The accompanying notes are an integral part
of these consolidated financial statements
The accompanying notes are an integral part
of these consolidated financial statements
The accompanying notes are an integral part
of these consolidated financial statements
The accompanying notes are an integral part
of these consolidated financial statements
Notes to Financial Statements
Note 1 – Nature of Business and Significant
Accounting Policies
Nature of Business
Soul and Vibe Interactive Inc. (“the
Company”) was incorporated in the state of Nevada on January 5, 2011 (“Inception”). The Company’s primary
business focus and source of revenue is the development and publishing (sales) of games, interactive books, and downloadable/streamable
music for digital devices. We develop, publish, and digitally distribute interactive entertainment (games and interactive books)
for video game consoles, mobile and augmented reality/wearable tech devices, personal computers, and social-media platforms.
We develop, publish, and digitally distribute music for play on digital devices through downloadable/streamable channels that include,
but are not limited to, the likes of: Apple Music, iTunes, Spotify, Google Play, Amazon, Rdio, Deezer, Tidal, YouTube Music, Beats/MediaNet,
and Microsoft Groove. The music service Shazam, also, recognizes Soul and Vibe Music products. The Company primarily sells
its products through digital distribution channels. To date, the Company's products have been a mix of licensed brand and internally
generated, wholly owned intellectual properties.
Principles of Consolidation
The accompanying consolidated financial statements
included herein have been prepared by Soul and Vibe Interactive Inc. (“SVI”) and its wholly owned subsidiary Soul and
Vibe Entertainment, Inc., a Nevada corporation (“Soul,” and collectively with SVI, the “Company”) in accordance
with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission
(the “SEC”). We believe that all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation
of financial position and the results of operations presented have been reflected herein and that the disclosures made are adequate
to make the information not misleading.
Use of Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, and the 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 from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
Derivative Instruments
The Company accounts for derivative instruments
in accordance with ASC Topic 815,
Derivatives and Hedging
, all derivative instruments are reflected as either assets or
liabilities at fair value in the balance sheet. The Company uses estimates of fair value to value its derivative instruments. Fair
value is defined as the price to sell an asset or transfer a liability in an orderly transaction between willing and able market
participants. In general, the Company’s policy in estimating fair values is to first look at observable market prices for
identical assets and liabilities in active markets, where available. When these are not available, other inputs are used to model
fair value such as prices of similar instruments, yield curves, volatilities, prepayment speeds, default rates and credit spreads
(including for the Company’s liabilities), relying first on observable data from active markets. Additional adjustments may
be made for factors including liquidity, credit, bid/offer spreads, etc., depending on current market conditions. Transaction costs
are not included in the determination of fair value. When possible, the Company seeks to validate the model’s output to market
transactions. Depending on the availability of observable inputs and prices, different valuation models could produce materially
different fair value estimates. The values presented may not represent future fair values and may not be realizable. The Company
categorizes its fair value estimates in accordance with ASC 820 based on the hierarchical framework associated with the three levels
of price transparency utilized in measuring financial instruments at fair value as discussed above. As of December 31, 2015 and
2014, the Company had a $1,313,673 and $1,081,318 of derivative liabilities, respectively.
Fair Value of Financial Instruments
ASC 820,
Fair Value Measurements
, (ASC
820) and ASC 825,
Financial Instruments
(ASC 825), requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. It establishes a fair value hierarchy based on the level of independent,
objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the
fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. It prioritizes
the inputs into three levels that may be used to measure fair value:
Level 1 - Level 1 applies to assets or liabilities
for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 - Level 2 applies to assets or liabilities
for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar
assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume
or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can
be derived principally from, or corroborated by, observable market data.
Level 3 - Level 3 applies to assets or liabilities
for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value
of the assets or liabilities.
The Company’s financial instruments consist
principally of cash, accounts payable, notes, convertible notes, accrued liabilities and derivative liabilities. Pursuant to ASC
820 and 825, the fair value of cash is determined based on “Level 1” inputs, which consist of quoted prices in active
markets for identical assets. The recorded values of financial instruments other than derivative liabilities approximate their
current fair values because of their nature and respective maturity dates or durations. Derivative liabilities are measured at
fair value. The following table sets forth by level with the fair value hierarchy the Company’s financial assets and liabilities
measured at fair value on December 31, 2015 and 2014:
December 31, 2015:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,313,673
|
|
|
$
|
1,313,673
|
|
December 31, 2014:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,081,318
|
|
|
$
|
1,081,318
|
|
Revenue Recognition
The Company primarily digitally distributes
its products through (an) online merchants / portal service(s). The Company recognizes revenue at the “on demand” point
of sale by the customer and recognizes a receivable. (For the purposes of digital distribution, customer is equivalent to end consumer.)
The portal service(s) track product sales on a daily / near-daily basis.
For the Company’s games and entertainment
apps (such as e-books) payment is remitted to the Company every two weeks, monthly, or quarterly (depending upon the digital merchant
/ portal service). Ownership of product is transferred to the customer with a no refund, no return policy, as set by the online
portal service(s). For retail distributed products (pick-ups and select licensed-brand games), the Company recognizes revenue through
traditional retail "sell-in" and "sell-through." Receivables are logged based on "sell-through" reports
from retailers and distributors. Based on the distributor, product sales are tracked on a monthly basis. On average, between thirty
(30) to forty-five (45) days following the end of a month, the distributor remits payment to the Company. Ownership of product
is transferred to the customer (end user) with a no refund, no return policy, as set by individual retailers.
For the Company’s music releases (soundtracks
and multi-track singles) it receives sales reports three months following any given month’s end. Earned revenue is collected
by the Company’s aggregator and the Company, at its own discretion, can request the earned funds be deposited into its proprietary
PayPal account at a time of its own choosing.
Advertising and Promotion
All costs associated with advertising and promoting
products are expensed as incurred. The Company has incurred advertising and promotion costs for the years ended December 31, 2015
and 2014 of $37,169 and $184,632, respectively.
Basic and Diluted Loss Per Share
The basic net loss per common share is computed by dividing the
net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing
the net income adjusted on an “as if converted” basis, by the weighted average number of common shares outstanding
plus potential dilutive securities.
Stock-Based Compensation
The Company adopted Financial Accounting Standards
Board (FASB) guidance on stock based compensation upon inception at January 5, 2011. Under FASB ASC 718-10-30-2, all share-based
payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair
values. Pro forma disclosure is no longer an alternative.
