MOBIQUITY
TECHNOLOGIES,
INC.
Condensed
Consolidated Statements of Operations (Unaudited)
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue
|
|
$
|
202,020
|
|
|
$
|
42,562
|
|
|
$
|
384,011
|
|
|
$
|
113,494
|
|
|
|
|
202,020
|
|
|
|
42,562
|
|
|
|
384,011
|
|
|
|
113,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service revenue
|
|
|
154,124
|
|
|
|
34,603
|
|
|
|
560,155
|
|
|
|
122,913
|
|
|
|
|
154,124
|
|
|
|
34,603
|
|
|
|
560,155
|
|
|
|
122,913
|
|
Gross Profit
|
|
|
47,896
|
|
|
|
7,959
|
|
|
|
(176,144
|
)
|
|
|
(9,419
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
791,600
|
|
|
|
1,773,670
|
|
|
|
3,816,557
|
|
|
|
5,929,691
|
|
Total Operating Expenses
|
|
|
791,600
|
|
|
|
1,773,670
|
|
|
|
3,816,557
|
|
|
|
5,929,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(743,704
|
)
|
|
|
(1,765,711
|
)
|
|
|
(3,992,701
|
)
|
|
|
(5,939,110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(761,691
|
)
|
|
|
(1,177,734
|
)
|
|
|
(2,652,927
|
)
|
|
|
(2,598,411
|
)
|
Loss on Derivative Instrument
|
|
|
1,608,259
|
|
|
|
1,444,861
|
|
|
|
2,892,290
|
|
|
|
2,201,696
|
|
Initial derivative expense
|
|
|
–
|
|
|
|
–
|
|
|
|
(1,284,704
|
)
|
|
|
(565,780
|
)
|
Loss on disposition of fixed assets
|
|
|
–
|
|
|
|
(17,526
|
)
|
|
|
–
|
|
|
|
(17,526
|
)
|
Loss on Settlement of Debt
|
|
|
(960,177
|
)
|
|
|
–
|
|
|
|
(3,666,374
|
)
|
|
|
–
|
|
Impairment of intangible assets
|
|
|
–
|
|
|
|
–
|
|
|
|
(12,127
|
)
|
|
|
–
|
|
Total Other Income (Expense)
|
|
|
(113,609
|
)
|
|
|
249,601
|
|
|
|
(4,723,842
|
)
|
|
|
(980,021
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss from continuing operations
|
|
$
|
(857,313
|
)
|
|
$
|
(1,516,110
|
)
|
|
$
|
(8,716,543
|
)
|
|
$
|
(6,919,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive (Loss)
|
|
|
–
|
|
|
|
11,129
|
|
|
|
13,047
|
|
|
|
(9,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from operations of discontinued entity
|
|
|
7,053
|
|
|
|
(155,014
|
)
|
|
|
(237,244
|
)
|
|
|
(602,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Comprehensive Loss
|
|
$
|
(850,260
|
)
|
|
$
|
(1,659,995
|
)
|
|
$
|
(8,940,740
|
)
|
|
$
|
(7,531,454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
192,860,824
|
|
|
|
82,656,917
|
|
|
|
178,527,374
|
|
|
|
81,619,169
|
|
See notes to condensed consolidated financial statements.
MOBIQUITY
TECHNOLOGIES,
INC.
Consolidated
Statements of Cash Flows (Unaudited)
Nine Months Ended September 30,
|
|
2017
|
|
|
2016
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,716,543
|
)
|
|
$
|
(6,919,131
|
)
|
Net loss-discontinued operations
|
|
|
(237,245
|
)
|
|
|
(602,663
|
)
|
|
|
|
(8,953,788
|
)
|
|
|
(7,521,794
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation Expense
|
|
|
2,994
|
|
|
|
81,394
|
|
Amortization - Intangible Assets
|
|
|
14,700
|
|
|
|
14,700
|
|
Amortization - Debt discount
|
|
|
2,061,307
|
|
|
|
1,878,002
|
|
Stock-based compensation
|
|
|
516,629
|
|
|
|
512,949
|
|
Common stock issued for services
|
|
|
314,310
|
|
|
|
122,750
|
|
Initial derivative expense
|
|
|
1,284,704
|
|
|
|
565,780
|
|
Disposal of assets
|
|
|
–
|
|
|
|
17,526
|
|
Gain on change in derivative
|
|
|
(2,892,291
|
)
|
|
|
(2,201,696
|
)
|
Gain on settlement of debt
|
|
|
3,666,374
|
|
|
|
–
|
|
Loss on disposition of fixed assets
|
|
|
12,241
|
|
|
|
–
|
|
Expenses paid from note
|
|
|
567,737
|
|
|
|
–
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(205,026
|
)
|
|
|
–
|
|
Inventory
|
|
|
–
|
|
|
|
–
|
|
Prepaid expenses and other assets
|
|
|
(7,654
|
)
|
|
|
(49,906
|
)
|
Accounts payable
|
|
|
(123,198
|
)
|
|
|
290,019
|
|
Accrued expenses and other current liabilities
|
|
|
(121,332
|
)
|
|
|
72,463
|
|
Accrued interest
|
|
|
471,637
|
|
|
|
656,431
|
|
Total adjustments
|
|
|
5,563,132
|
|
|
|
1,963,412
|
|
Net Cash Used in Operating Activities
|
|
|
(3,390,656
|
)
|
|
|
(5,558,382
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
–
|
|
|
|
(253,145
|
)
|
Net Cash Used in Investing Activities
|
|
|
–
|
|
|
|
(253,145
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Convertible notes issued for cash, net
|
|
|
2,378,000
|
|
|
|
2,840,376
|
|
Proceeds from issuance of common stock
|
|
|
311,250
|
|
|
|
–
|
|
Proceeds received from exercising warrants
|
|
|
95,834
|
|
|
|
–
|
|
Cash paid for accrued interest
|
|
|
(3,140
|
)
|
|
|
–
|
|
Proceeds from the collection of stock subscription receivable
|
|
|
456,503
|
|
|
|
–
|
|
Proceeds for the issuance of preferred stock
|
|
|
–
|
|
|
|
400,000
|
|
Net Cash Provided by Financing Activities
|
|
|
3,238,447
|
|
|
|
3,240,376
|
|
|
|
|
|
|
|
|
|
|
Net (Decrease) in Cash and Cash Equivalents
|
|
|
(152,209
|
)
|
|
|
(2,571,151
|
)
|
Cash and Cash Equivalents, beginning of period
|
|
|
193,934
|
|
|
|
130,489
|
|
Cash and Cash Equivalents, end of period
|
|
$
|
41,725
|
|
|
$
|
(2,440,662
|
)
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure Information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
–
|
|
|
$
|
61,192
|
|
Cash paid for taxes
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Non-cash Disclosures:
|
|
|
|
|
|
|
|
|
Conversion of note and interest into AAA Preferred and common stock
|
|
$
|
2,706,196
|
|
|
$
|
–
|
|
Extinguishment of convertible promissory notes
|
|
$
|
960,178
|
|
|
$
|
–
|
|
Stock issued for interest
|
|
$
|
–
|
|
|
$
|
449,297
|
|
Original debt discount against derivative liabilities
|
|
$
|
–
|
|
|
$
|
1,079,016
|
|
See notes to condensed consolidated
financial statements.
