NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 2015
NOTE 1 – THE COMPANY AND NATURE OF BUSINESS
Freeze Tag, Inc. (the "Company") is a leading creator of mobile social games that are fun and engaging for all ages. Based on a free-to-play business model that has propelled games like Candy Crush Saga to worldwide success, the Company employs state-of-the-art data analytics and proprietary technology to dynamically optimize the gaming experience for revenue generation. Players can download and enjoy the Company's games for free, or they can purchase virtual items and additional features within the game to increase the fun factor. Our games encourage players to compete and engage with their friends on major social networks such as Facebook and Twitter.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company's revenues are derived primarily by licensing software products in the form of online and downloadable games for PC, Mac and smartphone platforms. The Company distributes its products primarily through online games portals and smartphone device manufacturers ("distribution partners"), which market the games to end-users. The nature of our business is such that we sell games basically through four distribution outlets – web portals, brick and mortar retail distributors, mobile distributors and publishers, and our own web portal, www.freezetag.com.
Product Sales (web and mobile revenues)
The Company recognizes revenue from the sale of our products upon the transfer of title and risk of loss to its customers, and once any performance obligations have been completed. Revenue from product sales is recognized after deducting the estimated allowance for returns and price protection.
Licensing Revenues (retail revenues- royalties)
Third-party licensees distribute games under license agreements with the Company. We receive royalties from the licensees as a result. We recognize these royalties as revenues upon receipt of the monthly or quarterly (varies per distribution partner) revenue reports provided by the partner. Revenue from licensing/royalties is recognized after deducting the estimated allowance for returns and price protection.
Some license agreements require a royalty advance from the licensee/distributor in which case the original advance is recognized as a liability and royalty revenue is deducted from the advance as earned.
Other Revenues
Other revenues primarily include Ad game revenue and work-for-hire game related revenue. We derive our advertising game revenue from certain of our partners that offer our games free of charge to consumers in exchange for the consumers being exposed to advertising embedded in our games. In this way, we do not receive revenue for the sale of our games, but rather a percentage of the "advertising" revenue generated by these player views. This method of generating revenue is essentially the same as traditional radio or television advertising where consumers are allowed to enjoy content for "free" but are forced to watch (or listen) to advertising before, in between and at the end of the programming content.
Additionally, we derive some revenue from "work-for-hire" projects. Some of our partners occasionally ask us to render "work-for-hire" services for them such as preparing packaging materials. For example, a retail game and DVD publisher hired us to create several designs for printed packages that were used for games published by the publisher but not developed by us. For this work, we charge a one-time, fixed fee for each package design.
The Company recognizes this revenue once all performance obligations have been completed. In addition, persuasive evidence of an arrangement must exist and collection of the related receivable must be probable.
The Company recognizes revenue in accordance with current accounting standards when an arrangement exists, delivery has occurred, the price is fixed and determinable, and collectability is probable.
Cash and Cash Equivalents
For purposes of the Statement of Cash Flows, the Company considers liquid investments with an original maturity of three months or less to be cash equivalents. The Company places its cash and cash equivalents with large commercial banks. The Federal Deposit Insurance Corporation ("FDIC") insures these balances, up to $250,000. All of the Company's cash balances at December 31, 2015 and December 31, 2014 were insured. At December 31, 2015 and December 31, 2014 there were no cash equivalents.
Allowances for Returns, Price Protection, and Doubtful Accounts
Because the majority of the Company's business is derived through online portals (such as Big Fish Games) and wireless online app stores (such as Apple), there is no physical product, other than the downloadable bits of our games that is involved in the customer purchase. In the digital environment, the customer cannot 'return' a digital download product. Therefore, there are no returns. The customer can ask for a refund of a digital product, and if there are any, then they are reconciled or netted out by our distribution partners before we receive the corresponding payments and royalty statements. As such, we do not allow for returns, bad debts or price protection of digital download products.
However, the Company derives a small portion of our revenues from sales of physical packaged software for personal computers through distribution partners who sell through traditional retail channels. Product revenue is recognized net of allowances for price protection and returns and various customer discounts. Our distribution partners who sell to retailers may allow returns for our packaged personal computer products; these partners may decide to provide price protection or allow returns for personal computer products after they analyze: (1) inventory remaining in the retail channel, (2) the rate of inventory sell-through in the retail channel, and (3) the remaining inventory on hand of our games. To allow for these returns, price protection and various customer discounts, some of our distribution partners who sell to retailers will hold back a percentage of our revenue. These "hold-back" amounts, typically a percentage of revenue, are then reconciled on a quarterly basis and detailed on the statements we receive from our distribution partners. As of December 31, 2015 and December 31, 2014, the allowance for doubtful accounts was $5,600.
Concentrations of Credit Risk, Major Customers and Major Vendors
The Company's customers are the end-consumers that purchase its games from the websites where the Company has its games listed for sale. Therefore, the Company does not have any individual customers that represent any more than a fraction of its revenue. However, the Company does have primary distribution partners, which are the owners of the websites where it sells its games. Under the Company's distribution agreements it is not obligated to make, distribute or sell any games. However, for any games the Company does make and wishes to distribute it can list them on one or more of these websites under a revenue sharing arrangement where it shares the revenue from any of its games that sell. The sharing arrangement varies greatly depending on the distributor with the Company generally keeping between 35% and 70% of the revenue and the distributor keeping the remainder of the revenue generated by each sale. At times the Company enters into "exclusivity options" whereby if a distributor wishes to have an exclusive period carrying the Company's games (normally 30-90 days) it will agree to that in exchange for the distributor marketing the game in their newsletter and other marketing programs. Due to the fact the Company has a number of distribution partners and a variety of different websites where it can sell its games, the Company is not substantially dependent on any of its distribution partners or agreements. In addition to the distribution agreements, the Company currently has licensing agreements with Ohio Art Company and CMG Worldwide, which allow it to develop and distribute games around third party intellectual property in exchange for paying royalty payments. The Company is not substantially dependent on either of those licensing agreements.
