10-Q 1 mwip111613form10q.htm FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: September 30, 2013

or

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ________________ to __________________

 

Commission File Number 000-1321002

  MEDISWIPE, INC.  
(Exact name of registrant as specified in its charter)
     
Delaware   20-8484256
(State or other jurisdiction of incorporation or organization)   (IRS Employer Identification No.)
     
407 East Fort Street, Suite 510, Detroit, MI. 48226
(Address of principal executive offices)
     
  (248) 262-6850  
 (Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑           No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a larger accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer           ☐ Accelerated filer ☐
Non-accelerated filer             ☐
(Do not check if a smaller reporting company)		 Smaller reporting company ☑

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes   ☐       No  ☑

The number of shares outstanding of the Registrant's $0.0001 par value Common Stock as of November 14, 2013, was 450,101,553 shares

 

 
 

INDEX TO FORM 10-Q

 

  Page
Part I.  Financial Information  
   
Item 1.  Financial Statements  
   
Condensed Balance Sheets at September 30, 2013 (Unaudited) and December 31, 2012 2
   
Condensed Statements of Operations for the three and nine months ended September 30, 2013 and 2012 (Unaudited) 3
   
Condensed Statements of Cash Flows for the nine months ended September 30, 2013 and 2012 (Unaudited)   4-5
   
Notes to Condensed Financial Statements (Unaudited) 6-19
   
Item 2.  Management’s Discussion and Analysis                                                                                                                                20-23
   
Item 3.  Quantitative and Qualitative Disclosures about Market Risks 24
   
Item 4.  Controls and Procedures 24-25
   
Part II.  Other Information  
   
Item 1. Legal Proceedings 26
   
Item 1A. Risk Factors 26
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
   
Item 3. Defaults Upon Senior Securities 26
   
Item 4. Mine Safety Disclosures 26
   
Item 5. Other Information 26
   
Item 6.  Exhibits 26
   

 

Signatures

 

27

 

 

 

 

 

 

 

 

 

MEDISWIPE, INC.
                   
CONDENSED CONSOLIDATED BALANCE SHEETS
                   
 
                   
                   
                   
          September 30,   December 31,
          2013   2012
            (Unaudited)      
               
ASSETS
                 
Current Assets:            
  Cash and cash equivalents   $         153,247   $              1,892
  Accounts receivable              43,955                14,133
  Inventory              18,545                         -
  Deferred financing costs              20,308                  2,203
      Total current assets             236,055                18,228
Other                  3,872      
Property and equipment, net of accumulated depreciation of $40      2,469                         -
      Total assets   $         242,396   $            18,228
                   
LIABILITIES AND STOCKHOLDERS' DEFECIENCY
                   
Current Liabilities:            
  Accounts payable and accrued expenses    $         160,317   $            99,130
  Deferred compensation              13,550                40,880
  Convertible debt, net of discounts of $83,521 (2013) and $19,648 (2012)                8,979                35,852
  Convertible note payable (net of discount of $20,111)             317,389                         -
  Derivative liabilities               98,149                38,590
  Litigation contingency                       -                46,449
      Total current liabilities             598,384              260,901
                       
Commitments and Contingencies            
                   
Stockholders' Deficiency:            
  Series B convertible preferred stock, $0.0001 par value; 1,000,000 shares authorized, 1,000,000 (2013) and            
    800,000 (2012) shares issued and outstanding                   100                      80
  Common stock, $.0001 par value; 500,000,000 shares authorized; 448,878,661 (2013) shares            
    and 466,632,164 (2012) shares issued and outstanding              44,888                46,663
  Additional paid-in capital          8,278,863            4,829,953
  Deferred stock compensation                       -             (222,083)
  Accumulated deficit         (8,679,839)           (4,897,286)
                   
      Total stockholders' deficiency            (355,988)             (242,673)
                   
           Total liabiities and stockholders' deficiency   $         242,396   $            18,228
                   
                   
                   
      See notes to condensed consolidated financial statements.

