NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2017 AND 2016
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, 2017 of $26,361,315, a net loss for the year ended January 31, 2017 of $12,303,664, cash flows used in operating activities of $635,292 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.
Reclassifications
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, 2017 and 2016, 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 intangible assets and goodwill at January 31, 2017 and 2016, and recognized an impairment loss of $3,807,207 and $1,200,003 during the year ended January 31, 2017 and 2016.
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, 2017 and 2016, the Company had a valuation allowance for doubtful accounts of $18,876 and $0, respectively, for the Company’s accounts receivable. During the years ended January 31, 2017 and 2016, the Company recorded bad debt expense for uncollectible amounts of $18,876 and $11,782, 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, 2017 and 2016, 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, 2017 and 2016 were $0 and $2,500, 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.
Related Parties
The Company follows ASC 850, "Related Party Disclosures," for the identification of related parties and disclosure of related party transactions. See note 16.
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. For the year ended January 31, 2017 and 2016, respectively, the following options, warrants, convertible notes and Series A convertible preferred stock were excluded from the computation of diluted net loss per shares as the result of the computation was anti-dilutive.
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, 2017 and January 31, 2016 for assets measured at fair value on a recurring basis:
Carrying Value at January 31, 2017
|
January 31, 2017
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities- available for sale
|
|
$
|
102,300
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
102,300
|
|
|
Total assets
|
|
|
102,300
|
|
|
|
-
|
|
|
|
-
|
|
|
|
102,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
2,088,684
|
|
|
|
2,088,684
|
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,088,684
|
|
|
$
|
2,088,684
|
|
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
|
|
Recent Accounting Pronouncements
In September 2017, the FASB has issued Accounting Standards Update (ASU) No. 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments.” The amendments in ASU No. 2017-13 amends the early adoption date option for certain companies related to the adoption of ASU No. 2014-09 and ASU No. 2016-02. Both of the below entities may still adopt using the public company adoption guidance in the related ASUs, as amended. The effective date is the same as the effective date and transition requirements for the amendments for ASU 2014-09 and ASU 2016-02.
In May 2014, the FASB issued an accounting standards update which modifies the requirements for identifying, allocating, and recognizing revenue related to the achievement of performance conditions under contracts with customers. This update also requires additional disclosure related to the nature, amount, timing, and uncertainty of revenue that is recognized under contracts with customers. This guidance is effective for fiscal and interim periods beginning after December 15, 2017 and is required to be applied retrospectively to all revenue arrangements. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.
In January 2017, the FASB has issued Accounting Standards Update (ASU) No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” These amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Effective for public business entities that are a SEC filers for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. ASU 2017-04 should be adopted on a prospective basis.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This new standard clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This new standard will be effective for the Company on January 1, 2018, however, early adoption is permitted with prospective application to any business development transaction.
In December 2016, the FASB has issued Accounting Standards Update (ASU) No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” The amendments affect narrow aspects of the guidance issued in ASU 2014-09 including Loan Guarantee Fees, Contract Costs, Provisions for Losses on Construction-Type and Production-Type Contracts, Disclosure of Remaining Performance Obligations, Disclosure of Prior Period Performance Obligations, Contract Modifications, Contract Asset vs. Receivable, Refund Liability, Advertising Costs, Fixed Odds Wagering Contracts in the Casino Industry, and Costs Capitalized for Advisors to Private Funds and Public Funds. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements for FASB Accounting Standards Codification Topic 606. Public entities should apply Topic 606 (and related amendments) for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein.
The Company is currently evaluating the method of adoption and the potential impact that Topic 606 may have on our financial position and results of operations.
Management has considered all recent accounting pronouncements issued. The Company’s management believes that these recent pronouncements will not have a material effect on the Company’s financial statements.
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, 2017 and 2016 and recorded an unrealized gain on change in fair value of the asset of $24,000 and $49,350, respectively. Total fair value of the available for sale security at January 31, 2017 and 2016 is $102,300 and $78,300, respectively.
NOTE 5 – ACQUISITIONS
XTELUS LLC and XETLUS S.A.
On June 27, 2016, the Company entered into an acquisition agreement with NEOGEN Holdings LLC, whereby the Company acquired 100% of the membership interest of XTELUS LLC and XETLUS S.A. (“XTELUS”). The acquisition of XTELUS 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 XTELUS; (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 XTELUS amounted to $100,000 and consisted of 1 Series D Preferred Stock, which is convertible into $100,000 of common shares at any time following 12 months from the issuance of such 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:
|
|
June 26,
2016
|
|
|
1 share of Series D Preferred Shares
|
|
$
|
100,000
|
|
|
Total Purchase Price
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
Assets and Liabilities:
|
|
June 26,
2016
|
|
|
Current assets
|
|
$
|
51,374
|
|
|
Current liabilities
|
|
|
(29,260
|
)
|
|
Goodwill
|
|
|
77,886
|
|
|
Fair value of total assets
|
|
$
|
100,000
|
|
Revenues of $922,912 and net loss of $58,297 since the acquisition date are included in the consolidated statements of operations and comprehensive income (loss) for the year ended January 31, 2017.