For the year ended December 31, 2015, the Company's primary distributors that represented 10% or more of its revenues were: Big Fish Games – 23.67%, Wired Media – 22.74%, Apple – 18.08% and S.A.D. – 13.51%. For the year ended December 31, 2014, the Company's primary distributors that represented 10% or more of its revenues were: Big Fish Games – 25.29%, RealNetworks – 18.90%, Exent – 13.35%, Apple – 11.53% and Amazon – 11.01%.
At December 31, 2015, the Company's primary distributors and partners that represented 10% or more of its accounts receivable were: Apple – 16.93%, Big Fish Games – 10.00% and Exent – 48.81%. At December 31, 2014, the Company's primary distributors and partners that represented 10% or more of its accounts receivable were: Exent – 71.43%.
Income Taxes
We account for income taxes using ASC Topic 740, Income Taxes. Under ASC Topic 740, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
ASC Topic 740 includes accounting guidance which clarifies the accounting for the uncertainty in recognizing income taxes in an organization by providing detailed guidance for financial statement recognition, measurement and disclosure involving uncertain tax positions. This guidance requires an uncertain tax position to meet a more-likely-than-not recognition threshold at the effective date to be recognized both upon the adoption of the related guidance and in subsequent periods.
The Company has no uncertain tax positions at any of the dates presented.
Foreign Currency Translation
The Company derives a portion of its revenue from foreign countries, which report to the Company in foreign currency, but pay in U.S. Dollars. Because of the fluctuations between the reporting time and the payment period (up to 60 days), it is necessary to make adjustments to the Company's accounting records. These adjustments are recorded under a Foreign Currency Translation expense account, and shown in the Statement of Operations as a General& Administrative expense.
Accounting for Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC Topic 718-10, Compensation-Stock Compensation and ASC Subtopic 505-50, Equity-Based Payments to Non-Employees ("ASC stock-based compensation guidance"). Stock-based compensation expense recognized during the requisite services period is based on the value of share-based payment awards after reduction for estimated forfeitures. Forfeitures are estimated at the time of grant and are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company had no stock-based compensation expense recognized in its statements of operations for the years ended December 31, 2015 and 2014.
Fair Value of Financial Instruments
The Company adopted FASB ASC 820 on October 1, 2008. Under this FASB, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.
The Company has various financial instruments that must be measured under the new fair value standard including cash and debt. The Company currently does not have non-financial assets or non-financial liabilities that are required to be measured at fair value on a recurring basis. The Company's financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. The fair value of the Company's cash is based on quoted prices and therefore classified as Level 1.
Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.
Cash, accounts receivable, capitalized production costs, prepaid royalties, prepaid expenses, accounts payable, accrued compensation, accrued royalties, accrued interest, accrued expenses, unearned royalties, notes payable – related party and technology payables reported on the balance sheet are estimated by management to approximate fair market value due to their short term nature.
The following tables provide a summary of the fair values of assets and liabilities measured on a non-recurring basis at December 31, 2015 and 2014:
2015
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Gains
(Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
841,677
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
841,677
|
|
|
$
|
(106,543
|
)
|
2014
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Losses
(Gains)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
$
|
438,374
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
438,374
|
|
|
$
|
241,154
|
|
The Company believes that the market rate of interest as of December 31, 2015 and 2014 was not materially different to the rate of interest at which the convertible notes payable were issued. Accordingly, the Company believes that the fair value of the convertible notes payable approximated their carrying value at December 31, 2015 and 2014.
Use of Estimates
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") requires the Company's management to make judgments, assumptions and estimates that affect the amounts reported in its financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates and these differences may be material.
Research and Development Costs
The Company charges costs related to research & development of products to general and administrative expense as incurred. The types of costs included in research and development expenses include research materials, salaries, contractor fees, and support materials.
Intellectual Property Licenses (Prepaid Royalties)
Intellectual property license costs represent license fees paid to intellectual property rights holders for use of their trademarks or copyrights in the development of the Company's products. Intellectual property license costs represent license fees paid to intellectual property rights holders for use of their trademarks, copyrights, software, technology, music or other intellectual property or proprietary rights in the development of the Company's products. Depending upon the agreement with the rights holder, the Company may obtain the rights to use acquired intellectual property in multiple products over multiple years, or alternatively, for a single product. Minimum guaranteed royalty payments for intellectual property licenses are initially recorded as an asset (prepaid royalties or prepaid licensing fees), and a current liability, (accrued royalties payable) at the contractual amount upon execution of the contract when no significant performance remains with the licensor. Commencing upon the related product's release date, intellectual property licenses costs are amortized to "Cost of Sales – Licensing" based upon the percentage of revenue outlined in the contract with each specific licensor. Generally, the Company's intellectual property licensing contracts call for licensors to be paid a percentage of revenue actually received by the Company, with allowances for minimum guarantees. Sometimes, the terms of the specific licensing contracts allow for the Company to re-capture expenses before licensing out royalties are calculated.
Capitalized intellectual property costs for those products that are cancelled or abandoned are charged to product development expense in the period of cancellation.
