NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2016 AND 2015
NOTE 1 – DESCRIPTION OF BUSINESS
Gawk Incorporated (“we”, “our”, the “Company”) was incorporated in the state of Nevada on January 6, 2011 with principal business address at 5300 Melrose Avenue, Suite 42, Los Angeles, CA. The Company offers a suite of cloud communications, cloud connectivity, cloud computing, and managed cloud-based applications solutions to small, medium, and large businesses; and offers domestic and international voice services to communications carriers worldwide. It offers a suite of advanced data center and cloud-based services, including fault tolerant, high availability cloud servers, which comprise platform as a service, infrastructure as a service, and a content delivery network; managed network services that converge voice and data applications, structured cabling, wireless, and security services, as well as include Internet access via Ethernet or fiber at speeds ranging from 10 Mbps to 10 Gbps; and data center solutions, including cloud services, colocation services, and business continuity services, such as storage and security. Our website is located at www.gawkinc.com
NOTE 2 – GOING CONCERN
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, the Company has an accumulated deficit at January 31, 2016 of $14,057,651, a net loss for the year ended January 31, 2016 of $6,743,113, cash flows used in operating activities of $472,072 and needs additional cash to maintain its operations.
These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company’s continued existence is dependent upon management’s ability to develop profitable operations, continued contributions from the Company’s executive officers to finance its operations and the ability to obtain additional funding sources to explore potential strategic relationships and to provide capital and other resources for the further development and marketing of the Company’s products and business.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America. Significant accounting policies are as follows:
Use of Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of net revenues and expenses recognized during the periods presented. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements; accordingly, actual results could differ from these estimates. The Company’s most significant estimates relate to the valuation of its intangible assets, goodwill impairment, derivative liabilities, and the valuation of its common stock.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated. We currently have no investments accounted for using the equity or cost methods of accounting.
Reclassifictions
Certain prior year amounts have been reclassified to conform with the current year presentation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At January 31, 2016 and 2015, cash and cash equivalents include cash on hand and cash in the bank.
Goodwill and Other Intangible Assets
We account for goodwill and intangible assets in accordance with ASC 350 "Intangibles-Goodwill and Other" ("ASC 350"). ASC 350 requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. In addition, ASC 350 requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt. Application of the goodwill impairment test requires judgment, including the identification of reporting units; assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions or the occurrence of one or more confirming events in future periods could cause the actual results or outcomes to materially differ from such estimates and could also affect the determination of fair value and/or goodwill impairment at future reporting dates.
We completed an evaluation of goodwill at January 31, 2016 and recognized an impairment loss of $1,200,003 during the year ended Janaury31, 2016. No impairment loss was recognized for the year ended January 31, 2015.
The cost of intangible assets with determinable useful lives is amortized to reflect the pattern of economic benefits consumed, either on a straight-line or accelerated basis over the estimated periods benefited. Patents, technology and other intangibles with contractual terms are generally amortized over their respective legal or contractual lives. Customer relationships, brands and other non-contractual intangible assets with determinable lives are amortized over periods 3 years. When certain events or changes in operating conditions occur, an impairment assessment is performed and lives of intangible assets with determinable lives may be adjusted.
Long-Lived Assets
Long-lived assets are evaluated for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted future cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value.
Property and Equipment
Property and equipment, consisting mostly of computer equipment, is recorded at cost reduced by accumulated depreciation. Depreciation expense is recognized over the assets’ estimated useful lives of three years using the straight-line method. Major additions and improvements are capitalized as additions to the property and equipment accounts, while replacements, maintenance and repairs that do not improve or extend the life of the respective assets, are expensed as incurred. Estimated useful lives are periodically reviewed and, when appropriate, changes are made prospectively. When certain events or changes in operating conditions occur, asset lives may be adjusted and an impairment assessment may be performed on the recoverability of the carrying amounts.
Accounts Receivable and Allowance for Uncollectible Accounts
Substantially all of the Company’s accounts receivable balance is related to trade receivables. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments for services. Accounts with known financial issues are first reviewed and specific estimates are recorded. The remaining accounts receivable balances are then grouped in categories by the number of days the balance is past due, and the estimated loss is calculated as a percentage of the total category based upon past history. Account balances are charged against the allowance when it is probable that the receivable will not be recovered. As of January 31, 2016 and 2015, the Company had no valuation allowance for the Company’s accounts receivable. During the years ended January 31, 2016 and 2015, the Company recorded bad debt expense for uncollectible amounts of $11,782 and $0, respectively.
Marketable securities and other investments
We adopted ASC 825, “The Fair Value Option for Financial Assets and Financial Liabilities. Under this statement, an entity may elect to use fair value to measure eligible items. The adoption of this statement did not have an impact on our results of operations or financial condition.
We classify these investments as current assets and carry them at fair value. We recognize all unrealized and realized gains and losses on our available-for-sale securities in other income in the accompanying consolidated statements of operations and comprehensive income (loss).
Revenue Recognition
The Company pursues opportunities to realize revenues from consulting services. It is the company’s policy that revenues and gains will be recognized in accordance with ASC Topic 605-10-25, “Revenue Recognition.” Under ASC Topic 605-10-25, revenue earning activities are recognized when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.
Our Business Services revenue includes monthly recurring charges (“MRC”) to customers, for whom charges are contracted over a specified period of time, and variable usage fees charged to customers that purchase our business products and services. Revenue recognition commences after the provisioning, testing and acceptance of the service by the customer. MRCs continue until the expiration of the contract, or until cancellation of the service by the customer. To the extent that payments received from a customer are related to a future period, the payment is recorded as deferred revenue until the service is provided or the usage occurs.
Our Carrier Services revenue is primarily derived from usage fees charged to other carriers that terminate voice traffic over our network. Variable revenue is earned based on the length of a call, as measured by the number of minutes of duration. It is recognized upon completion of the call, and is adjusted to reflect the allowance for billing adjustments. Revenue for each customer is calculated from information received through our network switches. Our customized software tracks the information from the switches and analyzes the call detail records against stored detailed information about revenue rates. This software provides us with the ability to complete a timely and accurate analysis of revenue earned in a period. We believe that the nature of this process is such that recorded revenues are unlikely to be revised in future periods.
Income Taxes
The Company utilizes the asset and liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for operating loss and tax credit carry-forwards and for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that the value of such assets will be realized.
The Company uses the two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not, that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating the Company's tax positions and tax benefits, which may require periodic adjustments. At January 31, 2016 and 2015, the Company did not record any liabilities for uncertain tax positions.
Research and Development and Software Development Costs
Capitalization of certain software development costs are recorded after the determination of technological feasibility. Based on our product development process, technological feasibility is determined upon the completion of a working model. To date, costs incurred by us from the completion of the working model to the point at which the product is ready for general release have been insignificant. Accordingly, we have charged all such costs to research and development expense in the period incurred. Our research and development costs for the years ended January 31, 2016 and 2015 were $2,500 and $605,142, respectively.