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. Net D is controlled by Chris Hall, who is an officer, director, and a controlling shareholder of the Company.
The fair value of the consideration and the assets acquired is based on the aggregate value of the note payable, preferred stock and 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 payable to a related party with 0% annual interest, 5,000,000 common shares valued at $66,500, 500 Series A Preferred shares valued at $0, 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 Company paid net cash of $134,531 for acquisition of Net D’s asset. 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 to related party
|
|
|
350,000
|
|
|
5,000,000 common shares
|
|
|
66,500
|
|
|
500 Series A Preferred shares
|
|
|
-
|
|
|
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”) from Net D, a related party. 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. Net D and Connexum are controlled by Chris Hall, who is an officer, director, and a controlling shareholder of the Company.
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.
On January 18, 2016, 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.
On January 16, 2017, the Company entered into amendment to acquisition agreement, to amend for issuing Series D Preferred Shares instead of issuing Series C Preferred shares, as follows;
10 Series D Preferred Shares of Gawk Incorporated, if Connexum achieves 80% of anticipated revenue and another 10 Series D Preferred Shares of Gawk Incorporated, if Connexum achieves 100% of anticipated revenue, for a total of 20 shares of Series D Preferred Shares of Gawk Incorporated. The Series D Preferred Shares will convert at the rate of $100,000 for each Series D Preferred Shares held.
On January 18, 2017, Connexum achieved 100% of anticipated revenue within one year from the date of acquisition. As a result, Gawk issued 20 Series D Preferred Shares and recognized additional goodwill of $1,000,000. Total goodwill generated from acquisition of Connexum was $1,416,851 as of January 31, 2017
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 to related party
|
|
$
|
1,000,000
|
|
|
5,000,000 Series B Preferred shares
|
|
|
54,375
|
|
|
Contingent consideration – 20 Series D Preferred shares
|
|
|
2,000,000
|
|
|
Total Purchase Price
|
|
$
|
3,054,375
|
|
|
|
|
|
|
|
|
Fair Value of Consideration:
|
|
January 18,
2016
|
|
|
Current assets
|
|
$
|
86,132
|
|
|
Current liabilities assumed
|
|
|
(172,763
|
)
|
|
Customer list
|
|
|
1,724,155
|
|
|
Goodwill
|
|
|
1,416,851
|
|
|
Fair value of total assets
|
|
$
|
3,054,375
|
|
Unaudited combined proforma results of operations for the year ended January 31, 2017 and 2016 as though the Company acquired Connexum, Net D, and XTELUS on February 1, 2015, are set forth below:
|
|
|
January 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Revenues
|
|
$
|
6,054,109
|
|
|
$
|
5,688,741
|
|
|
Cost of revenues
|
|
|
4,711,771
|
|
|
|
4,085,383
|
|
|
Gross profit
|
|
|
1,342,338
|
|
|
|
1,603,358
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
8,992,236
|
|
|
|
4,082,657
|
|
|
Operating loss
|
|
|
(7,649,898
|
)
|
|
|
(2,479,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
(4,744,045
|
)
|
|
|
(3,143,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued operations
|
|
|
16,118
|
|
|
|
(1,239,427
|
)
|
|
Net Loss
|
|
$
|
(12,377,825
|
)
|
|
$
|
(6,861,759
|
)
|
WebRunner, LLC
On October 30, 2014, the Company, through a comprehensive agreement with Webrunner, LLC (“Webrunner”), has purchased a complete data center. The Company sold WebRunner on October 31, 2016 (see Note 6).
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:
|
|
|
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.
NOTE 6 – DISCONTINUED OPERATIONS
On October 31, 2016, the Company entered into the asset purchase and sale agreement (the “Agreement”) with Giggle Fiber, LLC. Pursuant to the terms of the Agreement, the Company sold the equipment, customer list of Webrunner and bank accounts related to Webrunner for $413,861, payable in installments. The Company recorded gain on sales of assets of $111,467 as discontinued operations during the year ended January 31, 2017. The total consideration received was $401,052.