Income Taxes
The Company accounts for income taxes in accordance
with the FASB Topic ASC 740, “Income Taxes.” We account for income taxes under the asset and liability method, which
requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been
included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences
between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized
in income in the period that includes the enactment date.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued Accounting
Standards Update (ASU) No. 2016-02, Leases (Topic 842), which provides guidance for accounting for leases. The new guidance requires
companies to recognize the assets and liabilities for the rights and obligations created by leased assets, initially measured at
the present value of the lease payments. The accounting guidance for lessors is largely unchanged. The ASU is effective for annual
and interim periods beginning after December 15, 2018. It is to be adopted using a modified retrospective approach. The Company
is currently evaluating the impact that the adoption of this guidance will have on the Company’s financial statements.
In November 2015, FASB issued ASU No. 2015-17,
which amended the Income Taxes (Topic 740) of the Accounting Standards Codification to simplify the presentation of deferred income
taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. The amendments
will be effective for consolidated financial statements issued for annual periods beginning after December 15, 2017 with early
adoption permitted as of the beginning of an interim or annual reporting period. The Company will apply the guidance prospectively.
The Company does not expect these amendments to have a material effect on its consolidated financial statements.
Reclassifications
The presentation of certain items in the consolidated
financial statements for the year ended December 31, 2014 has been changed to conform to the classifications used in 2015. These
reclassifications had no effect on stockholders' equity or net income as previously reported.
Development Costs
The Company capitalizes all game software development
costs once upon reaching the application development stage, management has authorized and committed funding to the project and
it is probable that the project will be completed. Costs that are capitalized are primarily fees paid to consultants in the form
of cash and common stock of the Company. Capitalization ceases no later than the point at which the project is substantially complete
and ready for its intended use, generally after all substantial testing is completed. As of December 31, 2015 and 2014, capitalized
software development costs totaled $515,155 and $429,405 respectively.
Capitalized software development costs are
amortized over the estimated useful life of 5 years, using the greater of the straight-line method or the ratio of current revenues
to total projected future revenues. Amortization expense related to capitalized software development costs for the years ended
December 31, 2015 and 2014 was $70,770 and $45,704, respectively.
Note 2 – Going Concern
The accompanying consolidated
financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. This basis of accounting contemplates the recovery of the Company's
assets and the satisfaction of its liabilities in the normal course of business. Through December 31, 2015, the Company had incurred
cumulative losses of $6,607,969 since inception. Additionally, the Company, has negative working capital, and a deficit in stockholders'
equity. All of these items raise substantial doubt about its ability to continue as a going concern. In view of these matters,
recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon continued
operations of the Company, which in turn is dependent upon the Company's ability to raise additional capital and generate revenues
from its operations. The financial statements do not include classification of recorded asset amounts or amounts and classification
of liabilities that might be necessary, should the Company be unable to continue as a going concern.
Management has taken
the following steps to revise its operating and financial requirements, which it believes are sufficient to provide the Company
with the ability to continue as a going concern. Management devoted considerable effort during the year ended December 31, 2015,
towards (i) obtaining additional equity financing, (ii) evaluation of its distribution and marketing methods, (iii) identifying
and negotiating development/publishing and product acquisition opportunities for the Company, and (iv) launching two new publishing
labels, Soul and Vibe Music & Soul and Vibe Books, in an effort to increase the number of potential revenue generating product
launches on a staggered release schedule. In addition, the Company began to generate its first revenues in the first quarter of
2014 and has continued to generate revenue through 2015.
Management's plans
with respect to alleviating the adverse financial conditions that caused the Company’s independent auditors to express substantial
doubt about the Company's ability to continue as a going concern are as follows:
Management requires
$2.5M to $3.0M in financing in order to begin execution of its business plan and to continue operations. This capital, if raised,
would be utilized over a twelve-month period. The financing will cover the acquisition of pick-ups (depending on the value of the
financing, also the development of a proprietary intellectual property (IP) product) along with the release of the games and entertainment
apps as well as the marketing and public relations (PR) expenses associated with bringing them to market on a variety of hardware
platforms that include: video game consoles, mobiles devices, and personal computers (which also includes browser-based social
media platforms, such as Facebook.) The anticipated number of pick-ups is two. The financing would also cover general and administrative
expenses, operational expenses and will allow the Company to secure an initial number of premium full-time employees. The Company
is currently evaluating financing opportunities that are compatible with its growth plans and business model. Additional financing
(beyond the identified $2.5M to $3.0M; cumulatively of $5.0M) would allow the Company to pursue development of multiple projects
“from scratch” and publish them in a “staggered” release, as per its current three-year business plan.
Since our Company’s inception, we have
generated a degree of revenue. Revenue generation began in the 1
st
quarter of 2014 with the release of our first video
game product. The release was Timeless Gems, an innovative "match-3" game that features board game elements. Timeless
Gems was released, worldwide, on Facebook, Google's Google Play, and Apple's App Store (for iPhone, iPad, and iPod Touch) in February
and March 2014. In addition to the development and release of the Timeless Gems product, two packages of expansion content for
Timeless Gems were developed and released during fiscal year 2014. A third package of expansion content for Timeless Gems was developed
during fiscal year 2014. This third package of expansion content was released in December 2015.
In June 2014, with the opening game of the
2014 World Cup Soccer tournament, the company released a second video game product, Striker Rush: Champion Edition. Striker Rush:
Champion Edition was released, worldwide, through Apple’s App Store (for iPhone, iPad, and iPod Touch mobile devices), and
through Google's Google Play and Amazon.com (for Android devices) in concert with its development partner, 1DER Entertainment.
During fiscal year 2014, the Company licensed
Timeless Gems and Striker Rush: Champion Edition to Tanjarine, a subsidiary of TouchTunes, the largest provider of in-venue music
and entertainment throughout North America. Tanjarine was the first integrated tabletop ordering, entertainment and pay-at-the-table
solution to combine 10" proprietary tabletop tablets with server handhelds, which expedited service, payments, and cross-marketed
products and services with in-venue second screen televisions. The platform provided guests with menu and entertainment options,
portability that eliminated the constraints of one-tablet-per-table installations, and other innovations that helped increase restaurant
efficiency and average check size. Customizable for bars and restaurants, Tanjarine’s catalog of entertainment offers games,
music and content targeted everyone from families to sports fans to couples and more. Many of the games also enabled guests to
play with a friend or connect the tabletop tablets to second screen televisions located throughout a venue, which created a more
interactive gaming experience. The Company anticipated it would continue to receive licensing revenue from Tanjarine through 2015
and beyond, as Tanjarine purchased product installs of the Company’s products for play on their proprietary hardware. In
April of 2015, TouchTunes was acquired by a third party. As part of the acquisition, TouchTunes terminated their subsidiary, Tanjarine,
as well as all pre-existing contractual (licensing) agreements.