MOBIQUITY TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(UNAUDITED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
NATURE OF OPERATIONS – On September
10, 2013, Mobiquity Technologies, Inc. changed its name from Ace Marketing & Promotions, Inc. “the Company” or
“Mobiquity”). We operate through two wholly-owned U.S. subsidiaries, namely, Mobiquity Networks, Inc. and Ace Marketing
& Promotions, Inc. Mobiquity Networks owns 100% of Mobiquity Wireless S.L.U, a company incorporated in Spain. This corporation
had an office in Spain to support our U.S. operations, which office was closed in the fourth quarter of 2016.
We operate a national
location-based mobile advertising network that has developed a consumer-focused proximity network. Our integrated suite of proprietary
location based mobile advertising technologies allows clients to execute more personalized and contextually relevant experiences,
driving brand awareness and incremental revenue.
Mobiquity Technologies,
Inc., a New York corporation (OTCQB: MOBQ). Through its wholly-owned subsidiary, Mobiquity Networks, Inc. has evolved and grown
from a mobile advertising technology company focused on Driving Awareness and Foot-traffic throughout its indoor mall-based beacon
network, into a next generation mobile location data and marketing company. The Company provides precise unique, at-scale location
based data and insights on consumer’s real-world behavior and trends for use in marketing and research. With our combined
data sets beacon data, and first party location data via our advanced Software Development Kit (SDK) utilizing multiple geo-location
technologies; Mobiquity Networks provides one of the most accurate and scaled solution for mobile data collection and analysis.
This should create several revenue streams, including, but not limited to; Push Notification Campaigns, Re-targeting Campaigns,
Data Licensing,
Audience Profiles, Attribution Reporting and Custom Research.
Ace Marketing is our
legacy marketing and promotions business which provides integrated marketing services to our commercial customers. While Ace Marketing
currently represents a substantial portion of our revenue, as anticipated the activity from Ace Marketing was a diminishing portion
of corporate revenue as our attention is principally focused on developing and executing on opportunities in our Mobiquity Networks
business. Certain assets and liabilities of Ace Marketing were sold in the fourth quarter of 2017 and will no longer be an operating
entity for Mobiquity Technologies.
GOING CONCERN - The accompanying consolidated
financial statements have been prepared assuming the Company will continue as a going concern. The Company's continued existence
is dependent upon the Company's ability to obtain additional debt and/or equity financing to advance its new technology revenue
stream. The Company has incurred losses for the three months and nine months ended September 30, 2017. As of September 30, 2017,
the Company has an accumulated deficit of $60,135,881. The Company has had negative cash flows from operating activities of $3,232,160
for the nine months ended September 30, 2017. These factors raise substantial doubt about the ability of the Company to continue
as a going concern.
Management has plans
to address the Company’s financial situation as follows:
In the near term, management
plans to continue to focus on raising the funds necessary to implement the Company’s business plan related to mobile location
data. Management will continue to seek out both equity and debt financing to obtain the capital required to meet the Company’s
financial obligations. There is no assurance, however, that lenders and investors will continue to advance capital to the Company
or that the new business operations will be profitable. The possibility of failure in obtaining additional funding and the potential
inability to achieve profitability raises doubts about the Company’s ability to continue as a going concern.
In the long term, management
believes that the Company’s projects and initiatives will be successful and will provide cash flow to the Company that will
be used to finance the Company’s future growth. However, there can be no assurances that the Company’s efforts to raise
equity and debt at acceptable terms or that the planned activities will be successful, or that the Company will ultimately attain
profitability. The Company’s long-term viability depends on its ability to obtain adequate sources of debt or equity funding
to meet current commitments and fund the continuation of its business operations, and the ability of the Company to achieve adequate
profitability and cash flows from operations to sustain its operations.
PRINCIPLES OF CONSOLIDATION - The accompanying
consolidated financial statements include the accounts of Mobiquity Technologies, Inc., formerly known as Ace Marketing & Promotions,
Inc., and its wholly owned subsidiaries, Mobiquity Networks, Inc., Ace Marketing, Inc., (which has had its name changed to Ace
Marketing & Promotions, Inc.). All intercompany accounts and transactions have been eliminated in consolidation.
The Condensed Consolidated Balance
Sheets as of September 30, 2017, the Condensed Consolidated Statements of Operations for the three months and nine months ended
September 30, 2017 and 2016 and the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017
and 2016 have been prepared by us without audit, and in accordance with the requirements of Form 10-Q and, therefore, they do not
include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash
flows in conformity with accounting principles generally accepted in the United States of America. In our opinion, the accompanying
unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly in all material respects
our financial position as of September 30, 2017, results of operations for the three and nine months ended September 30, 2017 and
2016 and cash flows for the nine months ended September 30, 2017 and 2016. All such adjustments are of a normal recurring nature.
The results of operations and cash flows for the three and nine months ended September 30, 2017 are not necessarily indicative
of the results to be expected for the full year. We have evaluated subsequent events through the filing of this Form 10-Q with
the Securities and Exchange Commission, and determined there have not been any events that have occurred that would require adjustments
to our unaudited Condensed Financial Statements.
The information contained
in this report on Form 10-Q should be read in conjunction with our Form 10-K for our fiscal year ended December 31, 2016.
ESTIMATES - The preparation of financial
statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS- The
Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance
on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability,
as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that
market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes
a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques,
are assigned a hierarchical level.
The following are the
hierarchical levels of inputs to measure fair value:
|
·
|
Level 1 - Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities.
|
|
|
|
|
·
|
Level 2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
|
|
|
·
|
Level 3 - Unobservable inputs reflecting the Company's assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
|
The carrying amounts
of the Company's financial assets and liabilities, such as cash, prepaid expenses, other current assets, accounts payable &
accrued expenses, certain notes payable and notes payable - related party, approximate their fair values because of the short maturity
of these instruments.
The Company accounts
for its derivative liabilities, at fair value, on a recurring basis under level 3.
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Fair value of derivatives
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
821,834
|
|
|
$
|
821,834
|
|
Embedded Conversion Features
The Company evaluates
embedded conversion features within convertible debt under ASC 815 "Derivatives and Hedging" to determine whether the
embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with
changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the
instrument is evaluated under ASC 470-20 "Debt with Conversion and Other Options" for consideration of any beneficial
conversion feature.
Derivative Financial Instruments
The
Company has financial instruments that are considered derivatives or contain embedded features subject to derivative accounting
related to 12 convertible notes issued totaling $2,136,500 which included a ratchet provision in the conversion price of
$.05 or $.30 or a price equal to the last equity transaction completed by the Company as part of a subscription agreement
.
The notes have maturity dates ranging from July 31, 2017 – February 27, 2018. The Company also has financial instruments
that are considered derivatives or contain embedded features subject to derivative accounting
related to 500,000 warrants
which included a ratchet provision in the conversion price of $.05 as part of a conversion of preferred AAA shares, and 1,000,000
warrants which included a ratchet provision in the conversion price of $.055 as part of a placement fee related to a note
.
