NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 and 2014
NOTE
1 - COMPANY OVERVIEW
Ubiquity,
Inc. (“Ubiquity”, “we”, “us”, “our” or the “Company”) is focused
on providing a platform which enables anyone to connect to internet-based content on any type of device. Ubiquity’s unique
technology and robust patent portfolio has led to the development of the Company’s signature product, the Sprocket. The
Sprocket can be easily downloaded onto any type of device (such as mobile phone, tablet, laptop, etc.) and then easily customized
to provide the user with easy access to all web-based content, social media outlets, video-based content, private networks, social
networks, personalized files, intelligent search, and virtually all other media. In short, the Sprocket provides easy and expedited
access to content in the manner and choices selected by the user. The Sprocket also provides detailed analytics and data on the
end-users, delivering tremendous value as a marketing tool to the content providers and advertisers.
Ubiquity
expects new markets to be created and existing markets to be disrupted. There’s no shortage of examples of how Virtual Reality
(“VR”), Augmented Reality (“AR”) and Mixed Reality (“MR”) can reshape existing ways of doing
things- from buying a new home, interacting with a doctor, or watching a football game. As the technology advances, price points
decline, and an entire new marketplace of applications (both business and consumer) hit the market. Ubiquity believes VR/AR has
the potential to spawn a multibillion-dollar industry, and may possibly be as game changing as the advent of the PC was. VR (which
immerses the user in a virtual world) and AR (immerses the user which overlays digital information onto the physical world) is
driving a trend towards the adoption of software and applications delivered via head-mounted-devices “HMDs” as a new
computing form factor.
Ubiquity
has adopted its platforms to include the advancement of Virtual, Augmented and Mixed reality. It has excited us for decades, happening
now due to the alignment of ecosystem drivers and technology advancements enabling the delivery of products and services via this
medium. Currently it is mobile technologies that are accelerating the adoption of products and services designed to stimulate
our human senses with realistic feedback that is truly immersive that allows intuitive interactions. Imagine how desktop, video,
shopping, entertainment, travel, education and training, fitness, and healthcare can be enhanced by Virtual, (“VR”)
Augmented (“AR”) and Mixed reality (“MR”). Ubiquity aims to capitalize on the evolving use cases, the
potential market disruption, and the challenge of moving from science fiction to widespread adoption.
Virtual,
Augmented and Mixed reality is essentially an artificial, software-created environment presented to users in such an immersive
way that it is accepted as real. By stimulating the senses of sight and sound –and sometimes touch– we can interact
with these environments in much the same way as we would the real world.
Immersion
enhances everyday experiences, making them more realistic, engaging, and satisfying. VR, AR and MR provide the ultimate level
of immersion, creating a sense of physical presence in real or imagined worlds. They bring a new paradigm for how we can interact
with the world, offering unprecedented experiences and unlimited possibilities that will enhance our lives in many ways.
Sprocket
VR
Ubiquity’s
Sprocket VR technology is an integrated system that enables the most effective delivery of technology and services which has a
universal platform on which all applications can be created and shared. Essentially, it enables the “App Store” of
virtual reality. Sprocket VR’s technologies and services range from augmented reality to virtual reality to holographic
images and the deployment and editing of VR content across all devices.
Ubiquity
is uniquely positioned to support superior immersive Virtual and Augmented reality experiences across all platforms and head mounted
devices (HMD’s). Ubiquity is committed to bringing seamless user experience to its customers through innovation. The Company’s
business strategy leverages its unique patent portfolio to design and develop its own proprietary platforms, software applications,
to establish new products and solutions with superior ease-of-use, seamless integration, and innovative design. The Company’s
strategy also includes expanding its distribution network to effectively reach more customers and establish new business opportunities
worldwide. The Company believes it has a sustainable competitive advantage in what could be the biggest market opportunity anywhere
for the next decade or more.
Organization
of Company
On
March 5, 2013, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ubiquity Acquisition
Corporation, a Nevada corporation and wholly-owned subsidiary of the Company (“Acquisition Sub”), and Ubiquity Broadcasting
Corporation, a Delaware corporation (“Ubiquity-DE”).
Pursuant
to the terms of the Merger Agreement, Acquisition Sub merged with and into Ubiquity-DE in a statutory reverse triangular merger
(the “Merger”), with Ubiquity-DE surviving as a wholly-owned subsidiary of the Company. At the closing of the Merger
on September 20, 2013 (the “Closing Date”), we issued Ubiquity-DE shareholders one share of our common stock, par
value $0.001 per share for each share of Ubiquity-DE’s common stock, par value $0.001 (the “Share Exchange”).
As a result of the Merger, we ceased our prior operations and became a multimedia company focused on the intersection of cloud-based
cross platform applications synchronized across all screens for enhancing the digital lifestyle.
The
transaction was regarded as a reverse merger whereby Ubiquity-DE was considered to be the accounting acquirer as its management
retained control of the Company after the Share Exchange.
On
December 31, 2014, effective March 31, 2015, the Company entered into a Share Exchange Agreement (the “Agreement”)
with Sponsor Me, Inc. (“Sponsor Me”), a Nevada corporation, and a related party, which resulted in the acquisition
of 100% of the issued and outstanding equity securities of Sponsor Me. Pursuant to the terms of the Agreement, the Company acquired
all of the outstanding capital stock of Sponsor Me from the Sponsor Me shareholders for an aggregate purchase price of 3,878,467
shares, or 3.59% of the Company’s common stock. In addition, in connection with the transaction, the Company forgave notes
accounts/receivables due from Sponsor Me and SC Business, Inc., and members or SME management and SME consultants, who are also
members of Ubiquity management, forgave approximately $3.2M in accrued salary and related payroll taxes. The Company recorded
the acquisition of the remaining non-controlling interest as an equity transaction in accordance with Accounting Standards Codification
(“ASC”) 810.
Sponsor
Me is a new kind of digital publishing company that combines expert editorial with ecommerce for distribution on mobile and social
platforms. Sponsor Me, Inc. is considered a related party. Brenden Garrison is the CEO of Sponsor Me and is also the CFO of the
Company. Christopher Carmichael is a consultant of Sponsor Me and is also the CEO of the Company, and Connie Jordan is a consultant
and a director of Sponsor Me, and is also Senior Executive Vice president of the Company. In addition, Sponsor Me has a similar
shareholder group including the Company’s CEO and EVP. Thus, the Company accounted for the acquisition of Sponsor Me as
an entity under common control using the carry over basis related to Sponsor Me’s assets and liabilities.
In
addition, in connection with the transaction, the Company forgave notes/accounts receivables due from Sponsor Me and SC Business,
Inc.Members of SME management and SME consultants, who are also members of Ubiquity management, forgave approximately $3.2M in
accrued salary and related expenses, Christopher Carmichael forgave $1,470,863, Connie Jordan forgave $1,198,565, and Brenden
Garrison forgave $257,026 and the Company was relieved of paying payroll liabilities accrued in the amount of $313,136. On the
closing date the management of SME relinquished all shares held as follows: Christopher Carmichael cancelled 19,800,000 in Sponsor
Me, Inc. Connie Jordan cancelled 19,800,000 shares in Sponsor Me, Inc. and Brenden Garrison cancelled 25,000 shares in Sponsor
Me, Inc., owning an aggregate 39,625,000 shares in Sponsor Me, Inc. and did not receive any additional shares in Ubiquity, Inc.
or any other compensation in Ubiquity, Inc. as part of the Share Exchange Agreement. The Company recorded the acquisition of the
remaining non-controlling interest as an equity transaction in accordance with (ASC) 810.
SC
Business, Inc. (“SC”) is an entity owned by the Company’s CFO, Brenden Garrison. At times SC, in order to assist
the Company in accessing its credit card lines (as provided by the Carmichael family – see “Loans Payable –
Related Parties” below), periodically charged the Company’s credit cards and remitted the related funds, net of fees,
back to Ubiquity or to SME.
Remittances
to SME are intercompany transactions. Accordingly, such amounts are eliminated in the consolidation of SME.
As
of March 31, 2015, the carrying value of Sponsor Me’s assets and liabilities were as follows:
|
|
March
31, 2015
|
|
Current Assets
|
|
$
|
4,188
|
|
Non-Current Assets
|
|
|
8,267
|
|
Current Liabilities
|
|
|
(108,434
|
)
|
Current Liabilities
- Related Parties
|
|
|
(10,000
|
)
|
Net Current Liabilities
|
|
$
|
(105,979
|
)
|
At
March 31, 2015, the following entry was recorded due to the forgiveness of accrued wages and taxes due to officers and to remove
the Non-controlling interest:
|
|
March
31, 2015
|
|
Accrued Wages to Officers
|
|
$
|
(2,926,456
|
)
|
Accrued Taxes on Wages to Officers
|
|
|
(313,137
|
)
|
Removal of Non-Controlling
Interest
|
|
|
5,139,218
|
|
Reduction of Additional
Paid-in Capital
|
|
$
|
1,899,625
|
|
In
addition, the operations of Sponsor Me are included within these consolidated financial statements and thus a pro-forma for the
years ended December 31, 2015 and 2014 is not required.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles
generally accepted in the United States of America (“U.S. GAAP”) and are presented in US dollars.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries Ubiquity
Broadcasting Corp. and Sponsor Me, Inc. (“SME”) for all periods presented, and its majority owned subsidiary Sprocket
Wearables, Inc. (see below). Prior to March 31, 2015, the Company did not have an equity ownership in SME. However, since SME
was primarily owned by officers of the Company, the Company had the power to make decisions that were most significant to SME
and was expected to absorb the losses of SME. The Company determined that as of January 1, 2014, SME should be consolidated in
with the Company’s operations. This determination was based upon the fact that the Company was the primary funding source
for SME’s operations. Prior to 2014, SME funded operations through the sale of SME common stock. Effective March 31, 2015,
the Company acquired SME; see above for additional information. All material inter-company accounts and transactions have been
eliminated in consolidation.
Sprocket
HK Limited
Ubiquity
entered a corporate mandate with Strategic Capital Management Limited (“SCM”) to create Sprocket Hong Kong Limited.
On March 3, 2015, Sprocket HK Limited was incorporated by James Tsiolis in Hong Kong with Ubiquity, Inc. holding a 51% non-dilutable
stake in Sprocket HK Limited in accordance with the license agreement. The SCM Mandate was to manage all distribution channels
and partners (among other things) throughout Australia, Asia, and North America via licensing of the Sprocket.
On
March 13, 2015, Ubiquity, Inc. entered into a Non-Exclusive Commercial Technology License Agreement (the “License Agreement”)
with Sprocket HK Limited (“Sprocket”), a Hong Kong limited liability company. Pursuant to the terms of the License
Agreement, the Company agreed to grant to Sprocket HK a domestic and international non-exclusive license to and distribute products
and services based upon the technology owned by the Company. Sprocket HK would also negotiate licenses with third parties, subject
to the terms and conditions set forth in the License Agreement. The contract carried a minimum cash payment 180 days from the
originate date of the contract in the amount of $100,000. and carried a revenue share agreement where Sprocket HK was to pay Ubiquity,
Inc 60% of all net revenue proceeds of all licensed and sub-licensed technology either directly or indirectly. The cash flow generated
from this agreement would have been or general expenses and working capital in Ubiquity, Inc. Ubiquity, as of the date of this
filing, the Company has still not received its initial $100,000 minimum cash payment.
On
March 20, 2015, Sprocket HK entered into a licensing agreement with iWebgate Limited dba Netlinkz (ASX:NET), amended as of May
4, 2015 whereby Sprocket HK granted to iWebgate dba Netlinkz (ASX:NET)a non-exclusive, license to use the Sprocket in their field
of use “for telecom and commercial providers within a mobile container”. iWebgate dba Netlinkz (ASX:NET) is to pay
Sprocket HK 60% per quarter of all net revenue proceeds received directly or indirectly from sub-licensing the sprocket. The source
code only related to the “wheel” elements and not the back end data and analytics. iWebgate dba Netlinkz (ASX:NET)
represented its intital distribution partner to be Telstra Corporation in Australia.
Effective
June 28, 2016, the Company terminated its license agreement with Sprocket HK due to the material breach for non-payment of its
initial minimum cash payment of $100,000.00,, not properly issuing the agreed 51% stake in Sprocket HK, and failure to provide
Ubiquity the contractually agreed upon representation on the board of directors The Company sent out a notice to cure the material
breach and no remedy was made within the contractual agreement of 30 days.
Although
the Company never received its 51% stake of Sprocket HK, nor did Chris Carmichael receive the board seat in Sprocket HK that was
a material part of the compensation outlined in the Sprocket HK License agreement, on August 15, 2016, a director of Sprocket
HK sent a letter to the Company stating Ubiquity’s shares are cancelled in the Sprocket HK entity, effectively confirming
the termination of the arrangement.
Sprocket
Wearables, Inc.
On
September 18, 2015, the Company entered into a Mobile Applications Development and Services Agreement (“Agreement
”
)
with Appetizer Mobile LLC (“Appetizer”). Under the terms of the Agreement, Appetizer will provide all necessary development
services related to mobile applications for the use of the Company’s signature product, the “Sprocket”, in wearable
tech devices. Specifically, the first project will be for the integration of the Sprocket into the Apple Watch. Pursuant to the
Agreement, the Company formed a new corporation, Sprocket Wearables, Inc. on September 25, 2015 (“Sprocket Wearable’s”).
Appetizer will initially own twenty five percent (25%) of the issued shares of Sprocket Wearables. As of December 31, 2015, the
Company owns 65%, Appetizer Mobile owns 25% and other investors own 10% through the investment of $1M in cash. As of December
31, 2015, investments of $500,000 have been received with the remaining $500,000 received in 2016. As of June 12, 2017, an additional
$1,500,000 has been received.
On
September 25, 2015, Ubiquity, Inc. entered into an exclusive license agreement with Sprocket Wearable’s Inc. The agreement
calls for a 15% royalty of the gross sales of all licensed goods and services and an initial license non-refundable entry fee
of $1,500,000, which will be used at the corporate level for general working capital purposes. This $1,500,000 in licensing
revenue is eliminated in consolidation as it is a consolidated entity.
During
the year ended December 31, 2015, there were no operations for this entity, other than the agreements listed above, and
the investments received and agreements entered into.
Variable
Interest Entity
Sponsor
Me:
U.S
GAAP
require that if
an entity is the primary beneficiary of a variable interest entity (“VIE”), the entity should consolidate the assets,
liabilities and results of operations of the VIE in its consolidated financial statements. Ubiquity, Inc. considers itself to
be the primary beneficiary of SME, and accordingly, has consolidated these entities beginning in January 2014, with the equity
interests of the unaffiliated investors in SME presented as Non-controlling Interests in the accompanying interim consolidated
financial statements.
