ITEM 1. DESCRIPTION OF BUSINESS.
(a) General Business Development
Corporate History
MediSwipe, Inc., (referred to hereafter as “MWIP,” or, the “Company”), was initially incorporated under the laws of the State of Delaware in February 1997 under the name Easy Street Online, Inc.
In August of 1997, the Company changed its name to Frontline Communications Corp. (“Frontline”) and operated as a regional Internet service provider ("ISP") providing Internet access, web hosting, website design, and related services to residential and small business customers throughout the Northeast United States and, through a network partnership agreement, Internet access to customers nationwide.
On April 3, 2003, the Company acquired Proyecciones y Ventas Organizadas, S.A. de C.V. ("Provo Mexico") and in December 2003 the Company changed the name to Provo International Inc. (“Provo”).
In September 2008, Provo changed its name to Ebenefits Direct, Inc., which, through its wholly-owned subsidiary, L.A. Marketing Plans, LLC, engaged in the business of direct response marketing. The Company’s principal business was to market and sell non-insurance healthcare programs designed to complement medical insurance products and to provide savings for those who cannot afford or qualify for traditional health insurance products.
On October 14, 2008, Ebenefits Direct, Inc. changed its name to Seraph Security, Inc. (“Seraph”).
On April 25, 2009, Seraph acquired Commerce Online Technologies, Inc., a credit and debit card processing company.
On May 20, 2009, Seraph Security, Inc. changed its name to Commerce Online, Inc. to more accurately reflect its core business of merchant processing, and financial services.
As of February 18, 2010, Commerce Online, Inc. changed its name to Cannabis Medical Solutions, Inc. as a provider of merchant processing payment technologies for the medical marijuana and wellness sector.
On March 8, 2010 the Company completed the acquisition of 800 Commerce, Inc. (“800 Commerce”) a Florida Corporation incorporated by the Company’s Chief Executive Officer. The company issued 1,000,000 shares of common stock to 800 Commerce for all the issued and outstanding stock of 800 Commerce, Inc. See NONCONTROLLING INTEREST AND DECONSOLIDATION on page 19 of this Form 10-K.
In June 2010, 31,288,702 shares of common stock were issued as dividend shares (the “dividend”) to all existing shareholders of common stock of record.
On June 14, 2011, Cannabis Medical Solutions, Inc. changed its name to MediSwipe Inc. to better correspond with the business of the Company; merchant and mobile payment solutions to the health and wellness sector.
On June 26, 2013, the Company formed American Hemp Trading Company, a wholly owned subsidiary.
On June 26, 2013, the Company formed Agritech Innovations, Inc. (“AGTI”), a wholly owned subsidiary. On September 3, 2013, AGTI changed its name to Agritech Venture Holdings, Inc. (“AVHI”).
On November 12, 2013, the Board of Directors of the Company approved by unanimous written consent a 1-for-10 Reverse Stock Split and to decrease the authorized common stock of the Company to 250,000,000. Pursuant to the Reverse Stock Split, each ten (10) shares of the Company’s Common Stock automatically converted into one share of Common Stock.
On November 12, 2013, the Financial Industry Regulatory Authority approved the company’s 1-for-10 Reverse Stock Split on the Company’s common stock outstanding with an effective date of December 11, 2013. All the share amounts in this report issuances are stated to reflect the reverse stock split.
The consolidated financial statements include the accounts of the Company and 800 Commerce, Inc. (“800 Commerce”) until May 10, 2012 when 800 Commerce sold shares of its common stock to third parties resulting in the Company no longer holding a controlling interest in 800 Commerce. All material intercompany balances and transactions have been eliminated.
Unless otherwise noted, references in this Form 10-K to “Seraph,” “Commerce Online, Inc.,” “Cannabis Medical Solutions” the “Company,” “we,” “our” or “us” means MediSwipe, Inc.
(b) Financial information about segments.
Through December 31, 2013 we operated in two reportable segments: merchant services and wholesale sales.
(c) Narrative Description of Business
MediSwipe, Inc. (www.MediSwipe.com) currently offers a variety of services and product lines to the medicinal marijuana sector including the digitization of patient records, and the distribution of hemp based nutritional products. The Company also provides a complete line of innovative solutions for electronically processing of merchant and patient transactions within the healthcare industry. Recently, the Company began importing and distributing vaporizers and e-cigarettes under the Company's Mont Blunt brand and the management of real property for fully-licensed and compliant growers and dispensaries within regulated medicinal and recreational markets.
Through June 30, 2012, the Company provided merchant services to approximately forty medical dispensaries and wellness centers throughout California and Colorado through our sponsor bank Electronic Merchant Systems (“EMS”). Effective July 1, 2012, EMS advised all medical dispensaries that they will no longer accept their Visa and MasterCard transactions. This action had a materially adverse effect on our business. EMS notified its clients that they can still take Discover cards, but asked that medical dispensary merchants batch and settle any Visa and Mastercard transactions by June 30, 2012.
Since July 2012, the Company has through strategic partnerships within the medicinal marijuana healthcare industry, overcome the impact of the decline in the dispensary processing credit card business. The Company has introduced product lines including digital patient records and medical data management systems (“DMS”) and the wholesaling of products to dispensaries and smoke shops.
Products and Services
During 2013, the Company introduced and planned to market patient certification stations and stored value cards that were planned to be used in conjunction with the Medipay kiosks. However due to the evolving and changing state laws and inconsistency from state to state regarding permitted and prohibited dispensary activities, the Company decided to focus on digital patient records and medical data management systems (“DMS”) and the wholesaling of products to dispensaries and smoke shops.
Data Management System
MediSwipe’s Digital Management System (“DMS”), a technology platform that enables consumers to securely file, store and conveniently retrieve important original and authentic personal health documents via the Internet. A complex security-stressed society faces many real and perceived threats that require on-demand access to valuable documents at home and during travel. Authentic images of documents such as; a passport while traveling abroad, or a prescription for a medical need or a homeowner’s policy during an evacuation are always accessible. The service is an economical solution with an easy-to-use web-based application that has the potential to appeal to a market base of at least 75 million U.S. consumers.
MediSwipe’s DMS is compatible with virtually all operating systems, web browsers, and file formats. Users can quickly upload or even e-fax their documents into their secure “vault”, and then organize, manage, review and send document copies wherever needed, anytime via the Internet.
The MediSwipe DMS provides the highest level of privacy and security and does not rely on the accuracy of user-entered data. Images of actual documents, uploaded to the patient personal registry, form the basis for this solution. Critical personal items are safe and timeless in a secure, encrypted environment where privacy and security are paramount. Patients can then load all of the data onto their own digital patient identification card to be used throughout the MediSwipe platform.
Chill Drinks
On April 13, 2013 the Company entered into a one year Distribution Agreement with Chill Drinks, LLC (“Chill Drinks”). Chill drinks has the rights to an energy drink called Chillo Energy Drink (“Chillo”) and a hemp ice tea drink called C+ Swiss Ice Tea (“C+Swiss”). Chillo and C+Swiss are referred to as the Chill Drink Products. Pursuant to the Distribution Agreement, the Company has the exclusive distribution and placement rights of the Chill Drink Products to medical dispensaries.
Recent Events
On March 18, 2014, the Company announced it had completed the purchase, sale and lease back of 80 acres zoned for agricultural use in Pueblo County, Colorado. The Company executed a Joint Venture Agreement on March 14, 2014 and completed the purchase of the 80 acre parcel on March 17, 2014. As part of the purchase and Joint Venture Agreement, the Company holds the deed and title to the property within its wholly owned subsidiary, AVHI, and will maintain the exclusive Master Lessor rights for ninety-nine years. The exclusive agreement will enable AVHI to sublease individual parcels of the 80 acre parcel to fully-licensed and compliant growers and dispensaries within the regulated medicinal and recreational market of Colorado. AVHI will receive rents and management fees on providing infrastructure, water, electricity, equipment leasing and security services. AVHI is presently working on its first agreements for tenants to move into the facility as early as May of 2014.
Employees
In addition to the Company’s executive officers, currently the Company has two employees. The Company relies on several independent contractors and other agreements it has with other companies to provide the services needed. Each management hire has been carefully selected to address immediate needs in particular functional areas, but also with consideration of the Company’s future needs during a period of expected rapid growth and expansion. Value is placed not only on outstanding credentials in specific areas of functional expertise, but also on cross-functionality, a strong knowledge of content acquisition and distribution, along with hands-on experience in scaling operations from initial beta and development stage through successful commercial deployment.
Sales and Marketing Strategy
MediSwipe’s plan is to gain market share and move quickly to secure a relevant market position within the healthcare industry. MediSwipe intends to accomplish this by continuing the development of MediSwipe software, and by cultivating relationships with clients that will result in a long term, repetitive business. The Company will target medical practices, health maintenance organizations, wellness centers, medical dispensaries and internet users. The Company will utilize public relations campaigns, medical conferences, mobile applications, billboards, trade shows and alliances and partnerships with third parties.
In order to more quickly penetrate its target market, MediSwipe will need to recruit computer technicians, invest in more server hardware and expand its staff.
Competition
There are other companies working in the medical information technology arena such as GE Healthcare, Bio-Imaging Technologies, and Cyber Records.
Some competing companies offer a USB key for medical record storage, but require the customer to provide or "self-populate" the information to be stored. The information in a self-populated record is limited and is only as accurate as the individual's memory and understanding of their health condition.
Other companies expect each customer to obtain their own medical records from their various healthcare providers. Some offer a CD-Rom for record storage. Usually, the CD-Rom cannot be updated with any changes to an individual's medical status or treatment. Therefore, a new CD-Rom needs to be obtained from that company in order for the individual to have the most current, accurate information regarding their health.
There are companies that are solely web-based that do not provide the customer the capability to have a copy of their records. In this case, an Internet connection is required to view stored documents. In addition, there are companies that do not concentrate on digitizing an individual's medical records but on converting medical facilities' records from paper to electronic format.
Some of our systems and services may include intellectual property obtained from third parties. It may be necessary in the future to seek or renew licenses relating to various aspects of its systems and services. There is no guarantee that such licenses could be obtained on reasonable terms or at all. Because of technological changes in the industries in which we compete, current extensive patent coverage, and the rapid rate of issuance of new patents, it is possible that certain components of our systems and services may unknowingly infringe existing patents or intellectual property rights of others.
ITEM 1A
ITEM 1A - Risk Factors
An investment in our common stock involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information contained in this Annual Report on Form 10-K, before investing in our common stock. If any of the events anticipated by the risks described below occur, our results of operations and financial condition could be adversely affected which could result in a decline in the market price of our common stock, causing you to lose all or part of your investment.
We recently acquired master leasing rights for a term of 99 years for 80 acres in Pueblo, Colorado, where we plan to sublease to tenants who are in the business of growing medicinal marijuana.
Growing medical marijuana is deemed to be illegal under the Federal Controlled Substances Act even though such activities may be permissible under state law. A theoretical risk exists that our activities could be deemed to be facilitating the selling or distribution of marijuana in violation of the federal Controlled Substances Act, or to constitute aiding or abetting, or being an accessory to, a violation of that Act. We believe, however, that such a risk is relatively low. Federal authorities have not focused their resources on such tangential or secondary violations of the Act, nor have they threatened to do so, with respect to the leasing of real property or the sale of equipment that might be used by medical cannabis gardeners, or with respect to any supplies marketed to participants in the emerging medical cannabis industry. We are unaware of such a broad application of the Controlled Substances Act by federal authorities, and we believe that such an attempted application would be unprecedented.
We depend on third party providers for a reliable Internet infrastructure and the failure of these third parties, or the Internet in general, for any reason would significantly impair our ability to conduct our business.
We outsource all of our data center facility management to third parties who host the actual servers and provide power and security in multiple data centers in each geographic location. These third party facilities require uninterrupted access to the Internet. If the operation of our servers is interrupted for any reason, including natural disaster, financial insolvency of a third party provider, or malicious electronic intrusion into the data center, our business would be significantly damaged. If either a third party facility failed, or our ability to access the Internet was interfered with because of the failure of Internet equipment in general or we become subject to malicious attacks of computer intruders, our business and operating results will be materially adversely affected.
The gathering, transmission, storage and sharing or use of personal information could give rise to liabilities or additional costs of operation as a result of governmental regulation, legal requirements, civil actions or differing views of personal privacy rights.
We transmit and plan to store a large volume of personal information in the course of providing our services. Federal and state laws and regulations govern the collection, use, retention, sharing and security of data that we receive from our customers and their users. Any failure, or perceived failure, by us to comply with U.S. federal or state privacy or consumer protection-related laws, regulations or industry self-regulatory principles could result in proceedings or actions against us by governmental entities or others, which could potentially have an adverse effect on our business, operating results and financial condition. Additionally, we may also be contractually liable to indemnify and hold harmless our customers from the costs or consequences of inadvertent or unauthorized disclosure of their customers' personal data which we store or handle as part of providing our services.