2

MEDISWIPE, INC.
                             
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 
                             
(Unaudited)
                           
                           
         For the Three Months Ended September 30,     For the Nine Months Ended September 30, 
        2013     2012   2013   2012
                             
Revenues:                      
  Fee revenue, net  $               14,946    $                         781    $                 72,678    $               50,239
  Product revenue                32,385                                -                    62,738                           -
    Total revenues                47,331                            781                  135,416                  50,239
Cost of sales product                45,511                                -                    69,880                           -
                             
Gross profit                 1,820                            781                    65,536                  50,239
                             
Operating Expenses:                      
  Administrative and management fees (including $9,975 and $3,126,655 stock based                      
  compensation for the three and nine months ended September 30, 2013, respectively)              76,424                     152,641                3,328,285     213,429
  Professional and consulting fees (including $22,208 and $126,542 stock based                           
  compensation for the three and nine months ended September 30, 2013, respectively)              32,158                         4,100                  185,363                  11,500
  Commissions                        -                                -                    31,200                    8,512
  Rent and other occupancy costs                 5,341                         3,582                    24,124                  15,265
  Advertising and promotion                 9,043                                -                    17,914                           -
  Other general and administartive expenses                33,412                         1,156                    80,492                  34,199
                             
      Total operating expenses              156,378                     161,479                3,667,378                282,905
                             
      Operating loss             (154,559)                    (160,698)               (3,601,842)               (232,666)
                             
Other Income (Expense):                      
  Interest income                 3,375                                -                      3,375                           -
  Interest expense               (53,268)                      (35,045)                 (175,828)               (127,981)
  Derivative liability (expense) income                22,043                      (51,116)                     (8,250)                 (33,072)
  Gain on deconsolidation of subsidiary                        -                                -                             -                  62,636
      Total other expense, net               (27,850)                      (86,161)                 (180,703)                 (98,417)
                             
                             
Net loss             (182,409)                    (246,859)                 (3,782,545)                 (331,083)
Less: net loss attributable to noncontrolling interest                        -                                -                             -                      695
                             
Net loss attributable to Mediswipe, Inc.  $            (182,409)    $                 (246,859)    $            (3,782,545)    $            (330,388)
                             
                             
Basic and diluted loss attributable to Mediswipe, Inc.                      
  common stockholders, per share  $  (0.00)    $  (0.00)    $  (0.01)    $  (0.00)
                             
Weighted average number of common shares outstanding                      
    Basic and diluted        447,700,053               440,791,373            462,528,047          403,701,126
                             
      See notes to condensed consolidated financial statements.

 

3

 

MEDISWIPE, INC
                       
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                       
THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012
(Unaudited)
                       
              2013   2012
CASH FLOWS FROM OPERATING ACTIVITIES            
  Net loss   $ (3,782,545)   $ (330,388)
  Adjustments to reconcile net loss to net cash used in operating activities:            
    Stock issued for consulting services             115,250                        -
    Amortization of deferred stock compensation             192,472                        -
    Preferred stock issued for services          2,821,275              135,061
    Fair value of stock options issued             124,200                        -
    Amortization of deferred financing costs     26,396                 7,352
    Amortization of discounts on convertible notes     103,517              113,255
    Change in fair market value of derivative liabilities      (17,038)               31,361
    Beneficial conversion feature               29,561                        -
    Litigation contingency                       -                        -
    Initial derivative liability expense on convertible notes               25,288                 1,711
    Depreciation                     40                        -
    Change in noncontrolling interest                       -                   (695)
    Gain on deconsolidation of subsisiary                       -              (62,636)
    Cash effect of deconsolidation                       -                (5,166)
    Changes in operating assets and liabilities:            
    (Increase) decrease in :            
      Inventory              (18,545)                        -
      Accounts receivable              (29,822)                 4,934
      Prepaid assets and other               (3,872)                        -
    Increase in :            
      Accounts payable and accrued expenses     74,495               17,588
      Deferred compensation     72,692               62,080
Net cash used in operating activities            (266,636)              (25,543)
                       