Under
ASC 810-10 the Primary Beneficiary is the party that has both of the following:
1.
The power to make decisions regarding the activities that most significantly impact the success of the VIE, and
2.
The obligation to absorb losses or rights to receive benefits of the entity that could potentially be significant to the VIE.
When
multiple parties make decisions over different activities of the entity, only the party with power to direct the activities that
most significantly impacts the entity’s economic performance will have satisfied the first condition. The Company, has the
power to direct the most significant activities of SME.
Ubiquity
satisfies the second condition because as the primary source of capital beginning in 2014, Ubiquity, Inc. is expected to absorb
the losses that will be significant to the VIE. On March 31, 2015, SME was acquired by Ubiquity and thus the VIE was eliminated.
Sprocket
HK:
Variable
Interest Entity
U.S.
GAAP requires that if an entity is the primary beneficiary of a variable interest entity (“VIE”), the entity should
consolidate the assets, liabilities and results of operations of the VIE in its consolidated financial statements.
Under
ASC 810-10 the Primary Beneficiary is the party that has both of the following:
1.
The power to make decisions regarding the activities that most significantly impact the success of the VIE, and
2.
The obligation to absorb losses or rights to receive benefits of the entity that could potentially be significant to the VIE.
Ubiquity,
Inc. does not consider itself to be the primary beneficiary of Sprocket HK. Based on the above, the accounts of Sprocket HK were
not consolidated in the accompanying consolidated financial statements,
When
multiple parties make decisions over different activities of the entity, only the party with power to direct the activities that
most significantly impacts the entity’s economic performance will have satisfied the first condition. The Company, does
not have the power to direct the most significant activities of Sprocket HK. Originally the Company was formed with the intent
of giving Ubiquity, Inc a 51% stake in Sprocket HK, as well as a Board of Directors seat of Sprocket HK; however the Company was
never given shares nor was a board of director seat granted.
Ubiquity
also does not satisfy the second condition either. Ubiquity, Inc. is not expected to absorb any gains or losses that will be significant
to the VIE. On June 28, 2016 Ubiquity ceased doing all business altogether due to a material breach of its licensing agreement.
Although this entity was consolidated at September 30, 2015 (no significant operations), Sprocket HK was deconsolidated
at December 31, 2015, based on the analysis noted above, without gain or loss.
Non-Controlling
Interests
Non-controlling
interest disclosed within the consolidated statements of operations represents the minority ownership’s 100% share of net
losses of SME incurred during three months ended March 31, 2015. On March 31, 2015, SME was acquired by Ubiquity and thus the
non-controlling interest was eliminated on that date.
Ubiquity,
Inc. does not own Sprocket HK Limited as of August 2016 due to the breach of the agreement and failure to to provide required
financial information, which is not consolidated into the accompanying consolidated financial statements. See above for additional
information.
Ubiquity,
Inc. owned 65% of Sprocket Wearables, Inc. as of December 31, 2015 which is consolidated into the accompanying consolidated
financial statements. See above for additional information.
Cash
and Cash Equivalents
For
purposes of the accompanying consolidated financial statements, the Company considers all highly liquid instruments with an initial
maturity of three months or less to be cash equivalents.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are reported at realizable value, net of allowances for doubtful accounts, which is estimated and recorded in the period
the related revenue is recorded. The Company has a standardized approach to estimate and review the collectability of its receivables
based on a number of factors, including the period they have been outstanding. Historical collection and payer reimbursement experience
is an integral part of the estimation process related to allowances for doubtful accounts. In addition, the Company regularly
assesses the state of its billing operations in order to identify issues, which may impact the collectability of these receivables
or reserve estimates. The allowance for doubtful accounts was 0, and $70,000, respectively, at December 31, 2015
and 2014.
Property
and Equipment
The
capital assets are being depreciated over their estimated useful lives of, three to fifteen years using the straight-line method
of depreciation for book purposes. The cost of leasehold improvements is amortized over the lesser of the length of the related
leases or the estimated useful lives of the assets.
Maintenance
and repairs are charged to operations when incurred. Betterments and renewals are capitalized. When equipment and leasehold improvements
are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or
loss is included in operations.
Software
Development Costs
Research
and development costs are charged to expense as incurred. However, the costs incurred for the development of computer software
that will be sold, leased, or otherwise marketed are capitalized when technological feasibility has been established. These capitalized
costs are subject to an ongoing assessment of recoverability based on anticipated future revenues and changes in hardware and
software technologies. Amortization of capitalized software development costs begins when the product is available for general
release to customers and revenues are generated. Amortization is computed as the ratio of current gross revenues for a product
to the total of current and anticipated future gross revenues for the product. Amortization of capitalized software development
costs for purchased technology that is technologically feasible at the time of purchase begins upon purchase and for internally
developed costs, when the product is available for release to customers. Amortization is computed using a straight-line method
over the estimated useful life of five (5) years.
During
the years ended December 31, 2015 and 2014, the Company incurred development costs in which were expensed of $235,713
and $444,811, respectively.
Intangible
Assets
Intangible
assets are amortized using the straight-line method over periods ranging from five to fifteen years. The Company periodically
evaluates the recoverability of intangible assets and takes into account events or circumstances that warrant revised estimates
of useful lives or that indicate impairment exists. The majority of Ubiquity’s intangible assets are subject to amortization.
See Note 5 for additional information.
Impairment
of Long-Lived Assets
The
Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets may
not be recoverable. When such events or changes in circumstances are present, the Company assesses the recoverability of long-lived
assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows.
If the total of the future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss
based on the excess of the carrying amount over the fair value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or the fair value less costs to sell. See Note 5 for additional information.
Derivative
Financial Instruments
The
Company does not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks that may affect the
fair values of our financial instruments. However, under the provisions ASC 815 – “Derivatives and Hedging”
certain financial instruments that have characteristics of a derivative, as defined by ASC 815, such as embedded conversion features
on our Convertible Notes, that are potentially settled in the Company’s own common stock, are classified as liabilities
when either (a) the holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not within the Company’s
control. In such instances, net-cash settlement is assumed for financial accounting and reporting purposes, even when the terms
of the underlying contracts do not provide for net-cash settlement. Derivative financial instruments are initially recorded, and
continuously carried, at fair value each reporting period.
The
value of the embedded conversion feature is determined using the Black-Scholes option pricing model. All future changes in the
fair value of the embedded conversion feature will be recognized currently in earnings until the note is converted or redeemed.
Determining the fair value of derivative financial instruments involves judgment and the use of certain relevant assumptions including,
but not limited to, interest rate risk, credit risk, volatility and other factors. The use of different assumptions could have
a material effect on the estimated fair value amounts.
Fair
Value of Financial Instruments
The
Company follows the guidance of ASC 820: Fair Value Measurement and Disclosure. Fair value is defined as the exit price, or the
amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
as of the measurement date. The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the
use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when
available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based
on market data obtained from sources independent of our Company. Unobservable inputs are inputs that reflect our Company’s
assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three
levels of inputs that may be used to measure fair value:
Level
1. Observable inputs such as quoted prices in active markets;
Level
2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level
3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
As
of December 31, 2015, the Company’s derivative liabilities are considered a level 3 financial instrument; see Note 7 for
discussion of valuation. As of December 31, 2015, we did not have any level 1or 2, assets or liabilities.
The
carrying amounts reflected in the balance sheets for cash, prepaid expenses, other assets, accounts payable, accrued expenses,
and notes payable approximate the respective fair values due to the short maturities of these items.
Revenue
Recognition
The
Company recognizes revenue when (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have
been rendered; (iii) the sales price is fixed or determinable; and (iv) collectability is reasonably assured. Revenue from packaged
product sales to distributors and resellers is usually recorded when related products are shipped. However, when the revenue recognition
criteria required for distributor and reseller arrangements are not met, revenue is recognized as payments are received. Revenues
from licensing the rights to technology and/or patents are typically recorded when access to the technology and/or patents is
provided.
Cost
of Revenue
Cost
of revenue includes the direct costs to distribute the product and the direct costs to provide online services, production, consulting,
product support, licensing opportunities, training and certification of sub-contractors.
Stock-Based
Compensation
The
Company accounts for employee stock-based compensation in accordance with the guidance of ASC Topic 718: “Compensation -
Stock Compensation”, which requires all share-based payments to employees, including grants of employee stock options, to
be recognized in the consolidated financial statements based on their fair values. The Company generally estimates the grant date
fair value of stock options using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model is affected by
the Company’s stock price on the date of grant, the expected stock price volatility over the expected term of the award,
the risk-free interest rate for the expected term of the award and expected dividends. The Company recognizes stock-based compensation
expense on a straight-line basis over the service period of the award.
The
Company follows ASC Topic 505-50, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring,
or in Conjunction with Selling Goods and Services,” for stock options and warrants issued to consultants and other non-employees.
In accordance with ASC Topic 505-50, these stock options and warrants issued as compensation for services provided to the Company
are accounted for based upon the fair value of the services provided or the estimated fair market value of the option or warrant,
whichever can be more clearly determined. The fair value of the equity instrument is charged directly to compensation expense
and additional paid-in capital over the period during which services are rendered.
Common
stock issued in connection with services whereby the performance is complete and for asset acquisitions are typically valued using
the closing market price of the Company’s common stock on the date of the agreement.
In
accordance with the guidance, an asset acquired in exchange for issuance of fully vested, non-forfeitable equity instruments should
not be presented or classified as an offset to equity on the grantor’s balance sheet once the equity instrument is granted
for accounting purposes. Accordingly, the Company has accounted for certain issuances as prepaid assets in the accompanying consolidated
balance sheets.
Income
Taxes
Income
taxes are computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and
liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and
are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax
assets that, based on available evidence, are not expected to be realized.
The
Company’s income tax returns are based on calculations and assumptions that are subject to examination by the Internal Revenue
Service and other tax authorities. In addition, the calculation of the Company’s tax liabilities involves dealing with uncertainties
in the application of complex tax regulations. The Company recognizes liabilities for uncertain tax positions based on a two-step
process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates
that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation
processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized
upon settlement. While the Company believes it has appropriate support for the positions taken on its tax returns, the Company
regularly assesses the potential outcomes of examinations by tax authorities in determining the adequacy of its provision for
income taxes. The Company continually assesses the likelihood and amount of potential adjustments and adjusts the income tax provision,
income taxes payable and deferred taxes in the period in which the facts that give rise to a revision become known. To date there
have been no uncertain tax positions.
Concentration
of Credit Risks
The
Company maintains its cash and cash equivalents in bank deposit accounts, which, at times, may exceed federally insured limits.
The Company has not experienced any losses in such accounts; however, amounts in excess of the federally insured limit may be
at risk if the bank experiences financial difficulties.
Use
of Estimates
Preparing
consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, and expenses. Examples include estimates of loss contingencies and product life cycles, valuation of the
Company’s common stock and common stock options, derivative liabilities, and assumptions such as the elements comprising
a software arrangement, including the distinction between upgrades/enhancements and new products; when the Company reaches technological
feasibility for its products; the potential outcome of the future tax consequences of events that have been recognized in the
Company’s consolidated financial statements or tax returns; and determining when investment impairments are other-than-temporary.
Actual results and outcomes may differ from these estimates and assumptions.
Earnings
per Common and Common Equivalent Share
The
computation of basic earnings per common share is computed using the weighted average number of common shares outstanding during
the year. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during
the year plus common stock equivalents which would arise from the exercise of warrants and stock options outstanding using the
treasury stock method and the average market price per share during the year. Convertible notes payable, options, warrants and
convertible preferred stock which are common stock equivalents are not included in the diluted earnings per share calculation
for the years ended December 31, 2015 and 2014, respectively, since their effect is anti-dilutive.
Recently
issued accounting pronouncements
In
May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU
2014-09”), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that
govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU
2014-09 will be effective for the Company beginning in its first quarter of 2017. Early adoption is not permitted. The new revenue
standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized
as of the date of adoption. The Company’s
adoption of this standard did not have a
material impact on the Company’s consolidated financial statements.
In
August 2014, the FASB issued guidance that requires management to evaluate whether there are conditions or events that raise substantial
doubt about an entity’s ability to continue as a going concern. If such conditions or events exist, disclosures are required
that enable users of the financial statements to understand the nature of the conditions or evens, management’s evaluation
of the circumstances and management’s plans to mitigate the conditions or events that raise substantial doubt about the
entity’s ability to continue as a going concern. The Company will be required to perform an annual assessment of its ability
to continue as a going concern when this standard becomes effective on January 1, 2017. The Company’s
adoption
of this guidance did not have a material impact on the Company’s consolidated financial statements.
In
April 2015, FASB issued ASU 2015-03, simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt
issuance costs in financial statements. ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct
deduction from the related debt liability rather than as an asset. Amortization of debt issuance costs will continue to be reported
as interest expense. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2015. Early adoption is
permitted. The adoption of this guidance on January 1, 2015 did not have a material impact on the Company’s consolidated
financial statements.
In
November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The amendments
in this update simplify the presentation of deferred taxes by requiring deferred tax assets and liabilities be classified as noncurrent
on the balance sheet. These amendments may be applied either prospectively to all deferred tax liabilities and assets or retrospectively
to all periods presented. The amendments are effective for financial statements issued for annual periods beginning after December
15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning
of an interim or annual reporting period. The guidance is not expected to have a material impact on the Company’s consolidated
financial statements. The Company’s
adoption of this guidance did not have a material
impact on the Company’s consolidated financial statements
In
February 2016, the Financial Accounting Standards Board (“FASB”)
issued
Accounting Standards Update No. 2016-02 “Leases (Topic 842)” (“ASU 2016-02”), which requires lessees to
put most leases on the balance sheet but recognize expense on the income statement in a manner similar to current accounting.
For lessors, ASU 2016-02 also modifies the classification criteria and the accounting for sales-type and direct financing leases.
The standard requires a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest
comparative period in the financial statements and is effective in the first quarter of 2019. Early adoption of ASU 2016-02 is
permitted; however the Company plans to adopt the standard in the first quarter of 2019. The Company is evaluating the impact
of ASU 2016-02.
The
following standards were effective for and adopted by the Company in 2017. The adoption of these standards did not have a material
impact on the Company’s consolidated financial position, results of operations or cash flows:
Update
2017-04—
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
A
public business entity that is an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill
impairment tests in fiscal years beginning after December 15, 2019.A public business entity that is not an SEC filer should adopt
the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December
15, 2020. All other entities, including not-for-profit entities, that are adopting the amendments in this Update should do so
Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
The Company is evaluating the impact of ASU
2017-04.
