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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b(2) of the Exchange Act. (Check one).
Large accelerated filer
[ ]
Accelerated filer
[ ]
Non-accelerated filer(1)
[ ]
Smaller reporting company
[X]
(1) Do not check if a smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity on November 7, 2014 held by non-affiliates of the registrant (based on the average bid and asked price of such stock on such date of $1.00) was approximately $18,297,903. Shares of common stock held by each officer of the Company (or of its wholly-owned subsidiary) and director and by each person who owns 10% or more of the outstanding common stock of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. Without acknowledging that
any individual director of registrant is an affiliate, all directors have been included as affiliates with respect to shares owned by them.
At November 7, 2014, there were 18,297,903 shares outstanding of the issuer’s common stock, par value $0.001 per share.
On August 27, 2014, our Board of Directors approved a change to our fiscal year from September 30 to December 31, effective beginning with the year ended December 31, 2013. This Transition Report on Form 10-K contains financial results for the 2013 transition period from September 30, 2013 to December 31, 2013.
When financial results for the 2013 transition period are compared to financial results for the prior year period, the results compare the three month periods ended December 31, 2013 and December 2012. The results for the three month period ended December 31, 2012 are unaudited. When financial results for fiscal 2013 are compared to financial results for fiscal 2012, the results compare our previous fiscal years, or the twelve-months periods ended September 30, 2013 and September 30, 2012. The following table show the months included within the various comparison periods:
Fiscal 2013 (3-month) Results Compared With Fiscal 2012 (3-month)
Calendar 2012
(3-month, unaudited)
Calendar 2013
(3-month)
October 2012-December 2012
October 2013-December 2013
Fiscal 2013 (12-month) Results Compared With Fiscal 2012 (12-month)
In addition to historical information, this Transition Report on Form 10-K may contain statements relating to future results of SpendSmart Networks, Inc. (including certain projections and business trends) that are “forward-looking statements.” Our actual results may differ materially from those projected as a result of certain risks and uncertainties. These risks and uncertainties include, but are not limited to, without limitation, statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as “expects” or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, “plans”, “estimates” or “intends”, or stating that certain actions, events or results “may”, “could”, “would”,
“might” or “will” be taken, occur or be achieved) are not statements of historical fact and may be “forward-looking statements.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results or achievements of the Company to be materially different from any future results or achievements of the Company expressed or implied by such forward-looking statements. Such factors include, among others, those set forth herein and those detailed from time to time in our other Securities and Exchange Commission (“SEC”) filings. These forward-looking statements are made only as of the date hereof, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information,
future events or otherwise, except as otherwise required by law. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Also, there can be no assurance that the Company will be able to raise sufficient capital to continue as a going concern.
As used in this Transition Report on Form 10-K, the terms "we", "us", "our", “SpendSmart Networks, Inc.”, and the "Company" means SpendSmart Networks, Inc., a Delaware corporation, its wholly-owned subsidiary SpendSmart Networks, Inc., a California corporation or their management.
Current Business & Strategy
Through our Mobile and Loyalty Marketing Division, we provide proprietary loyalty systems and a suite of digital engagement and marketing services that help local merchants build relationships with consumers and drive revenues. These services are implemented and supported by a vast network of certified digital marketing specialists, aka “Certified Masterminds,” who drive revenue and consumer relationships for merchants via loyalty programs, mobile marketing, mobile commerce and financial tools, such as prepaid card and reward systems. We enter into licensing agreements for our proprietary loyalty marketing solution with “Certified Masterminds” which sell and support the technology in their respective markets. Our products aim to make Consumers’ dollars go further when they spend it with merchants in the SpendSmart network of merchants, as they receive exclusive
deals, earn rewards and ultimately build a connection with their favorite merchants. Additionally, through our Card Division, we offer pre-paid card programs and pre-paid program management. As discussed below, we are currently conducting an assessment of the Card Division to determine whether to continue operating this segment or to possibly wind-down its operations.
Our business strategy consists of delivering and managing:
(i)
Loyalty platforms
a.
Merchant funded rewards
b.
Loyalty rewards tablet/kiosk
c.
Proprietary rewards management system
(ii)
Mobile marketing technology
a.
Text and email messaging
b.
Customer analytics and propensity marketing
c.
Patent pending ‘automated engagement’ engine
d.
Text2Win sweepstakes features
(iii)
Enterprise level loyalty and mobile marketing consulting
a.
Monthly hands on reviews by our “Certified Masterminds”
b.
Campaign creation and optimization
c.
Localized support
(iv)
Pre-paid payment products
a.
Pre-Paid Debit Cards serving the teen demographic
(v)
Payment platform
a.
Pre-paid program manager
b.
Card management platform
We plan to pursue these strategies across a broad range of consumer, business, for-profit and non-profit organization, and government/municipal sectors. In addition, we have partnered with various groups to develop strategic affinity/co-brand opportunities. We expect to continue such partnership programs with various global for-profit and non-profit organizations.
On February 11, 2014, we acquired substantially all of the assets of SMS Masterminds. Upon the completion of the acquisition, we developed our Mobile and Loyalty Marketing Division. SMS Masterminds is a turnkey mobile loyalty solution focused on delivering mobile and loyalty marketing services for small and medium sized businesses. SMS Mastermind’s business is composed of multiple revenue components including set up fees and recurring license fees, messaging, equipment and marketing services fees and value added mobile marketing and mobile commerce services. We expect to offer a “SpendSmart Network” to all merchant partners, which will support all product lines and additional products and feature functionality that is expected to be developed to expand the capabilities of the SpendSmart Network.
Our mobile loyalty solution is focused on mobile marketing for small and medium sized businesses. Our proprietary loyalty marketing solution is licensed to “certified Masterminds” to sell and support the technology in their respective markets. This technology consists of our loyalty and mobile marketing platforms. The licensee sets up and deploys an appropriate loyalty solution customized for the merchant they are servicing. As SMS messages are sent out, revenues are generated on both the licensee and SSPC side. We expect to offer a “SpendSmart Network” to all merchant partners, which will support all product lines and additional products and feature functionality that we expect to develop to expand the capabilities of the SpendSmart Network.
We enter into licensing agreements with licensees that seek to utilize our proprietary loyalty and mobile marketing platforms. Typically, our licensing agreements provide for a term of two years, and provide the licensee with an exclusive territory designation. As part of the initial business development fee that is paid by the licensee to us, they receive access to our support and training services, as well as loyalty kiosks. In some cases, we provide an in house financing option that allows the licensee to finance part of the cost of the initial business development fee over a period of up to two years.
We provide training to each new licensee, wherein they become a “Certified Mastermind” and we guide them through the process of establishing their independent logo, building their exclusive brand, and setting up all the elements of their website and promotional materials. Upon completion of the training process, the licensee is assigned a senior licensee as their “Mentor” who comes to their location for a three-day training and initial sales visit. Upon completion of the initial training, new licensee then begin working with local merchants in their exclusive territory to sell and support the mobile and loyalty marketing services that they provide.
In addition to our introductory training program, our licensees have access to an online forum and knowledge base, and the ability to interface with various in house resources for needs related to merchant account management and support, as well as sales and business development.
Card Division & Pre-Paid Program Management and Platform
Our Card Division consists of our pre-paid card programs and our pre-paid program management and platform. The pre-paid card program includes our general purpose card and our SpendSmart MasterCard Teen Prepaid Card. Our SpendSmart MasterCard Teen Prepaid Card has been selected, among many possible products, by MasterCard, as the tween/teen gift solution in the MasterCard 2013 Holiday Gift Guide “Master the Season.”
We believe that our pre-paid platform provides us with the opportunity to present turnkey, prepaid programs, such as the SpendSmart Teen card, to small or regional banks, credit unions, affinity organizations and business looking to issue a prepaid card. Under this Program Manager support platform, we will serve as a card program manager for various types of card programs for a revenue share or pay a per card fee structure. This platform enables us to provide card program management, back office operational and servicing support for other companies in the payment space. Through this strategy, we have enhanced our reach to a new and significantly broader universe including merchant/business/charitable for-profit and non-profit, and government sectors. At the same time, we intend to expand our access and mobile marketing capabilities to all demographic segments and a global consumer and partner base.
Based on the continued losses incurred by our card division, as well as our efforts to reduce expenses, we are currently conducting an assessment of the card division to determine whether to continue operating this segment or to possibly wind-down its operations.
TechXpress Acquisition
On September 18, 2014, we purchased substantially all of the web related assets of TechXpress, Inc. (“TechXpress”), a California corporation. TechXpress provides personalized website, eCommerce and mobile app development services, as well as web marketing tools and analytics. We anticipate that we will integrate these solutions with our existing loyalty program offerings.
Advertising and Marketing Strategies
SpendSmart develops the loyalty and mobile marketing license through the acquisition of interested ‘prospects’ or leads generated through various advertisements placed on web portals throughout the internet, as well as through referrals from existing licensees. These lead sources have proven to be a consistent and reliable channel for interested potential licensees. We intend to continue to look for new sources of licensee leads, as well as increase our budget to increase our volume of leads generated. All other aspects of the business will be promoted through our network of licensees in North America.
Financial Model
Our Mobile and Loyalty Marketing Division provides for multiple revenue components including set up fees and recurring license fees, messaging, equipment and marketing services fees and value added mobile marketing and mobile commerce services. Our Card Division provides for multiple revenue components derived from fees from cardholders for various services we provide and fees we receive from merchants when our cards are used. The direct costs incurred by us in connection with the Card Division include discounts and per transaction, charges from merchant credit card companies and amounts paid to our processing partner for card issuance and transaction costs.
We employ outside consultants to handle overflow work for development on our proprietary mobile loyalty platform and payment system, as well as for marketing, design, business development and other general and administrative functions of our Company when needed. While we intend to restrict the number of new employees we add to our Company’s workforce, we believe that new personnel will be necessary in the future in the areas of project management, software programming, operations, accounting, sales and administration.
Barriers to Entry
Our Company has applied for patents in connection with our Card Division and its related uses and planned future features, one of which was recently issued. We believe that the business processes in connection with our Card Division are original to our Company; however we may discover that others have patent claims of which we are currently unaware. Should we be successful in obtaining the grant of the patents under application and should we be successful in countering any challenges to their validity that might emerge, the lifetime of the granted patents would be twenty years. Should the patent applications in question be approved, it could give us a cost advantage from the license fees that future potential competitors would be required to pay as well as revenues
from said license fees. There can be no assurances however that we will be successful in recovering such a patent or successful in countering any challenges thereto.
The market for loyalty and mobile marketing services is large, growing and highly competitive. We have identified a number of providers of loyalty and mobile marketing related products and services.
Spot On is a provider of a loyalty rewards platform that utilizes touchscreen tablet to digitize a punch card type loyalty program. At this time Spot appears to be privately held, but well financed. They are based in Illinois and have significant penetration in the Chicago area as well as many other parts of the east and west coast. They do not at this time have any kind of mobile/text marketing component to their offering, but instead focus on digitizing the punch card experience and delivering messaging to consumers via email. Spot on does not at this time have any localized representation or support, instead they rely on selling and supporting nationally over the phone and via their website.
BellyCard is a provider of loyalty rewards platforms directly to merchants utilizing a touchscreen tablet to digitize the punch card type loyalty program. They claim to have a total of 6 thousand locations in the US and have significant presence in a number of the top DMA’s in the country. They utilize an iPad device as their touchscreen interface and have robust customer analytics engine that the merchant can utilize to understand trends in their business. They do not at this time provide any mobile/texting capability and do not have localized support or sales teams. They instead rely on national support and an outsourced phone sales team.
The market for prepaid cards is large, growing and highly competitive. We have identified a number of providers of prepaid cards and related products and services.
Green Dot Corporation and NetSpend Holdings, Inc. are leaders in marketing general-purpose reloadable prepaid cards. Both of these companies have as primary market focuses under-banked consumers and tout their services as tailored to meet their customers’ particular financial services needs in a manner that traditional banking institutions have historically not met. Both companies have built extensive distribution networks throughout the US and have strong online presences. In addition to a formidable active card user base, Green Dot is a leader in establishing a convenient way for cardholders to add funds to their accounts. While neither company to our knowledge is currently specifically courting our identified target market of young people and their parents, they both represent potential sources of future competition for our
Company.
American ExpressTM is a worldwide leader in the credit card and financial services industry whose credit cards account for a significant percentage of the total volume of credit card transactions in the United States. American ExpressTM has a product named PASS which is a prepaid reloadable card that “parents give to teens.” PASS has many of the features we offer and intend to offer with our SSPC Card and American ExpressTM has devoted substantial resources to publicize this youth oriented payment option. We believe that PASS has drawbacks not found in SSPC Cards, nevertheless American ExpressTM is a world recognized brand with substantial marketing capabilities that is likely to provide formidable competition for our
Company.
PayPalTM is a pioneer provider of alternatives to credit card use for Internet and other purchases. PayPalTM facilitates transactions between online buyers and sellers and first became popular for commerce interactions over online auction sites such as eBay (eBay purchased PayPalTM in 2002). Users of PayPalTM establish accounts that are funded by the customer, either through the customer’s credit card or a bank account. Upon establishment of the account, a customer can designate that online payments be charged against his PayPalTM account balance. PayPalTM has announced its intention to service
the youth payment market through initiatives that would allow owners of PayPalTM accounts to establish allowance accounts for others (e.g. children) that the parents can fund as desired. PayPalTM could potentially present a strong challenge to the SSPC program given its substantial name recognition and financial strength.
We are also aware of other prepaid card providers that have products that seek to facilitate online commerce through added features aimed at both merchants and consumers. There are several prepaid card providers that specifically target youth in their product offerings (e.g. MYPLASH, and PAYjr). Similar to the SSPC Card, these prepaid cards represent a way for parents to be linked to their children’s accounts.
In summary, while we face potential future competition in our target market for our products, we currently believe our products offer distinct features that respond to market needs not well served by the identified competitors mentioned above. However, many of these firms have longer operating histories, greater name recognition and greater financial, technical, and marketing resources than us. Increased competition from any of these sources could result in our failure to achieve and maintain an adequate level of customer demand and market share to support the cost of our operations.
Corporate History
Our Company was originally incorporated in the State of Colorado on May 14, 1990 as “Snow Eagle Investments, Inc.” and was inactive from 1990 until 1997. In April 1997, the Company acquired the assets of 1st Net Technologies, LLC, a California limited liability company, and the Company changed its name to “1st Net Technologies, Inc.” and operated as an Internet commerce and services business. In August 2001, the Company suspended its operations. In September of 2005, the
Company acquired VOS Systems, Inc. (the “VOS Subsidiary”) as its wholly owned subsidiary and the Company changed its name to “VOS International, Inc.” and traded under the symbol “VOSI.OB”. The VOS Subsidiary operated as a technology company involved in the design, development, manufacturing, and marketing of consumer electronic products.
On October 16, 2007, we sold the VOS Subsidiary and acquired BillMyParents-CA (at the time both our Colorado parent and California subsidiary were named IdeaEdge, Inc.). On May 1, 2009, our Company changed our name from IdeaEdge, Inc. to Socialwise, Inc., and our stock traded under the symbol “SCLW.OB”. On May 25, 2011, we changed our name to BillMyParents, Inc. and beginning June 13, 2011, our stock traded under the symbol “BMPI.OB.” On February, 15, 2013, we changed our name to The SpendSmart Payments Company and beginning February 28, 2013, our stock traded under the symbol
“SSPC.OB.” Effective as of June 20, 2014, the Company was re-domiciled from Colorado to Delaware. Effective as of June 20, 2014, we filed an amendment to our Certificate of Incorporation changing our name to “SpendSmart Networks, Inc.”
Our corporate offices were previously located at 6190 Cornerstone Court, Suite 216, San Diego California 92121, where we leased approximately 3,100 square feet of office space. The monthly rental payments for the facility were approximately $2,695 plus common area maintenance charges. We closed our San Diego offices on July 17, 2013, however we had lease payment obligations remaining through June, 2014. Our corporate offices are now located in San Luis Obispo, CA, where we lease approximately 5,000 square feet of office space. The monthly payment is approximately $10,572, including association and common area maintenance charges. We also have offices in Des Moines, IA, where we lease approximately 1,000 square feet of office space. The monthly payments for the facility are approximately $1,800, including common area maintenance charges. We believe our
facilities are in good condition and adequate to meet our current and anticipated requirements.
Item 3 – Legal Proceedings
From time to time and in the course of business, we may become involved in various legal proceedings seeking monetary damages and other relief. The amount of any ultimate liability from such claims cannot be determined. However, except as otherwise disclosed herein, there are no legal claims currently pending or threatened against us that in the opinion of our management would be likely to have a material adverse effect on our financial position, results of operations or cash flows. Our Company was involved in an arbitration with our previous processor but we have since agreed to a settlement of such arbitration. The agreed upon settlement amount had been accrued at December 31, 2013 and was paid on February
13, 2014.
Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock trades publicly on the OTCQB under the symbol "SSPC." The OTCQB is a regulated quotation service that displays real-time quotes, last-sale prices and volume information in over-the-counter equity securities. The OTCQB securities are traded by a community of market makers that enter quotes and trade reports. This market is extremely limited and any prices quoted may not be a reliable indication of the value of our common stock. The following table sets forth the high and low bid prices per share of our common stock by the OTCQB for the periods indicated as reported on the OTCQB. On November 3, 2014, the closing price of our common stock as reported on the OTCQB was $.90 per share.
Our stock began trading on the OTC Bulletin Board under the symbol “IDED.OB” on October 18, 2007 and was later changed to “IDAE.OB” on March 12, 2008 and to “SCLW.OB” on May 13, 2009 and to “BMPI.OB” on June 13, 2011. On July 23, 2012 our stock was moved from the OTC Bulletin Board to the OTCQB. The quotes represent inter-dealer prices, without adjustment for retail mark-up, markdown or commission and may not represent actual transactions. The trading volume of our securities fluctuates and may be limited during certain periods. As a result of these volume fluctuations, the liquidity of an investment in our securities may be adversely affected.
Holders of Record
As of November 5, 2014, 18,297,903 shares of our common stock were issued and outstanding, and held by approximately 2,000 stockholders.
Transfer Agent
Our transfer agent is TranShare Corporation, 4626 South Broadway, Englewood, CO80113, Telephone (303) 662-1112.
Dividends
We have never declared or paid any cash dividends on our common stock. For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our common stock. Any future determination to pay dividends will be at the discretion of our Board of Directors.
Securities Authorized for Issuance under Equity Compensation Plans
The table below sets forth information as of December 31, 2013 and September 30, 2013, with respect to compensation plans under which our common stock is authorized for issuance.
On January 8, 2013, our Board of Directors approved the adoption of our 2013 Equity Incentive Plan (the “2013 Plan”). The 2013 Plan was approved by our shareholders on February 15, 2013. The 2013 Plan provides for granting of stock-based awards including: incentive stock options, non-statutory stock options, stock bonuses and rights to acquire restricted stock. The total number of shares of common stock that may be issued pursuant to stock awards under the 2013 Plan shall not exceed in the aggregate 3,000,000 shares of the common stock of our Company. On August 4, 2011, our Board of Directors approved the adoption of the SpendSmart Networks, Inc. 2011 Equity Incentive Plan (the “2011
Plan”). The 2011 Plan has been approved by our shareholders. The 2011 Plan provides for granting of stock-based awards including: incentive stock options, non-statutory stock options, stock bonuses and rights to acquire restricted stock. The total number of shares of common stock that may be issued pursuant to stock awards under the 2011 Plan shall not exceed in the aggregate 25,000,000 shares of the common stock of our Company. We also have a stockholder-approved Plan (the IdeaEdge, Inc. 2007 Equity Incentive Plan - the “2007 Plan”, previously approved by our shareholders). The 2007 Plan has similar provisions and purposes as the 2011 Plan. The total number of shares of common stock that may be issued pursuant to stock awards under the 2007 Plan shall not exceed in the aggregate 4,000,000 shares of the common stock of our
Company. The table below sets forth information as of December 31, 2013 with respect to our 2007 Plan, 2011 Plan, and 2013 Plan:
Plan Category
Number of securities to be issued upon exercise of outstanding options
Weighted-average exercise price of outstanding options
Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by shareholders (2007 Plan)
-
$
-
266,666
Equity compensation plans subject to approval by shareholders (2011 Plan)
1,566,667
6.99
100,000
Equity compensation plan approved by shareholders (2013 Plan)
Disclosure not required as a result of our Company’s status as a smaller reporting company.
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed in this prospectus. See “FORWARD LOOKING STATEMENTS” paragraph above.
Overview and Financial Condition
Discussions with respect to our Company’s operations included herein refer to our operating subsidiary, SpendSmart Networks, Inc. CA and the consolidated results of the company. The Company purchased SpendSmart Networks, Inc.-CA on October 16, 2007. On February 11, 2014, we acquired substantially all of the assets of SMS Masterminds. The Company will derive a significant/majority of its revenues from the operations of its SMS Masterminds segment in the
future.
Our prepaid card product offerings are marketed primarily to parents, enabling them to link and communicate with younger cardholders (generally their children or other young people in their care) in order to guide responsible spending. Our products have been designed with significant features that we hope consumers will find compelling. We continue to market our products (both online, in traditional retail settings and with strategic partners) to the public as a convenient and safe youth payment system.
While we are optimistic about the prospects for prepaid card products, since this continues to be a relatively new product offering, there can be no assurance about whether or when they will turn out to be a successful or if they will generate sufficient revenues to fund our operations over future periods.
Our aggregate new card fee revenues vary based upon the number of ICs activated and the activities associated therewith. Our aggregate monthly maintenance fee revenues vary primarily based upon the number of active cards in our portfolio and the average fee assessed per account. Our average monthly maintenance fee per active account depends upon the extent to which fees are waived based on promotional considerations. Our aggregate ATM fee revenues vary based upon the number of cardholder ATM transactions and the average fee per ATM transaction.
In order to better represent our financial results and to make them comparable to leading companies in the prepaid card industry, we have classified our operating expenses into four major categories: (1) selling and marketing; (2) personnel related; (3) operations; and (4) general and administrative expenses. We do not allocate common expenses to any of these expense categories.
Selling and marketing expenses
Selling and marketing expenses totaled $204,777 for the three months ended December 31, 2013 ($4,654,948 for the three months ended December 31, 2012). This amounted to a decrease of $4,450,171 from 2013 to 2014 or 95.6%. Decreases in marketing consulting in the most recent quarter over the prior year’s corresponding quarter’s totals were due to decreased expenditures for marketing agencies in the current year. Our levels of direct marketing were substantially reduced in the current period while we focused more on our account engagement (e.g. revenue per card). Marketing programs expense dropped in the current period compared to last year due mainly to higher advertising spend and the $3,750,000 in endorsement-related expense.
Personnel related expenses
Personnel related expenses totaled $1,736,689 and $3,893,183 for the three months ended December 31, 2013 and 2012, respectively. This amounted to a decrease of $2,156,494 from 2013 to 2014 or 55.4%. Overall decreases in personnel related expenses reflected the reduction of employees and consultants over the prior year, as well as a reduction in our provisions for bonuses accrued during the period. Stock based compensation was significantly lower due to fewer option and warrant grants made and accrued during the most recently completed period (and in prior periods that vested in the current period). Other personnel related expenses include employer taxes, employee benefits and other employee related costs.
Processing expenses
Processing expenses totaled $165,306 and $387,354 for the three months ended December 31, 2013 and 2012, respectively. This resulted in a decrease of $222,048 from 2013 to 2014 or 57.3%. Decreases in processing expenses were the result of a decrease in our accrual related to the settlement with our previous card processor along. Our plan is to continue to reduce our costs on a per account basis over time. Customer service costs were reduced due to our bringing some of the customer service function in house (with the related personnel expense included in salaries and wages above).
General and administrative expenses totaled $312,386 for the three months ended December 31, 2013 ($314,644 for the three months ended December 31, 2012). This resulted in a decrease of $2,258 and corresponding percentage decrease of 0.7% from 2012 to 2013.
For the three months ended December 31, 2013 and 2012, interest income totaled $631 and $1,044, respectively.
For the three months ended December 31, 2013 and 2012, interest expense totaled $7,073 and $0, respectively.
We recognized a gain from the change in the fair value of financial instruments of $271,190 for the three months ended December 31, 2013, compared to $8,587,290 for the comparable period in 2012.
For the three months ended December 31, 2013, our net loss totaled $1,927,360 ($414,298 for the three months ended December 31, 2012). Our basic and diluted net loss per share was $0.19 for the three months ended December 31, 2013 (a loss of $0.06 for the three months ended December 31, 2012). Common stock equivalents and outstanding options and warrants were not included in the calculations due to their anti-dilutive effects.
At December 31, 2013 and 2012, our total assets were $709,198 and $1,272,295, respectively, while we had negative working capital of $618,179. Total liabilities were $1,321,426 and $1,395,469, respectively, (all of which were current) and our stockholders’ deficit totaled $612,228.
Our cash and cash equivalents balance at December 31, 2013 totaled $497,313. During the three months ended 2013, positive cash flows resulted from financing and investing activities of $500,300, offset by negative cash flows from operating activities totaling $1,073,735.
Our revenues increased $11,188 or 1.1% over the prior period’s total, but have not reached the level required to support our current and planned infrastructure and that would result in profits from operations. Revenues consist of fees charged to our customer prepaid cardholders for monthly maintenance fees, ATM fees, load fees and other insignificant revenues. We continue to not charge our cardholders for new card initiation fees. We charge maintenance fees on our issued cards (“ICs”) to cardholders on a monthly basis pursuant to the terms and conditions in our cardholder agreements. We charge ATM fees to cardholders when they withdraw money or conduct other transactions at certain ATMs in accordance with the terms and conditions in our cardholder agreements. Other revenues (currently insignificant) consist primarily of fees associated with optional products or services, which we may offer to consumers
during the card activation process.
Our aggregate new card fee revenues vary based upon the number of ICs activated and the activities associated therewith. Our aggregate monthly maintenance fee revenues vary primarily based upon the number of active cards in our portfolio and the average fee assessed per account. Our average monthly maintenance fee per active account depends upon the extent to which fees are waived based on promotional considerations. Our aggregate ATM fee revenues vary based upon the number of cardholder ATM transactions and the average fee per ATM transaction.
In order to better represent our financial results and to make them comparable to leading companies in the prepaid card industry, we have classified our operating expenses into four major categories: (1) selling and marketing; (2) personnel related; (3) operations; and (4) general and administrative expenses. We do not allocate common expenses to any of these expense categories.
Selling and marketing expenses
Selling and marketing expenses for the twelve months ended September 30, 2013 totaled $5,617,974 ($3,025,724 for the twelve months ended September 30, 2012). This was an increase of $2,592,250 and 85.7% from 2012 to 2013. Decreases in marketing consulting in the most recent twelve month period over the prior twelve month period totals were due to not employing brand awareness marketing agencies in 2013. Our levels of direct marketing were significantly reduced toward the end of 2013 while we focused more on our account engagement (e.g. revenue per account) and our transition to a new card processor. Marketing programs in the current year included the recognition of $3,750,000 in expense in connection with payment made in connection with a new endorsement agreement signed in November 2012.
Personnel related expenses
Personnel related expenses totaled $12,316,632 during the twelve month period ended September 30, 2013, ($8,983,667 for the year ended September 30, 2012). This amounted to an increase of $3,332,965 or a 37.1% increase from 2012 to 2013. Overall increases in personnel related expenses reflected the closing of our San Diego office in July and reduction in bonus accruals offset by the addition of employees and consultants over the prior fiscal year, including a new President and Controller. Stock based compensation was significantly higher due to option and warrant grants made to directors, executive officers and endorsers (and in prior periods that vested in the current year). Other personnel related expenses include employer taxes, employee benefits and other employee related costs.
Processing expenses
Processing expenses totaled $1,792,179 for the twelve months ended September 30, 2013 ($3,284,869 for the twelve months ended September 30, 2012). This resulted in a decrease of $1,492,690 or 45.4% compared to 2012. Decreases in processing expenses were the result of a decrease in our account holder base compared to 2012 as well as more favorable rates with our new processor. Our plan is to continue to reduce such costs on a per account basis over time. Contracted software development expenses decreased compared to the prior fiscal year due to expenses incurred in 2012 in connection with the completed transition to our new card processor. Card creation and account initiation expenses were down significantly year to date due to our change in processors and the related cost structure negotiated from prior year along with associated
credits recorded in 2013. Customer service costs were reduced due to our bringing much of the customer service function in house (with the related personnel expense included in salaries and wages above).
General and administrative expenses
General and administrative expenses totaled $2,548,890 for the twelve months ended September 30, 2013 ($1,468,718 for the twelve months ended September 30, 2012). This resulted in an increase of $1,080,172 or 73.5% from 2012 to 2013. Investor relations consulting results from the issuance of stock to investor relations consultants for services performed on our behalf (this is a noncash expense). We had significant issuances of stock issued to an investor relations consultant in 2013, up from work done in 2012. Legal expenses are up significantly over the prior year in connection with continued work on our name change, proxy vote, stock split, SEC reporting obligations, and pending acquisition. Insurance increased due to increased coverage needed for D&O insurance. Accounting charges increased due to
the restatements for the years ended September 30, 2012 and 2011 along with the interim quarterly reports.
For the twelve months ended September 30, 2013 and 2012, interest income totaled $4,334 and $5,103, respectively. Interest income resulted from cash on deposit during the respective twelve month periods.
During the twelve months ended September 30, 2013, we recognized a gain from the change in the fair value of derivative liabilities of $8,668,688 (and a loss of $5,346,358 in fiscal 2012). These derivative liabilities are the fair value of warrants issued in fiscal 2010 with anti-dilution privileges and warrants issued in fiscal 2012 with certain registration privileges.
For the twelve months ended September 30, 2013, our net loss totaled $12,583,216 ($21,094,983 for the twelve months ended September 30, 2012). Our basic and diluted net loss per share was $1.55 and $3.94 for the twelve months ended September 30, 2013 and September 30, 2012, respectively. Common stock equivalents and outstanding options and warrants were not included in the calculations due to their effect being anti-dilutive.
We have primarily financed our operations to date through the sale of unregistered equity. At September 30, 2013, our total current assets were $1,264,913. Total current liabilities were $1,395,469 (all of which were current) and our stockholders’ deficiency totaled $123,174. Also included in current liabilities were amounts arising in connection with derivative liabilities (consisting of warrants) totaling $57,784. These liabilities represent the fair value of the warrants. Any future settlement of these securities could result either: (1) upon their expiration unexercised; or (2) upon their exercise and receipt of cash by our Company of the cash proceeds of their exercise (assuming the exercise is not effected on a cashless basis allowed by some of the outstanding warrants accounted for as derivatives).
We may raise additional funding through the sale of unregistered common stock and warrants although there can be no assurance that we will be successful in raising such funds. This description of our recent financing and our future plans does not constitute an offer to sell or the solicitation of an offer to buy our securities, nor shall such securities be offered or sold in the United States absent registration or an applicable exemption from the registration requirements and certificates evidencing such shares contain a legend stating the same.
Our cash and cash equivalents balance at September 30, 2013 totaled $1,070,748.
Going Concern
As noted above (and by our independent registered public accounting firm in their report on our consolidated financial statements as of and for the period ended December 31, 2013), there exists substantial doubt about our ability to continue as a going concern. Our financial statements do not contain any adjustments related to the outcome of this uncertainty.
Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, related 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. We continually evaluate our estimates and judgments and we base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.
Contractual Obligations
With the exception of employment agreements and the endorsement agreement described elsewhere herein, we have no outstanding contractual obligations through the date of this report that are not cancellable at our Company’s option.
Critical Accounting Policies Involving Management Estimates and Assumptions
Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, related 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. We continually evaluate our estimates and judgments and we base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.
In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we must make a variety of estimates that affect the reported amounts and related disclosures. We have identified the following accounting policies that we believe require application of management’s most subjective judgments, often requiring the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Our significant accounting policies are described in more detail in the notes to consolidated financial statements included elsewhere in this filing. If actual results differ significantly from our estimates and projections, there could be a material effect on our financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make 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. Actual results could differ materially from those estimates.
Revenue Recognition
We generally have two revenue sources: monthly account fees and usage fees. Monthly account fees are recognized in the month for which the cardholder has a balance on an active card. No fees are charged or recorded as revenue for cards for which there is no cardholder balance. Usage fees are recognized at the time of the transaction. We defer revenue for monthly fees paid in advance of the related month of service. Deferred revenues at December 31, 2013, September 30, 2013 and 2012 were insignificant. We recognize fee revenue gross of related processing costs and service fees. We do not collect sales taxes in connection with our products or services. During the twelve months ended September 30, 2013 and 2012,
and the three months ended December 31, 2013 we remitted cardholder funds to the issuing bank within two business days of card loading. As of December 31, 2013, September 30, 2013 and September 30, 2012 we had $201,866, $177,894, and $203,479, respectively, of cardholder funds included in amounts on deposit with or due from merchant processors.
We account for stock based compensation arrangements through the measurement and recognition of compensation expense for all stock based payment awards to employees and directors based on estimated fair values. We use the Black-Scholes option valuation model to estimate the fair value of our stock options and warrants at the date of grant. The Black-Scholes option valuation model requires the input of subjective assumptions to calculate the value of options and warrants. We use historical company data among other information to estimate the expected price volatility and the expected forfeiture rate and not comparable company information, due to the lack of comparable publicly traded companies that exist in our industry.