The following table shows the results of operations of Webrunner for fiscal years 2017 and 2016 which are included in the gain (loss) from discontinued operations:
|
|
|
Years Ended
|
|
|
|
|
July 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Revenue
|
|
$
|
225,575
|
|
|
$
|
318,484
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
General and administration
|
|
|
(186,913
|
)
|
|
|
(179,228
|
)
|
|
Impairment loss
|
|
|
-
|
|
|
|
(1,200,003
|
)
|
|
Depreciation and amortization
|
|
|
(134,011
|
)
|
|
|
(178,680
|
)
|
|
Loss from discontinued operations
|
|
$
|
(95,349
|
)
|
|
$
|
(1,239,427
|
)
|
NOTE 7 – EQUIPMENT
Equipment at January 31, 2017 and 2016 consist of the following:
|
|
|
January 31,
2017
|
|
|
January 31,
2016
|
|
|
Acquisition of Webrunner - Equipment
|
|
|
-
|
|
|
|
176,975
|
|
|
Total tangible assets
|
|
|
-
|
|
|
|
176,975
|
|
|
Accumulated depreciation of tangible assets
|
|
|
-
|
|
|
|
(73,740
|
)
|
|
Total tangible assets
|
|
$
|
-
|
|
|
$
|
103,235
|
|
Depreciation expense for the years ended January 31, 2017 and 2016 amounted to $44,244 and $58,992, respectively. All depreciation expenses are included in loss from discontinued operations.
On October 31, 2016, the Company entered into the asset purchase and sale agreement (the “Agreement”) with Giggle Fiber, LLC. Pursuant to the terms of the Agreement, the Company sold the equipment, customer list of Webrunner and bank accounts related to the Webrunner for $413,861, payable in instalments. The total consideration received was $401,052. The Company recorded gain on sales of asset of $111,467 as discontinued operations during the year ended January 31, 2017 (See Note 16).
The following table summarizes the carrying amounts of the sold assets;
|
|
|
October 31,
|
|
|
Assets
|
|
2016
|
|
|
Bank accounts related to Webrunner
|
|
$
|
12,809
|
|
|
Equipment, net of depreciation of $117,984
|
|
|
58,991
|
|
|
Intangible assets, net of amortization $239,378
|
|
|
119,689
|
|
|
Goodwill
|
|
|
110,905
|
|
|
Total assets
|
|
$
|
302,394
|
|
NOTE 8 – INTANGIBLES AND GOODWILL
Intangible assets at January 31, 2017 and 2016 consist of the following:
|
|
|
January 31,
2017
|
|
|
January 31,
2016
|
|
|
Customer list - Webrunner
|
|
$
|
-
|
|
|
$
|
359,067
|
|
|
IP Address - Webrunner
|
|
|
81,920
|
|
|
|
81,920
|
|
|
Customer list - Net D
|
|
|
-
|
|
|
|
433,376
|
|
|
Customer list - Connexum
|
|
|
1,724,155
|
|
|
|
1,724,155
|
|
|
Total intangible assets
|
|
|
1,806,075
|
|
|
|
2,598,518
|
|
|
Accumulated amortization of intangible assets
|
|
|
(656,244
|
)
|
|
|
(312,173
|
)
|
|
Total intangible assets
|
|
$
|
1,149,831
|
|
|
$
|
2,286,345
|
|
The intangible assets are amortized over an estimated useful life of 3 years. Amortization expense from continuing operations amounted to $746,487 and $155,736 for the years ended January 31, 2017 and 2016, respectively. Amortization expense from discontinued operations amounted to $89,766 and $119,688 for the years ended January 31, 2017 and 2016, respectively.
Goodwill at January 31, 2017 and 2016 consist of the following:
|
|
|
January 31,
2017
|
|
|
January 31,
2016
|
|
|
Goodwill of Webrunner
|
|
$
|
-
|
|
|
$
|
110,905
|
|
|
Goodwill of Net D
|
|
|
-
|
|
|
|
3,548,749
|
|
|
Goodwill of Connexum
|
|
|
1,416,851
|
|
|
|
416,851
|
|
|
|
|
$
|
1,416,851
|
|
|
$
|
4,076,505
|
|
During the year ended January 31, 2017, we determined that the carrying value of Net D and XTELUS, which are separate reporting units, exceeded its fair value at the measurement date, requiring step two in the impairment test process. The fair value of the Net D and XTELUS reporting unit were determined primarily using an income approach based on the present value of discounted cash flows. We determined the implied fair value of intangible asset and goodwill were substantially below the carrying value of the reporting unit. Accordingly, we recognized impairment loss of $180,572 in intangible asset and $3,548,749 in goodwill for Net D and $77,886 in goodwill for XTELUS, which resulted in no intangible asset and goodwill remaining for Net D and XTELUS as of January 31, 2017.
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.