Update
2017-09—
Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting
Effective
for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early
adoption is permitted, including adoption in any interim period, for public business entities for reporting periods for which
financial statements have not yet been issued.
The Company is evaluating the impact
of ASU
2017-09.
Update
2017-01—
Business Combinations (Topic 805): Clarifying the Definition of a Business
Public
business entities should apply the amendments in this Update to annual periods beginning after December 15, 2017, including interim
periods within those periods.
The Company is evaluating the impact of ASU
2017-14.
Update
2016-17—
Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control
The
amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2016, including
interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity
early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that
includes that interim period. The Company’s
adoption of this guidance did not have
a material impact on the Company’s consolidated financial statements
Update
2016-09—
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
For
public business entities, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods
within those annual periods. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts
the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes
that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company’s
adoption of this guidance did not have a material impact on the Company’s consolidated
financial statements.
Update
2016-07—
Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method
of Accounting
Effective for all entities
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied
prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in
the adoption of the equity method. Earlier application is permitted.
The Company’s
adoption
of this guidance did not have a material impact on the Company’s consolidated financial statements.
Effective
Date and Transition Guidance (a consensus of the Private Company Council)
NOTE
3 - PREPAID EXPENSES AND OTHER ASSETS
Prepaid
expenses consisted of payroll deposits as of December 31, 2015 and 2014.
Other
assets consisted of deposits on operating leases as of December 31, 2015 and 2014.
NOTE
4 - PROPERTY AND EQUIPMENT
Property
and equipment recorded at cost consisted of the following as of December 31, 2015 and 2014:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
Machinery and equipment
|
|
$
|
477,104
|
|
|
$
|
486,122
|
|
Office equipment
|
|
|
879,752
|
|
|
|
881,100
|
|
Leasehold improvements
|
|
|
641,599
|
|
|
|
641,599
|
|
Subtotal
|
|
|
1,998,455
|
|
|
|
2,008,821
|
|
Accumulated depreciation
|
|
|
(1,550,128
|
)
|
|
|
(1,257,637
|
)
|
Property and
equipment, net
|
|
$
|
448,327
|
|
|
$
|
751,184
|
|
Depreciation
expense was $298,763 and $304,158 for the years December 31, 2015 and 2014, respectively.
NOTE
5 - INTANGIBLE ASSETS
The
Company’s capitalized costs in relation to developing and acquiring intangible assets, consisted of the following as of
December 31, 2015 and 2014:
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Gross
|
|
|
|
|
|
Impairment/
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
Life
(Yrs)
|
|
|
1-Jan
2014
|
|
|
Additions
|
|
|
Disposal
|
|
|
December
31, 2014
|
|
|
Amortization
|
|
|
December
31, 2014
|
|
Amortized
Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent
& Trademarks
|
|
|
5
|
|
|
|
1,085,077
|
|
|
|
138,948
|
|
|
|
-
|
|
|
|
1,224,025
|
|
|
|
(254,049
|
)
|
|
|
969,976
|
|
Media
Projects
|
|
|
5
|
|
|
|
363,850
|
|
|
|
272,559
|
|
|
|
-
|
|
|
|
636,409
|
|
|
|
-
|
|
|
|
636,409
|
|
Sprocket
Asset Group
|
|
|
5
|
|
|
|
5,502,827
|
|
|
|
2,746,536
|
|
|
|
-
|
|
|
|
8,249,363
|
|
|
|
(2,890,100
|
)
|
|
|
5,359,263
|
|
Website
|
|
|
5
|
|
|
|
63,589
|
|
|
|
90,951
|
|
|
|
-
|
|
|
|
154,540
|
|
|
|
(35,118
|
)
|
|
|
119,422
|
|
|
|
|
|
|
|
$
|
7,015,343
|
|
|
$
|
3,248,994
|
|
|
$
|
-
|
|
|
$
|
10,264,337
|
|
|
$
|
(3,179,267
|
)
|
|
$
|
7,085,070
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
Life
(Yrs)
|
|
|
1-Jan
2015
|
|
|
Additions
|
|
|
Impairment
|
|
|
December
31, 2015
|
|
|
Amortization
|
|
|
December
31, 2015
|
|
Amortized Intangible
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent
& Trademarks
|
|
|
5
|
|
|
|
969,976
|
|
|
|
74,226
|
|
|
|
(988,925
|
)
|
|
|
55,277
|
|
|
|
(55,277
|
)
|
|
|
-
|
|
Media Projects
|
|
|
5
|
|
|
|
636,409
|
|
|
|
174,338
|
|
|
|
(405,496
|
)
|
|
|
405,251
|
|
|
|
-
|
|
|
|
405,252
|
|
Sprocket Asset Group
|
|
|
5
|
|
|
|
5,359,263
|
|
|
|
5,136
|
|
|
|
(3,936,538
|
)
|
|
|
1,427,861
|
|
|
|
(1,427,861
|
)
|
|
|
-
|
|
Website
|
|
|
5
|
|
|
|
119,347
|
|
|
|
-
|
|
|
|
(91,046
|
)
|
|
|
28,301
|
|
|
|
(28,301
|
)
|
|
|
-
|
|
|
|
|
|
|
|
$
|
7,084,995
|
|
|
$
|
253,700
|
|
|
$
|
(5,422,055
|
)
|
|
$
|
1,916,690
|
|
|
$
|
(1,511,439
|
)
|
|
$
|
405,252
|
|
Amortization
expense for all intangible assets was $1,514,206 and $1,511,439 for the years ended December 31, 2015 and 2014, respectively.
The Sprocket Asset Group consists of the Invicta Immersive Property, Think Mobile Giftsender, Think Media, Digital Magazine, and
a portion of the websites that were previously reported.
Additions
to Intangible Assets
Additions
to the intangible assets primarily relate to the Company’s development of patents and trademarks, the Sprocket platform,
GiftSender, Monkeybars, MOFF, and studio projects. The Company has incurred significant costs for intangible assets in the past
and does not expect to see intangible costs level out or drop in the future as the Company continues to invest and develop its
intellectual property. The Company analyzes these assets typically on an annual basis, during the fourth quarter, and when there
are other indicating factors, see below for discuss regarding impairments recorded.
Loss
on Impairment
Management
reviews intangible assets with finite lives for impairment whenever events or changes in circumstances indicate the carrying value
of the intangible assets may not be recoverable. Recoverability of the intangible assets is measured by comparing the carrying
amount of the assets to the future estimated undiscounted cash flows that the asset is expected to generate. If the estimated
undiscounted future cash flows are less than the carrying amount, these intangible assets with finite lives are considered to
be impaired. The amount of the impairment is measured as the difference between the carrying amount of these assets and their
estimated fair value. The fair value of the asset is estimated based on discounted future cash flows using a discount rate commensurate
with the risk. Our estimate of future cash flows requires assumptions and judgment, including forecasting future sales and expenses
and estimating useful lives of the assets. The use of different assumptions, estimates or judgments, such as the estimated future
cash flows or the discount rate used to discount such cash flows, could significantly increase or decrease the estimated fair
value of the intangible assets with finite lives. Intangible assets primarily consist of the Sprocket Asset Group, internally
developed Intellectual Property, acquired Intellectual Property, and a robust portfolio of patents, which are referred to as the
Sprocket Asset Group. This analysis was performed during our reporting process for our December 31, 2015 annual consolidated
financial statements. Procedures performed during the process include, but are not limited to, the following:
During
the process of preparing the 2015 consolidated financial statements, it became apparent that the recoverability of the Sprocket
Asset Group was not reasonably assured, as a result of its foreign entity and partner Sprocket HK and iWebgate (ASX:IWG) dba Netlinkz
(ASX:NET) and its arranged licensing agreement terms being breached by the licensee. As a consequence, management is unable to
estimate expected cash flows with any certainty. As a result of such subsequent developments, management has concluded that, as
of December 31, 2015, the remaining carrying value of the sprocket asset group was fully impaired. Based on the information available
at the time of our filings prior to December 31, 2015, management does not feel that such full impairment was appropriate for
such prior filings. The loss on impairment for 2015 was ($5,422,055).
NOTE
6 - ACCRUED EXPENSES
Accrued
expenses consisted of the following as of December 31, 2015 and 2014:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
Salaries
and wages - Ubiquity, Inc.
|
|
$
|
564,767
|
|
|
$
|
559,704
|
|
Payroll and other taxes
|
|
|
1,169,197
|
|
|
|
1,145,125
|
|
Accrued consulting
fee - BOD Member $450,000 and $150,000
|
|
|
791,877
|
|
|
|
150,000
|
|
Accrued interest
|
|
|
459,068
|
|
|
|
-
|
|
Accrued rent
|
|
|
93,575
|
|
|
|
52,558
|
|
Stock purchase guarantee
|
|
|
205,700
|
|
|
|
-
|
|
Other
|
|
|
310,499
|
|
|
|
1,967
|
|
Total current accrued
expenses
|
|
|
3,594,682
|
|
|
|
1,909,354
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages,
long-term - Ubiquity, Inc.
|
|
|
-
|
|
|
|
1,000,000
|
|
Salaries
and wages, long-term - Sponsor Me, Inc.
|
|
|
-
|
|
|
|
3,120,120
|
|
Total
accrued expenses
|
|
$
|
3,594,682
|
|
|
$
|
6,029,474
|
|
The
Company’s Chief Executive Officer and Senior Executive Vice President are paid as consultants and thus the required payroll
taxes are not withheld and remitted to the appropriate taxing authorities. The Company issues these individuals 1099s which represent
amounts paid to them. In connection with this, the Company accrues estimated taxes and penalties due to taxing authorities in
which would be potentially due if the taxing authorities were to require the Company’s to pay if the individuals were deemed
employees. The Company accrues the taxes at the time in which the amounts payable to the individuals is recorded. See Note 8 for
discussion related to compensation either paid and/or accrued for related parties. As of December 31, 2015 and 2014, total amounts
accrued related to potential payroll taxes and penalties were $868,075 and $890,623, respectively. The California Employment Development
Department has confirmed final balances for the tax years ending 2009 through March 31, 2017 for a total owing $225,555. The Company
has a higher accrual for what is actually owed as when the above mentioned Officer and Vice President start receiving payment
of their accrued salary it will match with the correct period.
In
February 2015, the Company’s Chief Executive Officer forgave accrued salary and bonuses of $1 million dollars in exchange
for options to purchase 2,561,856 shares of common stock with an exercise price of $0.485 per share. The options vest immediately
and have a five year life. The Company valued the options at $1,159,506 using the Black Scholes Option Pricing model; see Note
9 for variables used. In addition, accrued payroll taxes and penalties related to the forgiven salary and bonus of $118,000 were
re-classed as the payroll amounts were not paid. The difference between the salary and taxes forgiven and the fair market value
of the options of $41,006 was recorded as additional compensation expense.
See
Note 10 for discussion related to the stock purchase guarantee.
See
Note 8 for discussion related to the accrued consulting fee - BOD Member and the portion of Salaries and wages - Ubiquity due
to the Company’s officers.
NOTE
7 - NOTES PAYABLE
Convertible
Notes Payable - Variable Conversion Price
At
various times to fund operations, the Company issues convertible notes payable in which the conversion features are variable.
In addition, some of these convertible notes payable have issuance discounts and other fees withheld. During the year ended
December 31, 2015 the Company issued convertible notes payable principal amounts aggregating $2,380,350 in which proceeds
of $2,168,475 were received. The convertible notes payable incur interest rates ranging from 1% to 12% per annum with due dates
ranging from August 2015 to April 2017. The convertible notes payable were initially convertible into common stock of the Company
at discounts ranging from 55-65% of either the lowest closing prices in the 20 days before the conversion date, the lowest trading
price in the 25 days before the conversion date, or the volume-weighted average price of the three days before the conversion
date. Certain of these notes are convertible immediately upon issuance, while others do not become convertible for a period of
180 days after issuance. Derivative accounting applies upon the conversion feature being available to the holder, as it is variable
and does not have a floor as to the number of common shares in which could be converted. The Company has recorded, or will record,
a derivative liability in connection with the convertible notes payable on the date they become convertible. The combination of
the original issue discount (“OID”), fees paid and allocation to the derivative liabilities resulted in discounts
to the convertible notes payable. The discounts are being amortized over the term of the convertible notes payable. In addition,
the Company issued 450,000 shares of common stock in connection with some of the convertible notes. The Company valued the common
stock at $95,250 based upon the closing market price on the date of the transaction. The value of the common stock was
recorded as a discount to the notes payable. On April 15, 2015, the default provision of all convertible notes payable were triggered
due to the Company’s delinquency in filing their annual report. Thus, as of April 15, 2015, all convertible notes payable
became convertible; interest rates were increased at rates ranging from 12% to 24% per annum; and the principal balances were
increased at rates ranging from 110% to 150% totaling $716,605 in additional principal plus $471,990 in interest.
The increase in principal was recorded as interest expense during the year ended December 31, 2015.
As
of December 31, 2015 and 2014, the Company has $3,405,076 and $204,000 in principal of convertible notes payable,
respectively. During the years ended December 31, 2015 and 2014, $2,030,802 and $881 of the discount was amortized to interest
expense, respectively. As of December 31, 2015 and 2014, the unamortized debt discounts were 361,944 and $3,119, respectively.
The Company is amortizing the debt discount using the straight line method due to the short term of the notes. The remaining
discount at December 31, 2015, will be amortized during 2016.
During the year ended December
31, 2015, principal of $75,000 was converted into 1,552,701 shares of common stock. In connection with this conversion, the Company
determined the fair market value of common stock to be $353,883 based upon the closing market price on the date of conversion.
In connection with the conversion, the Company reclassified derivative liabilities of $231,292 and recorded a gain on extinguishment
of $8,441 which represented the difference between the fair market value of the common stock and the convertible notes and derivative
liabilities extinguished.
During
the year ended December 31, 2015, principal of $125,120 of convertible notes were repaid. In connection with these repayments,
derivative liabilities of $119,226 were reclassed to equity as the convertible note in which the derivative liabilities corresponded
to were repaid and thus the conversion feature was eliminated.
At
various times during the year ended December 31, 2015, the Company issued a total of 925,000 shares of common stock to various
holders of the convertible notes payable. The issuances related to various penalties, settlements, etc. related to the convertible
notes payable being in default. The Company valued the shares at $229,623 based upon the closing market price of the Company’s
common stock on the date of the transaction. The value of the common stock was immediately expensed as interest expense.
