MEDISWIPE,
INC.
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CONDENSED
CONSOLIDATED BALANCE SHEETS
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March 31,
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December 31,
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2013
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2012
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(Unaudited)
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ASSETS
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Current Assets:
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Cash and cash equivalents
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$
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9,873
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$
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1,892
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Accounts receivable
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17,716
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14,133
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Deferred financing costs
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5,083
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2,203
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Prepaid assets and other
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2,200
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-
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Total current assets
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$
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34,872
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$
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18,228
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LIABILITIES AND STOCKHOLDERS DEFICIENCY
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Current Liabilities:
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Accounts payable and accrued expenses
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$
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127,409
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$
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99,130
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Deferred compensation
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72,122
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40,880
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Convertible debt, net of discounts of $59,324 (2013)
and $19,648 (2012)
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29,176
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35,852
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Derivative liabilities
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95,474
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38,590
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Litigation contingency
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46,449
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46,449
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Total current liabilities
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370,630
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260,901
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Commitments and Contingencies
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STOCKHOLDERS DEFICIENCY
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Series B convertible preferred stock, $0.01 par value;
1,000,000 shares authorized, 800,000 shares issued and outstanding
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8,000
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8,000
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Common stock, $.01 par value; 500,000,000 shares authorized;
470,581,444 (2013) shares and 466,632,164 (2012) shares issued and outstanding
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4,705,817
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4,666,324
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Additional paid-in capital
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229,648
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202,372
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Deferred stock compensation
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(133,249)
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(222,083)
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Accumulated deficit
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(5,145,974)
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(4,897,286)
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Total stockholders' deficiency
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(335,758)
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(242,673)
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Total liabilities and stockholders'
deficiency
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$
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34,872
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$
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18,228
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See notes to condensed consolidated financial statements.
MEDISWIPE,
INC.
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CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
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(Unaudited)
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Three
Months Ended March 31, 2013
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Three
Months Ended March 31, 2012
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Fee revenue, net
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$
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49,818
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$
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26,124
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Operating Expenses:
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Administrative and management fees (including $44,417
(2013) stock based compensation)
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109,9174
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25,900
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Professional and consulting fees (including $59,917
(2013) stock based compensation)
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88,919
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2,350
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Commissions
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31,200
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8,512
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Rent and other occupancy costs
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3,752
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5,726
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Advertising and promotion
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3,644
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-
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Other general and administartive expenses
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26,051
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11,834
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Total operating expenses
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263,483
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54,322
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Operating loss
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(213,665)
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(28,198)
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Other Income (Expense):
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Interest expense
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(29,930)
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(46,124)
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Derivative liability (expense) income
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(5,093)
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44,712
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Total other expense, net
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(35,023)
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(1,412)
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Net loss
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(248,688)
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(29,610)
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Less: net loss attributable to noncontrolling interest
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-
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282
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Net loss attributable to Mediswipe, Inc.
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$
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(248,688)
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$
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(29,328)
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Basic and diluted loss attributable to Mediswipe, Inc.
common stockholders, per share
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$
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(0.00)
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$
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(0.00)
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Weighted average number of common shares outstanding
- Basic and diluted
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466,709,378
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374,993,995
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See notes to condensed consolidated financial statements.
MEDISWIPE,
INC
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CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
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THE
THREE MONTHS ENDED MARCH 31, 2013 AND 2012
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(Unaudited)
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Three
Months Ended March 31, 2013
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Three
Months Ended March 31, 2012
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CASH FLOWS FROM OPERATING ACTIVITIES
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Net loss
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$
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(248,688)
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$
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(29,610)
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Adjustments to reconcile net loss to net cash used
in operating activities:
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Stock issued for consulting services
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15,500
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-
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Amortization of deferred stock compensation
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88,834
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-
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Amortization of deferred financing costs
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2,120
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2,807
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Amortization of discount on convertible notes
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25,324
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40,329
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Change in fair market value of derivative liabilities
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(144)
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(44,713)
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Initial derivative liability expense on convertible
notes
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5,237
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-
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Changes in operating assets and liabilities:
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Increase in :
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Accounts receivable
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(3,583)
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(680)
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Prepaid assets and other
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(2,200)
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-
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Increase in :
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Accounts payable and accrued expenses
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34,339
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6,753
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Deferred compensation
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31,242
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22,500
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Net cash used in operating activities
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(52,019)
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(2,613)
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Cash flows from financing activities:
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Proceeds from issuance of convertible debt
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65,000
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-
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Payment of deferred financing costs
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(5,000)
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-
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Net cash provided by financing activities
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60,000
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-
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Net increase (decrease) in cash and cash equivalents
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7,981
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(2,613)
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Cash and cash equivalents, beginning
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1,892
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3,355
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Cash and cash equivalents, ending
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$
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9,873
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$
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742
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Supplemental disclosure of cash flow information:
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Cash paid for interest
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$
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-
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$
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-
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Cash paid for income taxes
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$
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-
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$
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-
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Schedule of non-cash financing activities:
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Conversion of notes payable and interest into common
stock
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$
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38,060
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$
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10,000
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See notes to
condensed consolidated financial statements.
