Global Equity International, Inc.
X3 Jumeirah Bay, Office 3305
Jumeirah Lake Towers, Dubai, UAE
May 8, 2015
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549
| Attention: | Ms. Shannon Sobotka |
| Staff Accountant |
| Re: | Global Equity International, Inc. |
| Item 4.02 Form 8-K/A | |
| Filed on April 22, 2015 | |
| File No. 000-54557 |
Dear Madam,
This letter is our response to your letter to this registrant of April 27, 2015, regarding the above-referenced matter (“Comment Letter”).The purpose of this letter is to resolve Staff comments in the Comment Letter.
Our responses to the Comment Letter are as follows:
Item 4.02 Form 8-K filed April 22, 2015
| 1. | We note the quantitative information provided in response to our comment 1 a. and remain unclear how the analysis performed of convertible notes for assessing derivative liability, interest expense, prepaid, certain fixed assets and revenue policy resulted in the determination that significant adjustments were required to be made.Please amend your filing to include a description of the errors that caused your accountants to advise you to place non-reliance on your previously issued financial statements. Include within the amendment the quantitative information described above. |
Response:
Quantitative information for Three Months ending on 3/31/2014
| Balance Sheet - March 31, 2014 | ||||||||||||
| As Previously Stated | Restatement Adjustments | As Restated | ||||||||||
| Assets | ||||||||||||
| Current Assets | ||||||||||||
| Prepaids | $ | 8,167 | $ | 5,802 | $ | 13,969 | ||||||
| Other current assets | 466,027 | (13,826 | ) | 452,201 | ||||||||
| Total current assets | $ | 482,742 | $ | (8,024 | ) | $ | 474,718 | |||||
| Current Liabilities | ||||||||||||
| Deferred revenue | $ | 169,750 | $ | 46,250 | $ | 216,000 | ||||||
| Accounts payable and accrued liabilities | 50,064 | (700 | ) | 49,364 | ||||||||
| Loans payable - related parties | 57,194 | 700 | 57,894 | |||||||||
| Accrued interest | 238,651 | 36,078 | 274,729 | |||||||||
| Total current liabilities | $ | 1,793,661 | $ | 82,328 | $ | 1,875,989 | ||||||
| Accumulated deficit | $ | (5,435,292 | ) | $ | (90,352 | ) | $ | (5,525,644 | ) | |||
| Total stockholders’ deficit | $ | (2,643,048 | ) | $ | (90,352 | ) | $ | (2,733,400 | ) | |||
| Profit and Loss - Three Months - March 31, 2014 | ||||||||||||
| As Previously Stated | Restatement Adjustments | As Restated | ||||||||||
| Revenue | $ | 152,250 | $ | (46,250 | ) | $ | 106,000 | |||||
| General and administrative expenses | $ | 45,241 | $ | 8,024 | $ | 53,265 | ||||||
| Total Operating Expenses | $ | 247,414 | $ | 8,024 | $ | 255,438 | ||||||
| Net (loss) from operations | $ | (95,164 | ) | $ | (54,274 | ) | $ | (149,438 | ) | |||
| Other income (expense): | ||||||||||||
| Interest Expense | $ | (122,118 | ) | $ | (36,078 | ) | $ | (158,196 | ) | |||
| Total (income) expense | $ | (127,607 | ) | $ | (36,078 | ) | $ | (163,685 | ) | |||
| Net loss | $ | (222,771 | ) | $ | (90,352 | ) | $ | (313,123 | ) | |||
| Comprehensive Loss: | ||||||||||||
| Net loss | $ | (222,771 | ) | $ | (90,352 | ) | $ | (313,123 | ) | |||
| Comprehensive Loss | $ | (222,771 | ) | $ | (90,352 | ) | $ | (313,123 | ) | |||
| Statement of Cash Flows - For the Three Months ended March 31, 2014 | ||||||||||||
| As Previously Stated | Restatement Adjustments | As Restated | ||||||||||
| Cash flows from operating activities | ||||||||||||
| Net profit (loss) | $ | (222,771 | ) | $ | (90,352 | ) | $ | (313,123 | ) | |||
| Changes in operating assets and liabilities: | ||||||||||||
| Prepaids, cash | 25,632 | (5,802 | ) | 19,830 | ||||||||
| Accrued interest | 122,119 | 36,078 | 158,197 | |||||||||
| Accounts payable and accrued liabilities | 11,076 | (700 | ) | 10,376 | ||||||||
| Accounts payable - related parties | 100,232 | 700 | 100,932 | |||||||||
| Deferred revenue | (77,250 | ) | 46,250 | (31,000 | ) | |||||||
| Other current assets | (13,826 | ) | 13,826 | - | ||||||||
Explanations of Restatement Adjustments in Q1 2014:
Prepayments and Other Current Assets:
We adjusted our other current assets by $13,826 as at March 31, 2014, of which $8,024 was rent that we had prepaid and never expensed and $5,802 was a transfer to prepaid account.