NOTE 9 – NOTES PAYABLE
The Company had the following notes payable and notes payable - related party outstanding as of January 31, 2017 and 2016:
Notes Payable
|
|
|
January 31,
2017
|
|
|
January 31,
2016
|
|
|
Dated – October 30, 2014
|
|
$
|
10,000
|
|
|
$
|
10,000
|
|
|
Dated – June 3, 2015
|
|
|
-
|
|
|
|
25,000
|
|
|
Dated – December 11, 2015
|
|
|
-
|
|
|
|
50,000
|
|
|
Dated – August 4, 2016
|
|
|
25,000
|
|
|
|
-
|
|
|
Dated – September 30, 2016
|
|
|
65,476
|
|
|
|
-
|
|
|
Total notes payable
|
|
|
100,476
|
|
|
|
85,000
|
|
|
Less: debt discount and deferred financing fees
|
|
|
(1,546
|
)
|
|
|
-
|
|
|
|
|
|
98,930
|
|
|
|
85,000
|
|
|
Less: current portion of notes payable
|
|
|
98,930
|
|
|
|
85,000
|
|
|
Long-term notes payable
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company recognized amortization expense related to the debt discount and deferred financing fees of $1,404 and $0 for the year ended January 31, 2017 and 2016, respectively. The total borrowings and principal repayment on note payable during the year ended January 31, 2017 was $147,050 and $59,524, respectively.
Dated - October 30, 2014
On October 30, 2014, the Company exercised the comprehensive acquisition agreement of Webrunner, LLC (“Webrunner”) 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 note issued on June 3, 2015 matured in December 2015. On August 4, 2016, the Company entered into the new agreement with Crossover Capital Fund I, LLC, which the Company issued a new convertible note of $75,000 for the payment of the two notes totaling $75,000. As a result of this agreement, the Company recognized gain on debt settlement of $9,279 for the year ended January 31, 2017.
Dated – August 4, 2016
The note was issued to Mr. Doyle Knudson, are subject to annual interest of 15% and are secured by 250,000 shares of common stock. The note matured in February 2017. The total cash proceeds received from the note was $25,000
Dated – September 30, 2016
The Company entered into the revenue based factoring agreement with Powerup Lending Group, Ltd. and received cash of $125,000. The note includes an original issue discount and financing fee of $2,950 and the Company received cash of $122,050. The Company is required to make weekly principal and interest payments of $4,560 for a period of 34 weeks through May 30, 2017.
Notes Payable - related party
|
|
|
January 31,
2017
|
|
|
January 31,
2016
|
|
|
Dated – April 23, 2015
|
|
$
|
231,250
|
|
|
$
|
282,250
|
|
|
Dated - January 18, 2016
|
|
|
-
|
|
|
|
975,000
|
|
|
Dated - December 21, 2016
|
|
|
542,349
|
|
|
|
-
|
|
|
Total notes payable
|
|
|
773,599
|
|
|
|
1,257,250
|
|
|
Less: current portion of notes payable
|
|
|
614,085
|
|
|
|
868,361
|
|
|
Long-term notes payable
|
|
$
|
159,514
|
|
|
$
|
388,889
|
|
The total borrowings and principal repayment on related party note payable during the year ended January 31, 2017 was $25,000 and $582,903, respectively
Dated - April 23, 2015
On May 1, 2015, in connection with the acquisition of the assets of Net D Consulting, Inc. (“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 $51,000 during the year ended January 31, 2017.
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 incurred additional $25,000 borrowing from Net D during the year ended January 31, 2017. The Company paid principal and interest payments of $574,252 for the year ended January 31, 2017. On December 21, 2016, the Company entered into the new agreement which the company issued a note payable of $574,252 for payment of the old Note of $500,000. As a result, the Company recorded loss on debt extinguishment of $74,252 for the year ended January 31, 2017.
Dated – December 21, 2016
On December 21, 2016, the Company entered into the new agreement which the company issued a note payable of $574,252 for payment of the Note dated January 18, 2016. The Note bears interest rate of $7.29% for 1
st
12 months and then 3.25% for 13 through 18 months. The Company is required to make monthly principal and interest payments of $226,985 for a period of 18 months through June 20, 2018. The Company paid principal and interest payments of $48,956 for the year ended January 31, 2017.