The
Company issued 37,500 shares to a convertible debt holder recorded at a fair value $16,875 as part of a forbearance agreement.
Derivative
Liabilities
In
connection with convertible notes payable, the Company records derivative liabilities for the embedded conversion feature.
The derivative liabilities are valued on the date the convertible note payable become convertible and revalued at each reporting
period. During the year ended December 31, 2015, the Company recorded initial derivative liabilities of $3,267,843 based upon
the following Black-Scholes option pricing model average assumptions: an exercise price of $0.0853 to $1.00, our stock price on
the date of grant ($0.15 to $0.57), expected dividend yield of 0%, expected volatility of 132% to 200%, risk free interest rates
ranging from 0.23% to 0.56% and expected terms ranging from one (1) to two (2) years. Upon initial valuation, the derivative liability
exceeded the face value of certain of the convertible note payables by approximately $1,363,000, which was recorded as a day one
loss on derivative liability.
On
December 31, 2015, the derivative liabilities were revalued at $6,785,665 resulting in a loss of $4,713,824 related to the change
in fair market value of the derivative liabilities for the year ended December 31, 2015. The derivative liabilities were revalued
using the Black-Scholes option pricing model with the following average assumptions: an exercise price of $0.04 to $0.15, our
stock price on the date of valuation ($.12 to $.24), expected dividend yield of 0%, expected volatility of 143% to 188%,
risk-free interest rates ranging from 0.23% to 0.58%, and an expected terms ranging from 0.10 to 1.83 years.
Other
Convertible Notes Payable Transactions
On
November 17, 2014, Ubiquity, Inc. closed a financing transaction by entering into a Purchase Agreement dated November 12,
2014 (the “Purchase Agreement”) with KBM Worldwide, Inc. (the “Purchaser”) for an aggregate principal
amount of $204,000 (the “Purchase Price”). Pursuant to the Purchase Agreement, the Company issued an 8% Convertible
Promissory Note (the “Note”).
The Note earned an interest
rate per annum equal to 8% and had a maturity date of August 14, 2015 (the “Maturity Date”). The Note was convertible
any time during the period beginning on the date which was one hundred eighty (180) days following the date of the issuance
on this Note and ended on the later of (i) the Maturity Date and (ii) the date of payment of the Default Amount at a conversion
price equal to 50% discount to the average of the lowest three (3) trading prices for the Common Stock during the twenty (20)
Trading Day period immediately prior the conversion date. The Note Conversion Price was subject to adjustment in the case
of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances of securities
below the conversion price of the Note. Since the conversion feature was only convertible after six months, there was
no derivative liability as of December 31, 2014.
In
the event of default, (“Event of Default”) the Purchaser has the right to require the Company to repay in cash all
or a portion of the Note at a price equal to 150% of the aggregate principal amount of the Note plus all accrued and unpaid interest
on the principal amount of this Note. In addition, in the event of a merger, consolidation, exchange of shares, recapitalization,
reorganization or other similar event, (“Major Event”) the Purchaser has the option to treat the event as an Event
of Default or may immediately convert the remaining balance on the Note and shall be entitled to receive as many shares as the
Purchaser would have been entitled to immediately prior to the Major Event. The Company repaid KBM timely.
On
February 11, 2014, the Company entered into an agreement with a law firm in which $27,249 in accounts payable was converted to
a convertible promissory note in the same amount. Under the terms of the agreement, the note was immediately convertible at $0.001
per share, incurred interest at 10% and due upon demand. The Company didn’t account for the transaction until the year ended
December 31, 2015 when a conversion was requested and the oversight was identified. The Company determined that a beneficial conversion
feature of $27,249 should have been recorded and immediately expensed as interest expense at the time of the original agreement.
The amount was recorded during the year ended December 31, 2015 as the amount was not considered material to the year ended
December 31, 20 a 2014. During the year ended December 31, 2015, assignees of the holder converted $16,000 of the balance into
16,000,000 shares of common stock. As of December 31, 2015, $11,249 was due on the note and is included witin convertible notes
payable.
Future
Potential Dilution
Most
of the Company’s convertible notes payable contain adjustable conversion terms with significant discounts to market. As
of June 12, 2017 the Company’s convertible notes payable are potentially convertible into an aggregate of approximately
90 million shares of common stock. In addition, due to the variable conversion prices on some of the Company’s convertible
notes, the number of common shares issuable is dependent upon the traded price of the Company’s common stock.
NOTE
8 - RELATED PARTY TRANSACTIONS
Compensation
Related
UBIQUITY,
INC.
SC
Business, Inc.
SC
Business, Inc. (“SC”) is an entity owned by the Company’s CFO, Brenden Garrison. At times SC charges Ubiquity
for tax/consulting work. In order to assist the Company in accessing its credit card lines (as provided by the Carmichael family
– see “Loans Payable – Related Parties” below), SC Business periodically charges the Company’s credit
cards and remits the related funds, net of fees, back to Ubiquity or to SME. The following is a summary of the transactions between
the parties during the years ended December 31, 2015 and 2014:
|
|
2015
|
|
|
2014
|
|
Receivable
from SC Business, beginning of the year
|
|
$
|
1,279,681
|
|
|
$
|
437,812
|
|
Amount
charged on Ubiquity Credit Cards by SC Business
|
|
$
|
4,628,579
|
|
|
$
|
2,619,267
|
|
Amounts
remitted back to Ubiquity
|
|
|
(3,842,503
|
)
|
|
|
(1,673,407
|
)
|
Amounts
retained by SC for settlements of Brenden Garrison’s accrued salary and reimbursements(2015) and amounts due SC (2014)
|
|
|
(191,796
|
)
|
|
|
(28,758
|
)
|
PayPal
and other fees incurred by SC Business
|
|
|
(166,327
|
)
|
|
|
(75,233
|
)
|
|
|
|
|
|
|
|
|
|
Receivable
from SC Business
(1
)
|
|
$
|
1,707,634
|
|
|
$
|
1,279,681
|
(1)
|
Amounts
remitted to SME
|
|
$
|
426,787
|
|
|
$
|
609,897
|
(2)
|
|
(1)
|
The substance of this receivable
is that it is due from SME based on the balance being related to amounts remitted from Ubiquity to SME. Accordingly, such
amounts are eliminated in the consolidation of SME.
|
|
(2)
|
Net of approximately $232,000
of amounts owed to SC Business.
|
Max
Gan
Max
Gan was an employee of the Company. In prior years Max Gan loaned the company money periodically and also assisted
the Company in accessing its credit card lines. Max Gan then remitted the related amount charged, net of fees, back to
Ubiquity. The following is a summary of the transactions between the parties during the year ended December 31, 2015 and 2014:
|
|
2015
|
|
|
2014
|
|
Receivable from Max Gan,
beginning of year
|
|
$
|
247,461
|
|
|
$
|
125,920
|
|
Amount charged on Ubiquity Credit Cards
|
|
$
|
718,124
|
|
|
$
|
574,040
|
|
Amounts remitted back to Ubiquity
|
|
|
(642,079
|
)
|
|
|
(393,405
|
)
|
PayPal and
other fees incurred
|
|
|
(13,876
|
)
|
|
|
(42,185
|
)
|
Interest Service
fees charged
|
|
$
|
0
|
|
|
$
|
(16,909
|
)
|
Allowance
for bad debt
|
|
|
(309,630
|
)
|
|
|
|
|
Receivable
from Max Gan,net, end of period
|
|
$
|
0
|
|
|
$
|
247,461
|
|
Nicholas
Mitsakos
Nicholas
Mitsakos was the Company’s Co-Chairman of the Board. The Company entered into a directors retention agreement with Mitsakos
on March 22, 2013 for the issuance of 250,000 shares of common stock and amended in July 2013 for the issuance of an additional
250,000 shares of common stock. Finally, the agreement was amended in December 2013, which calls for monthly payments of $25,000
beginning in January 2014. During the years ended December 31, 2015 and 2014, the Company recorded expense of $300,000 and $150,000,
respectively, under the contract. As of December 31, 2015 and December 31, 2014, the cash amounts owed under the contract were
$450,000 and $150,000, respectively. Subsequent to year end, the amounts due were settled with the issuance of 1,986,439
common shares see Note 14.
Carmichael
Enterprises
This
entity is owned by Al Carmichael, who is the father of our CEO, Chris Carmichael. Al Carmichael is the signor for the Company’s
business credit cards. In exchange for providing the Company with the access to the related credit lines, the Company pays him
a monthly fee of $2,500 per month. During the years ended December 31, 2015 and 2014, the Company expensed $30,000 and $30,000
in consulting fees of which $0 and $0 was due, respectively. In addition, the Company owed him $16,000 and $10,000, in reference
to a note payable at December 31, 2015 and 2014, respectively. On October 24, 2016, Albert Carmichael filed a UCC-1 financing
statement for amounts owed relating to a personal loan to the Company as well as certain credit being secured for the Company
listing the Company’s fixed assets as collateral.
Brittany
Carmichael
Brittany
Carmichael is the daughter of our CEO, Chris Carmichael and provided secretarial, administrative, and marketing support
for the Company. The Company expensed approximately $69,753 and $27,012 related to her salary, reimbursed expenses, and beneficial
payments charged against her salary during the years ended December 31, 2015 and 2014, respectively. Effective November 30, 2016
Brittany no longer provided services to the Company.
Cameron
Carmichael
Cameron
Carmichael is the son of our CEO, Chris Carmichael, and provided studio related services to the Company. The Company expensed
approximately $33,526 and $31,375 related to his salary, reimbursed expenses, and beneficial payments against his salary during
the years ended December 31, 2015 and 2014, respectively. Effective March 1, 2017 Cameron no longer provided services to the Company.
Shane
Carmichael
Shane
Carmichael is the son of our CEO, Chris Carmichael, and provided studio related services to the Company. The Company expensed
approximately $72,084 and $66,737 related to his salary, reimbursed expenses, and beneficial payments charged against his salary
during the years ended December 31, 2015 and 2014, respectively. Effective December 31, 2016 Shane no longer provided services
to the Company.
Christopher
Carmichael & Connie Jordan
The
following is a summary of compensation paid and amounts payable to Christopher Carmichael and Connie Jordan for the years ended
December 31, 2015 and 2014:
|
|
Christopher
|
|
|
Christopher
|
|
|
|
|
|
|
|
|
|
Carmichael
|
|
|
Carmichael
|
|
|
Connie
Jordan
|
|
|
Connie
Jordan
|
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
Beginning Accrued Balance
|
|
$
|
2,705,365
|
|
|
$
|
1,053,398
|
|
|
$
|
1,199,523
|
|
|
$
|
181,241
|
|
Add SME <FN 6> - January 1, 2014
|
|
|
0
|
|
|
|
1,220,863
|
|
|
|
0
|
|
|
|
971,065
|
|
Annual Salary - Ubiquity, Inc.
|
|
|
532,200
|
|
|
|
539,400
|
|
|
|
264,400
|
|
|
|
264,400
|
|
Annual Salary - Sponsor Me, Inc.
|
|
|
0
|
|
|
|
200,000
|
|
|
|
0
|
|
|
|
180,000
|
|
Annual Director Fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Bonus
|
|
|
13,467
|
|
|
|
403,010
|
|
|
|
3,634
|
|
|
|
120,943
|
|
Other Reimbursements (3)
|
|
|
73,929
|
|
|
|
14,994
|
|
|
|
63,539
|
|
|
|
5,957
|
|
Subtotal
|
|
|
3,324,961
|
|
|
|
3,431,665
|
|
|
|
1,531,096
|
|
|
|
1,723,606
|
|
Payments
|
|
|
(505,352
|
)(2)
|
|
|
(726,300
|
)(2)
|
|
|
(270,084
|
)(2)
|
|
|
(524,083
|
)(2)
|
SME Amounts Forgiven in Share Exchange Agreement(4)
|
|
|
(1,470,863
|
)
|
|
|
-
|
|
|
|
(1,198,565
|
)
|
|
|
-
|
|
Option Exchange Forgiveness of Salary
|
|
|
(1,000,000
|
)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual - Ending December 31
|
|
$
|
348,746
|
|
|
$
|
2,705,365
|
|
|
$
|
62,448
|
|
|
$
|
1,199,523
|
|
(1)
Salary and bonuses forgiven for the exchange to purchase options, see Note 6.
(2)
Payments do not include amounts SME paid an aggregate of approximately $62,573 and $61,875 in benefits for the years ended December
31, 2015 and 2014, respectively.
(3)
Other income primarily relates to the benefit of using American Express points.
(4)
See Note 6.
For
the year ended December 31, 2015, Chris Carmichael loaned Ubiquity $1,204,905 and at December 31, 2015 was owed $605,172. The
loans are memorialized by contracts bearing 8% interest annually.
On
June 9, 2016, Christopher Carmichael filed a UCC-1 financing statement for his amounts owed as an officer director and loans to
the Company totaling over $2,000,000 owed at the time, listing the Company’s intellectual property and other fixed
assets as collateral. Chris Carmichael had previously loaned the Company $14,571,612 through personal loans and amounts
secured by his family for business expenses for the two years ended December 31, 2015 and 2014 respectively, including $8,065,771
for the year ended December 31, 2015.
Annual
Salary
On
December 20, 2013, effective January 1, 2014, the Board of Directors approved to increase Christopher Carmichael, the Company’s
CEO, annual salary from $420,000 to $525,000. Additionally, the CEO receives and accrues a medical allowance of $1,200 per month.
In addition, the CEO receives an annual grant of 300,000 options prior to January 1, 2014 and 600,000 subsequently.
On
December 20, 2013, effective January 1, 2014, the Board of Directors approved to increase the Company’s CFO’s annual
salary from $150,000 to $225,000 and an annual option grant of 150,000 shares.
The
Company’s Senior Executive Vice President, Connie Jordan, received an annual salary of $250,000 during the years ended December
31, 2015 and 2014. Additionally, the Senior Executive Vice President receives and accrues a medical allowance of $1,200 per month
and an annual option grant of 200,000 prior to January 1, 2014 and 300,000 subsequently.
Bonus
During
the years ended December 31, 2015 and 2014, the CEO earned bonuses of $13,467 and $403,010, respectively, in connection with the
bonus provisions of his related employment agreement (see Note 10). During the years ended December 31, 2015 and 2014, the Senior
Executive Vice President earned bonuses of $3,634 and $120,943, respectively, in connection with the bonus provisions of her related
employment agreement (see Note 10). The Company accounts for the bonuses as payroll expense.
