NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For The Three Months Ended March 31,
2016
NOTE 1 - DESCRIPTION OF BUSINESS
Organization
Wowio, LLC was formed on June 29, 2009
under the laws of Texas (“Wowio Texas”). On July 16, 2010, the Company converted to a C-corporation under the laws
of Texas. Wowio, Inc. and its wholly owned subsidiary Carthay Circle Publishing (collectively, the “Company”, “we”,
“our”, “Wowio”) is an emerging company in the creation, production, distribution and monetization of digital
entertainment. We specialize in creating custom brand strategies to develop, produce, distribute and promote entertainment properties
across multiple product lines and distribution channels, including our own websites, traditional media, social media and emerging
technologies.
The Company operates in a rapidly changing
technological and digital entertainment market and its activities are subject to significant risks and uncertainties, including
failing to secure additional funding to further exploit the Company’s current technology and digital entertainment properties.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
This summary of significant accounting
policies is presented to assist the reader in understanding and evaluating the Company’s consolidated financial statements.
The consolidated financial statements and notes are the representations of the Company’s management, who are responsible
for their integrity and objectivity. The accounting policies conform to accounting principles generally accepted in the United
States of America (“U.S. GAAP”) and have been consistently applied in the preparation of the consolidated financial
statements.
Basis of Presentation
The condensed consolidated balance sheet
as of December 31, 2015, which has been derived from consolidated audited financial statements and the interim unaudited condensed
consolidated financial statements as of March 31, 2016 and 2015 have been prepared in accordance with U.S. GAAP for
interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and
Article 8 of SEC Regulation S-X. These condensed consolidated financial statements do not include all of the information and footnotes
required by U.S. GAAP for complete financial statements. Therefore, these unaudited condensed consolidated financial statements
should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year
ended December 31, 2015, included in the Company’s Form 10-K.
The condensed consolidated financial statements
included herein as of and for the three months ended March 31, 2016 and 2015 are unaudited; however, they contain all normal recurring
accruals and adjustments that, in the opinion of the Company’s management, are necessary to present fairly the condensed
consolidated financial position of the Company as of March 31, 2016, the condensed consolidated results of its operations for the
three months ended March 31, 2016 and 2015, the condensed consolidated statement of stockholder’s deficit for the three months
ended March 31, 2016 and condensed consolidated statements of cash flows for the three months ended March 31, 2016 and 2015. The
results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for
the full year or any future interim periods.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
“Revenue from Contracts
with Customers (Topic 606)”
(“ASU 2014-09”). ASU 2014-09 amends the guidance for revenue recognition
to replace numerous, industry specific requirements and converges areas under this topic with those of the International Financial
Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer
of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature,
amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization
and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing
estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. Entities can transition
to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. On July 9, 2015, the FASB
approved amendments deferring the effective date by one year to December 15, 2017 for annual reporting periods beginning after
that date and permitting early adoption of the standard, but not before the original effective date or for reporting periods beginning
after December 15, 2016. The Company has not yet selected a transition method and is currently assessing the impact the adoption of ASU 2014-09 will have on our consolidated financial statements and disclosures.
In August 2014, the FASB issued ASU No.
2014-15,
“Presentation of Financial Statements - Going Concern”
. The amendments in this update provide
guidance in U.S. GAAP about management’s responsibilities to evaluate whether there is substantial doubt about an entity’s
ability to continue as a going concern and to provide related footnote disclosures. The main provision of the amendments are for
an entity’s management, in connection with the preparation of financial statements, to evaluate whether there are conditions
or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern
within one year after the date that the financial statements are issued. Management’s evaluation should be based on relevant
conditions and events that are known or reasonably knowable at the date the consolidated financial statements are issued. When
management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going
concern, the entity should disclose information that enables users of the consolidated financial statements to understand all
of the following: (1) principal conditions or events that raised substantial doubt about the entity’s ability to continue
as a going concern (before consideration of management’s plans); (2) management’s evaluation of the significance of
those conditions or events in relation to the entity’s ability to meet its obligations; and (3) management’s plans
that alleviated substantial doubt about the entity’s ability to continue as a going concern or management’s plans
that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue
as a going concern. The amendments in this update are effective for interim and annual reporting periods after December 15, 2016
and early application is permitted. The Company is currently assessing this guidance for future implementation.
In April 2015, the FASB issued
Accounting Standard Update (“ASU”) 2015-03, Simplifying the Presentation of Debt Issuance Costs. This update
requires capitalized debt issuance costs to be classified as a reduction to the carrying value of debt rather than a deferred
charge, as is currently required. This update was effective for the Company for all annual and interim periods beginning
after December 15, 2015 and is required to be adopted retroactively for all periods presented, and early adoption was
permitted. Effective on January 1, 2016, the Company adopted ASU 2015-03 and determined there was no impact of this new
accounting standard on its consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include
the accounts of Wowio, Inc. and its wholly-owned subsidiary Carthay Circle Publishing. All intercompany balances and transactions
have been eliminated in consolidation.
Revenue Recognition and Deferred Revenue
The Company recognizes revenues in accordance
with FASB Accounting Standards Codification (“ASC”) Topic 605, which requires that four basic criteria must be met
before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling
price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (4) will be based on management’s
judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions
for discounts and rebates to customers, estimated returns and allowances, and other adjustments will be provided for in the same
period the related sales are recorded. The Company will defer any revenue for which the product has not been delivered or for which
services have not been rendered or are subject to refund until such time that the Company and the customer jointly determine that
the product has been delivered or services have been rendered or no refund will be required.
The Company’s primary revenues streams
are as follows:
eBooks
For eBook downloads purchased
by the customer directly through the Company’s website, the Company recognizes revenue when the right to download content
is granted. The Company evaluates whether it is appropriate to record the gross amount of product sales and related costs or the
net amount earned. Generally, the Company records such revenues on a net basis due to a general lack of indicators that the Company
is the primary obligor primarily due to the Company’s lack of ability to determine price. Typically for these sales, the
Company’s net revenues consist of a credit card processing fee along with the majority of the advertising fee when there
is an ad sponsor.