| Other current assets – As previously stated | $ | 466,027 | ||
| Other current assets – Restated Balance | $ | 452,201 | ||
| Restatement Adjustments | $ | 13,826 | ||
| Breakdown of Restatement Adjustments: | ||||
| Prepaid rent expensed out | $ | 8,024 | ||
| Other current asset balance transferred to Prepaids | $ | 5,802 | ||
| Total | $ | 13,826 |
| 2 |
| Prepaids – As previously stated | $ | 8,167 | ||
| Prepaids – Restated Balance | $ | 13,969 | ||
| Restatement Adjustments | $ | 5,802 | ||
| Breakdown of Restatement Adjustments: | ||||
| Other current asset balance transferred to Prepaids | 5,802 | |||
| Total | $ | 5,802 |
Revenue recognition policy:
We had previously accounted for revenue and deferred revenue by taking an estimated timeframe for work contractually agreed to be completed and dividing the amount received from each client into this estimated number of months and account for this amount on a month to month basis.
Our auditors brought to our attention that our method of booking income was not US GAAP compliant. Therefore, we analyzed the individual milestones contemplated on our contractual agreements. Once analyzed, we quantified each milestone and then accounted for the milestones effectively completed. This created a change of $46,250 in both our revenue and deferred revenue for the three months ending on March 31, 2014.
Accounts payable and Loans payable - related parties:
Restatement adjustment relating to Accounts Payable and Loans Payable – related parties amounting to $700 was related to a travel expenses incurred by our CFO, Enzo Taddei for business purposes. These expenses were accounted for as accounts payable instead of a related party loan. So, we rectified this transaction and reclassified $700 as loan payable – related parties instead of Accounts Payable.
Accrued interest:
There was some miscommunication between our Company and a noteholder called Eden as to certain penalties that we had to accrue due to the loan being in default. As a result of this miscommunication, we never booked the $36,078 of extra interest and penalties for 3 months ending on March 31, 2014. This was the reason for restatement adjustment of $36,078 in Interest expense and Accrued Interest accounts.
Quantitative information for Six Months ending on 6/30/2014
| Balance Sheet - June 30, 2014 | ||||||||||||
| Assets | As Previously Stated | Restatement Adjustments | As Restated | |||||||||
| Current Assets | ||||||||||||
| Prepaids | $ | 28,653 | $ | (10,699 | ) | $ | 17,954 | |||||
| Total current assets | $ | 493,432 | $ | (10,699 | ) | $ | 482,733 | |||||
| Total assets | $ | 505,272 | $ | (10,699 | ) | $ | 494,573 | |||||
| Current Liabilities | ||||||||||||
| Deferred revenue | $ | 31,000 | $ | 185,000 | $ | 216,000 | ||||||
| Accrued interest | 308,198 | 94,203 | 402,401 | |||||||||
| Notes payable - net of unamortized discount | 1,178,742 | (178,984 | ) | 999,758 | ||||||||
| Derivative Liability on notes payable | - | 534,023 | 534,023 | |||||||||
| Total current liabilities | $ | 1,979,123 | $ | 634,242 | $ | 2,613,365 | ||||||
| Subscription Receivable | $ | - | $ | (100,000 | ) | $ | (100,000 | ) | ||||
| Accumulated deficit | (5,719,949 | ) | (544,941 | ) | (6,264,890 | ) | ||||||
| Other Comprehensive gain (loss) | - | - | - | |||||||||
| Total stockholders’ deficit | $ | (2,818,326 | ) | $ | (644,941 | ) | $ | (3,463,267 | ) | |||
| 3 |
| Profit and Loss - Six Months - June 30, 2014 | ||||||||||||
| As Previously Stated | Restatement Adjustments | As Restated | ||||||||||
| Revenue | $ | 346,000 | $ | (185,000 | ) | $ | 161,000 | |||||
| General and administrative expenses | $ | 96,200 | $ | 10,699 | $ | 106,899 | ||||||
| Total Operating Expenses | $ | 585,328 | $ | 10,699 | $ | 596,027 | ||||||
| Net (loss) from operations | $ | (239,328 | ) | $ | (195,699 | ) | $ | (435,027 | ) | |||
| Other income (expense): | ||||||||||||
| Interest Expense | $ | (258,651 | ) | $ | (83,692 | ) | $ | (342,343 | ) | |||
| Amortization of debt discount | (25,858 | ) | (39,527 | ) | (65,385 | ) | ||||||
| Gain (loss) on Derivative Liability | - | (226,023 | ) | (226,023 | ) | |||||||
| Total income (expense) | $ | (268,102 | ) | $ | (349,242 | ) | $ | (617,344 | ) | |||
| Net loss | $ | (507,430 | ) | $ | (544,941 | ) | $ | (1,052,371 | ) | |||
| Comprehensive Loss: | ||||||||||||
| Net loss | $ | (507,430 | ) | $ | (544,941 | ) | $ | (1,052,371 | ) | |||
| Comprehensive Loss | $ | (507,430 | ) | $ | (544,941 | ) | $ | (1,052,371 | ) | |||
| Statement of Cash Flows For the Six Months ended June 30, 2014 | ||||||||||||
| As Previously Stated | Restatement Adjustments | As Restated | ||||||||||
| Cash flows from operating activities | ||||||||||||
| Net profit (loss) | $ | (507,430 | ) | $ | (544,941 | ) | $ | (1,052,371 | ) | |||
| Adjustments to reconcile net loss to net | ||||||||||||
| cash used in operating activities | ||||||||||||
| Gain (loss) on derivate liability - Notes payable | - | 226,023 | 226,023 | |||||||||
| Amortization of debt discount | 25,858 | 39,527 | 65,385 | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Prepaids, cash | 5,146 | 9,799 | 14,945 | |||||||||
| Accrued interest | 191,667 | 84,891 | 276,558 | |||||||||
| Accounts payable and accrued liabilities | 24,466 | (298 | ) | 24,168 | ||||||||
| Deferred revenue | (216,000 | ) | 185,000 | (31,000 | ) | |||||||
Explanations of Restatement Adjustments for Q2 2014:
Prepayments:
We adjusted our prepaid assets by $10,699 as at June 30, 2014 which was rent expense that we had prepaid and never expensed. So, this restatement adjustment related to amortization of prepaid rent for the six months ending on June 30, 2014.