Accrued
Amounts Payable to CEO and Senior Executive Vice President
As
of December 31, 2015 and 2014, amounts payable to the CEO related to the items discussed above were $348,746 and $2,705,365, respectively.
See Note 6 for discussion related to $1,000,000 of salary and bonus payable to the CEO exchanged for options to purchase shares
of the Company’s common stock. As of December 31, 2015 and 2014, amounts payable to the Senior Executive Vice President
related to the items discussed above were $241,925 and $1,199,523, respectively.
Board
of Director Fees
Effective
July 1, 2014, the Company revised its policy for providing compensation to members of the board of directors. Each independent
board member receives an annual fee off$25,000 payable annually and additional compensation annually ranging from $5,000 - $10,000
depending on the board members participation in the Company’s various committees. In addition, effective July 1, 2014, the
Company officers who also reside on the board of directors do not receive compensation. During the years ended December 31, 2015
and 2014, the Company accrued $85,000 And $32,500 respectively, in connection with amounts due to non-officer board of director
members. As of December 31, 2015 and 2014, $217,500 and $132,500 was included in accrued expenses in the accompanying consolidated
balance sheets, respectively.
On June 9, 2016, Christopher
Carmichael filed a UCC-1 financing statement for his amounts owed as an officer director and loans to the company totaling over
$2,000,000 owed at the time, listing the Company’s intellectual property and other fixed assets as collateral. Chris Carmichael
had previously loaned the company $14,571,612 through personal loans and amounts secured by his family for business expenses for
the years ended December 31, 2015 and 2014 respectively, including $8,065,771 for the year ended December 31, 2015.
UBIQUITY,
INC.
The
Carmichael Family has personally guaranteed two Company credit cards and has allowed the Company use of their personal credit
cards as needed. Total lines of credit personally guaranteed by the Carmichael family are up to $800,000 per month and is memorialized
in a formal loan agreement. Of which a total loaned from the use of these guaranteed cards was $6,824,866 and $6,280,841 during
the years ended December 31, 2015 and 2014, respectively. See Note 9 for discussion of options granted during the year ended December
31, 2015 in connection with this guarantee.
The
Company benefited from the use of American Express points totaling approximately $70,000 in cash value. The Company used these
points to pay for business expenses, to pay down the business card, and other expenses.
The
Company had certain notes payable outstanding to related parties as of December 31, 2015 and 2014. During the years ended December
31, 2015 and 2014, the Company borrowed $1,204,905 and $225,000 from Chris Carmichael for which payments were made of $599,732
and $225,000, respectively. As of December 31, 2015 and 2014, Christopher Carmichael was owed $605,172 and $0, respectively. The
amounts were unsecured, incurred interest at 8% per annum and due on demand. During the year ended December 31, 2015, the Company
recorded accrued interest of $10,100. The proceeds were used for operations.
Albert
Carmichael, a family member of the Company’s CEO, was owed $16,000 and $10,000 as of December 31, 2015 and 2014, respectively.
The amounts are unsecured, non-interest bearing and due on demand. The proceeds were used for operations.
Employees,
consultants or shareholders of the Company were owed $74,394 and $18,489 as of December 31, 2015 and 2014, respectively. The amounts
are unsecured, non-interest bearing and due on demand. However, the Company is recording interest at 8% per annum which
is consistent with other related party loans, for a total accrued interest of $7,500 as of December 31, 2015. The proceeds were
used for operations. In addition, during the year ended December 31, 2015, the Company issued 736,834 shares of common stock in
settlement of $57,500 in principal balance. The Company valued the shares of common stock at $81,032 based upon the closing market
price on the date of issuance. The excess fair market value of the common stock over the amount relieved of $23,532 was recorded
as interest expense. As of December 31, 2015, one of the notes representing $20,000 is convertible into shares of common stock
at a rate of $.08 per share.
In
February 2014, the Company received a $50,000 loan from a shareholder. The proceeds from the loan were used for operations and
were due on demand. No formal terms were ever entered into in connection with the loan. During the year ended December
31, 2014, the Company repaid the $50,000 loan and an additional $5,000 which was accounted for as interest expense.
NOTE
9 - STOCKHOLDERS’ EQUITY
Reverse
Stock Split
On
April 21, 2014, the Company received approval from the Financial Industry Regulatory Authority (“FINRA”) to effectuate
a reverse split of 3.5 to 1 (the “Reverse Split”) in which each shareholder will be issued one (1) share of common
stock in exchange for 3.5 shares of their currently issued common stock. The stock split has been retroactively applied to this
filing.
Preferred
Stock
In
February 2015, the board of directors approved the designation of 500 shares of preferred stock, par value $0.001 per share, of
the Company as Series A Preferred Stock. The Series A Preferred stock receive no dividends or liquidation preferences. Each share
is entitled to the equivalent of 1,000,000 votes of common stock.
On
March 6, 2015, the Company issued the CEO and the SEVP 250 shares each of Series A Preferred Stock. In connection with this issuance,
the Company valued the shares at $295,918. The shares were valued under the provisions ASC 820 Fair Value Measurements taking
into account the control premium associated with the voting provisions of the Series A. The Company expensed the value of the
Series A upon issuance as there were no additional performance requirements.
On
December 31, 2015 the company issued 1,500,000 Series A preferred shares to Christopher Carmichael and 500,000 Series A preferred
shares to Connie Jordan valued at $24,745.
Proceeds
from Sales of Common Stock
During
the years ended December 31, 2015 and 2014, the Company issued 60,094,410 and 10,551,572 shares of common stock for cash proceeds
of $3,483,031 and $8,060,178, respectively. As of December 31, 2015, the Company recorded a subscription receivable of $173,000
for the issuance of shares of common stock for which the cash was received subsequent to December 31, 2015. Included with certain
of the stock issuances, the Company issued a warrant to purchase 333,334 shares of common stock with an exercise price of $0.50,
vested upon grant and mature in April 2020.
During
the year ended December 31, 2015 Sprocket Wearables, Inc. issued 500,000 shares of common stock for cash proceeds of $500,000.
Common
Stock Issued for Services and Settlement
During
the years ended December 31, 2015 and 2014, the Company issued 9,984,450 and 1,739,107 shares of common stock for services
and settlement. The Company determined the value of such shares to be $2,726,666 and $10,568,834 for the years ended December
31, 2015 and 2014, respectively. The values were based upon the fair market value of the Company’s common stock on the date
of performance, which in most cases is the agreement date. Services performed in connection with these issuances relate to assignment
to the board of directors, advisory services related to listing on a national exchange, marketing, broadcasting and production
related services.
On
March 22, 2013, the Company entered into an agreement to retain a new co-chairman of the board. The agreement granted 285,714
shares of common stock valued at $0.54 per share for services to be rendered over a twelve month period. In July 2013, the agreement
was amended to grant an additional 285,714 shares for services through February 2014 with a fair market value of $0.66. The value
of the shares were recorded as a prepaid asset of $1,052,500 and was being amortized over the period of service.
See
Note 7 for additional issuances of common stock.
Options
During
the year ended December 31, 2015, the Company granted options to purchase 3,007,231 shares of common stock to the board of directors
and employees, including 850,000 to the CEO and 550,000 to the EVP for board of director and employment services; 150,000 to the
CFO, 269,331 to the CEO in connection with guarantees made on Company loans/credit cards; 32,767 to the CEO in connection with
the Monkey Bars asset acquisition and 684,223 to employees and other board members. The options were valued at $3,827,938 on the
grant date using the Black-Scholes option-pricing model with the following assumptions: exercise prices ranging from $0.87 to
$2.41; dividend yield of 0%; expected volatility of 163%; risk-free interest rates of 0.12% and expected life of 60 months. During
the years ended December 31, 2015 and 2014, the Company recorded $2,136,401 and $2,331,085 in compensation expense in connection
with the options, respectively. The Company expects to record the remaining unamortized portion of $338,286 during the year ending
December 31, 2016.
During the years ended December
31, 2015, the Company granted options to purchase 1,125,000 shares of common stock to the board of directors and employees, including
600,000 to the CEO and 300,000 to the EVP, 150,000 to the CFO in connection with their employment; 2,561,856 to the CEO in connection
with the forgiveness of $1.0 million in accrued salary (see Note 6); and 75,000 to an employee. The options were valued at $765,927
on the grant date using the Black-Scholes option-pricing model with the following assumptions: exercise prices ranging from $0.49
to $0.67; dividend yield of 0%; expected volatility of 164.0%; risk-free interest rates of 0.12% and expected life of 60 months.
During the year ended December 31, 2015, the Company recorded $634,101 in compensation expense in connection with the options.
The Company expects to record the remaining unamortized portion of $111,079 during the year ending December 31, 2016.
During
the year ended December 31, 2015, the Company granted options to purchase 1,993,057 shares of common stock to the CEO in connection
with the Company’s use of the CEO’s personal credit card. Under the terms of the arrangement, the Company issues options
which represent 10% of the balance on the credit card at the end of the month. The exercise price represents the closing market
price of the Company’s common stock at the close of the month. The options are immediately vested. The options were valued
at $522,277 on the grant date using the Black-Scholes option-pricing model with the following assumptions: exercise prices ranging
from $0.11 to $0.67; dividend yield of 0%; expected volatility ranging from 162% - 165%; risk-free interest rates of 0.12% and
expected life of 60 months. During the year ended December 31, 2015, the Company recorded $522,277 in compensation expense in
connection with the options, respectively.
The
aggregate intrinsic values of the options on the date of grant were $0 as the Company issues options at the then fair market value
of common stock. As of December 31, 2015, all options were exercisable at prices above the fair market value of the Company’s
common stock.
During
the year ended December 31, 2014, the Company granted options to purchase 2,536,321 shares of common stock to the board of directors
and employees, including 850,000 to the CEO and 550,000 to the EVP for board of director and employment services; 269,331 to the
CEO in connection with guarantees made on Company loans/credit cards; 32,767 to the CEO in connection with the Monkey Bars asset
acquisition and 834,223 to employees and other board members. The options were valued at $3,827,938 on the grant date using the
Black-Scholes option-pricing model with the following assumptions: exercise prices ranging from $0.87 to $2.41; dividend yield
of 0%; expected volatility of 163%; risk-free interest rates of 0.12% and expected life of 60 months. 1,536,321 options were fully
vested and expensed as of December 31, 2014. During the year ended December 31, 2014, the Company recorded $3,084,820 in compensation
expense in connection with the options.
NOTE
10 - COMMITMENTS AND CONTINGENCIES
Employment
Agreements
On
March 1, 2015, the board modified Christopher Carmichael’s employment agreement to reflect the same base salary of $525,000
annually but a different bonus structure focusing on the revenue performance of the Company. He also is to receive 600,000 options
annually. Beginning March 1, 2015, Carmichael receives three and a half percent (3.5%) of gross revenue from any and all corporate
activities worldwide and a two and a half percent (2.5%) gross override of the book value derived from all cashless transactions
t. Mr. Carmichael is also awarded twenty percent of all gross revenues associated with the project known as “106 Yards”.
All cashless transactions are paid out as common stock. Upon termination of the amended agreement, the Company is obligated to
pay employee any outstanding liabilities owed to him and amounts owed per the contract to the end of the term. On March 1, 2015,
the board modified Connie Jordan’s employment agreement to reflect the same base salary of $250,000 annually but a different
bonus structure focusing on the revenue performance of the Company. Beginning March 1, 2015, Jordan receives one and a half percent
(1.5%) of gross revenue from any and all corporate activities worldwide and a three percent (3%) gross override of revenue resulting
from the successful patent prosecution, litigation, settlement or actions taken by the Company. Upon termination of the amended
agreement, the Company is obligated to pay employee any outstanding liabilities owed to her and amounts owed per the contract
to the end of the term. She also is to receive 300,000 options.
On
January 1, 2014, Brenden Garrison’s employment contract was amended to reflect an annual base salary of $225,000 with additional
compensation of 150,000 options annually.
On
January 1, 2012, as amended on August 1, 2013, the Company entered into an employment agreement with Bryan Harpole (the “Harpole
Agreement”) to be employed as the Company’s general studio manager on an at will basis. Mr. Harpole received an annual
salary of $150,000 and is eligible for certain bonuses including an annual bonus in the form of stock options to purchase 75,000
shares at an exercise price of $4.00. Harpole receives a one percent (1%) gross override for all revenue relating to studio revenues.
Effective April, 2016, Mr. Harpole no longer provided services to the Company, and the employment agreement was terminated.
The
foregoing descriptions of the terms of the Carmichael Agreement, Jordan Agreement, Garrison Agreement, and Harpole Agreement do
not purport to be complete and are qualified in their entirety by reference to the provisions of such agreements filed as Exhibits
10.1 10.2, 10.3, and 10.4 to the December 31, 2015 10-K, respectively.
Other
Contingencies
At
the time of death of the former President of Ubiquity, Gregory Crotty had accrued $93,743 in salary, 22,857 Common Shares of Ubiquity
Broadcasting Corporation, and had 200,929 options to purchase Ubiquity Broadcasting Corporation Common Shares at $5.25 per share.
He also had 42,857 shares of common stock issued in his name. Ubiquity will have to issue these shares and pay the balance of
his accrued salary to the proper beneficiary once established. As of December 31, 2015, an established beneficiary has yet to
be named. All 200,929 options expired as of December 31, 2011 and are not included in total options outstanding.
During
the first quarter of 2013, the Employment Development Department of the State of California (the “EDD”) notified the
Company that it proposed to categorize our independent contractors as employees and proposed an assessment of additional employment
taxes in the amount of $305,885, which represented a contingent liability. The Company filed a formal petition as of April 22,
2013. The Company has recorded a provision for the assessment as an accrued expense even though the Company believes the independent
contractors do not meet the definition of an employee. In a letter from the EDD dated July 21, 2015, the EDD issued a final assessment
of employment taxes in the amount of $36,128 for the period from October 1, 2009 to September 30, 2012. For the period April 1,
2013 to December 31, 2015, the EDD issued a notice of adjustment with an amount due of $39,427.21, and for the subsequent periods
up to March 31, 2017 the amount owed was $150,339. As of December 31, 2015 and 2014, total amounts accrued on the accompanying
consolidated financial statements related to potential payroll taxes and penalties were $868,075 and $890,623, respectively.
The California Employment Development Department has confirmed final balances for the tax years ended 2009 through March
31, 2017 for a total owing $225,555. The Company has a higher accrual for what is actually owed as when the above mentioned Officer
and Vice President start receiving payment for their accrued salary it will match with the correct period.
