
July 21, 2015
Incorporated
herein by reference to the registrant’s Form 8-K filed on
September 1, 2015
Incorporated
herein by reference to the registrant’s Form 8-K filed on
October 6, 2015
Incorporated
herein by reference to the registrant’s Form 8-K filed on
July 20, 2016
Incorporated
herein by reference to the registrant’s Form 8-K filed on
December 2, 2016
|
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, thereunto duly
authorized.
Date: May 16, 2017
|
SpendSmart Networks
Inc., a Delaware corporation
By:
/s/ LUKE
WALLACE
Luke
Wallace, Chief Executive Officer
(Principal
Executive Officer)
|
Power of Attorney
We, the
undersigned directors and/or officers of SpendSmart Networks, Inc.,
a Delaware corporation, hereby severally constitute and appoint
Luke Wallace acting individually, his true and lawful
attorney-in-fact and agent, with full power of substitution and
re-substitution, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments to this
Transition Report on Form 10-K, and to file the same, with all
exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be
done that such Transition Report on Form 10-K and its amendments
shall comply with the Securities Act, and the applicable rules and
regulations adopted or issued pursuant thereto, as fully to all
intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent,
or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
In
accordance with the requirements of the Securities Act of 1934,
this report has been signed by the following persons in the
capacities and on the dates stated.
Signature
|
|
Title
|
Date
|
|
|
|
|
/s/
LUKE WALLACE
|
|
Chief Executive Officer
|
May 16, 2017
|
Luke Wallace
|
|
|
|
|
|
|
|
/s/
BRETT SCHNELL
|
|
Chief Financial Officer and Treasurer
|
May 16, 2017
|
Brett Schnell
|
|
(Principal
Financial Officer and Principal Accounting Officer)
|
|
|
|
|
|
/s/
ISAAC BLECH
|
|
Director
|
May 16, 2017
|
Isaac Blech
|
|
|
|
|
|
|
|
/s/
PATRICK KOLENIK
|
|
Director
|
May 16, 2017
|
Patrick Kolenik
|
|
|
|
|
|
|
|
/S/
JOSEPH PROTO
|
|
Director
|
May 16, 2017
|
Joseph Proto
|
|
|
|
|
|
|
|
/s/
KA CHEONG CHRISTOPHER LEONG
|
|
Director
|
May 16, 2017
|
Ka Cheong Christopher Leong
|
|
|
|
|
|
|
|
/s/
JOHN EYLER
|
|
Director
|
May 16, 2017
|
John Eyler
|
|
|
|
-78-