As of December 31, 2015 and 2014, prepaid royalties (or prepaid licensing fees) were $4,507 and $4,936, respectively.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)". ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016; however, in July 2015, the FASB agreed to delay the effective date by one year. The proposed deferral may permit early adoption, but would not allow adoption any earlier than the original effective date of the standard. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently assessing the impact the adoption of ASU 2014-09, including possible transition alternatives, will have on our financial statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)". The amendments in this ASU revise the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2018 and are to be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. We are currently unable to determine the impact on our financial statements of the adoption of this new accounting pronouncement.
NOTE 3 – GOING CONCERN
As shown in the accompanying financial statements, the Company incurred net losses of $1,870,677 and $1,355,030 for the years ended December 31, 2015 and 2014, respectively. As of December 31, 2015, the Company's accumulated deficit was $8,984,510. During the years ended December 3l, 2015 and 2014, the Company experienced negative cash flows from operations largely due to its continued investment spending for product development of game titles for smartphones and tablets that are expected to benefit future periods. Those facts, along with our lack of access to a significant bank credit facility, create an uncertainty about the Company's ability to continue as a going concern. Accordingly, the Company is currently evaluating its alternatives to secure financing sufficient to support the operating requirements of its current business plan, as well as continuing to execute its business strategy of distributing game titles to digital distribution outlets, including mobile gaming app stores, online PC and Mac gaming portals, and opportunities for new devices such as tablet (mobile internet device) applications, mobile gaming platforms and international licensing opportunities.
The Company's ability to continue as a going concern is dependent upon its success in securing sufficient financing and in successfully executing its plans to return to positive cash flows during fiscal year 2016. The Company's financial statements do not include any adjustments that might be necessary if it were unable to continue as a going concern.
NOTE 4 –
ACCRUED EXPENSES
Accrued expenses consisted of the following at December 31:
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Accrued vacation
|
|
$
|
64,461
|
|
|
$
|
68,344
|
|
Accrued royalties
|
|
|
408,134
|
|
|
|
406,790
|
|
Technology payable
|
|
|
18,000
|
|
|
|
18,000
|
|
Other
|
|
|
1,417
|
|
|
|
2,181
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
492,012
|
|
|
$
|
495,315
|
|
Accrued royalties consist of amounts owed to other parties with whom the Company has revenue-sharing agreements or from whom it licenses certain trademarks or copyrights.
Unearned royalties consist of royalties received from licensees, which have not yet been earned. Unearned royalties were $195,033 and $202,499 at December 31, 2015 and 2014, respectively.
As of December 31, 2015 and 2014, the Company had technology payable of $18,000 resulting from a technology transfer agreement with an unrelated party entered into in June 2011, payable in 24 installments of $1,500 without interest.
NOTE 5 –
DEBT
Convertible Notes Payable – Related Party
Convertible notes payable, related party consisted of the following at December 31:
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
Convertible note payable to the Holland Family Trust, maturing on September 30, 2016, with interest at 10%
|
|
$
|
222,572
|
|
|
$
|
222,572
|
|
Convertible note payable to Craig Holland, maturing on September 30, 2016, with interest at 10%
|
|
|
813,602
|
|
|
|
813,602
|
|
Convertible note payable to Craig Holland, maturing on December 31, 2016, with interest at 10%
|
|
|
186,450
|
|
|
|
186,450
|
|
Convertible note payable to Mick Donahoo, maturing on December 31, 2016, with interest at 10%
|
|
|
186,450
|
|
|
|
186,450
|
|
Convertible note payable to Craig Holland, maturing on December 31, 2016, with interest at 10%
|
|
|
6,925
|
|
|
|
11,532
|
|
Convertible note payable to Mick Donahoo, maturing on December 31, 2016, with interest at 10%
|
|
|
31,042
|
|
|
|
35,648
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,447,041
|
|
|
$
|
1,456,254
|
|
The "Holland Family Trust Convertible Note" is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The "Variable Conversion Price" shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). "Market Price" means the average of the three lowest trading prices for the Company's common stock during the twenty-five (25) trading-day period ending on the latest complete trading day prior to the date of conversion. "Fixed Conversion Price" shall mean $0.00005.
The Company evaluated the Holland Family Trust Convertible Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The note payable is convertible into common stock at the discretion of the Holland Family Trust. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash.
As of September 30, 2014, $72,107 of accrued interest was added to the note principal and $813,602 of the note was transferred to Craig Holland. A new convertible note for $222,572 was issued to the Holland Family Trust with the same terms as the previous note, with the exception of the maturity date, which was extended to September 30, 2016. As of December 31, 2015 and 2014, accrued interest related to the Holland Family Trust Convertible Note was $27,867 and $5,610, respectively.
On September 30, 2014, $813,602 principal balance (including interest) of the Holland Family Trust Convertible Note was transferred to Craig Holland (the "Holland Transferred Convertible Note"). The Holland Transferred Convertible Note retains the same terms as the original Holland Family Trust Convertible Note with the exception of the maturity date, which was extended to December 31, 2016. As of December 31, 2015 and 2014, accrued interest related to the Holland Transferred Convertible Note was $101,867 and $20,507, respectively.
On December 31, 2013, the Company converted $186,450 of accrued salaries due to Craig Holland into a convertible note (the "Holland Accrued Salary Note") and converted $186,450 of accrued salaries due to Mick Donahoo into a convertible note (the "Donahoo Accrued Salary Note"). The Holland Accrued Salary Note and the Donahoo Accrued Salary Note are convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The "Variable Conversion Price" shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). "Market Price" means the average of the three lowest trading prices for the Company's common stock during the twenty-five (25) trading-day period ending on the latest complete trading day prior to the Conversion Date. "Fixed Conversion Price" shall mean $0.00005.
The Company evaluated the Holland Accrued Salary Note and the Donahoo Accrued Salary Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, the conversion feature does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. As of December 31, 2015 and December 31, 2014, there was accrued interest related to each of these notes of $37,290 and $18,645, respectively.