Share-Based Compensation
The Company measures the cost of services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. Employee awards are accounted for under ASC 718 - where the awards are valued at grant date. Awards given to nonemployees are accounted for under ASC 505 where the awards are valued at earlier of commitment date or completion of services. Compensation cost for employee awards is recognized over the vesting or requisite service period. The Black-Scholes option-pricing model is used to estimate the fair value of options or warrants granted.
Basic and Diluted Net Loss per Common Share
Basic income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the reporting period. The weighted average number of shares is calculated by taking the number of shares outstanding and weighting them by the amount of time that they were outstanding. Diluted earnings per share reflects the potential dilution that could occur if stock options, warrants, and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company. There were 36,100,000 and 9,100,000 options/warrants, a convertible note for $2,149,666 and $1,800,000 secured by 84,133,879 and 18,000,000 shares of common stock issued by the Company during the years ended January 31, 2016 and 2015, respectively.
Diluted loss per share is the same as basic loss per share during periods where net losses are incurred since the inclusion of the potential common stock equivalents would be anti-dilutive as a result of the net loss.
Concentration of Credit Risk
All of the Company’s cash and cash equivalents are maintained in regional and national financial institutions. The Company has exposure to credit risk to the extent that its cash and cash equivalents exceed amounts covered by the U.S. federal deposit insurance; however, the Company has not experienced any losses in such accounts. In management’s opinion, the capitalization and operating history of the financial institutions are such that the likelihood of material loss is remote.
Derivative Financial Instruments
The fair value of an embedded conversion option that is convertible into a variable amount of shares and warrants that include price protection reset provision features are deemed to be “down-round protection” and, therefore, do not meet the scope exception for treatment as a derivative under ASC 815 “Derivatives and Hedging”, since “down-round protection” is not an input into the calculation of the fair value of the conversion option and warrants and cannot be considered “indexed to the Company’s own stock” which is a requirement for the scope exception as outlined under ASC 815.
The accounting treatment of derivative financial instruments requires that the Company record the embedded conversion option and warrants at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.
The Black-Scholes option valuation model was used to estimate the fair value of the embedded conversion options and warrants. The model includes subjective input assumptions that can materially affect the fair value estimates. The expected volatility is estimated based on the most recent historical period of time, of our common stock, equal to the weighted average life of the options.
Conversion options are recorded as debt discount and are amortized as interest expense over the life of the underlying debt instrument.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, accounts payable and accrued expenses, and 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 Company adopted ASC Topic 820,
Fair Value Measurements
(“ASC Topic 820”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The standard provides a consistent definition of fair value which focuses on an exit price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard also prioritizes, within the measurement of fair value, the use of market-based information over entity specific information and establishes a three-level hierarchy for fair value measurements based on the nature of inputs used in the valuation of an asset or liability as of the measurement date.
The three-level hierarchy for fair value measurements is defined as follows:
|
●
|
|
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; liabilities in active markets;
|
|
|
|
|
|
●
|
|
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability other than quoted prices, either directly or indirectly, including inputs in markets that are not considered to be active; or directly or indirectly including inputs in markets that are not considered to be active;
|
|
|
|
|
|
●
|
|
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement
|
The following table summarizes fair value measurements by level at January 31, 2016 and January 31, 2015 for assets measured at fair value on a recurring basis:
Carrying Value at January 31, 2016
|
January 31, 2016
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Marketable securities- available for sale
|
|
$
|
78,300
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
78,300
|
|
|
Total assets
|
|
|
78,300
|
|
|
|
-
|
|
|
|
-
|
|
|
|
78,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
620,237
|
|
|
|
620,237
|
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
620,237
|
|
|
$
|
620,237
|
|
Carrying Value at January 31, 2015
|
January 31, 2015
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Marketable securities- available for sale
|
|
$
|
28,950
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
28,950
|
|
|
Total assets
|
|
|
28,950
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Accounting Pronouncements Adopted
During the fourth quarter of January 31, 2016, the Company adopted Accounting Standards Update (“ASU”) 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs," which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability. This standard requires retrospective application. There were no debt issuance costs in the prior year that required reclassification.
In November 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes.” Currently deferred taxes for each tax jurisdiction are presented as a net current asset or liability and net noncurrent asset or liability on the balance sheet. To simplify the presentation, the new guidance requires that deferred tax liabilities and assets for all jurisdictions along with any related valuation allowances be classified as noncurrent in a classified statement of financial position. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption is permitted. The Company has adopted this guidance in the fourth quarter of the year ended January 31, 2016 on a retrospective basis. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations or cash flows, and did not have any effect on prior periods due to the full valuation allowance against the Company’s net deferred tax assets.
Recent Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The Company is currently in the process of evaluating the impact of the adoption on its financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. The ASU will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of adopting this guidance.
In January 2016, the FASB issued ASU 2016-01, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this guidance.
In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement –Period Adjustments.” Changes to the accounting for measurement-period adjustments relate to business combinations. Currently, an acquiring entity is required to retrospectively adjust the balance sheet amounts of the acquiree recognized at the acquisition date with a corresponding adjustment to goodwill as a result of changes made to the balance sheet amounts of the acquiree. The measurement period is the period after the acquisition date during which the acquirer may adjust the balance sheet amounts recognized for a business combination (generally up to one year from the date of acquisition). The changes eliminate the requirement to make such retrospective adjustments, and, instead require the acquiring entity to record these adjustments in the reporting period they are determined. The new standard is effective for both public and private companies for periods beginning after December 15, 2015. The Company is currently evaluating the impact of adopting this guidance.
In August 2015, the FASB issued ASU No. 2015-14, Revenue From Contracts With Customers (Topic 606)." The amendments in this ASU defer the effective date of ASU 2014-09. Public business entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We are still evaluating the effect of the adoption of ASU 2014-09.
In April 2015, the FASB issued ASU 2015-05, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement," which provides guidance about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015, and early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.
In April 2015, the FASB issued guidance related to a customer’s accounting for fees paid in a cloud computing arrangement. This standard provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015, and early adoption is permitted. The Company will adopt this guidance on January 1, 2016. The adoption of this guidance is not expected to have a material impact on its financial position, results of operations or cash flows.
NOTE 4 – MARKETABLE SECURITIES
On September 4, 2014 Cloud issued 30,000 post-split common shares through a consulting agreement with Gawk Incorporated valued at $105,000. The common stock issued to Gawk, for consulting services, has been accounted for as a marketable security valued at $105,000. The services have been earned and completed in accordance with the agreement.
The Company fair valued the marketable security available for sale at January 31, 2016 and 2015 and recorded a gain on change in fair value of the asset of $49,350 and a loss on change in fair value of the asset of $76,050, respectively. Total fair value of the available for sale security at January 31, 2016 and 2015 is $78,300 and $28,950, respectively.
NOTE 5 – ACQUISITIONS
On October 30, 2014, the Company, through a comprehensive agreement with Webrunner, LLC (“Webrunner”), has purchased a complete data center.
The fair value of the consideration and the assets acquired is based on the aggregate value of the common stock issued in exchange for the software as shown below:
The acquisition consisted primarily of the purchase of a data center and all of its business, which are considered to meet the definition of a business in accordance with FASB ASC Topic 805, "Business Combinations". As such, the Company accounted for the acquisition as a business combination.