MEDISWIPE, INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
BUSINESS
MediSwipe Inc. (the “Company”
or “Mediswipe”) offers a complete line of merchant services providing innovative solutions for electronically processing
merchant and patient transactions within the healthcare industry. The Company is primarily focused on providing payment and banking
solutions to licensed medical marijuana dispensaries, pharmacies and healthcare patient facilities.
Through June 30, 2012, the Company provided
merchant services to approximately forty medical dispensaries and wellness centers throughout California and Colorado through our
sponsor bank Electronic Merchant Systems (“EMS”). Effective July 1, 2012, EMS advised all medical dispensaries that
they will no longer accept their Visa and MasterCard transactions. This action had a materially adverse effect on our business.
The Company
has utilized its existing banking and merchant network and moved toward vertical markets within both the medicinal medical marijuana
and healthcare sector over the last several months. During the three months ended March 31, 2013, through strategic partnerships
with banking and financing partners the Company received commission based fees for
arranging for third party financing for
elective surgery procedures
.
In April
2013 and in partnership with Digital Records Inc. of Florida, the Company is now introducing its proprietary
Data Management
System (DMS). DMS is designed specifically for medicinal dispensaries in regulated jurisdictions. The DMS application is a HIPAA
compliant, web-secure document repository and collaboration system, developed exclusively for the medical marijuana industry. DMS
includes patient registration, digital records management and tracking of all caregiver transactions, including log-in time, date
stamp and quantity and type of medication prescribed. DMS was developed by industry leaders in document imaging and management,
patient work-flow, and cloud-based web solutions to provide patients, caregivers, dispensaries, labs, providers and certification
centers with the industry's first complete, cloud-based network collaboration system.
The patient records management
system within DMS features include the importing, scanning, emailing and faxing of all medical records and many other novel functions.
DMS provides our users a manner to effectively manage their documents in one central, HIPAA compliant, secure repository.
The Company’s DMS's infrastructure
is the only system available to the medical marijuana industry that allows patients, caregivers, dispensaries, laboratories, providers
and certification centers to communicate, educate and operate in an environment promoting checks and balances. DMS is extremely
unique and has been developed around the concept of promoting to patients the idea of becoming proactive, rather than reactive
with their healthcare and to follow the right side of State Law. In addition, it is our desire to allow our clients to operate
in an environment that will allow them to anticipate any changes to Federal and State Laws, such as the likelihood of state required
patient monitoring systems, akin to those currently required for the sale of other narcotics.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
BASIS OF PRESENTATION AND PRINCIPLES
OF CONSOLIDATION
The accompanying condensed consolidated
financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to
present the financial position, results of operations and cash flows for the stated periods have been made. Except as described
below, these adjustments consist only of normal and recurring adjustments. Certain information and note disclosures normally included
in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted. These condensed financial statements should be read in conjunction with
a reading of the Company’s consolidated financial statements and notes thereto included in the Company’s Form 10-K
annual report filed with the Securities and Exchange Commission (SEC) on April 2, 2013. Interim results of operations for the three
months ended March 31, 2013 are not necessarily indicative of future results for the full year. Certain amounts from the 2012 period
have been reclassified to conform to the presentation used in the current period.
The condensed consolidated financial
statements include the accounts of the Company and 800 Commerce, until May 10, 2012 when 800 Commerce sold shares of its common
stock to third parties resulting in the Company no longer holding a controlling interest in 800 Commerce. All material intercompany
balances and transactions have been eliminated.
NONCONTROLLING INTEREST AND DECONSOLIDATION
On January 1, 2011, the Company
adopted authoritative accounting guidance that requires the ownership interests in subsidiaries held by parties other than the
parent, and income attributable to those parties, be clearly identified and distinguished in the parent’s consolidated financial
statements. The Company’s noncontrolling interest is now disclosed as a separate component of the Company’s consolidated
equity deficiency on the balance sheets. Earnings and other comprehensive income are separately attributed to both the controlling
and noncontrolling interests. Earnings per share are calculated based on net income attributable to the Company’s
controlling interest.