During the fourth quarter of 2013, the Company
entered into a development/published agreement with 1DER Entertainment for SirVival, an interactive game. As a part of the development/publishing
agreement, the Company acquired the SirVival IP from 1DER Entertainment. Through fiscal year 2014 and the first two quarters of
2015, the Company continued the development of SirVival; the game was released, worldwide, on Facebook, Google's Google Play, and
Apple's App Store (for iPhone, iPad, and iPod Touch) during the third quarter of 2015. In addition to the development and release
of the SirVival video game product, one package of expansion content for SirVival entered development during the fourth quarter
of 2014, but this package has not yet been released. The Company will formally announce the targeted release date of this expansion
pack at a later date.
In June 2015, the Company announced a new (second)
publishing label, Soul and Vibe Music. Soul and Vibe Music is a proprietary music-publishing label that publishes music content
through downloadable/streamable distribution channels that include, but are not limited to, the likes of: Apple Music, iTunes,
Spotify, Google Play, Amazon, Rdio, Deezer, Tidal, YouTube Music Key, Beats/MediaNet, and Microsoft Groove. The Company aims to
leverage its existing, and to develop new, music assets that are associated with its licensed-brands and internally generated intellectual
properties as stand-alone “premium” music soundtrack and single-track and/or multi-track music single product releases.
It is the Company’s intent that these music soundtrack and single-track and/or multi-track music single product releases
will double as potential revenue-generating cross-promotional marketing vehicles for the Company’s video games and entertainment
apps based on licensed-brands and internally generated intellectual properties. As of December 31, 2015, Soul and Vibe Music has
released one full-length soundtrack, “Songs of SirVival,” and four multi-track music singles, “SirVival and Tantrum,”
“Who Is Gurk Burkle?,” “Smorgon Magma, The Black Rider,” and “Spellbound.” The development
of a fifth multi-track music single, “Bugaboo, A Bump In The Night,” commenced during the fourth quarter of 2015, but
it was neither formally announced nor released until February 2016.
As the Soul and Vibe Music label grows, the
Company intends to pursue the licensing of music for 1.) inclusion in its games and apps and, 2.) to release, via downloadable/streamable
distribution channels, as “premium” stand-alone and/or compilation music product releases. The Company also anticipates
it will contract music industry subject matter experts as consultants to help broaden the label’s product mix. The Company
anticipates that a broadened product mix for the Soul and Vibe Music label will increase consumer awareness, build IPs, and drive
revenue.
To date, all music content published by Soul
and Vibe Music are copyrighted assets of the Company. Each individual music track is a unique asset that is identifiable through
a proprietary ISRC code. EPs are identifiable through a proprietary UPC code. The music content that comprises Soul and Vibe Music
releases are each recognized by the music identification service, Shazam. The music content that comprises Soul and Vibe Music
releases are, also, cross-promoted (on iTunes) via the Options Menu of the Company’s SirVival video game.
In August 2015, the Company announced a new
(third) publishing label, Soul and Vibe Books. Soul and Vibe Books is a proprietary publishing label that specializes in the development
and launch of digitally distributed electronic books (“e-books” and “interactive storybooks.”) The Company
aims to leverage its licensed-brands and internally generated intellectual properties as stand-alone “premium” entertainment
app e-books. It is the Company’s intent that these e-books will double as potential revenue-generating cross-promotional
marketing vehicles for the Company’s video games and entertainment apps based on licensed-brands and internally generated
intellectual properties. During the twelve months ended December 31, 2015, the Company continued the development of a four-product
line of e-books based on the Company’s John Deere licensed brand. The first product in the four-product line was Johnny Tractor
and Friends: County Fair. Johnny Tractor and Friends: County Fair was launched on Apple’s App Store for iPhone, iPad, and
iPod Touch in September 2015 and on Google’s Google Play and Amazon (for Android devices) in October 2015. The Company launched
a second e-book, Johnny Tractor and Friends: Snow Day, in December 2015. During the fourth quarter, the Company continued development
on a third e-book. The Company anticipates it will formally announce, and release, this third e-book during the 1
st
quarter of 2016. The Company anticipates the fourth e-book in the series will be formally announced, and released, during the second
quarter of 2016. Ultimately, it is the Company’s intent to localize all four e-books in the line into a variety of languages
including, but not limited to, French, German, Spanish, and Italian. The Company anticipates that localized versions of its e-books
will be released, albeit on a staggered release schedule, throughout fiscal year 2016; the localized versions of its e-books will
be released as title updates via Apple’s App Store, Google’s Google Play, and Amazon.
On November 30, 2015, the Company announced
its line of John Deere-branded Johnny Tractor and Friends e-books will be cross-promoted with TOMY International (“TOMY”)
toys that are also based on the Johnny Tractor and Friends IP. Commencing in December 2015, and continuing through 2016, TOMY’s
line of John Deere-branded Johnny Tractor and Friends toys will feature, within the packaging, a two-sided pack-in poster. The
Company’s Johnny Tractor and Friends series of e-books is highlighted on one side of the poster, and a robust selection
from TOMY’s diverse line of Johnny Tractor and Friends toys is highlighted on the other. In addition, each of the Company’s
Johnny Tractor and Friends interactive storybooks cross-promotes TOMY’s toys via a color full-screen image that appears
at the end of each e-book. TOMY’s line of Johnny Tractor and Friends toys are available at
Target
,
Walmart
,
Toys”R”Us
,
Amazon
, and many other fine retail and online merchants. The Company anticipates that the
cross-promotional relationship with TOMY will increase consumer awareness for the Soul and Vibe Books label and its line of e-book
products.
As the Soul and Vibe Books label grows, the
Company intends to expand its e-book product mix to feature additional lines based on both the Company’s proprietary IPs
and other licensed-brands. The Company also anticipates it will pursue a broadening of the supported hardware platforms on which
its e-books can be read. The Company anticipates that expanded platform support, and a broadened product mix for the Soul and Vibe
Books label, will increase consumer awareness, build IPs, and drive revenue.