The interpretation and application of privacy, data protection and data retention laws and regulations are currently unsettled particularly with regard to location-based services, use of customer data to target advertisements and communication with consumers via mobile devices. Such laws may be interpreted and applied inconsistently from country to country and inconsistently with our current data protection policies and practices. Complying with these varying international requirements could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business, operating results or financial condition.
As privacy and data protection have become more sensitive issues, we may also become exposed to potential liabilities as a result of differing views on the privacy of personal information. These and other privacy concerns, including security breaches, could adversely impact our business, operating results and financial condition.
In the U.S., we have voluntarily agreed to comply with wireless carrier technological and other requirements for access to their customers' mobile devices, and also trade association guidelines and codes of conduct addressing the provision of location-based services, delivery of promotional content to mobile devices and tracking of users or devices for the purpose of delivering targeted advertising. We could be adversely affected by changes to these requirements, guidelines and codes, including in ways that are inconsistent with our practices or in conflict with the rules or guidelines in other jurisdictions.
We have identified material weaknesses in our internal control over financial reporting which could, if not remediated, result in material misstatements in our financial statements.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. During the fourth quarter of fiscal year 2013, management identified material weaknesses in our internal control over financial reporting as discussed in Item 9A of this Annual Report on Form 10-K. As a result of these material weaknesses, our management concluded that our internal control over financial reporting was not effective based on criteria set forth by the Committee of Sponsoring Organization of the Treadway Commission in Internal Control-An Integrated Framework. We are planning to engage in developing a remediation plan designed to address these material weaknesses. If our remedial measures are insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results, which could lead to substantial additional costs for accounting and legal fees and shareholder litigation.
We may require additional capital in the future, which may not be available or may only be available on unfavorable terms.
We monitor our capital adequacy on an ongoing basis. To the extent that our funds are insufficient to fund future operating requirements, we may need to raise additional funds through corporate finance transactions or curtail our growth and reduce our liabilities. Any equity, hybrid or debt financing, if available at all, may be on terms that are not favorable to us. If we cannot obtain adequate capital on favorable terms or at all, our business, financial condition and operating results could be adversely affected.
RISKS RELATING TO OWNERSHIP OF OUR COMMON STOCK
Although there is presently a market for our common stock, the price of our common stock may be extremely volatile and investors may not be able to sell their shares at or above their purchase price, or at all. We anticipate that the market may be potentially highly volatile and may fluctuate substantially because of:
· Actual or anticipated fluctuations in our future business and operating results;
· Changes in or failure to meet market expectations;
· Fluctuations in stock market price and volume
As a public company, we will incur substantial expenses.
The U.S. securities laws require, among other things, review, audit, and public reporting of our financial results, business activities, and other matters. Recent SEC regulation, including regulation enacted as a result of the Sarbanes-Oxley Act of 2002, has also substantially increased the accounting, legal, and other costs related to becoming and remaining an SEC reporting company. If we do not have current information about our Company available to market makers, they will not be able to trade our stock. The public company costs of preparing and filing annual and quarterly reports, and other information with the SEC and furnishing audited reports to stockholders, will cause our expenses to be higher than they would be if we were privately-held. These increased costs may be material and may include the hiring of additional employees and/or the retention of additional advisors and professionals. Our failure to comply with the federal securities laws could result in private or governmental legal action against us and/or our officers and directors, which could have a detrimental effect on our business and finances, the value of our stock, and the ability of stockholders to resell their stock.
FINRA sales practice requirements may limit a stockholder’s ability to buy and sell our stock.
The Financial Industry Regulatory Authority (“FINRA”) has adopted rules that relate to the application of the SEC’s penny stock rules in trading our securities and require that a broker/dealer have reasonable grounds for believing that the investment is suitable for that customer, prior to recommending the investment. Prior to recommending speculative, low priced securities to their non-institutional customers, broker/dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative, low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker/dealers to recommend that their customers buy our Common Stock, which may have the effect of reducing the level of trading activity and liquidity of our Common Stock. Further, many brokers charge higher transactional fees for penny stock transactions. As a result, fewer broker/dealers may be willing to make a market in our Common Stock, reducing a shareholder’s ability to resell shares of our Common Stock.
The Company’s Common Stock is currently deemed to be “penny stock”, which makes it more difficult for investors to sell their shares.
The Company’s Common Stock is currently subject to the “penny stock” rules adopted under section 15(g) of the Exchange Act. The penny stock rules apply to companies whose common stock is not listed on the NASDAQ Stock Market or other national securities exchange and trades at less than $5.00 per share or that have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years). These rules require, among other things, that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If the Company remains subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for the Company’s securities. If the Company’s securities are subject to the penny stock rules, investors will find it more difficult to dispose of the Company’s securities.
We have raised capital through the use of convertible debt instruments that causes substantial dilution to our stockholders.
Because of the size of our Company and its status as a "penny stock" as well as the current economy and difficulties in companies our size finding adequate sources of funding, we have been forced to raise capital through the issuance of convertible notes and other debt instruments. These debt instruments carry favorable conversion terms to their holders of up to 50% discounts to the market price of our common stock on conversion and in some cases provide for the immediate sale of our securities into the open market. Accordingly, this has caused dilution to our stockholders in 2013 and may for the foreseeable future. As of December 31, 2013, we had approximately $732,500 in convertible debt and potential convertible debt outstanding. This convertible debt balance as well as additional convertible debt we incur in the future will cause substantial dilution to our stockholders.
Because we are quoted on the OTCQB instead of an Exchange or national quotation system, our investors may have a tougher time selling their stock or experience negative volatility on the market price of our common stock.
Our common stock is traded on the OTCQB. The OTCQB is often highly illiquid, in part because it does not have a national quotation system by which potential investors can follow the market price of shares except through information received and generated by a limited number of broker-dealers that make markets in particular stocks. There is a greater chance of volatility for securities that trade on the OTCQB as compared to a national exchange or quotation system. This volatility may be caused by a variety of factors, including the lack of readily available price quotations, the absence of consistent administrative supervision of bid and ask quotations, lower trading volume, and market conditions. Investors in our common stock may experience high fluctuations in the market price and volume of the trading market for our securities. These fluctuations, when they occur, have a negative effect on the market price for our securities. Accordingly, our stockholders may not be able to realize a fair price from their shares when they determine to sell them or may have to hold them for a substantial period of time until the market for our common stock improves.
We do not intend to pay dividends.
We do not anticipate paying cash dividends on our common stock in the foreseeable future. We may not have sufficient funds to legally pay dividends. Even if funds are legally available to pay dividends, we may nevertheless decide in our sole discretion not to pay dividends. The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors our board of directors may consider relevant. There is no assurance that we will pay any dividends in the future, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend.
Our operating history and lack of profits which could lead to wide fluctuations in our share price. You may be unable to sell your common shares at or above your purchase price, which may result in substantial losses to you. The market price for our common shares is particularly volatile given our status as a relatively unknown company with a small and thinly traded public float.
The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our share price is attributable to a number of factors. First, our common shares are sporadically and thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative or “risky” investment due to our limited operating history and lack of profits to date, and uncertainty of future market acceptance for our potential products. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. Many of these factors are beyond our control and may decrease the market price of our common shares, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common shares will be at any time, including as to whether our common shares will sustain their current market prices, or as to what effect that the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price.
Shareholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the volatility of our share price.
SHOULD ONE OR MORE OF THE FOREGOING RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED, INTENDED OR PLANNED.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY .
Effective on December 1, 2011 a company controlled by our Chief Executive Officer entered into a two year agreement to rent executive office space in West Palm Beach, Florida. The lease automatically renewed for 3 month periods unless terminated in writing 30 days prior to the then current end date by either party. The monthly rent for approximately 1,200 square feet was $2,500. Effective March 1, 2012, the rent became $3,500. The Company realized an expense of $18,605 for the year ending December 31, 2012 for the space utilized. Effective in February 2013, the Company no longer utilized this space in West Palm Beach and agreed to pay $750 per month through June 1, 2013.
Effective on April 1, 2013, the Company entered into a three year agreement to rent approximately 2,500 square feet of office space (the “Office Lease”) in Detroit, Michigan. The monthly rent under this lease was $2,200 per month.
Effective August 28, 2013, the Company and the landlord amended the Office Lease allowing the Company to move to a new location in downtown Detroit. The new lease was for 3,657 square feet for monthly rent of $3,047. In November 2013, the Company was notified that the owner of the building (the Company’s landlord) was delinquent in their obligations to the mortgage holder of the building.
In January 2014, due to the uncertainty of the Company’s Office Lease in Detroit, Michigan, the Company decided to relocate its administrative offices to West Palm Beach, Florida. Effective April 1, 2014, the Company has entered into a rent sharing agreement for the use of 1,300 square feet with a company controlled by the Company’s CFO. The Company has agreed to pay $750 per month for the space.
Effective May 15, 2013 through September 15, 2013, the Company leased warehouse space on a month to month basis for the shipping and logistics of the Company’s Chillo drink products for $850 per month. Subsequent to September 15, 2013, the Company compensates the landlord on a per box shipping fee.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS .
We are not currently involved in any litigation, action, suit, proceeding, inquiry, or investigation before or by any court, public board, government agency, self-regulatory organization, or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries, or of our company’s or our company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
During the year ended December 31, 2012, the Company became aware of a prior matter regarding Provo, and the Company recorded an expense of $46,449 pursuant to judgment in this matter.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5.
ITEM 5. MARKET PRICE AND DIVIDENDS ON THE REGISTRANTS COMMON EQUITY AND OTHER SHAREHOLDER MATTERS .
The Company’s common stock is traded in the over-the-counter market, and quoted in the National Association of Securities Dealers over The Counter Quotation Board under the symbol “MWIP.”
(a) Market Information
The following table sets forth for the periods indicated the high and low bid quotations for our common stock. These quotations represent inter-dealer quotations, without adjustment for retail markup, markdown, or commission and may not represent actual transactions.
(b) Holders.
The number of record holders of our common stock as of March 24, 2014 was approximately 397, this excludes shareholders who hold their stock in street name. The Company estimates that there are over 8,700 stockholders who hold their shares of common stock in street name.
(c) Dividends
On September 4, 2013, the Company distributed the 6,000,000 shares of common stock of 800 Commerce it owned on a pro-rata basis to the Company’s shareholders of record as of September 3, 2013.
The Company did not declare any cash dividends for the year ended December 31, 2013. Our Board of Directors does not intend to distribute any cash dividends in the near future. The declaration, payment and amount of any future dividends will be made at the discretion of the Board of Directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the Board of Directors considers relevant. There is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend.
(d) Securities authorized for issuance under equity compensation plans.
None
Recent Sales of Unregistered Equity Securities
On March 19, 2013, the Company issued 25,000 shares of restricted common stock, to Empire Relations Holdings, LLC, as consideration under a consulting agreement dated March 7, 2013 for public and financial relations services. The fair value was $15,500 based on the closing stock price of $0.62 per share on the measurement date as the shares are non-refundable and no future performance obligation exists.
On March 31, 2013, the Company agreed to issue 369,928 shares of common stock upon the conversion of the remaining balance of $32,000 of a convertible note and accrued and unpaid interest of $6,060.
Previously the Company appointed Mr. James Canton to be an advisor to the Company’s Board of Directors. In April 2013, the Company agreed to issue to Mr. Canton 200,000 shares of common stock, a warrant to purchase 300,000 shares of common stock at an exercise price of $0.50 per share with an expiration date on the third year anniversary of the grant, and 25,000 shares of common stock to be issued at the end of each calendar quarter beginning on June 30, 2013 and ending on the earlier of March 31, 2015 (the term of Canton’s advisor role) or the date Canton is no longer serving as an advisor to the board of directors. The Company valued the warrant at $124,200 based on the Black Scholes formula. The Company included $102,500 in stock based compensation expense for the year ended December 31, 2013 for the 275,000 shares of common stock issued as of December 31, 2013, based upon the market price of the common stock on the grant dates.
On April 23, 2013 the Company issued a Convertible Note to an unaffiliated third party in exchange and for the cancellation of a litigation contingency of $46,449, which was acquired by the third party. Also on April 23, 2013, the Company issued 175,000 shares of common stock in satisfaction of the April 23, 2013 Convertible Note. The shares were issued at $0.265 per share, and the Company recorded a beneficial conversion feature expense of $29,561.
On June 4, 2013 and June 11, 2013, the Company issued in the aggregate 121,027 shares of common stock in satisfaction of the November 28, 2012 note of $23,500 and accrued and unpaid interest of $940. The shares were issued at $0.20 per share.