Management determined that the Company was the acquirer in the business combination in accordance with ASC Topic 805, "Business Combinations", based on the following factors: (i) there was a change in control of Webrunner; (ii) the Company was the entity in the transaction that issued its equity instruments, and in a business combination, the acquirer usually is the entity that issues its equity interests; (iii) the Company’s pre-transaction directors retained the largest relative voting rights of the Company post-transaction; (iv) the composition of the Company’s current board of directors and management was the result of the appointment by the Company’s pre-transaction directors.
The purchase price paid for the acquisition was $2,104,932 which included $225,000 in cash, 1 Series C Preferred share convertible into $1,000,000 of common stock and 9,100,000 options to purchase stock at an exercise price of $0.10 valued at $879,932 using the Black Scholes option pricing model. The assumptions used to value the options were as follows: a) stock price of $0.0978; b) strike price of $0.10, c) term of 5 years and d) volatility of 268%. The following table summarizes the fair value of the consideration paid by the Company and the fair value amounts assigned to the assets acquired on the acquisition date:
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|
|
October 30,
2014
|
|
|
Fair Value of Consideration:
|
|
|
|
|
Cash
|
|
$
|
225,000
|
|
|
1 Series C Preferred share convertible into common shares
|
|
|
1,000,000
|
|
|
9,100,000 options at an exercise price of $0.10
|
|
|
879,932
|
|
|
Total Purchase Price
|
|
$
|
2,104,932
|
|
|
|
|
|
|
|
|
Recognized amounts of identifiable assets acquired:
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Cash
|
|
$
|
190,931
|
|
|
IP Address
|
|
|
81,920
|
|
|
Customer list
|
|
|
359,067
|
|
|
Equipment
|
|
|
176,975
|
|
|
Goodwill
|
|
|
1,310,908
|
|
|
Fair value of total assets
|
|
|
2,119,801
|
|
|
Note payable RND Media
|
|
|
(10,000
|
)
|
|
Accounts payable and accrued liabilities
|
|
|
(4,869
|
)
|
|
Fair value of net assets
|
|
$
|
2,104,932
|
|
Webrunner, Inc. assets includes IP Address space assigned to it through American Registry for Internet Numbers (ARIN) which consists of a /19, pronounced “Slash Nineteen”, which contains 8192 IP Addresses that are used in conjunction with our services provided to our customers.
An Internet Protocol address (IP address) is a numerical label assigned to each device (e.g., computer, printer) participating in a computer network that uses the Internet Protocol for communication. An IP address serves two principal functions: host or network interface identification and location addressing.
The designers of the Internet Protocol defined an IP address as a 32-bit number and this system, known as Internet Protocol Version 4 (IPv4), is still in use today. However, because of the growth of the Internet and the predicted depletion of available addresses, a new version of IP (IPv6), using 128 bits for the address, was developed in 1995. IPv6 was standardized as RFC 2460 in 1998, and its deployment has been ongoing since the mid-2000s.
IP addresses are usually written and displayed in human-readable notations, such as 172.16.254.1 (IPv4), and 2001:db8:0:1234:0:567:8:1 (IPv6).
The Internet Assigned Numbers Authority (IANA) manages the IP address space allocations globally and delegates five regional Internet registries (RIRs) to allocate IP address blocks to local Internet registries (Internet service providers) and other entities.
The expected of the Equipment, IP Addresses and Customer List is 3 years of which we will be applying both amortization and depreciation on a quarterly basis in a straight line format.
The comprehensive agreement call for the implementation of three employment agreement and three management agreements for the members of Webrunner LLC. The Company has not adopted an employee stock option plan which has been approved by the shareholders.
Net D Consulting Inc.
On April 24, 2015, the Company entered into an asset purchase and sale agreement with Net D Consulting Inc. ("Net D") which closed on May 1, 2015.
The fair value of the consideration and the assets acquired is based on the aggregate value of the common stock issued in exchange for the software as shown below:
The acquisition consisted of the purchase of a customer list which met the definition of a business in accordance with FASB ASC Topic 805, "Business Combinations". As such, the Company accounted for the acquisition as a business combination.
Management determined that the Company was the acquirer in the business combination in accordance with ASC Topic 805, "Business Combinations", based on the following factors: it involved a transaction or other event in which an acquirer obtains control of one or more businesses, which an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants.
The purchase price paid for the assets acquired, as amended on December 21, 2015, amounted to $3,982,125 and consisted of the following: $150,000 in cash, a $350,000 note with 0% annual interest and payable on October 7, 2016, 5,000,000 common shares valued at $66,500, 25,000,000 Series B Preferred shares valued at $415,625 and 3 Series C Preferred shares convertible into $3,000,000 common shares. The following table summarizes the fair value of the consideration paid by the Company and the fair value amounts assigned to the assets acquired on the acquisition date:
|
Fair Value of Consideration:
|
|
|
|
|
Cash
|
|
$
|
150,000
|
|
|
Note payable
|
|
|
350,000
|
|
|
5,000,000 common shares
|
|
|
66,500
|
|
|
25,000,000 Series B Preferred shares convertible into common shares
|
|
|
415,625
|
|
|
3 Series C Preferred shares convertible into common shares
|
|
|
3,000,000
|
|
|
Total Purchase Price
|
|
$
|
3,982,125
|
|
|
|
|
|
|
|
|
Recognized amounts of identifiable assets acquired:
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Customer list
|
|
$
|
433,376
|
|
|
Goodwill
|
|
|
3,548,749
|
|
|
Fair value of total assets
|
|
$
|
3,982,125
|
|
Connexum, LLC.
On January 18, 2016, the Company entered into an acquisition agreement with Net D, whereby the Company acquired 100% of the membership interest of Connexum, LLC (“Connexum”). The acquisition of Connexum met the definition of a business in accordance with FASB ASC Topic 805, "Business Combinations". As such, the Company accounted for the acquisition as a business combination.
Management determined that the Company was the acquirer in the business combination in accordance with FASB ASC Topic 805, "Business Combinations", based on the following factors: (i) there was a change in control of Connexum; (ii) the Company was the entity in the transaction that issued its equity instruments, and in a business combination, the acquirer usually is the entity that issues its equity interests; (iii) the Company's pre-transaction directors retained the largest relative voting rights of the Company post-transaction; (iv) the composition of the Company's current board of directors and management was the result of the appointment by the Company's pre-transaction directors.