Litigation
Think
Design Media, Inc. and Related Entities
As
previously disclosed in the Company’s Quarterly Report for September 30, 2015 on February 26, 2015, the Company, Think Mobile,
Inc., Think Design Media, Inc. and all other parties to the lawsuits submitted to the Superior Court of California, County of
Orange a request for dismissal of all actions between the parties, after executing a Confidential Settlement Agreement and Release
(the “Agreement”). As part of the Agreement, the lawsuits were settled and the Company obtained a full release from
all defendants to such lawsuits.
Other
Ubiquity
v. Castro
:
On
or about July 2014, Ubiquity filed a demand for arbitration with
Judicial
Arbitration and Mediation Services
(‘JAMS’) against Lawrence E. Castro (“Castro”)
for breach of the settlement agreement dated August 19, 2013, which was executed to settle and resolve a dispute between Ubiquity
and Castro regarding a prior “Work for Hire” relationship between the parties (the “Castro Settlement”).
Under the Castro Settlement, the Company paid Castro monetary compensation in exchange for providing certain agreements and assurances
designed to protect certain intellectual property, business plans, road maps, vendors, investor relationships, employee relationships,
contractors and work in progress. The arbitration complaint filed by Ubiquity alleges that Castro breached the Castro Settlement
and is seeking damages in the amount of $176,763, plus interest, representing the stated damages in the settlement agreement of
what Ubiquity has paid to Castro. Ubiquity also seeked injunctive relief, actual losses incurred by Castro’s breach, and
damages for unjust enrichment, including expenses and other sundry damages.
Ubiquity was awarded a final
amended award on January 6, 2017 for attorney’s fees of $32,919 and costs of $10,219 along with the original award for damages
of $176,763. Interest is awarded as allowed on unpaid balances until paid in full. Total award less interest is $219,901.
Kay
Strategies v. Ubiquity
:
Kay
Strategies filed a complaint against the Company and its officers and directors for various violations of federal and state securities
law, in the District Court for the Southern District of California. The Company and its officers and directors thereafter moved
to dismiss the complaint under FRCP 12(b)(5) and 12(b)(6). Kay Strategies chose instead to amend voluntarily. Kay Strategies then
filed a First Amended Complaint, alleging the same federal and state securities violations. The amended pleading essentially alleges
that Kay Strategies purchased restricted Ubiquity stock from a third party. Kay Strategies’ personal representatives allegedly
advised it that they were orally informed by Ubiquity’s outside securities’ attorney that it would lift the stock
restrictions by a certain date, which did not occur, allegedly causing Kay Strategies damages. Kay Strategies contends that it
would not have purchased the Ubiquity stock from the third party had it not had this assurance. The Company denies that it ever
made such a guarantee or represented same to Kay Strategies’ representative. Ubiquity also contends that if outside counsel
made any statements [which the Company denies happening], counsel was never authorized to do so. Prior to the stock purchase,
no authorized director, officer or agent of the Company met with or discussed with anyone at Kay Strategies its prospective purchase
of the Company’s stock from any third party. Ubiquity recently filed another FRCP 12(b)(6) motion challenging the efficacy
of these allegations. The district court dismissed Kay Strategies’ first and second Amended Complaint without prejudice.
On July 15, 2016, the court issued an order denying the Motion to Dismiss Claims against the Defendants, and directed Defendants
to answer on or before August 15, 2016. On August 12, 2016, Defendants filed their Answer to the Amended Complaint.
On
November 18, 2016, an Early Neutral Evaluation Conference and Case Management Conference were held before Magistrate Judge Louisa
S. Porter. The case did not settle. A scheduling order issued thereafter on November 21, 2016. A Mandatory Settlement Conference
is scheduled for October 2, 2017 at 10:00 a.m.
Kay
Strategies is seeking $1,667,893 in compensatory damages and also undisclosed punitive damages and other court related costs.
The Company has accrued all amounts due under the agreement.
Typenex
v. Ubiquity
:
On
August 14, 2015, the Company was served with a demand for arbitration by Typenex Co-Investment, LLC (“
Typenex
”).
Typenex was the holder of one of the many convertible notes issued by the Company. Typenex was claiming, among other things, that
the Company is in breach of the convertible note issued in its favor (the “
Note
”), and that it is entitled
to an injunction against the Company enjoining it from, among other things, up to and until the Note is paid in full (i) issuing
any other convertible debt with a variable interest rate; (ii) paying any cash to the holders of any other convertible notes issued
by the Company; and, (iii) issuing any additional shares of stock to the holders of any other variable interest rate convertible
notes issued by the Company. The arbitrator issued an interim injunction for the equitable relief described above. Arbitration
finally took place on March 22, 2016, and the arbitrator tentatively awarded Typenex damages, attorney fees and costs of $767,960.42,
less $150,000, for a total award of $617,960.42. In addition, the arbitrator awarded Typenex costs. Finally, the arbitrator kept
in place the prior interim restraining orders. Though Chris Carmichael also was named a defendant, he was dismissed by Typenex
prior to the arbitration hearing. On April 19, 2016, Typenex filed a petition in the Third Judicial District Court in and for
Salt Lake County, Utah to confirm the award. Ubiquity intends to respond and object to the petition. While the Company admittedly
owes the principal on the Note, the Company believes the arbitrator erred in awarding any damages or interest thereon. Error is
further ascribed to the arbitrator’s continuance of injunctive relief. The Company and Typenex are currently circulating
settlement terms to resolve this matter. The Company has accrued all amounts due under the convertible note agreement.
Avant
Garde v. Ubiquity
:
Avant
Garde initiated litigation against the Company, for the recovery of the Company’s lease of its office space in Irvine, California,
claiming the Company’s failed to timely pay its September 2015 rent, allegedly one day late, under the applicable lease.
When Ubiquity failed inadvertantly to timely answer the unlawful detainer suit, the Company was defaulted. Instead of moving to
set aside the default, the Company entered into two forbearance agreements, both of which lapsed. The Company then moved the Orange
County Superior Court for an order restoring the lease, which motion was denied. The court thereafter stayed the action pending
the outcome of an appeal challenging the denial filed by Ubiquity. On March 14, 2016, Ubiquity paid an additional $150,000 for
an increased security deposit until the appeal is finalized. The Court of Appeals issued its decision affirming the trial court’s
order denying Ubiquity’s Petition for relief from judgment declaring the release forfeited. The Opinion was issued on February
17, 2017 and made final April 21, 2017. On May 17, 2017 Avant Garde entered into a settlement agreement with the Company reinstating
the lease with the original terms and conditions of the lease. The lease will be up for renewal January 2020. The Company must
provide a $150,000 letter of credit to its landlord by June 30, 2017 or it risks default on the lease.
Vista
Capital
On
March 10, 2016, Vista Capital Investments, LLC (“Vista”) filed suit against the Company for breach of contract, unjust
enrichment, declaratory relief, promissory estoppel, fraud, negligent misrepresentation and civil conspiracy in the Superior Court,
Central Division, For the County of San Diego, California. The genesis of the suit is Vista’s allegations that the Company
breached two Convertible Notes, one for $100,000 and the other for $50,000, by failing to timely repay these notes, when Vista
declared the notes all due and payable after the Company failed to make timely filings with the SEC. The Company denies any wrongdoing,
and intends to challenge the complaint by demurrer. The Company currently has a settlement offer being circulated to dismiss all
claims. The Company has accrued all amounts due under the the convertible note agreement.
Keener
Litigation
On
March 15, 2016, Justin Keener (“Keener”) dba JMJ Financial, sued the Company for breach of contract, arising out of
a $300,000 convertible note representing capital infusions by Keener into the Company. Keener alleges the Company has failed to
timely repay the note, after Keener demanded payment of the entire principal and interest under the note due to the Company’s
default of certain other provisions of the note, which, as alleged, accelerated the note repayments. A Default judgment was entered
against Ubiquity on February 9, 2017. Ubiquity is in the process of setting aside the default judgment so that a reduced settlement
can be negotiated between the parties. The Company has accrued all amounts due under the the convertible note agreement.
Firstfire
Global Opportunities Litigation
On
March 28, 2016, Firstfire Global Opportunities Fund LLC (“Firstfire”) filed suit against Ubiquity for breach of a
securities purchase agreement, dated March 17, 2015, and a $140,250 senior convertible note (issued on March 17, 2015), attorneys’
fees and unjust enrichment in the Supreme Court of New York, New York County. Firstfire contends that Ubiquity breached the note
by failing to timely repay “any amount towards the aggregate sum that Firstfire is owed,” the total of which is $304.889.88.
A
Judgment in the total amount of $315,406.24 was issued on August 10, 2016. The Company is currently negotiating the debt and in
the process of having the default set aside. The Company has accrued all amounts due under the the convertible note agreement
and judgment.
Brett
and Mark Tomberlin Lawsuit
On
April 8
,
2016, a lawsuit was filed in the Orange County Superior Court by Brett and Mark Tomberlin, seeking damages
for Ubiquity’s failure to timely repay under eight promissory notes totaling $184,450. They also claim that they were misled
into believing that the notes would be paid timely. The Company denies the allegations. The company and the Tomberlin’s
settled for the following: (i) Ubiquity sells all rights of Queen Mary to Brett Tomberlin; (ii) Ubiquity transfers to Brett Tomberlin
Bill of Sale and Short Form Bill of Sale of the Project; (iii) if the Project is produced and released, Ubiquity will receive
5% of 100% of Net Proceeds arising from the Picture; (iv) If the Picture is produced and released, IDW Productions will accord
Connie Jordan Carmichael and Christopher Carmichael an executive producer credit on the screen in the motion picture; (v) Tomberlin
shall pay Ubiquity $150,000 for Ubiquity’s actions; (vi) Tomberlin dismisses lawsuit and forgives the promissory notes;
(vii) Tomberlin as a part of the mutual release, releases any claims that may arise as a part of the termination of his employment
from the company (viii) Ubiquity will indemnify Tomberlin of all claims, losses, etc. regarding Ubiquity’s warranties and
representations in the Agreement; and (ix) Mutual release of the parties. The case was settled May 27, 2016 and dismissed May
31, 2016.
R
Squared Partners, LLC Litigation
On
April 20, 2016, R Squared Partners, LLC (“R Squared”) filed suit in the Supreme Court of New York, County of New York
against Ubiquity and its CEO, Chris Carmichael, for breach of contract, breach of the implied covenant, unjust enrichment, specific
performance, fraud, negligent misrepresentation, and civil conspiracy. The complaint essentially alleges that Ubiquity entered
into a purchase and note transaction with R Squared whereby R Squared loaned the Company $140,250, which was due on September
20, 2015. R Squared alleges that, except for a $20,000 payment, the Company has not timely repaid the principal or interest on
the note. R Squared also claims that the Company defaulted under other terms of the purchase agreement, including Ubiquity’s
failure to obtain certain insurance policies, reduction of the book – value of certain of its assets, impairing its ability
to pay its debts, and failure to honor R Squared’s third party participation rights by entering into third party financing
agreements, though R Squared alleges that it has lost “not less than” $500,000. R Squared also seeks sundry injunctive
relief, restraining Ubiquity and Carmichael from entering into future third party agreements and stock issuances. Finally, R Squared
seeks undefined fraud damages against Ubiquity and its CEO arising out of Ubiquity’s and Carmichael alleged representations,
as manifested in the purchase agreement.
On
October 27, 2016, the Court entered judgment in favor of R Squared Partners, LLC and against Ubiquity Inc. in the amount of $140,250
plus interest at 15% per annum from September 20, 2015 through entry of judgment. The Court also awarded R Squared Partners, LLC
$17,500 in attorneys’ fees, per the terms of the promissory note.
In
this order, the Court also ordered that the clerk sever and enter judgment dismissing all claims against Christopher Carmichael,
finding that Plaintiff had failed to prove that Carmichael acted in any capacity other than as CEO of Ubiquity or that any basis
for individual liability exists.
The
Company is currently engaged in settlement discussions to exhaust this debt. The Company has accrued all amounts due under the
the convertible note agreement and judgment.
North
Matter:
On
October 10, 2014, the Company was served with a complaint filed on September 13, 2014 by a former consultant against the Company,
in the Superior Court of Arizona, Maricopa County. The complaint alleges that the consultant was to receive warrants to purchase
1,142,857 shares of common stock as a commencement fees for services in which commenced on December 15, 2006. On October 28, 2016
North was awarded a $7,700,000 default judgment. The Company still believes the claim is without merit; and also still believes
the statute of limitations has passed. The Company recorded a $7.7M loss contingency on the books as of December 31, 2015. The
Company filed a motion to vacate the default judgment and dismiss the action on March 30, 2017, and is set to be heard July 17,
2017. Although the Company booked a $7,700,000 loss contingency it believes the default judgment will be set aside in the near
future.
Pillar
Marketing Group:
On
June 17, 2016 Pillar Marketing sent a demand for arbitration stemming from an alleged breach of contract from an agreement, dated
April 23, 2015, for $45,000 of services. The company has not recorded a loss or contingency for this amount as it does not feel
the balance is owed, and is unable to predict the outcome of the demand. On July 18, 2016, Pillar Marketing Group filed a demand
for arbitration with AAA. No arbitration is currently scheduled.
LG
Capital Funding, LLC
On
June 14, 2016, LG Capital Funding, LLC sued Ubiquity, Inc. claiming that Ubiquity owes LG Capital $238,508.71 under the provisions
of the Convertible Promissory Note (due on April 17, 2016), due to default of filing requirements of Section 8 of the note. Ubiquity
originally received $100,000 on the disputed note, and is unable to predict the outcome of the suit. The Company has accrued all
amounts due under the the convertible note agreement.
Justin
Sundquist, Henry Kingi, and Eagle Flights Stunts, Inc
On
August 9, 2016, the above filed a fraud and securities fraud action against Ubiquity. Plaintiffs were looking for rescission of
their purchases of Ubiquity common stock, and payment to them by Ubiquity of the consideration given for such stock, plus interest
at the legal rate. On October 3, 2016, the case filed by Justin Sundquist and Henry Kingi had been dismissed voluntarily, without
prejudice. On October 14, 2016 the case filed by Justin Sundquist and Henry Kingi was moved to the San Diego United States District
court in accordance with the low number rule. In January 2017, the court granted The Company’s motion to compel arbitration
in Delaware. Mr. Kingi and Mr. Sundquist have filed for Arbitration with the American Arbitration Association claiming damages
of approximately $1.8 million dollars representing approximately 1,444,000 common shares purchased and issued between May 2013
and November 2014. There are no future hearings on calendar, and the Company is unable to predict the future outcome.