On December 31, 2013, the Company converted a note payable to Mick Donahoo of $55,250 and accrued interest of $15,399 into a new convertible related party note in the amount of $70,649 (the "Mick Donahoo Convertible Note").
On December 31, 2013, the Company converted a note payable to Craig Holland of $35,100 and accrued interest of $11,432 into a new convertible related party note in the amount of $46,532 (the "Craig Holland Convertible Note").
The Mick Donahoo Convertible Note and the Craig Holland Convertible Note are convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The "Variable Conversion Price" shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). "Market Price" means the average of the three lowest trading prices for the Company's common stock during the twenty-five (25) trading-day period ending on the latest complete trading day prior to the Conversion Date. "Fixed Conversion Price" shall mean $0.00005.
The Company evaluated the Mick Donahoo Convertible Note and the Craig Holland Convertible Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The agreements modified the debt to make it convertible into common stock of the Company. As of December 31, 2015 and December 31, 2014, there was accrued interest payable related to these notes totaling of $5,146 and $4,699, respectively.
On October 23, 2014, Craig Holland converted $35,000 principal and $2,836 accrued interest into 39,829,849 shares of the Company's common stock.
On October 23, 2014, Mick Donahoo converted $35,000 principal and $2,836 accrued interest into 39,829,849 shares of the Company's common stock.
On October 8, 2015, Craig Holland converted $4,607 principal and $2,028 accrued interest into 12,637,860 shares of the Company's common stock.
On October 8, 2015, Mick Donahoo converted $4,607 principal and $2,028 accrued interest into 12,637,860 shares of the Company's common stock.
Effective October 15, 2015, we entered into an Amendment to Convertible Promissory Note with each of Craig Holland and Mick Donahoo with respect to the Craig Holland Convertible Note and the Mick Donahoo Convertible Note. The parties agreed to modify the terms of the notes such that in the event the lender issues a valid conversion notice and the conversion notice results in a conversion price less than the then-par value of the Company's common stock, the conversion will be effected at par value with additional principal amounts added to the note equal to the value of the common shares that were not able to be issued due to the conversion price being less than the par value of the Company's common stock. As the amendment did not alter the shares received by converting the notes, no additional value was recorded by the Company as a result of these amendments.
Total accrued interest payable for the related party convertible notes was $209,461 and $68,106 as of December 31, 2015 and December 31, 2014, respectively.
Convertible Notes Payable – Non-Related Party
Convertible notes payable – non-related party consisted of the following at December 31:
|
|
2015
|
|
|
2014
|
|
Convertible note payable to Robert Cowdell, maturing on December 31, 2016, with interest at 10%
|
|
$
|
61,443
|
|
|
$
|
61,443
|
|
Convertible note payable to an accredited investor, with interest at 10%
|
|
|
-
|
|
|
|
45,300
|
|
Convertible note payable to an accredited investor, maturing on September 30, 2016, with interest at 10%
|
|
|
31,126
|
|
|
|
50,000
|
|
Convertible note payable to an accredited investor, maturing on September 30, 2016, with interest at 10%
|
|
|
50,000
|
|
|
|
50,000
|
|
Convertible note payable to an accredited investor, maturing on September 30, 2016, with interest at 10%
|
|
|
50,000
|
|
|
|
50,000
|
|
Convertible note payable to an accredited investor, maturing on September 30, 2016, with interest at 10%
|
|
|
50,000
|
|
|
|
50,000
|
|
Convertible note payable to an accredited investor, maturing on September 30, 2016, with interest at 10%
|
|
|
50,000
|
|
|
|
50,000
|
|
Convertible note payable to an accredited investor, maturing on June 25, 2017, with interest at 10%
|
|
|
50,000
|
|
|
|
50,000
|
|
Convertible note payable to an accredited investor, maturing on June 25, 2017, with interest at 10%
|
|
|
50,000
|
|
|
|
50,000
|
|
Convertible note payable to an accredited investor, maturing on June 25, 2017, with interest at 10%
|
|
|
50,000
|
|
|
|
50,000
|
|
Convertible note payable to an accredited investor, maturing on June 25, 2017, with interest at 10%
|
|
|
50,000
|
|
|
|
50,000
|
|
Convertible note payable to an accredited investor, maturing on June 25, 2017, with interest at 10%
|
|
|
50,000
|
|
|
|
50,000
|
|
Convertible note payable to an accredited investor, maturing on June 25, 2017, with interest at 10%
|
|
|
100,000
|
|
|
|
100,000
|
|
Convertible note payable to an accredited investor, maturing on June 25, 2017, with interest at 10%
|
|
|
50,000
|
|
|
|
50,000
|
|
Convertible note payable to an accredited investor, maturing on June 25, 2017, with interest at 10%
|
|
|
70,000
|
|
|
-
|
|
Convertible note payable to an accredited investor, maturing on June 25, 2017, with interest at 10%
|
|
|
30,000
|
|
|
-
|
|
Convertible note payable to an accredited investor, maturing on November 11, 2016, with interest at 10%
|
|
|
30,000
|
|
|
-
|
|
Convertible note payable to an accredited investor, maturing on November 11, 2016, with interest at 10%
|
|
|
40,000
|
|
|
-
|
|
Convertible note payable to an accredited investor, maturing on November 11, 2016, with interest at 10%
|
|
|
110,000
|
|
|
-
|
|
Convertible note payable to an accredited investor, maturing on November 11, 2016, with interest at 10%
|
|
|
88,000
|
|
|
-
|
|
Convertible note payable to an accredited investor, maturing on November 11, 2016, with interest at 10%
|
|
|
90,000
|
|
|
-
|
|
Convertible note payable to an accredited investor, maturing on November 11, 2016, with interest at 10%
|
|
|
90,000
|
|
|
-
|
|
Convertible note payable to an accredited investor, maturing on April 28, 2017, with interest at 10%
|
|
|
65,000
|
|
|
-
|
|