On June 26, 2013, B. Michael Friedman, the Company’s CEO exchanged 3,033,500 shares of common stock for 450,000 shares of Class B Preferred Stock. The Company reduced accrued compensation due Mr. Freidman of $100,022 and recognized stock based compensation expense of $2,821,275.
On July 8, 2013, the Company issued 185,714 shares of common stock in satisfaction of the January 2, 2013 Asher convertible note of $37,500 and accrued and unpaid interest of $1,500. The shares were issued at $0.21 per share.
On August 22, 2013 and August 27, 2013, the Company issued in the aggregate 131,480 shares of common stock in satisfaction of the February 11, 2013 note of $27,500 and accrued and unpaid interest of $1,100. The shares were issued at $0.21 per share.
On October 21, 2013, the Company issued 172,289 shares of common stock in satisfaction of the April 18, 2013 Asher convertible note of $27,500 and accrued and unpaid interest of $1,100. The shares were issued at approximately $0.16 per share.
On November 22, 2013, the Company issued 145,191 shares of common stock to Typenex upon the conversion of $20,000 of their Note. The shares were issued at approximately $0.1377 per share.
On December 11, 2013, the Company issued 424,899 shares of common stock to Typenex upon the conversion of $50,000 of their Note. The shares were issued at approximately $0.1177 per share.
On March 26, 2012, the Company issued 454,545 shares of common stock upon the conversion of $10,000 of outstanding convertible notes. The shares were issued at approximately $0.022 per share.
On April 23, 2012, the Company issued 500,000 shares of common stock upon the conversion of $10,000 of outstanding convertible notes. The shares were issued at $0.02 per share.
On May 3, 2012, the Company issued 375,000 shares of common stock upon the conversion of $5,000 of outstanding convertible notes and $1,000 of accrued and unpaid interest. The shares were issued at $0.016 per share.
On May 16, 2012, the Company issued 857,143 shares of common stock upon the conversion of $12,000 of outstanding convertible notes. The shares were issued at $0.014 per share.
On May 31, 2012, the Company issued 1,400,000 shares of common stock upon the conversion of $13,000 of outstanding convertible notes and $1,000 of accrued and unpaid interest. The shares were issued at $0.01 per share.
On June 21, 2012, the Company issued 600,000 shares of common stock upon the conversion of $6,000 of outstanding convertible notes. The shares were issued at $0.01 per share.
On July 9, 2012, the Company issued 1,125,000 shares of common stock upon the conversion of $9,000 of outstanding convertible notes. The shares were issued at $0.008 per share.
On July 11, 2012, the Company issued 1,214,286 shares of common stock upon the conversion of $8,500 of outstanding convertible notes. The shares were issued at $0.007 per share.
On July 24, 2012, the Company issued 416,667 shares of common stock upon the conversion of $1,500 of outstanding convertible notes and $1,000 of accrued and unpaid interest. The shares were issued at $0.006 per share.
On October 25, 2012, the Company issued 1,071,429 shares of common stock upon the conversion of $15,000 of outstanding convertible notes. The shares were issued at $0.014 per share.
On November 25, 2012, the Company issued 1,175,000 shares of common stock upon the conversion of $17,500 of outstanding convertible notes and $1,300 of accrued and unpaid interest. The shares were issued at $0.016 per share.
The Company offered and sold the securities in reliance on an exemption from federal registration under Section 4(2) of the Securities Act of 1933 and Rule 506 promulgated thereunder. The Company relied on this exemption and rule based on the fact that there were a limited number of investors, all of whom were accredited investors and (i) either alone or through a purchaser representative, had knowledge and experience in financial and business matters such that each was capable of evaluating the risks of the investment, and (ii) the Company had obtained subscription agreements from such investors indicating that they were purchasing for investment purposes only. The securities were not registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The disclosure contained herein does not constitute an offer to sell or a solicitation of an offer to buy any securities of the Company, and is made only as permitted by Rule 135c under the Securities Act.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Not required for smaller reporting Companies
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OR PLAN OF OPERATION.
The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto for the years ended December 31, 2013 and 2012.
The independent auditor’s reports on our financial statements for the years ended December 31, 2013 and 2012 includes a “going concern” explanatory paragraph that describes substantial doubt about our ability to continue as a going concern. Management’s plans in regard to the factors prompting the explanatory paragraph are discussed below and also in Note 1 to the audited consolidated financial statements.
While our independent auditor has presented our financial statements on the basis that we are a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time, they have raised a substantial doubt about our ability to continue as a going concern.
(a) Liquidity and Capital Resources.
For the year ended December 31, 2013, net cash used in operating activities was $453,566 compared to $39,463 for the year ended December 31, 2012. The Company had a net loss of $4,421,662 for the year ended December 31, 2013 compared to $461,852 for the year ended December 31, 2012. The net loss for the year ended December 31, 2013 was impacted by stock and warrant compensation expense of $3,255,947 comprised of $2,821,275 of preferred stock compensation, the amortization of deferred stock compensation of $192,472 from the previous issuance of Series B preferred stock, $124,200 warrant based compensation for issuance of warrants to purchase 300,000 shares of common stock to our advisor to the board of directors, $80,000 for the one time issuance of 200,000 shares of common stock to the same advisor, 75,000 shares of common stock (with an additional 25,000 shares to be issued each quarter the advisor continues his relationship with the Company) valued at $22,500 and $15,500 for the issuance of 25,000 shares for the services provided to the Company. Additional non-cash expenses for the year ended December 31, 2013 were the amortization of the initial discounts of $185,612 on the convertible notes, the initial derivative liability expense and the change in fair market value of the derivatives of $353,761, amortization of deferred financing fees of $38,808 also related to the convertible promissory notes, loss related to the conversion of the contingent liability to common stock of $29,561 and a gain on discontinuance of equity method of $67,186 The net loss in the prior period was impacted by (i) $113,108 related to the initial expense and changes in the fair market value of derivative liabilities associated with convertible notes payable, the amortization of the initial discount on the convertible notes and amortization of deferred financing fees also related to the convertible promissory notes, (ii) $209,372 of stock based compensation and (iii) $46,449 of litigation contingency expenses. These expenses were offset by $62,526 of income and other adjustments related to the deconsolidation of 800 Commerce, Inc.
Net cash provided by financing activities for the year ended December 31, 2013 was $579,500 compared to $38,000 for the year ended December 31, 2012. During the year ended December 31, 2013 the Company received $627,500 on the issuance of convertible notes and paid deferred financing fees of $48,000.
For the year ended December 31, 2012 the Company received $56,000 on the issuance of convertible notes and $5,000 from the sale of 800 Commerce, Inc.’s common stock (a majority owned subsidiary of the Company at the time of the stock sale). During the year ended December 31, 2012 the Company repaid $18,000 of convertible notes and paid $5,000 of deferred financing costs related to the issuance of new convertible notes.
The Company has limited cash and cash equivalents on hand. The Company plans to maintain its’ capital needs through the collection of our account receivables and notes receivables. In January 2014, the Company collected $200,000 of notes receivable and issued a convertible note for $1,660,000, of which the Company received $300,000 upon the note issuance. The Company also was issued six (6) notes, each in the amount of $200,000. Based on the receipts in January 2014, and the notes issued to the Company, the Company believes it will be able to support our operating expenses and to meet our other obligations as they become due. The potential conversions of any convertible notes issued by the Company will cause dilution to our stockholders.
(b) Results of Operations
Results of operations for the year ended December 31, 2013 vs. December 31, 2012
REVENUES
Revenues for the years ended December 31, 2013 and 2012 were comprised of the following:
In April 2013, Alternative Capital Solutions (“ACS”) and the Company terminated their agreements and accordingly, the Company will no longer be receiving fees related to the ACS agreement. During 2013, the Company entered into an exclusive distributorship agreement with Chill Drinks, LLC (See Note 1) for sales (began in April 2013) of Chill Drink’s products to dispensaries. Also through August 2013 the Company generated revenues related to its’ cloud based patient software.
Revenues from the 2012 period were all related to merchant processing fees the Company received from medical dispensaries. Effective July 1, 2012, the merchant processing fees ceased as a result of Mastercard and Visa declining to accept credit card charges from medical dispensaries.
OPERATING EXPENSES
Operating expenses were $3,898,317 for the year ended December 31, 2013 compared to $433,664 for 2012.
Year ended December 31,
Administration and management fees increased as a result of the increase of the amount accrued for the salaries for our CEO from $90,000 for the year ended December 31, 2012 to $150,000 for the year ended December 31, 2013 and compensation recorded for our CFO of $36,000 and $96,000 for the years ended December 31, 2012 and 2013, respectively.
Stock compensation expense, management was comprised of $2,821,275 of preferred stock compensation related to the 450,000 shares of Class B preferred stock issued to the Company’s CEO, in exchange for the return of 3,033,500 shares of common stock. The 2013 expense also includes the amortization of deferred stock compensation of $81,431 from the previous issuance of Series B preferred stock. The 2012 expense is as a result of the amortization of deferred stock compensation.
Stock compensation expense, other for 2013 includes $111,041 for the amortization of deferred stock compensation, $124,200 warrant based compensation for the issuance of a warrant to purchase 300,000 shares of common stock to our advisor to the board of directors, $80,000 for the one time issuance of 200,000 shares of common stock to the same advisor, 75,000 shares of common stock (with an additional 25,000 shares to be issued each quarter the advisor continues his relationship with the Company) valued at $22,500 and $15,500 for the issuance of 25,000 shares for services provided to the Company. The 2012 expense is as a result of the amortization of deferred stock compensation.
Professional and consulting fees increased for the year ended December 31, 2013 compared to 2012 as a result of investor relation costs of $41,552 for the year ended December 31, 2013, compared to $14,949 for the year ended December 31, 2012. Legal and consulting fees of $31,435 were incurred for the year ended December 31, 2013, compared to $7,750 for the year ended December 31, 2012.
Commissions and license fees increased to $58,871 for the year ended December 31, 2013, from $28,012 for the year ended December 31, 2012. The increase in 2013 was as a result of commissions due for the sales of Chillo Drink Products as well as licensing fees of $13,500 incurred in 2013.
General and other administrative costs for the year ended December 31, 2013, were $137,881 compared to $24,456 for the year ended December 31, 2012. Expenses for the year ended December 31, 2013, include public company filing and transfer agent fees of $30,770, travel and entertainment costs of $43,071, internet and web based service costs of $26,585, office supplies of $8,661 and $28,794 of other general and administrative costs.
OTHER INCOME (EXPENSE)
Other expenses for the year ended December 31, 2013 was $578,321 compared to $105,588 for the year ended December 31, 2012. The 2013 expenses were comprised of $299,856 of interest expense, $38,493 change in fair market value of derivative liabilities and the initial derivative liability expense of convertible notes of $315,268. The 2013 interest expense was comprised of $185,612 related to the amortization of the initial discount on convertible promissory notes, $38,808 for the amortization of the deferred financing costs, $45,875 for the interest expense on the face value of the notes, and a beneficial conversion feature related to the conversion of the contingent liability to common stock of $29,561. Also included in other expenses was a gain on distribution of equity method investee of $67,186 and $8,110 of interest income related to interest collected on notes receivables. The 2012 expenses were comprised of $46,449 of litigation contingency expenses and interest expense of $148,200. The expenses were offset by $62,636, the gain recorded on the deconsolidation of 800 Commerce, Inc. and a gain of $26,425 for the fair market value change in the derivative liability associated with convertible promissory notes, Included in interest expense is $130,829 of amortization of the discount on convertible notes, $8,704 of amortization of deferred financing costs related to the convertible notes and $8,667 of interest expense on the face value of the convertible notes.
OFF BALANCE SHEET ARRANGEMENTS
None
Critical Accounting Policies
Accounting Policies and Estimates
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.
As such, in accordance with the use of accounting principles generally accepted in the United States of America, our actual realized results may differ from management’s initial estimates as reported. A summary of significant accounting policies are detailed in notes to the financial statements which are an integral component of this filing.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the Securities and Exchange Commission, Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition” (“SAB No. 104”). SAB 104 clarifies application of generally accepted accounting principles related to revenue transactions. The Company also follows the guidance in EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables ("EITF Issue No. 00-21"), in arrangements with multiple deliverables.
The Company recognizes revenues when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectability is reasonably assured.
The Company recognizes revenue during the month in which products are shipped or commissions were earned.
NONCONTROLLING INTEREST AND DECONSOLIDATION
On January 1, 2011, the Company adopted authoritative accounting guidance that requires the ownership interests in subsidiaries held by parties other than the parent, and income attributable to those parties, be clearly identified and distinguished in the parent’s consolidated financial statements. The Company’s noncontrolling interest is now disclosed as a separate component of the Company’s consolidated equity deficiency on the balance sheets. Earnings and other comprehensive income are separately attributed to both the controlling and noncontrolling interests. Earnings per share are calculated based on net income attributable to the Company’s controlling interest.