Occasionally, the Company sells
download cards to retailers and directly to end customers, which are redeemable on its websites for content downloads over an established
time frame. The Company records proceeds from the initial sale of the card to deferred revenue, which is included in accounts payable
and accrued expenses in the accompanying consolidated balance sheets, and is recognized as revenue over the related download period,
which approximates the usage period.
Advertising
Visitor demographics and time
spent on a website are the primary drivers behind advertising-based revenue models for internet properties. Website advertising
revenue is primarily recognized on a flat-fee basis based on cost per thousand impressions (“CPM”). The Company earns
CPM revenue from the display of graphical advertisements on its websites. Revenue from flat-fee services is based on a customer’s
period of contractual service and is recognized on a straight-line basis over the term of the contract. Proceeds from such contracts
are deferred and are included in revenue on a pro-rata basis over the term of the related agreements.
Patent Licensing
The Company owns Patent No.
7,848,951, issued by the USPTO on December 7, 2010, protecting the insertion of ads into eBooks. The Company intends to pursue
patent licensing arrangements with eBook distribution outlets looking to create new revenue streams for eBook downloads. The Company
will also pursue any violators who infringe on the patent’s claims, ultimately generating license revenues on a per-book
or per-ad basis.
Revenue from patent licensing
arrangements is recognized when earned, estimable and realizable. The timing of revenue recognition is dependent on the terms of
each license agreement and on the timing of sales of licensed products. The Company generally recognizes royalty revenue when it
is reported to the Company by its licensees, which is generally one quarter in arrears from the licensees’ sales. For licensing
fees that are not determined by the number of licensed units sold, the Company recognizes license fee revenue on a straight-line
basis over the life of the license.
Creative IP Licensing
Revenues are also generated
by the exploitation of WOWIO’s own proprietary content of creative material such as comic books, graphic novels, screenplays,
and other published and non-published content. The WOWIO-owned Spacedog library is available for sale on wowio.com and the Company
retains 90% of all retail sales for that content library.
The Company’s content
also generates revenues from licensing stories/characters/concepts to studios and other producing partners. Licensing deals that
may generate revenue for the Company include film option/acquisition fees, television option/acquisition fees, video game licensing,
content licensing for apps, apparel and merchandise licensing.
Concentrations of Credit Risk
A financial instrument which potentially
subjects the Company to concentrations of credit risk is cash. The Company places its cash with financial institutions deemed by
management to be of high credit quality. The Federal Deposit Insurance Corporation (“FDIC”) provides basic deposit
coverage with limits up to $250,000 per owner. At March 31, 2016 and December 31, 2015, there were no uninsured amounts.
During the three months ended March 31, 2015, one customer accounted for approximately 98% of revenues. (see Note 8)
Use of Estimates
The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of
revenues and expenses during the reporting periods.
Significant estimates made by
management include, among others, fair value of common stock and preferred stock issued, fair value of beneficial conversion
features, fair value of derivative liabilities and realization of deferred tax assets.
The Company bases its estimates on historical experience, knowledge of current conditions and belief of what could occur in
the future considering available information. The Company reviews its estimates on an on-going basis. The actual results
experienced by the Company may differ materially and adversely from its estimates. To the extent there are material
differences between the estimates and actual results, future results of operations will be affected.
Fair Value Measurements
Fair value measurements are determined
based on the assumptions that market participants would use in pricing an asset or liability. U.S. GAAP establishes a hierarchy
for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs
by requiring that the most observable inputs be used when available. The established fair value hierarchy prioritizes the use of
inputs used in valuation methodologies into the following three levels:
Level 1: Quoted prices (unadjusted)
for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of
fair value and must be used to measure fair value whenever available.
Level 2: Significant other observable
inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable
inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing
an asset or liability. For example, level 3 inputs would relate to forecasts of future earnings and cash flows used in a discounted
future cash flows method.
The Company’s financial instruments
consist of cash, accounts payable, accrued expenses, notes payable, convertible notes payable and related party notes payable.
The Company cannot determine the estimated fair value of its convertible notes payable as instruments similar to the convertible
notes payable could not be found. Other than for convertible notes payable, the carrying value for all such instruments approximates
fair value due to the short-term nature of the instruments.
The Company uses Level 3 of the fair value
hierarchy to measure the fair value of the derivative liabilities and revalues its derivative convertible notes, preferred stock
and warrant liabilities at every reporting period and recognizes gains or losses in the statements of operations that are attributable
to the change in the fair value of the derivative convertible notes, preferred stock and warrant liabilities.
Beneficial Conversion Features
In certain instances, the Company has entered
into convertible notes that provide for an effective or actual rate of conversion that is below market value, and the embedded
beneficial conversion feature (“BCF”) does not qualify for derivative treatment. In these instances, the Company accounts
for the value of the BCF as a debt discount, which is then amortized to interest expense over the life of the related debt using
the straight-line method, which approximates the effective interest method.
Advertising Expense
The Company expenses marketing, promotions
and advertising costs as incurred. For the three months ended March 31, 2016 and 2015, such costs totaled $0 and $540, respectively.
Such costs are included in general and administrative expense in the accompanying consolidated statements of operations.
Stock-Based Compensation
All share-based payments, including grants
of stock to employees, directors and consultants, are recognized in the consolidated financial statements based upon their estimated
fair values.
The Company’s accounting policy for
equity instruments issued to consultants and vendors in exchange for goods and services follows ASC Topic 505. As such, the value
of the applicable stock-based compensation is periodically re-measured and income or expense is recognized during their vesting
terms. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at
which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s
performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is primarily
recognized over the term of the consulting agreement. In accordance with FASB guidance, an asset acquired in exchange for the issuance
of fully vested, non-forfeitable equity instruments should not be presented or classified as an offset to equity on the grantor’s
balance sheet once the equity instrument is granted for accounting purposes.