| 4 |
Revenue recognition policy:
We had previously accounted for revenue and deferred revenue by taking an estimated timeframe for work contractually agreed to be completed and dividing the amount received from each client into this estimated number of months and account for this amount on a month to month basis.
Our auditors brought to our attention that our method of booking income was not US GAAP compliant. Therefore, we analyzed the individual milestones contemplated on our contractual agreements. Once analyzed, we quantified each milestone and then accounted for the milestones effectively completed. This created a change of $185,000 in both our revenue and deferred revenue for the six months ending on June 30, 2014.
Accrued interest:
There was some miscommunication between our Company and a note holder called Eden as to certain penalties that we had to accrue due to the loan being in default. As a result of this miscommunication, we never booked the $83,692 of extra interest and penalties for six months ending on June 30, 2014. We also had a $10,511 oversight regarding the original issue discount (“OID”) to be accrued regarding our note with JMJ Financial.
Breakdown of restatement adjustments of accrued interest on related loan notes as on June 30, 2014 was as follows:
| Description | As previously stated | Restated Balance | Restatement Adjustments | |||||||||
| JMJ Financial | $ | 1,222 | $ | 11,733 | $ | 10,511 | ||||||
| Eden | 135,482 | 219,174 | 83,692 | |||||||||
| $ | 94,203 | |||||||||||
Convertible notes and derivative liability:
We evaluated the terms and conditions of the notes at the quarter end. Because the economic characteristics and risks of the equity linked conversion options were not clearly and closely related to a debt-type host, the conversion features required classification and measurement as derivative financial instruments. The accounting treatment of derivative financial instruments requires that the Company record the initial fair value of the derivative first by allocating the fair value of the embedded derivative as a reduction to the face value of the debt recorded as a contra liability or debt discount to be accreted over the term of the note. On each reporting date, the fair value of the embedded derivative is calculated with changes in value recorded to other expense.
By following the above evaluation, there was a restatement adjustment of $(178,984) in Notes payable which was mainly related to unamortized debt discount balance. We also recognized the respective derivative liability on each convertible note amounting to $534,023 as at June 30, 2014 by following Black Scholes option pricing model.
The breakdown of the restatement adjustments relating to Notes payable – net of unamortized debt discount was as follows:
| Notes Payable – As previously stated | $ | 1,178,742 | ||
| Prepaids – Restated Balance | $ | 999,758 | ||
| Restatement Adjustments | $ | (178,984 | ) | |
| Breakdown of Restatement Adjustments: | ||||
| Notes Payable | $ | 75,266 | ||
| Un-amortized debt discount balance (see below) | (254,250 | ) | ||
| Total | $ | (178,984 | ) |
| 5 |
The breakdown of the restatement adjustments relating to unamortized debt discount and derivative liability on notes payable as at June 30, 2014 was as follows:
| Description | Unamortized debt discount balance | Derivative Liability on notes payable | ||||||
| LG Capital LLC | $ | 83,229 | $ | 160,406 | ||||
| Adar Bay LLC | 83,229 | 160,406 | ||||||
| JMJ Financial | 53,646 | 132,911 | ||||||
| Asher Enterprises Inc | 34,146 | 80,300 | ||||||
| Restatement Adjustments | $ | 254,250 | $ | 534,023 | ||||
| ● | LG Capital LLC |
On May 1, 2014 , the Company issued a $100,000 convertible promissory note (the “LG Note”) to LG Capital Funding, LLC, a New York limited liability company (the “Lender”). The LG Note provided for up to an aggregate of $100,000 in gross proceeds. The LG Note was due to mature on May 1, 2015, accrues interest of 8% and is convertible into shares of common stock any time after 180 days of May 1, 2014, at a conversion price equal to 60% of lowest daily Volume Weighted Average Price (“VWAP”) of the common stock as reported on the National Quotations Bureau OTCQBon which the Company’s shares are traded or any exchange upon which the common stock may be traded in the future, for the twenty prior trading days, including the day upon which a Notice of Conversion is received by the Company. Accrued interest shall be paid in shares of common stock at any time at the discretion of the Lender pursuant to the conversion terms above. The first LG Note may be prepaid within 180 days with penalty. The note may not be prepaid after the 180th day.