The purchase price paid for the acquisition of Connexum amounted to $2,054,375 and consisted of the following: a $1,000,000 note with annual interest of 18% which matures on August 1, 2017 and 5,000,000 Series B Preferred shares valued at $54,375. The note provides for monthly principal and interest payments of $63,806. The agreement also provides for contingent consideration of 1 Series C Preferred share convertible into $1,000,000 common shares if Connexum achieves 80% of anticipated revenue and another 1 Series C Preferred share convertible into $1,000,000 common shares if Connexum achieves 100% of anticipated revenue within one year from the date of acquisition. The Company determined that Connexum will meet 80% of the anticipated revenue and has recognized the fair value of the contingent consideration of $1,000,000 as of January 31, 2016. The following table summarizes the fair value of the consideration paid by the Company and the fair value amounts assigned to the assets acquired on the acquisition date:
|
Fair Value of Consideration:
|
January 18, 2016
|
|
|
Note payable
|
|
$
|
1,000,000
|
|
|
5,000,000 Series B Preferred shares
|
|
|
54,375
|
|
|
Contingent consideration - 1 Series C Preferred share
|
|
|
1,000,000
|
|
|
Total Purchase Price
|
|
$
|
2,054,375
|
|
|
|
|
|
|
|
|
Fair Value of Consideration:
|
January 18, 2016
|
|
|
Current assets
|
|
$
|
86,132
|
|
|
Current liabilities assumed
|
|
|
(172,763
|
)
|
|
Customer list
|
|
|
1,724,155
|
|
|
Goodwill
|
|
|
416,851
|
|
|
Fair value of total assets
|
|
$
|
2,054,375
|
|
Revenues of $59,259 and net income of $6,923 since the acquisition date are included in the consolidated statements of operations and comprehensive income (loss) for the year ended January 31, 2016.
Unaudited proforma results of operations for the years ended January 31, 2016 and 2015 as though the Company acquired Connexum on the first day of each fiscal year are set forth below:
|
|
|
Year Ended January 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Revenues
|
|
$
|
5,632,531
|
|
|
$
|
4,068,353
|
|
|
Cost of revenues
|
|
|
3,751,241
|
|
|
|
2,582,590
|
|
|
Gross profit
|
|
|
1,881,289
|
|
|
|
1,485,763
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
5,596,381
|
|
|
|
6,892,576
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(6,858,124
|
)
|
|
|
(5,711,671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average of shares outstanding
|
|
|
194,920,175
|
|
|
|
169,720,932
|
|
Equipment at January 31, 2016 and 2015 consist of the following:
|
|
|
January 31, 2016
|
|
|
January 31, 2015
|
|
|
Computer equipment
|
|
$
|
176,975
|
|
|
$
|
176,975
|
|
|
Less - accumulated depreciation
|
|
|
(73,740
|
)
|
|
|
(14,748
|
)
|
|
|
|
$
|
103,235
|
|
|
$
|
162,227
|
|
Depreciation expense for the years ended January 31, 2016 and 2015 amounted to $58,992 and $14,748, respectively.
NOTE 7 – INTANGIBLES AND GOODWILL
Intangible assets at January 31, 2016 and 2015 consist of the following:
|
|
|
January 31, 2016
|
|
|
January 31, 2015
|
|
|
Customer list - Webrunner
|
|
$
|
359,067
|
|
|
$
|
359,067
|
|
|
IP Address - Webrunner
|
|
|
81,920
|
|
|
|
81,920
|
|
|
Customer list - Net D
|
|
|
433,376
|
|
|
|
-
|
|
|
Customer list - Connexum
|
|
|
1,724,155
|
|
|
|
-
|
|
|
|
|
|
2,598,518
|
|
|
|
440,987
|
|
|
Less - accumulated amortization of intangible assets
|
|
|
(312,173
|
)
|
|
|
(36,749
|
)
|
|
|
|
$
|
2,286,345
|
|
|
$
|
404,238
|
|
The intangible assets are amortized over an estimated useful life of 3 years. Amortization expense amounted to $275,424 and $36,749 for the years ended January 31, 2016 and 2015, respectively. No impairment loss was recognized during the years ended January 31, 2016 and 2015.
Goodwill at January 31, 2016 and 2015 consist of the following:
|
|
|
January 31, 2016
|
|
|
January 31, 2015
|
|
|
Goodwill of Webrunner
|
|
$
|
110,905
|
|
|
$
|
1,310,908
|
|
|
Goodwill of Net D
|
|
|
3,548,749
|
|
|
|
-
|
|
|
Goodwill of Connexum
|
|
|
416,851
|
|
|
|
-
|
|
|
Total
|
|
$
|
4,076,505
|
|
|
$
|
1,310,908
|
|
During the year ended January 31, 2016, we determined that the carrying value of Webrunner, which is a separate reporting unit, exceeded its fair value at the measurement date, requiring step two in the impairment test process. The fair value of the Webrunner reporting unit was determined primarily using an income approach based on the present value of discounted cash flows. We determined the implied fair value of goodwill was substantially below the carrying value of the reporting unit's goodwill. Accordingly, we recognized a goodwill impairment loss of $1,200,003, which resulted in goodwill of $110,905 remaining for Webrunner as of January 31, 2016. No impairment of goodwill was recognized for the year ended January 31, 2015.
NOTE 8 – NOTES PAYABLE
The Company had the following notes payable and notes payable – related party outstanding as of January 31, 2016 and 2015:
|
Notes payable
|
|
|
|
|
|
|
|
|
|
January, 31, 2016
|
|
|
January, 31, 2015
|
|
|
Dated – October 30, 2014
|
|
$
|
10,000
|
|
|
$
|
10,000
|
|
|
Dated – June 3, 2015
|
|
|
25,000
|
|
|
|
-
|
|
|
Dated – December 11, 2015
|
|
|
50,000
|
|
|
|
-
|
|
|
Total notes payable
|
|
|
85,000
|
|
|
|
10,000
|
|
|
Less: current portion of notes payable
|
|
|
(85,000
|
)
|
|
|
(10,000
|
)
|
|
Long-term notes payable
|
|
$
|
-
|
|
|
$
|
-
|
|
Dated – October 30, 2014
On October 30, 2014 the Company exercised the comprehensive acquisition agreement of Webrunner, LLC and in the acquisition the Company assumed the debt of RNC Media in the amount of $10,000. The Note does not have any interest payable and is due upon demand.
Dated – June 3, 2015 and December 11, 2015
The two notes were issued to Mr. Doyle Knudson, are subject to annual interest of 15% and are convertible into a total of 863,000 common shares. The notes matured in December 2015 and are currently past due.
|
Notes payable - related party
|
|
|
|
|
|
|
|
|
|
January, 31, 2016
|
|
|
January, 31, 2015
|
|
|
Dated – April 23, 2015
|
|
$
|
282,250
|
|
|
$
|
-
|
|
|
Dated - January 18, 2016
|
|
|
975,000
|
|
|
|
-
|
|
|
Total notes payable
|
|
|
1,257,250
|
|
|
|
-
|
|
|
Less: current portion of notes payable
|
|
|
(868,361
|
)
|
|
|
-
|
|
|
Long-term notes payable
|
|
$
|
388,889
|
|
|
$
|
-
|
|
Dated – April 23, 2015
On May 1, 2015, in connection with the acquisition of the assets of Net D, the Company issued a $350,000 note which bears no interest and matures on October 7, 2016. The Company made repayments on the note of $67,750 during the year ended January 31, 2016.
Dated – January 18, 2016
On January 18, 2016, in connection with the acquisition of Connexum, the Company issued a $1,000,000 note to Net D which bears annual interest of 18%. The Company is required to make monthly principal and interest payments of $63,806 for a period of 18 months through August 1, 2017. The Company paid $25,000 in a good faith advance on January 27, 2016.