From January 1, 2011 through May 31,
2011, the Company owned 100% of 800 Commerce. From June 1, 2011 through October 1, 2011 800 Commerce sold 465,000 shares of its
common stock and issued 3,534,000 shares of its common stock to its officers as compensation. After these transactions, the Company
owned 60% of 800 Commerce. On May 10, 2012, 800 Commerce sold 3,150,000 shares of its common stock, reducing the Company’s
ownership to 45%. On May 18, 2012, 800 Commerce sold 1,500,000 shares of its common stock, reducing the Company’s ownership
to 40%. On June 10, 2012 issued 1,500,000 shares of common stock pursuant to a consulting agreement and 1,851,000 shares of common
stock for legal services and in lieu of compensation, and since June 30, 2012, 800 Commerce has sold 500,000 shares of its common
stock and issued 500,000 shares of its common stock pursuant to a consulting agreement. Subsequent to these issuances the Company
currently owns approximately 32% of the outstanding common stock of 800 Commerce. Effective May 10, 2012, the Company is no longer
consolidating 800 Commerce in its’ financial statements. The noncontrolling interest included in the Company’s consolidated
statement of operations is a result of noncontrolling interest investments in 800 Commerce up to the date of deconsolidation of
May 10, 2012. Noncontrolling interests through May 10, 2012 are classified in the condensed consolidated statements of operations
as part of consolidated net loss.
Subsequent to May 10, 2012, the Company’s
investment in 800 Commerce is accounted for using the equity method and was reduced to zero.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid
investments with an original term of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
The Company records accounts receivable from
amounts due from its processors. The Company charges certain merchants for processing services at a bundled rate based on a percentage
of the dollar amount of each transaction and, in some instances, additional fees are charged for each transaction. The Company
charges other merchant customers a flat fee per transaction, and may also charge miscellaneous fees to our customers, including
fees for returns, monthly minimums, and other miscellaneous services. All the charges and collections thereon flow through our
processors who then remit the fee due the Company within the month following the actual charges.
DEFERRED FINANCING COSTS
The costs related to the issuance of debt are
capitalized and amortized to interest expense using the straight-line method through the maturities of the related debt.
REVENUE RECOGNITION
The Company recognizes revenue in accordance
with FASB ASC 605, Revenue Recognition. ASC 605 requires that four basic criteria are met: (1) persuasive evidence of an arrangement
exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectability is reasonably
assured.
The Company recognizes revenue during the month in which
commissions are earned.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value measurements are determined
under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to measure fair
value, distinguishing between market participant assumptions developed based on market data obtained from sources independent of
the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant
assumptions developed based on the best information available in the circumstances (“unobservable inputs”).
Fair value is the price that would be
received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction
between market participants at the measurement date. In determining fair value, the Company primarily uses prices and other relevant
information generated by market transactions involving identical or comparable assets (“market approach”). The Company
also considers the impact of a significant decrease in volume and level of activity for an asset or liability when compared with
normal activity to identify transactions that are not orderly.
The highest priority is given to unadjusted
quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level
3 measurements). Securities are classified in their entirety based on the lowest level of input that is significant to the fair
value measurement.
The three hierarchy levels are
defined as follows:
Level 1 – Quoted
prices in active markets that is unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted
prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in
active markets or financial instruments for which significant inputs are observable, either directly or indirectly;
Level 3 – Prices
or valuations that require inputs that are both significant to the fair value measurement and unobservable.
Credit risk adjustments are applied
to reflect the Company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent
with that applied in developing counterparty credit risk adjustments, but incorporates the Company’s own credit risk as observed
in the credit default swap market.
The Company's financial instruments
consist primarily of cash, accounts payable and accrued expenses, and convertible debt. The carrying amounts of such financial
instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest
rates of these instruments. The estimated fair value is not necessarily indicative of the amounts the Company would
realize in a current market exchange or from future earnings or cash flows.
INCOME TAXES
The Company accounts for income
taxes in accordance with ASC 740-10, Income Taxes. Deferred tax assets and liabilities are recognized to reflect the estimated
future tax effects, calculated at the tax rate expected to be in effect at the time of realization. A valuation allowance related
to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
ASC 740-10 prescribes a recognition
threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on
recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues.
Interest and penalties are classified as a component of interest and other expenses. To date, the Company has not been assessed,
nor paid, any interest or penalties.
Uncertain tax positions are measured
and recorded by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may
be recognized or continue to be recognized. The Company’s tax years subsequent to 2005 remain subject to examination by federal
and state tax jurisdictions.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are computed
in accordance with ASC 260, "Earnings per Share". Basic earnings (loss) per share is computed by dividing net income
(loss), after deducting preferred stock dividends accumulated during the period, by the weighted-average number of shares of common
stock outstanding during each period. Diluted earnings per share is computed by dividing net income by the weighted-average number
of shares of common stock, common stock equivalents and other potentially dilutive securities, if any, outstanding during the period.