Income Taxes
The Company accounts for income
taxes under the provision of ASC 740. As of March 31, 2016 and December 31, 2015, there were no unrecognized tax benefits
included in the consolidated balance sheets that would, if recognized, affect the effective tax rate. The Company’s
practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no
accrual for interest or penalties on its consolidated balance sheets as of March 31, 2016 and December 31, 2015 and has not
recognized interest and/or penalties in the consolidated statements of operations for the three months ended March 31, 2016
and 2015. The Company is subject to taxation in the United States, Texas and California.
Basic and Diluted Loss per Common Share
Basic net loss per common share is
computed by dividing net loss attributable to common stockholders for the period by the weighted-average number of common
shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss attributable to common
stockholders for the period by the weighted-average number of common and common equivalent shares, such as warrants
outstanding during the period. Common stock equivalents from warrants, preferred stock and convertible notes payable were
17,243,698,091
and
1,895,235 for the three months ended March 31, 2016 and 2015, respectively, and are excluded from the calculation of diluted
net loss per share for all periods presented because the effect is anti-dilutive.
Derivative Liabilities
The Company evaluates debt instruments,
preferred stock, stock options, stock warrants or other contracts to determine if those contracts or embedded components of those
contracts qualify as derivatives to be separately accounted for under the relevant sections of ASC Topic 815-40,
Derivative
Instruments and Hedging: Contracts in Entity’s Own Equity
. The result of this accounting treatment could be that the
fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at each balance sheet date
and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded
in the statement of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument
is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are
initially classified as equity that become subject to reclassification under ASC Topic 815-40 are reclassified to a liability account
at the fair value of the instrument on the reclassification date.
Certain of the Company’s embedded
conversion features on debt, preferred stock and warrants with potentially insufficient authorized shares to settle outstanding
contracts in the future are treated as derivatives for accounting purposes. The Company estimates the fair value of these embedded
conversion features and warrants with potentially insufficient authorized shares to settle outstanding contracts in the future
using the Black-Scholes Merton option pricing model (“Black-Scholes”) (see Note 6). Based on these provisions, the
Company has classified all conversion features and warrants as derivative liabilities at March 31, 2016 and December 31, 2015.
NOTE 3 - GOING CONCERN
The accompanying consolidated
financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company’s revenues since inception have been nominal.
Additionally, since inception, the Company has had recurring operating losses and negative cash from operations and at March
31, 2016 and December 31, 2015, had negative working capital. These factors raise substantial doubt about the Company’s
ability to continue as a going concern.
The Company’s continuation as a going
concern is dependent on its ability to obtain additional financing to fund operations, implement its business model, and ultimately,
to attain profitable operations. The Company will need to secure additional funds through various means, including equity and debt
financing, funding from a licensing arrangement or any similar financing. There can be no assurance that the Company will be able
to obtain additional debt or equity financing, if and when needed, on terms acceptable to the Company, or at all. Any additional
equity or debt financing may involve substantial dilution to the Company’s stockholders, restrictive covenants or high interest
costs. The Company’s long-term liquidity also depends upon its ability to generate revenues from the sale of its products
and achieve profitability. The failure to achieve these goals could have a material adverse effect on the execution of the Company’s
business plan, operating results and financial condition. The Company intends to raise additional financing.
The consolidated financial statements do
not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification
of liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 4 - ACQUISITIONS
Wowio, LLC
On June 29, 2009, Wowio Texas entered
into a securities purchase agreement (the “Agreement”) with Platinum Studios, Inc. (“Platinum”)
pursuant to which Platinum agreed to transfer to the Company, all of the membership interests of Wowio, LLC (a Pennsylvania
Limited Liability Company and wholly owned subsidiary of Platinum) (“Wowio Penn”) in exchange for total
consideration of $3,150,000, comprised of assumed liabilities of approximately $1,636,000 (of which $82,853 was still
outstanding as of March 31, 2016 and December 31, 2015), including $794,518 of amounts owed to Brian Altounian (which
was fully paid or settled as of March 31, 2015) the Company’s former CEO, and an additional $1,514,000 to be paid via
royalty at a rate of 20% of gross revenues generated from acquired assets. Subsequent to the $1,514,000 being satisfied, such
royalty rate shall reduce to 10% of net revenues generated in perpetuity.
Drunk Duck
On May 5, 2010, Wowio Texas entered into
an asset purchase agreement with Platinum pursuant to which Platinum agreed to transfer to the Company, all of the ownership interests
in the assets, including related websites, of Drunk Duck (the “Duck”) in exchange for total consideration of $1,000,000
in cash of which $350,000 of such amount had been previously paid, $150,000 was due from July 2010 – October 2010 and $500,000
is to be paid in quarterly installments equal to a minimum of 10% of net revenue derived from the purchased assets. As a security
interest, Platinum retained a 10% ownership position in the assets, which is being reduced proportionately, as payments are made
to Platinum. As of March 31, 2016, Platinum retained ownership of 6.5% of the assets, as a result of amounts owed to Platinum under
the purchase agreement. The $150,000 initially due from July 2010 to October 2010 remains outstanding as of March 31, 2016 and
December 31, 2015.
Spacedog Entertainment, Inc.
Effective May 15, 2010, Wowio Texas entered
into a securities purchase agreement with Spacedog Entertainment, Inc. (a New York corporation) (“SDE”) pursuant to
which SDE agreed to transfer to Wowio, Inc., all of the common stock of SDE in exchange for total consideration of $1,650,000,
comprised of $107,000 in cash, 1,187 shares of common stock (valued at $1,543,000 - based on the estimated fair value on the measurement
date) and an additional $1,000,000 to be paid via royalty at a rate of 100% of gross revenues generated from SDE assets. Subsequent
to the $1,000,000 being satisfied, the seller shall no longer be entitled to receive any further royalties. In accordance with
the agreement, the Company neither assumed nor became responsible, in any way, for any liabilities, debts or other obligations
of SDE.