Embedded derivatives are valued separately from the host instrument and are recognized as derivative liabilities in the Company’s
balance sheet. The Company measures these instruments at their estimated fair value and recognizes changes in their estimated
fair value in results of operations during the period of change. The Company has estimated the fair value of these embedded derivatives
for convertible debentures and associated warrants using a multinomial lattice model as of September 30, 2017. The fair values
of the derivative instruments are measured each quarter, which resulted in a gain of $2,892,291 and derivative expense of $1,284,704
during the period ended September 30, 2017. As of September 30, 2017, the fair market value of the derivatives aggregated $821,834
using the following assumptions: estimated 0.1 to 4.58-year term, estimated volatility of 92.80% to 338.04%, and a discount rate
of 0.00% to 1.47%.
Cash and cash equivalents
include money market securities that are considered to be highly liquid and easily tradable as of September 30, 2017 and December
31, 2016. These securities are valued using inputs observable in active markets for identical securities and are therefore classified
as Level 1 within our fair value hierarchy.
The carrying amounts
of financial instruments, including accounts receivable, accounts payable and accrued liabilities, and promissory note, approximated
fair value as of September 30, 2017 and December 31, 2016, because of the relatively short-term maturity of these instruments and
their market interest rates. No instruments are carried at fair value.
CASH AND CASH EQUIVALENTS
-
The Company considers all highly liquid debt instruments with a maturity of three months or less, as well as bank money market
accounts, to be cash equivalents. As of September 30, 2017, and December 31, 2016, the balances were $213,268 and $193,934, respectively.
CONCENTRATION OF CREDIT RISK
-
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of trade receivables
and cash and cash equivalents.
Concentration of credit
risk with respect to trade receivables is generally diversified due to the large number of entities comprising the Company's customer
base and their dispersion across geographic areas principally within the United States. The Company routinely addresses the financial
strength of its customers and, as a consequence, believes that its receivable credit risk exposure is limited.
The Company places
its temporary cash investments with high credit quality financial institutions. At times, the Company maintains bank account balances,
which exceed FDIC limits. As of September 30, 2017, and December 31, 2016, the Company exceeded FDIC limits by $0 and $0,
respectively.
REVENUE RECOGNITION — The Company
recognizes revenue, for all revenue streams, when it is realized or realizable and estimable in accordance with ASC 605,
"Revenue
Recognition".
The Company will recognize revenue only when all of the following criteria have been met:
|
·
|
Persuasive evidence for an agreement exists;
|
|
·
|
Service has been provided;
|
|
·
|
The fee is fixed or determinable; and,
|
|
·
|
Collection is reasonably assured.
|
ACE MARKETING —
Ace Marketing's revenue is recognized when title and risk of loss transfers to the customer and the earnings process is complete.
In general, title passes to our customers upon the customer's receipt of the merchandise. Revenue is recognized on a gross basis
since Ace Marketing has the risks and rewards of ownership, latitude in selection of vendors and pricing, and bears all credit
risk. Advance payments made by customers are included in customer deposits. Ace Marketing records all shipping and handling fees
billed to customers as revenues and related costs as cost of goods sold, when incurred. Additional source of revenue, derived from
emails/texts directly to consumers are recognized under contractual arrangements. Revenue from this advertising method is recognized
at the time of service provided.
MOBIQUITY NETWORKS
– Revenue is recognized with the billing of an advertising contract or data licensing sale. The customer signs a contract
directly with us for an advertising campaign with mutually agreed upon term and is billed on the start date of the advertising
campaign, which are normally in short duration periods. The second type of revenue is through the licensing of our data. Revenue
from data can occur in two ways; the first is a direct feed, which is billed at the end of each month. The second way is through
the purchasing of audience segments. When an audience segment is purchased, we bill the buyer upon reported usage, which is usually
30 days from the order date.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - Management
must make estimates of the collectability of accounts receivable. Management specifically analyzes accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment
terms when evaluating the adequacy of the allowance for doubtful accounts. As of September 30, 2017, and December 31, 2016, allowance
for continuing operations doubtful accounts were $0.00 and $0.00, respectively.
INVENTORY - Inventory is recorded at cost
(First In, First Out) and is comprised of finished goods. The Company maintains an inventory on hand for its largest customer's
frequent order items. All items held are branded for the customer, therefore are not available for public distribution. The Company
has an agreement with this customer, for cost recovery, if vendor relationship is terminated. There have been minimal reserves
placed on inventory, based on this arrangement. As of September 30, 2017, and December 31, 2016, the Company has reserved against
$0.00 and $0.00, respectively.
PROPERTY AND EQUIPMENT - Property and equipment
are stated at cost. Depreciation is expensed using the straight-line method over the estimated useful lives of the related assets.
Leasehold improvements are being amortized using the straight-line method over the estimated useful lives of the related assets
or the remaining term of the lease. The costs of additions and improvements, which substantially extend the useful life of a particular
asset, are capitalized. Repair and maintenance costs are charged to expense. When assets are sold or otherwise disposed of, the
cost and related accumulated depreciation are removed from the account and the gain or loss on disposition is reflected in operating
income.
LONG LIVED ASSETS - Long-lived assets such
as property, equipment and identifiable intangibles are reviewed for impairment whenever facts and circumstances indicate that
the carrying value may not be recoverable. When required impairment losses on assets to be held and used are recognized based on
the fair value of the asset. The fair value is determined based on estimates of future cash flows, market value of similar assets,
if available, or independent appraisals, if required. If the carrying amount of the long-lived asset is not recoverable from its
undiscounted cash flows, an impairment loss is recognized for the difference between the carrying amount and fair value of the
asset. When fair values are not available, the Company estimates fair value using the expected future cash flows discounted at
a rate commensurate with the risk associated with the recovery of the assets. The company recognized $223,487 impairment losses
for the period ended December 31, 2016 and $12,127 for the nine months ended September 30, 2017.
WEBSITE TECHNOLOGY - Website technology
developed during the prior years were capitalized for the period of development and testing. Expenditures during the planning
stage and after implementation have been expensed in accordance with ASC 985.
ADVERTISING COSTS
-
Advertising costs are expensed as incurred. For the nine months ended September 30, 2017 and September 30, 2016, there were advertising
costs of $0 and $3,129, respectively.
ACCOUNTING FOR STOCK BASED COMPENSATION.
Stock based compensation cost is measured at the grant date fair value of the award and is recognized as expense over the requisite
service period. The Company uses the Black-Sholes option-pricing model to determine fair value of the awards, which involves certain
subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options
before exercising them ("expected term"), the estimated volatility of the Company's common stock price over the expected
term ("volatility") and the number of options for which vesting requirements will not be completed ("forfeitures").
Changes in the subjective assumptions can materially affect estimates of fair value stock-based compensation, and the related amount
recognized on the consolidated statements of operations. Refer to Note 6 "Stock Option Plans" in the Notes to Consolidated
Financial Statements
in
this report for a more detailed discussion.
BENEFICIAL CONVERSIONS - Debt instruments
that contain a beneficial conversion feature are recorded as deemed interest to the holders of the convertible debt instruments.
The beneficial conversion is calculated as the difference between the fair values of the underlying common stock less the proceeds
that have been received for the debt instrument limited to the value received.