These aforementioned releases, across the games,
interactive books, and downloadable/streamable music product categories, have begun to generate a degree of revenue for the Company.
Our operations to date have been financed by Mr. Chiodo, our sole officer, and independent accredited investors who have entered
into private finance transactions with us.
The Company intends to focus its operational
strategy on the development of digitally distributed video game, interactive book, and music product for a variety of hardware
platforms that include: Video game consoles (for example: Xbox 360 and PlayStation 3), mobile (for example: Apple iOS, Android,
and Windows hand-held/portable devices), augmented reality/wearable tech devices (for example: HTC Vive, Vuzix-branded hardware,
and Oculus Rift), personal computers (such as PC and Mac), and browser-based social media platforms, such as Facebook. Our video
game products are also anticipated to be released on portable video game consoles (for example: Nintendo 3DS and PlayStation Vita),
which can be defined as residing in both the video game console and mobile hardware platform categories. Our music products are
also anticipated to be accessible on internet-enabled video game consoles (for example: Spotify via the PlayStation Network and
Microsoft Groove via the Xbox One.) The Company wishes to emphasize: Individual products will be designed for specific hardware
platforms and that not all products will be ultimately released on all hardware platforms.
Most of the Company’s products are expected
to be digitally distributed (via download) through a “First Party” distribution store (for example: Facebook, Microsoft
Corporation’s Marketplace, Apple Inc.’s App Store, Google’s Google Play, Amazon, etc.). Some of the Company’s
products may bear licensed-brands through which there is potential for exploitation via merchandising, cross-promotion and/or publicity
tie-ins with its licensor, as well as within social media communities. Other Company products will be based on our internally generated
and wholly owned intellectual properties.
The Company’s products are focused within
three core areas: Licensed-brand games and Apps (inclusive of e-books), internally-generated intellectual property (“IP”)
based games, e-books, and music, and so-called “Pick-Ups.” Pick-ups are products developed (and financed) by independent
software/content developers located throughout the world. Oftentimes, these independent software/content developers are looking
for a publishing partner such as the Company as they tend to: (i) lack the marketing/publicity infrastructure and relationships
to properly bring a game to market, (ii) need to partner with a company in possession of platform-specific publishing licenses,
and/or (iii) require some additional capital to complete the development cycle. The Company can acquire the products created by
these independent software/content developers for either a flat fee or a combination of a flat fee and a small “back-end”
royalty that is payable once the Company recoups its costs. Pick-ups could be beneficial for the Company as they represent products
that can often be quickly brought to market and subsequently fill in the gaps between the releases of the “bigger”
Licensed-Brand and internally-generated IP-based products. This allows the Company to establish a recurring release calendar that:
(i) more-evenly distributes revenues across a fiscal year and (ii) provides a steady stream of content for our users and games
industry media to talk about, thus reinforcing our Soul and Vibe brand as a publishing label. It is anticipated that a large portion
of the Company’s product portfolio in fiscal year 2016 onward may be comprised of pick-up opportunities.
Our business is primarily
focused on developing, publishing, and marketing video games and entertainment Apps, interactive books, and downloadable/streamable
music for multiple hardware platform categories: Console, mobile and augmented reality/wearable tech devices, personal computers,
and browser-based social media networks. In regards to console publishing, we have entered into publishing agreements with hardware
platform manufacturers such as Microsoft Corporation, Sony (through Sony Computer Entertainment of America, LLC), and, most recently,
in the 3
rd
Quarter of 2015, Nintendo of America. Our publishing agreements with these entities are for non-exclusive
licenses, both for the rights to publish and to develop titles for their respective hardware platforms. These agreements form a
foundation for our business. We must maintain a license to develop and publish titles for each console platform. Each license specifies
the territory to which it applies, and licenses range from multi-national distribution to approval on a title-by-title basis. Our
existing hardware platform licenses are with Microsoft (for the Xbox 360, Windows 8, Windows Live, and Windows Phone), with Sony
(for the PlayStation 3 and PlayStation Vita), and with Nintendo of America for the Nintendo 3DS™ system and the Wii U™
system. (The Company also intends to pursue development and publishing licensing for Nintendo’s forthcoming console, codenamed
“NX,” which is rumored to launch in 2016.) Our publishing licenses with Microsoft, Sony, and Nintendo require that
we obtain approval for publication of new titles on a title-by-title basis. As a result, the number of titles we are able to publish
for these hardware platforms and our ability to time the release of titles is dependent upon decisions made by third party hardware
manufacturers.
Note 3 – Related Party Transactions
Related Party Notes Payable
During 2015, the Company paid an amount due
of $2,500 to an officer of the Company. The amount was unsecured and bore no interest.
Related Party Convertible Notes Payable
During July 2013, the Company received $9,000
in exchange for a Convertible Note with a maturity value of $10,000 and a warrant to purchase up to 834 shares of the Company’s
common stock for a period of two years at a price of $0.60 per share. The convertible note is unsecured, due one year from the
date of issue and accrues interest at a rate of approximately 10% per annum. During August 2014 an agreement was signed extending
the due date of the convertible note to February 2015. Pursuant to this agreement, the holder was issued a warrant to purchase
1,000 additional shares of the Company’s common shares for a period of two years at a price of $0.06 per share. The warrants
that were issued in July 2013 expired during the quarter ended June 30, 2015. The warrants that were issued in August 2014 are
scheduled to expire in August 2016 if not exercised or “called” by the Company prior to expiration.
The Company valued the initial warrant and
beneficial conversion feature of the convertible note at $10,000, which was recorded as a discount to the convertible note. This
discount was being amortized over the initial life of the convertible note, which expired in July 2014. The Company valued the
additional warrant at $1,728, which was recorded as a discount to the convertible note. This discount is being amortized over the
remaining life of the convertible note or until such time as the convertible note is repaid or converted, or upon exercise of the
warrants. During the years ended December 31, 2015 and 2014, the Company amortized $0 and $324 of these debt discounts to interest
expense, respectively. In July 2015, warrants for 834 shares of the Company’s Common stock, which were issued in July 2013
in connection with one Convertible Note, expired. The warrants that were issued in August 2014 are scheduled to expire in August
2016 if not exercised or “called” by the Company prior to expiration.