NOTE 5 - DEBT
Revolving Loan
In connection with a credit agreement (“Revolving
Loan”) with TCA Global Credit Master Fund, LP (“TCA”), the Company issued a series of three warrants to TCA (“TCA
Warrants”), each to purchase 184,157 shares of common stock, or 1% of the issued and outstanding common stock of the Company
at September 21, 2012. Each warrant had an exercise price of $0.01 per share. Each of the TCA Warrants was immediately exercisable
upon issuance and had terms of six months, nine months and twelve months, respectively. Each of the TCA Warrants had a mandatory
redemption clause, which obligated the Company to redeem the warrant in full by payment of $30,000 each if not exercised by the
respective redemption dates through September 21, 2013. The Company recorded $90,000 in accounts payable and accrued expenses with
a corresponding reduction to additional paid-in capital related to TCA Warrants in connection with its mandatory redemption clause,
with $60,000 still outstanding as of March 31, 2016 and December 31, 2015.
The Revolving Loan contains various covenants,
certain of which the Company was not in compliance with at March 31, 2016. The amount of principal due as of March 31, 2016 and
December 31, 2015 was $50,000, and $60,000 in warrant liabilities. Accrued interest and fees related to the Revolving Loan of $30,041
and $27,797 is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets as of March 31,
2016 and December 31, 2015, respectively.
Notes Payable – Related Parties
During 2011, the Company issued an
aggregate of $157,355 of notes payable to employees in lieu of compensation due. The notes matured in December 2012, are now
due on demand and accrue interest at a rate of 2.25% per year. The amount of principal due at March 31, 2016 and December
31, 2015 was $100,902. Accrued interest of $18,823 and $18,257 is included in accounts payable and accrued expenses in the
accompanying consolidated balance sheets as of March 31, 2016 and December 31, 2015, respectively.
Notes Payable
Notes payable consist of the following
at:
|
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
Secured note payable to an individual, 15% interest rate, entered into in December 2011, due on demand, as amended
|
|
|
15,000
|
|
|
|
15,000
|
|
|
Secured note payable to an individual, 12% interest rate, entered into in September 2013, due on demand with default interest of 17%, 50% satisfied by a third party in 2014
|
|
|
25,000
|
|
|
|
25,000
|
|
|
Note payable to an individual, 12% interest rate, entered
into in November 2013, due on demand with default interest of 17%, due on demand
|
|
|
50,000
|
|
|
|
50,000
|
|
|
Note payable to an individual, flat interest of $20,000, entered into in April 2014, due on demand
|
|
|
450,000
|
|
|
|
450,000
|
|
|
Note payable to an individual, non-interest bearing, entered into in August 2014, was paid off in January 2016
|
|
|
-
|
|
|
|
35,000
|
|
|
Notes payable to various individuals, 12% interest rate, entered into from August 2013 to January 2014, due on demand
|
|
|
5,000
|
|
|
|
5,000
|
|
|
Secured note payable to an individual, 12% interest rate, entered into in January 2014, was paid off in January 2016
|
|
|
-
|
|
|
|
260,000
|
|
|
Note payable to an individual, 8% interest rate, entered into in November 2014, due on demand
|
|
|
20,000
|
|
|
|
20,000
|
|
|
Note payable to an individual, 8% interest rate, entered into in October 2014, was paid off in January 2016
|
|
|
-
|
|
|
|
5,000
|
|
|
|
|
$
|
565,000
|
|
|
$
|
865,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current portion
|
|
|
(565,000
|
)
|
|
|
(865,000
|
)
|
Accrued interest related to notes payable
of $98,524 and $153,786 is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets as
of March 31, 2016 and December 31, 2015, respectively.
Convertible Notes Payable
Convertible notes payable consist of the
following at:
|
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
Secured convertible note, 10% interest rate, entered into on August 26, 2014, due on demand, 20% default interest rate
|
|
|
57,973
|
|
|
|
57,973
|
|
|
Secured convertible note, 12% interest rate, entered into on August 29, 2014, due on demand, 24% default interest rate
|
|
|
25,807
|
|
|
|
26,728
|
|
|
Convertible notes, interest rates of 8% to 12%, entered into in September 2014, due on demand
|
|
|
31,500
|
|
|
|
31,500
|
|
|
Secured convertible note, 8% interest rate, entered into on November 18, 2014, due on demand, 20% default interest rate
|
|
|
3,135
|
|
|
|
3,135
|
|
|
Secured convertible note, 8% interest rate, entered into on November 18, 2014, due on demand, 24% default interest rate
|
|
|
23,650
|
|
|
|
23,650
|
|
|
Secured convertible note, 8% interest rate, entered into on December 15, 2014, due on demand, 24% default interest rate
|
|
|
37,758
|
|
|
|
37,758
|
|
|
Secured convertible note, 8% interest rate, entered into on December 15, 2014, due on demand, 24% default interest rate
|
|
|
44,000
|
|
|
|
44,000
|
|
|
Secured convertible note, 12% interest rate, entered into on January 7, 2015, due on demand, 22% default interest rate
|
|
|
66,913
|
|
|
|
69,908
|
|
|
Secured convertible note, 0% interest rate, entered into on February 19, 2015, due on demand, net of debt discount of $0, paid off in January 2016
|
|
|
-
|
|
|
|
2,500
|
|
|
Secured convertible note, 8% interest rate, entered into
on February 4, 2015, due in February 2017, net of debt discount of $ 5,662 and $8,134
|
|
|
10,979
|
|
|
|
8,507
|
|
|
Secured convertible note, 12% interest rate, entered into on February 20, 2015, due on demand
|
|
|
45,750
|
|
|
|
45,750
|
|
|
Secured convertible note, 12% interest rate, entered into on March 16, 2015, due on demand
|
|
|
45,750
|
|
|
|
45,750
|
|
|
Secured convertible note, 12% interest rate, entered into on March 16, 2015, due on demand
|
|
|
376
|
|
|
|
376
|
|
|
Secured convertible note, 10% interest rate, entered into on April 20, 2015, due on demand
|
|
|
43,591
|
|
|
|
43,591
|
|
|
Secured convertible note, 12% interest rate, entered into on April 20, 2015, due on demand
|
|
|
70,500
|
|
|
|
70,500
|
|
|
Secured convertible note, 12% interest rate, entered into on May 1, 2015, due on demand, net of debt discount of $0 and $2,778
|
|
|
39,750
|
|
|
|
23,722
|
|
|
Secured convertible note, 8% interest rate, entered into on May 16, 2015, due on demand, net of debt discount of $0 and $1,563
|
|
|
6,500
|
|
|
|
4,938
|
|
|
|
|
$
|
553,932
|
|
|
$
|
540,286
|
|
|
Less current portion
|
|
|
(553,932
|
)
|
|
|
(540,286
|
)
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
During the three months ended March 31,
2016, various holders of convertible notes payable converted $3,916 in principal into
125,110,167 shares of the Company’s common stock.
