| Summary of Significant Accounting Policies | The condensed consolidated financial statements have been prepared
in accordance with GAAP. Loans Receivable and Accounts Receivable The Company extended credit to its licensees
in the normal course of business and performs credit evaluations of its customers. The Company no longer offers extended payment
terms. Loans and accounts receivable are stated at amounts due from customer’s net of an allowance for doubtful accounts.
Accounts that are outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance
for doubtful accounts by considering a number of factors, including the length of time loan and accounts receivable are past due
and the customer's current ability to pay its obligation to the Company. The Company writes off loans and accounts receivable when
they become uncollectible. Use of Estimates The preparation of financial statements in conformity
with GAAP requires 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. Significant estimates inherent in the preparation of the accompanying consolidated financial statements
include recoverability and useful lives of intangible assets, the valuation allowance related to the Company's deferred tax assets,
the allowance for doubtful accounts related and notes and accounts receivable, the fair value of stock options and warrants granted
to employees, consultants, directors, investors and placement agents, notes, derivative liabilities (conversion option) and assumptions
used to fair value the inducement expense related to the warrant tender offer. Revenue Recognition The Company generates revenues primarily in
the form of set up fees, license fees, messaging, equipment and marketing services fees and value added mobile marketing and mobile
commerce services. License fees are charged monthly for support services. Set-up fees primarily consist of
fees for website development services (including support and unspecified upgrades and enhancements when and if they are available),
training and professional services that are not essential to functionality. The Company offers two licenses consisting of our Engage
license and our Thrive license. The Company now offers both licenses in a combined package known as the Customer Loyalty System
License (“CLS”). The revenues for Engage, Thrive, and CLS license set-up fees are recognized over the training and
implementation periods of one month, respectively. The Company recognizes revenues when all of
the following conditions are met:
● there is persuasive evidence of an arrangement;
● the products or services have been delivered to the customer;
● the amount of fees to be paid by the customer is fixed or determinable; and
● The collection of the related fees is probable. Signed agreements are used as evidence of an
arrangement. Electronic delivery occurs when we provide the customer with access to the software. The Company assesses whether
a fee is fixed or determinable at the outset of the arrangement, primarily based on the payment terms associated with the transaction.
The Company offered extended payment terms in 2014 and 2015 with regards to the setup fee with typical terms of payment due between
one and three years from delivery of license. The Company no longer offers extended payment terms. The Company assessed collectability
of the set-up fee based on a number of factors such as collection history and creditworthiness of the licensee. If the Company
determines that collectability is not probable, revenue is deferred until collectability becomes probable, generally upon receipt
of cash. License arrangements may also include set-up
fees for website development, delivery of tablets, professional services and training services, which are typically delivered within
30-60 days of the contract term. In determining whether set-up fee revenues should be accounted for separately from license revenues,
we evaluate whether the set-up fees are considered essential to the functionality of the license using factors such as the nature
of our products; whether they are ready for use by the customer upon receipt; the nature of our implementation services, which
typically do not involve significant customization to or development of the underlying software code; the availability of services
from other vendors; whether the timing of payments for license revenues is coincident with performance of services; and whether milestones or acceptance
criteria exist that affect the realizability of the license fee. Substantially all of our set-up fee arrangements are recognized
as the services are performed. Payments received in advance of services performed are deferred and recognized when the related
services are performed. We do not offer refunds and therefore have not
recorded any sales return allowance for any of the periods presented. Upon a periodic review of outstanding accounts and notes
receivable, amounts that are deemed to be uncollectible are written off against the allowance for doubtful accounts. Deferred revenue consists substantially of amounts