Convertible note payable to an accredited investor, maturing on April 28, 2017, with interest at 10%
|
|
|
65,000
|
|
|
-
|
|
Convertible note payable to an accredited investor, maturing on April 28, 2017, with interest at 10%
|
|
|
60,000
|
|
|
-
|
|
Convertible note payable to an accredited investor, maturing on April 28, 2017, with interest at 10%
|
|
|
50,000
|
|
|
-
|
|
Convertible note payable to an accredited investor, maturing on April 28, 2017, with interest at 10%
|
|
|
50,000
|
|
|
-
|
|
Convertible note payable to an accredited investor, maturing on April 28, 2017, with interest at 10%
|
|
|
50,000
|
|
|
-
|
|
Total
|
|
|
1,585,569
|
|
|
|
756,743
|
|
Less discount
|
|
(180,208
|
)
|
|
(343,902
|
)
|
|
|
|
|
|
|
|
|
|
Net convertible notes payable
|
|
$
|
1,405,361
|
|
|
$
|
412,841
|
|
On December 31, 2013, the Company converted $55,429 of convertible debt and $6,014 in accrued interest due to Robert Cowdell (the "Convertible Cowdell Note") into a convertible note. The Convertible Cowdell Note is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The "Variable Conversion Price" shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). "Market Price" means the average of the three lowest trading prices for the Company's common stock during the twenty-five (25) trading-day period ending on the latest complete trading day prior to the Conversion Date. "Fixed Conversion Price" shall mean $0.00005. The Convertible Cowdell Note had accrued interest of $12,289 and $6,144 as of December 31, 2015 and 2014, respectively.
The Company evaluated the Convertible Cowdell Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The agreement modified the debt to make it convertible into common stock of the Company.
The convertible notes to an accredited investor (the "Accredited Investor") with outstanding balances at December 31, 2015 were issued in $50,000 tranches in January, February, March, April, May, June, July, August, September, October and December 2014, and tranches of $100,000 in November 2014, $70,000 in January 2015, two $30,000 tranches in February 2015, $40,000 in February 2015, $110,000 in March 2015, $88,000 in April 2015, $90,000 in May and June 2015, $65,000 in July and August 2015, $60,000 in September 2015 and $50,000 in October, November and December 2015. Each note is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The "Variable Conversion Price" shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). "Market Price" means the average of the three lowest trading prices for the Company's common stock during the twenty-five (25) trading-day period ending on the latest complete trading day prior to the Conversion Date. "Fixed Conversion Price" shall mean $0.00005. The notes also include conversion price reset features that are triggered when new equity issuances are made by the Company; as a result, this feature caused the Company to consider this feature a derivative liability. The maturity date of the notes is generally one year from the date of funding, with the maturity date of the tranches issued in February 2015 through December 2015 nine months from the date of funding. The due date of the note that includes tranches funded through May 2014 with outstanding principal balances totaling $231,126 as of December 31, 2015 was extended to September 30, 2015. The due date of the note that includes tranches funded from June 2014 through February 2015 with outstanding principal balances totaling $500,000 as of December 31, 2015 was extended to June 25, 2016.
The January 2014 derivative was valued as of January 6, 2014 at $44,493, which was recorded as a debt discount. During the year ended December 31, 2015, $731 was amortized from the debt discount. The debt discount was fully amortized at December 31, 2015. The January 2014 note had accrued interest of $5,814 and $4,863 as of December 31, 2015 and 2014, respectively.
The February 2014 derivative was valued as of February 18, 2014 at $44,556, which was recorded as a debt discount. During year ended December 31, 2015, $5,981 was amortized from the debt discount. The debt discount was fully amortized at December 31, 2015. The February 2014 note had accrued interest of $9,329 and $5,981 as of December 31, 2015 and 2014, respectively.
The March 2014 derivative was valued as of March 26, 2014 at $77,884, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the year ended December 31, 2015, $11,644 was amortized from the debt discount. The debt discount was fully amortized at December 31, 2015. The March 2014 note had accrued interest of $8,836 and $3,836 as of December 31, 2015 and 2014, respectively.
The April 2014 derivative was valued as of April 25, 2014 at $90,605, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the year ended December 31, 2015, $15,753 was amortized from the debt discount. The debt discount was fully amortized at December 31, 2015. The April 2014 note had accrued interest of $8,425 and $3,425 as of December 31, 2015 and 2014, respectively.
The May 2014 derivative was valued as of May 21, 2014 at $95,029, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the year ended December 31, 2015, $19,315 was amortized from the debt discount. The debt discount was fully amortized at December 31, 2015. The May 2014 note had accrued interest of $8,068 and $3,068 as of December 31, 2015 and 2014, respectively.
The June 2014 derivative was valued as of June 25, 2014 at $83,184, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the year ended December 31, 2015, $24,110 was amortized from the debt discount. The debt discount was fully amortized at December 31, 2015. The June 2014 note had accrued interest of $7,575 and $2,575 as of December 31, 2015 and 2014, respectively.
The July 2014 derivative was valued as of July 15, 2014 at $73,999, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the year ended December 31, 2015, $26,849 was amortized from the debt discount. The debt discount was fully amortized at December 31, 2015. The July 2014 note had accrued interest of $7,301 and $2,301 as of December 31, 2015 and 2014, respectively.