During the three months ended March 31,
2016, the Company was in default on certain convertible notes. Pursuant to the default provisions contained in the respective note
agreements, the Company recorded an aggregate of additional interest expense of $13,250, which was added to the outstanding principal
balance.
Accrued interest related to convertible
notes payable of $92,506 and $62,985 is included in accounts payable and accrued expenses in the accompanying consolidated balance
sheets as of March 31, 2016 and December 31, 2015, respectively.
As of March 31, 2016, the Revolving Loan
and a number of the outstanding related party notes payable, notes payable and convertible notes payable balances are delinquent.
The Company is in negotiations with the note holders to amend the terms of the notes.
NOTE 6 - DERIVATIVE LIABILITIES
The Company applies the accounting standard
that provides guidance for determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity’s
own stock. The standard applies to any freestanding financial instrument or embedded features that have the characteristics of
a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock.
From time to time, the Company has issued
notes and preferred stock with embedded conversion features and warrants to purchase common stock. Certain of the embedded conversion
features and warrants contain price protection or anti-dilution features that result in these instruments being treated as derivatives.
In addition, potentially in the future, the Company may have an insufficient number of available shares of common stock to settle
outstanding contracts. Accordingly, the Company has estimated the fair value of these embedded conversion features, warrants, and
derivatives related to the insufficient number of authorized shares to settle outstanding contracts using Black-Scholes with the
following assumptions:
Expected volatility is based primarily
on historical volatility. Historical volatility was computed using weekly pricing observations for recent periods. We believe this
method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants
and embedded conversion features.
We currently have no reason to believe
that future volatility over the expected remaining life of these warrants and embedded conversion features is likely to differ
materially from historical volatility. The expected life is based on the remaining term of the warrants and embedded conversion
features. The risk-free interest rate is based on U.S. Treasury securities consistent with the remaining term of the warrants and
embedded conversion features.
During the three months ended March 31, 2016, the Company reclassified $19,000 of derivative liability
to additional paid in capital related to debt conversions and pay off during the period.
During three months ended March 31, 2016
and 2015, the Company recorded gain (loss) of $(544,000) and $898,000 related to the change in fair value of the warrants and embedded
conversion features which is included in change in fair value of derivative liabilities in the accompanying consolidated statements
of operations.
The following table presents our warrants
and embedded conversion features which have no observable market data and are derived using Black-Scholes measured at fair value
on a recurring basis, using Level 3 inputs, as of March 31, 2016 and 2015:
|
|
|
For the Three
months ended
March 31,
2016
|
|
|
For the Three
months ended
March 31,
2015
|
|
|
Annual dividend yield
|
|
|
0-8
|
%
|
|
|
0
|
%
|
|
Expected life (years)
|
|
|
0.12 – 3.30
|
|
|
|
0.07 – 4.05
|
|
|
Risk-free interest rate
|
|
|
0.16% – 1.31
|
%
|
|
|
0.02% – 1.42
|
%
|
|
Expected volatility
|
|
|
365.83%-633.99
|
%
|
|
|
139.52%-446.40
|
%
|
The level 3 carrying value as of March
31, 2016 and December 31, 2015:
|
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
Embedded Conversion Features
|
|
$
|
1,716,000
|
|
|
$
|
1,191,000
|
|
|
Warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
|
$
|
1,716,000
|
|
|
$
|
1,191,000
|
|
|
Change in fair value
|
|
$
|
(544,000
|
)
|
|
$
|
(987,000
|
)
|
The following table presents the changes
in fair value of our warrants and embedded conversion features measured at fair value on a recurring basis for three months ended
March 31, 2016:
|
Balance as of December 31, 2015
|
|
|
1,191,000
|
|
|
Issuance of warrants and embedded conversion features
|
|
|
-
|
|
|
Extinguishment of derivatives
|
|
|
(19,000
|
)
|
|
Change in fair value
|
|
|
544,000
|
|
|
Balance as of March 31, 2016
|
|
$
|
1,716,000
|
|
NOTE 7 - STOCKHOLDERS’ EQUITY
Preferred Stock
On March 9, 2012 and amended on September
10, 2012, the Company designated and determined the rights and preferences of 5,000,000 shares of Series A preferred stock (“Series
A”) with a par value of $0.0001. The Company is authorized to issue 5,000,000 shares of Series A. The holders of Series A
are entitled to receive dividends in preference to dividends on common stock and are entitled to vote together with the holders
of common stock with a voting right equivalent to 50 votes of common stock for each share of Series A held. In the event of liquidation,
the holders of Series A shall be issued one share of common stock for every 50 shares of Series A.
On June 19, 2012, the Company issued 85,000
shares of Series A in connection with a consulting agreement entered into with a director. The value of the shares was $255,000
(based on the fair value of the Series A on the measurement date) and was recorded as prepaid consulting to be amortized over the
service period of twelve months in accordance with the terms of the contract. On October 31, 2012, the Company modified the terms
of the consulting agreement to extend the service period for an additional four years or a total of fifty-five months. During the
three months ended March 31, 2016 and 2015, the Company amortized $7,304 in general and administrative expense in the accompanying
consolidated statements of operations.