NOTE 9 – CONVERTIBLE NOTES PAYABLE
The Company had the following convertible notes payable outstanding as of January 31, 2016 and 2015:
|
|
|
January, 31, 2016
|
|
|
January, 31, 2015
|
|
|
Dated – August 22, 2014
|
|
$
|
1,700,000
|
|
|
$
|
1,800,000
|
|
|
Dated – July 31, 2015
|
|
|
65,000
|
|
|
|
-
|
|
|
Dated - August 12, 2015 and December 15, 2015
|
|
|
66,666
|
|
|
|
-
|
|
|
Dated - August 18, 2015
|
|
|
38,000
|
|
|
|
-
|
|
|
Dated - September 29, 2015
|
|
|
27,500
|
|
|
|
-
|
|
|
Dated - October 7, 2015
|
|
|
26,500
|
|
|
|
-
|
|
|
Dated - October 26, 2015
|
|
|
28,500
|
|
|
|
-
|
|
|
Dated - November 6, 2015
|
|
|
34,000
|
|
|
|
-
|
|
|
Dated - November 18, 2015
|
|
|
50,000
|
|
|
|
-
|
|
|
Dated - December 29, 2015
|
|
|
35,000
|
|
|
|
-
|
|
|
Dated - January 4, 2016
|
|
|
40,000
|
|
|
|
-
|
|
|
Dated - January 20, 2016
|
|
|
38,500
|
|
|
|
-
|
|
|
|
|
|
2,149,666
|
|
|
|
1,800,000
|
|
|
Less: debt discount and deferred financing fees
|
|
|
(204,427
|
)
|
|
|
(208,950
|
)
|
|
|
|
|
1,945,239
|
|
|
|
1,591,050
|
|
|
Less: current portion of convertible notes payable
|
|
|
1,934,932
|
|
|
|
(1,591,050
|
)
|
|
Long-term convertible notes payable
|
|
$
|
10,307
|
|
|
$
|
-
|
|
The Company recognized amortization expense related to the debt discount and deferred financing fees of $342,831 and $149,250 for the years ended January 31, 2016 and 2015, respectively, which are included in interest expense in the consolidated statements of operations and comprehensive income (loss).
Dated – August 22, 2014
On June 17, 2014 a verified complaint was filed in Maricopa County, Arizona being case number CV 2014-008511 against the Company by an investor known as Doyle Knudson. On August 22, 2014 the parties settled this case recognizing that the settlement constitutes a compromise of disputed claims by the respective Parties, liability for which is expressly denied by the Parties. The summary of the settlement is as follows:
The Company transferred $750,000 to Mr. Knudson on the day of settlement, executed a $1.8 million Convertible Promissory Note with a conversion price of $0.10 per share, a Settlement Agreement and amended Mr. Knudson’s Series C Preferred Stock Purchase Agreement to provide that Mr. Knudson can convert his seven (7) Series C Preferred shares into common stock at any time after the date of this Settlement Agreement. The Company has also amended the Certificate of Designation for the Series C Preferred shares to reflect that the shares are convertible on any date after the date of this Settlement Agreement as reflected in the Amendment to the Certificate of Designation. The total value of the legal settlement was $2,550,000.
Mr. Knudson has filed a Stipulation to Dismiss the Lawsuit with prejudice.
The Company recorded a discount on the convertible note due to a beneficial conversion feature of $358,200 and amortized $208,950 and $149,250 for the years ended January 31, 2016 and 2015, respectively.
On May 21, 2015, the convertible note was amended to transfer $50,000 of the note principal to another lender. The amendment was accounted for as a debt extinguishment and the corresponding unamortized discount was written off to interest expense. Due to the variable conversion rates in the other convertible notes (see below), the balance of the note after the transfer of $1,750,000 became tainted and the embedded conversion option was bifurcated and accounted for as a derivative liability. The fair value of the derivative liability, on the $1,750,000 convertible note, amounting to $586,250 was calculated using the Black Scholes valuation model and was reclassified from additional paid in capital. On December 9, 2015, the note was again amended to transfer $50,000 of the note principal to the same lender as noted above. Since the embedded conversion option was already accounted for as a derivative liability, the amendment did not require to be analyzed under the debt modification guidance.
The two notes transferred to another lender, as disclosed above, totaling to $100,000 are convertible at the option of the holder at a conversion price per share equal to 50% of the lowest closing bid price for the common stock during 30 trading days immediately preceding a conversion. Due to the variable conversion rates in the notes, the embedded conversion option was bifurcated and accounted for as a derivative liability. The fair value of the derivative liability amounting to $268,997 was calculated using the Black Scholes valuation model. $50,000 of the value assigned to the derivative liability was recognized as a debt discount to the note while the balance of $218,997 was recognized as a “day 1” derivative loss. During the year ended January 31, 2016, the two convertible notes totaling $100,000, accrued interest of $12,198, and the associated fees of this conversion of $9,760 were converted into 44,189,102 common shares and the corresponding derivative liability at the date of conversion of $238,314 was credited to additional paid in capital.
Dated – Issued in fiscal year 2016
During the year ended January 31, 2016, the Company issued a total of $449,666 notes with the following terms:
|
|
·
|
Terms ranging from 9 months to 2 years
|
|
|
·
|
Annual interest rates ranging from 5% to 12%
|
|
|
·
|
Convertible at the option of the holders either at issuance or180 days from issuance. The note dated September 29, 2015 is convertible at the later of the maturity date or date of default.
|
|
|
·
|
Conversion prices are typically based on the discounted (50% to 60% discount) lowest trading prices of the Company’s shares during various periods prior to conversion. Certain notes allow for the conversion price to be the lower of $0.01 or the discounted trading price
|
Certain notes allow the Company to redeem the notes at rates ranging from 118% to 148% depending on the redemption date provided that no redemption is allowed after the 180
th
day. Likewise, certain notes include original issue discounts totaling to $24,166. During the year ended January 31, 2016, the Company also recognized deferred financing fees totaling $55,142
The Company determined that the conversion feature met the definition of a liability in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging - Contracts in Entity's Own Stock and therefore bifurcated the embedded conversion option once the note becomes convertible and accounted for it as a derivative liability. The fair value of the conversion feature was recorded as a debt discount and amortized to interest expense over the term of the note.
The Company valued the conversion feature using the Black Scholes valuation model. The fair value of the derivative liability for all the notes that became convertible during the year amounted to $459,733. $209,000 of the value assigned to the derivative liability was recognized as a debt discount to the notes while the balance of $250,733 was recognized as a “day 1” derivative loss.
NOTE 10 –
DERIVATIVE LIABILITIES
The Company analyzed the conversion option for derivative accounting consideration under ASC 815, Derivatives and Hedging, and hedging, and determined that the instrument should be classified as a liability since the conversion option becomes effective at issuance resulting in there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options.
ASC 815 requires we assess the fair market value of derivative liability at the end of each reporting period and recognize any change in the fair market value as other income or expense item.