The principal amount of $50,000 under the second note shall be received by the Company no later than January 1, 2015. All principal under this Note shall be due and payable no later than July 1, 2015.This Full Recourse Note shall bear simple interest at the rate of 8%. This second Note was booked as contra equity under “Subscriptions Receivable”.
The fair value of the derivative liability as at June 30, 2014, was determined using the Black Scholes option pricing model with a quoted market price of $0.24, a conversion price of $0.132, expected volatility of 295.8%, no expected dividends, a remaining term of 10 months and a risk-free interest rate of 0.07% resulting in a fair value per share of $0.2091 multiplied by the 767,190 shares that would be issued if the Note was exercised as of June 30, 2014.
As of June 30, 2014, a total interest of $666 was accrued and a total of $16,438 debt discount was amortized leaving an unamortized balance of $83,229. The fair value of derivative liability as on June 30, 2014, is recorded at $160,406, thereby recognizing a net loss on derivative liability as of June 30, 2014 of ($60,406).
| ● | Adar Bay LLC: |
On May 1, 2014, the Company issued a $100,000 convertible promissory note (the “AB Note”) to Adar Bay, LLC, a New York limited liability company (the “Lender”). The AB Note provided for up to an aggregate of $100,000 in gross proceeds. The AB Note was due to mature on May 1, 2015, accrues interest of 8% and is convertible into shares of common stock any time after 180 days of May 1, 2014, at a conversion price equal to 60% of lowest daily Volume Weighted Average Price (“VWAP”) of the common stock as reported on the National Quotations Bureau OTCQBon which the Company’s shares are traded or any exchange upon which the common stock may be traded in the future, for the twenty prior trading days, including the day upon which a Notice of Conversion is received by the Company. Accrued interest shall be paid in shares of common stock at any time at the discretion of the Lender pursuant to the conversion terms above. The first AB Note may be prepaid within 180 days with penalty. The note may not be prepaid after the 180th day.
The First Note matures on May 1, 2015, accrues interest of 8% and is convertible into shares of common stock any time 180 days after May 1, 2014, at a conversion price equal to 60% of lowest daily VWAP of the Common Stock as reported on the National Quotations Bureau OTCQBwhich the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future, for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company. Accrued interest shall be paid in shares of common stock at any time at the discretion of the Lender pursuant to the conversion terms above. The First Note may be prepaid within 180 days with penalty. The First Note may not be prepaid after the 180th day.
| 6 |
The principal amount of $50,000 under the second note shall be received by the Company no later than January 1, 2015. All principal under this Note shall be due and payable no later than July 1, 2015.This full recourse note shall bear simple interest at the rate of 8%. This second Note was booked as contra equity under “Subscriptions Receivable”.
The fair value of the derivative liability as of June 30, 2014, was determined using the Black Scholes option pricing model with a quoted market price of $0.24, a conversion price of $0.132, expected volatility of 295.8%, no expected dividends, a remaining term of 10 months and a risk-free interest rate of 0.07% resulting in a fair value per share of $0.2091 multiplied by the 767,190 shares that would be issued if the Note was exercised as of June 30, 2014.
As of June 30, 2014, a total interest of $666 was accrued and a total of $16,438 debt discount was amortized leaving an unamortized balance of $83,229. The fair value of derivative liability as on June 30, 2014, is recorded at $160,406, thereby recognizing a net loss on derivative liability as of June 30, 2014 of ($60,406).
| ● | JMJ Financial |
On June 12, 2014, the Company issued a $250,000 convertible promissory note (the “JMJ Note”) to JMJ Financial, a Nevada sole proprietorship (the “Lender”). The JMJ Note provides up to an aggregate of $250,000 in gross proceeds. The JMJ Note matures on June 12, 2016, accrues interest of 12% and is convertible into shares of common stock any time after the agreement was signed. The conversion price is the lesser of $.30 or 60% of the lowest trade price in the 25 trading days previous to the conversion. The Note also contemplated a further 10% discount to market if the shares were not deliverable by DWAC. Accrued interest shall be paid in shares of common stock at any time at the discretion of the Lender pursuant to the conversion terms above. This Note may be prepaid interest free within 90 days with the accrued interest at 12% per annum and the OID proportional to $25,000. The note may not be prepaid after the 91st day.The Company opted to receive only $55,000 of the possible $250,000.
The fair value of the derivative liability as at June 30, 2014, was determined using the Black Scholes option pricing model with a quoted market price of $0.24, a conversion price of $0.132, expected volatility of 401.89%, no expected dividends, over remaining term of 1.93 years and a risk-free interest rate of 0.110% resulting in a fair value per share of $0.2391 multiplied by 555,848 shares that would be issued if the Note was exercised as of June 30, 2014.