On April 2, 2012, the Company designated
and determined the rights and preferences of 2,000,000 shares of Series B preferred stock (“Series B”) with a par value
of $0.0001. The Company is authorized to issue 2,000,000 shares of Series B. The holders of Series B are entitled to receive dividends
in preference to any dividends on common stock and are entitled to vote together with the holders of common stock with a voting
right equivalent to 300 votes of common stock for each share of Series B held. In the event that two or more shareholders who combined
own more than 20% of the outstanding common stock enter into an agreement for the purpose of acquiring, holding, voting or disposing
of any voting securities of the Company, then the holders of Series B, as a class, shall be issued three shares of common stock
for every share of common stock outstanding. In the event of liquidation, the holders of Series B shall be issued one share of
common stock for every 300 shares of Series B.
On January 27, 2015, the Company
issued the former CEO 4,000,000 shares of Series A Preferred Stock of the Company as settlement for $40,000 of accrued wages,
which were valued based on the market price of the equivalent number of common shares on the date of issuance of $0.0026 per
share, which resulted in a gain on settlement of accrued wages of $39,792, which was recorded as contributed capital in the
three months ended March 31, 2015.
On February 6, 2015, the Company issued
a consultant 250,000 shares of Series A Preferred Stock of the Company for service provided. The shares were valued based on the
market price of the equivalent number of common shares on date of issuance of $0.0045 per share or $1,125.
On May 11, 2015, the Board of Directors
of the Company approved the creation of Series C, D, E and F shares of Preferred Stock.
The Company is authorized to issue
5,300 shares of Series C Preferred Stock (“Series C”) par value of $0.0001 per share. The Series C will, with
respect to dividends and liquidation, winding up or dissolution, rank: (a) senior with respect to dividends and pari passu in
right of liquidation with the common stock, par value $0.0001 per share; (b) junior to the Series A and B Preferred Stock;
(c) senior to any future designation of preferred stock; (d) junior to all existing and future indebtedness of the Company.
Commencing on date of issuance, holders of Series C will be entitled to receive dividends on each outstanding share of Series
C, which will accrue in shares of Series C at a rate equal to 8% per annum from the issuance date. The Conversion price of
the Series C shall mean the lower of (i) $0.004 per share of common stock, or (ii) 70% of the lowest VWAP in the 10 trading
days prior to the date of the conversion notice. The Series C PS may be converted at any time after the earlier to occur of
the (i) six-month anniversary of the issuance date or (ii) an effective registration statement covering the shares of common
stock to be issued pursuant to the conversion notice. In the event of conversion, the Company shall issue to the holder of such series C Preferred Stock
a number of shares of common stock equal to the $1,000 (liquidation value) divided by the conversion price.
On May 11, 2015, the Company issued a consultant
an aggregate of 300 shares of Series C of the Company for service provided. Due to the embedded conversion feature of the Series
C, the Company computed the estimated fair value of the derivative instrument and recorded the initial fair value of $28,000 as
a derivative liability on date of issuance. The value of the Series C, E, F shares is included in derivative liabilities
in the accompanying balance sheets.
The Company is authorized to issue 4 shares
of Series D Preferred Stock (“Series D”) par value of $0.00001 per share. If at least one share of Series D Preferred
Stock is issued and outstanding, then the total aggregate issued shares of Series D Preferred Stock at any given time, regardless
of their number, shall have voting rights equal to four times the sum of: (i) the total number of shares of Common Stock which
are issued and outstanding at the time of voting, plus (ii) the total number of shares of Series A, Series, B, Series C, Series
E, and Series F Preferred Stock which are issued and outstanding at the time of voting divided by (iii) the number of shares of
Series D Preferred Stock issued and outstanding at the time of voting.
On May 11, 2015, the Company issued 4 shares
of Series D as settlement for $73,167 of accrued wages to Brian Altounian, the Company’s former Chief Executive Officer and
Chairman and a beneficial shareholder. No solicitation was made in connection with these transactions and no underwriting discounts
were made or given. The Company believes that the issuance of the Series D was a transaction not involving a public offering and
was exempt from registration with the Securities and Exchange Commission pursuant to Rule 4(2) of the Securities Act of 1933. Mr.
Altounian effectively controls the Company by virtue of the voting rights associated with the Series D Preferred Stock. The valuation
of the 4 shares of Series D was $73,167 and was obtained from a valuation specialist, which applied a control premium percentage
to the market capitalization value of the Company on the valuation date.
The Company is authorized to issue 10,000,000
shares of Series E Preferred Stock (“Series E”) par value of $0.00001 per share. The holders of Series E are entitled
to receive dividends in preference to dividends on common stock. Each share of Series E shall be convertible at par value $0.00001
per share (the “Series E Preferred”), at any time, and/or from time to time, into the number of shares of the Company’s
common stock, par value $0.00001 per share equal to the fixed price of the Series E of $2.50 per share, divided by the par value
of the Series E, subject to adjustment as may be determined by the Board of Directors from time to time (the “Conversion
Rate”). Upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, before any distribution
or payment shall be made to the holders of any stock ranking junior to the Series E, the holders of the Series E shall be entitled
to be paid out of the assets of the Company an amount equal to $1.00 per share or, in the event of an aggregate subscription by
a single subscriber for Series E in excess of $100,000, $0.997 per share (as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like with respect to such shares) (the “Preference Value”), plus all declared but unpaid
dividends, for each share of Series E held by them. After the payment of the full applicable Preference Value of each share of
the Series E as set forth herein, the remaining assets of the Company legally available for distribution, if any, shall be distributed
ratably to the holders of the Company’s Common Stock. Each share of Series E shall have ten votes for any election or other
vote placed before the shareholders of the Company. Shares of Series E are anti-dilutive to reverse splits. The conversion rate
of shares of Series E, however, would increase proportionately in the case of forward splits, and may not be diluted by a reverse
split following a forward split. The value of the Series C, E, F shares is included in derivative liabilities in the accompanying
balance sheets.
On May 11, 2015, the Company issued a consultant
40,000 shares of Series E of the Company for service provided. Each share of Series E preferred stock can be converted into approximately
6.4 shares of common stock. Due to the embedded conversion feature of the Series E, the Company computed the estimated fair
value of the derivative instrument and recorded the initial fair value of $88,000 as a derivative liability on date of issuance
(see Note 6).