Interest expense related to this convertible note payable totaled
$127 and $1,458 for the years ended December 31, 2015 and 2014, respectively.
During May 2015, the Company issued an exchange
note to an accredited investor in substitution for $32,024 of previously outstanding convertible note balance and the accrued interest
balance to an unrelated third party, pursuant to an exchange agreement. The July 2013 Convertible Note was included in this exchange.
The exchange note was issued with a maturity value of $32,024, is due in May 2016, bears no interest and is convertible into shares
of the Company at a rate equal to 65% of the average of the lowest three trading prices during the 25 consecutive trading days
immediately preceding the conversion date. The note also stipulates a conversion limitation, whereby the holder may not convert
more than 33.33% of the principal balance within a 15-day period during the 90 days following the date of issuance. The note principal
was converted into 525,066 shares during 2015. There is no outstanding balance as of December 31, 2015.
Related Party Payable
The Company owes an officer of the Company $22,068 and $0 as of
December 31, 2015 and 2014, respectively which relates to expense reimbursement.
Note 4 – Convertible Debentures
During the year ended December
31, 2014, the Company issued various convertible debentures in the total amount of $210,667: $200,000 cash and $10,667 original
issue discount. The debenture issued in 2014 is unsecured and bears interest of 10% per annum, maturing in nine months. The outstanding
principal and accrued interest of the debenture is convertible into shares of the Company’s common stock at the option of
the holder at a conversion price per share equal to the lesser of the trading price on the date immediately preceding the conversion
date, or an amount equal to 60% of the lowest trading price for the ten trading days immediately preceding the conversion date.
The following is a schedule of the convertible
debentures outstanding as of December 31, 2014:
Description
|
|
Date
|
|
Conversion
Price
|
|
Original
Principal
Amount
|
|
|
Unpaid
Principal
Balance
|
|
|
Term
|
|
Interest
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debenture 1
|
|
8/8/2013
|
|
Fixed
|
|
$
|
105,000
|
|
|
$
|
105,000
|
|
|
18 months
|
|
|
10
|
%
|
Debenture 2
|
|
8/8/2013
|
|
Fixed
|
|
|
7,778
|
|
|
|
7,778
|
|
|
18 months
|
|
|
10
|
%
|
Debenture 3
|
|
8/8/2013
|
|
Fixed
|
|
|
10,000
|
|
|
|
10,000
|
|
|
18 months
|
|
|
10
|
%
|
Debenture 4
|
|
9/18/2014
|
|
Variable
|
|
|
210,667
|
|
|
|
210,667
|
|
|
9 months
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at December 31, 2014
|
|
|
|
|
|
$
|
333,445
|
|
|
$
|
333,445
|
|
|
|
|
|
|
|
Less discount
|
|
|
|
|
|
|
|
|
|
|
(135,617
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
197,828
|
|
|
|
|
|
|
|
During the year ended December
31, 2015, the Company issued various convertible debentures in the total amount of $514,476: $339,500 cash; $18,406 original issue
discount; $50,000 services; $29,899 adjustment to principal; and $76,671 for accrued interest payable. In addition in 2015, a total
principal balance of $419,982 was extinguished through the conversion of principal to common shares of the Company. The debentures
issued in 2015 are unsecured and bear simple interest ranging from 0% to 10% per annum, with maturities ranging from three months
to three years. The outstanding principal and accrued interest of the debentures are convertible into shares of the Company’s
common stock at variable discounted pricing based conversion prices defined in the underlying agreements. Debentures 1 –
3 were convertible at a fixed price but were exchanged into notes with variable discounted pricing before any conversions took
place.
The following is a schedule of the convertible
debentures outstanding as of December 31, 2015:
Description
|
|
Date
|
|
Conversion
Price
|
|
Original
Principal
Amount
|
|
|
Unpaid
Principal
Balance
|
|
|
Term
|
|
Interest
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debenture 1
|
|
8/8/2013
|
|
Fixed
|
|
$
|
105,000
|
|
|
$
|
0
|
|
|
18 months
|
|
|
10
|
%
|
Debenture 2
|
|
8/8/2013
|
|
Fixed
|
|
|
7,778
|
|
|
|
0
|
|
|
18 months
|
|
|
10
|
%
|
Debenture 3
|
|
8/8/2013
|
|
Fixed
|
|
|
10,000
|
|
|
|
0
|
|
|
18 months
|
|
|
10
|
%
|
Debenture 4
|
|
9/18/2014
|
|
Variable
|
|
|
210,667
|
|
|
|
0
|
|
|
9 months
|
|
|
10
|
%
|
Debenture 5
|
|
2/3/2015
|
|
Variable
|
|
|
55,556
|
|
|
|
0
|
|
|
24 months
|
|
|
12
|
%
|
Debenture 6
|
|
3/12/2015
|
|
Variable
|
|
|
58,850
|
|
|
|
0
|
|
|
12 months
|
|
|
10
|
%
|
Debenture 7
|
|
3/16/2015
|
|
Variable
|
|
|
52,500
|
|
|
|
26,100
|
|
|
12 months
|
|
|
8
|
%
|
Debenture 8
|
|
3/20/2015
|
|
Variable
|
|
|
110,293
|
|
|
|
0
|
|
|
12 months
|
|
|
10
|
%
|
Debenture 9
|
|
4/21/2015
|
|
Variable
|
|
|
53,500
|
|
|
|
42,156
|
|
|
12 months
|
|
|
0
|
%
|
Debenture 10
|
|
5/7/2015
|
|
Variable
|
|
|
32,024
|
|
|
|
0
|
|
|
12 months
|
|
|
0
|
%
|
Debenture 11
|
|
5/11/2015
|
|
Variable
|
|
|
250,799
|
|
|
|
76,411
|
|
|
12 months
|
|
|
10
|
%
|
Debenture 12
|
|
6/2/2015
|
|
Variable
|
|
|
45,000
|
|
|
|
41,500
|
|
|
12 months
|
|
|
8
|
%
|
Debenture 13
|
|
9/16/2015
|
|
Variable
|
|
|
28,000
|
|
|
|
28,000
|
|
|
30 months
|
|
|
1
|
%
|
Debenture 14
|
|
9/25/2015
|
|
Variable
|
|
|
28,000
|
|
|
|
28,000
|
|
|
12 months
|
|
|
10
|
%
|
Debenture 15
|
|
9/16/2015
|
|
Variable
|
|
|
25,000
|
|
|
|
0
|
|
|
18 months
|
|
|
10
|
%
|
Debenture 16
|
|
9/25/2015
|
|
Variable
|
|
|
33,850
|
|
|
|
4,059
|
|
|
12 months
|
|
|
10
|
%
|
Debenture 17
|
|
10/20/2015
|
|
Variable
|
|
|
50,000
|
|
|
|
50,000
|
|
|
6 months
|
|
|
2
|
%
|
Debenture 18
|
|
10/23/2015