The Company determined our derivative liabilities to be a Level 3 fair value measurement and used the Black-Scholes pricing model to calculate the fair value as of January 31, 2016. The Black-Scholes model requires six basic data inputs: the exercise or strike price, time to expiration, the risk free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of each convertible note is estimated using the Black-Scholes valuation model. The following weighted-average assumptions were used in the January 31, 2016 and January 31, 2015:
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
January 31, 2016
|
|
|
January 31, 2015
|
|
|
Expected term
|
|
0.4 - 2 years
|
|
|
|
-
|
|
|
Expected average volatility
|
|
|
249% - 328
|
%
|
|
|
-
|
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
|
Risk-free interest rate
|
|
|
0.05% - 0.83
|
%
|
|
|
-
|
|
At January 31, 2016, the estimated fair values of the liabilities measured on a recurring basis are as follows:
|
January, 31, 2016
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Dated – August 22, 2014
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
122,400
|
|
|
$
|
122,400
|
|
|
Dated – July 31, 2015
|
|
|
-
|
|
|
|
-
|
|
|
|
102,743
|
|
|
|
102,743
|
|
|
Dated - August 12, 2015 and December 15, 2015
|
|
|
-
|
|
|
|
-
|
|
|
|
108,616
|
|
|
|
108,616
|
|
|
Dated – September 29, 2015
|
|
|
-
|
|
|
|
-
|
|
|
|
87,420
|
|
|
|
87,420
|
|
|
Dated - October 7, 2015
|
|
|
-
|
|
|
|
-
|
|
|
|
42,891
|
|
|
|
42,891
|
|
|
Dated - January 20, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
67,105
|
|
|
|
67,105
|
|
|
Warrants dated - November 9
|
|
|
-
|
|
|
|
-
|
|
|
|
89,062
|
|
|
|
89,062
|
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
620,237
|
|
|
$
|
620,237
|
|
The following table summarizes the changes in the derivative liabilities during the year ended January 31, 2016:
|
Fair Value Measurements Using Significant Observable Inputs (Level 3)
|
|
|
|
|
|
|
|
Balance - January 31, 2015
|
|
$
|
-
|
|
|
Addition of new derivatives recognized as debt discounts
|
|
|
259,000
|
|
|
Addition of new derivatives for tainted warrants
|
|
|
340,200
|
|
|
Addition of new derivatives recognized as loss on derivatives
|
|
|
469,730
|
|
|
Derivatives settled upon conversion of debt
|
|
|
(238,314
|
)
|
|
Reclassification from APIC to derivative liability due to tainted instruments
|
|
|
586,250
|
|
|
Gain on change in fair value of the derivative liability
|
|
|
(796,629
|
)
|
|
Balance - January, 31, 2016
|
|
$
|
620,237
|
|
The net gain on derivatives during the year ended January 31, 2016 and 2015 was $326,899 and $0, respectively.
NOTE 11 – STOCK PAYABLE
Investor payable - common shares
In December 2013 and January 2014, the Company entered into stock purchase agreements with third parties for 100,000 and 250,000 Series B Preferred shares, respectively, for a total consideration of $100,000 and $250,000, respectively. The Company was unable to issue the preferred shares and has accounted for the amounts received as investor payable.
The Company also issued 8,000,000 Preferred B Warrants with the acquisition of Poker Junkies LLC. These Preferred Series B Warrants once exercised would require the Company to issue Series B Preferred shares. From November 2013 through January 31, 2014 the Company issued 1,028,000 of Series B Preferred stock valued at $1,028,000 for the exercise of the Preferred B warrants. From February 2014 through April 2014 the Company issued 699,200 of Series B Preferred stock valued at $699,200 for the exercise of the Preferred B warrants. On June 18, 2014 the Company rescinded this transaction due to the failure of the holder to deliever the Preferred B warrants. The Company decided to issue common shares in lieu of issuing the Series B Preferred shares related to the acquisition of Poker Junkies LLC and those issued in connection with the stock purchase agreements disclosed above. The Company agreed to issue common stock at 125% of the value of the Series B Preferred shares. During the years ended January 31, 2016 and 2015, the Company issued 4,960,000 and 9,232,000 common shares, respectively, for a total consideration of $496,000 and $923,200, respectively.
As of January 31, 2016 and 2015, investor payable – common stock totaled $658,000 and $1,154,000, respectively.
Preferred Stock Payable
On October 30, 2014, the Company recorded $1,000,000 as preferred share payable which shall be converted to 1 Series C Preferred share for the acquisition of Webrunner. On April 9, 2015, the Company issued 1 Series C Preferred Share to settle this payable.
On December 21, 2015, the Company recorded preferred stock payable of $13,438 for 13,437,500 Series B Preferred shares related to the acquisition of the assets of Net D (see Note 5) since as of January 31, 2016, the Company did not have sufficient unissued Series B preferred shares.
As of January 31, 2016 and 2015, preferred stock payable totaled $13,438 and $1,000,000, respectively.
NOTE 12 – EQUITY
Amendment to Articles of Incorporation or Bylaws
On January 7, 2016, the Company filed a Certificate of Amendment with the state of Nevada, to the Company’s Articles of Incorporation, to increase the number of authorized shares of capital stock to 1,500,000,000 shares. With 1,400,000,000 shares of common stock, par value $0.001 and 100,000,000 shares of preferred stock, par value $0.001.
Preferred Stock
Series A Preferred Stock
The Company is authorized to issue 1,000 shares of series A Preferred Stock at a par value of $0.001. The terms of the Certificate of Designation of the Series A Preferred Stock, include the right to vote in aggregate, on all shareholder matters equal to 51% of the total vote (“Super Majority Voting Rights”). The Series A Preferred Stock will be entitle to this 51% voting right no matter how many shares of common stock or other voting stock of the Company are issued or outstanding in the future.
As of January 31, 2016 and 2015, 1,000 shares of series A Preferred Stock were issued and outstanding, respectively.
Series B Convertible Preferred Stock
On March 11, 2016, the Company amended its Articles of Incorporation to increase the number of preferred shares designated Series B Convertible Shares (the “Series B”) from 50,000,000 to 95,000,000. Holders of the Series B Preferred shares shall be entitled to receive dividends or other distributions with the holders of the Company’s common shares on an “as converted” basis when, as, and if declared by the directors of the Company.
The Holders have the right to convert each Series B Preferred share, at any time after 6 months from the date of issuance, into fully paid and non-assessable common shares on the basis of 1 Series B Preferred share for 1.25 common shares (1:1.25).
During the year ended January 31, 2016, the Company issued Series B Preferred shares, as follows:
|
|
·
|
437,500 shares were sold for cash on June 22, 2015 for a total consideration of $17,500.
|
|
|
·
|
25,000,000 shares with fair value of $415,625 in connection with the acquisition of Net D’s assets (see Note 5). Of this amount, the par value of $13,438 related to the 13,437,500 shares in excess of the authorized shares at January 31, 2016 is reported as preferred stock payable in the consolidated balance sheets
|
|
|
·
|
5,000,000 shares with a fair value of $54,375 in connection with the acquisition of Connexum (see Note 5).
|
|
|
·
|
25,000,000 shares with a fair value of $415,625 as settlement of amounts due to the CEO totaling $438,854. As a result, the Company recorded a loss on settlement of liabilities of $2,976,771 (see also below).
|
|
|
·
|
8,000,000 shares were sold for cash in January 2016 for a total consideration of $30,000
|
As of January 31, 2016 and 2015, 50,000,000 and 0 shares of Series B Preferred Stock were issued and outstanding, respectively.