The Company is authorized to issue 10,000,000
shares of Series F Preferred Stock (“Series F”) par value of $0.00001 per share. The holders of Series F are entitled
to receive dividends in preference to dividends on common stock. Each share of Series F shall be convertible, at any time, and/or
from time to time, into 500 shares of the Company’s common stock, par value $0.00001 per share (the “Common Stock”).
Such conversion shall be deemed to be effective on the business day (the “Conversion Date”) following the receipt by
the Corporation of written notice from the holder of the Series C Preferred Stock of the holder’s intention to convert the
shares of Series C Stock, together with the holder’s stock certificate or certificates evidencing the Series C Preferred
Stock to be converted. Upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, before
any distribution or payment shall be made to the holders of any stock ranking junior to the Series F, the holders of the Series
F shall be entitled to be paid out of the assets of the Company an amount equal to $1.00 per share or, in the event of an aggregate
subscription by a single subscriber for Series F in excess of $100,000, $0.997 per share (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like with respect to such shares) (the “Preference Value”), plus all
declared but unpaid dividends, for each share of Series F held by them. After the payment of the full applicable Preference Value
of each share of the Series F as set forth herein, the remaining assets of the Company legally available for distribution, if any,
shall be distributed ratably to the holders of the Company’s Common Stock. Each share of Series F shall have one vote for
any election or other vote placed before the shareholders of the Company. Shares of Series F are anti-dilutive to reverse splits.
The conversion rate of shares of Series F, however, would increase proportionately in the case of forward splits, and may not be
diluted by a reverse split following a forward split.
On June 29, 2015, the Company issued 1,600
shares of Series F of the Company for cash proceeds of $4,000. Due to the embedded conversion feature of the Series F, the Company
computed the estimated fair value of the derivative instrument and recorded the initial fair value of $103,000 as a derivative
liability on date of issuance (see Note 6). The value of the Series C, E, F shares is included in derivative liabilities in the
accompanying balance sheets.
In July, 2015, the Company issued two individuals
an aggregate of 8,000 shares of Series F of the Company for cash proceeds of $20,000. Due to the embedded conversion feature of
the Series F, the Company computed the estimated fair value of the derivative instrument and recorded the initial fair value of
$44,000 as a derivative liability on date of issuance (see Note 6). The value of the Series C, E, F shares is included in derivative
liabilities in the accompanying balance sheets.
Common Stock
On August 20, 2015, the Board of Directors
of the Company amended its Certificate of Foundation to increase the authorized common stock from 5 billion to 20 billion shares.
On June 19, 2012, the Company issued an
aggregate of 385 shares of common stock at $3,900.00 per share in connection with a consulting agreement entered into with a director.
The value of the shares was $1,500,000 (based on the fair value of the common stock on the measurement date) and was recorded as
prepaid consulting to be amortized over the service period of twelve months in accordance with the terms of the contract. On October
31, 2012, the Company modified the terms of the consulting agreement to extend the service period for an additional four years
or a total of fifty-five months. During the three months ended March 31, 2016 and 2015, the Company amortized $42,969, in general
and administrative expense in the accompanying consolidated statements of operations.
During the three months ended March 31,
2016, various holders of convertible notes payable converted $3,916 in principal into
125,110,167 shares of the Company’s common stock.
(see Note 5).
During the three months ended March 31, 2016, the Company issued an aggregate of 1,000,000,000 shares
of its common stock to the CEO (250,000,000) and chairman of the board (750,000,000) for reduction of accrued wages in the aggregate
amount of $20,000.
Reverse Stock Splits
In January 2014, the Company effected a
one-for-ten reverse stock split of the Company’s outstanding shares of common stock (effective January 21, 2014) and of the
Company’s outstanding shares of Series A Preferred Stock (effective January 22, 2014). The accompanying consolidated financial
statements have been updated to reflect the effect of these reverse stock splits.
On June 3, 2015, the board of directors
of the Company approved a 1,300 to 1 reverse stock split of shares of common stock. The reverse stock split was approved by the
Financial Industry Regulatory Authority on July 7, 2015. All fractional shares were rounded up, shares of common stock and
per share data issued prior to July 2015, have been retroactively restated to reflect the impact of the reverse stock split
for all periods presented.
Warrants
The following represents a summary of all
common stock warrant activity:
|
|
|
Outstanding Common Stock Warrants
|
|
|
|
|
Number of
Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
821
|
|
|
$
|
208
|
|
|
$
|
-
|
|
|
Grants
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Cancelled/Expired
|
|
|
(36
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at March 31, 2016 (2)
|
|
|
785
|
|
|
$
|
208
|
|
|
$
|
-
|
|
|
|
(1)
|
Represents the difference between the exercise price and the estimated fair value of the Company’s common stock at the end of the reporting period.
|
|
|
|
|
|
|
(2)
|
The common stock warrants outstanding and exercisable as of March 31, 2016 and December 31, 2015 have a weighted-average contractual remaining life of 2.6 years and 2.9 years, respectively.
|
In January 2014, the Company issued a Secured
Promissory Note to an individual in the amount of $300,000 (See Note 5). In connection with this note, the Company issued a warrant
to purchase 25,000 shares of the Company’s Series A Preferred Stock at a price of $1.50 per share with an expiration date
of January 2017. As of March 31, 2016 and December 31, 2015, all of these preferred stock warrants are outstanding.
NOTE 8 - RELATED PARTY TRANSACTIONS
Alliance and Altounian have ownership interests
in Akyumen Technologies, Corp. (“Akyumen”). At March 31, 2016 and December 31, 2015, Alliance and Altounian owned less
than 1% of Akyumen individually and collectively. During the three months ended March 31, 2015, Akyumen provided certain software
development and technology related services to the Company for $250,000. Such costs were expensed to general and administrative
expense in the accompanying consolidated statement of operations. In addition, Akyumen engaged the Company for an advertising campaign
on the Company’s websites. The advertising campaign was for $150,000 for the period April 1, 2014 through June 30, 2015.
The Company recorded $25,000 in advertising revenue for the three months ended March 31, 2015, in
the accompanying consolidated statement of operations.