Bryan
Harpole
On
May 25, 2016, Bryan Harpole filed a lawsuit claiming a breach of the Employment Agreement, dated January 1, 2012 and related Amendment,
dated July 25, 2013. His unconfirmed claims include the following payments: unpaid salary (including statutory penalties according
to proof pursuant to Labor Code 201 et seq amount undetermined), unpaid commissions ($4,268.25), unpaid bonuses ($55,548.30),
unpaid vacation ($12,694) and sick ($1,731) days, medical insurance premiums ($5,100) and failure to deliver common stock (options)
($25,500) in accordance with the agreement Mr. Harpole would have been required to make full payment of the options as defined
in the stock option agreement and Company’s demand after 30 days of his employment ceasing in the amount of $551,000.00
for the entirety of his 225,000 options or any portion thereof. As of the date of this filing no payment or payment arrangement
has been made by Mr. Harpole, thus rendering the options invalid. Total damages include, but not limited to, $104,841.55 of salary
amounts including statutory penalties plus possible court costs. He also sued for workers’ compensation benefits but was
denied by the insurance carrier as being a false claim on July 25, 2016. Following rounds of demurrers, Bryan Harpole filed a
Second Amended Complaint on March 13, 2017, removing the claims asserted against the officers and directors of the Company. This
Complaint asserts a single cause of action for Breach of Contract against Ubiquity, Inc. This complaint claims the same damages
as previously filed.
Iconic
Holdings, LLC
On
June 3, 2016, Iconic Holdings, LLC sued the Company, claiming that Ubiquity owes Iconic $400,000 under the provisions of the Convertible
Promissory Note due to default of filing requirements of Section 2.00(e)(vi) of the Note. Ubiquity originally received $97,500
on the disputed note. The Company is currently in settlement discussions, andhas accrued all amounts due under the the convertible
note agreement.
American
States Insurance Company
One
June 9, 2016 America States Insurance Company filed a breach of contract against Ubiquity for a total potential amount owed of
$44,904.73. The company contends it cancelled the agreements and is unable to determine the outcome of the breach of contract
claim.
De
Lage Landen Financial Services, Inc.
On
January 29, 2016, De Lage Landen claimed the Company breached its leasing agreement dated on or about May 17, 2011 and claim breached
damages of $29,396.37. The Company has not accounted for an accrual for this claim as it us unable to determine the outcome at
this time. The Company contends it does not owe the balance as the lease was terminated.
William
Alessi
William
Alessi alleges that Ubiquity hired him to work as a consultant on May 21, 2015 and agreed to pay him 1,160,000 shares of common
stock for the service period from May 21, 2015 to May 20, 2016. Alessi contends that the stock was trading at $.36 per share and
was worth $417,600. The Company contends it issued such shares in September 2015 in accordance with the contract and does not
owe anything further.
Other
Contingencies
Conversant,
Inc. Acquisition and Subsequent Termination
On
January 27, 2015, Ubiquity entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ubiquity Merger
Sub, Inc., a wholly owned subsidiary of Ubiquity (“Merger Sub”), and Coversant, Inc. (“Coversant”), providing
for the merger of Merger Sub with and into Coversant (the “Merger”), with Coversant surviving the Merger as a wholly
owned subsidiary of Ubiquity. Coversant’s SoapBox platform is an Internet of Things Service Bus (IoT-SB) that securely and
efficiently connects things (devices, sensors, actuators) to humans, applications and databases for analysis and controls of devices.
SoapBox is designed to federate disparate systems and allow organizations to utilize current legacy equipment that are not able
to communicate with each other to now do so with, in most cases, not having to upgrade hardware or software on the systems themselves.
On
September 8, 2015 the Merger Agreement was terminated. The Company had not taken any steps to integrate Conversant into the operations
of the Company, and the Company has not yet utilized any of the assets of Conversant or combined the financial results of Conversant
into the financials of the Company. The Company believes that the termination of the Merger Agreement will not have a material
effect on its operations.
NOTE
11 - INCOME TAXES
For
the years ended December 31, 2015 and 2014, the Company incurred net losses and therefore has no tax liability. The Company began
operations in 2007 and had net operating loss carry-forwards of approximately that will be carried forward and can be used through
the year 2034 to offset future taxable income. In the future, the cumulative net operating loss carry-forward for income tax purposes
may differ from the cumulative financial statement loss due to timing differences between book and tax reporting.
The
provision for Federal income tax consists of the following for the years ended December 31, 2015 and 2014:
|
|
2015
|
|
|
2014
|
|
Income tax benefit
attributable to:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(12,494,082
|
)
|
|
|
(8,396,722
|
)
|
Permanent differences
|
|
|
4,169,348
|
|
|
|
4,794,619
|
|
Valuation
allowance
|
|
|
8,324,734
|
|
|
|
3,602,103
|
|
Net
provision for income tax
|
|
|
-
|
|
|
|
-
|
|
The
cumulative tax effect at the expected rate of 34% of significant items comprising our net deferred tax amount is as follows as
of December 31, 2015 and 2014:
|
|
|
2,015
|
|
|
|
2,014
|
|
Deferred tax asset attributable to:
|
|
|
|
|
|
|
|
|
Net operating loss carryover
|
|
|
49,934,273
|
|
|
|
41,609,540
|
|
Valuation
allowance
|
|
|
(49,934,273
|
)
|
|
|
(41,609,540
|
)
|
Net deferred
tax asset
|
|
|
-
|
|
|
|
-
|
|
Due
to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry forwards of approximately for Federal
income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carry
forwards may be limited as to use in future years.
The
Company has identified the United States Federal tax returns as its “major” tax jurisdiction. The United States Federal
return years 2010 through 2015 are still subject to tax examination by the United States Internal Revenue Service; however, we
do not currently have any ongoing tax examinations. The Company is subject to examination and currently does not have any ongoing
tax examinations.
NOTE
12 - GOING CONCERN
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
As shown in the accompanying consolidated financial statements, the Company has negative working capital, has incurred operating
losses each of the past two years, and has not yet produced sufficient revenues to cover the cost of operations. These factors
raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities
that might be necessary in the event that the Company cannot continue as a going concern.
The
Company is currently in various negotiations for the licensing of their Sprocket platform, however, no formal terms have been
agreed upon. To date, revenues from licensing agreements have not been sufficient to fund operations. The Company estimates that
approximately $10 million in capital will be needed to fund operations for the next 12 months. Thus, until the Company can generate
sufficient cash flows to fund operations, the Company is dependent on raising additional capital through debt and/or equity transactions.
In addition, the Company may have to renegotiate current convertible debt obligations, reduce certain overhead costs through the
deferral of salaries and other means, defer costs related to the development of their technologies, and settle liabilities through
negotiation. Currently, the Company does not have any commitments or assurances for additional capital, other than disclosed below,
nor can the Company provide assurance that such financing will be available to it on favorable terms, or at all. If, after utilizing
the existing sources of capital available to the Company, further capital needs are identified and the Company is not successful
in obtaining the financing, it may be forced to curtail its existing or planned future operations as discussed above. Subsequent
to year end and through June 12, 2017, the Company received proceeds of $3,954,431 from the issuance of 75,591,448 shares common
stock and did not raise any funds through convertible notes payable.
The
ability of the Company to continue as a going concern is dependent upon the Company’s ability to attain a satisfactory level
of profitability and obtain suitable and adequate financing. There can be no assurance that management’s plan will be successful.
NOTE
13 - SUBSEQUENT EVENTS
Sales
of Common Stock
Subsequent
to December 31, 2015, the Company issued approximately 77,728,749 shares of common stock for cash proceeds of $4,775,743
Each sale was made pursuant to a Securities Purchase Agreement the Company has used for previous sales of its common stock and
containing terms, conditions, representations, and warranties typically found in similar transactions. Each sale was an exempt
private placement with offers and sales made only to “accredited investors” without the use of public advertising
and without registration under the Securities Act in reliance on the exemptions provided by Section 4(a)(2) of the Securities
Act and/or Regulation D promulgated thereunder and in reliance on similar exemptions under applicable state laws.
Common
Stock Issued for Services
Subsequent
to December 31, 2015, the Company issued approximately 17,634,712 shares of common stock for the services valued at $3,495,669.
Common
Stock Issued for Debt
Subsequent
to December 31, 2015, the Company issued approximately 13,235,579 shares of common stock for the settlement of $468,130. Included
in this amount was the amount described below to Nicholas Mitsakos cancellation of debt.
Nicholas
Mitsakos Cancellation of Debt
On
January 4, 2016 Nicholas Mitsakos converted his outstanding debt of $456,881 to 1,986,439 common shares of stock at the rate $0.23
cents per share.
Convertible
Note
On
October 21, 2016, the Company entered into an agreement with a debt holder in which $5,466 in accounts payable was converted to
a convertible promissory note in the same amount. Under the terms of the agreement, the note was immediately convertible at $0.001
per share, incurred interest at 10% and due upon demand. The Company accounted for the transaction in the quarter ended December
31, 2016 when a conversion was requested. The Company determined that a beneficial conversion feature of $5,466 will be recorded
and immediately expensed as interest expense at the time of the original agreement. Assignees of the holder converted $5,466 of
the balance into 5,466,000 shares of common stock, on October 21, 2016.
Other
In
accordance with ASC 855-10, the Company has analyzed its operations subsequent to December 31, 2015 through the date these consolidated
financial statements were issued and has determined that it does not have any material subsequent events to disclose other than
the events described above.
Series
A Preferred Stock
Licensing
On
May 5, 2016 (the “
Effective Date
”) Ubiquity, Inc. (the “
Company
”) entered into a Non-Exclusive
License Agreement (the “
License Agreement
”) with Dash Radio, Inc. (“
Dash Radio
”), a Delaware
corporation. Pursuant to the terms of the License Agreement, the Company agreed to grant to Dash Radio worldwide non-exclusive
license to use its patents and trademarks of the Sprocket technology. As consideration for the granting the non-exclusive license,
Dash Radio shall pay royalties to the Company equal to (1) 5% of the gross sales of the Dash Radio App, (2) an entry fee equal
to one hundred thousand dollars ($100,000). In addition, Dash Radio shall maintain a minimum sales volume of the licensed goods
as described below. If Dash Radio fails to reach the minimum sales volume at any time, then a royalty on the difference between
the minimum sales and the actual sales shall be due and payable 10 days after the close of the calendar year in which the sales
took place.
On
April 24, 2017, the Company entered into an exclusive license agreement with ADGUILD Japan, L.T.D. until December 31, 2021 primarily
licensing its Sprocket, Immersive, and Lifestyle Patents in a predetermined territory. The License has a non-refundable entry
fee in the amount of $3,000,000.00 (THREE MILLION DOLLARS) to be paid out over the term of the agreement. The Company will also
receive royalties of 5% of the gross sales of all licensing related revenue with minimum sales requirements each year as follows,
$575,000 for 2017, $1,250,000 for 2018, $1,500,000 for 2019, $1,750,000 for 2020, and $2,250,000 for 2021.
Board
of Director Activity
On
February 1, 2016, the Board of Directors (the “Board”) of Ubiquity, Inc. (the “Company”), appointed Greg
Jones, 62, as a new member of the Board. He has held key positions in the development of finance, technology and marketing companies
in Asia, U.S., and Australia. Since 2013, Mr. Jones has served as Principal of Kee Capital Group, where he has assisted in raising
finances for various infrastructure projects and developed markets in consumer products leasing for SME’s in Asia and developed
a leasing organization for major items including aviation products, locomotives and rolling stock. Since 2012, Mr. Jones has also
served as the Chairman of Strategic Marketing Services International Limited, located in Hong Kong, where he designed for brand
development and marketing of various products for private companies and agencies. He has also currently serves as a Director of
the Australian College of Arts International Pty Limited, Ausmusic Limited, and Wallace Wine Company.
On
June 1, 2016, Webb Blessley resigned as a member of the Board of Directors (the “Board”) of Ubiquity, Inc. (the “Company”).
Mr. Blessley’s resignation was not related to any disagreement with the Company on any matter relating to the Company’s
operations, policies and practices. The Company accepted Mr. Blessley’s resignation and expressed appreciation for the services
he performed as a director. Mr. Blessley also resigned from his duties as Secretary and Treasurer.
June
8, 2016 - As a part of the corporate restructuring plan of Ubiquity, Inc (the “Company”), on June 8, 2016, Nick Mitsakos,
who was presently Co-Chairman was appointed as Interim Chief Executive Officer and will remain as Co-Chairman of the Company.
Mr. Carmichael who has served the dual roles of CEO and Creative Architect relinquished the role of CEO and remained
Co-Chairman and continue to serve as Chief Creative Architect of the Company. Mr. Carmichael’s relinquishing of his
role as CEO was not related to any disagreement with the Company on any matter relating to the Company’s operations,
policies and practices. The Company expressed appreciation for the services Mr. Carmichael performed as a Chief Executive Officer.
June
10, 2016 - As a part of the corporate restructuring plan of Ubiquity, Inc (the “Company”), on June 10, 2016, Greg
Jones relinquished his role as a board member of Ubiquity, Inc. and rescinded all contracts between himself and Ubiquity, Inc.
Mr. Jones departure was not related to any disagreement with the Company on any matter relating to the Company’s operations,
policies and practices. The Company expressed appreciation for the services Mr. Jones performed as a Board Member.
June
20, 2016 - As a part of the corporate restructuring and growth plan of Ubiquity, Inc (the “Company”), on June 20,
2016, Jonathan Kalbfield signed his contract to become Ubiquity, Inc’s. Chief Technology Officer.
August
12, 2016 - Nicholas Mitsakos resigned as the Interim Chief Executive Officer and as the Co-Chairman and member of the Board of
Directors of Ubiquity, Inc. effective August 12, 2016. Mr. Mitsakos’ resignation was not related to any disagreement with
the Company on any matter relating to the Company’s operations, policies and practices. While serving on the board of directors
and as CEO of the company, Mitsakos failed to advise the board of his SEC investigation into a company owned and solely controlled
by Mitsakos known as Matrix Capital. Matrix Capital has never had any affiliation with Ubiquity, its Officers, Directors, or Shareholders
whatsoever. On June 7, 2017.
On
August 15, 2016, the Board of Directors (the “Board”) of Ubiquity, Inc. (the “Company”), appointed Bola
Ajere, 68, as a new member of the Board. Bola Ajere is the President & CEO and founder of the AMC Consulting Group, a management
and technology consulting company based in Los Angeles, California, specializing in Information Technology, Corporate Governance,
Risk Management and Regulatory Compliance Programs. He is also the CEO and founder of the Sierra Madre Group, an Intellectual
Property Management and manufacturing company. Recently, he founded the AMC Online Media Services Company, a professional online
interactive media company based in Los Angeles, California.