Cash flows from investing activities:            
  Purchase of furniture and fixtures               (2,509)                        -
                       
Net cash used in investing activities               (2,509)                        -
                       
                       
Cash flows from financing activities:            
  Proceeds from issuance of convertible debt             157,500               32,500
  Issuance of subsidiary common stock for cash                       -                 5,000
  Proceeds from convertible notes             300,000                        -
  Payment of convertible notes                       -              (12,000)
  Payment of deferred financing costs              (37,000)                (2,500)
Net cash provided by financing activities             420,500               23,000
                       
Net increase (decrease) in cash and cash equivalents             151,355                (2,543)
Cash and cash equivalents, beginning                1,892                 3,355
                       
Cash and cash equivalents, ending   $         153,247   $                812
                       
Supplemental disclosure of cash flow information:              
                       
  Cash paid for interest   $                   -   $                    -
                       
  Cash paid for income taxes   $                   -   $                    -
4
                       
Schedule of non-cash financing activities:            
  Conversion of notes payable and interest into common stock   $         133,816   $           78,000
                       
  Settlement of accrued compensation with preferred stock   $         100,022   $          451,858
                       
  Reclass of derivative liabilities to additional paid in capital upon              
    conversion of convertible notes   $                   -   $           71,866
                       
  Conversion of litigation contingency liability into common stock   $           46,449   $                    -
 
See notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

5

MEDISWIPE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 - ORGANIZATION

 

BUSINESS

 

MediSwipe Inc. (the “Company” or “Mediswipe”) offers a complete line of merchant services providing innovative solutions for electronically processing merchant and patient transactions within the healthcare industry. The Company is primarily focused on providing innovative patient solutions to licensed medical marijuana dispensaries, pharmacies and healthcare patient facilities.

 

Through June 30, 2012, the Company provided merchant services to approximately forty medical dispensaries and wellness centers throughout California and Colorado through our sponsor bank Electronic Merchant Systems (“EMS”). Effective July 1, 2012, EMS advised all medical dispensaries that they will no longer accept their Visa and MasterCard transactions. This action had a materially adverse effect on our business.

 

The Company has utilized its existing banking and merchant network and moved toward vertical markets within both the medicinal medical marijuana and healthcare sector over the last several months. During the three months ended March 31, 2013, through strategic partnerships with banking and financing partners the Company received commission based fees for arranging for third party financing for elective surgery procedures.

 

On April 30, 2013 the Company entered into a one year Distribution Agreement with Chill Drinks, LLC (“Chill Drinks”). Chill Drinks has the rights to an energy drink called Chillo Energy Drink (“Chillo”) and a hemp ice tea drink called C+ Swiss Ice Tea (“C+Swiss”). Chillo and C+Swiss are referred to as the (“Chill Drink Products”). Pursuant to the Distribution Agreement the Company has the exclusive distribution and placement rights of the Chill Drink Products to medical dispensaries.

 

The Company introduced during the quarter ending June 30, 2013, its’ proprietary Data Management System (DMS). DMS is designed specifically for medicinal dispensaries in regulated jurisdictions. The DMS application is a HIPAA compliant, web-secure document repository and collaboration system, developed exclusively for the medical marijuana industry. DMS includes patient registration, digital records management and tracking of all caregiver transactions, including log-in time, date stamp and quantity and type of medication prescribed. DMS was developed by industry leaders in patient work-flow, and cloud-based web solutions to provide patients, caregivers, dispensaries, labs, providers and certification centers with the industry's first complete, cloud-based network collaboration system.

 

The patient records management system within DMS features include the importing, scanning, emailing and faxing of all medical records and many other novel functions. DMS provides our users a manner to effectively manage their documents in one central, HIPAA compliant, secure repository.