As of June 30, 2014, a total interest expense of $11,733, an accrued interest of $11,733 was recognized and a total of $1,354 debt discount was amortized leaving an unamortized balance of $53,646. The fair value of derivative liability as on June 30, 2014, is recorded at $132,911, thereby recognizing a net loss on derivative liability as of June 30, 2014 of ($77,911).
| ● | Asher Enterprises Inc. |
On April 1, 2014, the Company secured a nine month convertible note for $53,000 with an 8% interest rate due on December 10, 2014. The terms of the conversion were at a 42% discount to market based on an average price calculated on the 10 trading days prior to the conversion date. If the Company opted to pay the loan back on or before the maturity date, instead of converting the note into equity, the Company shall make payment to the holder of an amount in cash equal to 130% of total amount due inclusive of principal and interest accrued.
The fair value of the derivative liability as at June 30, 2014, was determined using the Black Scholes option pricing model with a quoted market price of $0.24, a conversion price of $0.1277, expected volatility of 338.75%, no expected dividends, over remaining term of 5.5 months and a risk-free interest rate of 0.040% resulting in a fair value per share of $0.1934 multiplied by 415,172 shares that would be issued if the Note was exercised as of June 30, 2014.
As of June 30, 2014, a total interest expense of $1,060, an accrued interest of $1,060 was recognized and a total of $18,854 debt discount was amortized leaving an unamortized balance of $34,146. The fair value of derivative liability as on June 30, 2014, is recorded at $80,300, thereby recognizing a net loss on derivative liability as at June 30, 2014 of ($27,300).
| 7 |
Quantitative information for Nine Months ending on 9/30/2014
| Balance Sheet – September 30, 2014 | ||||||||||||
| As Previously Stated | Restatement Adjustments | As Restated | ||||||||||
| Assets | ||||||||||||
| Current Assets | ||||||||||||
| Prepaids | $ | 62,429 | $ | (42,033 | ) | $ | 20,396 | |||||
| Other current assets | 452,201 | - | 452,201 | |||||||||
| Loans receivable | 6,000 | - | 6,000 | |||||||||
| Total current assets | $ | 540,302 | $ | (42,033 | ) | $ | 498,269 | |||||
| Fixed assets, net | $ | 22,404 | $ | 8,496 | $ | 30,900 | ||||||
| Total assets | $ | 567,706 | $ | (33,537 | ) | $ | 534,169 | |||||
| Current Liabilities | ||||||||||||
| Deferred revenue | $ | 250,000 | $ | 210,000 | $ | 460,000 | ||||||
| Accounts payable - related parties | 331,985 | (22,750 | ) | 309,235 | ||||||||
| Accrued interest | 378,979 | 147,945 | 526,924 | |||||||||
| Notes payable - net of unamortized discount | 1,128,951 | (119,756 | ) | 1,009,195 | ||||||||
| Derivative Liability on notes payable | - | 473,020 | 473,020 | |||||||||
| Total current liabilities | $ | 2,220,133 | 688,459 | $ | 2,908,592 | |||||||
| Additional paid in capital | $ | 2,963,638 | $ | 16,667 | $ | 2,980,305 | ||||||
| Subscription Receivable | - | (100,000 | ) | (100,000 | ) | |||||||
| Accumulated deficit | (6,076,550 | ) | (638,574 | ) | (6,715,124 | ) | ||||||
| Other Comprehensive gain (loss) | - | (89 | ) | (89 | ) | |||||||
| Total stockholders’ deficit | $ | (2,996,902 | ) | $ | (721,996 | ) | $ | (3,718,898 | ) | |||
| Total liabilities, redeemable preferred stock & stockholders’ deficit | $ | 567,706 | $ | (33,537 | ) | $ | 534,169 | |||||
| Profit and Loss - Nine Months - September 30, 2014 | ||||||||||||
| As Previously Stated | Restatement Adjustments | As Restated | ||||||||||
| Revenue | $ | 555,000 | $ | (210,000 | ) | $ | 345,000 | |||||
| General and administrative expenses | $ | 226,463 | $ | 10,699 | $ | 237,162 | ||||||
| Total Operating Expenses | $ | 1,079,115 | $ | 10,699 | $ | 1,089,814 | ||||||
| Net (loss) from operations | $ | (524,115 | ) | $ | (220,699 | ) | $ | (744,814 | ) | |||
| Other income (expense): | ||||||||||||
| Interest Expense | $ | (329,432 | ) | $ | (137,434 | ) | $ | (466,866 | ) | |||
| Amortization of debt discount | (26,567 | ) | (115,422 | ) | (141,989 | ) | ||||||
| Gain (loss) on Derivative Liability | - | (165,020 | ) | (165,020 | ) | |||||||
| Total income (expense) | $ | (339,915 | ) | $ | (417,876 | ) | $ | (757,791 | ) | |||
| Net loss | $ | (864,030 | ) | $ | (638,575 | ) | $ | (1,502,605 | ) | |||
| Weighted average number of common shares outstanding - basic and diluted | 31,866,476 | (339,633 | ) | 31,526,843 | ||||||||
| Net loss per common share - basic and diluted | $ | (0.01 | ) | $ | (0.04 | ) | $ | (0.05 | ) | |||
| Comprehensive Loss: | ||||||||||||
| Net loss | $ | (864,030 | ) | $ | (638,575 | ) | $ | (1,502,605 | ) | |||
| Comprehensive Loss | $ | (864,030 | ) | $ | (638,575 | ) | $ | (1,502,605 | ) | |||
| 8 |
| Statement of Cash Flows For the Nine Months ended September 30, 2014. | ||||||||||||
| As Previously Stated | Restatement Adjustments | As Restated | ||||||||||