The August 2014 derivative was valued as of August 19, 2014 at $64,104, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the years ended December 31, 2015, $31,644 was amortized from the debt discount. The debt discount was fully amortized at December 31, 2015. The August 2014 note had accrued interest of $6,836 and $1,822 as of December 31, 2015 and 2014, respectively.
The September 2014 derivative was valued as of September 17, 2014 at $62,915, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the year ended December 31, 2015, $35,616 was amortized from the debt discount. The debt discount was fully amortized at December 31, 2015. The September 2014 note had accrued interest of $6,438 and $1,438 as of December 31, 2015 and 2014, respectively.
The October 2014 derivative was valued as of October 13, 2014 at $63,347, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the year ended December 31, 2015, $39,178 was amortized from the debt discount. The debt discount was fully amortized at December 31, 2015. The October 2014 note had accrued interest of $6,069 and $1,068 as of December 31, 2015 and 2014, respectively.
The November 2014 derivative was valued as of November 7, 2014 at $99,757, which was recorded as a debt discount. During the year ended December 31, 2015, $84,998 was amortized from the debt discount. The debt discount was fully amortized at December 31, 2015. The November 2014 note had accrued interest of $11,644 and $1,671 as of December 31, 2015 and 2014, respectively.
The December 2014 derivative was valued as of December 17, 2014 at $58,456, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the year ended December 31, 2015, $48,082 was amortized from the debt discount. The debt discount was fully amortized at December 31, 2015. The December 2014 note had accrued interest of $5,178 and $178 as of December 31, 2015 and 2014, respectively.
The January 2015 derivative was valued as of January 14, 2015 at $29,360, which was recorded as a debt discount. During the year ended December 31, 2015, $28,234 was amortized from the debt discount. The debt discount had a balance at December 31, 2015 of $1,126. The January 2015 note had accrued interest of $6,751 as of December 31, 2015.
The first February 2015 derivative was valued as of February 10, 2015 at $23,984, which was recorded as a debt discount. During the year ended December 31, 2015, $21,290 was amortized from the debt discount. The debt discount had a balance at December 31, 2015 of $2,694. The first February 2015 note had accrued interest of $2,671 as of December 31, 2015.
The second February 2015 derivative was valued as of February 11, 2015 at $18,003, which was recorded as a debt discount. During the year ended December 31, 2015, $18,003 was amortized from the debt discount. The debt discount was fully amortized at December 31, 2015. The second February 2015 note had accrued interest of $2,663 as of December 31, 2015.
The third February 2015 derivative was valued as of February 25, 2015 at $19,494, which was recorded as a debt discount. During the year ended December 31, 2015, $19,494 was amortized from the debt discount. The debt discount was fully amortized at December 31, 2015. The third February 2015 note had accrued interest of $5,096 as of December 31, 2015.
The March 2015 derivative was valued as of March 10, 2015 at $31,885, which was recorded as a debt discount. During the year ended December 31, 2015, $31,885 was amortized from the debt discount. The debt discount was fully amortized at December 31, 2015. The March 2015 note had accrued interest of $8,951 as of December 31, 2015.
The April 2015 derivative was valued as of April 17, 2015 at $31,397, which was recorded as a debt discount. During year ended December 31, 2015, $29,456 was amortized from the debt discount. The debt discount had a balance at December 31, 2015 of $1,941. The April 2015 note had accrued interest of $6,244 as of December 31, 2015.
The May 2015 derivative was valued as of May 22, 2015 at $36,550, which was recorded as a debt discount. During the year ended December 31, 2015, $29,531 was amortized from the debt discount. The debt discount had a balance at December 31, 2015 of $7,019. The May 2015 note had accrued interest of $5,523 as of December 31, 2015.
The June 2015 derivative was valued as of June 23, 2015 at $41,878, which was recorded as a debt discount. During the year ended December 31, 2015, $29,192 was amortized from the debt discount. The debt discount had a balance at December 31, 2015 of $12,686. The June 2015 note had accrued interest of $4,734 as of December 31, 2015.
The July 2015 derivative was valued as of July 28, 2015 at $38,600, which was recorded as a debt discount. During the year ended December 31, 2015, $21,897 was amortized from the debt discount. The debt discount had a balance at December 31, 2015 of $16,703. The July 2015 note had accrued interest of $2,796 as of December 31, 2015.
The August 2015 derivative was valued as of August 21, 2015 at $37,269, which was recorded as a debt discount. During the year ended December 31, 2015, $17,954 was amortized from the debt discount. The debt discount had a balance at December 31, 2015 of $19,315. The August 2015 note had accrued interest of $2,369 as of December 31, 2015.
The September 2015 derivative was valued as of September 24, 2015 at $37,820, which was recorded as a debt discount. During the year ended December 31, 2015, $13,527 was amortized from the debt discount. The debt discount had a balance at December 31, 2015 of $24,293. The September 2015 note had accrued interest of $1,763 as of December 31, 2015.
The October 2015 derivative was valued as of October 23, 2015 at $35,290, which was recorded as a debt discount. During the year ended December 31, 2015, $8,887 was amortized from the debt discount. The debt discount had a balance at December 31, 2015 of $26,403. The September 2015 note had accrued interest of $959 as of December 31, 2015.
The November 2015 derivative was valued as of November 30, 2015 at $36,448, which was recorded as a debt discount. During the year ended December 31, 2015, $4,232 was amortized from the debt discount. The debt discount had a balance at December 31, 2015 of $32,216. The September 2015 note had accrued interest of $438 as of December 31, 2015.