   

The Company’s DMS's infrastructure is the only system available to the medical marijuana industry that allows patients, caregivers, dispensaries, laboratories, providers and certification centers to communicate, educate and operate in an environment promoting checks and balances. DMS is extremely unique and has been developed around the concept of promoting to patients the idea of becoming proactive, rather than reactive with their healthcare and to follow the right side of State Law.  In addition, it is our desire to allow our clients to operate in an environment that will allow them to anticipate any changes to Federal and State Laws, such as the likelihood of state required patient monitoring systems, akin to those currently required for the sale of other narcotics.

 

6

On August 1, 2013, the Company and Medical Cannabis Network, Inc. (“MCN”) entered into a Subscription and Services Agreement (the “SSA”). Pursuant to the terms of the SSA, the Company has the exclusive license to access and use MCN’s products and services, including but not limited to, technology (services collaboration software) and services (including hosting, professional services support and maintenance). The six month exclusive license requires the Company to pay MCN $3,000 per month for the first two months of the agreement and $5,000 per month thereafter.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

 

The accompanying condensed consolidated financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to present the financial position, results of operations and cash flows for the stated periods have been made. Except as described below, these adjustments consist only of normal and recurring adjustments. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed financial statements should be read in conjunction with a reading of the Company’s consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report filed with the Securities and Exchange Commission (SEC) on April 2, 2013. Interim results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of future results for the full year. Certain amounts from the 2012 period have been reclassified to conform to the presentation used in the current period.

 

The condensed consolidated financial statements include the accounts of the Company and 800 Commerce, until May 10, 2012 when 800 Commerce sold shares of its common stock to third parties resulting in the Company no longer holding a controlling interest in 800 Commerce. All material intercompany balances and transactions have been eliminated

 

NONCONTROLLING INTEREST AND DECONSOLIDATION

 

On January 1, 2011, the Company adopted authoritative accounting guidance that requires the ownership interests in subsidiaries held by parties other than the parent, and income attributable to those parties, be clearly identified and distinguished in the parent’s consolidated financial statements. The Company’s noncontrolling interest is now disclosed as a separate component of the Company’s consolidated equity deficiency on the balance sheets. Earnings and other comprehensive income are separately attributed to both the controlling and noncontrolling interests.  Earnings per share are calculated based on net income attributable to the Company’s controlling interest.

 

From January 1, 2011 through May 31, 2011, the Company owned 100% of 800 Commerce. From June 1, 2011 through October 1, 2011 800 Commerce sold 465,000 shares of its common stock and issued 3,534,000 shares of its common stock to its officers as compensation. After these transactions, the Company owned 60% of 800 Commerce. On May 10, 2012, 800 Commerce sold 3,150,000 shares of its common stock, reducing the Company’s ownership to 45%. On May 18, 2012, 800 Commerce sold 1,500,000 shares of its common stock, reducing the Company’s ownership to 40%. On June 10, 2012 issued 1,500,000 shares of common stock pursuant

7

to a consulting agreement and 1,851,000 shares of common stock for legal services and in lieu of compensation, and since June 30, 2012, 800 Commerce has sold 500,000 shares of its common stock and issued 500,000 shares of its common stock pursuant to a consulting agreement. Subsequent to these issuances the Company currently owns approximately 32% of the outstanding common stock of 800 Commerce. Effective May 10, 2012, the Company is no longer consolidating 800 Commerce in its’ financial statements. The noncontrolling interest included in the Company’s consolidated statement of operations is a result of noncontrolling interest investments in 800 Commerce up to the date of deconsolidation of May 10, 2012. Noncontrolling interests through May 10, 2012 are classified in the condensed consolidated statements of operations as part of consolidated net loss.

 

Subsequent to May 10, 2012, the Company’s investment in 800 Commerce is accounted for using the equity method and was reduced to zero.