FOREIGN CURRENCY TRANSLATIONS - The Company's
functional and reporting currency is the U.S. dollar. We owned a subsidiary in Europe. Our subsidiary's functional currency is
the EURO. All transactions initiated in EUROs are translated into U.S. dollars in accordance with ASC 830-30,
"Translation
of Financial Statements,"
as follows:
|
(i)
|
Monetary assets and liabilities at the rate of exchange in effect at the balance sheet date.
|
|
|
|
|
(ii)
|
Fixed assets and equity transactions at historical rates.
|
|
|
|
|
(iii)
|
Revenue and expense items at the average rate of exchange prevailing during the period.
|
Adjustments arising
from such translations are deferred until realization and are included as a separate component of stockholders' equity as a component
of comprehensive income or loss. Therefore, translation adjustments are not included in determining net income (loss) but reported
as other comprehensive income. The subsidiary has since been closed down with foreign operations now being conducted back in the
United States.
INCOME TAXES - Deferred income taxes are
recognized for temporary differences between financial statement and income tax basis of assets and liabilities for which income
tax or tax benefits are expected to be realized in future years. A valuation allowance is established to reduce deferred tax assets,
if it is more likely than not, that all or some portion of such deferred tax assets will not be realized. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
We have reviewed the
FASB issued Accounting Standards Update ("ASU") accounting pronouncements and interpretations thereof that have effectiveness
dates during the periods reported and in future periods. The Company has carefully considered the new pronouncements that alter
previous generally accepted accounting principles and does not believe that any new or modified principles will have a material
impact on the corporation's reported financial position or operations in the near term. The applicability of any standard is subject
to the formal review of our financial management and certain standards are under consideration.
NOTE 2: LOSS PER SHARE
Basic loss per common
share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period.
Dilutive loss per share gives effect to stock options and warrants, which are considered to be dilutive common stock equivalents.
Basic loss per common share was computed by dividing net loss by the weighted average number of shares of common stock outstanding.
The number of common shares potentially issuable upon the exercise of certain options and warrants that were excluded from the
diluted loss per common share calculation was approximately 100,796,390 because they are anti-dilutive as a result of a net loss
for the three and nine months ended September 30, 2017.
NOTE 3: CONVERTIBLE PROMISSORY NOTES
Summary of Convertible
Promissory Notes:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Arnost Note
|
|
$
|
–
|
|
|
$
|
322,000
|
|
Cavu Notes net of $0 for 2017 and $8,379 for 2016
|
|
|
100,000
|
|
|
|
241,621
|
|
Berg Notes (a)
|
|
|
50,000
|
|
|
|
3,722,000
|
|
Investor Note, net of discounts
|
|
|
100,000
|
|
|
|
6,546,654
|
|
Secured Debt (b) net of $425,311 for 2017 and $0 for 2016
|
|
|
2,326,189
|
|
|
|
-0-
|
|
Total Debt
|
|
|
2,576,189
|
|
|
|
10,832,275
|
|
Current portion of debt
|
|
|
2,576,189
|
|
|
|
10,832,275
|
|
Long-term portion of debt
|
|
$
|
–
|
|
|
$
|
–
|
|
|
(a)
|
Between August and December 2015, the Company borrowed $3,675,000 from accredited investors. These loans are due and payable the earlier of December 31, 2016 or the completion of an equity financing of at least $2,500,000. Upon the sale of the unsecured promissory notes, the Company issued $1 of principal, one share of common stock and a warrant to purchase one share of common stock at an exercise price of $0.40 per share through August 31, 2017. Accordingly, an aggregate of 3,675,000 shares of common stock and warrants to purchase a like amount were issued in the last six months of 2015. Each noteholder has the right to convert the principal of their note and accrued interest thereon at a conversion price of $0.30 per share or at the noteholder’s option, into equity securities of the Company on the same terms as the last equity transaction completed by the Company prior to each respective conversion date.
|
|
|
|
|
(b)
|
On February 28, 2017, the Company
entered into an agreement with two non-affiliated persons to provide $1.6 million of short term secured debt
financing in three monthly tranches. The Company will issue in connection with each tranche, a six-month secured
convertible promissory note. In connection with this transaction, the Company agreed to issue an origination fee of
3,200,000 warrants. Alexander Capital L.P. acted as Placement Agent and Advisor for this transaction. In August
and September 2017, the noteholders exchanged their $1,100,000 of notes that were coming due in August 2017 plus a 30% premium and accrued interest for new six-month notes in the
principal amount of $1,501,500. As additional consideration for the exchange, the Company
issued 366,667 shares of common stock. The loss recognized on the extinguishment of debt is $960,177.
|
The
Company has financial instruments that are considered derivatives or contain embedded features subject to derivative accounting
related to 12 convertible notes issued totaling $2,136,500 which included a ratchet provision in the conversion price of
$.05 or $.30 or a price equal to the last equity transaction completed by the Company as part of a subscription agreement
.
The notes have maturity dates ranging from July 31, 2017 – February 27, 2018. The Company also has financial instruments
that are considered derivatives or contain embedded features subject to derivative accounting
related to 500,000 warrants
which included a ratchet provision in the conversion price of $.05 as part of a conversion of preferred AAA shares, and 1,000,000
warrants which included a ratchet provision in the conversion price of $.055 as part of a placement fee related to a note
.
Embedded derivatives are valued separately from the host instrument and are recognized as derivative liabilities in the Company’s
balance sheet. The Company measures these instruments at their estimated fair value and recognizes changes in their estimated
fair value in results of operations during the period of change. The Company has estimated the fair value of these embedded derivatives
for convertible debentures and associated warrants using a multinomial lattice model as of September 30, 2017. The fair values
of the derivative instruments are measured each quarter, which resulted in a gain of $2,892,291 and derivative expense of $1,284,704
during the period ended September 30, 2017. As of September 30, 2017, the fair market value of the derivatives aggregated $821,834
using the following assumptions: estimated 0.1 to 4.58-year term, estimated volatility of 92.80% to 338.04%, and a discount rate
of 0.00% to 1.47%.
In April 2016 through
the filing date of this Form 10-Q, the Company issued and sold 12% unsecured promissory notes in the principal amount of $1,025,000,
convertible at $0.20 per common share. Upon conversion, the note holders would receive 100% warrant coverage, exercisable at $0.20
per common share over a period of five years with cashless exercise provisions. These notes automatically convert in the event
at least $5 million is raised in an equity financing. Prior to the mandatory conversion date, note holders have the option to convert
the principal and accrued interest also on the same terms as the mandatory conversion and the Company has the option to prepay.