Series C Convertible Preferred Stock
The Series C Preferred Stock consists of 100 shares, at a par value of $0.001 per share, with certain rights, privileges, preferences and restrictions as set forth in Series C Preferred Stock Certificate of Designation. Holders of the Series C Preferred shares shall be entitled to receive dividends or other distributions with the holders of the Company’s common share on an “as converted” basis when, as and if, declared by the directors of the Company.
Each share of the Series C Preferred Stock shall be convertible, at the option of the holder thereof and subject to notice requirements at any time following 12 months from the issuance of such shares, into such number of fully paid and non-assessable common shares worth $1,000,000.
During the year ended January 31, 2016, the Company issued Series C Preferred shares, as follows:
|
|
·
|
1 share to settle the preferred stock payable of $1,000,000 recorded in connection with the acquisition of Webrunner
|
|
|
·
|
3 shares with a fair value of $3,000,000 in connection with the acquisition of Net D’s assets (see Note 5).
|
|
|
·
|
3 shares with a fair value of $3,000,000 as settlement of amounts due to the CEO totaling $438,854. As a result, the Company recorded a loss on settlement of liabilities of $2,976,771.
|
On April 11, 2014, the Company and Doyle Knudson entered into a Series C Preferred Stock Purchase Agreement dated as of April 10, 2014, pursuant to which the Company sold 7 Series C Preferred shares for an aggregate purchase price of $3,300,000.
As of January 31, 2016 and 2015, 14 and 7 shares of Series C Preferred Stock were issued and outstanding, respectively.
Common stock
The Company is authorized to issue 1,400,000,000 shares of common stock at a par value of $0.001.
During the year ended January 31, 2016, the Company issued common shares, as follows:
|
|
·
|
2,700,000 common shares with a fair market value of $54,000 to James E McCrink Trust in accordance with a settlement agreement reached with the latter on January 19, 2015 in connection with a complaint filed on November 4, 2014.
|
|
|
·
|
21,000,000 shares with a fair value of $161,100 as compensation to board members and employees.
|
|
|
·
|
16,150,000 shares with a fair value of $134,960 as compensation to consultants.
|
|
|
·
|
4,587,156 shares with a fair value of $20,183 to settle a $40,000 payable. The Company recognized a gain on settlement of liabilities of $19,817.
|
|
|
·
|
1,545,000 shares with a fair value of $13,042 as deferred financing fees
|
|
|
·
|
4,960,000 shares in exchange for warrants for a total consideration of $496,000 (see Note 11).
|
|
|
·
|
5,000,000 shares with fair value of $66,500 in connection with the acquisition of Net D’s assets (see Note 5).
|
|
|
·
|
44,189,102 common shares were issued for the conversion of debt, accrued interest and associated fees of $121,958.
|
During the year ended January 31, 2015, the Company issued common shares, as follows:
|
|
·
|
9,232,000
shares of common stock valued at the trading prices of $0.10 for value of $923,200 for conversion from Series B Preferred Stock.
|
|
|
·
|
500,000 shares of common
stock valued at the trading price of $0.10 for value of $50,000 for services rendered.
|
|
|
·
|
Cancelled
150,000,000 common shares
with par value of $150,000, which were surrended by a Company
controlled by our CEO and is a related party.
|
As of January 31, 2016 and 2015, 261,863,258 and 161,732,000 shares of common stock were issued and outstanding, respectively.
Warrants and Options
Warrants
As of January 31, 2016 and 2015, there are no warrants outstanding.
The Company has 9,100,000 options issued in connection with the acquisition of Webrunner (see Note 5).
On October 21, 2015, the Company entered into two separate agreements with consultants to provide the Company with consulting services in exchange for common shares of 20,000,000 and 7,000,000, respectively. In November, 2015, the Company amended these two agreements. As a result of the amendment, the Company issued 27,000,000 stock options with an exercise price of $0.005 per share instead of the common shares. The options can be exercised by the holder any time prior to December 1, 2016. These options were tainted as a result of the convertible notes with variable conversion rates (see Note 9) and were accounted for as derivative instruments at the time of issuance. The fair value of the options amounting to $340,200 was recorded as stock compensation expense during the year ended January 31, 2016, with a corresponding credit to derivative liability (see Note 10).
The following table summarizes information relating to outstanding and exercisable stock options as of January 31, 2016:
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
Number of Shares
|
|
|
Weighted Average Remaining
Contractual life (in years)
|
|
Weighted Average Exercise Price
|
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
|
|
|
9,100,000
|
|
|
|
3.75
|
|
|
$
|
0.10
|
|
|
|
9,100,000
|
|
|
$
|
0.10
|
|
|
|
27,000,000
|
|
|
|
0.84
|
|
|
$
|
0.005
|
|
|
|
27,000,000
|
|
|
$
|
0.005
|
|
|
|
36,100,000
|
|
|
|
1.57
|
|
|
$
|
0.03
|
|
|
|
36,100,000
|
|
|
$
|
0.03
|
|
The options have an intrinsic value at January 31, 2016 of $59,400.
NOTE 13 – COMMITMENTS AND CONTINGENCIES
Rent expense for the years ended January 31, 2016 and 2015 was $82,486 and $19,311, respectively.
|
Months of Term
or Period
(Beginning March 1, 2013)
|
|
Monthly Rate Per
Rentable Square Foot
|
|
Monthly Basic Rent
(rounded to the nearest dollar)
|
|
1 to 12
|
|
$2.13
|
|
$5,534
|
|
13 to 24
|
|
$2.23
|
|
$5,794
|
|
25 to 36
|
|
$2.33
|
|
$6,053
|
|
37 to 48
|
|
$2.43
|
|
$6,313
|
|
49 to 60
|
|
$2.54
|
|
$6,599
|
Minimum future rental payments under operating leases as of January 31, 2016:
|
|
|
Amount
|
|
|
2017
|
|
$
|
75,496
|
|
|
2018
|
|
|
78,902
|
|
|
2019
|
|
|
6,599
|
|
|
Thereafter
|
|
|
-
|
|
|
Total minimum lease payments
|
|
$
|
160,997
|
|
Licensing Agreement / Deposit
On June 11, 2014 we entered into a license and subscription agreement with Cloud Medical Doctor Software Corporation formerly National Scientific Corporation (NSCT) which changed it’s name to Cipher Loc Corporation and ticker symbol to (CLOK) ("Cloud") for $1,125,000. The agreement grants to us a non-exclusive encryption license agreement which entitles us to utilize Cloud's encryption software solution within the Customer's business. We purchased a 48 months encryption licensing agreement to incorporate into our existing web based software. The licensing agreement will protect members of our platform from hackers and other privacy intrusion vehicles. CipherLoc has various features that will further protect our members and end users of our web developed platform. As of January 31, 2016, the software has not been delivered to the Company and as such the cash paid for the encryption licensing agreement of $1,125,000 has been accounted as a deposit. During the year ended January 31, 2016, the Company wrote off 50% of the deposit amounting to $562,500 to impairment expense.