From January 1, 2011 through May 31, 2011, the Company owned 100% of 800 Commerce. From June 1, 2011 through October 1, 2011 800 Commerce sold 465,000 shares of its common stock and issued 3,534,000 shares of its common stock to its officers as compensation. After these transactions, the Company owned 60% of 800 Commerce. On May 10, 2012, 800 Commerce sold 3,150,000 shares of its common stock, reducing the Company’s ownership to 45%. On May 18, 2012, 800 Commerce sold 1,500,000 shares of its common stock, reducing the Company’s ownership to 40%. On June 10, 2012 issued 1,500,000 shares of common stock pursuant to a consulting agreement and 1,851,000 shares of common stock for legal services and in lieu of compensation, and during the remainder of 2012, 800 Commerce sold 500,000 shares of its common stock and issued 550,000 shares of its common stock pursuant to consulting agreements. Subsequent to these issuances and as of December 31, 2012, the Company currently owned approximately 32% of the outstanding common stock of 800 Commerce. Effective May 10, 2012, the Company is no longer consolidating 800 Commerce in its’ financial statements. The noncontrolling interest included in the Company’s consolidated statement of operations is a result of noncontrolling interest investments in 800 Commerce up to the date of deconsolidation of May 10, 2012. Noncontrolling interests through May 10, 2012 are classified in the condensed consolidated statements of operations as part of consolidated net loss. Subsequent to May 10, 2012, the Company’s investment in 800 Commerce is accounted for using the equity method and was reduced to zero.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original term of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
The Company records accounts receivable from amounts due from its customers upon the shipment of products. The allowance for losses is established through a provision for losses charged to expenses. Receivables are charged against the allowance for losses when management believes collectibility is unlikely.
INVENTORY
Inventory is valued at the lower of cost or market value. Cost is determined using the first in first out (FIFO) method. Provision for potentially obsolete or slow moving inventory is made based on management analysis or inventory levels and future sales forecasts.
DEFERRED FINANCING COSTS
The costs related to the issuance of debt are capitalized and amortized to interest expense using the straight-line method over the lives of the related debt.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
We evaluate long-lived assets and identifiable intangible assets with finite useful lives in accordance with ASC 350-30 and ASC 360 (formerly SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets), and accordingly, management reviews our long-lived assets and identifiable intangible assets with finite useful lives for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We recognize an impairment loss when the sum of the future undiscounted net cash flows expected to be realized from the asset is less than its carrying amount. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Considerable judgment is necessary to estimate the fair value of the assets and accordingly, actual results could vary significantly from such estimates. Our most significant estimates and judgments relating to the long-lived asset impairments include the timing and amount of projected future cash flows.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value measurements are determined under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to measure fair value, distinguishing between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”).
Fair value is the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company primarily uses prices and other relevant information generated by market transactions involving identical or comparable assets (“market approach”). The Company also considers the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity to identify transactions that are not orderly.
The highest priority is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Securities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The three hierarchy levels are defined as follows:
Level 1 - Quoted prices in active markets that is unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 - Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly;
Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
Credit risk adjustments are applied to reflect the Company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the Company’s own credit risk as observed in the credit default swap market.
The Company's financial instruments consist primarily of cash, accounts payable and accrued expenses, and convertible debt. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments. The estimated fair value is not necessarily indicative of the amounts the Company would realize in a current market exchange or from future earnings or cash flows.
INCOME TAXES
The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes. Deferred tax assets and liabilities are recognized to reflect the estimated future tax effects, calculated at the tax rate expected to be in effect at the time of realization. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. Interest and penalties are classified as a component of interest and other expenses. To date, the Company has not been assessed, nor paid, any interest or penalties.
Uncertain tax positions are measured and recorded by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized. The Company’s tax years subsequent to 2005 remain subject to examination by federal and state tax jurisdictions.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are computed in accordance with ASC 260, "Earnings per Share". Basic earnings (loss) per share is computed by dividing net income (loss), after deducting preferred stock dividends accumulated during the period, by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities, if any, outstanding during the period. There were 300,000 outstanding warrants as of December 31, 2013 and no outstanding warrants or options as of December 31, 2012. As of December 31, 2013, the Company’s outstanding convertible debt is convertible into 3,120,000 shares of common stock and 1,000,000 shares of Class B convertible preferred stock is convertible into 22,227,623 shares of common stock. These amounts are not included in the computation of dilutive loss per share because their impact is antidilutive.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock awards issued to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. The measurement date is the earlier of (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty's performance is complete. Stock awards granted to non-employees are valued at their respective measurement dates based on the trading price of the Company’s common stock and recognized as expense during the period in which services are provided.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting Companies
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
The audited financial statements of the Company required pursuant to this Item 8 are included in, as a separate section commencing on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
ITEM 9A(T).
ITEM 9A(T). CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
A review and evaluation was performed by the Company's management, including the Company's Chief Executive Officer (the "CEO") and Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this annual report. Based on that review and evaluation, the CEO and CFO have concluded that as of December 31, 2013 disclosure controls and procedures, were not effective at ensuring that the material information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported as required in the application of SEC rules and forms.
Management’s Report on Internal Controls over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a set of processes designed by, or under the supervision of, a company’s principal executive and principal financial officers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
● Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and disposition of our assets;
● Provide reasonable assurance our transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
● Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted that any system of internal control, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our CEO and CFO have evaluated the effectiveness of our internal control over financial reporting as described in Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this report based upon criteria established in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As a result of this evaluation, we concluded that our internal control over financial reporting was not effective as of December 31, 2013 as described below.
We assessed the effectiveness of the Company’s internal control over financial reporting as of evaluation date and identified the following material weaknesses:
Insufficient Resources: We have an inadequate number of personnel with requisite expertise in the key functional areas of finance and accounting.
Inadequate Segregation of Duties: We have an inadequate number of personnel to properly implement control procedures.
Lack of Audit Committee: We do not have a functioning audit committee, resulting in lack of independent oversight in the establishment and monitoring of required internal controls and procedures.
We are committed to improving the internal controls and will (1) consider to use third party specialists to address shortfalls in staffing and to assist us with accounting and finance responsibilities, (2) increase the frequency of independent reconciliations of significant accounts which will mitigate the lack of segregation of duties until there are sufficient personnel and (3) may consider appointing additional outside directors and audit committee members in the future.
We have discussed the material weakness noted above with our independent registered public accounting firm. Due to the nature of this material weakness, there is a more than remote likelihood that misstatements which could be material to the annual or interim financial statements could occur that would not be prevented or detected.
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the SEC that permit us to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
(a) (b) Identification of directors and executive officers.
Set forth below is information regarding the Company’s current directors and executive officers. There are no family relationships between any of our directors or executive officers. The directors are elected annually by stockholders. The executive officers serve at the pleasure of the Board of Directors:
Name Age Positions Held and Tenure
B. Michael Friedman Chief Executive Officer and Director
Barry Hollander Chief Financial Officer and Director
(c) Identification of significant employees.
None
(d) Identification of family relationships
None
(e)Business experience
B. Michael Friedman, Chief Executive Officer. Since 2009, Mr. B. Michael Friedman has been the Company’s Chief Executive Officer and member of the Company’s Board of Directors. In February 2010 (inception date) Mr. Friedman founded 800 Commerce and has been the President since inception date. Mr. Friedman has over 20 years of investment banking experience, particularly in the areas of mergers and acquisitions, manufacturing, marketing, advertising, and licensing. Since 2008 Mr. Friedman operates in a managerial capacity, First Level Capital LLC, a mergers and acquisitions and financial consulting firm located in Los Angeles, California. Mr. Friedman received his Bachelor of Science (BS) in Marketing and Management in 1986 from the University of Florida, in Gainesville, Florida.
Barry S. Hollander, Chief Financial Officer. Mr. Hollander has been the CFO of the Registrant since April 12, 2011. Since April 2011, Mr. Hollander has been the Chief Financial Officer of 800 Commerce, Inc. (“800 Commerce”). Since July 2013, Mr. Hollander has been the CFO and a Director of American Doctors Online (“ADOL”). ADOL, a private company is in the telehealth/ telemedicine industry. From February 2010 through February 2013, Mr. Hollander was the Chief Financial Officer of Quture International, Inc. (formerly known as Techs Loanstar, Inc.), a publicly traded Company. Mr. Hollander was the acting Chief Executive Officer of FastFunds Financial Corporation, a publicly traded company with limited business operations. In July 2010, Mr. Hollander formed Venture Equity, LLC (“Venture Equity”), a Florida limited liability company that provides financial services to private and public companies. Mr. Hollander is the sole member of Venture Equity.
(f) Involvement in certain legal proceedings
None
(g) Promoters and control persons
None
Code of Ethics
We adopted a Code of Ethics for Senior Financial Management to promote honest and ethical conduct and to deter wrongdoing. This Code applies to our Chief Executive Officer and Chief Financial Officer and other employees performing similar functions. The obligations of the Code of Ethics supplement, but do not replace, any other code of conduct or ethics policy applicable to our employees generally.
Under the Code of Ethics, all members of the senior financial management shall:
● Act honestly and ethically in the performance of their duties at our company,
● Avoid actual or apparent conflicts of interest between personal and professional relationships,
● Provide full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submits to, the SEC and in other public communications by our company,
● Comply with rules and regulations of federal, state and local governments and other private and public regulatory agencies that effect the conduct of our business and our financial reporting,
● Act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing the member’s independent judgment to be subordinated
● Respect the confidentiality of information in the course of work, except when authorized or legally obtained to disclosure such information,
● Share knowledge and maintain skills relevant to carrying out the member’s duties within our company,
● Proactively promote ethical behavior as a responsible partner among peers and colleagues in the work environment and community,
● Achieve responsible use of and control over all assets and resources of our company entrusted to the member, and
● Promptly bring to the attention of the Chief Executive Officer any information concerning (a) significant deficiencies in the design or operating of internal controls which could adversely affect to record, process, summarize and report financial data or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in our financial reporting or internal controls.
Corporate Governance
There have been no material changes to procedures by which security holders may recommend nominees to our board of directors.
We currently have no standing audit or nominating committees of our board of directors. Our entire board of directors currently performs these functions.
Director Independence
Our board of directors currently has two directors and has no standing sub-committees at this time due to the associated expenses and the small size of our board. We are not currently listed on a national securities exchange that has requirements that a majority of the board of directors be independent.
In performing the functions of the audit committee, our board oversees our accounting and financial reporting process. In this function, our board performs several functions. Our board, among other duties, evaluates and assesses the qualifications of the Company’s independent auditors; determines whether to retain or terminate the existing independent auditors; meets with the independent auditors and financial management of the Company to review the scope of the proposed audit and audit procedures on an annual basis; reviews and approves the retention of independent auditors for any non-audit services; reviews the independence of the independent auditors; reviews with the independent auditors and with the Company’s financial accounting personnel the adequacy and effectiveness of accounting and financial controls and considers recommendations for improvement of such controls; reviews the financial statements to be included in our annual and quarterly reports filed with the Securities and Exchange Commission; and discusses with the Company’s management and the independent auditors the results of the annual audit and the results of our quarterly financial statements. While we do not currently have a standing compensation committee, our non-employee director considers executive officer compensation, and our entire board participates in the consideration of director compensation. Our non-employee board members oversee our compensation policies, plans and programs. Our non-employee board members further review and approve corporate performance goals and objectives relevant to the compensation of our executive officers; review the compensation and other terms of employment of our Chief Executive Officer and our other executive officers; and administer our equity incentive and stock option plans. Each of our directors participates in the consideration of director nominees. In addition to nominees recommended by directors, our board will consider nominees recommended by shareholders if submitted in writing to our secretary. Our board believes that any candidate for director, whether recommended by shareholders or by the board, should be considered on the basis of all factors relevant to our needs and the credentials of the candidate at the time the candidate is proposed. Such factors include relevant business and industry experience and demonstrated character and judgment.
ITEM 11
ITEM 11 EXECUTIVE COMPENSATION.
The following tables set forth all of the compensation awarded to, earned by or paid to: (i) each individual serving as our principal executive officer during the fiscal years ended December 31, 2013 and 2012; (ii) each other individual that served as an executive officer at the conclusion of the fiscal year ended December 31, 2013 and who received in excess of $100,000 in the form of salary and bonus during such fiscal year.
Table 1. Summary Compensation of Executive Officers
(1) Includes $90,000 (2012) and $32,347 (2013) expensed to our CEO as deferred compensation authorized by the Board of Directors of the Company.