The fair values of the derivative instruments are measured each quarter, which resulted in a gain of $2,892,291 and initial derivative
expense of $1,284,704. As of December 31, 2016, the fair market value of these derivatives aggregated $126,275, using the following
assumptions: estimated 0.3 year term, estimated volatility of 279%, and a discount rate of 0.51%. As of September 30, 2017, the
fair market value of the derivatives aggregated $1,152,499 using the following assumptions: estimated 0.1 to 4.58-year term, estimated
volatility of 92.80% to 338.04% and the discount rate of 0.00% to 1.47%
The Company
raised $700,000 in the third quarter of 2016 from the sale of secured promissory notes in the principal amount of $700,000
from six accredited investors. Each Note was scheduled to be repaid on October 31, 2016, extended to December 15, 2016 but
payment was not made. In lieu of interest on the Note, 4,900,000 restricted shares of common stock were issued to the Note
Holders. At the option of the Note Holder, each Note shall be convertible at the lower of $.20 per common share or into
securities on the same terms of the next completed equity offering of at least $10 million in gross proceeds. In the event
the Note is converted into common stock, 100% warrant conversion shall be provided to the Note Holder for each share of
common stock issued upon conversion. These warrants will have a term of three years and shall be exercisable at $.20 per
common share. Prior to this offering, Thomas Arnost, Executive Chairman, has a secured interest in the amount of $322,000 in
the assets of the Company and its subsidiaries. Mr. Arnost has agreed that the investors in this offering will have a pari
passu first secured interest with Mr. Arnost in all assets of the Company and its subsidiaries. The fair values of the
derivative instruments are measured each quarter, which resulted in a gain of $11,071. As of December 31, 2016, the fair
market value of these derivatives aggregated $42,945, using the following assumptions: estimated volatility of 279.0%, and a
discount rate of 0.51%. As of September 30, 2017, the fair market value of these derivatives aggregated $1,152,499, using the
following assumptions: expected volatility of 92.80% to 338.04% and a discount rate of 0.00% to 1.47%.
In February 2017, The
Company debt holders converted $3,672,000 of notes being converted at 0.05 per share into 73,440,000 shares of common stock.
In February 2017, the
Company reported that all of its Series AA preferred stock and substantially all of its outstanding debt both secured and unsecured
(approximately $12.1 million) have been converted into equity securities of the Company as outlined below. It should be noted that
the capital transactions below were based on a premium to the average closing sale price of $0.045 per share during the 60 day
period prior to February 08, 2017. The Company had outstanding 1,122,588 shares of newly designated Series AAA preferred stock
and $1,350,000 of convertible notes. The convertible notes consist of $1,200,000 of secured notes and $150,000 of unsecured notes.
Of the 1,122,588 shares of Series AAA preferred stock outstanding, 240,000 Series AA preferred stock with an original cost basis
of $2.4 million were converted into Series AAA preferred stock. The remaining 882,588 shares of Series AAA preferred stock were
issued in exchange for the conversion of principal and accrued interest of approximately $11,854,038 of unsecured debt. This conversion
resulted in a loss on extinguishment of debt of $2,706,197. The terms of the Series AAA preferred stock can be summarized as follows:
The price of each preferred
share shall be, at the option of the holder, convertible into 100 shares of Common Stock. If the preferred shares are converted,
the subscriber will then receive 100% warrant coverage, with each warrant exercisable at $.05 per share with a cash payment to
the Company through the close of business on December 31, 2019. The preferred shares have no voting or other preferences except
as required by law other than the right of conversion described above and a liquidation preference equal to $.01 per share.
In February 2017, Thomas
Arnost, our Executive Vice Chairman, and another principal stockholder agreed to convert letters of credit in the principal amount
of $2,700,000 and $322,000 of secured debt into shares of common stock at the then marketing price of $.05 per share. Accrued interest
on these obligations were either previously converted into our common stock or were upon conversion of the principal, converted
into common stock at the fair market value of our common stock at each interest accrual date.
Between August and
September 2017, the Company issued $750,000 of secured notes due in six months to various investors. The notes are convertible
at $.05 per share through the maturity date, subject to adjustment in the event of default. A total of 750,000 origination shares
of common stock were issued to the noteholders. Thomas Arnost, Chairman of the Company, invested $100,000 in the loan transaction.
NOTE 4: STOCKHOLDERS'
DEFICIT
In December 2015, the
Company sold 200,000 shares of its Series AA Preferred Stock at a purchase price of $10 per share and raised $2 million. Each share
of Preferred Stock is convertible into 50 shares of Common Stock at an effective conversion price of $.20 per share of Common Stock.
The Preferred Stockholder has anti-dilution protection rights through December 31, 2016. In the first quarter of 2016, the Company
sold an additional 40,000 shares of its Series AA Preferred Stock and raised $400,000. In 2017, the Company exchanged 240,000 shares
of AA preferred stock for AAA preferred stock. Also in 2017, the Company issued an additional 882,588 shares of AAA preferred stock
in exchange for outstanding debt and accrued interest. The AAA Preferred shares at a purchase price of $10 per share shall be,
at the option of the holder, convertible into 100 shares of Common Stock. If the preferred shares are converted, the subscriber
will then receive 100% warrant coverage, with each warrant is exercisable at $0.05 per share with an expiration date of December
31, 2019. The preferred shares have no voting or other preferences except as required by law other than the right of conversion
described above and a liquidation preference equal to $.01 per share. During the six months ended June 30, 2017, 5,000 AAA Preferred
shares were converted to 500,000 shares of common stock.
Between February 2017
and September 30, 2017, preferred stockholders owning 15,000 shares of Series AAA Preferred Stock have exchange their preferred
shares for 1,500,000 common shares and Warrants to purchase an equivalent amount of shares.
Shares issued for services
During the quarter
ended March 31, 2017, the Company issued 3,800,000 common shares, at $0.06 to $0.13 per share, valued at $314,310. During the second
and third quarters of 2017, the Company issued no common shares for services.
Shares issued for accrued interest
During the quarter
ended March 31, 2017, the Company issued 3,919,620 common shares, at $0.04 to $0.05 per share, valued at $194,790 and AAA preferred
shares of 47,588, at $10.00 per share, valued at $475,841. No shares were issued for interest during the quarter ended June 30,
2017. During the quarter ended September 30, 2017 the Company issued 32,544 common shares, at $0.09 per share, valued
at $3,074.
During the year entered
December 31, 2016, the Company issued 1,000,000 common shares in satisfaction of back rent owed the landlord in the sum of $57,157.
The shares were valued at $20,000 and a gain on settlement of debt was recorded of $36,177.
During the year ended
December 31, 2016, the Company issued 11,908,335 common shares, at $0.05 per share, valued at $594,417 for the exercise of outstanding
warrants. During the quarter ended March 31, 2017, the Company issued 1,916,667 shares, at $0.05 per share, valued at $95,834 for
cash for the exercise of outstanding warrants.
See Note 3 above for
a discussion of certain stock transactions.
NOTE 5: STOCK-BASED COMPENSATION
Compensation costs
related to share-based payment transactions, including employee stock options, are recognized in the financial statements utilizing
the straight-line method for the cost of these awards.
The Company's results
for the three months ended September 30, 2017 and 2016 include employee share-based compensation expense totaling $91,300 and $163,500,
respectively. The Company’s results for the nine-month periods ended September 30, 2017 and 2016 include share based compensation
expense totaling approximately $516,600 and $512,900, respectively. Such amounts have been included in the Condensed Consolidated
Statements of Operations within selling, general and administrative expenses. No income tax benefit has been recognized in the
statement of operations for share-based compensation arrangements due to a history of operating losses.