The December 2015 derivative was valued as of December 21, 2015 at $37,163, which was recorded as a debt discount. During the year ended December 31, 2015, $1,351 was amortized from the debt discount. The debt discount had a balance at December 31, 2015 of $35,812. The September 2015 note had accrued interest of $166 as of December 31, 2015.
Total accrued interest payable for the non-related party convertible notes was $154,925 and $41,385 as of December 31, 2015 and 2014, respectively.
The Company recorded total interest expense, including debt discount and beneficial conversion feature amortization, for all debt of $887,447 and $903,811 for the years ended December 31, 2015 and 2014, respectively.
NOTE 6 – DERIVATIVE FINANCIAL INSTRUMENTS
As discussed in Note 5, the Company issued convertible notes payable to non-related parties that contain anti-dilutive, or down round, price protection. Pursuant to ASC 815-15 Embedded Derivatives and ASC 815-40 Contracts in Entity's Own Equity, the Company recorded a derivative liability for the price protection provisions issued within the convertible debt transactions.
The fair values of the Company's derivative liabilities are estimated at the issuance date and are revalued at each subsequent reporting date using a multinomial lattice model simulation discussed below. At December 31, 2015 and 2014, the Company recorded current derivative liabilities of $841,677 and $438,374, respectively. The net change in fair value of the derivative liabilities resulted in a loss of $106,543 for the year ended December 31, 2015 and a gain of $241,154 for the year ended December 31, 2014, which are reported as other income/(expense) in the statements of operations.
The following table presents details of the Company's derivative liabilities for the years ended December 31, 2015 and 2014:
Balance, December 31, 2013
|
|
$
|
-
|
|
Increases in derivative value due to new issuances of notes
|
|
|
638,806
|
|
Derivative adjustment to beneficial conversion feature
|
|
|
50,000
|
|
Derivative adjustment due to debt conversion
|
|
|
(9,278
|
)
|
Change in fair value of derivative liabilities
|
|
|
(241,154
|
)
|
|
|
|
|
|
Balance, December 31, 2014
|
|
|
438,374
|
|
|
|
|
|
|
Increases in derivative value due to new issuances of notes
|
|
|
455,141
|
|
Derivative adjustment due to debt conversion
|
|
|
(158,381
|
)
|
Change in fair value of derivative liabilities
|
|
|
106,543
|
|
|
|
|
|
|
Balance, December 31, 2015
|
|
$
|
841,677
|
|
The Company calculated the fair value of the compound embedded derivatives using a multinomial lattice model simulation. The model is based on a probability weighted discounted cash flow model using projections of the various potential outcomes.
Key inputs and assumptions used in valuing the Company's derivative liabilities are as follows for issuances of notes:
|
·
|
Stock prices on all measurement dates were based on the fair market value
|
|
|
|
|
·
|
Down round protection is based on the subsequent issuance of common stock at prices less than the conversion feature
|
|
|
|
|
·
|
The probability of future financing was estimated at 100%
|
|
|
|
|
·
|
Computed volatility ranging from 284% to 299%
|
NOTE 7 – STOCKHOLDERS' DEFICIT
Certificate of Amendment
On October 23, 2015, holders of a majority of the Company's outstanding voting securities and the Company's Board of Directors approved an amendment to the Company's Certificate of Incorporation (the "Certificate of Amendment") to: (i) increase the total number of authorized shares of the Company's capital stock from 510,000,000 shares to 2,010,000,000 shares, of which 2,000,000,000 will be available for issuance as Common Stock and 10,000,000 will be available for issuance as preferred stock; and (ii) change the par value of the Company's authorized capital stock from $0.001 per share to $0.00001 per share. The Certificate of Amendment became effective upon the filing of the Certificate of Amendment with the Delaware Secretary of State. The change in par value has been given retroactive effect in the accompanying financial statements.
Stock Issuances
As of December 31, 2015 and 2014, the Company had common stock payable of $16,800 resulting from a technology transfer agreement with an unrelated party that obligated the Company to issue a total of 96,000 shares of its common stock, payable in 8 quarterly installments of 12,000 shares.
On October 14, 2014, an accredited investor converted $4,700 principal and $384 accrued interest into 4,919,735 shares of our common stock at a conversion price of $0.00103 per share.
On October 23, 2014, Craig Holland converted $35,000 principal and $2,838 accrued interest into 39,829,849 shares of our common stock at a conversion price of $0.00095 per share.
On October 23, 2014, Mick Donahoo converted $35,000 principal and $2,838 accrued interest into 39,829,849 shares of our common stock at a conversion price of $0.00095 per share.
During the year ended December 31, 2015, the Company issued a total of 70,648,155 shares of its common stock to an accredited investor in conversion of $64,174 principal and $8,778 accrued interest payable at conversion prices ranging from $0.00088 to $0.00135 per share, and settled $158,381 of derivative liabilities.
On October 8, 2015, Craig Holland converted $4,607 principal and $2,028 accrued interest into 12,637,860 shares of the Company's common stock.
On October 8, 2015, Mick Donahoo converted $4,607 principal and $2,028 accrued interest into 12,637,860 shares of the Company's common stock.
2006 Stock Option Plan
The 2006 Stock Option Plan was adopted by our Board of Directors in March of 2006. A total of 550,000 shares of Common Stock have been reserved for issuance to employees, consultants and directors upon exercise of incentive and non-statutory options and stock purchase rights which may be granted under the Company's 2006 Stock Plan (the "2006 Plan"). On October 15, 2009, 235,000 of those options were exercised, leaving 315,000 shares available for issuance to employees. Because of the 5.31-for-one forward stock split of the Company's common stock on October 15, 2009, there are now 1,512,650 shares available for issuance as a part of this stock plan. As of December 31, 2014, there were 560,000 options outstanding to purchase shares of Common Stock, and no shares of Common Stock had been issued pursuant to stock purchase rights under the 2006 Plan.