Derivatives
We account for certain of our outstanding warrants as derivative liabilities. These derivative liabilities are ineligible for equity classification due to provisions of the instruments that may result in an adjustment to their conversion or exercise prices. The fair value of these liabilities is estimated using option pricing models that are based on the individual characteristics of our warrants, preferred and common stock, the derivative liability on the valuation date as well as assumptions for volatility, remaining expected life, risk-free interest rate and, in some cases, credit spread.
Recent Accounting Pronouncements
Please see Note 2 to our consolidated financial statements included herein.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of December 31, 2013.
Consolidated Statements of Changes in Stockholders’ Equity (Deficiency) for the three months ended December 31, 2013 and the years ended September 30, 2013 and 2012
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
SpendSmart Networks, Inc.
We have audited the accompanying consolidated balance sheets of SpendSmart Networks, Inc. (the “Company”) as of December 31, 2013, September 30, 2013 and September 30, 2012, and the related consolidated statements of operations, changes in stockholders’ deficiency and redeemable preferred and common stock (not classified as equity), and cash flows for the three month period ended December 31, 2013 and for each of the years ended September 30, 2013 and 2012. The financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
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 audit 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 audits 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
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 consolidated financial position of SpendSmart Networks, Inc. as of December 31, 2013, September 30, 2013 and September 30, 2012, and the consolidated results of their operations and their cash flows for the three month period ended December 31, 2013 and years ended September 30, 2013 and September 30, 2012, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As described in Note 1 to the consolidated financial statements, the Company has incurred net losses since inception and has an accumulated deficit at December 31, 2013. These factors among others raise substantial doubt about the ability of the Company to continue as a going concern. Management’s plans in regard to those matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Redeemable Series B convertible preferred stock; $.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding; liquidation preference of $0 converted to common stock at January 19, 2013 (10,165 shares issued and outstanding at December 31, 2013; liquidation preference of $10,165,000 at December 31, 2012)
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8,656,892
Redeemable common stock; $0.015 par value; 0 shares issued and outstanding, and not classified as equity at December 31, 2013 (784,750 shares issued and outstanding, and not classified as equity at December 31, 2012)
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1,026,173
STOCKHOLDERS' DEFICIT
Series A Convertible Preferred Stock; $.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding at December 31, 2013 (0 shares issued and outstanding at September 30, 2013 and 353 shares issued and outstanding at September 30, 2012))
(Formerly known as The SpendSmart Payments Company)
Notes to Consolidated Financial Statements
1. Basis of Presentation and Going Concern
The Company is a Colorado corporation. Through the subsidiary incorporated in the state of California, SpendSmart Networks, Inc. (“SpendSmart-CA”), the Company issues and services prepaid cards marketed to young people and their parents. The Company is a publicly traded company trading on the OTC Bulletin Board under the symbol “SSPC.” The accompanying audited consolidated financial statements include the accounts of the Company and SpendSmart-CA for the three months ended December 31, 2013 and for the 12-month years ended September
30, 2013 and 2012, respectively. All intercompany amounts have been eliminated in consolidation.
As of December 31, 2013, the Company’s audited consolidated financial statements included an opinion containing an explanatory paragraph as to the uncertainty of the Company’s ability to continue as a going concern. The Company has continued to incur net losses through December 31, 2013 and have yet to establish profitable operations. These factors among others create a substantial doubt about our ability to continue as a going concern. The Company’s audited consolidated financial statements
as of and for the periods ended December 31, 2013 do not contain any adjustments for this uncertainty. In response to the Company’s cash needs, the Company raised subsequent to December 31, 2013, additional cash through the sale of common stock and warrants as described in our footnotes that follow. All additional amounts raised will be used for the Company’s future investing and operating cash flow needs.
The Company also currently plan to attempt to raise additional required capital through the sale of unregistered shares of the Company’s preferred or common stock (accompanied by warrants to purchase our common stock). All additional amounts raised will be used for our future investing and operating cash flow needs. However there can be no assurance that we will be successful in consummating such financing. This description of our recent financing and future plans for financing does not constitute an offer to sell or the solicitation of an offer to buy our securities, nor shall such securities be offered or sold in the United States absent registration or an applicable exemption from the registration requirements and certificates evidencing such shares
contain a legend stating the same.
In June 2014, the Company changed its name to SpendSmart Networks, Inc. and SpendSmart Payments Company-CA changed its name to SpendSmart Networks, Inc.
2. Summary of Significant Accounting Policies
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, fair value of financial instruments, at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.
The Company generally has two revenue sources: monthly account fees and usage fees. Monthly account fees are recognized in the month for which the cardholder has a balance on an active card. No fees are charged or recorded as revenue for cards for which there is no cardholder balance. Usage fees are recognized at the time of the transaction. The Company defers revenue for monthly fees paid in advance of the related month of service. Deferred revenues at December 31, 2013 were insignificant. The Company recognizes fee revenue gross of related processing costs and service fees. The
Company does not collect sales taxes in connection with the products or services. During the period ended December 31, 2013, September 30, 2013, and September 30, 2012, the Company remitted cardholder funds to the issuing bank within two business days of card loading. As of December 31, 2013 we had $201,866 of cardholder funds included in amounts on deposit with or due from merchant processor and also recorded an offsetting liability of the same amount in accounts payable. As of September 30, 2013 and September 30, 2012 we had $177,894 and $203,479, respectively, of cardholder funds
included in amounts on deposit with or due from merchant processor and also recorded an offsetting liability of the same amount in accounts payable.
Cash and cash equivalents
The Company considers all investments with an original maturity of three months or less to be cash equivalents. Cash equivalents primarily represent funds invested in money market funds, bank certificates of deposit and U.S. government debt securities whose cost equals fair market value.
From time to time, the Company has maintained bank balances in excess of insurance limits established by the Federal Deposit Insurance Corporation. The Company has not experienced any losses with respect to cash. Management believes the Company is not exposed to any significant credit risk with respect to its cash and cash equivalents.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets (generally three to five years). Costs incurred for maintenance and repairs are expensed as incurred and expenditures for major replacements and improvements are capitalized and depreciated over their estimated remaining useful lives. Depreciation expense for the twelve months ended September 30, 2013 and 2012 was $4,526 and $1,131, respectively and was $1,131 for the three months ended December 31, 2013.
Valuation of Long-Lived Assets
The Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the estimated fair value of the assets. There has not been any impairments recorded.
Income Tax Expense Estimates and Policies
As part of the income tax provision process of preparing the Company’s financial statements, the Company is required to estimate the Company’s provision for income taxes. This process involves estimating our current tax liabilities together with assessing temporary differences resulting from differing treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Management then assesses the likelihood that the Company deferred tax assets will be recovered from future taxable income and to the extent believed that recovery is not
likely, a valuation allowance is established. Further, to the extent a valuation allowance is established and changes occur to this allowance in a financial accounting period, such changes are recognized in the Company’s tax provision in the Company’s consolidated statement of operations. The Company’s use of judgment in making estimates to determine the Company’s provision for income taxes, deferred tax assets and liabilities and any valuation allowance is recorded against our net deferred tax assets.
There are various factors that may cause these tax assumptions to change in the near term, and the Company may have to record a future valuation allowance against our deferred tax assets. The Company recognizes the benefit of an uncertain tax position taken or expected to be taken on the Company’s income tax returns if it is “more likely than not” that such tax position will be sustained based on its technical merits.
The Company accounts for stock based compensation arrangements through the measurement and recognition of compensation expense for all stock based payment awards to employees and directors based on estimated fair values. The Company uses the Black-Scholes option valuation model to estimate the fair value of the Company’s stock options and warrants at the date of grant. The Black-Scholes option valuation model requires the input of subjective assumptions to calculate the value of options and warrants. The Company uses historical company data among other information to estimate the expected
price volatility and the expected forfeiture rate and not comparable company information.
Derivatives
The Company accounts for certain of its outstanding warrants issued in fiscal 2010, 2012 and 2013 (“2010 Warrants,”“2012 Warrants” and “2013 Warrants, respectively) as derivative liabilities. The 2010 Warrants were determined to be ineligible for equity classification due to provisions of the respective instruments that may result in an adjustment to their conversion or exercise prices. These derivative liabilities which arose from the issuance of the 2010 Warrants resulted in an ending balance of derivative liabilities of $26,505, $57,784, and $14,345,625, as of December 31, 2013, September 30, 2013, and September 30, 2012, respectively. On March
20, 2013, the Company amended its warrant agreement for the 2012 and 2013 warrants whereby removing all terms that required net cash settlement, and as a result, the Company recorded its derivative liabilities relating to these warrants through March 20, 2013, at which time the balance of the derivative liability was reclassified into additional paid in capital. The value of the derivative liability that was reclassified to additional paid in capital at March 20, 2013 was $8,734,085.
The Company recognized a gain due to changes in the fair value of derivatives for the three months ended December 31, 2013 of $271,190 and for the year ended September 30, 2013 totaling $8,668,688 with a loss of $5,346,358 for the year ended September 30, 2012, respectively. Subsequent changes to the fair value of the derivative liabilities will continue to require adjustments to their carrying value that will be recorded as other income (in the event that their value decreases) or as other expense (in the event that their value increases). In general (all other factors being equal), the
Company will record income when the market value of the Company’s common stock decreases and will record expense when the value of the Company’s stock increases. The fair value of these liabilities is estimated using option pricing models that are based on the individual characteristics of the Company’s warrants, preferred and common stock, as well as assumptions for volatility, remaining expected life, risk-free interest rate and, in some cases, credit spread.
Net Loss per Share
The Company calculates basic earnings per share (“EPS”) by dividing the Company’s net loss and comprehensive net loss applicable to common shareholders by the weighted average number of common shares outstanding for the period, without considering common stock equivalents. Diluted EPS is computed by dividing net income or net loss and comprehensive net loss applicable to common shareholders by the weighted average number of common shares outstanding for the period and the weighted average number of dilutive common stock equivalents, such as options and warrants. Options and warrants are only included in the calculation of diluted EPS when their effect is dilutive.
During the twelve months ended September 30, 2012, the Company issued Series B preferred stock with warrants to purchase additional common stock. The fair value of the warrants issued was approximately $4,481,126, at the issue date, resulting in a beneficial conversion feature and an immediate deemed dividend of approximately $4,481,126.
Warrant Liability
The Company accounts for the 159,167 common stock warrants granted in connection with certain financing transactions (“Transactions”) in accordance with the guidance contained in ASC 815-40-15-7D, "Contracts in Entity's Own Equity" whereby under that provision they do not meet the criteria for equity treatment and must be recorded as a liability. Accordingly, the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the
Company's statements of operations. The fair value of the warrants issued by the Company in connection with the transactions have been estimated using a Monte Carlo simulation.
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value for applicable assets and liabilities, we consider the principal or most advantageous market in which we would transact and we consider assumptions market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. This guidance also establishes a fair value hierarchy to prioritize inputs used in measuring fair value as follows:
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Level 1: Observable inputs such as quoted prices in active markets;
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Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
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Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The Company’s financial instruments are cash and cash equivalents, accounts payable, and derivative liabilities. The recorded values of cash equivalents and accounts payable approximate their fair values based on their short-term nature. The fair value of derivative liabilities is estimated using option pricing models that are based on the individual characteristics of our warrants, preferred and common stock, the derivative liability on the valuation date as well as assumptions for volatility, remaining expected life, risk-free interest rate and, in some cases, credit spread. The derivative liabilities are the only Level 3 fair value measures.
A summary of quantitative information with respect to valuation methodology and significant unobservable inputs used for the Company’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy as of December 31, 2013, September 30, 2013 and September 30, 2012 is as follows:
The Company elected the fair value option for notes payable as this option better matches the changes in fair value of notes payable. The decision to elect the fair value option, which is irrevocable once elected, is determined on an instrument by instrument basis and applied to an entire instrument.
The following tables present the activity for liabilities measured at estimated fair value using unobservable inputs for the three months ended December 31, 2013, and the twelve months ended September 30, 2013 and 2012:
The Company expenses advertising costs as incurred. The Company has no existing arrangements under which we provide or receive advertising services from others for any consideration other than cash. Advertising expenses (primarily in the form of Internet direct marketing) totaled $85,156 and $2,077,766 for the twelve months ended September 30, 2013 and 2012, respectively and $0 for the three months ended December 31, 2013.
Litigation
From time to time, the Company may become involved in litigation and other legal actions. The Company estimates the range of liability related to any pending litigation where the amount and range of loss can be estimated. The Company records its best estimate of a loss when the loss is considered probable. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, the Company records a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information
available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated. Through the date of these financial statements, the Company is currently not involved in litigation or other legal actions.
Our Company was involved in an arbitration with our former processor but we have since agreed to a settlement of such arbitration. The agreed upon settlement amount had been accrued at December 31, 2013 and was paid on February 13, 2014.
Recently Issued Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board, “FASB” issued ASU 2011-05, “Presentation of Comprehensive Income”, an amendment to FASB ASC Topic 220, “Comprehensive Income”. The update gives companies the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments in the update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The ASU is effective for the Company for fiscal years, and interim periods within those years, beginning after December 15, 2011. The
adoption of ASU 2011-05 did not have any impact on the company as the company has no other comprehensive income or loss, and therefore the net income or loss equals to the total comprehensive income or loss. In December 2011, the FASB issued ASU 2011-12 “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” This update stated that the specific requirement to present items that are reclassified from other comprehensive income to net income alongside their respective components of net income and other comprehensive income will be deferred. In February 2013, the FASB issued ASU 2013-02 “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive
Income”. This update requires companies to present the effects on the line items of net income of significant reclassifications out of accumulated other comprehensive income if the amount being reclassified is required under U.S. generally accepted accounting principles to be reclassified in its entirety to net income in the same reporting period. ASU 2013-02 is effective prospectively for the Company for fiscal years, and interim periods within those years, beginning after December 15, 2012. The Company’s consolidated financial statements were not significantly impacted by the adoption of this amended guidance.
The Financial Accounting Standards Board (“FASB”) has issued Accounting Standards Update (“ASU”) No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered.. The amendments in this
ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s condensed consolidated balance sheets and results of operations.
The FASB has issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective on January 1, 2017 and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially
applying the ASU recognized at the date of initial application. The adoption of this standard is not expected to have a material impact on the Company’s condensed consolidated balance sheets and results of operations.
The FASB has issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The guidance, which is effective for annual reporting periods ending after December 15, 2016, extends the responsibility for performing the going-concern assessment to management and contains guidance on how to perform a going-concern assessment and when going-concern disclosures would be required under U.S. GAAP. The Company will assess the provisions of ASU 2014-15 and its impact on the consolidated financial statements. The events and conditions that raise substantial doubt regarding the Company’s
ability to continue as a going concern have been disclosed in Note 1.
3. Redeemable Preferred Stock
From January 1, 2012 through July 19, 2012, the Company entered into subscription agreements with accredited investors pursuant to which we issued a total of 10,165 shares of our Series B Preferred Stock (convertible into 1,694,167 shares of the Company’s Common Stock), and five year warrants to purchase up to an additional 1,111,042 shares of our Common Stock at exercise prices ranging between $7.50 and $9.00 per share, in exchange for gross and net proceeds totaling approximately $10,165,000 and $9,219,461, respectively. The Series B Convertible Preferred Stock automatically converted to common stock on January
19, 2013 as in accordance with the registration statement. In aggregate 10,165 outstanding shares of the Series B Stock automatically converted into 1,694,167 common shares.
During the year ended September 30, 2012, the Company issued Series B preferred stock with warrants to purchase additional common stock. The fair value of the warrants issued was approximately $4,481,126 at the issue date, resulting in a beneficial conversion feature and an immediate deemed dividend of approximately $4,481,126.
4. Convertible Promissory Notes
On October 25, 2013 and November 4, 2013, the Company closed a private placement of 10 Units to a total of 2 investors, each Unit consisting of (i) a 13-month $50,000 principal amount promissory note (“Promissory Note”) bearing an annual interest rate of 7%, and (ii) a four-year callable Warrant (the "Promissory Note Warrants"), to purchase 20,000 shares of common stock. The Company received gross proceeds of $500,000.
The Promissory Notes are convertible into shares of capital stock at a conversion price equal to the lesser of i) $1.25 per share of common stock, or ii) a 25% discount to market price of the next equity offering.
The Company, upon five-day notice to holders of outstanding Promissory Note Warrants, has the right, subject to limitations, to call all or any portion of the Warrants then outstanding if (i) the VWAP for each of ten (10) consecutive trading days equals or exceeds $4.50 per share and (ii) has a minimum trading volume of 50,000 shares per day over the same period.
The Company elected the fair value option for notes payable as this option better matches the changes in fair value of notes payable. The decision to elect the fair value option, which is irrevocable once elected, is determined on an instrument by instrument basis and applied to an entire instrument. The Company recognized a $239,911 net change in fair value of financial instruments the condensed consolidated statements of operations from October 25, 2013 through December 31, 2013. On February 11, 2014, the holders of the Promissory Notes converted their holdings into
226,655 shares of Series C Preferred.