The following table
summarizes stock-based compensation expense for the three and nine months ended September 30, 2017 and 2016:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Employee stock-based compensation - option grants
|
|
$
|
91,271
|
|
|
$
|
142,040
|
|
|
$
|
394,129
|
|
|
$
|
437,699
|
|
Employee stock-based compensation - stock grants
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Non-Employee stock-based compensation - option grants
|
|
|
–
|
|
|
|
21,500
|
|
|
|
11,500
|
|
|
|
75,250
|
|
Non-Employee stock-based compensation - stock grants
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Non-Employee stock-based compensation-stock warrant
|
|
|
–
|
|
|
|
–
|
|
|
|
111,000
|
|
|
|
–
|
|
Total
|
|
$
|
91,271
|
|
|
$
|
163,540
|
|
|
$
|
516,629
|
|
|
$
|
512,949
|
|
NOTE 6: STOCK OPTION PLAN
During Fiscal 2005,
the Company established, and the stockholders approved, an Employee Benefit and Consulting Services Compensation Plan (the "2005
Plan") for the granting of up to 2,000,000 non-statutory and incentive stock options and stock awards to directors, officers,
consultants and key employees of the Company. On June 9, 2005, the Board of Directors amended the Plan to increase the number of
stock options and awards to be granted under the Plan to 4,000,000. During Fiscal 2009, the Company established a plan of long-term
stock-based compensation incentives for selected Eligible Participants of the Company covering 4,000,000 shares. This plan was
adopted by the Board of Directors and approved by stockholders in October 2009 and shall be known as the 2009 Employee Benefit
and Consulting Services Compensation Plan (the "2009 Plan"). In September 2013, the Company's stockholders approved an
increase in the number of shares covered by the 2009 Plan to 10,000,000. In February 2015, the board approved, subject to stockholder
approval within one year, an increase in the number of shares under the 2009 Plan to 20,000,000 shares. (The 2005 and 2009 Plans
are collectively referred to as the "Plans" and the Company has a combined 14,000,000 shares, which will increase to
24,000,000 shares upon stockholder approval of the increase in the 2009 Plan, available for issuance under the Plans.)
In the first quarter
of 2016, the Board approved and stockholders ratified a 2016 Employee Benefit and Consulting Services Compensation Plan covering
10,000,000 shares (the “2016 Plan”) and approving moving all options which exceeded the 2009 Plan limits to the 2016
Plan.
All stock options under
the Plans are granted at or above the fair market value of the common stock at the grant date. Employee and non-employee stock
options vest over varying periods and generally expire either 5 or 10 years from the grant date. The fair value of options at the
date of grant was estimated using the Black-Scholes option pricing model. For option grants, the Company will take into consideration
payments subject to the provisions of ASC 718 "Stock Compensation", previously Revised SFAS No. 123 "Share-Based
Payment" ("SFAS 123 (R)"). The fair values of these restricted stock awards are equal to the market value of the
Company's stock on the date of grant, after taking into certain discounts. The expected volatility is based upon historical volatility
of our stock and other contributing factors. The expected term is based upon observation of actual time elapsed between date of
grant and exercise of options for all employees. Previously, such assumptions were determined based on historical data.
The weighted average
assumptions made in calculating the fair values of options granted during the three and nine months ended September 30, 2017 and
2016 are as follows:
|
|
Three Months Ended
September 30
|
|
|
Nine Months Ended
June 30
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Expected volatility
|
|
|
0.00%
|
|
|
|
131.39%
|
|
|
|
146.77%
|
|
|
|
134.23%
|
|
Expected dividend yield
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Risk-free interest rate
|
|
|
0.00%
|
|
|
|
0.97%
|
|
|
|
1.89%
|
|
|
|
1.24%
|
|
Expected term (in years)
|
|
|
0.00%
|
|
|
|
5.00
|
|
|
|
5.00
|
|
|
|
5.00
|
|
|
|
Share
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding, January 1, 2017
|
|
|
18,315,001
|
|
|
|
0.41
|
|
|
|
5.14
|
|
|
$
|
5,625
|
|
Granted
|
|
|
250,000
|
|
|
|
0.05
|
|
|
|
4.3
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Cancelled & Expired
|
|
|
(1,050,000
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2017
|
|
|
17,515,001
|
|
|
|
0.39
|
|
|
|
4.68
|
|
|
$
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, September 30, 2017
|
|
|
17,037,918
|
|
|
|
0.39
|
|
|
|
4.65
|
|
|
$
|
2,000
|
|
The weighted-average
grant-date fair value of options granted during the nine months ended September 30, 2017 and 2016 was $0.05 and $0.10, respectively.
The aggregate intrinsic
value of options outstanding and options exercisable at September 30, 2017 is calculated as the difference between the exercise
price of the underlying options and the market price of the Company's common stock for the shares that had exercise prices, that
were lower than the $0.04 closing price of the Company's common stock on September 30, 2017.
As of September 30,
2017, the fair value of unamortized compensation cost related to unvested stock option awards was $290,783.
The weighted average
assumptions made in calculating the fair value of warrants granted during the three and nine months ended September 30, 2017 and
2016 are as follows:
|
|
Three Months Ended
September 30
|
|
|
Nine Months Ended
September 30
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Expected volatility
|
|
|
0.00%
|
|
|
|
0.00%
|
|
|
|
151.49%
|
|
|
|
0.00%
|
|
Expected dividend yield
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Risk-free interest rate
|
|
|
0.00%
|
|
|
|
0.00%
|
|
|
|
1.88%
|
|
|
|
0.00%
|
|
Expected term (in years)
|
|
|
0.00
|
|
|
|
–
|
|
|
|
4.75
|
|
|
|
–
|
|
|
|
|
Share
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding, January 1, 2017
|
|
|
|
21,252,734
|
|
|
$
|
0.48
|
|
|
|
1.40
|
|
|
$
|
–
|
|
|
Granted
|
|
|
|
5,700,000
|
|
|
$
|
0.07
|
|
|
|
3.50
|
|
|
|
–
|
|
|
Exercised
|
|
|
|
(1,916,667
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
Expired
|
|
|
|
(3,492,221
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
Outstanding, September 30, 2017
|
|
|
|
21,543,846
|
|
|
$
|
0.37
|
|
|
|
1.51
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercisable, September 30, 2017
|
|
|
|
21,543,846
|
|
|
$
|
0.37
|
|
|
|
1.51
|
|
|
$
|
–
|
|
NOTE 7: COMMITMENTS AND CONTINGENCIES
COMMITMENTS –
In April 2011, we entered
into our agreement with Simon Property Group, which agreement was amended first in September 2013 and then in July 2014. This second
amendment provides for us to expand our location-based mobile mall network footprint to about 195 current Simon malls across the
United States. Our agreement with Simon currently expires December 31, 2017. Simon is entitled to receive fees from us equal to
the greater of a pre-set per mall fee or a percentage of revenues derived from within the Simon Mall network. The revenue share
agreement in which Simon participates will exceed the minimum annual mall fees if the Company has generated revenues within the
Simon network of about $15 million or more in a calendar year. Our agreement with Simon requires the company to maintain letters
of credit for each calendar year under the agreement represented by the minimum amount of fees due for such calendar year. For
2015, the minimum fees of $2.7 million has been secured through two bank letters of credit, one of which was issued in the amount
of $1,350,000 utilizing the funds of a non-affiliated stockholder and the second letter of credit was obtained in the same amount
through the funds of Thomas Arnost, our Executive Chairman. In the event Simon draws down upon either letter of credit, we have
until the next minimum payment due date (approximately 90 days) after the draw down to obtain replacement letters of credit. Each
person who secured our letters of credit has the opportunity to notify us that they wish to turn the cash funds securing the letters
of credit over to us and to convert such funds into Common Stock currently at a conversion price of $.20 per share. Also, each
person who issued the letter of credit is receiving quarterly, while the letters of credit are outstanding, options to purchase
125,000 shares of Common Stock, exercisable at the prevailing market price per share on the date of grant and interest at the rate
of 8% per annum on the monies that they have had to set aside in their bank accounts and are unable to have access to such monies.