Contingency
At the time of acquisition of Connexum, Windstream Holdings, Inc. ("Windstream"), a provider of voice and data network communications, and managed services, to businesses in the United States, claimed that Connexum owed them $600,000, which charges Connexum denies. In 2015, Connexum contracted with Windstream to purchase high cost long distance services. When receiving the initial invoices Connexum noticed the bill was not what was expected and issued a dispute for the incorrect charges and paid the non-disputed amount of just over $20,000. Then, without notice, Windstream turned off services. Shortly thereafter Windstream and Connexum disputed over high cost traffic. Windstream continued to bill Connexum for many months even after disconnecting its service, which ended up totaling nearly $580,000 of disputed fees. At the time of disconnection, there was approximately $20,000 in actual unpaid usage fees. It is remote that the Company would pay these fees. Windstream has not threatened litigation at this point and Connexum is actively working to settle the disputed amount.
NOTE 14 – INCOME TAXES
The benefit for income taxes from continued operations for the years ended January 31, 2016 and 2015 consist of the following:
|
|
|
Year Ended
|
|
|
|
|
January 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
531,744
|
|
|
$
|
1,874,193
|
|
|
State
|
|
|
140,756
|
|
|
|
496,110
|
|
|
|
|
|
672,500
|
|
|
|
2,370,303
|
|
|
Valuation allowance
|
|
|
(672,500
|
)
|
|
|
(2,370,303
|
)
|
|
Provision benefit for income taxes, net
|
|
$
|
-
|
|
|
$
|
-
|
|
The difference between income tax expense computed by applying the federal statutory corporate tax rate and actual income tax expense is as follows:
|
|
January 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
Statutory federal income tax rate
|
|
|
(34
|
%)
|
|
|
(34
|
%)
|
|
State income taxes and other
|
|
|
9
|
%
|
|
|
9
|
%
|
|
Change in valuation allowance
|
|
|
34
|
%
|
|
|
34
|
%
|
|
Effective tax rate
|
|
|
-
|
|
|
|
-
|
|
Deferred income taxes result from temporary differences in the recognition of income and expenses for the financial reporting purposes and for tax purposes. The tax effect of these temporary differences representing deferred tax asset and liabilities result principally from the following:
|
|
January 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
3,416,210
|
|
|
$
|
2,743,710
|
|
|
Valuation allowance
|
|
|
(3,416,210
|
)
|
|
|
(2,743,710
|
)
|
|
Deferred income tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred income taxes result from temporary differences in the recognition of income and expenses for the financial reporting purposes and for tax purposes. The Company has a net operating loss carryforward of approximately $7,944,000 available to offset future taxable income through 2035. For income tax reporting purposes, the Company’s aggregate unused net operating losses are subject to limitations of Section 382 of the Internal Revenue Code, as amended. Under the Tax Reform Act of 1986, the benefits from net operating losses carried forward may be impaired or limited on certain circumstances. Events which may cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. The consolidation of any limitations that may be imposed for future issuances of equity securities, including issuances with respect to acquisitions have not been determined. The Company has provided a valuation reserve against the full amount of the net operating loss benefit, because in the opinion of management based upon the earning history of the Company; it is more likely than not that the benefits will not be realized.
For the years ended January 31, 2016 and 2015, the difference between the amounts of income tax expense or benefit that would result from applying the statutory rates to pretax income to the reported income tax expense of $0 is the result of the net operating loss carryforward and the related valuation allowance.
The Company anticipates it will continue to record a valuation allowance against the losses of certain jurisdictions, primarily federal and state, until such time as it is able to determine it is “more-likely-than-not” the deferred tax asset will be realized. Such position is dependent on whether there will be sufficient future taxable income to realize such deferred tax assets. The Company’s effective tax rate may vary from period to period based on changes in estimated taxable income or loss by jurisdiction, changes to the valuation allowance, changes to federal, state or foreign tax laws, future expansion into areas with varying country, state, and local income tax rates, deductibility of certain costs and expenses by jurisdiction.
NOTE 15 – RELATED PARTY TRANSACTIONS
On December 21, 2015, the Company issued 25,000,000 Series B Preferred shares with a fair value of $415,625 and 3 Series C Preferred shares with a fair value of $3,000,000 as settlement of amounts due to the CEO totaling $438,854. As a result, the Company recorded a loss on settlement of liabilities of $2,976,771.
As of January 31, 2016 and 2015, the current CEO had accrued salaries of $0 and $136,500, respectively.
As of January 31, 2016, the Company has outstanding notes payable to Net D totaling to $1,257,250 in connection with the Company’s acquisition of Connexum and certain assets of Net D (see Note 9). The sole owner of Net D is a director the Company. Net D also performs certain services for the Company in connection with the latter’s Carrier Services business. During the year ended January 31, 2016, the Company incurred total fees in connection with such services of $133,436. As of January 31, 2016, the Company has an outstanding payable to Net D of $27,942.
During the years ended January 31, 2016 and 2015, the CEO advanced the Company cash of $0 and $52,354, respectively. As of January 31, 2016 and 2015, the amount owed to the prior CEO for advances was $0 and $52,354, respectively.
Related party expenses for the years ended January 31, 2016 and 2015:
|
|
|
|
January 31,
2016
|
|
|
January 31,
2015
|
|
|
Legal
|
Personal Expenses of Mars Callahan
|
|
$
|
-
|
|
|
$
|
102,114
|
|
|
Unauthorized withdrawals
|
Personal Expenses of John Hermansen
|
|
|
-
|
|
|
|
193,215
|
|
|
Unauthorized withdrawals
|
Personal Expenses of Mars Callahan
|
|
|
-
|
|
|
|
105,705
|
|
|
Related Party Expenses
|
|
|
$
|
-
|
|
|
$
|
401,034
|
|
The above related party expenses are unauthorized withdrawal of expenses for personal expenses and past legal bills of Mars Callahan and John Hermansen.
NOTE 16 – SUBSEQUENT EVENTS
Subsequent to January 31, 2016, an aggregate of 80,390,834 common shares were issued for the conversion of debt, accrued interest and associated fees of $205,964.
Subsequent to January 31, 2016,
the Company entered into an agreement to issue 9 convertible promissory notes to unrelated companies for an amount of $290,495.
Subsequent to January 31, 2016, the Company assigned 7 notes with principal amounts totaling to $263,250 to one lender which resulted to the payment of prepayment penalties amounting to $84,995.
On or around April 27, 2016, Tarpon Bay Partners, LLC (“Tarpon Bay”) initiated action against the Company in New York State Supreme Court, case #652178/2016. Tarpon Bay has elected for summary judgment in lieu of complaint. Tarpon Bay is claiming,
inter alia
, that the Company owes $93,500 in unpaid notes and services. The claims stems from intended transactions the Company was to enter with Tarpon Bay. Tarpon Bay was to provide the Company with funding and certain services in exchange for promissory notes from the Company. The notes were executed by the Company, but Tarpon Bay provided no funding or services and is not entitled to repayment of any note given by the Company. The Company intends to vehemently defend the foregoing action.