|
|
Variable
|
|
|
*
|
|
|
|
53,897
|
|
|
17 months
|
|
|
2
|
%
|
Debenture 19
|
|
10/26/2015
|
|
Variable
|
|
|
**
|
|
|
|
25,000
|
|
|
29 months
|
|
|
1
|
%
|
Debenture 20
|
|
10/26/2015
|
|
Variable
|
|
|
***
|
|
|
|
0
|
|
|
29 months
|
|
|
1
|
%
|
Debenture 21
|
|
11/9/2015
|
|
Variable
|
|
|
10,000
|
|
|
|
10,000
|
|
|
10 months
|
|
|
10
|
%
|
Debenture 22
|
|
11/23/2015
|
|
Variable
|
|
|
5,000
|
|
|
|
5,000
|
|
|
24 months
|
|
|
0
|
%
|
Debenture 23
|
|
12/2/2015
|
|
Variable
|
|
|
11,500
|
|
|
|
11,500
|
|
|
12 months
|
|
|
10
|
%
|
Debenture 24
|
|
12/4/2015
|
|
Variable
|
|
|
28,500
|
|
|
|
28,500
|
|
|
12 months
|
|
|
10
|
%
|
Debenture 25
|
|
12/4/2015
|
|
Variable
|
|
|
****
|
|
|
|
26,316
|
|
|
17 months
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at December 31, 2015
|
|
|
|
|
|
$
|
1,211,817
|
|
|
$
|
456,439
|
|
|
|
|
|
|
|
Less discount
|
|
|
|
|
|
|
|
|
|
|
(262,468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
193,971
|
|
|
|
|
|
|
|
Less current portion
|
|
|
|
|
|
|
|
|
|
|
(181,842
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,129
|
|
|
|
|
|
|
|
|
*
|
Convertible debenture was transferred from Debenture
11 in the table above.
|
|
**
|
Convertible debenture was transferred from Debenture 16 in the table above.
|
|
***
|
Convertible debenture was transferred from Debenture 15 in the table above.
|
|
****
|
Convertible debenture was transferred from Debenture 18 in the table above.
|
Accrued interest payable for the convertible
debentures was $17,896 and $23,115 as of December 31, 2015 and 2014, respectively.
Scheduled maturity of long-term debt are as
follows at December 31, 2015:
2016
|
|
|
342,167
|
|
2017
|
|
|
85,213
|
|
2018
|
|
|
29,059
|
|
Less discount
|
|
|
(262,468
|
)
|
Net convertible debentures
|
|
|
193,971
|
|
Note 5 – Derivative Liabilities
The Company evaluated the convertible debentures
discussed in Note 4 (with the exception of debentures 1 – 3 which were considered under ASC Topic 470) in accordance with
ASC Topic 815, “Derivatives and Hedging,” and determined that the conversion feature of the convertible promissory
notes were not afforded the exemption for conventional convertible instruments due to their variable conversion rates. The notes
have no explicit limit on the number of shares issuable so they did not meet the conditions set forth in current accounting standards
for equity classification. The Company elected to recognize the notes under paragraph 815-15-25-4, whereby there would be a separation
into a host contract and derivative instrument. The Company elected to initially and subsequently measure the notes in their entirety
at fair value, with changes in fair value recognized in earnings. The Company recorded a derivative liability representing the
imputed interest associated with the embedded derivative. The debt discount is amortized over the life of the note and recognized
as interest expense.
For the years ended December 31, 2015 and 2014,
the Company amortized debt discount of $315,098 and $362,259 to interest expense, respectively. For purpose of estimating the fair
value of the derivative liability, the Company used the Black Scholes option valuation model. The derivative liability is adjusted
periodically according to stock price fluctuations and other inputs and was $1,313,673 and $1,081,318 at December 31, 2015 and
2014, respectively.
At December 31, 2015 and 2014, the convertible
debentures and related accrued interest payable were convertible into approximately 247,328,000 and 1,128,000 shares of common
stock, respectively.
The Company valued the Convertible Debenture
conversion option derivatives using the Black-Scholes option-pricing model using the following assumptions: (1) risk-free interest
rates of 0.03% to $1.06% (2) lives of between 0.2 and 2.21 years, (3) expected volatility of between 288% to 519%, (4) zero expected
dividends, (5) conversion prices as set forth in the Convertible Debentures, and (6) the common stock price of the underlying shares
on the valuation dates.
The following table summarizes the derivative
liabilities included in the balance sheet at December 31, 2015:
Conversion option derivative liabilities December 31, 2013
|
|
$
|
1,575,807
|
|
Addition of new conversion option derivatives
|
|
|
200,000
|
|
Reclassification of conversion option derivative to gain on extinguishment of debt
|
|
|
(663,619
|
)
|
Change in fair value
|
|
|
(30,870
|
)
|
Derivative liability at December 31, 2014
|
|
|
1,081,318
|
|
Addition of new conversion option derivatives
|
|
|
2,531,803
|
|
Reclassification of conversion option derivative to gain on extinguishment of debt
|
|
|
(1,917,734
|
)
|
Change in fair value
|
|
|
(381,714
|
)
|
Derivative liability at December 31, 2015
|
|
$
|
1,313,673
|
|
Note 6 – Common Stock and Common Stock
Warrants
Common Stock
Effective August 25, 2015, the holder of a
majority of the shares of common stock approved a reverse split of such shares by a ratio of 1 for 40. As a result of the reverse
split, each forty shares of common stock issued and outstanding prior to the Reverse Split had been converted into one share of
common stock, and all options, warrants, and any other similar instruments convertible into, or exchangeable or exercisable for,
shares of common stock have been proportionally adjusted. There were 623 shares issued to eliminate the fractional shares for the
reverse stock split. All common stock shares have been retroactively restated to reflect the reverse split.
As of January 7, 2016,
the Company amended their articles of incorporation to increase the number of authorized shares of common stock, par value $0.001
per share, from 300,000,000 to 750,000,000.