In April, July and October 2016 and January and April 2017, Simon drew down on each bank letter of credit for an aggregate of $1,350,000
owed to each letter of credit provider, prior to terminating the agreement in September 2017 for failure to pay their agreed upon
fees. During the first quarter of 2017, the Letter of Credit holders converted the entire $2,700,000 into 54,000,000 shares of
Common Stock.
Pursuant to a master
agreement effective August, 2015, we entered into an agreement with PREIT pursuant to which we have the right to install our Mobi-Beacons
and to send information across the air space of the common areas of our PREIT mall network, which will include approximately 27
malls in select states in the United States. Our right to install our Mobi-Beacons to market and sell third party paid advertising
in the interior common areas of these malls is exclusive. Under our agreement between us and PREIT, PREIT is entitled to an agreed
upon revenue share over the four-year term of the agreement. In the event the net revenue share as defined in the agreement is
not attained for any measurement period, also as defined in the agreement, either party may terminate the agreement upon 90 days
prior written notice. PREIT may also terminate the agreement if it determines that Mobiquity’s installed equipment is not
adequate and/or provides a negative user experience for the visitors to the PREIT malls. The agreement also provides for PREIT
to adjust the number of malls subject to the agreement from time-to-time based upon changes in its beneficial ownership in the
malls.
Pursuant to a master
agreement entered into in 2015, we entered into an agreement with Rouse pursuant to which we have the right to install our Mobi-Beacons
to send information across the air space of the common areas of our Rouse mall network, which will include approximately 30 malls
in select states in the United States. Our right to install our Mobi-Beacons to market and sell third party paid advertising in
the interior common areas of these malls is exclusive. Under our agreement between us and Rouse, Rouse is entitled to an agreed
upon revenue share over the four-year term of the agreement. In the event the net revenue share as defined in the agreement is
not attained for any measurement period, also as defined in the agreement, either party may terminate the agreement upon 90 days
prior written notice. Either party may also terminate the agreement due to a material breach which is not cured within 30 days
of written notice. Also, Rouse upon at least 60 days written notice to us prior to the end of the second contract year, may terminate
the agreement with respect to any participating property for any reason at the end of the second contract year. The agreement also
provides for Rouse to adjust the number of malls subject to the agreement from time-to-time based upon changes in its beneficial
ownership in the malls.
In February 2012, the
Company entered into a lease agreement for new executive office space of approximately 4,200 square feet located at 600 Old Country
Road, Suite 541, Garden City, NY 11530. The lease agreement was for 63 months, commencing April 2012 and expired in June 2017.
The annual rent under this office facility for the first year was about $127,000, including electricity, subject to an annual increase
of 3%. The Company owes approximately $57,504 under this lease which is currently in collections.
Our lease for approximately
2,000 square feet of space at an annual cost of approximately $30,100 (inclusive of taxes) at 1105 Portion Road, Farmingville,
NY 11738 expired in November 2013. We currently lease this property on a month to month basis for approximately $2,500 per month
beginning December 2014, with a 5% increase in rent each year.
In March of 2014, we
entered into a month-to-month lease agreement for approximately 400 square feet of office space located in Manhattan, NY at a monthly
cost of $3,700. In May of 2015 we moved to a larger location with the same landlord on a month to month basis for $7,500 per month.
In June of 2017, we
entered into a month-to-month lease agreement for approximately 1,600 square feet of office space located in Uniondale New York
at a monthly cost of $6,500 for the months of July and August 2017.
Minimum future rentals
under non-cancelable lease commitments are as follows:
YEARS ENDING DECEMBER 31,
|
|
|
|
|
|
2017
|
|
|
|
–
|
|
|
2018
|
|
|
|
–
|
|
|
2019 and thereafter
|
|
|
|
–
|
|
|
|
|
|
$
|
–
|
|
Rent and real
estate tax expense was approximately $1,090,118 and $2,801,090 for the nine months ended September 30, 2017 and 2016, of
which $969,521 and $2,634,837 were related to mall rents, respectively. Rent and real estate tax expense was
approximately $36,499 and $886,312 for the three months ended September 30, 2017 and 2016, of which $0.00 and $825,218 were
related to mall rents, respectively.
EMPLOYMENT CONTRACTS –
Michael D. Trepeta and Dean L. Julia
On March 1, 2005, the
Company entered into employment contracts with two of its officers, namely, Dean L. Julia and Michael D. Trepeta. The employment
agreements provide for minimum annual salaries plus bonuses equal to 5% of pre-tax earnings (as defined) and other perquisites
commonly found in such agreements. In addition, pursuant to the employment contracts, the Company granted the officers options
to purchase up to an aggregate of 400,000 shares of common stock.
On August 22, 2007,
the Company approved a three-year extension of the employment contracts with two of its officers expiring on February 28, 2011.
The employment agreements provided for minimum annual salaries with scheduled increases per annum to occur on every anniversary
date of the contract and extension commencing on March 1, 2008. A signing bonus of options to purchase 150,000 shares granted to
each executive were fully vested at the date of the grant and exercisable at $1.20 per share through August 22, 2017. Ten year
options to purchase 50,000 shares of common stock are to be granted at fair market value on each anniversary date of the contract
and extension commencing March 1, 2008. Termination pay of one year base salary based upon the scheduled annual salary of each
executive officer for the next contract year, plus the amount of bonuses paid (or entitle to be paid) to the executive for the
current fiscal year of the preceding fiscal year, whichever is higher.
On April 7, 2010, the
Board of Directors approved a five-year extension of the employment contract of Dean L. Julia and Michael D. Trepeta to expire
on March 1, 2015. The Board approved the continuation of each officer’s current salary and scheduled salary increases on
March 1
st
of each year. The Board also approved a signing bonus of stock options to purchase 200,000 shares granted
to each officer which is fully vested at the date of grant and exercisable at $.50 per share through April 7, 2020; ten-year stock
options to purchase 100,000 shares of Common Stock to be granted to each officer at fair market value on each anniversary date
of the contract and extension thereof commencing March 1, 2011; and termination pay of one year base salary based upon the scheduled
annual salary of each executive officer for the next contract year plus the amount of bonuses paid or entitled to be paid to the
executive for the current fiscal year or the preceding fiscal year, whichever is higher. In the event of termination, the executives
will continue to receive all benefits included in the employment agreement through the scheduled expiration date of said employment
agreement prior to the acceleration of the termination date thereof.
In July 2012, the Company
approved and in January 2013 the Company implemented amending the employment agreements of Messrs. Julia and M. Trepeta to expire
on February 28, 2017, subject to an automatic one- year renewal on March 1, 2013 and on each March 1
st
thereafter, unless
the Employment Agreement is terminated in accordance with its terms on or before December 30
th
of the prior calendar
year. In the event of termination without cause, the executives will continue to receive all salary and benefits included in the
employment agreement through the scheduled expiration date of said employment agreement prior to the acceleration of the termination
date thereof, plus one-year termination pay.