Under the 2006 Plan, options may be granted to employees, directors, and consultants. Only employees may receive "incentive stock options," which are intended to qualify for certain tax treatment, and consultants and directors may receive "non-statutory stock options," which do not qualify for such treatment. A holder of more than 10% of the outstanding voting shares may only be granted options with an exercise price of at least 110% of the fair market value of the underlying stock on the date of the grant, and if such holder has incentive stock options, the term of the options must not exceed five years.
Options and stock purchase rights granted under the 2006 Plan generally vest ratably over a four year period (typically 1⁄4 or 25% of the shares vest after the 1st year and 1/48 of the remaining shares vest each month thereafter); however, alternative vesting schedules may be approved by the Board of Directors in its sole discretion. Any unvested portion of an option or stock purchase right will accelerate and become fully vested if a holder's service with the Company is terminated by the Company without cause within twelve months following a Change in Control (as defined in the 2006 Plan).
All options must be exercised within ten years after the date of grant. Upon a holder's termination of service for any reason prior to a Change in Control, the Company may repurchase any shares issued to such holder upon the exercise of options or stock purchase rights. The Board of Directors may amend the 2006 Plan at any time. The 2006 Plan will terminate in 2016, unless terminated sooner by the Board of Directors.
The Company did not grant any stock options or warrants during the years ended December 31, 2015 and 2014. The Company did not record any stock-based compensation expense during the years ended December 31, 2015 and 2014.
A summary of the status of the options and warrants issued by the Company as of December 31, 2015, and changes during the years ended December 31, 2015 and 2014 is presented below:
|
|
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2013
|
|
|
560,000
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Canceled / Expired
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2014
|
|
|
560,000
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Canceled / Expired
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2015
|
|
|
560,000
|
|
|
$
|
0.10
|
|
NOTE 8 – LOSS PER COMMON SHARE
The computation of basic earnings per common share is based on the weighted average number of shares outstanding during the period. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the period plus the weighted average common stock equivalents which would arise from the exercise of stock options, warrants and rights outstanding using the treasury stock method and the average market price per share during the period.
For the years ended December 31, 2015 and 2014, the diluted weighted average number of shares is the same as the basic weighted average number of shares as the conversion of debt, options and warrants would be anti-dilutive.
NOTE 9 – RELATED PARTY TRANSACTIONS
The Company had convertible notes payable to related parties totaling $1,447,041 and $1,456,254 as of December 31, 2015 and 2014, respectively. See Note 5 for a detailed disclosure of this related party debt, including interest rates, terms of conversion and other repayment terms. Accrued interest payable to related parties was $209,461 and $68,106 as of December 31, 2015 and 2014, respectively.
As further discussed in Note 5, on September 30, 2014, $72,107 of accrued interest was added to the principal of a convertible note payable to the Holland Family Trust and $813,602 of the note was transferred to Craig Holland. A new convertible note for $222,572 was issued to the Holland Family Trust with the same terms as the previous note, with the exception of the maturity date, which was extended to September 30, 2016.
On October 23, 2014, Craig Holland converted $35,000 principal and $2,838 accrued interest into 39,829,849 shares of our common stock at a conversion price of $0.00095 per share.
On October 23, 2014, Mick Donahoo converted $35,000 principal and $2,838 accrued interest into 39,829,849 shares of our common stock at a conversion price of $0.00095 per share.
On October 8, 2015, Craig Holland converted $4,607 principal and $2,028 accrued interest into 12,637,860 shares of the Company's common stock at a conversion price of $0.000525 per share.
On October 8, 2015, Mick Donahoo converted $4,607 principal and $2,028 accrued interest into 12,637,860 shares of the Company's common stock at a conversion price of $0.000525 per share.
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Leases
We the lease our office facilities on a month-to-month lease with either party having the option to terminate with 30 days notice. The Company or Company employees or contractors own all of the computer and office equipment that is used in the course of business. We do not have any lease agreements for any office equipment.
NOTE 11 – INCOME TAXES
The Company accounts for income taxes in accordance with standards of disclosure propounded by the FASB, and any related interpretations of those standards sanctioned by the FASB. Accordingly, deferred tax assets and liabilities are determined based on differences between the financial statement and tax bases of assets and liabilities, as well as a consideration of net operating loss and credit carry forwards, using enacted tax rates in effect for the period in which the differences are expected to impact taxable income. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized. Due to the uncertainty as to the utilization of net operating loss carry forwards, a valuation allowance has been made to the extent of any tax benefit that net operating losses may generate.
The provision for income taxes consists primarily of state minimum franchise taxes and totaled $400 and $1,565 for the years ended December 31, 2015 and 2014, respectively. For Federal and California income tax purposes, the Company has net operating loss carry forwards that expire through 2029. The net operating loss as of December 31, 2015 and 2013 were $2,845,460 and $1,700,527, respectively. No tax benefit has been reported in the financial statements because after evaluating our own potential tax uncertainties, the Company has determined that there are no material uncertain tax positions that have a greater than 50% likelihood of reversal if the Company were to be audited.
The deferred tax asset and the valuation allowance consist of the following at December 31:
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
$
|
967,456
|
|
|
$
|
578,179
|
|
Valuation allowance
|
|
|
(967,456
|
)
|
|
|
(578,179
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE 12 – SUBSEQUENT EVENTS
Subsequent to December 31, 2015, we issued a total of 11,915,495 shares of our common stock in the conversion of convertible notes payable principal totaling $4,400 and accrued interest payable totaling $962.