In December 2015, the Company received
$100,000 from Akyumen as an advance on a potential future investment into the Company. During the three months ended March
31, 2016, the Company received another $514,000 from Akyumen as an advance on a potential future investment into the Company.
Such amounts are due on demand and are non-interest bearing, if the potential investment is not consummated. During the
period from April 1, 2016 through May 16, 2016, Akyumen advanced on additional $62,500. Such amounts have been included in
related party payables in the accompanying consolidated balance sheets at March 31, 2016 and December 31, 2015.
On January 27, 2015, the Company issued
the former CEO 4,000,000 shares of Series A Preferred Stock of the Company as settlement for $40,000 of accrued wages, which were
valued based on the market price of the equivalent number of common shares on the date of issuance of $0.0026 per share, which
resulted in a gain on settlement of accrued wages of $39,792, which was recorded as contributed capital for the three months ended March 31, 2015.
On May 11, 2015, the Company issued 4 shares
of Series D as settlement for $73,167 of accrued wages to Former CEO (see Note 7).
In January 2016, the Company issued 750,000,000 shares of its common stock to Mr. Altounian for reduction
of accrued payroll in amount of $15,000. In January 2015, the Company issued 250,000,000 shares of its common stock to the CEO
for reduction of accrued payroll in amount of $5,000.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Royalties
In connection with certain of the Company’s
acquisitions, the Company has entered into various royalty agreements (see Note 4). Royalty payments related to acquisitions range
from 10% to 100% of related revenue, as summarized below:
|
|
·
|
Wowio, LLC - 20% of related revenue until all purchase price consideration has been satisfied,
then 10% of related revenue through perpetuity.
|
|
|
·
|
Duck - 10% of related revenue until all purchase price consideration has been satisfied, with no
subsequent royalty amounts due.
|
|
|
·
|
SDE - 100% of related revenue until all purchase price consideration has been satisfied, with no
subsequent royalty amounts due.
|
Additionally, the Company enters into royalty
agreements with the authors of the eBooks included on its websites, which call for royalty payments based on various percentages
of revenues earned, less processing fees and in the case of Sponsored Downloads, a fixed price per download.
Employment Agreements
On September 15, 2015, the Company entered
into an employment agreement with Mr. Robert Estareja as Chief Executive Officer, which expires in September 2017, with an automatic
renewal period of two years unless otherwise terminated. The employment agreement requires annual base salary payments of $300,000
per year. In addition, the executive is entitled to bonuses in amounts based on various factors, including but not limited to the
Company’s financial performance, amount of financing received and producer fee credits. Pursuant to the agreement, if the
executive is terminated without cause, he is entitled to receive an amount equal to six months of his annual base salary.
On September 15, 2015, the Company entered
into an employment agreement with Mr. Brian Altounian as Executive, which expires in September 2017, with an automatic renewal
period of two years unless otherwise terminated. Mr. Altounian will serve as the chairman of the Board of Directors of the Company
and provide advisory services to the CEO. The employment agreement requires annual base salary payments of $180,000 per year. In
addition, the executive is entitled to bonuses solely at the discretion of the Board of Directors. Pursuant to the agreement, if
the executive is terminated without cause, he is entitled to receive an amount equal to six months of his annual base salary.
Indemnities and Guarantees
During the normal course of business, the
Company has made certain indemnities and guarantees under which the Company may be required to make payments in relation to certain
transactions. These indemnities include certain agreements with its officers under which the Company may be required to indemnify
such person for liabilities arising out of their employment relationship. In connection with the Company’s acquisitions,
the parties have agreed to indemnify each other from claims relating to the acquisition agreements. In connection with the Company’s
publisher agreements, the parties have agreed to indemnify each other from certain claims relating to the agreements. The duration
of these indemnities and guarantees varies, and in certain cases, is indefinite. The majority of these indemnities and guarantees
do not provide for any limitation of the maximum potential future payments we may be obligated to make. Historically, the Company
has not been obligated to make significant payments for these obligations and no liability has been recorded for these indemnities
and guarantees in the accompanying consolidated balance sheets.
Legal
In October 2013, a former employee filed
a complaint against the Company and its CEO, seeking past due wages of $57,096, damages and attorney’s fees. The Company
has accrued the amount of past due wages in its consolidated financial statements. A judgment was entered into on March 18, 2016
for an amount of $162,475, which includes interest of $14,005. The Company accrued the remaining amount of $91,374 and related
interest of $8,529 in accounts payable and accrued expenses as of March 31, 2016 and December 31, 2015.
On March 18, 2016, CBK Consultants,
Inc. (“CBK”) filed a Notice of Motion for Summary Judgment in Lieu of Compliant against us (CBK Consultants, Inc.
a/k/a CBK, Inc. v. Wowio, Inc., Supreme Court of the State of New York, County of Nassau), seeking the repayment of $450,000
of principal from a promissory note we given CBK along with $20,000 of interest along with costs and attorney fees. We were
scheduled to appear in court on April 22, 2016. An order granting or denying the motion for Summary Judgement has not been
filed as of the date of this filing. The Company has accrued such costs and they are included in notes payable and accrued
expenses.
In the normal course of business, the Company
may become involved in various legal proceedings. The Company knows of no pending or threatened legal proceeding to which the Company
is or will be a party that, if successful, might result in material adverse change in the Company’s business, properties
or financial condition.
NOTE 10 – WITHHELD PAYROLL
TAXES
Since its inception, the Company made several
payments to employees for wages that were net of state and federal income taxes. Due to cash constraints, the Company has not yet
remitted all of these withheld amounts to the appropriate government agency. Accordingly, the Company has recorded $358,477, related to this obligation in accrued compensation and related costs in the accompanying consolidated balance sheets
as of March 31, 2016 and December 31, 2015, including estimated penalties and interest.
NOTE 11 - SUBSEQUENT EVENTS
In April and May 2016, various
holders of convertible notes payable converted approximately $43,000 in principal and $1,600 in unpaid accrued interest
into 1,093,533,706 shares of the Company’s common stock.
In April, a Preferred Stock holder converted 5 shares of Series C Preferred Stock plus its dividend into
76,642,857.