On May 28, 2013, the
Company approved amending the employment agreements of Messrs. Julia and Trepeta to provide that each officer may choose an annual
bonus equal to 5% of pre-tax earnings for the most recently completed year before deduction of annual bonuses paid to officers
or, in the event majority control of the Company is acquired by a person or a group of persons during the prior fiscal year, the
officer may choose to receive the aforementioned bonus or 1% of the control consideration paid by acquirer(s) to acquire majority
control of the Company.
Separation Agreement
In April 2017, Michael
Trepeta entered into a separation agreement with the Company pursuant to which he resigned as an executive officer and director.
There is currently a vacancy in the Board of Directors of the Company. After his resignation, the Board changed Dean Julia’s
title from Co-Chief Executive Officer to Chief Executive Officer.
Pursuant to Michael
Trepeta’s separation agreement, Mr. Trepeta is entitled to the following benefits:
|
·
|
Six months’ coverage under the Company’s existing director/officer insurance policy;
|
|
·
|
Indemnification per existing employment agreement;
|
|
·
|
Expense reimbursement through May 31, 2017;
|
|
·
|
All options vested shall continue until their normal expiration date; and
|
|
·
|
Mutual releases.
|
Thomas Arnost
In December 2014,
we entered into a three-year employment agreement with Thomas Arnost serving as Executive Chairman of the board. Mr. Arnost
receives a monthly salary of $10,000 plus an annual grant of options for serving on the board of directors. In the event of
his termination, by Mr. Arnost or by the company for cause, Mr. Arnost will receive his pay through the termination date. In
the event that Mr. Arnost is terminated without cause, he shall be entitled to receive his salary paid through the end of the
term of his agreement. Mr. Arnost may terminate the agreement at any time by giving three months’ prior written notice
to our board of directors. Mr. Arnost will also be entitled to indemnification against all claims, judgments, damages,
liabilities, costs and expenses (including reasonably legal fees) arising out of, based upon or related to his performance of
services to us, to the maximum extent permitted by law.
Sean Trepeta
In December 2014, Mobiquity
Networks entered into an employment agreement with Sean Trepeta, to serve as President of Mobiquity Networks as an employee at
will. Mr. Trepeta, as a full-time employee, is to be paid a salary at the rate of $20,000 per month. Upon the execution of the
agreement, he received 10-year options to purchase 1,500,000 shares of our common stock vesting quarterly over a period of three
years. For calendar 2015, he will be entitled to a bonus of $125,000 upon revenues of Mobiquity Networks achieving a minimum of
$6 million in revenues and a further bonus of $125,000 for a total of $250,000 at such time as Mobiquity Network’s revenues
achieve a minimum of $12 million, it being understood that any revenues which do not have a 30% margin shall not count toward these
totals. All options granted to Mr. Trepeta will become immediately vested in the event of a change in control of our Company or
sale of substantially all of our assets. In the event we terminate Mr. Trepeta without cause, after six months of continued
employment under the employment agreement, Mr. Trepeta is entitled to receive three months’ severance pay.
Paul Bauersfeld
In December 2014, we
entered into an employment agreement with Paul Bauersfeld, our Chief Technology Officer, who is an employee at will. Mr. Bauersfeld,
as a full-time employee, is to be paid a salary at the rate of $25,000 per month. Upon the execution of the agreement, he received
10-year options to purchase 1,000,000 shares of our common stock vesting quarterly over a period of three years. For calendar 2015,
he will be entitled to a bonus of $125,000 upon revenues of Mobiquity Networks achieving a minimum of $6 million in revenues and
a further bonus of $125,000 for a total of $250,000 at such time as Mobiquity Network’s revenues achieve a minimum of $12
million, it being understood that any revenues which do not have a 30% margin shall not count toward these totals. The foregoing
compensatory arrangements with Mr. Bauersfeld is in addition to the non-statutory stock options to purchase 2,600,000 shares of
our common stock previously granted to Mr. Bauersfeld. All options granted to Mr. Bauersfeld will become immediately vested
in the event of a change of control of our company or sale of substantially all of our assets. In the event we terminate Mr. Bauersfeld
without cause. Mr. Bauersfeld is entitled to receive six months’ severance pay.
Sean McDonnell
Sean McDonnell, our
Chief Financial Officer, is an employee at will and is currently receiving a salary of $132,000 per annum.
TRANSACTIONS WITH MAJOR CUSTOMERS —
The Company sells its
branded merchandise to a geographically diverse group of customers, performs ongoing credit evaluations of its customers and generally
does not require collateral. During the three and nine months ended September 30, 2017 two customers accounted for approximately
41% and 40%, respectively, of net revenues and for the three and nine months ended September 30, 2016, a customer accounted for
approximately 41% and 41%, respectively, of net revenues. The Company holds on hand certain items that are ordered on a regular
basis.
NOTE 8: DISCONTINUED OPERATION
In October 2017, the Company sold its Branded
Merchandise segment. Management committed to a plan to sell this segment early September 2017, following a strategic
decision to place greater focus on the Group’s key competencies – i.e. next generation mobile location data. By providing
precise unique, at-scale location based data insights on consumer’s real-world behavior and trends for use in marketing and
research.
|
A.
|
Results of discontinued operation
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,764,513
|
|
|
$
|
1,042,790
|
|
Expenses
|
|
|
2,001,757
|
|
|
|
1,645,453
|
|
(Loss) from discontinued operation, net
|
|
$
|
(237,244
|
)
|
|
$
|
(602,663
|
)
|
|
B.
|
Cash flows from (used in) discontinued operation
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(237,244
|
)
|
|
$
|
(602,663
|
)
|
Net cash from investing activities
|
|
$
|
–
|
|
|
$
|
–
|
|
Net increase (decrease) cash flows for the period
|
|
$
|
(202,470
|
)
|
|
$
|
(650,177
|
)
|
|
C.
|
Effect of disposal on the financial position of the Group
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
Property, equipment and intangibles, net
|
|
$
|
(3,043
|
)
|
|
$
|
(5,933
|
)
|
Inventories, net
|
|
|
(107,960
|
)
|
|
|
(79,291
|
)
|
Token liabilities
|
|
|
276,853
|
|
|
|
314,643
|
|
Net assets and liabilities
|
|
$
|
165,850
|
|
|
$
|
229,419
|
|
Consideration received, satisfied in cash
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
NOTE 9: SUBSEQUENT EVENTS
There are no subsequent
events required to be disclosed in the Notes to Financial Statements through the date of the report, except as follows: On October
17, 2017, the Company received relief of certain liabilities and cash consideration of $150,000 from the sale of specific assets
fixed and intangibles of Ace Marketing & Promotions, Inc. relating to its promotional products distribution company. These
assets were sold to a group represented by a principal of one of Ace’s customers. The sale also included various unpaid
inventory, which was offset by certain liabilities. As a result of the asset sale of Ace, the Company is able to focus all of
its management and employee effort and financial resources in developing the business of Mobiquity Networks, Inc., its wholly-owned
subsidiary.