There were not any outstanding warrants or options as of March 31, 2013 and 2012. As of March 31, 2013, the Company’s
outstanding convertible debt is convertible into 3,817,232 shares of common stock and 800,000 shares of Class B convertible preferred
stock is convertible into 376,465,155 shares of common stock. These amounts are not included in the computation of dilutive loss
per share because their impact is antidilutive.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock awards
issued to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. The measurement date is the earlier
of (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the
date at which the counterparty's performance is complete. Stock awards granted to non-employees are valued at their respective
measurement dates based on the trading price of the Company’s common stock and recognized as expense during the period in
which services are provided.
For the three months ended March 31,
2013 and 2012 the Company recorded stock based compensation of $104,334 and $0, respectively(See Notes 7 and 8). As of March 31,
2013, the Company does not have any outstanding stock options or warrants.
USE OF ESTIMATES
The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reported period.
Actual results could differ from those estimates.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
Accounting standards that have been
issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected
to have a material impact on the consolidated financial statements upon adoption.
NOTE 4 - RECLASSIFICATIONS
Certain prior period balances have been
reclassified to conform to the current period's financial statement presentation. These reclassifications had no impact on previously
reported results of operations or stockholders' deficiency.
NOTE 5 – SALES CONCENTRATION AND CONCENTRATION OF CREDIT
RISK
Cash
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash. The Company maintains cash balances at one financial institution,
which is insured by the Federal Deposit Insurance Corporation (“FDIC”). The FDIC insured institution insures
up to $250,000 on account balances. The company has not experienced any losses in such accounts.
Sales
None of our customers account for more
than 10% of our business, however we rely on a few
processors to provide to us, on a non-exclusive basis,
transaction processing and transmittal, transaction authorization and data capture, and access to various reporting tools. During
the three months ended March 31, 2013, 100% of our revenues were from our agreement with ACS.
In April 2013, ACS and the Company terminated
their agreements and accordingly, the Company will no longer be receiving fees related to the ACS agreement. The Company recently
entered into an exclusive distributorship agreement with Chill Drinks, LLC (See Note 11) for sales of Chill Drink’s products
to dispensaries. Sales began in April 2013. Also during the quarter ending June 30, 2013 the Company plans to roll out its’
DMS software (See note 1) and anticipates to begin a monthly recurring revenue model, whereby dispensaries will pay up to $400
per month for access to DMS. Additionally through DMS, the Company will be selling a patient digital health record storage system
for an annual fee. The Company will be introducing additional products in the forthcoming quarters to supplement the initial products.
Industry
Previously, the Company
generated substantially all of its’ revenue from providing merchant services to approximately forty medical dispensaries
and wellness centers throughout California and Colorado through our sponsor bank Electronic Merchant Systems (“EMS”).
EMS has advised all medical dispensaries that they will no longer accept their Visa and MasterCard transactions. This change was
effective on July 1, 2012 and had a materially adverse effect on our business.
NOTE 6 – CONVERTIBLE DEBT
In December
2011 the Company issued a $50,000 convertible promissory note as part of a guaranty fee due (the “Guaranty Note”) to
a Company that is affiliated with a former officer of the Company. Terms of the note include an eight percent per annum interest
rate and the note matured on the one year anniversary on December 20, 2012.
Additionally, the holder of the Note has the
right to convert the note into shares of common stock of the Company at a conversion price equal to eighty percent (80%) of the
lowest closing bid price of the common stock within five (5) days of the conversion. The beneficial conversion feature included
in the Guaranty Note resulted in an initial debt discount and derivative liability of $36,765.
During the year ended December 31, 2012,
the company made payments of $18,000, reducing the balance of the Guaranty Note to $32,000 as of December 31, 2012. As of December
31, 2012 the Company revalued the remaining conversion feature of the Guaranty Note at $13,209. On March 31, 2013 the Company and
the noteholder elected to convert the remaining $32,000 balance of the note and accrued and unpaid interest of $6,060 into 3,699,280
shares of common stock.
On November 28, 2012 the Company entered
into a $23,500 convertible note agreement (the 2012 Note) with Asher Enterprises, Inc. (“Asher”). We received net proceeds
of $20,000 from the 2012 Note after debt issuance costs of $2,500 paid for lender legal fees. These debt issuance costs will be
amortized over the earlier of the terms of the Note or any redemptions and accordingly $833 has been expensed as debt issuance
costs (included in interest expense) for the three months ended March 31, 2013.
The Company determined that the conversion
feature of the 2012 Note represents an embedded derivative since the Note is convertible into a variable number of shares upon
conversion. Accordingly, the Note is not considered to be conventional debt under EITF 00-19 and the embedded conversion feature
must be bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of this derivative
instrument has been recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount
to each Note. Such discount will be amortized from the date of issuance to the maturity dates of the Note. The change in the fair
value of the liability for derivative contracts will be recorded in other income or expenses in the consolidated statements of
operations at the end of each quarter, with the offset to the derivative liability on the balance sheet. The beneficial conversion
feature included in the 2012 Note resulted in an initial debt discount of $23,500 and an initial loss on the valuation of derivative
liabilities of $1,826 for a derivative liability initial balance of $25,326.
