| Summary of Significant Accounting Policies | 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. Loans and accounts receivable are stated at
amounts due from customers 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. The Company is no longer entering
into notes with its customers. 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, and notes and 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 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 assesses 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. 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 condensed 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. 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 months ended March
31, 2017 and 2016 was $0. Property and equipment has been fully depreciated as of March 31, 2017. 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 $0 and $179,646, respectively, in software development related to programming and coding for new product development
for the three months ended March 31, 2017 and 2016, respectively. Software amortization expense for the three months
ended March 31, 2017 and 2016 was $0 and $110,365, respectively. As of March 31, 2017 all software costs have been fully amortized. 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 quarters ended March 31, 2017 or 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 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. Derivatives - Warrant Liability The Company accounts for the common stock
warrants granted and still outstanding as of March 31, 2017 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 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. These 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 $0 in the fair value of derivatives for the three months ended March 31, 2017 and 2016, respectively.
These derivative liabilities which arose from the issuance of these warrants resulted in an ending balance of derivative liabilities
of $0 as of March 31, 2017 and December 31, 2016, and expired in 2016. 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 a loss of $66,283 and a gain of $503,105 in the fair value of these
derivatives for the three months ended March 31, 2017 and 2016, respectively. These derivative liabilities which arose from the
issuance of the 2016 Warrants resulted in an ending balance of derivative liabilities of $1,433,181 and $1,366,898 as of March
31, 2017 and December 31, 2016, respectively. 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, 2016 and 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. The Company’s derivative liability
has been measured at fair value at March 31, 2017 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 recognized gains of $43,583
and $179 in the fair value of derivatives for the three months ended March 31, 2017 and 2016, respectively. These derivative liabilities
which arose from the issuance of the convertible notes resulted in an ending balance of derivative liabilities of $44,659 and $88,242
as of March 31, 2017 and December 31, 2016, 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 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 derivative liabilities
that are categorized within Level 3 of the fair value hierarchy as of March 31, 2017 and December 31, 2016 is as follows:
Date of Valuation
March 31, 2017
December 31, 2016
Stock Price 0.02 0.02
Volatility (Annual) 142 % 140 %
Number of assumed financings 1 1
Total shares outstanding 42,475,571 41,975,571
Strike Price 0.01 0.01
Risk-free Rate 1.34 % 1.34 %
Maturity Date 7/15/2019 7/15/2019
Expected Life N/A N/A A summary of quantitative information with
respect to valuation methodology and significant unobservable inputs used for the Company’s conversion option derivative
that are categorized within Level 3 of the fair value hierarchy as of March 31, 2017 and December 31, 2016 is as follows:
Date of Valuation
March 31, 2017
December 31, 2016
Stock Price 0.02 0.02
Volatility (Annual) 48 % 140 %
Strike Price N/A N/A
Risk-free Rate 1.33 % 1.40 %
Maturity Date 7/7/2017 5/5/2017 At March 31, 2017 and December 31, 2016,
the estimated Level 3 fair values of the liabilities measured on a recurring basis are as follows:
Fair Value Measurements at March 31, 2017:
Carrying Value Level 1 Level 2 Level 3
Earn out liability $ - $ - $ - $ -
Warrant derivative liability 1,433,181 - - 1,433,181
Conversion option derivative liability 44,659 - - 44,659
Total $ 1,477,840 $ - $ - $ 1,477,840
Fair Value Measurements at December 31, 2016:
Carrying Value Level 1 Level 2 Level 3
Earn out liability $ - $ - $ - $ -
Warrant derivative liability 1,366,898 - - 1,366,898
Conversion option derivative liability 88,242 - - 88,242
Total $ 1,455,140 $ - $ - $ 1,455,140 The following tables present the activity for
Level 3 liabilities for the three months ended March 31, 2017:
Fair Value Measurements Using Level 3 Inputs
Conversion
Warrant Option
Derivative Liability Derivative Liability Earn-out Liability Total
Balance - December 31, 2016 $ 1,366,898 88,242 - $ 1,455,140
Additions during the period - - - -
Total (gains) or losses include in net loss 66,283 (43,583) - 22,700
Settlements during the period - - - -
Transfers in and/or out of Level 3 - - - -
Balance - March 31, 2017 $ 1,433,181 44,659 - $ 1,477,840 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 $67,421
and $31,809 for the three months ended March 31, 2017 and 2016, 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. On July 8,
2015, Intellectual Capital Management, LLC dba SMS Masterminds and SpendSmart Networks, Inc. were named in a potential class-action
lawsuit entitled Peter Marchelos, et al v. Intellectual Capital Management, et al, filed in the United States District Court Eastern
District of New York relating to alleged violations of the Telephone Consumer Protection Act of 1991. This The company was served with a lawsuit in
February 2017 alleging breach of contract by Bryan Sarlitt. The action relates to the acquisition of TechXpress in 2014 and additional
compensation that Mr. Sarlitt is claiming. The Company believes the Plaintiff’s allegations have no merit. There are
no other 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. Intangible assets Intangible assets currently consist of intellectual
property/technology 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 of 10 years. 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 $13,919 and $48,285 for the three months ended
March 31, 2017 and 2016, respectively. The Company evaluates the recoverability
of identifiable intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying
amount may not be recoverable. Such circumstances could include, but are not limited to (1) a significant decrease in the market
value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of
costs significantly in excess of the amount originally expected for the acquisition of an asset. The Company measures the carrying
amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future
net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment
loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value. The fair value is measured
based on quoted market prices, if available. If quoted market prices are not available, the estimate of fair value is based on
various valuation techniques, including the discounted value of estimated future cash flows. The evaluation of asset impairment
requires the Company to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions
require significant judgment and actual results may differ from assumed and estimated amounts. During the year ended December 31,
2016, the Company recorded an impairment loss of $979,072 related to an intangible asset. Recently Issued Accounting Pronouncements 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. Earlier application is permitted only as of annual reporting
periods beginning after December 15, 2016. The Company is evaluating the impact, if any, the pronouncement will have on both historical
and future financial positions and results of operations, with an expected completion date of June 30, 2017. 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. In June 2016, the FASB issued ASU 2016-13,
"Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" (ASU
2016-13), that requires entities to use a new impairment model based on expected losses. Under this new model an entity would recognize
an impairment allowance equal to its current estimate of credit losses on financial assets measured at amortized cost. ASU 2016-13
is effective for us beginning January 1, 2020 with early adoption permitted January 1, 2019. Credit losses under the new model
will consider relevant information about past events, current conditions and reasonable and supportable forecasts, resulting in
recognition of lifetime expected credit losses. We are currently evaluating the impact of adopting this guidance on our consolidated
financial statements. Segments The Company operates in one reportable segment.
Accordingly, no segment disclosures have been presented herein. |