During January 2014,
the Company sold an aggregate of 12,500 shares of its Common Stock to an accredited investor for an aggregate purchase price of
$50,000. In addition and pursuant to the stock purchase agreement, an additional 7,500 shares were issued to the investor in July
2014. The Company also sold an aggregate of 16,250 shares of its common shares to another accredited investor for an aggregate
purchase price of $130,000. Under this share purchase agreement, the investor was also issued warrants to purchase up to 17,500 shares
of its common shares. Both of these stock sales were pursuant to Rule 506 of Regulation D under the Securities Act.
During January 2014,
the Company also completed the initial closing of a private placement financing transaction with an accredited investor, pursuant
to a Securities Purchase Agreement. Pursuant to the Purchase Agreement, the Investor purchased 7,500 shares of the Company’s
Common Stock for a per share purchase price of $11.60 per share. Each per share purchase price will be based on the average
trading price of such shares for the 5 trading days prior to the closing (provided that certain conditions are met), and accordingly
the Company received aggregate gross proceeds of $87,000, excluding transaction costs, fees and expenses. On February 27, 2014,
the investor purchased an additional 7,500 shares for a per share purchase price of $10.50 with the Company receiving aggregate
gross proceeds of $78,750, excluding transaction costs, fees and expenses. During March, 2014, the investor purchased an
additional 4,748 shares for a per share purchase price of $9.40 with the Company receiving aggregate gross proceeds of $44,629,
excluding transaction costs, fees and expenses. The Investor originally agreed to purchase up to an additional 82,500 shares on
a monthly basis, subject to the fulfillment of certain conditions as more fully described in the Purchase Agreement, between the
date of the Purchase Agreement and the one-year anniversary thereof. As a result, the investor is entitled to purchase up
to an additional 62,752 shares of common stock during the term of the Purchase Agreement.
During the year ended December 31, 2014, pursuant
to terms of their individual consulting agreements, the Company’s advisory board members were issued a total of 40,983 shares
of common stock for their services. The total market value of the shares issued for advisory services was $58,655, equivalent to
approximately $1,000 for each month of service per member.
The Company issued 252,191 common shares to
individuals for consulting services rendered and software development costs incurred for the year ended December 31, 2014. The
total market value of the shares issued for consulting services was $903,905, $315,326 of which was recorded as prepaid expenses
and $588,579 of which is included in professional fees on the statement of operations for the year ended December 31, 2014.
During the year ended December 31, 2015, pursuant
to terms of their individual consulting agreements, the Company’s advisory board members were issued a total of 15,674 shares
of common stock for services. The total market value of the shares issued for advisory services was $29,143, equivalent to approximately
$1,000 for each month of service per member. Issuances of approximately 4,977,000 shares for services valued at $126,090 performed
during the year ended December 31, 2015 have been accrued as of December 31, 2015, within accrued expenses. These issuances will
occur subsequent to December 31, 2015.
The Company issued 105,084 common shares to
individuals for consulting services rendered for the year ended December 31, 2015. The total market value of the shares issued
for consulting services was $98,722, of which $71,100 was recorded as prepaid expenses and $27,622 of which is included in professional
fees on the statement of operations for the year ended December 31, 2015.
During 2015, pursuant to an employment agreement,
the Company issued 28,000 shares to the officer of the Company (Note 7). These shares were valued at $32,160 and are included in
general & administrative expenses on the statement of operations.
During 2015, pursuant to an employment agreement,
an officer of the Company was eligible to receive 8,000 shares of the Company’s common stock (Note 7). These shares have
not been issued as of December 31, 2015. The share issuance valued at $564 have been accrued as of December 31, 2015, within accrued
expenses.
During February 2015, the Company entered into
a common stock purchase agreement with an accredited investor, pursuant to which the Company may issue and sell, and the investor
is committed to purchase, up to $2,000,000 of shares of the Company’s common stock over the 36-month term following the effective
date of the agreement. Pursuant to the terms of the purchase agreement, the Company has reserved 175,000 shares of common stock
to be held in escrow. 150,000 of these shares of common stock were to be disbursed to the investor in the event the common stock
purchase agreement was not approved and deemed effective. 25,000 of these escrowed shares of common stock were to be disbursed
to the investor in the event the Company terminates the purchase agreement or certain capital draw down thresholds are not met
within the term of the common stock purchase agreement. During August 2015, the common stock purchase agreement was approved and
went effective and 150,000 of these escrowed shares were returned to treasury and cancelled.
During the year ended December 31, 2015 $419,982
of note principal, as described in Note 4, was converted into 59,739,841 common shares.
Common
Stock Warrants
During the year ended December 31, 2014, the
Company issued a warrant to purchase 17,500 shares of common shares, as noted above. The warrant is exercisable after the date
of the grant, and is exercisable at a price of $10 per share and expires five-years from the date of grant.
During the year ended
December 31, 2014 the Company issued a warrant to purchase 6,250 shares of common shares. The warrant is exercisable after the
date of the grant, and is exercisable at a price of $4.00 per share and expires five-years from the date of grant.
During the year ended December 31, 2014 the
Company issued warrants to purchase 13,278 shares of common shares, as described in Notes 3 and 4. The warrants are exercisable
after the date of the grant, are exercisable at a price of $2.40 per share, and expires two years from the date of grant.
During January 2015,
pursuant to an employment agreement, the Company issued a warrant to purchase 100,000 shares of the Company (Note 8). The warrant
is exercisable after the date of grant for a period of five years and has an exercise price of $1.20 per share. Additionally, the
warrant is callable by the Company after six months from the grant date at a price of $4.00 per share, and expires five years from
the date of grant.
The Company valued
its warrants using the Black-Scholes option-pricing model. Assumptions used during the year ended December 31, 2015
include (1) risk-free interest rates of 1.61%, (2) life of 5 years, (3) volatility of 229%, (4) zero expected dividends, (5) conversion
prices as set forth in the related instruments, and (6) the common stock price of the underlying share on the valuation dates.