NOTE 10 – CONVERTIBLE NOTES PAYABLE
The Company had the following convertible notes payable outstanding as of January 31, 2017 and 2016:
|
|
|
January 31,
2017
|
|
|
January 31,
2016
|
|
|
Promissory Note - Issued August 22, 2014, with a fixed conversion price of $0.10 per common share or 17,000,000 shares of common stock.
|
|
$
|
1,700,000
|
|
|
$
|
1,700,000
|
|
|
Promissory notes – Issued in fiscal year 2016, with variable conversion features.
|
|
|
83,951
|
|
|
|
449,666
|
|
|
Promissory notes – Issued in fiscal year 2017, with variable conversion features.
|
|
|
876,791
|
|
|
|
-
|
|
|
Total convertible notes payable
|
|
|
2,660,742
|
|
|
|
2,149,666
|
|
|
Less: debt discount and deferred financing fees
|
|
|
(598,790
|
)
|
|
|
(204,427
|
)
|
|
|
|
|
2,061,952
|
|
|
|
1,945,239
|
|
|
Less: current portion of convertible notes payable
|
|
|
2,061,952
|
|
|
|
1,934,932
|
|
|
Long-term convertible notes payable
|
|
$
|
-
|
|
|
$
|
10,307
|
|
The Company recognized amortization expense related to the debt discount and deferred financing fees of $1,109,303 and $342,831 for the year ended January 31, 2017 and 2016, respectively.
Promissory Note - August 22, 2014
In connection with the settlement agreement entered into with Doyle Knudson, an investor, in 2014, the Company issued a $1.8 million convertible promissory note with a fixed conversion price of $0.10 per share or 18,000,000 shares of common stock. The note is subject to annual interest of 10%, matured in August 2015 and is currently past due. In May and December 2015, a total of $100,000 note principal was transferred to another lender.
The Company initially recorded a discount on the convertible note due to a beneficial conversion feature of $358,200 and amortized $208,950 for the year ended January 31, 2016. Due to the variable conversion rates in the other convertible notes (see below), the $1,700,000 balance of the note became tainted and the embedded fixed conversion option was bifurcated and accounted for as a derivative liability.
Promissory Notes - 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 or 180 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.
Promissory Notes - Issued in fiscal year 2017
During the year ended January 31, 2017, the Company issued a total of $1,266,417 notes with the following terms:
|
|
·
|
Terms ranging from 9 months to 20 months
|
|
|
·
|
Annual interest rates ranging from 8% to 12%
|
|
|
·
|
Convertible at the option of the holders either at issuance or 180 days from issuance.
|
|
|
·
|
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 a floor of $0.0005 and $0.00005 per share.
|
Certain notes allow the Company to redeem the notes at rates ranging from 118% to 150% depending on the redemption date provided that no redemption is allowed after the 180
th
day. Likewise, certain notes include original issue discounts and deferred financing cost totaling to $146,976. The Company received cash of $785,858. During the year ended January 31, 2017, the Company repaid notes with principal amounts totaling to $33,333 and a total of $5,517 accrued interest was also added to principal.
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, including the notes issued in prior years, during the year ended January 31, 2017 amounted to $3,245,991. $1,356,692 of the value assigned to the derivative liability was recognized as a debt discount to the notes while the balance of $1,889,299 was recognized as a “day 1” derivative loss.
During the year ended January 31, 2017, the Company converted notes with principal amounts of $579,784 and accrued interest of $35,744 into 2,054,226,375 shares of common stock. The corresponding derivative liability at the date of conversion of $1,258,063 was credited to additional paid in capital.
Replacement of Notes
During the year ended January 31, 2017, the Company assigned 16 notes with outstanding principal amounts totaling to $424,178 to two lenders which resulted to the payment of prepayment penalties amounting to $156,809 and recognized loss on debt settlement of $267,646 due to the modification of the replacement note conversion feature, and the difference between the fair value of derivative of the conversion feature.
The following table summarizes the detail of assigned 16 notes;
|
|
|
Assigned
Notes
|
|
|
Principal
amount
|
|
|
Accrued
interest
|
|
|
Prepayment penalties
|
|
|
Tranches in effect as of January 31, 2017
|
|
|
5
|
|
|
$
|
147,741
|
|
|
$
|
12,992
|
|
|
$
|
66,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tranches in not effect as of January 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tranches in effect as of February 12, 2017
|
|
|
5
|
|
|
|
69,549
|
|
|
|
5,472
|
|
|
|
22,507
|
|
|
Tranches in effect as of March 12, 2017
|
|
|
2
|
|
|
|
60,000
|
|
|
|
6,401
|
|
|
|
19,920
|
|
|
Tranches in effect as of April 12, 2017
|
|
|
2
|
|
|
|
71,131
|
|
|
|
5,188
|
|
|
|
22,895
|
|
|
Tranches in effect as of May 12, 2017
|
|
|
2
|
|
|
|
75,757
|
|
|
|
7,827
|
|
|
|
25,075
|
|
|
Total
|
|
|
16
|
|
|
$
|
424,178
|
|
|
$
|
37,880
|
|
|
$
|
156,809
|
|
During the year ended January 31, 2017, the Company assigned an additional 10 notes with principal amounts totaling to $375,750 to two lenders. Prepayment of $142,670 was paid by cash and recognized in interest expense, and $31,440 was non-cash and recognized as prepayment penalties.