(2) All Other Compensation is related to the issuance of Class B Preferred Stock. During the year ended December 31, 2012, the Company issued 250,000 shares to Mr. Friedman, 250,000 shares to Mr. Rodriguez (cancelled in June 2013) and 50,000 shares to Mr. Hollander. The 2012 All Other Compensation amount for Mr. Friedman represents the value of the Class B preferred stock in excess of the deferred compensation due Mr. Friedman at the time of the issuance. The 2013 amount for Mr. Friedman is for the issuance of 450,000 shares of Class B Preferred Stock and includes the value of the excess shares on an as if converted basis, over the 3,033,500 shares of common stock Mr. Friedman returned to the Company. The All Other Compensation amount for Mr. Hollander represents the value of the Class B preferred stock issued for services performed by Mr. Hollander. The 2012 amount for Mr. Rodriguez represents the amortization from August thru December 31, 2012 of the value of the Class B preferred stock issued to Mr. Rodriguez, and through June 13, 2013, the effective date of the Company accepting Mr. Rodriguez’s resignation.
(3) Mr. Hollander’s 2013 salary includes $60,000 of accrued expenses to be paid in restricted shares of common stock, based on the market value of the common stock at the end of the period. The Company issued 545,454 shares of common stock in January 2014. The shares were issued at $0.11 per share, the market price of the common stock on December 31, 2013.
(4) Resigned June 13, 2013.
Option Grants
No options were granted during the year ended December 31, 2013. We have 300,000 outstanding warrants as of December 31, 2013.
Director Compensation
We do not pay fees to our directors for attendance at meetings of the board; however, we may adopt a policy of making such payments in the future. We will reimburse out-of-pocket expenses incurred by directors in attending board and committee meetings.
Employment Agreements
None.
Report on Repricing of Options
None.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
(a) Security ownership of certain beneficial owners.
(b) Security ownership of management.
The following table sets forth information known to the Company with respect to the beneficial ownership (as such term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of the outstanding common stock of the Company as of March 27, 2014 by: (1) each person known by the Company to beneficially own 5% or more of the Company’s outstanding common stock; (2) each of the named executive officers as defined in Item 402(a)(3); (3) each of the Company’s directors; and (4) all of the Company’s named executive officers and directors as a group. The number of shares beneficially owned is determined under rules promulgated by the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Including those shares in the tables does not, however, constitute an admission that the named stockholder is a direct or indirect beneficial owner of those shares.
(1) Based on a total of an aggregate of 62,655,006 shares of common stock outstanding and 750,000 shares of Class B Preferred Stock outstanding.
(2) Includes 21,929,252 (Friedman) and 1,566,375 (Hollander) shares of common stock for the conversion of Class B Preferred Stock.
(3) Includes 23,491,627 shares of common stock for the conversion of Class B Preferred Stock.
Changes in Control
There were no significant changes in control for the period ending December 31, 2013.
DESCRIPTION OF SECURITIES
General
Our authorized capital stock consists of 250,000,000 shares of common stock, par value $0.0001 and 1,000,000 shares of Series B Preferred Stock, par value $0.0001.
Common Stock
The shares of our common stock presently outstanding, and any shares of our common stock issues upon exercise of stock options and/or warrants, will be fully paid and non-assessable. Each holder of common stock is entitled to one vote for each share owned on all matters voted upon by shareholders, and a majority vote is required for all actions to be taken by shareholders. In the event we liquidate, dissolve or wind-up our operations, the holders of the common stock are entitled to share equally and ratably in our assets, if any, remaining after the payment of all our debts and liabilities and the liquidation preference of any shares of preferred stock that may then be outstanding. The common stock has no preemptive rights, no cumulative voting rights, and no redemption, sinking fund, or conversion provisions. Since the holders of common stock do not have cumulative voting rights, holders of more than 50% of the outstanding shares can elect all of our Directors, and the holders of the remaining shares by themselves cannot elect any Directors. Holders of common stock are entitled to receive dividends, if and when declared by the Board of Directors, out of funds legally available for such purpose, subject to the dividend and liquidation rights of any preferred stock that may then be outstanding.
Voting Rights
Each holder of Common Stock is entitled to one vote for each share of Common Stock held on all matters submitted to a vote of stockholders.
Dividends
Subject to preferences that may be applicable to any then-outstanding shares of Preferred Stock, if any, and any other restrictions, holders of Common Stock are entitled to receive ratably those dividends, if any, as may be declared from time to time by the Company’s board of directors out of legally available funds. The Company and its predecessors have not declared any dividends in the past. Further, the Company does not presently contemplate that there will be any future payment of any dividends on Common Stock.
Preferred Stock
Series B
On June 20, 2012 the Company cancelled and returned to authorized but unissued one million shares of Preferred A Stock, and authorized 1,000,000 shares of Class B Convertible Preferred Stock (the “Class B Preferred Stock”), par value $0.0001. The rights, preferences and restrictions of the Class B Preferred Stock,as amended, state; i) each share of the Class B Convertible Preferred Stock shall be entitled to a number of votes determined at any time and from time to time determined by dividing the number of then issued and outstanding shares of the Corporation’s common stock by one million; ii) the Class B Convertible Preferred Stock shall have a right to vote on all matters presented or submitted to the Corporation’s stockholders for approval in pari passu with holders of the Corporation’s common stock, and not as a separate class; iii) each share of the Class B Preferred Stock shall be convertible into shares of the Company’s common stock at the option of the holder into a number of shares of common stock determined by dividing the number of then issued and outstanding shares of the Company’s common stock (62,655,006 as of March 24, 2014) by two million. The preferred stock cannot be converted into a number of common shares that causes the number of issued and outstanding common stock to exceed the number of authorized shares of common stock.
On August 13, 2012 the Board of Directors of the Company authorized the issuance of 800,000 shares of Class B Preferred stock. The shares were issued as follows: B. Michael Friedman, 250,000 shares issued in lieu of accrued and unpaid salary due Mr. Friedman and stock based compensation (see Note 7) for his role as CEO of the Company; Erick Rodriguez, 250,000 shares for his role as President; Phillip Johnston, 100,000 shares issued pursuant to legal services to be provided for one year beginning August 12, 2012; Barry Hollander, 50,000 shares issued for his services as CFO (see Note 7) and Capital Strategy Corp., 150,000 shares for consulting services, including merger and acquisition consulting. The shares issued for legal services and consulting were recorded as deferred compensation (originally $355,334) and are being amortized over the term of their respective agreements. Accordingly, the Company has expensed and included $133,250 and $192,473 in stock based compensation for the years ended December 31, 2012 and 2013, respectively.
Amendment of our Bylaws
Our bylaws may be adopted, amended or repealed by the affirmative vote of a majority of our outstanding shares. Subject to applicable law, our bylaws also may be adopted, amended or repealed by our board of directors.
Transfer Agent
Interwest Transfer Company serves in the capacity of transfer agent.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
(a) Transaction with related persons.
Officer advances and repayments
None.
Management fees
Effective January 1, 2011, the Company agreed to annual compensation of $90,000 for its CEO, which was increased to $150,000 annually, effective January 1, 2013. Effective January 1, 2013, the Company has agreed to annual compensation of $96,000 for the CFO. The Company and the CFO have agreed that $3,000 per month will be paid in cash and $5,000 per month will be paid in restricted shares of common stock. For the years ended December 31, 2013 and 2012, the Company expensed $249,500 and $108,260 included in Administrative and Management Fees in the Consolidated Statements of Operations, included herein. In June 2013, Mr. Friedman and the Company, agreed to exchange 3,033,500 shares of common stock in partial consideration for the issuance of 450,000 shares of Class B Preferred Stock. The Company reduced accrued compensation of Mr. Friedman by $100,022 and recognized stock compensation expense of $2,821,275. As of December 31, 2013, the Company owed the CEO $35,437 and the CFO $60,000 (the stock based portion of the CFO’s compensation).
In August 2012, the Company issued 250,000 shares of Class B Preferred Stock to the President, valued at $177,667 and recorded the amount as deferred stock compensation to be amortized over one year. As of June 13, 2013, the Company accepted the resignation of Mr. Rodriguez as an Officer and Director of the Company. The Company has cancelled the Preferred Stock and returned the shares to the treasury of the Company for failure to complete the Employment Agreement and SweetMD transaction. Therefore, the Company stopped amortizing the deferred compensation during the quarter ended June 30, 2013, and recorded an entry to eliminate the remaining unamortized compensation of $29,611 with the corresponding entry to additional paid in capital. For the years ended December 31, 2012 and 2013, the Company amortized $66,625 and $81,431, respectively.
During the year ended December 31, 2012 the Company expensed management fees of $3,260 for payments made to Mr. Rodriguez.
Agreements with prior management
In December 2011 the Company issued a $50,000 convertible promissory note (see Note 6) as part of a guaranty fee due to a Company that is affiliated with a former officer of the Company. Terms of the note include an eight percent per annum interest rate and the note matured on the one year anniversary on December 20, 2012. Additionally, the holder of the Note has the right to convert the note into shares of common stock of the Company at a conversion price equal to eighty percent (80%) of the lowest closing bid price of the common stock within five (5) days of the conversion. On March 31, 2013, the Company and the noteholder elected to convert the remaining balance of the note of $32,000 and accrued and unpaid interest of $6,060 into 369,928 shares of common stock.
Also in December 2011, the Company agreed to pay an additional $50,000 in common stock, which is included in accounts payable and accrued expenses on the December 31, 2013 and 2012 balance sheets.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
Fees for audit services billed for the fiscal year ended December 31, 2013 and 2012 were $12,775 and $10,250 respectively and consisted of (i) audit of the Company’s annual financial statements; (ii) reviews of the Company’s quarterly financial statements; (iii) consultations on financial accounting and reporting matters arising during the course of the audit and reviews.
Audit-Related Fees
There were no other aggregated fees billed in the fiscal years ended December 31, 2013 and 2012 for assurance and related services by the principal accountants that were reasonably related to the performance of the audit or review of the financial statements that were not reported above.
Tax Fees
There were no fees in the fiscal years ended December 31, 2013 and 2012 for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning.
All Other Fees
There were no other fees billed in the fiscal year ended December 31, 2013 and 2012 for any other services.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND REPORTS.
Exhibits
(2) Filed herein.
(a) EXHIBITS
Signatures
In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form 10-K and authorized this registration statement to be signed on its behalf by the undersigned, on the 31st day of March, 2014.
Mediswipe, Inc.
/S/B. Michael Friedman
B. Michael Friedman
Chief Executive Officer
/S/ Barry Hollander
Barry Hollander
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated.
Signature
Title
Date
/s/ B. Michael Friedman
B. Michael Friedman
Director
March 31, 2014
/s/ Barry Hollander
Barry Hollander
Director
March 31, 2014
MEDISWIPE, INC.
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Mediswipe, Inc.
We have audited the accompanying balance sheets of Mediswipe, Inc. as of December 31, 2013 and 2012, and the related statements of income, stockholders’ deficiency, and cash flows for the years then ended. Mediswipe, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mediswipe, Inc. as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 11 to the financial statements, the Company has incurred operating losses, has incurred negative cash flows from operations and has a working capital deficit. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan regarding these matters is also described in Note 11 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
D. Brooks and Associates CPA’s, P.A.
West Palm Beach, Florida
March 31, 2014
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
MEDISWIPE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
BUSINESS
MediSwipe Inc. (the “Company” or “Mediswipe”) currently offers a variety of services and product lines to the medicinal marijuana sector including the digitization of patient records, and the distribution of hemp based nutritional products. The Company also provides a complete line of innovative solutions for electronically processing merchant and patient transactions within the healthcare industry. Recently, the Company began importing and distributing vaporizers and e-cigarettes under the Company's Mont Blunt brand and the management of real property for fully-licensed and compliant growers and dispensaries within regulated medicinal and recreational markets.
Through June 30, 2012, the Company provided merchant services to approximately forty medical dispensaries and wellness centers throughout California and Colorado through our sponsor bank Electronic Merchant Systems (“EMS”). Effective July 1, 2012, EMS advised all medical dispensaries that they will no longer accept their Visa and MasterCard transactions. This action had a materially adverse effect on our business.
During the year ended December 31, 2013, the Company utilized its existing banking and merchant network within both the medicinal medical marijuana and healthcare sector. During the three months ended March 31, 2013, through strategic partnerships with banking and financing partners the Company received commission based fees for arranging for third party financing for elective surgery procedures. Effective April 1, 2013, the Company no longer is providing these services.
On April 30, 2013, the Company entered into a one year Distribution Agreement with Chill Drinks, LLC (“Chill Drinks”). Chill Drinks has the rights to an energy drink called Chillo Energy Drink (“Chillo”) and a hemp ice tea drink called C+ Swiss Ice Tea (“C+Swiss”). Chillo and C+Swiss are referred to as the “Chill Drink Products”. Pursuant to the Distribution Agreement the Company has the exclusive distribution and placement rights of the Chill Drink Products to medical marijuana dispensaries.