| Cash flows from operating activities | ||||||||||||
| Net profit (loss) | $ | (864,030 | ) | $ | (638,575 | ) | $ | (1,502,605 | ) | |||
| Adjustments to reconcile net loss to net | ||||||||||||
| cash used in operating activities | ||||||||||||
| Gain (loss) on derivate liability - Notes payable | - | 165,020 | 165,020 | |||||||||
| Amortization of debt discount | 26,567 | 115,422 | 141,989 | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Prepaids, cash | (28,630 | ) | 41,132 | 12,502 | ||||||||
| Accrued interest | 262,448 | 138,633 | 401,081 | |||||||||
| Accounts payable and accrued liabilities | 49,895 | (297 | ) | 49,598 | ||||||||
| Accounts payable - related parties | 139,932 | (22,750 | ) | 117,182 | ||||||||
| Deferred revenue | 3,000 | 210,000 | 213,000 | |||||||||
| Net cash used in operating activities: | (173,688 | ) | 8,585 | (165,103 | ) | |||||||
| Cash Flows used in investing activities: | ||||||||||||
| Office furniture and equipment, net | (16,216 | ) | (8,496 | ) | (24,712 | ) | ||||||
| Net cash used in investing activities | (16,216 | ) | (8,496 | ) | (24,712 | ) | ||||||
| Net increase in cash | (31,704 | ) | 89 | (31,615 | ) | |||||||
| Effect of Exchange Rates on Cash | - | (89 | ) | (89 | ) | |||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||||||
| Debt discount recorded on notes payable | $ | 93,446 | $ | 114,554 | $ | 208,000 | ||||||
Explanations of Restatement Adjustments for Q3 2014:
Prepayments and fixed assets:
We adjusted our prepaid assets by $42,033, of which $10,699 was rent that we had prepaid and never expensed, $22,750 was prepaid rent for our CEO as per his employment agreement that also did not get expensed due to an oversight and finally, we adjusted a prepaid balance $8,584 which was a prepayment made that never got accounted for as a fixed asset.
| Prepaids – As previously stated | $ | 62,429 | ||
| Prepaids – Restated Balance | $ | 20,396 | ||
| Restatement Adjustments | $ | 42,033 | ||
| Breakdown of Restatement Adjustments: | ||||
| Prepaid rent expensed out | $ | 10,699 | ||
| Prepaid rent adjusted against payable to related party | 22,750 | |||
| Prepaid balance transferred to fixed asset | 8,584 | |||
| Total | $ | 42,033 |
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| Fixed Assets – As previously stated | $ | 22,404 | ||
| Fixed Assets – Restated Balance | $ | 30,900 | ||
| Restatement Adjustments | $ | 8,496 | ||
| Breakdown of Restatement Adjustments: | ||||
| Prepaid balance transferred to fixed asset | $ | 8,584 | ||
| Exchange rate difference (OCI) | (88 | ) | ||
| Total | $ | 8,496 |
Revenue recognition policy:
We had previously accounted for revenue and deferred revenue by taking an estimated timeframe for work contractually agreed to be completed and dividing the amount received from each client into this estimated number of months and account for this amount on a month to month basis.
Our auditors brought to our attention that our method of booking income was not US GAAP compliant. Therefore, we analyzed the individual milestones contemplated on our contractual agreements. Once analyzed, we quantified each milestone and then accounted for the milestones that had been effectively completed. This created a change of $210,000 in both our revenue and deferred revenue.
Accrued interest:
There was some miscommunication between our Company and a note holder called Eden as to certain penalties that we had to accrue due to the loan being in default. As a result of this miscommunication, we never booked the $137,434 of extra interest and penalties for nine months ending on September 30, 2014. We also had a $10,511 oversight regarding the OID to be accrued regarding our note with JMJ Financial.
Breakdown of restatement adjustments of accrued interest on related loan notes as on September 30, 2014 was as follows:
| Description | As previously stated | Restated Balance | Restatement Adjustments | |||||||||
| JMJ Financial | $ | 1,552 | $ | 12,063 | $ | 10,511 | ||||||
| Eden | 183,421 | 320,855 | 137,434 | |||||||||
| $ | 147,945 | |||||||||||
Convertible notes and derivative liability:
We evaluated the terms and conditions of the notes at the quarter end. Because the economic characteristics and risks of the equity linked conversion options were not clearly and closely related to a debt-type host, the conversion features required classification and measurement as derivative financial instruments. The accounting treatment of derivative financial instruments requires that the Company record the initial fair value of the derivative first by allocating the fair value of the embedded derivative as a reduction to the face value of the debt recorded as a contra liability or debt discount to be accreted over the term of the note. On each reporting date, the fair value of the embedded derivative is calculated with changes in value recorded to other expense.