5. Common Stock and Warrants
Common stock
During the three months ended December 31, 2013, the company issued 17,689 shares of common stock, at $2.94 per share, and the Company recognized expense of $52,000 for services rendered.
On December 13, 2012, the Company entered into subscription agreements (“Subscription Agreement”) with fifty-five accredited investors pursuant to which the Company issued 427,998 shares of our common stock, $0.001 par value (the “Common Shares”) at a purchase price of $6.00 per share (the “Offering”). Pursuant to the terms of the Offering, the Company issued five year warrants to purchase up to an additional 83,333 shares of our common stock in the aggregate, at an exercise price of $7.50 per share, to one investors, and five year warrants to purchase up to 86,166 shares of our common stock in
the aggregate, at an exercise price of $9.00 per share, to fifty-four investors. The Offering resulted in net proceeds to the Company of approximately $2,285,692 after deducting fees and expenses totaling $282,299.
On March 20, 2013, the Company amended its warrant and registration rights agreement whereby removing all terms that required net cash settlement. As a result, the Company reclassed 1,699,415 shares or $2,777,433 from redeemable common stock to common stock (classified as equity).
On July 15, 2013, the Company issued to a service provider 450,000 shares of common stock, at $2.25 per share, with a fair value of $1,012,500. During the period ended March 2013, the Company issued 11,167 shares of common stock to a contractor in exchange for programming services performed, at $6.00 per share, with a fair value of $67,002.
During the year ended September 30, 2012, the company issued 18,000 shares of common stock, at $6.00 per share, and the Company recognized expense of $108,000 for services rendered.
During the year ended September 30, 2013, the company issued 461,167 shares of common stock, at $2.34 per share, and the Company recognized expense of $1,079,502 for services rendered.
During the three months ended December 31, 2013, the company issued 17,639 shares of common stock, at $2.95 per share, and the Company recognized expense of $52,000 for services rendered.
Warrants
On June 10, 2013, the Company announced its intention to exercise certain classes of outstanding warrants that were initially issued to investors participating in private placement financings in 2010, 2011 and 2012 consisting of the following classes: (i) outstanding warrants to purchase an aggregate of 634,916 shares of the Company’s common stock issued to investors participating in the Company’s private placement financing completed on December 13, 2012 and November 30, 2012, of which 541,667 are exercisable at an exercise
price of $7.50 per share (the “$7.50 December Warrants”) and 93,249 are exercisable at an exercise price of $9.00 per share (the “$9.00 December Warrants”); (ii) outstanding warrants to purchase an aggregate of 1,016,518 shares of the Company’s common stock issued to investors participating in the Company’s private placement financings closed on July 19, 2012, June 20, 2012, May 24, 2012 and March 31, 2012, of which 833,333 are exercisable at an exercise price of $7.50 per share (the “$7.50 Investor Warrants”) and 183,185 are exercisable at an exercise price of $9.00 per share (the
“$9.00 Investor Warrants”); (iii) outstanding warrants to purchase an aggregate of 446,188 shares of the Company’s common stock issued to investors participating in the Company’s private placement financing completed on October 21, 2011 and November 21, 2011, of which 333,334 are exercisable at an exercise price of $7.50 per share (the “$7.50 2011 Warrants”) and 112,854 are exercisable at an exercise price of $9.00 per share (the “$9.00 2011 Warrants”); and (iv) outstanding warrants to purchase an aggregate of 431,950 shares of the Company’s common stock issued to investors participating in the
Company’s private placement financings closed on November 16, 2010, of which 125,000 are exercisable at an exercise price of $6.00 per share (the “$6.00 2010 Warrants”) and 306,950 are exercisable at an exercise price of $9.00 per share (the “$9.00 2010 Warrants”).The warrant redemption was intended to raise non-dilutive capital.
A Notice of Election to Participate was provided to the affected warrant holders on June 10, 2013. These warrant holders had until 5:00 p.m. ET on July 15, 2013, to exercise their outstanding warrants at $2.25 per share. Pursuant to the Offer to Amend and Exercise, on July 15, 2013 an aggregate of 662,540 warrants were tendered by their holders and were amended and exercised in connection therewith for an aggregate exercise price of approximately $1,490,715, including the following warrants: 85,974 $9.00 December Warrants; 99,703 $9.00 Investor Warrants; 83,334 $7.50 Investor Warrants; 82,408 $9.00 2011 Warrants; 93,751 $7.50 2011 Warrants; 154,870 $9.00 2010 Warrants; and 62,500 $6.00 2010 Warrants.
In accordance with ASC 718- 20-35, short-term inducement modifications shall be treated as an exchange of the original award for a new award. In substance, the Company repurchases the original instrument by issuing a new instrument of equal or greater value, incurring additional expense for any incremental value. The effects of this modification (incremental cost) shall be measured as the excess, if any, of the fair value of the modified award determined over the fair value of the original award immediately before its terms are modified, measured based on the share price and other pertinent factors at that date. Total recognized cost for an equity award shall at least equal the fair value of the award
at the grant date. As a result of this modification, there was no incremental cost.
In recompense for services performed on our behalf, we issued warrants to purchase up to 138,333 shares of our common stock during the three months ended December 31, 2013, including a five-year warrant to purchase up to 133,333 shares (exercise price of $2.00 per share) to a member of our Board of Directors and a five-year warrant to purchase up to 5,000 shares at $2.00 to our CFO (Chord Advisors, LLC). The expense recorded for the three months ended December 31, 2013 for both of these items was $29,452. During the three months ended December 31, 2013, we have not issued any warrants to advisors, consultants and in connection with the purchase of intellectual property. Warrants to purchase up to 150,000 shares of common stock have expired. Warrants to purchase
up to 3,881,325 shares of common stock remain outstanding at December 31, 2013, of which 3,279,367 have vested.
For the three months ended December 31, 2013, we issued 200,000 warrants to new investors. Through December 31, 2013, we have also issued warrants to purchase up to 4,917,276 shares of our common stock to investors (and as compensation to third parties in connection with investments) related to the sale of our common stock, 4,096,665 of which remain outstanding net of exercises, cancellations and expirations (all of which are fully vested).
6. Convertible Preferred Stock
Series A Preferred Stock
At December 31, 2013, September 30, 2013, and September 30, 2012the Company had 0, 0, and 353 shares, respectively, of Series A Cumulative Convertible Preferred Stock (the “Series A Stock”) outstanding. The Series A Stock was originally issued to investors for $100 per share. The following summarizes the terms of the Series A preferred stock outstanding:
Face Value: Each share of Series A Stock has a face and par value of $100 and $.001 per share, respectively.
Voluntary Conversion: Each share of Series A Stock is convertible at the election of the holders at any time into approximately 20 shares of our common stock, subject to increase under the anti-dilution provisions under the Certificate of Designation and the Subscription Agreement upon the occurrence of events as defined therein.
Dividends: Except in the event of default under the terms of the Subscription Agreement, the Series A Stock pays no dividends. In the event of an uncured default by our Company, the Series A Stock pays dividends of 12% per annum during the period our Company is in default as described under the Certificate of Designation.
Redemption: The Series A Stock is not required to be redeemed by our Company.
Liquidation Rights: Upon the occurrence of a liquidation event (as defined in the Certificate of Designation), the holders of Series A Stock will be repaid their full face value and cumulative accrued dividends prior to the receipt of any other class of preferred or common stock.
Forced Conversion: The Company has the right to force conversion of each share of Series A Stock into approximately 20 shares of common stock at any time provided the Company’s common stock has maintained a closing price of $15.00 per share for three consecutive trading days prior to conversion.
Voting Rights: The Company’s Series A Stock has no voting rights.
Covenants: The Subscription Agreement imposes certain covenants on the Company, including restrictions against incurring additional indebtedness, issuing any additional equity except certain permitted issuances, creating any liens on the Company’s property, amending its certificate of incorporation or bylaws in a manner which may adversely affect the Series A Stock holders, redeeming or paying dividends on shares of the Company’s outstanding common stock, and entering
into certain related party transactions.
The Company’s Series B Convertible Preferred Stock (“Series B Stock”) automatically converted to common stock on January 19, 2013 as in accordance with the registration statement which states that six months from the date of the final closing, as defined in the related subscription agreement, each share of Series B will automatically convert into common stock. 10,165 outstanding shares of Series B Stock automatically converted into 1,694,167 common shares at an effective price of $600 per share when adjusted for the 1:15 stock split.
At September 30, 2012, the Company had 10,165 shares of Series B convertible preferred stock (“Series B Stock”) outstanding that were issued to investors for $1,000 per share. The following summarizes the terms of the Series B Stock outstanding:
Face Value: Each share of Series B Stock has a face and par value of $1,000 and $0.001 per share, respectively.
Voluntary Conversion: Each share of Series B Stock is convertible at the election of the holders at any time into 167 shares of our common stock. Dividends: None.
Redemption: The Series B Stock is not required to be redeemed by the Company.
Liquidation Rights: Upon the occurrence of a liquidation event and after any payments to the holders of Series A Stock, the holders of Series B Stock will be repaid their full face value prior to the receipt of any other class of preferred or common stock.
Forced Conversion: Each share of Series B Stock shall automatically convert into common stock at the earlier of: 1) the effective date of registration of common shares into which Series B Stock is convertible; or 2) six months from the date of the final closing as defined in the related subscription agreement. The Series B Stock automatically converted to common stock on January 19, 2013 due to (2) above (the final closing date was July 19, 2012).
Voting Rights: Equal to the largest number of full shares of common stock into which the shares can be converted.
7.
Agreements for services, officer and Board of Directors’ compensation
In August 2012, the Company entered into one-year consulting agreements with Patrick Kolenik and Cary Sucoff (Messrs. Kolenik and Sucoff are members of the Company’s Board of Directors). The agreements call for the payment to Messrs. Kolenik and Sucoff of $5,000 each per month for their services to our Company. During the year ended September 30, 2013, the Company recognized and paid
expenses totaling $55,000, each in connection with these consulting agreements. During the three months ended December 31, 2013, the Company recognized and paid expenses totaling $0 in connection with these consulting agreements.
In October 2012, the Company granted a five-year warrant to purchase up to 133,333 shares of common stock to Chris Leong, a member of our Board of Directors. The warrant vests monthly over a period of twelve months; has an exercise price of $6.90 per share; and includes a cashless exercise option. In November 2012, the Company granted warrants to purchase up to 333,333 shares of common stock to William Hernandez, the Company’s President and a member of the Board of Directors (as of January 2013). The warrants vest over a period of three years; have an exercise price of $7.35 per share; include
a cashless exercise option; and expire five years after the date of grant. The fair value of these warrants on the grant date was $1,210,150 of which $527,984 was recognized as a noncash charge to personnel related expense during the year ended September 30, 2013 and $80,995 was recognized as a nocash charge to personnel related expense during the period ended December 31, 2013.
In November 2012 (the "Effective Date"), the Company entered into an Endorsement Agreement (the “Endorsement Agreement”) for the promotion of our products. The Endorsement Agreement has a term of fourteen months (the “Term”), unless extended as provided in the Endorsement Agreement. In connection with the Endorsement Agreement, the Company agreed to pay a nonrefundable advance totaling $3,750,000 (the “Advance”), of which $1,900,000 was paid in November 2012, with the remainder totaling $1,850,000 paid in January 2013. In addition to the Advance, the Company agreed to pay monthly incentive compensation per active account (“Incentive Compensation”).
The Advance is not recoupable from incentive compensation payments. The Company also agreed to pay a per month royalty per active account (“Royalty”). The Royalty payments are a single digit percentage of the revenue per card. The Advance is recoupable from Royalty payments made under the Endorsement Agreement. Upon the expiration of the Endorsement Agreement, the endorser will be entitled to receive the Royalty payments, subject to the recoupment of the Advance, and the Incentive Compensation, in perpetuity. The entire balance of the Advance totaling $3,750,000 was charged to operations during the year ended September 30, 2013. The amount of the royalty payments were immaterial at the end of the year ended September 30, 2013 due to the number of accounts earned to date as a result
of this endorsement.
Pursuant to the terms of the Endorsement Agreement, the Company issued the endorser warrants to purchase up to 133,334 shares of our common stock, as follows: 1) warrants to purchase 66,667 shares of the Company’s common stock vested upon the Effective Date, and 2) warrants to purchase another 66,667 shares of the Company’s common stock shall vest in equal monthly installments during the Term, each exercisable at an exercise price $7.05 per share. The Company also issued the endorser warrants to purchase up to an additional 133,333 shares of common stock
(the “Additional Warrant”). The Additional Warrant is exercisable for the number of shares of common stock equal to five times the number of active accounts in effect at the end of the Term, provided there are more than two hundred and fifty thousand active accounts as of the last day of the Term. The Additional Warrant will be exercisable no more rapidly than in equal monthly installments during the six month period immediately following the Term at an exercise price of $7.05 per share. In the event the product of five times the number of active accounts exceeds two million, we will issue the endorser an “End of Term Warrant” for the number of shares in excess of 133,333. The exercise price of the End of Term Warrant shall be the arithmetic mean of the high and low prices of our Company’s common stock on the last trading day before the date of the issuance of the End
of Term Warrant. If the Endorsement Agreement is extended, which is at the sole discretion of the endorser, the endorser will receive additional warrants to purchase 133,333 shares of the Company’s common stock for any such Extension Period (each, an “Extension Warrant”). Extension Warrants will vest equally on a monthly basis and will have an exercise price equal to the mean of the high and low prices of the Company’s common stock on the last trading day before the date of issuance of each Extension Warrant. The Company recognized $604,372 in expense related to the warrants issued to the endorser for the year ended September 30, 2013 and $151,700 was recognized
during the period ended December 31, 2013
Payments made in connection with the Advance, Incentive Compensation and Royalty will be recorded as an expense when incurred. Compensation expense related to the warrants, additional warrants, end of term warrants and extension warrants will be recognized based upon actual and expected vesting, of which an insignificant amount has been expensed for the year ended September 30, 2013 and period ended December 31, 2013.
In connection with the Endorsement Agreement (dated November 20, 2012) as of September 30, 2013, the Company made payments to two entities associated with a member of our Board of Directors, Jesse Itzler. Expenses related to these payments totaled $115,000 and $728,405 during the year ended September 30, 2013 and $0 for the three months ended December 31, 2013.
During January 2013 (the "Effective Date"), the Company entered into a Promotion/Endorsement Agreement (the “P/E Agreement”) with a term of eighteen (18) months (the “Term”). In connection with the P/E Agreement, the Company agreed to pay a nonrefundable fee of two hundred and fifty thousand dollars payable in four equal installments, on predetermined dates over the Term.
In addition to the fee, the Company has agreed to pay monthly incentive compensation per active account (“Incentive Compensation”) and have issued to the endorser additional warrants to purchase our common stock. Should the number of accounts reach a specified level, the endorser will have the opportunity to earn additional warrants equal to five times the number of active accounts at the end of the Term. The Additional Warrant (“Additional Warrant”) is exercisable for the number of shares of the Company’s common stock equal to five times the number of active accounts in effect at the end of the Term, provided there are more than two hundred and fifty thousand active accounts as of the last day of the Term. The Additional Warrant will be
exercisable no more rapidly than in equal monthly installments during the six month period immediately following the Term at an exercise price of $5.70 per share. In the event the product of five times the number of active accounts exceeds two million, the Company will issue the endorser an “End of Term Warrant” for the number of shares in excess of 133,333. The exercise price of the End of Term Warrant shall be the arithmetic mean of the high and low prices of our Company’s common stock on the last trading day before the date of the issuance of the End of Term Warrant. Extension Warrants will vest equally on a monthly basis and will have an exercise price equal to the mean of the high and low prices of our
Company’s common stock on the last trading day before the date of issuance of each Extension Warrant.
In February 2013, the Company granted warrants to purchase up to 200,000 shares of common stock to Kim Petry, the Company’s former CFO. She replaced former CFO, Jonathan Shultz. The warrants vest over a period of three years; have an exercise price of $5.85 per share; include a cashless exercise option; and expire five years after the date of grant. The fair value of these warrants on the grant date was $587,802. Ms. Petry resigned from the Company in October 2013, and the cost associated with the remainder of her warrants was recorded then.
On June 28, 2012, the Company entered into a Severance Agreement and General Release with James Collas the Company’s former President and Chief Executive Officer. Pursuant to the significant terms of the Agreement: 1) Mr. Collas left the Company’s employment effective July 6, 2012; 2) Mr. Collas surrendered 40,000 shares of common stock owned or controlled by him in exchange for $160,000 cash; and 3) Mr. Collas and the Company mutually released one another for all liabilities resulting
from Mr. Collas’ employment with our Company.