As of December 31, 2012, the Company
revalued the embedded conversion feature of the November 2012 Note. For the period from November 28, 2012 through December 31,
2012, the Company increased the derivative liability of $25,326 by $55 resulting in a derivative liability balance of $25,381.
On January 2, 2013 and February 11,
2013 the Company entered convertible note agreements (the 2013 Notes) with Asher for $37,500 and $27,500, respectively. We received
net proceeds of $60,000 from the 2013 Notes after debt issuance costs of $5,000 paid for lender legal fees. These debt issuance
costs will be amortized over the earlier of the terms of the Note or any redemptions and accordingly $1,287 has been expensed as
debt issuance costs (included in interest expense) for the three months ended March 31, 2013. The beneficial conversion feature
included in the 2013 Notes resulted in an initial debt discount of $65,000 and an initial loss on the valuation of derivative liabilities
of $5,237 for a derivative liability initial balance of $70,237.
The fair value of the embedded conversion
feature of the 2013 Notes was calculated at issue date utilizing the following assumptions:
Issuance Date
|
Fair Value
|
Term
|
Assumed Conversion Price
|
Market Price on Grant Date
|
Expected
Volatility Percentage
|
Risk free
Interest
Rate
|
1/3/13
|
40,476
|
9 months
|
$0.009
|
$0.0179
|
158%
|
0.12%
|
2/11/13
|
29,761
|
9 months
|
$0.0439
|
$0.0884
|
172%
|
0.11%
|
As of March 31, 2013 the Company revalued
the embedded conversion feature of the November 2012 Note and 2013 Notes. For the period from December 31, 2012 to March 31, 2013,
the Company decreased the derivative liability of the 2012 Note by $11 resulting in a derivative liability balance of $25,370.
From their date of issuances, the Company decreased the derivative liability of the 2013 Notes by $133 resulting in a derivative
liability of $70,104. The fair value of the 2012 and 2013 Notes was calculated at March 31, 2013 utilizing the following assumptions:
Note
Issuance
Date
|
Fair Value
|
Term
|
Assumed Conversion Price
|
Expected
Volatility Percentage
|
Risk free
Interest Rate
|
11/28/12
|
$25,370
|
5 months
|
$0.025
|
171%
|
0.11%
|
1/3/13
|
40,461
|
6 months
|
0.025
|
171%
|
0.11%
|
2/11/13
|
29,643
|
7 months
|
0.025
|
171%
|
0.11%
|
The inputs used to estimate the fair
value of the derivative liabilities are considered to be level 2 inputs within the fair value hierarchy.
A summary of the derivative liability
balance as of December 31, 2012 and March 31, 2013 is as follows:
Fair Value
|
Derivative
Liability Balance
12/31/12
|
Initial Derivative Liability
|
Redeemed
Convertible
Notes
|
Fair value change- three months ended
3/31/13
|
Derivative
Liability Balance 3/31/13
|
Guaranty Note
|
$13,209
|
-
|
$(13,209)
|
-
|
-
|
2012 Note
|
25,381
|
-
|
|
(11)
|
25,370
|
2013 Notes
|
-
|
70,237
|
|
(133)
|
70,104
|
Total
|
$38,590
|
$70,237*
|
$(13,209)
|
$(144)
|
$95,474
|
*Comprised of $65,000, the discount
on the face value of the convertible note and the initial derivative liability expense of $5,237 which is included in the derivative
liability expense of $887 on the condensed statement of operations for the three months ended March 31, 2013, included herein.
NOTE 7 – RELATED PARTY TRANSACTIONS
Management fees and stock compensation
expense
Effective January 1, 2011, the Company
has agreed to annual compensation of $90,000 for its CEO, which was increased to $150,000 annually, effective January 1, 2013.
Effective January 1, 2013, the Company has agreed to annual compensation of $96,000 for the CFO. For the three months ended March
31, 2013 and 2012 the Company recorded management fee expenses for management as follows:
Payee
|
|
|
Three
months ended
March
31, 2013
|
|
|
Three
months ended
March
31, 2012
|
B. Michael Friedman (CEO)
|
|
$
|
37,500
|
|
$
|
23,960
|
Erick Rodriguez (Pres.)
|
|
|
44,417
|
|
|
-
|
Barry Hollander (CFO)
|
|
|
24,000
|
|
|
1,500
|
TOTAL
|
|
$
|
$105,917
|
|
$
|
25,460
|
In August 2012, the Company issued 250,000
shares of Class B Preferred Stock to the President, valued at $177,667 and recorded the amount as deferred stock compensation to
be amortized over one year. For the three months ended March 31, 2013, the Company has amortized $44,417, which is included in
administrative and management fees.