NOTE 11 –
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, 2017. 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, 2017 and 2016:
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
January 31,
2017
|
|
|
January 31,
2016
|
|
|
Expected term
|
|
0 - 1.50 years
|
|
|
0.4 - 2 years
|
|
|
Expected average volatility
|
|
120% - 716
|
%
|
|
249% - 328
|
%
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
0
|
|
|
Risk-free interest rate
|
|
0.18% - 0.84
|
%
|
|
0.05% - 0.83
|
%
|
At January 31, 2017, the estimated fair values of the liabilities measured on a recurring basis are as follows:
|
January 31, 2017
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Promissory Note – Issued August 22, 2014
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,400
|
|
|
$
|
3,400
|
|
|
Promissory Notes – Issued in fiscal year 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
164,794
|
|
|
|
164,794
|
|
|
Promissory Notes – Issued in fiscal year 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
1,920,490
|
|
|
|
1,920,490
|
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,088,684
|
|
|
$
|
2,088,684
|
|
The following table summarizes the changes in the derivative liabilities during the year ended January 31, 2017:
|
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 recognized as options compensation
|
|
|
340,200
|
|
|
Addition of new derivatives recognized as day one loss on derivatives
|
|
|
469,730
|
|
|
Derivatives settled upon conversion of debt and exercise of warrants
|
|
|
(238,314
|
)
|
|
Reclassification from APIC to derivative due to tainted instruments
|
|
|
586,250
|
|
|
Loss on change in fair value of the derivative
|
|
|
(796,629
|
)
|
|
Balance - January 31, 2016
|
|
$
|
620,237
|
|
|
|
|
|
|
|
|
Addition of new derivatives recognized as debt discounts
|
|
|
1,356,692
|
|
|
Addition of new derivatives recognized as options compensation
|
|
|
177,000
|
|
|
Addition of new derivatives recognized as day one loss on derivatives
|
|
|
1,289,210
|
|
|
Derivatives settled upon conversion of debt and exercise of warrants
|
|
|
(1,417,063
|
)
|
|
Loss on change in fair value of the derivative
|
|
|
62,608
|
|
|
Balance - January 31, 2017
|
|
$
|
2,088,684
|
|
The net gain on derivatives during the year ended January 31, 2017 and 2016 was $1,351,818 and $326,899, respectively.
NOTE 12 – 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 deliver 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, 2017 and 2016, the Company issued 0 and 4,960,000 common shares, respectively, for a total consideration of $0 and $496,000, respectively.
As of January 31, 2017, and 2016, investor payable – common stock totaled $658,000, respectively.
Preferred Stock 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). During the year ended January 31, 2017, the Company issued 13,437,500 Series B Preferred shares to settle this 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.
As of January 31, 2017 and 2016, preferred stock payable totaled $0 and $13,438, respectively.
NOTE 13 – EQUITY
Amendment to Articles of Incorporation or Bylaws
On April 10, 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 15,000,000,000 shares. With 14,900,000,000 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, 2017, and 2016, 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, 2017, the Company issued Series B Preferred shares, as follows:
|
|
·
|
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. During the nine months ended October 31, 2016 the Company issued 13,437,500 Series B Preferred shares to settle this payable.
|
|
|
·
|
On February 3, 2016, 4,750,000 shares were sold for cash of $20,000. On issuance, value of the underlining common stock represented a beneficial conversion feature of $23,344. The beneficial conversion feature will be recognized when the preferred stock becomes convertible on August 3, 2016 as a deemed dividend.
|
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, 2017, and 2016, 68,187,500 and 50,000,000 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, 2017, the Company determined the Series C Convertible Preferred Stock is considered to be contingently redeemable convertible and as a result, has been classified as mezzanine equity in the Company's balance sheet, as of January 31, 2017 and 2016.
During the year ended January 31, 2017, the Company issued Series C Preferred shares, as follows:
|
|
·
|
1 share with a fair value of $1,000,000 as settlement of amounts due to the CEO totaling $271,200
|
|
|
·
|
1 share with a fair value of $1,000,000 as settlement of amounts due to the CFO totaling $164,000
|
As a result, the Company recorded a loss on settlement of debt of $1,564,800.
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 debt 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, 2017, and 2016, 16 and 14 shares of Series C Preferred Stock were issued and outstanding, respectively.
Series D Convertible Preferred Stock
On June 23, 2016, pursuant to its Articles of Incorporation and Bylaws, the Board of Directors of the Company, unanimously approved the designation of a new series of preferred stock, "Series D Convertible Preferred Stock.
Each share of the Series D 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 $100,000.
During the year ended January 31, 2017, the Company determined the Series D Convertible Preferred Stock is considered to be contingently redeemable convertible and as a result, has been classified as mezzanine equity in the Company's balance sheet, as of January 31, 2017 and 2016.