On April 26, 2011, the Company entered into an Agreement and Release with Mr. Collas pursuant to which the parties agreed that effective as of April 26, 2011, (i) Mr. Collas resigned as an officer and director of the Company; (ii) Mr. Collas’ Employment Agreement dated January 31, 2011was terminated and Mr. Collas continued his employment with the Company as a non-executive on an “at-will” basis; (iii) the Company paid Mr. Collas
$400,000 in satisfaction of all of its obligations under a terminated Employment Agreement; and (iv) Mr. Collas surrendered to the Company 66,667 shares of the Company’s common stock held by him.
9. Net Loss per Share Applicable to Common Stockholders
Options, warrants, and convertible debt outstanding were all considered anti-dilutive for the twelve months ended September 30, 2013 and 2012, and for the three months ended December 31, 2013, due to net losses.
The following securities were not included in the diluted net income (loss) per share calculation because their effect was anti-dilutive as of the periods presented:
On January 8, 2013, the Company’s Board of Directors approved the adoption of the SpendSmart Networks, Inc. 2013 Equity Incentive Plan (the “2013 Plan”). The 2013 Plan provides for granting of stock-based awards including: incentive stock options, non-statutory stock options, stock bonuses and rights to acquire restricted stock. The total number of shares of common stock that may be issued pursuant to stock awards under the 2013 Plan (as approved by the Board of Directors but subject to future shareholder approval solicited by a Proxy Statement filed in January 2013) shall not exceed in the aggregate 3,000,000 shares of the common stock of the Company. On August
4, 2011, the Board of Directors approved the adoption of the SpendSmart Networks, Inc. 2011 Equity Incentive Plan (the “2011 Plan”). The 2011 Plan provides for granting of stock-based awards including: incentive stock options, non-statutory stock options, stock bonuses and rights to acquire restricted stock. The total number of shares of common stock that may be issued pursuant to stock awards under the Plan shall not exceed in the aggregate 1,666,667 shares of the common stock of the Company. The Company also have a stockholder-approved Plan (the IdeaEdge, Inc. 2007 Equity Incentive Plan - the “2007 Plan”, previously approved by our shareholders). The 2007 Plan has similar provisions and purposes as the 2011 Plan. The total number of shares of common stock that may be issued pursuant
to stock awards under the 2007 Plan (as amended) shall not exceed in the aggregate 4,000,000 shares of the common stock of our Company. Upon shareholder approval of the 2013 Plan, our Board has expressed its intentions to issue no more shares under the 2011 and 2007 Plans.
At December 31, 2013 and September 30, 2013, we have outstanding a total of 1,566,667 and 1,651,678, respectively, of incentive and nonqualified stock options granted under the 2011 Plan and the 2007 Plan, all of which (for the purpose of computing stock based compensation) we have estimated will eventually vest. All of the options have terms of five years with expiration dates ranging from April 2014 to August 2017.
Stock option activity during the following periods was as follows:
During the twelve months ended September 30, 2012, the Company issued warrants to purchase the Company’s common stock to third parties providing consulting and advisory services, including five-year warrants to purchase up to 2,033,333 shares to members of the Company’s Board of Directors (includes grants made not during members’ terms of service on the Board) during fiscal 2012, respectively. The Company also issued warrants to purchase shares of the
Company’s common stock to investors in connection with the issuances of restricted shares of common stock during the twelve months ended September 30, 2013 and 2012 (the value of which was offset against the proceeds of the issuance of common stock and not charged to operations). Outstanding warrants from all sources have terms ranging from two to five and a half years.
In recompense for services performed on our behalf, we issued warrants to purchase up to 138,333 shares of our common stock during the three months ended December 31, 2013, including a five-year warrant to purchase up to 133,333 shares (exercise price of $2.00 per share) to a member of our Board of Directors and a five-year warrant to purchase up to 5,000 shares at $2.00 to our CFO (Chord Advisors, LLC). The expense recorded for the three month period ended December 31, 2013 for both of these items was $29,452. In recompense for services performed on our behalf, we issued warrants to purchase up to 6,300,000 shares of our common stock during the year ended September 30, 2013, including a five year warrant to purchase up to 2,000,000 shares (exercise price of
$10.35 per share) to a member of our Board of Directors. Through December 31, 2013, we have not issued any warrants to advisors, consultants and in connection with the purchase of intellectual property. Warrants to purchase up to 150,000 shares of common stock have expired. Warrants to purchase up to 3,881,325 shares of common stock remain outstanding at December 31, 2013, of which 3,279,367 have vested.
Warrant activity (including warrants issued to investors and for consulting and advisory services) during the three months ended December 31, 2013 and the twelve months ended September 30, 2013 and 2012 was as follows:
The numbers and exercise prices of all options and warrants outstanding at December 31, 2013 are as follows:
Shares Outstanding
Weighted Average Exercise Price
Expiration Period
35,380
8.70
1st Qtr, 2014
57,333
9.75
2nd Qtr, 2014
35,000
7.65
3rd Qtr, 2014
81,973
7.80
4th Qtr, 2014
78,100
7.80
1st Qtr, 2015
10,600
10.05
2nd Qtr, 2015
83,918
6.60
43rd Qtr, 2015
479,246
7.65
4th Qtr, 2015
872,800
7.20
1st Qtr, 2016
960,100
6.45
2nd Qtr, 2016
1,263,958
6.90
3rd Qtr, 2016
516,808
7.80
2nd Qtr, 2016
859,750
6.15
1st Qtr, 2017
1,076,475
7.65
2nd Qtr, 2017
1,599,208
6.75
3rd Qtr, 2017
1,195,675
6.75
4th Qtr, 2017
66,667
5.85
1st Qtr, 2018
138,333
1.95
4th Qtr, 2018
133,333
7.05
4th Qtr, 2022
9,544,657
Stock based compensation
Results of operations for the twelve months ended September 30, 2013 include stock based compensation costs totaling $9,495,292 ($6,040,144 for the twelve months ended September 30, 2012) all of which was charged to personnel related expenses in connection with the issuance of stock options and warrants issued to employees, directors, advisors and consultants (not including shares of stock issued directly for services). During the three months ended December 31, 2013, we recognized stock-based compensation expense totaling $1,268,307 in connection with the issuance of stock options and warrants issued to employees, directors, advisors and consultants (not including shares of stock issued directly for services).
For purposes of accounting for stock based compensation, the fair value of each option and warrant award is estimated on the date of grant using the Black-Scholes-Merton option pricing formula. Compensation expense is recognized upon actual vesting of the options. The following weighted average assumptions were utilized for the calculations during the twelve months ended September 30, 2013 and 2012 and the three months ended December 31, 2013 and 2012:
The weighted average expected option and warrant term for employee stock options granted reflects the application of the simplified method set out in SEC Staff Accounting Bulletin No. 107, Share-Based Payment (SAB 107). The simplified method defines the life as the average of the contractual term of the options and the weighted average vesting period for all options. The Company utilized this approach as its historical share option exercise experience does not provide a reasonable basis upon which to estimate an expected term. Expected volatilities are based on the historical volatility of the Company’s stock. The Company estimated the forfeiture
rate based on our expectation for future forfeitures and (for the purpose of computing stock based compensation given the contractual vesting of the Company’s options and warrants outstanding) the Company assumes that all options and warrants will vest. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield in effect at or near the time of grant. The Company has never declared or paid dividends and have no plans to do so in the foreseeable future.
As of December 31, 2013, $11,431,942 of total unrecognized compensation cost related to unvested stock based compensation arrangements is expected to be recognized over a weighted-average period of 37.9 months. The following table summarizes option activity in connection with stock options and warrants (which resulted in stock based compensation charges) as of and for the three months ended December 31, 2013 and the year ended September 30, 2013:
Weighted average grant date fair value of options and warrants granted
$
1.95
$
6.86
$
6.52
Aggregate intrinsic value of options and warrants exercised
-
-
3.75
Weighted average fair value of options and warrants vested
4.50
6.90
6.67
The range of exercise prices for options and warrants granted and outstanding (which resulted in stock based compensation charges) was as follows at December 31, 2013 and September 30, 2013:
As of September 30, 2013 and September 30, 2012, the Company had federal and state net operating loss carryovers of approximately $42.6 million and $32.0 million, which will begin to expire in 2022. As of December 31, 2013, the Company had federal and state net operating loss carryovers of approximately $43.3 million and $38.0 million, which will begin to expire in 2022.The net operating loss carryover may be subject to limitation under Internal Revenue Code section 382, should there be a greater than 50% ownership change as determined under the regulations.
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and taxing strategies in making this assessment. The Company has determined that, based on objective evidence currently available, it is more likely than not that the deferred tax assets will not be realized in future periods. Accordingly, the Company has provided a valuation allowance for the full
amount of the deferred tax assets at September 30, 2013 and September 30, 2012.
A reconciliation of the expected tax benefit computed at the U.S. federal and state statutory income tax rates to our tax benefit is as follows:
We file income tax returns in the U.S. and in the state of California with varying statutes of limitations. Our policy is to recognize interest expense and penalties related to income tax matters as a component of our provision for income taxes. There were no accrued interest and penalties associated with uncertain tax positions as of December 31, 2013. All operations are in California and the Company believes it has no tax positions which could more-likely-than not be challenged by tax authorities. We have no unrecognized tax benefits and thus no interest or penalties included in the financial statements. The Company is subject to examination for tax years after 2009 for federal purposes and after 2010
for California state tax purposes.
12.
Commitments
Our Company lease for its San Diego office facilities on a lease agreement through June 2014 with current monthly rentals of $2,695 plus common area maintenance charges. We moved our headquarters to Des Moines, IA in July, 2013 and subsequently moved our headquarters to San Luis Obispo in June 2014 after the SMS acquisition. We lease space in Des Moines and additional storage in San Diego. Rent expense was $74,778 and $45,103 for the twelve months ended September 30, 2013 and 2012, respectively and $18,485 for the three months ended December 31, 2013. Future rental commitments under contract
total $25,650 and $0 in fiscal 2014 and fiscal 2015, respectively.
We have an employee savings plan (the “Plan”) pursuant to Section 401(k) of the Internal Revenue Code (the “Code”), covering all of our employees. Participants in the Plan may contribute a percentage of compensation, but not in excess of the maximum allowed under the Code. Our Company may make contributions at the discretion of its Board of Directors. During the twelve months ended September 30, 2013 and 2012, we made contributions to the Plan totaling $58,738 and $48,850, respectively. During the three months ended December 31, 2013, we made contributions to the Plan totaling $5,095.
14. Subsequent events
On January 29, 2014, Mr. Rob DeSantis resigned from his position as a director of SpendSmart Networks, Inc. (the “Company”).
SMS Acquisition
On February 11, 2014, SpendSmart Networks, Inc., a Colorado corporation (“we,”“us,”“our,” or the “Company”), entered into subscription agreements (“Subscription Agreement”) with accredited investors pursuant to which we issued 1,131,099 shares of our newly designated Series C Convertible Preferred Stock (the “Series C Preferred Stock”) and warrants to purchase 4,524,396 shares of our common stock (the “Common Stock”) exercisable during the five-year period commencing on the date of issuance at $1.10 per share (the “Warrants”).
This offering resulted in gross proceeds to us of approximately $3,393,270. The placement agent, a FINRA registered broker-dealer, in connection with the financing received a cash fee totaling $534,327 and will receive warrants to purchase up to 113,110 shares of common stock at an exercise price of $1.265 per share as compensation. The Series C Preferred Stock and the Warrants were offered and sold without registration under the Securities Act of 1933, as amended (the “Securities Act”) in reliance on the exemptions provided by Section 4(2) of the Securities Act and Regulation D promulgated thereunder.
On February 11, 2014, immediately following the closing described above, the Company, through its wholly-owned subsidiary SpendSmart Networks, Inc., a California corporation (the “Subsidiary”), purchased substantially all of the assets of Intellectual Capital Management, Inc., d/b/a SMS Masterminds (“SMS”) a Nevada corporation, pursuant to the terms of an Asset Purchase Agreement (the “Asset Purchase Agreement”). In conjunction with the purchase of substantially all of the assets of SMS, the Company, through the Subsidiary acquired all of the goodwill owned by Alex Minicucci, the Chief Executive
Officer of SMS, relating to SMS, pursuant to the terms of a Goodwill Purchase Agreement (the “Goodwill Purchase Agreement”) (the closing of the Asset Purchase Agreement and Goodwill Purchase Agreement collectively referred to as the “SMS Acquisition”).
Pursuant to the Asset Purchase Agreement, the Company acquired all of the assets of SMS. In consideration of the purchased assets, the Company agreed to issue to SMS five million two hundred and fifty thousand shares of the Company’s common stock. Pursuant to the Goodwill Purchase Agreement, the Company agreed to pay Mr. Minicucci: (i) cash in the amount of four hundred and fifty thousand dollars in the aggregate upon the closing of a minimum of three million dollars in gross proceeds raised in a financing transaction; (ii) cash in the amount of four hundred and fifty thousand dollars
in the aggregate upon the closing of a minimum of seven million dollars in gross proceeds raised in a financing transaction; (iii) an earn-out payment relating to fifteen percent of the earnings generated by the SMS after the acquisition; and (iv) an additional earn-out payment tied to the EBITDA of the Company after the acquisition of SMS.
On February 11, 2014, in conjunction with the closing of the SMS Acquisition, Mr. Alex Minicucci was appointed as the Chief Executive Officer and a director of the Company.
Mr. Alex Minicucci is a serial entrepreneur with an 18 year background in web, ecommerce, and mobile marketing. In November 2008, Mr. Minicucci founded SMS Masterminds, subsequently earning several recognitions such as ‘Top 20 under 40 Entrepreneur in 2013. From 2006 to 2008, he served as Chief Operating Officer of TechXpress, Inc., a managed services IT firm. Between 2000 and 2003, Mr. Minicucci built and sold one of the nation’s largest virtual tour providers, USA Virtual Tours, to MediaNews Group. In the late 90’s, Mr. Minicucci started and ran one of the first web development firms in central California, TooPhat.com, Inc., focused on next generation web development combined with interactive 3D environments. Mr. Minicucci is an Eagle Scout and active mentor to business students at Cal Poly San Luis Obispo.
In connection with the appointment of Mr. Minicucci as Chief Executive Officer, the Company and Mr. Minicucci entered into an employment agreement (the “Minicucci Employment Agreement”). The Minicucci Employment Agreement has an initial term of three years. The Minicucci Employment Agreement provides for the payment of a base salary of $375,000 per year (subject to discretionary increases by the Board). The Minicucci Employment Agreement provides that Mr. Minicucci is entitled to usual and customary benefits and also contains usual and customary restrictive covenants (including non-competition, non-solicitation and confidentiality).
In conjunction with Mr. Minicucci’s appointment, Mr. Michael R. McCoy resigned from his position as Chief Executive Officer of the Company. Mr. McCoy’s resignation was not the result of any disagreements with the Company. Mr. McCoy will continue to serve in his capacity as a director of the Company.
On March 19, 2014, the board approved a compensation plan whereby each Director will receive an annual retainer in the amount of $20,000, a board meeting participation fee of $3,500 per meeting, annual option grants entitling each Director to purchase up to 45,000 shares of the company’s common stock, a committee meeting participation fee of $1,500 per meeting, and $5,000 annually to each committee chair.
On August 4, 2014, the Company, the Subsidiary and Alex Minicucci, the Company’s Chief Executive Officer, entered into an amendment to the Goodwill Purchase Agreement, which was initially executed on December 18, 2013 in conjunction with the acquisition of substantially all of the assets of SMS. Pursuant to the amendment to the Goodwill Purchase Agreement, the Minimum Earn Out Payments (as defined in the amendment) shall be payable in one lump sum at the Company’s discretion. The
Company made such Minimum Earn Out Payment in the amount of $270,000 in the aggregate to Mr. Minicucci on August 4, 2014.
On August 4, 2014, the Company amended Mr. Minicucci’s employment agreement increasing his annual base salary to $450,000 per annum.
On August 27, 2014, the Board of Directors of SpendSmart Networks, Inc. (the “Company”), approved a change to the Company’s year end from September 30th to December 31st, which will take effect immediately.
On September 18, 2014, the Company through its wholly-owned subsidiary SpendSmart Networks, Inc., a California corporation (the “Subsidiary”), purchased substantially all of the web related assets of TechXpress, Inc. (“TechXpress”), a California corporation, pursuant to the terms of an Asset Purchase Agreement (the “Asset Purchase Agreement”). In consideration of the purchased assets, the Company agreed to pay a purchase price consisting of $448,884 in cash and shares of the Company’s common stock, $0.001 par value per share, equal to $742,000, or an aggregate of 596,315 shares of
the Company’s common stock (the “Stock Consideration”).
On October 9, 2014, our Company granted options to purchase up to 525,000 shares of our common stock to 5 of our key licensees and a key employee. The options vest over the next four years; have an exercise price of $1.15 per share; and expire five years after the date of grant.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a)
Evaluation of disclosure controls and procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities and Exchange Commission Act of 1934 reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by
Securities and Exchange Commission Rule 13a-15(e) and 15d-15(e), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not operating effectively as of December 31, 2013. Our disclosure controls and procedures were not effective because of the “material weakness” described below.