Agreements with prior management
In December
2011 the Company issued a $50,000 convertible promissory note (see Note 6) as part of a guaranty fee due to a Company that is affiliated
with a former officer of the Company. Terms of the note include an eight percent per annum interest rate and the note matured on
the one year anniversary on December 20, 2012.
Additionally, the holder of the Note has the right to convert the note into
shares of common stock of the Company at a conversion price equal to eighty percent (80%) of the lowest closing bid price of the
common stock within five (5) days of the conversion. On March 31, 2013, the Company and the noteholder elected to convert the remaining
balance of the note of $32,000 and accrued and unpaid interest of $6,060 into 3,699,280 shares of common stock.
Also in December 2011, the Company agreed
to pay an additional $50,000 in common stock, which is included in accounts payable and accrued expenses on the March 31, 2013
and December 31, 2012 consolidated balance sheets.
NOTE 8 – COMMON AND PREFERRED
STOCK
Common Stock
On March 19, 2013, the Company issued
250,000 shares of restricted common stock, to Empire Relations Holdings, LLC, as consideration under a consulting agreement dated
March 7, 2013 for public and financial relations services. The fair value was $15,500 based on the closing stock price of $0.062
per share on the measurement date as the shares are non-refundable and no future performance obligation exists.
On March 31, 2013, the Company agreed
to issue 3,699,280 shares of common stock upon the conversion of the remaining balance of $32,000 of the guaranty note and accrued
and unpaid interest of $6,060 (see notes 6 and 7).
NOTE 9 – INCOME TAXES
Deferred income taxes reflect the net
tax effects of operating loss and tax credit carry forwards and temporary differences between carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in
which temporary differences representing net future deductible amounts become deductible. Due to the uncertainty of the Company’s
ability to realize the benefit of the deferred tax assets, the deferred tax assets are fully offset by a valuation allowance at
March 31, 2013 and 2012.
As of March 31, 2013, the Company had
a tax net operating loss carry forward of approximately $555,000.
Any unused portion of this carry
forward expires in 2030. Utilization of this loss may be limited in the event of an ownership change pursuant to IRS Section 382.
NOTE 10 – CONTINGENCIES AND COMMITMENTS
The Company is not aware of any legal
proceedings against it as of March 31, 2013. No contingencies have been provided in the financial statements.
NOTE 11 – GOING CONCERN
The accompanying consolidated financial
statements have been prepared assuming the Company will continue as a going concern. As of March 31, 2013 the Company had an accumulated
deficit of $5,145,974 and a working capital deficit of $335,758. These conditions raise substantial doubt about the Company's ability
to continue as a going concern.
The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
NOTE 12 – SUBSEQUENT EVENTS
On April 25, 2013, 800 Commerce filed
Amendment No.3 to its’ S-1 Registration Statement with the Securities and Exchange Commission (“SEC”). Upon approval
from the SEC and other regulatory approvals required, the Company will announce a shareholder record date, whereby shareholders
of the Company as of that date will be entitled to their pro-rata share of the six million shares of 800 Commerce common stock
owned by the Company.
Effective on April 1, 2013 the Company
entered into a three year agreement to rent office space in Detroit, Michigan. Totaling approximately 2,500 square feet, the space
will also be used to operate the Company’s Certification Station business. The Company’s monthly rent is $2,200.
Effective April 1, 2013, the Company
has agreed to engage Digital Records, Inc. (“DigiRecs”) to assist the Company in the development of software, including,
but not limited to the creation of documents for the Company’s Certification Stations, and the programming of the Company’s
Data Management Systems (“DMS”). The DMS application includes patient registration, digital records management and
tracking of all caregiver transactions including log-in time, date stamp and quantity and type of medication. Pursuant to the engagement
of DigiRecs, the Company has agreed to compensate DigiRecs $5,000 per month, for a twenty-four (24) month term and to issue to
DigiRecs a warrant to purchase 2,000,000 shares of common stock at an exercise price $0.005 per share. The warrant shall expire
on the third anniversary of its grant date. In conjunction with the agreement, the Company appointed Mr. Kevin Deitch and Mr. Timothy
Winn to serve s advisors the the Company’s Board of Directors.
Previously the Company appointed Mr.
Jayme Canton to be an advisor to the Company’s Board of Directors. In April 2013, the Company agreed to issue to Mr. Canton
2,000,000 shares of restricted common stock, a warrant to purchase 3,000,000 shares of common stock at an exercise price of $0.05
per share with an expiration date on the third year anniversary of the grant, and 250,000 shares of common stock to be issued at
the end of each calendar quarter beginning on June 30, 2013 and ending on the earlier of March 31, 2015 (the term of Canton’s
advisor role) or the date Canton is no longer serving as an advisor to the board of directors.