In 2013, the Company introduced MediSwipe’s Digital Management System (“DMS”), a technology platform that enables consumers to securely file, store and conveniently retrieve important original and authentic personal health documents via the Internet. DMS allows on-demand access to valuable documents at home and during travel. Authentic images of documents such as; a passport, prescriptions and insurance policies are always accessible. The service is an economical solution with an easy-to-use web-based application that has the potential to appeal to a market base of at least 75 million U.S. consumers.
MediSwipe’s DMS is compatible with virtually all operating systems, web browsers, and file formats. Users can quickly upload or even e-fax their documents into their secure “vault”, and then organize, manage, review and send document copies wherever needed, anytime via the Internet.
The MediSwipe DMS provides the highest level of privacy and security and does not rely on the accuracy of user-entered data. Images of actual documents, uploaded to the patient personal registry, form the basis for this solution. Critical personal items are safe and timeless in a secure, encrypted environment where privacy and security are paramount. Patients can then load all of the data onto their own digital patient identification card to be used throughout the MediSwipe platform.
On June 26, 2103, the Company formed two new wholly owned Florida subsidiaries American Hemp Trading Company and Agritech Innovations, Inc. (“AGTI”). On September 3, 2013, AGTI changed its name to Agritech Venture Holdings, Inc. (“AVHI”).
On August 1, 2013, the Company and Medical Cannabis Network, Inc. (“MCN”) entered into a Subscription and Services Agreement (the “SSA”). Pursuant to the terms of the SSA, the Company has the exclusive license to access and use MCN’s products and services, including but not limited to, technology (services collaboration software) and services (including hosting, professional services support and maintenance). The six month exclusive license requires the Company to pay MCN $3,000 per month for the first two months of the agreement and $5,000 per month thereafter. The Company is in discussions with MCN regarding the extension and or renewal of the agreement, and once finalized management plans to market the products to dispensaries.
On November 12, 2013, the Financial Industry Regulatory Authority approved the company’s 1-for-10 reverse stock split (the “Reverse Stock Split”) on the Company’s common stock outstanding with an effective date of December 11, 2013. Pursuant to the Reverse Stock Split, all share amounts in these consolidated financial statements have been adjusted to reflect the Reverse Stock Split.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). The consolidated financial statements include the accounts of the Company and 800 Commerce, Inc. (“800 Commerce”) until May 10, 2012 when 800 Commerce sold shares of its common stock to third parties resulting in the Company no longer holding a controlling interest in 800 Commerce. All material intercompany balances and transactions have been eliminated.
NONCONTROLLING INTEREST AND DECONSOLIDATION
On January 1, 2011, the Company adopted authoritative accounting guidance that requires the ownership interests in subsidiaries held by parties other than the parent, and income attributable to those parties, be clearly identified and distinguished in the parent’s consolidated financial statements. Earnings and other comprehensive income are separately attributed to both the controlling and noncontrolling interests. Earnings per share are calculated based on net income attributable to the Company’s controlling interest.
From January 1, 2011 through May 31, 2011, the Company owned 100% of 800 Commerce. From June 1, 2011 through October 1, 2011 800 Commerce sold 465,000 shares of its common stock and issued 3,534,000 shares of its common stock to its officers as compensation. After these transactions, the Company owned 60% of 800 Commerce. On May 10, 2012, 800 Commerce sold 3,150,000 shares of its common stock, reducing the Company’s ownership to 45%. On May 18, 2012, 800 Commerce sold 1,500,000 shares of its common stock, reducing the Company’s ownership to 40%. On June 10, 2012 issued 1,500,000 shares of common stock pursuant to a consulting agreement and 1,851,000 shares of common stock for legal services and in lieu of compensation, and during the remainder of 2012, 800 Commerce sold 500,000 shares of its common stock and issued 550,000 shares of its common stock pursuant to consulting agreements. Subsequent to these issuances and as of December 31, 2012, the Company owned approximately 32% of the outstanding common stock of 800 Commerce. Effective May 10, 2012, the Company is no longer consolidating 800 Commerce in its’ financial statements. The noncontrolling interest included in the Company’s consolidated statement of operations is a result of noncontrolling interest investments in 800 Commerce up to the date of deconsolidation of May 10, 2012. Noncontrolling interests through May 10, 2012 are classified in the condensed consolidated statements of operations as part of consolidated net loss. Subsequent to May 10, 2012, the Company’s investment in 800 Commerce is accounted for using the equity method and was reduced to zero.
As a result of the deconsolidation of 800 Commerce, Inc., the Company recorded a gain of $62,636, consisting of the following:
On June 20, 2013, 800 Commerce issued 900,000 shares of its common stock pursuant to a patent purchase agreement.
On August 5, 2013, 800 Commerce filed Amendment No.5 to its’ S-1 Registration Statement with the Securities and Exchange Commission (“SEC”). The SEC declared the registration statement effective on August 8, 2013, and on September 4, 2013, the Company distributed the 6,000,000 shares of common stock of 800 Commerce it owned on a pro-rata basis to the Company’s shareholders. As a result, the Company owns no interest in 800 Commerce and recognized a gain on distribution of interest in unconsolidated investee of $67,186 related to the recognition of advances to 800 Commerce previously reduced to zero in the application of equity method accounting.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original term of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
The Company records accounts receivable from amounts due from its customers upon the shipment of products. The allowance for losses is established through a provision for losses charged to expenses. Receivables are charged against the allowance for losses when management believes collectibility is unlikely.
INVENTORY
Inventory is valued at the lower of cost or market value. Cost is determined using the first in first out (FIFO) method. Provision for potentially obsolete or slow moving inventory is made based on management analysis or inventory levels and future sales forecasts.
DEFERRED FINANCING COSTS
The costs related to the issuance of debt are capitalized and amortized to interest expense using the straight-line method through the maturities of the related debt.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is provided by use of accelerated and straight-line methods over the estimated useful lives of the assets. The estimated useful lives of property and equipment are as follows:
Office equipment and furniture 	 5 years
Computer hardware and software	3 years
REVENUE RECOGNITION
The Company recognizes revenue in accordance with FASB ASC 605, Revenue Recognition. ASC 605 requires that four basic criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectability is reasonably assured.
The Company recognizes revenue during the month in which products are shipped or commissions are earned.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value measurements are determined under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to measure fair value, distinguishing between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”).
Fair value is the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company primarily uses prices and other relevant information generated by market transactions involving identical or comparable assets (“market approach”). The Company also considers the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity to identify transactions that are not orderly.
The highest priority is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Securities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The three hierarchy levels are defined as follows:
Level 1 - Quoted prices in active markets that is unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 - Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly;
Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
Credit risk adjustments are applied to reflect the Company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the Company’s own credit risk as observed in the credit default swap market.
The Company's financial instruments consist primarily of cash, accounts payable and accrued expenses, and convertible debt. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments. The estimated fair value is not necessarily indicative of the amounts the Company would realize in a current market exchange or from future earnings or cash flows.
INCOME TAXES
The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes. Deferred tax assets and liabilities are recognized to reflect the estimated future tax effects, calculated at the tax rate expected to be in effect at the time of realization. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. Interest and penalties are classified as a component of interest and other expenses. To date, the Company has not been assessed, nor paid, any interest or penalties.
Uncertain tax positions are measured and recorded by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized. The Company’s tax years subsequent to 2005 remain subject to examination by federal and state tax jurisdictions.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are computed in accordance with ASC 260, "Earnings per Share". Basic earnings (loss) per share is computed by dividing net income (loss), after deducting preferred stock dividends accumulated during the period, by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities, if any, outstanding during the period. There were 300,000 outstanding warrants as of December 31, 2013 and no outstanding warrants or options as of December 31, 2012. As of December 31, 2013, the Company’s outstanding convertible debt is convertible into 3,120,000 shares of common stock and 1,000,000 shares of Class B convertible preferred stock is convertible into 22,227,623 shares of common stock. These amounts are not included in the computation of dilutive loss per share because their impact is antidilutive.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock awards issued to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. The measurement date is the earlier of (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty's performance is complete. Stock awards granted to non-employees are valued at their respective measurement dates based on the trading price of the Company’s common stock and recognized as expense during the period in which services are provided.
For the years ended December 31, 2013 and 2012, the Company recorded stock and warrant based compensation of $3,255,947 and $209,372, respectively (See Notes 7 and 8).
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimates.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
Accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
NOTE 4 - RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to the current period's financial statement presentation. These reclassifications had no impact on previously reported results of operations or stockholders' deficiency.
NOTE 5 - SALES CONCENTRATION AND CONCENTRATION OF CREDIT RISK
CASH
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash. The Company maintains cash balances at one financial institution, which is insured by the Federal Deposit Insurance Corporation (“FDIC”). The FDIC insured institution insures up to $250,000 on account balances. The company has not experienced any losses in such accounts.
SALES
Through June 30, 2012, the Company generated substantially all of its’ revenue from providing merchant services to approximately forty medical dispensaries and wellness centers throughout California and Colorado through our sponsor bank Electronic Merchant Systems (“EMS”). EMS advised all medical dispensaries that they will no longer accept their Visa and MasterCard transactions. This change was effective on July 1, 2012 had a materially adverse effect on our business. For the year ended December 31, 2012 revenue generated through EMS (Customer C) was $43,773. Accordingly, the Company received approximately 56% of its’ 2012 revenues from EMS and approximately 35% of its revenues from providing financing for medical procedures as an agent for Alternative Capital Solutions, Inc. (“ACS” or Customer A).
For the years ended December 31, 2013 and 2012 two (2) customers each accounted for more than 10% of our business, as follows:
PURCHASES
For the year ended December 31, 2013 the Company purchased $66,343 (approximately 72%) from one vendor related to the purchase of Chillo and C+Swiss drinks and $18,686 (approximately 20% from another vendor related to our tobacco alternative product line.
NOTE 6 - CONVERTIBLE DEBT
In December 2011 the Company issued a $50,000 convertible promissory note as part of a guaranty fee due (the “Guaranty Note”) to a Company that is affiliated with a former officer of the Company. Terms of the note included an eight percent per annum interest rate and the note matured on the one year anniversary on December 20, 2012. Additionally, the holder of the Note had the right to convert the note into shares of common stock of the Company at a conversion price equal to eighty percent (80%) of the lowest closing bid price of the common stock within five (5) days of the conversion. The beneficial conversion feature included in the Guaranty Note resulted in an initial debt discount and derivative liability of $36,765.
As of December 31, 2011, the Company revalued the embedded derivative. For the period from issuance to December 31, 2011, the Company decreased the derivative liability of $36,765 by $1,050 resulting in a derivative liability balance of $35,715 at December 31, 2011. During the year ended December 31, 2012, the company made payments of $18,000, reducing the principal balance of the Guaranty Note to $32,000 as of December 31, 2012. The Company revalued the remaining portion of the embedded derivative as of December 31, 2012 and based on the valuation, the Company decreased the derivative liability balance by $13,652 resulting in a derivative liability balance of $13,209 at December 31, 2012.
On March 31, 2013 the Company and the noteholder elected to convert the remaining $32,000 balance of the note and accrued and unpaid interest of $6,060 into 369,928 shares of common stock. The fair value of derivative liability on the date of conversion totaling $13,209 was reclassed to additional paid in capital.
In September, October and December 2011, the Company entered into three separate note agreements with Asher Enterprises, Inc. (“Asher”) for the issuance of three convertible promissory notes each in the amount of $25,000 (“the September 2011 Note”, “the October 2011 Note” and “the December 2011 Note”, respectively, and together “ the 2011 Notes”). Among other terms the 2011 Notes are due nine months from their issuance dates, bear interest at 8% per annum, payable in cash or shares at the Conversion Price as defined herewith, and are convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 50% of the average of the lowest three trading prices (as defined in the note agreements) per share of the Company’s common stock for the ten trading days immediately preceding the date of conversion. Upon the occurrence of an event of default, as defined in the 2011 Notes, the Company is required to pay interest at 22% per annum and the holders may at their option declare a Note, together with accrued and unpaid interest, to be immediately due and payable. In addition, the 2011 Notes provide for adjustments for dividends payable other than in shares of common stock, for reclassification, exchange or substitution of the common stock for another security or securities of the Company or pursuant to a reorganization, merger, consolidation, or sale of assets, where there is a change in control of the Company. The Company may at its own option prepay the 2011 Notes and must maintain sufficient authorized shares reserved for issuance under the 2011 Notes.
On April 24, 2012 (“the April 2012 Note”) the Company entered into a $32,500 convertible note agreement and on November 28, 2012 (“the November 2012 Note”) into a $23,500 convertible note agreement with Asher under the same terms and conditions as the 2011 Notes. The Company received net proceeds of $51,000 from the 2012 Notes after debt issuance costs of $5,000 paid for lender legal fees. These debt issuance costs will be amortized over the earlier of the terms of the Note or any redemptions and accordingly $2,796 and $2,203, has been expensed as debt issuance costs (included in interest expense) for the years ended December 31, 2012 and 2013, respectively.