By following the above evaluation, there was a restatement adjustment of $119,756 in Notes payable which was mainly related to unamortized debt discount balance. We also recognized the respective derivative liability on each convertible note amounting to $473,020 as at September 30, 2014 by following Black Scholes option pricing model.
The breakdown of the restatement adjustments relating to Notes payable – net of unamortized debt discount was as follows:
| Notes Payable – As previously stated | $ | 1,128,951 | ||
| Prepaids – Restated Balance | $ | 1,009,195 | ||
| Restatement Adjustments | $ | (119,756 | ) | |
| Breakdown of Restatement Adjustments: | ||||
| Notes Payable | $ | 58,556 | ||
| Un-amortized debt discount balance (see below) | (178,312 | ) | ||
| Total | $ | (119,756 | ) |
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The breakdown of the restatement adjustments relating to un-amortized debt discount and derivative liability on notes payable as at June 30, 2014 was as follows:
| Description | Unamortized debt discount balance | Derivative Liability on notes payable | ||||||
| LG Capital LLC | $ | 58,357 | $ | 150,144 | ||||
| Adar Bay LLC | 58,357 | 150,144 | ||||||
| JMJ Financial | 46,725 | 128,837 | ||||||
| Asher Enterprises Inc | 14,873 | 43,895 | ||||||
| Restatement Adjustments | $ | 178,312 | $ | 473,020 | ||||
| ● | LG Capital LLC: |
On May 1, 2014 , the Company issued a $100,000 convertible promissory note (the “LG Note”) to LG Capital Funding, LLC, a New York limited liability company (the “Lender”). The LG Note provided for up to an aggregate of $100,000 in gross proceeds. The LG Note was due to mature on May 1, 2015, accrues interest of 8% and is convertible into shares of common stock any time after 180 days of May 1, 2014, at a conversion price equal to 60% of lowest daily Volume Weighted Average Price (“VWAP”) of the common stock as reported on the National Quotations Bureau OTCQBon which the Company’s shares are traded or any exchange upon which the common stock may be traded in the future, for the twenty prior trading days, including the day upon which a Notice of Conversion is received by the Company. Accrued interest shall be paid in shares of common stock at any time at the discretion of the Lender pursuant to the conversion terms above. The first LG Note may be prepaid within 180 days with penalty. The note may not be prepaid after the 180th day.
The principal amount of $50,000 under the second note shall be received by the Company no later than January 1, 2015. All principal under this Note shall be due and payable no later than July 1, 2015.This Full Recourse Note shall bear simple interest at the rate of 8%. This second Note was booked in Q2 as contra equity under “Subscriptions Receivable”.
The fair value of the derivative liability as at September 30, 2014, was determined using the Black Scholes option pricing model with a quoted market price of $0.16, a conversion price of $0.0871, expected volatility of 277.36%, no expected dividends, a remaining term of 7 months and a risk-free interest rate of 0.03% resulting in a fair value per share of $0.1266 multiplied by the 1,186,082 shares that would be issued if the Note was exercised as of September 30, 2014.
As of September 30, 2014, a total interest of $1,666 was accrued and a total of $41,643 debt discount was amortized leaving an unamortized balance of $58,357. The fair value of derivative liability as on September 30, 2014 is recorded at $150,144, thereby recognizing a net loss on derivative liability as of September 30, 2014 of ($50,144).
| ● | Adar Bay LLC: |
On May 1, 2014, the Company issued a $100,000 convertible promissory note (the “AB Note”) to Adar Bay, LLC, a New York limited liability company (the “Lender”). The AB Note provided for up to an aggregate of $100,000 in gross proceeds. The AB Note was due to mature on May 1, 2015, accrues interest of 8% and is convertible into shares of common stock any time after 180 days of May 1, 2014, at a conversion price equal to 60% of lowest daily Volume Weighted Average Price (“VWAP”) of the common stock as reported on the National Quotations Bureau OTCQBon which the Company’s shares are traded or any exchange upon which the common stock may be traded in the future, for the twenty prior trading days, including the day upon which a Notice of Conversion is received by the Company. Accrued interest shall be paid in shares of common stock at any time at the discretion of the Lender pursuant to the conversion terms above. The first AB Note may be prepaid within 180 days with penalty. The note may not be prepaid after the 180th day.
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The First Note matures on May 1, 2015, accrues interest of 8% and is convertible into shares of common stock any time 180 days after May 1, 2014, at a conversion price equal to 60% of lowest daily VWAP of the Common Stock as reported on the National Quotations Bureau OTCQBwhich the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future, for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company. Accrued interest shall be paid in shares of common stock at any time at the discretion of the Lender pursuant to the conversion terms above. The First Note may be prepaid within 180 days with penalty. The First Note may not be prepaid after the 180th day.
The principal amount of $50,000 under the second note shall be received by the Company no later than January 1, 2015. All principal under this Note shall be due and payable no later than July 1, 2015.This full recourse note shall bear simple interest at the rate of 8%. This second Note was booked in Q2 as contra equity under “Subscriptions Receivable”.