On April 10, 2013, the Company issued
a convertible promissory note to Asher for $27,500 under the same terms of the 2013 Notes described in Note 6. The note was funded
by Asher on April 18, 2013.
On April 23, 2013 the Company issued
a Convertible Note to an unaffiliated third party in exchange and for the cancellation of the litigation contingency of $46,449,
which was acquired by the third party. Also on April 23, 2013, the Company issued 1,750,000 shares of common stock in satisfaction
of the April 23, 2013 Convertible Note. The shares were issued at $0.0265 per share.
On April 30, 2013 the Company entered
into a one year Distribution Agreement with Chill Drinks, LLC (“Chill Drinks”). Chill Drinks has the rights to an energy
drink called Chillo Energy Drink (“Chillo”) and a hemp ice tea drink called C+ Swiss Ice Tea (“C+Swiss”).
Chillo and C+Swiss are referred to as the (“Chill Drink Products”). Pursuant to the Distribution Agreement the Company
has the exclusive distribution and placement rights of the Chill Drink Products to medical dispensaries.
On May 2, 2013, the Company signed a
term sheet to issue a convertible promissory note for up to $660,000 (the “Note”). The note will be due ten months
after its issue date, bear interest at 8% per annum and include an original issue discount (“OID”) of $60,000. The
OID will be pro-rated for the amount actually funded. It is anticipated at closing, the lender will advance $200,000 and issue
four $100,000 promissory notes to the Company with a stated annual interest rate of 8%. The Company can elect to begin the amortization
for repayment of the note for the greater of $165,000 or ¼ of the amount due, by the issuance of common stock at a 25% discount
to the average of the three lowest closing bid prices of the Company’s stock for the 20 days prior to conversion.
On May 10, 2013 the Board of Directors
agreed to retroactively to January 1, 2013, increase the annual compensation of Mr. Friedman, the Company’s CEO from $90,000
to $150,000, and to increase the annual compensation of Mr. Hollander, the Company’s CFO from $36,000 to $96,000, whereby
the increase will be paid in the form of restricted common stock at the end of each calendar quarter.
Management performed an evaluation of
the Company’s activity through the date these financials were issued to determine if they must be reported. The Management
of the Company determined that there were no other reportable subsequent events to be disclosed.
ITEM 2. MANAGEMENT'S DISCUSSION
AND ANALYSIS OR PLAN OF OPERATION
The following is management’s
discussion and analysis of certain significant factors that have affected our financial position and operating results during the
periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current
management. This report includes forward-looking statements. Generally, the words “believes,” “anticipates,”
“may,” “will,” “should,” “expect,” “intend,” “estimate,”
“continue,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other
reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or
outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which
speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.
The following discussion and analysis
of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements
and notes thereto for the years ended December 31, 2012 and 2011, included in our annual report on Form 10-K filed with the SEC
on April 13, 2013.
The independent auditors reports on
our financial statements for the years ended December 31, 2012 and 2011 includes a “going concern” explanatory paragraph
that describes substantial doubt about our ability to continue as a going concern. Management’s plans in regard to the factors
prompting the explanatory paragraph are discussed below and also in Note 11 to the condensed consolidated financial statements
filed herein.
(a)
Liquidity and Capital Resources.
For the three months ended March 31,
2013, net cash used in operating activities was $52,019 compared to $2,613 for the three months ended March 31, 2012. The company
had a net loss $248,688 for the three months ended March 31, 2013 compared to a net loss of $29,610 for the three months ended
March 31, 2012. The net loss for the three months ended March 31, 2013 was impacted by stock compensation expense of $104,334 comprised
of the amortization of deferred stock compensation of $88,834 from the previous issuance of Series B preferred stock and $15,500
for the issuance of 250,000 shares for services provided to the Company. Additional non-cash expenses for the three months ended
March 31, 2013 were the amortization of the initial discounts of $25,324 on the convertible notes, the initial derivative liability
expense, net of the change in the fair value of the derivatives of $5,093 and amortization of deferred financing fees of $2,120
also related to the convertible promissory notes.
During the three months ended March
31, 2013, net cash provided by financing activity was $60,000. This was comprised of issuance of convertible promissory notes of
$65,000 and the payment of deferred financing fees of $5,000.
For the three months ended March 31,
2013, cash and cash equivalents increased by $7,981 compared to a decrease of $2,613 for the three months ended March 31, 2012.
Ending cash and cash equivalents at March 31, 2013 was $9,873 compared to $1,892 at December 31, 2012.
During the three months ended March
31, 2013, 100% of our revenues were from our agreement with ACS. In April 2013, ACS and the Company terminated their agreements
and accordingly, the Company will no longer be receiving fees related to the ACS agreement. The Company recently entered into an
exclusive distributorship agreement with Chill Drinks, LLC (See Note 11) for sales of Chill Drink’s products to dispensaries.