(b)
Management’s annual report on internal control over financial reporting.
SEC rules implementing Section 404 of the Sarbanes-Oxley Act of 2002 require our 2013 Annual Report on Form 10-K to contain management’s report regarding the effectiveness of internal control over financial reporting. As a basis for our report, we tested and evaluated the design, documentation, and operating effectiveness of our internal control.
Management is responsible for establishing and maintaining effective internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act, of SpendSmart Networks, Inc. and its subsidiaries. The Company’s internal control over financial reporting consists of policies and procedures that are designed and operated to provide reasonable assurance about the reliability of the Company’s financial reporting and its process for preparing financial statements in accordance with generally accepted accounting principles (“GAAP”). There are inherent limitations in the effectiveness of any system of internal control, including the possibility
of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
Restatement of Previously Issued Financial Statements. On August 19, 2013, after consulting with the Company’s Audit Committee, management concluded it had incorrectly calculated its historical volatility for the fiscal year ended September 30, 2012. The error specifically related to an excel spreadsheet calculation whereby it was calculating a volatility that was significantly higher than it should have been. The historical volatility is a key assumption and driver in determining the valuation of the company’s stock based compensation and derivative liabilities. The
impact of the change will reduce the derivative liabilities and stock based compensation as of and for the fiscal year ended September 30, 2012. The Company also concluded that they did not maintain effective controls over financial reporting relating to the classification and reporting of financial instruments. The aforementioned errors constitute a material weakness over financial reporting and therefore the Company did not maintain effective internal control over financial reporting as of September 30, 2012. The control environment that existed at September 30, 2012 continued to exist through December
31, 2013 and therefore the company did not maintain effective internal controls over financial reporting.
Remediation plan. Since the determination regarding this deficiency, we have devoted significant effort and resources to remediation and improvement of our internal control over financial reporting. More specifically we have undertaken or will put in place the following actions:
●
In October 2013, we hired a new Chief Financial Officer through Chord Advisors to lead our complex accounting and finance initiatives.
●
In October 2012, we hired a Controller to assist our Chief Financial Officer with our Company’s accounting and financial tasks.
●
We have engaged a third party to administer our equity based compensation plan.
This Transition Report on Form 10-K does not include an attestation report of the Company’s independent public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent public accounting firm pursuant to permanent rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Transition Report on Form 10-K.
Our directors are elected by our stockholders to a term of one year and to serve until their successor is duly elected and qualified, or until their death, resignation or removal. Each of our officers is appointed by our Board of Directors to a term of one year and serves until their successor is duly elected and qualified, or until their death, resignation or removal from office.
On December 23, 2011, our shareholders approved a change to our Articles of Incorporation, which was approved by our Board, which amended our bylaws to provide that the number of directors of the Company shall be no less than one (1) and no greater than eleven (11). Prior to the amendment, our Articles and Bylaws provided that the number of directors of the Company shall be no less than one (1) and no greater than five (5). The amendment
to the Articles became effective upon the filing of the amendment with the Secretary of State of the State of Colorado on December 27, 2011. The amendment to the Bylaws became effective as of December 23, 2011.
Our current Board of Directors consists of nine directors.
1 On November 27, 2013, Mr. McCoy resigned from his position as Chairman of the Board of Directors.
2 On February 19, 2013, Mr. Shultz resigned from his position as Chief Financial Officer, Secretary and Treasurer of the Company.
3 Ms. Petry was appointed as the Chief Financial Officer, Secretary and Treasurer of the Company on February 19, 2013. On October 28, 2013, Ms. Petry resigned from her position as Chief Financial Officer, Secretary and Treasurer of the Company.
4 On November 27, 2013, the Board of Directors appointed Mr. Proto as the Chairman of the Board of Directors.
5 On November 27, 2013, the Board of Directors accepted the resignation of Mr. Itzler.
6 On October 1, 2013, the Board of Directors accepted the resignation of Mr. Thompson.
7 On October 1, 2013, the Board of Directors appointed Mr. Rubinstein as a member of the Board of Directors.
Alex Minicucci has been our Chief Executive Officer and Director since February 11, 2014. Mr. Minicucci is a serial entrepreneur with almost two decades of experience in web, ecommerce, and mobile marketing. In November 2008, Mr. Minicucci founded SMS Masterminds, subsequently earning several recognitions such as Top 20 under 40 Entrepreneur in 2013. Mr. Minicucci served as the Chief Executive Officer of SMS Masterminds until February 11, 2014. From 2006 to 2008, he served as Chief Operating Officer of TechXpress, Inc., a managed services IT firm. Between 2000 and 2003, Mr. Minicucci built and sold one of the nation’s largest virtual tour providers,
USA Virtual Tours, to MediaNews Group. In the late 1990’s, Mr. Minicucci started and ran one of the first web development firms in central California, TooPhat.com, Inc., focused on next generation web development combined with interactive 3D environments. Mr. Minicucci is an Eagle Scout and active mentor to business students at Cal Poly San Luis Obispo.
Mr. William Hernandez has been the President of the Company since November 12, 2012 and a director since January 8, 2013. Mr. Hernandez brings more than 30 years of experience in the global financial services, payments, transaction processing, card network, and brokerage industries. Mr. Hernandez is President and CEO of Conifer Consulting Group. Mr. Hernandez previously held the position of Executive Vice President at Epana/Unidos Financial a telecommunications and financial services company delivering relevant products to the Hispanic community in the US and Mexico. Mr. Hernandez also held the position of Executive Vice President of
First Data Corporation managing the US Card Strategic Financial Services supporting clients such as American Express. During his 7+ years at MasterCard International, Mr. Hernandez was a Senior Vice President of the Americas, directing the largest US-based financial institutions. Prior to MasterCard, he was employed by Citibank for 11 years, where he held various international executive positions where he spearheaded global consumer banking and consumer card products, services and access channel for Citibank’s businesses in the United States, Latin America, Europe and Asia. Mr. Hernandez also held executive positions at Financial Guaranty Insurance Co., Shearson American Express and Manufacturers Hanover Trust Company.
Mr. Jonathan Shultz had been the Chief Financial Officer and Treasurer of the Company from November 13, 2007 until February 19, 2013. Mr. Shultz has Bachelor’s and Master’s Degrees in Accounting and Finance, respectively, from San Diego State University. He is a Certified Public Accountant, a Certified Management Accountant and a Certified Financial Manager.
Ms. Kim Petry had been the Chief Financial Officer and Treasury of the CompanyFebruary 19, 2013 until October 28, 2013. Ms. Petry was employed by American Express from October 2008 to December 2012. From 2008 to 2010, Ms. Petry was the Vice President and Controller of Global Credit Cards and Small Business Services at American Express. In addition, from 2011 through 2012, Ms. Petry served as CFO of the Global Credit Cards and Small Business Services at American Express, where she led a team of over 150 finance professionals globally, supporting a business with over $4 billion in revenue. Prior to American Express, from 2006 to 2008, she was Vice President of Corporate Finance, Planning and Analysis
and Business Finance and Analysis with TIAA-CREF where she led over 140 professionals across the U.S. and was responsible for reporting, budgeting, forecasting, strategy, long-term planning, new product development, mergers and acquisitions. Ms. Petry served at US Trust Corporation/Schwab Corporation from 1998 to 2006 in several executive roles following her prior experience working as a Senior Audit Manager for Financial Services at PricewaterhouseCoopers. She earned her MBA from New York University and her BA with a major in accounting, graduating summa cum laude, from Adelphi University.
Mr. David Horin was appointed the Chief Financial Officer and Treasurer of the Company on October 28, 2013. Mr. Horin is currently the President of Chord Advisors, LLC, an advisory firm that provides targeted financial solutions to public (small-cap and mid-cap) and private small and mid-sized companies. From March 2008 to June 2012, Mr. Horin was the Chief Financial Officer of Rodman & Renshaw Capital Group, Inc., a full-service investment bank dedicated to providing corporate finance, strategic advisory, sales and trading and related services to public and private companies across multiple sectors and regions. From March 2003 through March 2008, Mr. Horin was the Managing Director of Accounting
Policy and Financial Reporting at Jefferies Group, Inc., a full-service global investment bank and institutional securities firm focused on growth and middle-market companies and their investors. Prior to his employment at Jefferies Group, Inc., from 2000 to 2003, Mr. Horin was a Senior Manager in KPMG’s Department of Professional Practice in New York, where he advised firm members and clients on technical accounting and risk management matters for a variety of public, international and early growth stage entities. Mr. Horin has a Bachelor of Science degree in Accounting from Baruch College, City University of New York. Mr. Horin is also a Certified Public Accountant.
Mr. Isaac Blech was appointed to the Board of Directors on March 10, 2011. He currently serves on the Board of Directors of Contrafect Corp., a biotech company specializing in novel methods to treat infectious disease; Cerecor, Inc., a biopharmaceutical company focused on activity in the human brain; Medgenics, Inc., a company that has developed a novel technology for the manufacture and delivery of therapeutic proteins; and Premier Alliance Group, Inc. (PIMO), a public company that provides business and technology consulting services to primarily Fortune 500 companies. Previously, Mr. Blech was an investor, advisor and director in a number of well-known companies, primarily focused in biotechnology.
Mr. Blech is the owner of 1,500,000 shares of our Company’s common stock and warrants to purchase up to an additional 1,337,500 million shares of our Company’s common stock. Mr. Blech has been a successful investor and a member of a number of Boards of Directors. We believe Mr. Blech’s past experience will be a tremendous benefit to our Company. Included among Mr. Blech’s more notable successes were:
●
Celgene Corporation – Mr. Blech was a founding shareholder of Celgene in 1986. Celgene has introduced two major cancer drugs and has a stock market valuation (as of September 6, 2011) of approximately $27 billion.
●
ICOS Corporation – Mr. Blech was a founding shareholder and member of the Board of Directors of ICOS beginning in 1991. ICOS discovered the drug Cialis and was later acquired by Eli Lilly for over $2 billion.
●
Nova Pharmaceutical Corporation – Mr. Blech was a founding shareholder and member of the Board of Directors of Nova from 1982 to 1990. Nova developed a treatment for brain cancer and subsequently merged with Scios Corporation which was later purchased for $2 billion by Johnson and Johnson.
●
Pathogeneses Corporation – Mr. Blech was a founding shareholder and member of the Board of Directors of Pathogeneses from 1992 to 1997. Pathogeneses created TOBI for the treatment of cystic fibrosis and was later acquired by Chiron Corp for $660 million.
●
Genetic Systems Corporation – Mr. Blech was a founding shareholder and member of the Board of Directors of GSC from 1981 to 1986. GSC developed the first inexpensive and accurate test to diagnose chlamydia and was later acquired by Bristol Myers for approximately $300 million.
Mr. Rob DeSantis was appointed to our Board of Directors on March 26, 2012 and resigned from the Board of Directors effective January 29, 2014. Mr. DeSantis co-founded Ariba, a provider of business to business e-commerce solutions that was one of the first B2B Internet companies to go public, and whose market capitalization reached $40 billion. He was also an early angel investor and board member of LinkedIn, the world’s largest professional online network, which has more than 150 million global members today.
Mr. Joseph Proto was appointed to our Board of Directors on January 26, 2012 and was appointed Chairman of the Board of Directors on November 28, 2013, replacing Mike McCoy. Mr. Proto is a seasoned and successful senior executive and entrepreneur with three decades in the billing and payments industry. Mr. Proto is currently the Chairman and Chief Executive Officer of electronic billing company Transactis Inc. He founded REMITCO, a remittance processing company where he also served as President for 11 years, which was acquired in 2000 by First Data Corp. Mr. Proto also founded Financial Telesis (CashFlex), a payment processor to 65 of the top 100 banks in the U.S., which was acquired by CoreStates/Wachovia and is now a part of
Wells Fargo. In 2004, Mr. Proto co-founded Windham Ventures, an investment company focusing on financial technology and life sciences companies, where he currently serves as a founding partner.
Mr. Cary Sucoff was appointed to our Board of Directors on May 23, 2011. Mr. Sucoff has served as an advisor to our Company since September 2009 through his firm Equity Source Partners, LLC, a firm he has owned and operated since February 2006. He has been key to our success in fundraising since joining our firm. Additionally, Mr. Sucoff is an attorney (non-practicing) and contributes valuable insights in the area of legal matters in addition to those areas for which he is contracted with our Company. We believe Mr. Sucoff’s broad and diversified background serves as a strong asset to our
Company.
Mr. Sucoff currently serves on the Board of Directors of Contrafect Corp., a biotech company specializing in novel methods to treat infectious disease, Cerecor, Inc., a biopharmaceutical company focused on activity in the human brain, Premier Alliance Group, Inc. (PIMO), a public company that provides business and technology consulting services to primarily Fortune 500 companies and American Roadside Burgers, Inc., a fast-casual hamburger restaurant company. Mr. Sucoff has been a member of the Board of Trustees of New England Law/Boston for over 20 years and is the current Chairman of the Endowment Committee. Mr. Sucoff has recently taught a third year law school seminar entitled “Perspectives in Law: Lawyers as Entrepreneurs and as Representatives of Entrepreneurs”. Mr. Sucoff received a B.A. from SUNY Binghamton (1974) and a J.D. from New England School of Law (1977) where he was the Managing Editor of the Law Review
and graduated Magna Cum Laude. Mr. Sucoff has been a member of the Bar of the State of New York since 1978.
Mr. Patrick M. Kolenik was appointed to our Board of Directors on August 30, 2011. Mr. Kolenik has over forty years of securities industry experience. Mr. Kolenik was the Chief Executive Officer of Sherwood Securities Corp. where he has been involved with more than 200 successful public and private financings. Since 2003, Mr. Kolenik has been a consultant to both public and private companies through his company PK Advisors. Mr. Kolenik currently serves on the Board of Directors of Premier Alliance Group, Inc. (PIMO) a public company that provides business and technology consulting services. Mr. Kolenik also serves on the Board of Directors of American Roadside Burgers, Inc. Mr. Kolenik has also been elected to the Board of Directors of Stratus Media Group (SMDI), a public company that owns and operates more than 140 live events.
Mr. Kolenik has advised our Company since May 2009 in the area of investment banking, fund raising and capital markets. We have greatly benefited from Mr. Kolenik’s contributions to date and look forward to his future guidance in his role as a member of our Board of Directors.
Mr. Jesse Itzler was appointed to our Board of Directors on July 24, 2012 and resigned from the Board of Directors effective November 27, 2013. In 2011, Mr. Itzler founded 100 Mile Group LLC, a brand incubator and creative marketing company, which is a successor to Suite 850, LLC (founded by Mr. Itzler in 2009). Mr. Itzler serves as the managing member of 100 Mile Group. In June 2010, Mr. Itzler co-founded PureBrands, LLC, a consumer products company featuring nutritional and dietary supplements. From 2001 through 2010, Mr. Itzler served as co-founder and vice-chairman of Marquis Jet Partners, a private aviation company. Mr. Itzler is a graduate of American University.
Mr. Brian Thompson was appointed to our Board of Directors on July 24, 2012 and resigned from the Board of Directors effective October 1, 2013. Since 2006, Mr. Thompson has been working for Mr. John Pappajohn at Equity Dynamics, Inc., a financial consulting firm. In his role as senior vice president, Mr. Thompson evaluates investment opportunities, performs due diligence, negotiates investment transactions, raises capital for new ventures and interacts with management teams through various board and board observer positions. Prior to this, Mr. Thompson was the CFO and CAO for Kum & Go, LC (“KG”), a convenience retailer. Prior to KG, Mr. Thompson was the President and CFO of Astracon, Inc. of Denver, CO, a provider of connectivity intelligence OSS software for communications service providers,
until its sale in 2003. From 1995 to 2000, Mr. Thompson was a Partner and CFO of the Edgewater Private Equity Funds. After receiving his BS/BA in accounting from the University of South Dakota in 1991, Mr. Thompson spent four years in the audit department of KPMG, LLP in San Antonio and Des Moines.
Dr. Ka Cheong Christopher Leong was appointed to our board on October 29, 2012. Dr. Leong is a co-founder and the President of Transpac Capital, a venture capital firm based in Singapore. Transpac was formed in 1989 through the amalgamation of Techno-Ventures Hong Kong, which Dr. Leong co-founded in 1986, and Transtech Capital Management of Singapore, both pioneers of venture capital in their respective countries. Prior to his venture capital career, Dr. Leong was the CEO of Amoy Canning Corporation Limited, a food and packaging conglomerate listed on the stock exchange of Hong Kong. Prior to Amoy he founded Convenience Foods Limited in Hong Kong, which he sold to RJR Nabisco. Prior to his industrial career, Dr. Leong was a Senior Scientist
at American Science and Engineering in Cambridge, MA. Dr. Leong has been a chairman of the Hong Kong Venture Capital Association, and is one of the founding inductees to the Singapore Venture Capital Hall of Fame in 2010 for his pioneering work in venture capital. Dr. Leong obtained a BS and a PhD degree from Massachusetts Institute of Technology, Cambridge, MA.