During year ended January 31, 2017, the Company issued Series D Preferred shares, as follows:
|
|
·
|
1 share with a fair value of $100,000 in connection with the acquisition of XTELUS (see Note 5).
|
|
|
·
|
20 shares with a fair value of $2,000,000 in connection with the acquisition of Connexum (See Note 5)
|
As of January 31, 2017 and 2016, 21 and 0 shares of Series D Preferred Stock were issued and outstanding, respectively.
Common stock
The Company is authorized to issue 14,900,000,000 shares of common stock at a par value of $0.001.
During the year ended January 31, 2017, the Company issued common shares, as follows:
|
|
·
|
2,054,226,375 common shares were issued for the conversion of debt and accrued interest of $615,528.
|
|
|
·
|
41,000,000 common shares in exchange for the exercise of options for no consideration
|
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.
|
As of January 31, 2017, and 2016, 2,357,089,633 and 261,863,258 shares of common stock were issued and outstanding, respectively.
Warrants and Options
Warrants
As of January 31, 2017, and 2016, there are no warrants outstanding.
Options
The Company has 9,100,000 options issued in connection with the acquisition of Webrunner.
During year ended January 31, 2017, the Company entered into three separate agreements with consultants to provide the Company with consulting services in exchange for options of 17,000,000, 5,000,000 and 17,000,000 with an exercise price of $0, respectively. The options can be exercised by the holder any time prior to June 30, August 31, and September 30, 2016. These options were tainted as a result of the convertible notes with variable conversion rates (see Note 7) and were accounted for as derivative instruments at the time of issuance. The fair value of the derivatives related to the options amounting to $177,000 was recorded as stock compensation expense during the year ended January 31, 2017, with a corresponding credit to derivative liability (see Note 11).
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 11).
During the year ended January 31, 2017, 41,000,000 options were exercise and the corresponding derivative liability at the date of exercise of $159,000 was credited to additional paid in capital.
During the year ended January 31, 2017, 25,000,000 options were forfeited, as a result, the company recorded gain on change in fair value of derivative of $81,472.
The following table summarizes information relating to outstanding and exercisable stock options as of January 31, 2017:
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 31, 2015
|
|
|
9,100,000
|
|
|
$
|
0.10
|
|
|
Granted
|
|
|
27,000,000
|
|
|
$
|
0.005
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
Forfeited/canceled
|
|
|
-
|
|
|
$
|
-
|
|
|
Outstanding, January 31, 2016
|
|
|
36,100,000
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
39,000,000
|
|
|
$
|
-
|
|
|
Exercised
|
|
|
(41,000,000
|
)
|
|
$
|
(0.0009
|
)
|
|
Forfeited/canceled
|
|
|
(25,000,000
|
)
|
|
$
|
-
|
|
|
Outstanding, January 1, 2017
|
|
|
9,100,000
|
|
|
$
|
0.10
|
|
|
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
|
|
|
|
2.75
|
|
|
$
|
0.10
|
|
|
|
9,100,000
|
|
|
$
|
0.10
|
|
The options have no intrinsic value at January 31, 2017.
Employee Incentive Bonus Plan
On June 27, 2016, the Company entered into employee agreement with two employees that contain preferred share issuance incentive bonuses based on various sales targets for XTELUS, for the 12- month period ending June 27, 2017. The first award contains cash compensation of $10,000 per month and the ability to earn 500,000 shares of Series B preferred stock if XTELUS revenue of $1,000,000 is generated within 12 months. The second award contains cash compensation of $20,000 per month, 5 shares of Series D preferred stock earned on June 27, 2017 (with 1 share earned immediately upon revenue of $100,000 being generated within first six months) and the ability to earn up to 6,500,000 shares of Series B preferred stock based upon XTELUS revenue targets up to $1,000,000 over 12 months and up to an additional 3,000,000 shares of Series B preferred stock based upon XTELUS revenue targets up between $1,000,000 and greater than $7,000,000 over 12 months. The Company assessed the probability that the revenue targets will be met and determined that the target revenue will most likely meet $1,000,000 and based on the stock awards, estimated the fair value of 6,500,000 shares of Preferred B stock at $32,500, 5 shares of Preferred D stock at $500,000 and 500,000 shares of Preferred B stock at $2,500, respectively. For the year ended January 31, 2017, the Company recognized stock based compensation of $361,000 under these awards, with a corresponding credit to additional paid in capital.
NOTE 14 – COMMITMENTS AND CONTINGENCIES
Rent
The lease is related to Webrunner business and on October 30, 2016, the Company entered into the sale of Webrunner business (See Note 6).
Rent expense from discontinued operations for the years ended January 31, 2017 and 2016 was $112,229 and $77,633, respectively.