The following table summarizes the outstanding
warrants and associated activity for the year ended December 31, 2015:
|
|
Number of Warrants
Outstanding
|
|
|
Weighted
Average Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Balance, December 31, 2013
|
|
|
15,307
|
|
|
|
23.20
|
|
|
|
3.12
|
|
Granted
|
|
|
37,027
|
|
|
|
6.40
|
|
|
|
3.15
|
|
Exercised
|
|
|
(8,333
|
)
|
|
|
4.00
|
|
|
|
4.39
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance, December 31, 2014
|
|
|
44,001
|
|
|
|
9.91
|
|
|
|
3.00
|
|
Granted
|
|
|
100,000
|
|
|
|
1.20
|
|
|
|
5.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
6,973
|
|
|
|
29.28
|
|
|
|
-
|
|
Balance, December 31, 2015
|
|
|
137,028
|
|
|
$
|
2.57
|
|
|
|
3.50
|
|
Note 7 – Employment Agreement
On January 20, 2015, we executed an Employment
Agreement with Peter Anthony Chiodo, which was effective as of January 1, 2015. Pursuant to the Agreement, Mr. Chiodo will continue
to serve Company’s Chief Executive Officer. The term of the Agreement commenced on January 1, 2015 and is for a period of
five years, unless terminated sooner pursuant to the terms of the Agreement. Mr. Chiodo will be paid a base salary of $160,000,
subject to annual adjustments, in addition to a signing bonus of $60,000. Mr. Chiodo will be entitled to receive an aggregate of
100,000 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), of which 24,000
such shares were issued immediately with the remaining 76,000 shares issuable at the rate of 4,000 shares per quarter on the first
day of each quarter beginning April 1, 2015 and continuing up to and including December 31, 2019. At the discretion of the Executive,
and to preserve the Company’s cash position, Mr. Chiodo is entitled to receive monthly compensation in the form of Common
Stock pursuant to the terms of the Agreement. There is approximately 2,560,000 shares remaining on this agreement. The remaining
shares to be issued at the rate of 160,000 shares per quarter on the first day of each quarter continuing January 1, 2016 and continuing
up to and including December 31, 2019. Also related to the execution of this agreement, the Company issued a warrant to purchase
100,000 commons shares of the Company’s common stock (Note 6). Additionally, pursuant to the terms of the employment agreement,
the Chief Executive Officer has the option to receive his compensation in cash or in the form of the Company’s common stock.
The total issuable shares under the provision are determined using 70% of the volume-weighted average share price of the five days
immediately preceding the end of the month in which the services were earned. The value of the shares will be based on the closing
price of the end of the month in which the services were earned. This employment agreement is effective for five years and contains
an automatic renewal provision for a period of one year.
Note 8 – Note Payable
On April 24, 2015, the Company entered into
a promissory note for $42,080 for services provided. The note carries an interest rate of 5%. The note requires monthly payments
of $2,000 and matures in April 2016. The note is personally guaranteed by the chief executive officer of the Company. The outstanding
balance of the note at December 31, 2015 is $27,580.
Note 9 – Lease Obligations
During December 2015, the Company entered into
a lease agreement to lease its corporate office in Salt Lake City, Utah until December 2017. Future minimum lease commitments under
the lease for the years ending December 31 are as follows: $29,491 – 2016 and $30,375 – 2017.
Note 10 –Tax Note
Deferred taxes are provided on a liability
method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards
and deferred tax liabilities are recognized for table temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax asset are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Net deferred tax liabilities consist of the
following components as of December 31, 2015 and 2014:
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
NOL Carryover
|
|
$
|
819,400
|
|
|
$
|
505,000
|
|
Related Party Accruals
|
|
|
-
|
|
|
|
600
|
|
Accrued payroll
|
|
|
85,800
|
|
|
|
-
|
|
Depreciation
|
|
|
2,900
|
|
|
|
-
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
-
|
|
|
|
(1,700
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(908,100
|
)
|
|
|
(503,900
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The income tax provision differs from the amount
of income tax determined by applying the U.S. federal income tax rate to pretax income from continuing operations for the years
ended December 31, 2015 and 2014 due to the following:
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Book Loss
|
|
$
|
(842,800
|
)
|
|
$
|
(827,400
|
)
|
Depreciation
|
|
|
1,100
|
|
|
|
(1,200
|
)
|
Meals & Entertainment
|
|
|
1,200
|
|
|
|
900
|
|
Related Party Accruals
|
|
|
(600
|
)
|
|
|
600
|
|
Stock and Warrants for Services
|
|
|
108,700
|
|
|
|
352,500
|
|
Loss (Gain) on Derivative
|
|
|
563,900
|
|
|
|
(12,000
|
)
|
Loss on Extinguishment of Debt
|
|
|
(358,400
|
)
|
|
|
29,800
|
|
Amortization of Debt Discount
|
|
|
123,100
|
|
|
|
141,300
|
|
Contributed Services
|
|
|
-
|
|
|
|
36,400
|
|
Valuation allowance
|
|
|
318,000
|
|
|
|
279,100
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
At December 31, 2015, the Company had net operating
loss carryforwards of approximately $2,101,000 that may be offset against future taxable income from the year 2016 to 2035. No
tax benefit has been reported in the December 31, 2015 financial statements since the potential tax benefit is offset by a valuation
allowance of the same amount. Tax years 2012 to current remain open to examination by U.S. federal and state tax authorities.
Note 11 – Subsequent Events
Management has evaluated subsequent events according to the requirements
of ASC Topic 855 to include the following.
Subsequent to December 31, 2015, the Company issued a total of approximately
176,802,000 shares of the Company’s common stock. All shares were issued in exchange for $123,423 of convertible note principal.
During January 2016, the Company received $75,000
from an accredited investor in exchange for a Convertible Note with a principal balance of $81,000. Interest on the note accrues
at the rate of 10% per annum. The note is due one year from the date of each installment and is convertible using a conversion
price of 50% of the lowest trade price (or a 50% discount to market) occurring during the 25 trading days immediately preceding
the conversion date. The note also stipulates a conversion limitation, whereby the holder may not convert more than 33.33% of the
principal balance within a 15-day period during the 90 days following the date of issuance.
During January 2016, the Company issued an
exchange note to an accredited investor in substitution for $50,000 previously outstanding convertible debenture balance pursuant
to an exchange agreement. The original note was associated with a consulting agreement; to financial consideration was paid to
the Company in exchange for this originally executed convertible debenture. The exchange note was issued with a maturity value
of $50,000, is due in April 2016, accrues at a rate of 2% per annum and is convertible into shares of the Company at a rate equal
to 60% of the average three lowest trade prices (or a 40% discount to market) occurring during the 20 trading days immediately
preceding the conversion date.