Mr. Jerold Rubinstein was appointed to our board on October 1, 2013. Mr. Rubinstein currently serves as the chair of our audit committee. Since June 28, 2012, Mr. Rubinstein has served as the Chairman of the Board, CEO and a director of Stratus Media Group, Inc., and joined the board of Stratus Group Media, Inc. in April 2011. Mr. Rubinstein is the chairman of the audit committee of CKE Restaurants, the parent company of Carl’s Jr. Restaurants and Hardees Restaurants. Mr. Rubinstein also serves as the non-executive chairman of US Global investors Inc., a mutual fund advisory company. Mr. Rubinstein has started and sold many companies over the years, including Bel Air Savings and Loan and DMX, a cable and satellite
music distribution company. Mr. Rubinstein started and sold XTRA Music Ltd., a satellite and cable music distribution company in Europe. Most recently Mr. Rubinstein consults with and serves on 3 early stage development companies. Mr. Rubinstein is both a CPA and attorney.
Mr. Michael R. McCoy had been our Chief Executive Officer, from September 19, 2011 until February 11, 2014, and Chairman, Board of Directors from September 19, 2011 until November 27, 2011. Formerly President, Consumer Credit Cards at Wells Fargo, Mr. McCoy was responsible for the overall business and strategic direction of this business unit, directing a staff of over 4,000 individuals and managing a customer base of over 8.5 million with over $20 billion in credit card balances. A recognized leader in the financial services industry, Mr. McCoy previously served in a number of executive positions at Wells Fargo, having served as group Senior Vice President, Strategy and Business Development
for Wells Fargo Financial, where he led the Retail Sales Finance and Insurance Services businesses and directed Marketing for the Wells Fargo Financial enterprise. He also served as Executive Vice President, Human Resources and Communications for the Home and Consumer Finance Group, which included Leadership Development, Learning and Development, Compensation, Recruiting and Corporate Sponsorships.
Prior to joining Wells Fargo in January 2001, Mr. McCoy led several national distribution organizations within the financial services sector, including serving as general manager for ING’s Financial Institution Division and at American Express, where he was chief marketing officer and senior vice president for American Enterprise Life.
Mr. McCoy, as the recent former President of the Consumer Credit Cards business unit at Wells Fargo, was responsible for a business with numerous similarities to our Company’s prepaid card business. Mr. McCoy is a very articulate spokesman for us and an excellent interface from our Board of Directors to the outside world. Mr. McCoy’s insights in the areas of strategy, regulatory compliance, fraud prevention and corporate value enhancement will serve him well as he guides our Board of Directors in his role as Chairman.
Mr. McCoy serves on numerous Boards within his community including the United Way. He earned his bachelor’s degree in business management at Missouri State University.
In evaluating director nominees, our Company considers the following factors:
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The appropriate size of the Board;
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Our needs with respect to the particular talents and experience of our directors;
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The knowledge, skills and experience of nominees;
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Experience with accounting rules and practices; and
Our Company’s goal is to assemble a Board of Directors that brings our Company a variety of perspectives and skills derived from high quality business, professional and personal experience. Other than the foregoing, there are no stated minimum criteria for director nominees.
Specific talents and qualifications that we considered for the members of our Company’s Board of Directors are as follows:
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Mr. McCoy as the recent former President of the Consumer Credit Cards business unit at Wells Fargo, was responsible for a business with numerous similarities to our Company’s prepaid card business. In the short time since joining our Company, Mr. McCoy has proven to be a very articulate spokesman for us and an excellent interface from our Board of Directors to the outside world. Mr. McCoy’s insights in the areas of strategy, regulatory compliance, fraud prevention and corporate value enhancement will serve him well as he guides our Board of Directors in his role as Chairman.
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Mr. Blech is the owner of a significant number of shares of our Company’s common stock and warrants to purchase additional shares of our Company’s common stock. Mr. Blech has been a successful investor and a member of a number of Boards of Directors. We believe Mr. Blech’s past experience will be a tremendous benefit to our Company. Included among Mr. Blech’s more notable successes were:
s
Celgene Corporation – Mr. Blech was a founding shareholder of Celgene in 1986. Celgene has introduced two major cancer drugs and had a stock market valuation (as of March 8, 2011) of approximately $25 billion.
s
ICOS Corporation – Mr. Blech was a founding shareholder and member of the Board of Directors of ICOS beginning in 1991. ICOS discovered the drug Cialis and was later acquired by Eli Lilly for over $2 billion.
s
Nova Pharmaceutical Corporation – Mr. Blech was a founding shareholder and member of the Board of Directors of Nova from 1982 to 1990. Nova developed a treatment for brain cancer and subsequently merged with Scios Corporation which was later purchased for $2 billion by Johnson and Johnson.
s
Pathogeneses Corporation – Mr. Blech was a founding shareholder and member of the Board of Directors of Pathogeneses from 1992 to 1997. Pathogeneses created TOBI for the treatment of cystic fibrosis and was later acquired by Chiron Corp for $660 million.
s
Genetic Systems Corporation – Mr. Blech was a founding shareholder and member of the Board of Directors of GSC from 1981 to 1986. GSC developed the first inexpensive and accurate test to diagnose chlamydia and was later acquired by Bristol Myers for approximately $300 million.
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Mr. DeSantis co-founded Ariba, a provider of business to business e-commerce solutions that was one of the first B2B Internet companies to go public, and whose market capitalization reached $40 billion. He was also an early angel investor and board member of LinkedIn, the world’s largest professional online network, which has more than 150 million global members today.
Mr. Proto is a seasoned and successful senior executive and entrepreneur with three decades in the billing and payments industry. Mr. Proto is currently the Chairman and Chief Executive Officer of electronic billing company Transactis Inc. Mr. Proto’s also founded REMITCO, a remittance processing company, which was acquired in 2000 by First Data Corp., and Financial Telesis (CashFlex), a payment processor to 65 of the top 100 banks in the U.S., which was acquired by CoreStates/Wachovia and is now a part of Wells Fargo. In 2004, Mr. Proto co-founded Windham Ventures, an investment company focusing on financial technology and life sciences companies, where he currently serves as a founding partner.
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Mr. Kolenik’s vast securities industry history and work as a consultant to both public and private companies allows us to benefit from wisdom he has accrued from many varied companies and situations. Mr. Kolenik’s other public and private company Board service has been valuable as he has been a Company interface to our investors and potential investors since 2009 (prior to his appointment to the Board). We expect to further benefit from his expertise, now as a recently added member of our Board of Directors.
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Mr. Sucoff has advised our Company since September 2009 in the area of investment banking, fund raising and capital markets. He has been key to our success in fundraising since joining our firm. Additionally, Mr. Sucoff is an attorney (non-practicing) and contributes valuable insights in the area of legal matters in addition to those areas for which he is contracted with our Company. Mr. Sucoff’s broad and diversified background has been a strong asset to our Company.
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Mr. Itlzer founded 100 Mile Group LLC, a brand incubator and creative marketing company, which is a successor to Suite 850, LLC (founded by Mr. Itzler in 2009). Mr. Itzler serves as the managing member of 100 Mile Group. In June 2010, Mr. Itzler co-founded PureBrands, LLC, a consumer products company featuring nutritional and dietary supplements.
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Mr. Thompson has been working for Mr. John Pappajohn at Equity Dynamics, Inc., a financial consulting firm. Prior to this, Mr. Thompson was the CFO and CAO for Kum & Go, LC (“KG”), a convenience store retailer. Prior to KG, Mr. Thompson was the President and CFO of Astracon, Inc. of Denver, CO, a provider of connectivity intelligence OSS software for communications service providers, until its sale in 2003. From 1995 to 2000, Mr. Thompson was a Partner and CFO of the Edgewater Private Equity Funds.
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Dr. Leong is a co-founder and the President of Transpac Capital, a venture capital firm based in Singapore. Transpac was formed in 1989 through the amalgamation of Techno-Ventures Hong Kong, which Dr. Leong co-founded in 1986, and Transtech Capital Management of Singapore, both pioneers of venture capital in their respective countries. Prior to his venture capital career, Dr. Leong was the CEO of Amoy Canning Corporation Limited, a food and packaging conglomerate listed on the stock exchange of Hong Kong. Prior to Amoy he founded Convenience Foods Limited in Hong Kong, which he sold to RJR Nabisco.
There are no family relationships among members of our management or our Board of Directors.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors, executive officers and beneficial owners of more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Directors, executive officers and greater than 10% beneficial owners are required by SEC regulations to furnish to us copies of all Section 16(a) reports they file.
Based solely on our review of the reports, we believe that all required Section 16(a) reports were timely filed during our last fiscal year. None of our directors, executive officers or greater than 10% beneficial owners filed any Form 5s.
We have adopted a Code of Business Conduct and Ethics that applies to, among other persons, our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. Our Code of Business Conduct and Ethics is available, free of charge, to any stockholder upon written request to our Corporate Secretary at SpendSmart Networks, Inc., 2680 Berkshire Parkway, Suite 130, Des Moines, Iowa50325.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has, during the past ten years, involved in any of the items below that the Company deems material to their service on behalf of the Company:
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been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
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had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
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been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
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been found by a court of competent jurisdiction in a civil action or by the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
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been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
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been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Securities Exchange Act of 1934, as amended (“Exchange Act”)), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Except as set forth in our discussion below in “Certain Relationships and Related Transactions,” none of our directors or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the Commission.
Corporate Governance
The business and affairs of the company are managed under the direction of our board. In the fiscal year ended September 30, 2013, we held five special board meetings and for the three months ended December 31, 2013, we held one meeting. Each of our directors has attended all meetings either in person or via telephone conference.
The information required by this item will be incorporated by reference from the information under the caption “Compensation of Named Executive Officers” contained in our 2013 Proxy Statement.
Overview of Executive Compensation Objectives and Philosophy
Our Company’s Management’s objectives are to attract and retain highly competent executives and to compensate them based upon a pay-for-performance mentality. Our current plan relies on goals and objectives agreed upon among the existing executive (officer and non-officer) group and our Company’s Board of Directors. The achievement of such goals and objectives constitute requirements for continued employment, advancement with our Company and receipt of incentive bonus payments.
With the intent to increase short-term and long-term stockholder value, we have designed our executive compensation policies and practices to reward our Company’s executives based on:
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Company performance;
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Individual performance; and
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The demonstration of leadership, team building skills and high ethical standards.
We include a significant equity component in our overall compensation to align the long-term interests of our executives with those of our stockholders. Our executive compensation plan is designed to encourage the success of our executives as a team, rather than only as individual contributors, by attaining overall corporate goals. In setting those goals, we consider the current and anticipated economic conditions in our market place and industry and the performance of other companies in our market place and industry.
Overall, we seek to employ executives that were not only qualified to fulfill the roles of the positions we require at the time of their hire, but who also have prior experience and demonstrated capabilities to function in a far larger and complex entity than where our Company is currently. We believe it is critical that our executives be able to work in an environment without the support of staff subordinates which usually accompany a larger and more seasoned company. Further, along with and given the benefit of maintaining continuity within the executive team, we highly desire executives that can adapt to what we hope will be a rapidly growing company. Our executives must be able to not only fill many roles within their areas of expertise, but also to oversee other areas that may be outside their specialty. Accordingly, we highly value
the trait of adaptability.
In order to attract the type of talented executive we seek, we have found that these individuals value the potential large future rewards that come from long-term compensation arrangements in the form of stock ownership and stock option arrangements over current cash compensation. Also, given the current early stage nature of our business and the accompanying premium we must place on cash, this allocation of compensation also currently benefits our Company. Accordingly, we have structured our compensation arrangements accordingly.
On July 23, 2012, we issued warrants to purchase common stock to certain Board members for their extraordinary efforts on behalf of the Company, as follows: Isaac Blech, 333,333; Joseph Proto, 200,000; Cary Sucoff, 133,333; and Patrick Kolenik, 133,333. The warrants vest monthly over a period of 12 months; have an exercise price of $6.45 per share; include a cashless exercise option; and expire 5 years after the date of grant. On July 24, 2012
we granted our Chief Executive Officer, Mr. McCoy, options to purchase 293,333 shares of the Company’s common stock. The options vest monthly over a period of 12 months; have an exercise price of $6.45 per share; and expire 5 years after the date of grant. On October 29, 2012, we granted Chris Leong warrants to purchase up to 133,333 shares of common stock at an exercise price of $10.35 per share and having a term of 5 years. The warrants will vest monthly over a period of 36 months provided Dr. Leong continues to serve on the Board. On November 12, 2012, we granted our President, William Hernandez, options to purchase up to 333,333 shares of common stock at an exercise price of $7.35 per share. The
options will vest as follows: 66,666 options vested immediately and the remaining 266,667 options vest equally over a thirty-six month period. On February 19, 2013, we granted our then Chief Financial Officer, Kim Petry, warrants to purchase up to 200,000 shares of common stock at an exercise price of $5.85 per share. At the time of Ms. Petry’s resignation as the Company’s Chief Financial Officer, a total of 61,000 warrant shares were vested. On October 1, 2013, we granted Jerold Rubinstein warrants to purchase up to 133,333 shares of common stock at an exercise price of $2.00 per share and having a term of 5 years.
Effective October 28, 2013, the Company entered into an advisory agreement (the “Chord Agreement”) with Chord Advisors, LLC (“Chord”). Pursuant to the Chord Agreement, Chord will provide the Company with comprehensive outsourced accounting solutions. The Company will pay Chord $7,500 per month. The Company has also agreed to issue Chord a vested stock option to purchase five thousand shares of common stock at an exercise price of $2.00 per share. The
Company’s Chief Financial Officer, David Horin, is the President of Chord. The Agreement may be terminated by either party.
Elements of Executive Compensation
Executive compensation consists of the following elements:
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Base salary;
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Annual incentive bonuses; and
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Long-term incentives.
Base Salary. The base salary for each executive is initially established through negotiation at the time the executive is hired, taking into account the scope of responsibilities, qualifications, experience, prior salary and competitive salary information within our industry. Year-to-year adjustments to each executive officer’s base salary are determined by an assessment of the sustained performance against individual goals, including leadership skills and the achievement of high ethical standards, the individual’s impact on the Company’s business and financial results, current salary in relation to the salary range designated for the job, experience, demonstrated potential for advancement, and an assessment against base salaries paid to executives for comparable jobs in the marketplace.
Annual Incentive Bonuses. Our Company’s bonus plan’s year begins on January 1st and runs through December 31st. Payments under future executive bonus plans that may be instituted will be based on achieving both personal and corporate goals. Personal goals will support our overall corporate goals and, wherever possible, contain quantitative components. An executive officer’s success or failure in meeting some or all of these personal goals will affect the individual’s bonus amount. Corporate goals will consist of specific financial targets for the Company. We believe that offering significant potential income in the form of bonuses will allow us to attract and
retain executives and to align their interests with those of our stockholders.
Long-Term Incentives. Our long-term incentives consist of our Company’s Common Stock and stock option awards. The objective of these awards is to align the longer-term interests of our stockholders and our executive officers and to complement incentives tied to annual performance.
401(k) and Other Benefits. During the three months ended December 31, 3013 and the twelve months ended September 30, 2013 and 2012, our executive officers were eligible to receive certain benefits available to all our employees on the same terms, including medical and dental insurance. During the year, we also maintained a tax-qualified 401(k) Plan, which provides for broad-based employee participation. Under the 401(k) Plan, all employees are eligible to receive matching contributions from the Company of 100% of employee contributions up to a maximum of 4% of the employees’ salaries, per year. We do not provide defined benefit pension plans or defined contribution retirement
plans to our executives or other employees. We believe that the 401(k) Plan and medical and dental insurance benefits allow us to remain competitive for employee talent, and we believe that the availability of these benefit programs generally enhances employee productivity and retention.
Employment Agreements
Our Company has entered into employment agreements with three of our named executive officers: Michael McCoy (our former Chief Executive Officer); William Hernandez (our President) and Alex Minicucci (our current Chief Executive Officer). A summary of the material terms of our employment agreements with our named executive officers is as follows:
Alex Minicucci, Chief Executive Officer. On February 11, 2014, in connection with the appointment of Mr. Minicucci as our Chief Executive Officer, the Company and Mr. Minicucci entered into an employment agreement (the “Minicucci Employment Agreement”). The Minicucci Employment Agreement has an initial term of three years. The Minicucci Employment Agreement provides for the payment of a base salary of $375,000 per year (subject to discretionary increases by the Board). The Minicucci Employment Agreement provides that Mr. Minicucci is entitled to usual and customary benefits and also contains usual and customary restrictive covenants (including non-competition, non-solicitation
and confidentiality).