invoiced in advance of revenue recognition for our products and services described above. We recognize deferred revenue as revenue
only when the revenue recognition criteria are met. 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. 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 had been 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 three and nine months
ended September 30, 2016 and 2015 was $0 and $0, and $628,999 and $535,286, respectively. Property and equipment has been fully
depreciated as of September 30, 2016. Software Capitalization The Company accounts for computer software used
in the business in accordance with ASC 350 “Intangibles-Goodwill and Other”. ASC 350 requires computer software costs
associated with internal use software to be charged to operations as incurred until certain capitalization criteria are met. Costs
incurred during the preliminary project stage and the post-implementation stages are expensed as incurred. Certain qualifying costs
incurred during the application development stage are capitalized as property, equipment and software. These costs generally consist
of internal labor during configuration, coding, and testing activities. Capitalization begins when (i) the preliminary project
stage is complete, (ii) management with the relevant authority authorizes and commits to the funding of the software project, and
(iii) it is probable both that the project will be completed and that the software will be used to perform the function intended. We
capitalized $291,957 and $732,533, respectively, in software development related to programming and coding for new product development
for the nine months ended September 30, 2016 and 2015. Software amortization expense for the three and nine months ended
September 30, 2016 and 2015 was $128,765 and $360,262, and $82,456 and $178,003, respectively. 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 impairment recorded during the period ended September 30, 2016. 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 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 condensed 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. 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 does not have any unrecognized tax benefits
or accrued penalties and interest. If such matters were to arise, the Company would recognize interest and penalties related to
income tax matters in income tax expense. Stock-Based Compensation 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. Net Income (Loss) per Share The Company calculates basic earnings per share
(“EPS”) by dividing the Company’s net income(loss) and comprehensive net income (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. For the three months ended September 30, 2016
diluted earnings per common share are computed by the numerator effected by the gain on the change in fair value of the warrant
liability and the denominator is increased to include the number of additional potential common shares from the warrants underlying
the warrant liability. Diluted earnings per common shares were calculated
using the following net income and weighted average shares outstanding for the three months ended September 30, 2016.
Three Months Ended September 30, 2016
Net income $ 176,882
Gain on the change in fair value of the warrant liability (389,658 )
Diluted earnings $ (212,776 )
Weighted average number of common and common equivalent shares outstanding:
Basic number of common shares outstanding 39,315,995
Dilutive effect of warrants 12,138,166
Diluted number of common and common stock equivalent shares outstanding: 51,454,161 For the nine months ended September 30, 2016
and the three and nine months ended September 30, 2015, diluted net loss per common share is equal to the basic net loss per common
share since all potentially dilutive securities are anti-dilutive. Potential common stock equivalents outstanding
as of September 30, 2016 and 2015 consist of convertible notes, common stock options, investor warrants, and compensation warrants:
September 30,
2016 2015
Convertible notes 8,719,640 1,512,500
Common stock options 19,726,842 8,666,833
Investor warrants 37,995,156 23,861,368
Compensation warrants 1,981,667 1,895,000
Excluded potentially dilutive securities 68,423,305 35,935,701 Derivatives - Warrant Liability The Company accounts for the common stock warrants
granted and still outstanding as of September 30, 2016 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
has been estimated using a Monte Carlo simulation. The Company accounted 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. The Company recognized gains
of $0 and $47,209 in the fair value of derivatives for the nine months ended September 30, 2016 and 2015, respectively. The Company
recognized a gain of $0 and $19,221 in the fair value of derivatives for the three months ended September 30, 2016 and 2015, respectively.