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 and during the year ended January 31, 2017, the Company wrote off the rest of 50% of the deposit amounting to $562,500 to impairment expense.
Contingency
StoneRidge
Gawk contracted Stoneridge Capital, LLC. (“Stoneridge”) for Finance and Business Development services within the entertainment and technology sector that applies to Company’s business model. Subsequent to signing these agreements Gawk pivoted the company’s focus from the streaming media market to the telecommunications sector at which point Stoneridge’s services were no longer needed nor had any services to that point been received by the Company. Pursuant to the agreement, Gawk agreed to pay Stoneridge $750,000 but feel this amount is not owing. As of January 31, 2017 and 2016, $750,000 and $250,000 was recorded in accounts payable, respectively.
Windstream Holdings, Inc.
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 unlikely 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.
On May 25, 2016, the Company reached a settlement with Windstream for $20,000, which the Company paid during the year ended January 31, 2017.
Tarpon Bay Partners LLC
On May 26, 2016, Tarpon Bay Partners, LLC (“Tarpon Bay”) initiated action against the Company in New York State Supreme Court, case #652178/2016. The company and Tarpon Bay Partners, LLC reached a settlement on December 29, 2016 and the Company paid $50,000 in accordance with the settlement agreement.
John Boritz
On or about November 11, 2016 a verified complaint was filed in the Circuit Court for Howard County, Maryland being case number C-16-107586-DT against the Company by an investor known as John Boritz. The Company intends to fervently defend the foregoing action.
NOTE 15 – INCOME TAXES
The benefit for income taxes from continued operations for the years ended January 31, 2017 and 2016 consist of the following:
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Year Ended
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January 31,
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2017
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2016
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Current:
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Federal
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$
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-
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$
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-
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State
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-
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-
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Deferred:
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Federal
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$
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871,182
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$
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531,744
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State
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230,607
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140,756
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1,101,789
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672,500
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Valuation allowance
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(1,101,789
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)
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(672,500
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)
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Provision benefit for income taxes, net
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$
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-
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$
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-
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The difference between income tax expense computed by applying the federal statutory corporate tax rate and actual income tax expense is as follows:
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January 31,
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2017
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2016
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Statutory federal income tax rate
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(34%
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)
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(34%
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)
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State income taxes and other
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9
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%
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9
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%
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Change in valuation allowance
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34
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%
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34
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%
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Effective tax rate
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-
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-
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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:
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January 31,
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2017
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2016
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Net operating loss carryforward
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$
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4,517,999
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$
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3,416,210
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Valuation allowance
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(4,517,999
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)
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(3,416,210
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)
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Deferred income tax asset
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$
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-
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$
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-
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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 $10,507,000 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, 2017 and 2016, 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.
Tax returns for the years ended 2011 through 2017, are subject to examination.
NOTE 16 – RELATED PARTY TRANSACTIONS
During the years ended January 31, 2017 and 2016, the CEO advanced the Company cash of $200, and $0, respectively.
During the years ended January 31, 2017, the Company paid a total of $218,500 consulting fees to Scrip2Screen, an entity owned by Scott Kettle.
On January 31, 2017, the Company issued 2 Series C Preferred shares with a fair value of $2,000,000 as settlement of amounts due to the CEO and CFO totaling $435,200. As a result, the Company recorded a loss on settlement of liabilities of $1,564,800. The Company leases executive housing for the CFO and rent expense of $44,000 was also settled by the issuance of this preferred stock.
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, 2017, and 2016, the amount owed to the CEO and CFO was $0 and $0, respectively.
As of January 31, 2017, and 2016, the Company has outstanding notes payable to Net D totaling to $773,599 and $1,257,250, respectively, in connection with the Company’s acquisition of Connexum and certain assets of Net D (see Note 8). 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, 2017 and 2016, the Company incurred total fees in connection with such services of $63,334 and $133,436, respectively. As of January 31, 2017, and 2016, the Company has an outstanding payable to Net D of $235,917 and $27,942, respectively.
NOTE 17 – SUBSEQUENT EVENTS
Subsequent to January 31, 2017 through September 28, 2017, the Company had the following transactions:
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Issued an aggregate of 3,985,956,874 common shares were issued for the conversion of debt, accrued interest and associated fees of $214,708.
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The Company assigned 11 notes with principal amounts and accrued interest totaling to $301,324 to one lender which resulted to the payment of settlement premiums amounting to $90,397.
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On March 30, 2017, the Company entered into a Settlement Agreement with the former directors and officers of Webrunners.
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On February 27, 2017, the Company entered into an equity financing agreement. The Company shall issue and sell to the Investor, and the Investor shall purchase from the Company, up to that number of Shares having an aggregate Purchase Price of $7,000,000.
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