The Company determined that the conversion feature of the 2012 Notes represents an embedded derivative since the Note is convertible into a variable number of shares upon conversion. Accordingly, the 2012 Notes are not considered to be conventional debt under EITF 00-19 and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of this derivative instrument has been recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to each Note up to the face amount of the note and any excess recorded as expense. Such discount will be amortized from the date of issuance to the maturity dates of the Note. The change in the fair value of the liability for derivative contracts will be recorded in other income or expenses in the consolidated statements of operations at the end of each quarter, with the offset to the derivative liability on the balance sheet.
The beneficial conversion feature included in the April 2012 Note resulted in an initial debt discount of $32,500 and an initial loss on the valuation of derivative liabilities of $2,658 for a derivative liability initial balance of $35,158.
The beneficial conversion feature included in the November 2012 Note resulted in an initial debt discount of $23,500 and an initial loss on the valuation of derivative liabilities of $1,826 for a derivative liability initial balance of $25,326.
As of December 31, 2012, the Company revalued the embedded conversion feature of the November 2012 Note. For the period from November 28, 2012 through December 31, 2012, the Company increased the derivative liability of $25,326 by $55 resulting in a derivative liability balance of $25,381. During the quarter ended June 30, 2013, the Company issued 121,027 shares of common stock in satisfaction of the convertible note and $940 of accrued and unpaid interest. The shares were issued at approximately $0.20 per share. During the quarter ended June 30, 2013, the Company issued 121,027 shares of common stock in satisfaction of the convertible note and $940 of accrued and unpaid interest. The shares were issued at approximately $0.20 per share. The fair value of derivative liability on the date of conversion totaling $25,381 was reclassed to additional paid in capital.
On January 2, 2013, February 11, 2013, April 10, 2013, July 29, 2013 and October 16, 2013, the Company entered convertible note agreements (the 2013 Notes) with Asher for $37,500, $27,500, $27,500, $65,000 and $70,000, respectively. We received net proceeds of $214,000 from the 2013 Notes after debt issuance costs of $13,500 paid for lender legal fees. These debt issuance costs will be amortized over the earlier of the terms of the Note or any redemptions and accordingly $8,989 has been expensed as debt issuance costs (included in interest expense) for the year ended December 31, 2013. The beneficial conversion feature included in the 2013 Notes resulted in an initial debt discount of $227,500 and an initial loss on the valuation of derivative liabilities of $35,029 for a derivative liability initial balance of $262,529.
The fair value of the embedded conversion features of the 2013 Notes was calculated at each issue date utilizing the following assumptions:
During the year ended December 31, 2013, the Company issued 489,484 shares of common stock in satisfaction of $92,500 of the 2013 Notes and $3,700 of accrued and unpaid interest. The shares were issued at approximately $0.1965 per share. The fair value of the derivative liabilities on the dates of conversion totaling $120,482 was reclassified to paid-in-capital.
As of December 31, 2013 the Company revalued the embedded conversion feature of the remaining 2013 Notes. From their dates of issuance, the Company increased the derivative liability of the remaining 2013 Notes by $53,101 resulting in a derivative liability as of December 31, 2013 of $205,920. The fair value of the 2013 Notes was calculated at December 31, 2013 utilizing the following assumptions:
The inputs used to estimate the fair value of the derivative liabilities are considered to be level 2 inputs within the fair value hierarchy.
On May 20, 2013 (the “Issuance Date”), the Company entered into a Securities Purchase Agreement with Typenex Co-Investment, LLC ("Typenex"), for the sale of an 8% convertible note in the principal amount of up to $667,500 (which includes Typenex legal expenses in the amount of $7,500 and a $60,000 original issue discount) (the “Company Note”) for a purchase price of $600,000, consisting of $100,000 paid in cash at closing on May 21, 2013 (the “Initial cash Purchase Price”) and five secured promissory notes, aggregating $500,000 (the “Investor Notes”), bearing interest at the rate of 8% per annum. Three of the Investor Notes aggregating $300,000 were funded in 2013 and the two remaining Investor Notes of $100,000 each were funded in January 2014, and are included in notes receivable in the balance sheet presented herein.
The Note bears interest at the rate of 8% per annum, and is due in four equal monthly installments ( the “Redemption Price”) beginning on the six month anniversary of the initial funding. All interest and principal must be repaid on February 21, 2014. The Note is convertible into common stock, at Typenex’s option, at a price of $0.55 per share. In the event the Company elects to prepay all or any portion of the Note, the Company is required to pay to Typenex an amount in cash equal to 125% multiplied by the sum of all principal, interest and any other amounts owing. Beginning on the date that is six (6) months after the later of (i) the Issuance Date, and (ii) the date the Initial Cash Purchase Price is paid to the Company (the “Initial Installment Date”), and on each applicable Installment Date thereafter, the Company shall pay to the Holder of this Note the applicable Installment Amount due on such date. Payments of the Installment Amount may be made (a) in cash (a “Company Redemption”), (b) by converting such Installment Amount into shares of Common Stock (a “Company Conversion”), or (c) by any combination of a Company Conversion and a Company Redemption so long as the entire amount of such Installment Amount due shall be converted and/or redeemed by the Company on the applicable Installment Date.
At any time prior to the payment of the applicable Redemption Price by the Company, the Holder shall have the option, in lieu of redemption, to cancel the Event of Default Redemption Notice by written notice to the Company (the “Redemption Cancellation Notice”). Upon the Company’s receipt of a Redemption Cancellation Notice, the Outstanding Balance of the Note as of the date of the Redemption Notice shall thereafter be due and payable upon demand, with payment of the Outstanding Balance being due ten (10) Trading Days after written demand therefor from the Holder; (y) the Conversion Price of this Note shall be automatically adjusted with respect to each conversion under this Note effected thereafter by the Holder to the lowest of (A) 75% of the lowest Closing Bid Price of the Common Stock during the period beginning on and including the date on which the applicable Redemption Notice is delivered to the Company and ending on and including the date of the Redemption Cancellation Notice, (B) the Market Price as of the date of the Redemption Cancellation Notice, (C) the then current Market Price, and (D) the then current Conversion Price.
The Company determined that the conversion feature of the Typenex Note represents an embedded derivative since the Note is convertible into a variable number of shares upon conversion. Accordingly, the Typenex Note are not considered to be conventional debt under EITF 00-19 and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of this derivative instrument has been recorded as a liability on the consolidated balance sheet with since the Typenex Note is now due on demand, the corresponding amount recorded as an expense
During the year ended December 31, 2013, the Company issued 570,000 shares of common stock in satisfaction of $70,000 of the Company Note. The shares were issued at $0.12279 per share. As of December 31, 2013, the outstanding principal balance is $597,500 and accrued and unpaid interest (included in accrued liabilities in the balance sheets herein) is $32,654.
A summary of the derivative liability balance as of December 31, 2012 and 2013 is as follows:
*Comprised of $227,500, the discount on the face value of the convertible note and the initial derivative liability expense of $315,268 which is included in the derivative liability expense of $73,522 on the condensed statement of operations for the year ended December 31, 2013, included herein.
NOTE 7 - RELATED PARTY TRANSACTIONS
Management fees and stock compensation expense
Effective January 1, 2011, the Company agreed to annual compensation of $90,000 for its CEO, which was increased to $150,000 annually, effective January 1, 2013. Effective January 1, 2013, the Company has agreed to annual compensation of $96,000 for the CFO. The Company and the CFO have agreed that $3,000 per month will be paid in cash and $5,000 per month will be paid in restricted shares of common stock. For the years ended December 31, 2013 and 2012, the Company expensed $249,500 and $108,260 included in Administrative and Management Fees in the Consolidated Statements of Operations, included herein. As of December 31, 2013, the Company owed the CEO $35,437 and the CFO $60,000 (the stock based portion of the CFO’s compensation).
In August 2012, the Company issued 250,000 shares of Class B Preferred Stock to the President, valued at $177,667 and recorded the amount as deferred stock compensation to be amortized over one year. Accordingly, as of June 30, 2013, the Company accepted the resignation of Mr. Rodriguez as an Officer and Director of the Company. The Company has cancelled the Preferred Stock and returned the shares to the treasury of the Company for failure to complete the Employment Agreement and a certain contemplated transaction. Therefore, the Company stopped amortizing the deferred compensation during the quarter ended June 30, 2013, and recorded an entry to eliminate the remaining unamortized compensation of $29,611 with the corresponding entry to additional paid in capital.
In June 2013, Mr. Friedman agreed to exchange 3,033,500 shares of common stock in partial consideration for the issuance of 450,000 shares of Class B preferred stock (see note 8). The Company recognized expenses of $133,250 and $192,473 for the years ended December 31, 2013 and 2012 related to amortization of the deferred compensation.
Agreements with prior management
In December 2011 the Company issued a $50,000 convertible promissory note (see Note 6) as part of a guaranty fee due to a Company that is affiliated with a former officer of the Company. Terms of the note included an eight percent per annum interest rate and the note matured on the one year anniversary on December 20, 2012. Additionally, the holder of the Note had the right to convert the note into shares of common stock of the Company at a conversion price equal to eighty percent (80%) of the lowest closing bid price of the common stock within five (5) days of the conversion. On March 31, 2013, the Company and the noteholder elected to convert the remaining balance of the note of $32,000 and accrued and unpaid interest of $6,060 into 369,928 shares of common stock.
Also in December 2011, the Company agreed to pay an additional $50,000 in common stock, which is included in accounts payable and accrued expenses on the December 31, 2013 and 2012 balance sheets.
NOTE 8 - COMMON AND PREFERRED STOCK
Common Stock
On November 12, 2013, the Board of Directors of the Company approved by unanimous written consent a 1-for-10 Reverse Stock Split and to decrease the authorized common stock of the Company to 250,000,000. Pursuant to the Reverse Stock Split, each ten (10) shares of the Company’s Common Stock automatically converted into one share of Common Stock.
On November 12, 2013, the Financial Industry Regulatory Authority approved the company’s 1-for-10 reverse stock split (the “Reverse Stock Split”) on the Company’s common stock outstanding with an effective date of December 11, 2013. All the following share issuances are stated to reflect the reverse stock split.
On March 19, 2013, the Company issued 25,000 shares of restricted common stock, to Empire Relations Holdings, LLC, as consideration under a consulting agreement dated March 7, 2013 for public and financial relations services. The fair value was $15,500 based on the closing stock price of $0.62 per share on the measurement date as the shares are non-refundable and no future performance obligation exists.
On March 31, 2013, the Company agreed to issue 369,928 shares of common stock upon the conversion of the remaining balance of $32,000 of the guaranty note and accrued and unpaid interest of $6,060 (see notes 6 and 7).
Previously the Company appointed Mr. James Canton to be an advisor to the Company’s Board of Directors. In April 2013, the Company agreed to issue to Mr. Canton 200,000 shares of common stock, a warrant to purchase 300,000 shares of common stock at an exercise price of $0.50 per share with an expiration date on the third year anniversary of the grant, and 25,000 shares of common stock to be issued at the end of each calendar quarter beginning on June 30, 2013 and ending on the earlier of March 31, 2015 (the term of Canton’s advisor role) or the date Canton is no longer serving as an advisor to the board of directors. The Company valued the warrant at $124,200 based on the Black Scholes formula. The Company included $102,500 in stock based compensation expense for the year ended December 31, 2013 for the 275,000 shares of common stock issued as of December 31, 2013, based upon the market price of the common stock on the grant dates.
On March 26, 2012, the Company issued 454,546 shares of common stock in satisfaction of $10,000 of the September 2011 Note. The shares were issued at approximately $0.022 per share.
On April 23, 2012, the Company issued 500,000 shares of common stock in satisfaction of $10,000 of the September 2011 Note. The shares were issued at $0.02 per share.
On May 3, 2012, the Company issued 375,000 shares of common stock in satisfaction of $5,000 of the September 2011 Note and $1,000 of accrued and unpaid interest. The shares were issued at $0.016 per share. This conversion resulted in the September 2011 Note having been paid in full.
On May 16, 2012, the Company issued 857,143 shares of common stock in satisfaction of $12,000 of the October 2011 Note. The shares were issued at $0.014 per share.
On May 31, 2012, the Company issued 1,400,000 shares of common stock in satisfaction of $13,000 of the October 2011 Note and $1,000 of accrued and unpaid interest. The shares were issued at $0.01 per share. This conversion resulted in the October 2011 Note having been paid in full.
On June 21, 2012, the Company issued 600,000 shares of common stock in satisfaction of $6,000 of the December 2011 Note. The shares were issued at $0.01 per share.