These derivative liabilities which arose from the issuance of the 2010 Warrants resulted in an ending balance of derivative liabilities
of $0 as of September 30, 2016 and December 31, 2015, respectively. These warrants expired in November 2015. The Company accounts for certain of its outstanding
warrants issued in fiscal 2016 (“2016 Warrants”) as derivative liabilities. The 2016 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. The Company recognized gains of $1,756,087 and $0 in the fair value of derivatives for the nine
months ended September 30, 2016 and 2015, respectively. The Company recognized gains of $781,085 and $0 in the fair value of derivatives
for the three months ended September 30, 2016 and 2015, respectively. These derivative liabilities which arose from the issuance
of the 2016 Warrants resulted in an ending balance of derivative liabilities of $2,343,255 and $0 as of September 30, 2016 and
December 31, 2015, respectively. Debt discount and issuance costs Debt issuance costs, including the value of
warrants issued in connection with debt financing and fees or costs paid to lender, are presented in the consolidated balance sheets
as a direct deduction from the carrying amount of that debt. The Company amortizes the discount to interest
expense over the term of the respective debt using the effective interest method. Derivatives – Bifurcated Conversion
Option in Convertible Notes The Company does not use derivative financial
instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has issued Convertible Notes
with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host
contracts, or (iii) may be net-cash settled by the counterparty. As required by ASC 815, Accounting for Derivative Financial
Instruments and Hedging Activities The Convertible Notes issued during the year
ended December 31, 2015 are subject to anti-dilution adjustments that allow for the reduction in the Conversion Price, as defined
in the agreement, in the event the Company subsequently issues equity securities including Common Stock or any security convertible
or exchangeable for shares of Common Stock for a price less than the current conversion price. The Company bifurcated and accounted
for the conversion option in accordance with ASC 815 as a derivative liability, since this conversion feature is not considered
to be indexed to the Company’s own stock. The Company’s derivative liability has
been measured at fair value at September 30, 2016 using a Monte-Carlo Simulation. Inputs into the model require estimates, including
such items as estimated volatility of the Company’s stock, estimated probabilities of additional financing, risk-free interest
rate, and the estimated life of the financial instruments being fair valued. In addition, since the conversion price contains an
anti-dilution adjustment, the probability that the Conversion Price of the Notes would decrease as the share price decreased was
also incorporated into the valuation calculation. The Company modified two existing Notes during
the first quarter 2016 and three existing Notes during the second quarter, 2016. According to FASB ASC 470-50, the modification
is accounted for as a debt extinguishment, whereby the new debt instrument is initially recorded at fair value, and that amount
is used to determine the debt extinguishment gain or loss to be recognized and the effective rate of the new instrument. We recognized
a loss on the extinguishment of debt of $415,689, of which $106,766 was related to the repricing of warrants for the nine months
ended September 30, 2016. The Company recognized a gain of $239,582 and
$186,026 in the fair value of derivatives for the nine months ended September 30, 2016 and 2015, respectively. These derivative
liabilities which arose from the issuance of the convertible notes resulted in an ending balance of derivative liabilities of $2,711
and $179 as of September 30, 2016 and December 31, 2015, 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). The fair value of these liabilities is estimated using
Monte Carlo 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. Fair value of assets and liabilities 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:
● Level 1: Observable inputs such as quoted prices in active markets;
● Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
● 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 receivable, notes receivable, notes payable, accounts payable and derivative liabilities. The
recorded values of cash equivalents, accounts receivable, notes receivable 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 and earn-out 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 September 30, 2016 and December 31, 2015 is as follows: A summary of quantitative information with respect
to valuation methodology and significant unobservable inputs used for the Company’s conversion options that are categorized
within Level 3 of the fair value hierarchy as of September 30, 2016 is as follows:
Date of Valuation September 30, 2016
Stock Price $0.06
Volatility (Annual) 112.2%
Strike Price $0.15 - $0.75
Risk-free Rate 0.86 - 0.85%
Maturity Date 10/2/16 - 6/26/19 At September 30, 2016 and December 31, 2015,
the estimated Level 3 fair values of the liabilities measured on a recurring basis are as follows:
Fair Value Measurements at September 30, 2016:
Carrying Value Level 1 Level 2 Level 3
Derivative liability-warrants liability $ 2,343,255 - - $ 2,343,255
Derivative liability – convertible options $ 2,711 - - $ 2,711
Total securities $ 2,345,966 $ - $ - $ 2,345,966
Fair Value Measurements at December 31, 2015:
Carrying Value Level 1 Level 2 Level 3
Earn-out liability $ - $ - $ - $ -
Derivative liability – convertible options $ 179 $ - $ - $ 179
Total securities $ 179 $ - $ - $ 179 The following tables present the activity for
Level 3 liabilities for the nine months ended September 30, 2016: Fair Value Measurements Using Level 3 Inputs
WarrantDerivative Liability Warrant ConversionNotes Conversion Earn-outLiability Earn-out Total
Balance - December 31, 2015 $ - 179 - $ 179
Additions during the period 4,099,342 242,114 - 4,341,456
Total Unrealized (gains) or losses include in net loss (1,756,087 ) (239,582 ) - (1,995,669 )
Settlements during the period - - - -
Transfers in and/or out of Level 3 - - - -
Balance - September 30, 2016 $ 2,343,255 2,711 - $ 2,345,966 Advertising The Company expenses advertising costs as incurred.