On
April 20, 2017, the Board of Directors (the “
Board
”) of Ubiquity, Inc. (the “
Company
”) voted
to appoint Robert B. Fernander to fill a vacancy on the Company’s Board. The Company entered into a Board of Directors Retention
Agreement (the “
Retention Agreement
”) with Mr. Fernander, pursuant to which the Company agreed to grant 250,000
shares of the Company’s Common Stock for the first year of service under the Retention Agreement, and an additional 250,000
shares of the Company’s Common Stock for each year of service as a director thereafter.
Mr.
Fernander has not been appointed to any committees of the Board at this time; however, the Company expects that he will be appointed
to one or more Board committees in the future. There are no arrangements or understandings between Mr. Fernander and any other
persons pursuant to which Mr. Fernander was appointed a director of the Company.
Potential/Actual
Board Resignations
Bola
Ajere has resigned from his respective position as an independent board member from the Ubiquity Inc. He will consider rejoining
the board if Ubiquity Inc. is able to obtain a D & O insurance with a coverage of $5 million by the end of June 2017.
On
May 25, 2017 Mr. Robert Fernander expressed his intentions to resign from the Board of Directors, should Ubiquity be unable to
secure adequate levels of directors and officers Insurance on or before June 30, 2017.
Interim
CEO Appointment
One
June 20, 2017, at the request of the majority of the Company’s shareholders current chairman Christopher Carmichael has
agreed to become the Company’s Interim Chief Executive Officer and will remain as Chairman of the Company. Mr. Carmichael
who has previously served the dual roles of CEO and Creative Architect will retain the role of interim CEO, Chief Creative Architect,
and Chairman until the shareholders meeting.
Suspension
of Trading
On
March 20, 2017, the Securities and Exchange Commission (“SEC”) announced the temporary suspension of trading in the
securities of Ubiquity, Inc., a Nevada corporation (the “Company or “Ubiquity”) (OTC Link: UBIQ), pursuant to
Section 12(k) of the Securities Exchange Act of 1934 (“Exchange Act”). The trading suspension commenced at 9:30 a.m.
EDT on March 20, 2017, and terminates at 11:59 p.m. EDT on March 31, 2017. The trading suspension may be extended by the SEC for
a period of up to thirty (30) calendar days.
The
SEC stated the following in its release (Release No. 80275)
The
Commission temporarily suspended trading in the securities of Ubiquity due to a lack of current and accurate information about
the company because Ubiquity is delinquent in its requisite periodic filings with the Commission pursuant to Section 13(a) of
the Exchange Act and Rules 13a-1 and 13a-13 thereunder. This order was entered pursuant to Section 12(k) of the Exchange Act.
Periodic
Reports that Have Not Been Filed
Ubiquity
has not filed its Annual Report on Form 10K as of, and for the annual periodending D December 31, 2016, respectively; or any
of the quarterly reports on Form 10Q required under the Exchange Act for 2016.
Administrative
Hearing that May Result in Revocation of Registration Under the Exchange Act
Additionally,
on March 20, 2017, Ubiquity was named as a respondent in an Order Instituting Administrative Proceedings and Notice of Hearing
Pursuant to Section 12(j) of the Exchange Act, File No. 3-17884 (the “Order”). The SEC stated in the Order,
In
view of the allegations made by the Division of Enforcement, the Commission deems it necessary and appropriate for the protection
of investors that public administrative proceedings be instituted to determine [among other things]: … B. Whether it is
necessary and appropriate for the protection of investors to suspend for a period not exceeding twelve months, or revoke the registration,
of each class of securities registered pursuant to Section 12 of the Exchange Act of the Respondent, and any successor under Exchange
Act Rules 12b-2 or 12g-3, regardless of corporate name.
A
related Administrative Procedures Ruling was issued on March 21 and provides that the administrative hearing will be held on April
17, 2017. A pre-hearing conference will be scheduled as required under this Administrative Procedures Ruling.
If
Ubiquity’s registration under Section 12(j) of the Exchange Act is revoked, then Ubiquity’s periodic reporting obligations
under the Exchange Act will terminate and the trading of Ubiquity’s securities will cease unless Ubiquity is able to otherwise
register its securities.
The
Company is assessing its best course of action under the current circumstances to preserve the value of the Company for its shareholders,
including participation in the administrative hearing. There can be no assurance that Company will be able to prevail at the administrative
hearing or that the registration of each class of its securities registered pursuant to Section 12 of the Exchange Act will not
be revoked.
Suspension
of Trading and Pending Administrative Hearing.
As
disclosed on March 20, 2017 in the Form 8-K filed by Ubiquity, Inc., a Nevada corporation (the “
Company
”
or “
Ubiquity
”) (OTC Link: UBIQ), on March 20, 2017, the Securities and Exchange Commission (“
SEC
”)
announced the temporary suspension of trading in the securities of the Company pursuant to Section 12(k) of the Securities Exchange
Act of 1934 (“
Exchange Act
”). The trading suspension commenced at 9:30 a.m. EDT on March 20, 2017, and would
terminate at 11:59 p.m. EDT on March 31, 2017. The trading suspension may be extended by the SEC for a period of up to 30 calendar
days. As stated in its release, the SEC temporarily suspended trading in the securities of Ubiquity due to a lack of current and
accurate information about the company.
The
Company also disclosed that it was named as a respondent in an Order Instituting Administrative Proceedings and Notice of Hearing
Pursuant to Section 12(j) of the Exchange Act, File No. 3-17884 (the “
Hearing
”). The purpose of the Hearing
before an Administrative Law Judge is to determine whether it is necessary and appropriate for the protection of investors to
suspend for a period not exceeding twelve months or revoke the registration, of each class of securities of the Company registered
pursuant to Section 12 of the Exchange Act. The hearing is currently scheduled for April 17, 2017.
Through
its counsel, the Company has been in contact with the SEC regarding the upcoming hearing. In these communications, the Company
has informed the SEC of its plan to get current on outstanding Section 12 filings and become fully compliant as soon as is reasonably
practicable.
The
Restructuring Plan
In
addition, the Company is currently indebted in the amount of approximately $3.1 million to certain hedge funds and other investors
holding convertible debt securities and warrants of the Company. Substantially all of these obligations are currently in default,
either by reason of non-payment or alleged breaches of covenants contained in the various investment agreements.
Since
2015, the Company has been named as a defendant in 16 lawsuits filed by various third parties, primarily consisting of holders
of its debt securities, alleging damages in excess of $3.0 million. In addition, due in part to its prior lack of funds to defend
certain all claims, in some cases, default judgments aggregating approximately $8.0 million were entered against the Company.The
Company has recently retained or is in the process of retaining litigation counsel for all such matters to the extent they are
not resolved in the near future. Litigation counsel is in the process of evaluating the Company’s positions in such matters,
including the possibility of seeking to vacate the default judgments.
Although
the Company believes that under its proposed Restructuring Plan set forth below (the “
Restructuring Plan
”)
,
most, if not all, of the litigation relating to investors who provided debt or equity financing to the Company can be settled
on commercially reasonable terms, there can be no assurance that the Company will be able to settle any of such claims or vacate
any default judgments.
As
indicated in our March 24, 2017 Form 8-K, Ubiquity was unable to file its Annual Reports on Form 10-K as of, and for the annual
periods ending December 31, 2015 and December 31, 2016 or the quarterly reports on Form 10-Q required under the Exchange Act during
2016, for several reasons, including inability to obtain requisite financial information from a Non-U.S. entity. We recently
were able to obtain such financial information and commenced all procedures necessary to enable us to prepare such financial
statements,, including our unaudited financial statements for the three months ended March 31, 2017, and enable our auditors to
audit our financial statements for the two fiscal years ended December 31, 2015 and December 31, 2016 and review such unaudited
interim financial statements.
The
Company intends to undertake a Restructuring Plan described in order to (a) ultimately achieve compliance with its reporting obligation
under the Exchange Act, (b) settle all, if not substantially all, of its outstanding litigation, and (c) implement its business
plan to commercialize its patent portfolio and provide software as a service (SaaS) , mobility as a service (MaaS), virtual and
augmented reality products and services.
Such
Restructuring Plan contemplates the following actions to be taken by the Company:
Compliance
with Exchange Act Reporting Requirements
.
The
Company is currently working with its securities counsel and its independent auditors to complete and file with the SEC on or
before June 30, 2017 or as soon thereafter as is reasonably practicable, its past due periodic SEC required filings.
In
the event that the Company’s registration under Section 12 of the Exchange Act is revoked, or if the Company ultimately
elects to voluntarily delist its securities under the Exchange Act, the Company will nevertheless undertake to complete on or
about June 30, 2017 its audited and unaudited financial statements for the past due fiscal years and interim periods. The Company
will then seek to relist its securities under Section 12 of the Exchange Act, by filing a registration statement under either
the Securities Act of 1933, as amended, or the Exchange Act.
However,
if the Company’s registration under Section 12 of the Exchange Act is revoked, or if the Company ultimately elects to voluntarily
delist its securities under the Exchange Act, even if we comply with our commitments set forth above and in our Restructuring
Plan, there can be no assurance that the Company’s will ever be able to relist its securities for trading under Section
12 of the Exchange Act.
Equity
Financing
Under
our proposed Restructuring Plan, the Company will undertake to obtain commitments from strategic investors for a private placement
equity financing of between $5.0 million and $10.0 million. In such connection, the management of the Company has sent proposed
subscription documents to prospective investors, under which such investors would subscribe to purchase Common Stock at $0.25
per share (subject to certain “make-whole” share adjustments provided therein). All funds provided with subscriptions
would be placed into a special escrow account acceptable to such investors, and shall be released to the Company only upon consummation
of the Restructuring Plan described herein, including the filing of all SEC Reports and (if applicable) relisting of the Company
securities under Section 12 of the Exchange Act. In addition, such subscription agreement provides that each subscribing investor
will have the option, exercisable within ten days of receipt of either (a) the Company’s 2016 Form 10-K Annual Report and
the Form 10-Q Quarterly Report for the three months ended March 31, 2017, or (b) a registration statement covering Company securities
declared effective by the SEC, to rescind his or its investment in Company securities.
There
can be no assurance that the Company will be able to obtain subscriptions for the contemplated minimum $5,000,000 of equity financing
on the above contemplated terms, if at all.
Settlements
with Creditors.
Subject
to establishment of an escrow account with a minimum of $5,000,000, the Company will then seek to negotiate settlements with its
creditors which would include payment or restructuring of the terms of convertible notes currently in default. There can be no
assurance that the Company will be able to effect such settlements on terms acceptable to the Company, if at all.
Reverse
Stock Split
.
Simultaneous
with the filing of the SEC Reports under the Exchange Act or in connection with any subsequent registration statement filed with
the SEC, the board of directors of the Company is considering filing an amendment to the Articles of Incorporation of the Company
to affect a 1:16 to 1:20 reverse stock split of its 800,000,000 authorized shares of Common Stock, and 290,760,132 issued and
outstanding shares of Common Stock. Upon conversion of outstanding convertible notes and warrants approximately an additional
60,000,000 shares of Common Stock are also subject to issuance.
If
such reverse stock split is implemented, the Company would have authorized 53,333,333 shares of Common Stock and 10,000,000 shares
of Preferred Stock authorized under its restated Articles of Incorporation, and approximately 19,384,000 shares of Common Stock
and 500 shares of preferred stock issued and outstanding. Each of the 500 shares of such outstanding preferred stock carries with
it 1,000,000 votes at any regular or special stockholders meeting or in connection with any consents required by stockholders.
All 500 shares of such preferred Stock are owned by Christopher Carmichael, Board of Director and Connie Jordan, the Executive
Vice President of the Company.
Stockholders
Meeting
.
At
such time as the Company has completed its audited financial statements for the fiscal years ended December 31, 2015 and December
31, 2016 and its unaudited interim financial statements, the Company will call a stockholders meeting to (a) elect a board of
directors, which will include, in addition to the current board members, three independent directors; and (b) ratify prior transactions,
including the Restructuring Plan. In any event, whether or not the Restructuring Plan has been accomplished, the Company will
nonetheless hold its annual stockholders meeting on or about September 5, 2017, or as soon thereafter as is practicable.
There
can be no assurance that all or any material portion of the Company’s proposed Restructuring Plan will be accomplished on
or about June 30, 2017, if at all. The failure to achieve all or substantially all of the provisions of such Restructuring Plan
would have a material and adverse effect on the Company and put its ability to continue its business operations into substantial
doubt
;
as a result of which current investors in the Company could lose their entire investment.
Suspension
of Trading and Pending Administrative Hearing.
As
disclosed on March 20, 2017 in the Form 8-K filed by Ubiquity, Inc., a Nevada corporation (the “
Company
”
or “
Ubiquity
”) (OTC Link: UBIQ), on March 20, 2017, the Securities and Exchange Commission (“
SEC
”)
announced the temporary suspension of trading in the securities of the Company pursuant to Section 12(k) of the Securities Exchange
Act of 1934 (“
Exchange Act
”). As stated in its release, the SEC temporarily suspended trading in the securities
of Ubiquity due to a lack of current and accurate information about the Company.
The
Company also disclosed that it was named as a respondent in an Order Instituting Administrative Proceedings (the
OIP
”)
and Notice of Hearing Pursuant to Section 12(j) of the Exchange Act, File No. 3-17884 (the “
Hearing
”). The
purpose of the Hearing before an Administrative Law Judge is to determine whether it is necessary and appropriate for the protection
of investors to suspend for a period not exceeding twelve months or revoke the registration, of each class of securities of the
Company registered pursuant to Section 12 of the Exchange Act. The Hearing was originally scheduled for April 17, 2017.
On
April 7, 2017, the Company, which has been delinquent in its periodic filings following its report for the quarter ended September
30, 2015, filed its Answer to the OIP and advised the SEC and the Administrative Law Judge that it plans to become current by
June 30, 2017. On April 11, 2017, the Administrative Law Judge vacated the April 17, 2017 hearing date and issued a scheduling
order for the SEC’s intended motion for summary disposition, pursuant to 17 C.F.R. § 201.250(b). The SEC served
the Company on June 15, 2017. The Company’s opposition to the SEC’s motion and the SEC’s reply will be due
on July 3, 2017, and July 10, 2017, respectively.
Other
In
accordance with ASC 855-10, the Company has analyzed its operations subsequent to December 31, 2015 through the date these consolidated
financial statements were issued and has determined that it does not have any material subsequent events to disclose other than
the events described above.