On July 9, 2012, the Company issued 1,125,000 shares of common stock in satisfaction of $9,000 of the December 2011 Note. The shares were issued at $0.008 per share.
On July 11, 2012, the Company issued 1,214,286 shares of common stock in satisfaction of $8,500 of the December 2011 Note. The shares were issued at $0.007 per share.
On July 24, 2012, the Company issued 416,667 shares of common stock in satisfaction of $1,500 of the December 2011 Note and $1,000 of accrued and unpaid interest. The shares were issued at $0.0059 per share. This conversion resulted in the December 2011 Note having been paid in full.
On October 25, 2012, the Company issued 1,071,429 shares of common stock in satisfaction of $15,000 of the December 2011 Note. The shares were issued at $0.007 per share.
On July 24, 2012, the Company issued 416,667 shares of common stock in satisfaction of $1,500 of the December 2011 Note and $1,000 of accrued and unpaid interest. The shares were issued at $0.0059 per share. This conversion resulted in the December 2011 Note having been paid in full.
On April 23, 2013 the Company issued a Convertible Note to an unaffiliated third party in exchange and for the cancellation of a litigation contingency of $46,449, which was acquired by the third party. Also on April 23, 2013, the Company issued 175,000 shares of common stock in satisfaction of the April 23, 2013 Convertible Note. The shares were issued at $0.265 per share, and the Company recorded a beneficial conversion feature expense of $29,561.
On June 4, 2013 and June 11, 2013, the Company issued in the aggregate 121,027 shares of common stock in satisfaction of the November 28, 2012 note of $23,500 and accrued and unpaid interest of $940. The shares were issued at $0.20 per share.
On June 26, 2013, B. Michael Friedman, the Company’s CEO exchanged 3,033,500 shares of common stock for 450,000 shares of Class B Preferred Stock. The Company reduced accrued compensation due Mr. Freidman of $100,022 and recognized stock based compensation expense of $2,821,275.
On July 8, 2013, the Company issued 185,714 shares of common stock in satisfaction of the January 2, 2013 Asher convertible note of $37,500 and accrued and unpaid interest of $1,500. The shares were issued at $0.21 per share.
On August 22, 2013 and August 27, 2013, the Company issued in the aggregate 131,480 shares of common stock in satisfaction of the February 11, 2013 note of $27,500 and accrued and unpaid interest of $1,100. The shares were issued at $0.21 per share.
On October 21, 2013, the Company issued 172,289 shares of common stock in satisfaction of the April 18, 2013 Asher convertible note of $27,500 and accrued and unpaid interest of $1,100. The shares were issued at approximately $0.16 per share.
On November 22, 2013, the Company issued 145,191 shares of common stock to Typenex upon the conversion of $20,000 of their Note. The shares were issued at approximately $0.1377 per share.
On December 11, 2013, the Company issued 424,899 shares of common stock to Typenex upon the conversion of $50,000 of their Note. The shares were issued at approximately $0.1177 per share.
Preferred Stock
On June 20, 2012 the Company cancelled and returned to authorized but unissued one million shares of Preferred A Stock, and authorized 1,000,000 shares of Class B Convertible Preferred Stock (the “Class B Preferred Stock”), par value $0.01. The rights, preferences and restrictions of the Class B Preferred Stock as amended, state; i) each share of the Class B Convertible Preferred Stock shall automatically convert (the “Conversion”) into shares of the Corporation’s common stock at the moment there are sufficient authorized and unissued shares of common stock to allow for the Conversion. The Class B Convertible Preferred Stock will convert in their entirety, simultaneously to equal one half (1/2) the amount of shares of common stock outstanding on a fully diluted basis immediately prior to the Conversion. The Conversion shares will be issued pro rata so that each holder of the Class B Convertible Preferred Stock will receive the appropriate number of shares of common stock equal to their percentage ownership of their Class B Convertible Preferred Stock and ii) all of the outstanding shares of the Class B Preferred Stock in their entirety will have voting rights equal to the amount of shares of common stock outstanding on a fully diluted basis immediately prior to any vote. The shares eligible to vote will be calculated pro rata so that each holder of the Class B Convertible Preferred Stock will be able to vote the appropriate number of shares of common stock equal to their percentage ownership of their Class B Convertible Preferred Stock. The Class B Convertible Preferred Stock shall have a right to vote on all matters presented or submitted to the Corporation’s stockholders for approval in pari passu with holders of the Corporation’s common stock, and not as a separate class.
On August 13, 2012 the Board of Directors of the Company authorized the issuance of 800,000 shares of Class B Preferred stock. The shares were issued as follows: B. Michael Friedman, 250,000 shares issued in lieu of accrued and unpaid salary due Mr. Friedman and stock based compensation (see Note 7) for his role as CEO of the Company; Erick Rodriguez, 250,00 shares issued for his role as President of the Company; Philip Johnston, 100,000 shares issued pursuant to legal services to be provided for one year beginning August 12, 2012; Barry Hollander, 50,000 shares issued for his services as CFO (see Note 7) and Capital Strategy Corp., 150,000 shares for consulting services, including merger and acquisition consulting. The shares issued for legal services and consulting were recorded as deferred compensation (originally $355,334) and are being amortized over the term of their respective agreements. Accordingly, the Company has expensed and included $133,250 and $192,473 in stock based compensation for the year ended December 31, 2012 and 2013, respectively.
As of December 31, 2012, the Company had 800,000 shares of Series B Preferred Stock (the “Class B Preferred Stock”), par value $0.01 outstanding. On June 12, 2013, pursuant to Rodriguez’s resignation, non-execution of the employment agreement dated August 10, 2012 and the failure to close a contemplated transaction the Company cancelled the book entry of Rodriguez’s 250,000 shares of Class B Preferred Stock.
Subsequent to the issuance of 450,000 shares of Class B Preferred Stock on June 26, 2013 as above, there are 1,000,000 shares of Class B Preferred Stock outstanding as of December 31, 2013.
Warrants
On April 26, 2013 and in connection with the appointment of Mr. James Canton to the Company’s advisory board, the Company issued a warrant to Mr. Canton to purchase 300,000 shares of common stock. The warrant expires on the three year anniversary and has an exercise price of $0.50 per share. The Company valued the warrant at $124,200 based on the Black Scholes formula and the following assumptions:
Estimated market value of common stock on measurement date: $0.04
Exercise price: $0.05
Risk free interest rate: 11%
Term in years: 3 years
Expected volatility: 223%
Expected dividends: 0.00%
A summary of the activity of the Company’s outstanding warrants at January 1, 2013 and December 31, 2013 is as follows:
NOTE 9 - INCOME TAXES
Deferred income taxes reflect the net tax effects of operating loss and tax credit carry forwards and temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. Due to the uncertainty of the Company’s ability to realize the benefit of the deferred tax assets, the deferred tax assets are fully offset by a valuation allowance at December 31, 2013 and 2012.
Income tax expense for 2013 and 2012 is as follows:
The following is a summary of the Company’s deferred tax assets at December 31, 2013 and 2012:
A reconciliation between the expected tax expense (benefit) and the effective tax rate for the years ended December 31, 2013 and 2012 are as follows:
As of December 31, 2013, the Company had a tax net operating loss carry forward of approximately $1,356,000. Any unused portion of this carry forward expires in 2030. Utilization of this loss may be limited in the event of an ownership change pursuant to IRS Section 382.
NOTE 10 - CONTINGENCIES AND COMMITMENTS
Effective on April 1, 2013, the Company entered into a three year agreement to rent approximately 2,500 square feet of office space (the “Office Lease”) in Detroit, Michigan. The monthly rent under this lease was $2,200 per month.
Effective August 28, 2013, the Company and the landlord amended the Office Lease allowing the Company to move to a new location in downtown Detroit. The new lease was for 3,657 square feet for monthly rent of $3,047. In November 2013, the Company was notified that the owner of the building (the Company’s landlord) was delinquent in their obligations to the mortgage holder of the building.
Effective May 15, 2013 through September 15, 2013, the Company leased warehouse space on a month to month basis for the shipping and logistics of the Company’s Chillo drink products for $850 per month. Subsequent to September 15, 2013, the Company compensates the landlord on a per box shipping fee.
Rent expense for the year ended December 31, 2013 and was $34,954 and $20,993, respectively.
The Company is not aware of any legal proceedings against it as of December 31, 2013. No contingencies have been provided in the financial statements.
NOTE 11 - GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As of December 31, 2013 the Company had an accumulated deficit of $9,318,948 and a working capital deficit of $885,945. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
MANAGEMENT’S PLAN
The Company presently maintains its’ daily operations and capital needs through collections of accounts receivable for product sales. In January 2014 the Company entered into a Secured Promissory Note of $1,660,000 to Tonaquint, Inc. (“Tonaquint”) (the same principals as Typenex) which includes a purchase price of $1,500,000 and transaction costs of $160,000. Upon closing, on January 31, 2014, the Company received $300,000 of the purchase price and Tonaquint issued the Company 6 secured promissory notes, each in the amount of $200,000.
The Company has acquired the master leasing rights to 80 acres of agriculturally zoned land in Pueblo, Colorado (see note 13). Management plans to build the required infrastructure on the land, subdivide the 80 acres into 16 lots, 5 acres each, and lease each lot(s) to fully-licensed and compliant growers and dispensaries within the regulated medicinal and recreational marijuana market of Colorado. Each lot will be able to accommodate 10,000 to 100,000 square foot greenhouses, dependent upon the tenant’s needs.
NOTE 12 - SEGMENT REPORTING
Description of segments
During the year ended December 31, 2013, the Company had operated in two reportable segments: merchant services and wholesale sales. Prior to April 1, 2013, the Company was receiving fees as the agent of record for fees pursuant to the ACS agreement. Beginning in the quarter ended June 30, 2013, the Company began wholesaling products (Chillo drinks). The accounting policies of the segments are the same as those described in the Note 1. The Company’s reportable segments are strategic business units that offer products.
For the year ended December 31, 2013, segment results are as follows:
For the year ended December 31, 2012 the Company operated in one segment, merchant services.
NOTE 13 - SUBSEQUENT EVENTS
In January 2014, due to the uncertainty of the Company’s Office Lease in Detroit, Michigan, the Company decided to relocate its administrative offices to West Palm Beach, Florida. Effective April 1, 2014, the Company has entered into a rent sharing agreement for the use of 1,300 square feet with a company controlled by the Company’s CFO. The Company has agreed to pay $750 per month for the space.
In January 2014 the Company issued in the aggregate 8,467,388 shares of common stock to Typenex upon the conversion of $523,564 of the Company Note and accrued and unpaid interest of $3,716. The shares were issued at approximately $0.06227 per share.
On January 13, 2014, the Company issued 545,454 shares of common stock to Venture Equity upon the conversion of $60,000 of accrued management fees. The shares were issued at $0.11 per share, the market price of the common stock on December 31, 2013.
On January 14, 2014, the Company issued 2,460,968 shares of common stock to Phil Johnston upon the conversion of 100,000 shares of Class B Preferred Stock.
On January 30, 2014, February 3, 2014 and February 5, 2014, the Company issued in the aggregate 369,420 shares of common stock to Asher upon the conversion of $65,000 of the 2013 Notes and accrued and unpaid interest of $2,600. The shares were issued at approximately $0.18299.
In January 2014 the Company received $200,000 from Typenex for the two remaining Investor Notes.
In January 2014 the Company entered into a Secured Promissory Note for $1,660,000 to Tonaquint, Inc. (“Tonaquint”) (the same principals as Typenex) which includes a purchase price of $1,500,000 and transaction costs of $160,000. On January 31, 2014, the Company received $300,000 of the purchase price. Tonaquint also issued to the Company 6 secured promissory notes, each in the amount of $200,000.
In March 2014, the Company issued 843,654 shares of common stock to Typenex upon the conversion of $116,611 of the Company note and accrued and unpaid interest. The shares were issued at approximately $0.1382 per share.
On March 18, 2014, the Company announced it had completed the purchase, sale and lease back of 80 acres zoned for agricultural use in Pueblo County, Colorado. The Company executed a Joint Venture Agreement on March 14, 2014 and completed the purchase of the 80 acre parcel on March 17, 2014. As part of the purchase and Joint Venture Agreement, the Company holds the deed and title to the property within its wholly owned subsidiary, Agritech Venture Holdings Inc., and will maintain the exclusive Master Lessor rights for ninety-nine years. The exclusive agreement will enable the Company to sublease individual parcels of the 80 acre parcel to fully-licensed and compliant growers and dispensaries within the regulated medicinal and recreational market of Colorado. The Company will receive rents and management fees on providing infrastructure, water, electricity, equipment leasing and security services. The Company is presently working on its first agreements for tenants to move into the facility as early as May of 2014.
On March 27, 2014, the Company issued 4,312,420 shares of common stock upon the conversion of 150,000 shares of Class B Preferred Stock.