The Company has no existing arrangements under which the Company provides or receives advertising services from others for any
consideration other than cash. Advertising expenses (primarily in the form of Internet direct marketing) totaled $49,537 and $102,949
for the three months ended September 30, 2016 and 2015, respectively. Advertising expenses (primarily in the form of Internet direct
marketing) totaled $125,607 and $255,517 for the nine months ended September 30, 2016 and 2015, respectively. 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 losses 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. Intangible assets Intangible assets consist of intellectual property/technology,
customer lists, and trade-name/marks acquired in business combinations under the purchase method of accounting are recorded at
fair value net of accumulated amortization since the acquisition date. Amortization is calculated using the straight line method
over the estimated useful lives at the following annual rates:
Useful Lives
IP/technology 10
Trade-name/marks 10 The Company reviews its finite-lived intangible
assets for impairment whenever events or changes in circumstances indicate that the carrying amount of finite-lived intangible
asset may not be recoverable. Recoverability of a finite-lived intangible asset is measured by a comparison of its carrying amount
to the undiscounted future cash flows expected to be generated by the asset. If the asset is considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset, which
is determined based on discounted cash flows. Amortization of intangible assets was $144,855 and $253,219 for the nine months ended
September 30, 2016 and 2015, respectively, and $48,285 and $84,660 for the three months ended September 30, 2016 and 2015, respectively. According to the Financial Accounting Standards
Board Accounting Standards Codification (“ASC”) 360 (“ASC 360”), a long-lived asset (group) that is held
and used should be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount (book
value) of the long-lived asset (group) might not be recoverable (i.e. information indicates that an impairment might exist). As
a result, companies are not required to perform an impairment analysis (i.e. test the asset (group) for recoverability and potentially
measure an impairment loss) if indicators of impairment are not present. Instead, entities would assess the need the need for an
impairment write-down only if an indicator of impairment is present. Companies are responsible for routinely assessing whether
impairment indicators are present. Recently Issued Accounting Pronouncements In February 2016, the FASB issued ASU 2016-02,
Leases which amended guidance for lease arrangements in order to increase transparency and comparability by providing additional
information to users of financial statements regarding an entity's leasing activities. The revised guidance seeks to achieve this
objective by requiring reporting entities to recognize lease assets and lease liabilities on the balance sheet for substantially
all lease arrangements. The guidance, which is required to be adopted in the first quarter of 2019, will be applied on a modified
retrospective basis beginning with the earliest period presented. Early adoption is permitted. We are currently evaluating the
impact of adopting this guidance on our consolidated financial statements. On May 28, 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers as amended (Topic 606), with an effective date for annual reporting periods beginning after
December 15, 2017, including interim periods within that reporting period, for public business entities. Earlier application is
permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that
reporting period. The Company is evaluating the impact, if any, the pronouncement will have on our financial statements. In August 2014, the FASB issued ASU No. 2014-15, Presentation
of Financial Statements—Going Concern , On March 30, 2016, the FASB issued ASU Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting . Segments The Company operates in one reportable segment.
Accordingly, no segment disclosures have been presented herein. |