The fair value of the derivative liability as at September 30, 2014, was determined using the Black Scholes option pricing model with a quoted market price of $0.16, a conversion price of $0.0871, expected volatility of 277.36%, no expected dividends, a remaining term of 7 months and a risk-free interest rate of 0.03% resulting in a fair value per share of $0.1266 multiplied by the 1,186,082 shares that would be issued if the Note was exercised as of September 30, 2014.
As of September 30, 2014, a total interest of $1,666 was accrued and a total of $41,643 debt discount was amortized leaving an unamortized balance of $58,357. The fair value of derivative liability as on September 30, 2014, is recorded at $150,144, thereby recognizing a net loss on derivative liability as of September 30, 2014 of ($50,144).
| ● | JMJ Financial |
On June 12, 2014, the Company issued a $250,000 convertible promissory note (the “JMJ Note”) to JMJ Financial, a Nevada sole proprietorship (the “Lender”). The JMJ Note provides up to an aggregate of $250,000 in gross proceeds. The JMJ Note matures on June 12, 2016, accrues interest of 12% and is convertible into shares of common stock any time after the agreement was signed. The conversion price is the lesser of $.30 or 60% of the lowest trade price in the 25 trading days previous to the conversion. The Note also contemplated a further 10% discount to market if the shares were not deliverable by DWAC. Accrued interest shall be paid in shares of common stock at any time at the discretion of the Lender pursuant to the conversion terms above. This Note may be prepaid interest free within 90 days with the accrued interest at 12% per annum and the OID proportional to $25,000. The note may not be prepaid after the 91st day.The Company opted to receive only $55,000 of the possible $250,000.
The fair value of the derivative liability as at September 30, 2014, was determined using the Black Scholes option pricing model with a quoted market price of $0.16, a conversion price of $0.0871, expected volatility of 288.36%, no expected dividends, over remaining term of 1.7 years and a risk-free interest rate of 0.130% resulting in a fair value per share of $0.153 multiplied by 842,195 shares that would be issued if the Note was exercised as of September 30, 2014.
As of September 30, 2014, a total interest expense of $12,063, an accrued interest of $12,063 was recognized and a total of $8,275 debt discount was amortized leaving an unamortized balance of $46,725. The fair value of derivative liability as on September 30, 2014, is recorded at $128,837, thereby recognizing a net loss on derivative liability as of September 30, 2014 of ($73,837).
| ● | Asher Enterprises Inc. |
On April 1, 2014, the Company secured a nine month convertible note for $53,000 with an 8% interest rate due on December 10, 2014. The terms of the conversion were at a 42% discount to market based on an average price calculated on the 10 trading days prior to the conversion date. If the Company opted to pay the loan back on or before the maturity date, instead of converting the note into equity, the Company shall make payment to the holder of an amount in cash equal to 130% of total amount due inclusive of principal and interest accrued.
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The fair value of the derivative liability as at September 30, 2014, was determined using the Black Scholes option pricing model with a quoted market price of $0.16, a conversion price of $0.0909, expected volatility of 138.05%, no expected dividends, over remaining term of 2.5 months and a risk-free interest rate of 0.130% resulting in a fair value per share of $0.0753 multiplied by 583,272 shares that would be issued if the Note was exercised as of September 30, 2014.
As of September 30, 2014, a total interest expense of $2,120, an accrued interest of $2,120 was recognized and a total of $38,126 debt discount was amortized leaving an unamortized balance of $14,874. The fair value of derivative liability as on September 30, 2014, is recorded at $43,895, thereby recognizing a net loss on derivative liability as at September 30, 2014 of ($9,105).
| 2. | We note your response to our prior comment 1 b. Please amend your filing to include this information. |
Response:
On April 8, 2015, our independent accountant brought to our attention a series of material adjustments that needed to be made to our financial statements. These adjustments primarily affected the derivative liability, interest expense, prepaid, fixed assets and revenue recognition policy. As a result of our independent accountant’s suggestions, we determined that significant adjustments were required to be made at each of the quarters ended March 31, June 30 and September 30, 2014.
Our Chief Executive Officer discussed this matter with the Company´s Chief Executive Officer and it was agreed that we had to file a Form 8-K stating that our investors and shareholders could not rely on our interim 2014 financial statements.
We have included this discussion in our amended filing.
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In responding to your comments, we acknowledge that:
| ● | the Company is responsible for the adequacy and accuracy of the disclosure in the filing; | |
| ● | staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and | |
| ● | the Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. |
Please address any further comments to our attorney, David E. Wise, Esq.
Mr. Wise’s contact information is set forth below:
Law Offices of David E. Wise
Attorney at Law
The Colonnade
9901 IH-10 West, Suite 800
San Antonio, Texas 78230
Telephone:(210) 558-2858
Facsimile: (210) 579-1775
Email: wiselaw@verizon.net
| Sincerely, | |
| /s/ Enzo Taddei | |
| Enzo Taddei | |
| Chief Financial Officer |
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