Sales began in April 2013. Also during the quarter ending June 30, 2013 the Company plans to roll out its’ DMS software (See
note 1) and anticipates to begin a monthly recurring revenue model, whereby dispensaries will pay up to $400 per month for access
to DMS. Additionally through DMS, the Company will be selling a patient digital health record storage system for an annual fee.
The Company will be introducing additional products in the forthcoming quarters to supplement the initial products.
We have limited cash and cash equivalents
on hand.
We presently maintain our daily operations and capital needs through the receipts of our monthly
account residuals.
We will need to raise funds to continue to be able to support our operating expenses and to meet our
other obligations as they become due. Sources available to us that we may utilize include the sale of unsecured convertible debentures
from unaffiliated investors which may cause dilution to our stockholders.
Additionally, our CEO has
loaned the Company money in the past. The company expects to increase sales of additional merchant accounts over the course of
this fiscal year.
(b)
Results of Operations
Results of operations for the three months ended March
31, 2013 vs. March 31, 2012
REVENUES
Revenues for the three months ended
March 31, 2013 were $49,818 compared to $26,124 for the three months ended March 31, 2012. Revenues in the current three month
period are a result of the Company receiving agent commissions pursuant to an agreement with Alternative Capital Solutions (“ACS”).
Revenues from 2012 period were all related to merchant processing fees the Company received from medical dispensaries. Effective
July 1, 2012, the merchant processing fees ceased as a result of Mastercard and Visa declining to accept credit card charges from
medical dispensaries.
OPERATING EXPENSES
Operating expenses were $263,483 for
the three months ended March 31, 2013 compared to $54,322 for the three months ended March 31, 2012. The expenses for the three
months ended March 31, 2013 and 2012 were comprised of:
Description
|
|
2013
|
|
2012
|
Administration and management fees
|
|
$
|
65,500
|
|
|
$
|
25,900
|
|
Stock compensation expense, management
|
|
|
44,417
|
|
|
|
—
|
|
Stock compensation expense, other
|
|
|
59,917
|
|
|
|
—
|
|
Professional and consulting fees
|
|
|
29,002
|
|
|
|
2,350
|
|
Commissions
|
|
|
31,200
|
|
|
|
8,512
|
|
Advertising and promotional expenses
|
|
|
3,644
|
|
|
|
—
|
|
Rent and occupancy costs
|
|
|
3,752
|
|
|
|
5,726
|
|
General and other administrative
|
|
|
26,051
|
|
|
|
11,384
|
|
Total
|
|
$
|
263,483
|
|
|
$
|
54,322
|
|
Administration and management fees increased
as a result of the increase of the amount accrued for the salaries for our CEO from $22,500 for the quarter ended March 31, 2012
to $37,500 for the three months ended March 31, 2013, and compensation recorded for our CFO of $24,000 for the three months ended
March 31, 2013.
Stock compensation expense, management
was comprised of the amortization of preferred stock issued to our President in August, 2012. Stock compensation expense other
is comprised of $15,500 related to the issuance of 250,000 shares of common stock issued to a consultant in the three months ended
March 31, 2013 and amortization of $44,417 of preferred stock issued to consultants in August 2012.
Professional and consulting fees increased
for the three months ended March 31, 2013 as a result of investor relation costs of $14,302 and consulting fees of $14,700 paid
pursuant to the ACS agreement. Commissions of $31,200 were also incurred pursuant to the ACS Agreement.
General and other administrative costs
for the three months ended March 31, 2013, included public company filing fees of $8,895, travel and entertainment costs of $5,636,
internet and web based service costs of $5,447, certification station set up costs of $2,904 and $3,169 of other general and administrative
costs.
OTHER INCOME (EXPENSE)
Other expense for the three months ended
March 31, 2013 was $35,023 compared to $1,412 for the three months ended March 31, 2012. Included in the current period is interest
expense of $29,930, comprised of $25,324 related to the amortization of the initial discount on convertible promissory notes, $2,120
for the amortization of the deferred financing costs and $2,486 for the interest expense on the face value of the notes. Also included
in other expenses for the three months ended March 31, 2013 was $5,237 for the initial derivative liability expense for the embedded
derivative in newly issued convertible notes and a credit to expense of $144 for the fair value change on the derivative liability
associated with the convertible promissory notes. Other expenses for the three months ended March 31, 2012 included interest expense
of $46,124. Interest expense was comprised of $40,329 related to the amortization of the initial discount on convertible promissory
notes, $2,807 for the amortization of the deferred financing costs and $2,988 for the interest expense on the face value of the
notes. These amounts were partially offset for the fair value change (decrease) of $44,712 in the derivative liability associated
with convertible promissory notes.
OFF BALANCE SHEET ARRANGEMENTS
None
Critical Accounting Policies
See Note 2 to the condensed consolidated financial statements
included herein.