Michael McCoy, former Chief Executive Officer and current Director: On September 19, 2011, we entered into an employment agreement with Mr. McCoy, which includes the following summary terms, (i) Mr. McCoy shall be paid an annual salary of $360,000; (ii) Mr. McCoy shall be paid his base salary, receive fringe benefits and continue to vest in any granted stock options and warrants for twelve months after the termination of his employment in the event that his employment is terminated other than for cause; (iii) Mr. McCoy shall be eligible for an annual cash bonus; and (iv) Mr. McCoy was granted options to purchase up to 706,667 shares of Company common stock at an exercise price of $7.20 per share.
On July 24, 2012, we amended Mr. McCoy’s employment agreement to provide that (1) Mr. McCoy’s Base Salary shall be increased by $40,000 per year, and (2) Mr. McCoy shall be entitled to a lump sum cash payment equal to one and one-half times his annual Base Salary in the event the Company changes his title to any position below that of Chief Executive Officer. All other terms of Mr. McCoy’s employment agreement remain in effect.
On September 16th, 2013, we amended Mr. McCoy’s employment agreement to provide that Mr. McCoy’s Salary be decreased by $280,000 per year to an annual salary of $120,000. Effective September 30th, 2014, Mr. McCoy was no longer an employee of the company.
William Hernandez, President: Mr. Hernandez was appointed as our President on November 12, 2012. Our employment with Mr. Hernandez includes the following summary terms: (i) an annual salary of $350,000; (ii) eligibility for an annual cash bonus equal to fifty percent (50%) of Mr. Hernandez’s annual salary, upon criteria to be determined (the first year’s bonus to be guaranteed by the Company); and (iii) options to purchase up to 333,333 shares of Company common stock at an exercise price of $7.35 per share, of which 66,666 options vest immediately and the remaining 266,667 options vest equally over a thirty-six month period.
The Impact of Tax and Accounting Treatments on Elements of Compensation
We have elected to award non-qualified and incentive stock options to all grantees of our Company’s stock options that remain outstanding as of the date of this report. All other options or warrants granted to advisors, Directors and consultants were non-qualified options or warrants in order to allow our Company to take advantage of the more favorable tax advantages associated with non-qualified stock options or warrants.
Internal Revenue Code Section 162(m) precludes the Company from deducting certain forms of non-performance-based compensation in excess of $1,000,000 to named executive officers. However, since stock-based awards comprise a significant portion of total compensation, the Board of Directors has taken appropriate steps to preserve deductibility for such awards in the future, when appropriate.
The Level of Salary and Bonus in Proportion to Total Compensation
Because of the commonality of interests among our executives and our stockholders in achieving the sustained, long-term growth of the value of our stock, we seek to keep cash compensation in line with market conditions and, if justified by the Company’s financial performance, place emphasis on the ownership of Company stock and use of stock options as a means of obtaining significantly better than average compensation. Our efforts to keep cash compensation in line with market conditions to date have been informal and based primarily on discussions with business colleagues in the local marketplace, consultation with a local benefits consulting firm and the review of widely available comparative salary data. We also based our conclusions that our cash compensation was in line with market conditions based on our executives’ prior employment
histories with other similar sized companies, in similar responsible positions. We have not engaged in a practice of formal benchmarking of our executive compensation, but expect to formalize our compensation practices in the future should we be successful in growing our business. Part of such formalization may take the form of benchmarking. Because of the significant equity stake or equity incentives that our executives maintain in our Company, we believe their cash compensation and benefits received are modest in comparison to similar sized public companies.
Other Compensation
We intend to continue to maintain our current benefits for our executives, including medical and dental insurance coverage and the ability to contribute to a 401(k) retirement plan; however, our Board of Directors may in its discretion revise, amend or add to the executive’s benefits if it deems it advisable. The benefits currently available to the executives are also available to our other employees.
The following table provides information regarding the compensation awarded to, earned by, or paid to our executives during the three months ended December 31, 2013 and the twelve months ended September 30, 2013 and 2012.
Our Company made group life, health, hospitalization and medical plans available for its employees, including the officers listed herein.
(2)
Refer to “Stock based compensation,” in the accompanying Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for the relevant assumptions used to determine the valuation of our option/warrant awards.
(3)
Mr. Shultz was paid on a part-time basis from August 1, 2010 to September 3, 2010. Mr. Shultz resigned from his position as Chief Financial Officer, Secretary and Treasurer effective February 19, 2013.
(4)
Amounts shown include matching contributions to the officers’ 401(k) retirement plans for all years presented.
Mr. McCoy’s employment commenced in September 2011 and amounts show here represents the amounts charged to operations through September 30, 2013. On October 3, 2011, Mr. McCoy was paid his entire first year’s salary totaling $360,000 as per his employment contract. On July 24, 2012, we amended Mr. McCoy’s employment agreement to provide that Mr. McCoy’s Base Salary shall be increased by $40,000 per year. On September 13, 2013, we amended Mr. McCoy’s employment agreement to provide that Mr. McCoy’s Base Salary shall be decreased by $280,000 per year. Mr. McCoy resigned as our Chief Executive Officer on February
11, 2014 and stepped down as the Chairman of the Board of Directors on November 27, 2013.
The above amounts with respect to compensation from option awards equaled the amounts that were recognized as compensation expense in our financial statements for the three months ended December 31, 2013 and the twelve months ended September 30, 2013 and 2012. The option award amounts were calculated in accordance with generally accepted accounting principles concerning share-based payments.
No options or warrants have been exercised by any of the grantees through the date of this period from September 30, 2013 through December 31, 2013. We have recognized the aggregate grant date fair value of option awards issued in our accompanying statements of operations, computed in accordance with FASB Accounting Stands Codification Topic 718.
None of our directors, executives or employees participates in or has account balances in qualified or non-qualified defined benefit plans sponsored by our Company. None of our named executive officers participate in or have account balances in non-qualified defined contribution plans or other deferred compensation plans maintained by our Company.
Outstanding Equity Awards at December 31, 2013
The following table provides information regarding outstanding equity awards (all in the form of stock options or warrants) to named executives as of December 31, 2013:
Our directors were compensated for their service on our Board of Directors with warrants to purchase common stock as outlined above. We did not pay any cash considerations to our Directors for their service for the fiscal year ended September 30, 2013. The following table provides information regarding our non-employee director compensation for the twelve months ended September 30, 2013. There was no compensation for the three months ended December 31, 2013:
Includes warrants to purchase up to 166,667 shares of common stock at an exercise price of $7.67 per share granted on November 1, 2011 and expiring November 1, 2016 and warrants to purchase up to 333,333 shares of common stock at an exercise price of $6.45 per share granted on July 23, 2012.
(2)
Includes warrants to purchase up to 66,667 shares of common stock at an exercise price of $7.20 per share granted on September 21, 2011 and expiring September 21, 2016 and warrants to purchase up to 133,333 shares of common stock at an exercise price of $6.45 per share granted on July 23, 2012.
(3)
Includes warrants to purchase up to 66,667 shares of common stock at an exercise price of $6.30 per share granted on August 4, 2011 and expiring August 4, 2016 and warrants to purchase up to 133,333 shares of common stock at an exercise price of $6.45 per share granted on July 23, 2012.
(4)
Mr. DeSantis resigned from the Board of Directors on January 29, 2014. Includes warrants to purchase up to 666,667 shares of common stock at an exercise price of $6.00 per share granted on March 26, 2012.
(5)
Mr. Proto was appointed as the Chairman of the Board of Directors on November 27, 2013. Includes warrants to purchase up to 200,000 shares of common stock at an exercise price of $6.45 per share granted on July 23, 2012.
(6)
Mr. Thompson resigned from the Board of Directors effective October 1, 2013. Includes warrants to purchase up to 133,333 shares of common stock at an exercise price of $6.45 per share granted on July 23, 2012.
(7)
Mr. Itzler resigned from the Board of Directors effective November 27, 2013. Includes warrants to purchase up to 133,333 shares of common stock at an exercise price of $6.45 per share granted on July 23, 2012.
(8)
Includes warrants to purchase up to 133,333 shares of common stock at an exercise price of $6.90 per share granted on October 29, 2012.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
As of November 7, 2014 (the “SO Date”), we had 18,297,903 shares of common stock outstanding. Options and warrants exercisable or convertible as of the SO Date or within sixty (60) days thereafter are used in determining each individual’s percentage of shares beneficially owned on the table below. The following table sets forth as of the SO Date, information regarding the beneficial ownership of our common stock with respect to (i) our officers and directors; (ii) by all directors and executive officers as a group; and (iii) all persons which the Company, pursuant to filings with the Securities and Exchange Commission (the “SEC”) and our stock transfer record by each person or group known by our management to own more than 5% of the outstanding
shares of our common stock. Under the rules of the Securities and Exchange Commission, a person (or group of persons) is deemed to be a “beneficial owner” of a security if he or she, directly or indirectly, has or shares the power to vote or to direct the voting of such security, or the power to dispose of or to direct the disposition of such security. Accordingly, more than one person may be deemed to be a beneficial owner of the same security. A person is also deemed to be a beneficial owner of any security, which that person has the right to acquire within sixty (60) days, such as our Series C Preferred stock, warrants or options to purchase shares of our common stock. Unless otherwise noted, each person has sole voting and investment power over the shares indicated below subject to applicable community property law.
Unless otherwise noted, the address is c/o SpendSmart Networks, Inc. 2680 Berkshire Parkway, Suite 130, Des Moines, Iowa50325.
(2)
Amounts include shares of common stock that would result from the exercise of outstanding vested options to purchase 1,020,000 shares of our common stock.
(3)
Amounts include shares of common stock that would result from the exercise of outstanding vested options to purchase 132,500 shares of our common stock.
(4)
Amounts include shares of common stock that would result from the exercise of the vested outstanding options and warrants to purchase 2,335,000 shares of our common stock.
(5)
Amounts include shares of common stock that would result from the exercise of vested outstanding options and warrants to purchase 597,080 shares of our common stock.
(6)
Amounts include shares of common stock that would result from the exercise of vested outstanding options and warrants to purchase 502,633 shares of our common stock.
(7)
Amounts include shares of common stock that would result from the exercise of the vested outstanding options to purchase 590,924 shares of our common stock.
(8)
Amounts include shares of common stock that would result from the exercise of the vested outstanding warrant to purchase 172,874 shares of our common stock.
(9)
Amounts include shares of common stock that would result from the exercise of the vested outstanding options and warrants to purchase 1,030,102 shares of our common stock.
(10)
Amounts include shares of common stock that would result from the exercise of the vested outstanding warrants/options to purchase 4,982,694 shares of our common stock.
(11)
Amounts include shares of common stock that would result from the exercise of the vested outstanding warrants/options to purchase 17,500 shares of our common stock.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Related Party Transactions. Our Company closely reviews transactions between the Company and persons or entities considered to be related parties (collectively “related parties”). Our Company considers entities to be related parties where an executive officer, director or a 5% or more beneficial owner of our common stock (or an immediate family member of these persons) has a direct or indirect material interest. Transactions of this nature require the approval of our management and our Board of Directors. We believe such transactions were at terms comparable to those we could have obtained from unaffiliated third parties. Since January
1, 2012, we have not had any transactions in which any of our related parties had or will have a direct or indirect material interest, nor are any such transactions currently proposed, except as noted below.
On March 6, 2014, the Company conducted and closed an offering of its Series C Convertible Preferred Stock. Windham-BMP Investment I, LLC (“Windham”) purchased an aggregate of 55,533 shares of Series C Preferred Stock and warrants to purchase 222,132 shares of common stock at an exercise price of $1.10 per share for an aggregate purchase price of $166,599. Mr. Proto, our Chairman, is a general partner of Windham. In addition, Transpac Investments Limited (“Transpac”) purchased an aggregate of 250,000 shares of Series C Preferred Stock and warrants to purchase 1,000,000 shares of common stock at an exercise price of $1.10 per share for an aggregate purchase price of $750,000. Dr. Ka
Cheong Christopher Leong, our Director, is the co-founder and President of Transpac.
On July 23, 2012, we issued warrants to purchase common stock to certain Board members for their extraordinary efforts on behalf of the Company, as follows: Isaac Blech, 333,333; Joseph Proto, 200,000; Cary Sucoff, 133,333; and Patrick Kolenik, 133,333. The warrants vest monthly over a period of 12 months; have an exercise price of $6.45 per share; include a cashless exercise option; and expire 5 years after the date of grant. On July 24, 2012
we granted our Chief Executive Officer, Mr. McCoy, options to purchase 293,333 shares of the Company’s common stock. The options vest monthly over a period of 12 months; have an exercise price of $6.45 per share; and expire 5 years after the date of grant. On October 29, 2012, we granted Chris Leong warrants to purchase up to 133,333 shares of common stock at an exercise price of $10.35 per share and having a term of 5 years. The warrants will vest monthly over a period of 36 months provided Dr. Leong continues to serve on the Board. On November 12, 2012, we granted our President, William Hernandez, options to purchase up to 333,333 shares of common stock at an exercise price of $7.35 per share. The
options will vest as follows: 66,667 options vested immediately and the remaining 266,667 options vest equally over a thirty-six month period.
During the twelve months ended September 30, 2011, we entered into subscription agreements with a member of our Board of Directors, Isaac Blech, pursuant to which we issued 1,333,333 shares of our common stock and five-year warrants to purchase up to an additional 1,208,333 shares of our common stock with an exercise price of $6.00 per share, in exchange for gross proceeds totaling $8,000,000. We also issued warrants to purchase up to a total of 100,000 shares of our common stock with an exercise price of $9.00 per share to Equity Source Partners, LLC (“ESP”), who assisted us in connection with the transactions (these totals do not reflect amounts received in connection with convertible debt described below). A principal of ESP Cary
Sucoff, became a member of our Company’s Board of Directors in May 2011.
Director Independence. Because our common stock is not currently listed on a national securities exchange, we have used the definition of “independence” of The NASDAQ Stock Market to make this determination. NASDAQ Listing Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the company or any other individual having a relationship which, in the opinion of the Company’s Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The NASDAQ listing rules provide that a director cannot be considered independent if:
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the director is, or at any time during the past three years was, an employee of the company;
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the director or a family member of the director accepted any compensation from the company in excess of $120,000 during any period of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions, including, among other things, compensation for board or board committee service);
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a family member of the director is, or at any time during the past three years was, an executive officer of the company;
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the director or a family member of the director is a partner in, controlling stockholder of, or an executive officer of an entity to which the company made, or from which the company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions);
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the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of the company served on the compensation committee of such other entity; or
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the director or a family member of the director is a current partner of the company’s outside auditor, or at any time during the past three years was a partner or employee of the company’s outside auditor, and who worked on the company’s audit.
Messrs. Blech, Proto, Sucoff, Kolenik, Rubinstein and Leong are the only members of the Board of Directors that are considered independent.
The aggregate fees during the twelve months ended September 30, 2013 and 2012 for professional services rendered by the predecessor auditors for the audit of the registrant’s annual financial statements and review of financial statements included in the registrant’s quarterly reports and registration statements (including expenses) totaled $59,243 and $59,243, respectively. Our audit fees for our 10-K for the twelve months ended September 30, 2013 was $32,000 and the March 31, 2013 and June 30, 2013 10Q’s were $8,000 each and for the three months ended
December 31, 2013 were $28,080.
For the amended 10-K/A and amended 10Q’s for the twelve months ended September 30, 2012 and 2011, our Company engaged EisnerAmper LLP and the aggregate fees for professional services rendered was $65,000 for the 10-K/A and $35,000 for the 10Q-A’s.
There were no fees billed in each of the last two fiscal years for assurance and related services by the predecessor auditors or EisnerAmper LLP that are reasonably related to the performance of the audit or review of the registrant's financial statements and are not reported under item (1).
(3) Tax Fees
No fees were billed for professional services rendered by the predecessor auditors or EisnerAmper LLP for tax compliance, tax advice, and tax planning for the twelve months ending September 30, 2013 and 2012 or for the three months ending December 31, 2013.
(4) All Other Fees
No aggregate fees were billed for professional services provided by the predecessor auditors or EisnerAmper LLP, other than the services reported in items (1) through (3) for the twelve months ending September 30, 2013 and 2012 and for the three months ending December 31, 2013.
(5) Audit Committee
The registrant's Board of Directors, which formerly performed the functions of the Audit Committee prior to its establishment on November 1, 2011, previously approved the predecessor auditor’s performance of services for the audit of the registrant’s annual financial statements for the twelve months ended September 30, 2012 and 2011. Audit-related fees, tax fees, and all other fees, if any, were also approved by the Board of Directors.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
We, the undersigned directors and/or officers of SpendSmart Networks, Inc., a Delaware corporation, hereby severally constitute and appoint Alex Minicucci, acting individually, his true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Transition Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done that such Transition Report on Form 10-K and its amendments shall comply with the Securities Act, and the applicable rules and regulations adopted
or issued pursuant thereto, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1934, this report has been signed by the following persons in the capacities and on the dates stated.