 

On August 5, 2013, 800 Commerce filed Amendment No.5 to its’ S-1 Registration Statement with the Securities and Exchange Commission (“SEC”). The SEC declared the registration statement effective on August 8, 2013, and on September 4, 2013, the Company distributed the 6,000,000 shares of common stock of 800 Commerce it owned on a pro-rata basis to the Company’s shareholders.

 

CASH AND CASH EQUIVALENTS

 

The Company considers all highly liquid investments with an original term of three months or less to be cash equivalents.

 

ACCOUNTS RECEIVABLE

 

The Company records accounts receivable from amounts due from its processors and customers. The Company records accounts receivable upon the shipment of products. The Company charges certain merchants for processing services at a bundled rate based on a percentage of the dollar amount of each transaction and, in some instances, additional fees are charged for each transaction. The Company charges other merchant customers a flat fee per transaction, and may also charge miscellaneous fees to our customers, including fees for returns, monthly minimums, and other miscellaneous services. All the charges and collections thereon flow through our processors who then remit the fee due the Company within the month following the actual charges.

 

DEFERRED FINANCING COSTS

 

The costs related to the issuance of debt are capitalized and amortized to interest expense using the straight-line method through the maturities of the related debt.  

 

PROPERTY AND EQUIPMENT

 

Property and equipment are stated at cost, and depreciation is provided by use of accelerated and straight-line methods over the estimated useful lives of the assets. The estimated useful lives of property and equipment are as follows:

 

  Office equipment, furniture and vehicles 5 years
  Computer hardware and software 3 years

 

REVENUE RECOGNITION

 

The Company recognizes revenue in accordance with FASB ASC 605, Revenue Recognition. ASC 605 requires that four basic criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectability is reasonably assured.

 

8

The Company recognizes revenue during the month in which products are shipped or commissions are earned.

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Fair value measurements are determined under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to measure fair value, distinguishing between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”).

 

Fair value is the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company primarily uses prices and other relevant information generated by market transactions involving identical or comparable assets (“market approach”). The Company also considers the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity to identify transactions that are not orderly.

 

The highest priority is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Securities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

The three hierarchy levels are defined as follows:

 

Level 1 – Quoted prices in active markets that is unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly;

 

Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

 

Credit risk adjustments are applied to reflect the Company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the Company’s own credit risk as observed in the credit default swap market.

 

The Company's financial instruments consist primarily of cash, accounts payable and accrued expenses, and convertible debt. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments.  The estimated fair value is not necessarily indicative of the amounts the Company would realize in a current market exchange or from future earnings or cash flows.

 

9

INCOME TAXES

 

The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes. Deferred tax assets and liabilities are recognized to reflect the estimated future tax effects, calculated at the tax rate expected to be in effect at the time of realization. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.

 

ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. Interest and penalties are classified as a component of interest and other expenses. To date, the Company has not been assessed, nor paid, any interest or penalties.

 

Uncertain tax positions are measured and recorded by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized. The Company’s tax years subsequent to 2005 remain subject to examination by federal and state tax jurisdictions.

 

EARNINGS (LOSS) PER SHARE

 

Earnings (loss) per share are computed in accordance with ASC 260, "Earnings per Share". Basic earnings (loss) per share is computed by dividing net income (loss), after deducting preferred stock dividends accumulated during the period, by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities, if any, outstanding during the period. There were 3,000,000 outstanding warrants as of September 30, 2013. As of September 30, 2013, the Company’s outstanding convertible debt is convertible into 4,870,886 shares of common stock and 1,000,000 shares of Class B convertible preferred stock is convertible into 448,378,861 shares of common stock. These amounts are not included in the computation of dilutive loss per share because their impact is antidilutive.

 

ACCOUNTING FOR STOCK-BASED COMPENSATION 

 

The Company accounts for stock awards issued to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. The measurement date is the earlier of (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty's performance is complete. Stock awards granted to non-employees are valued at their respective measurement dates based on the trading price of the Company’s common stock and recognized as expense during the period in which services are provided.

 

For the three and nine months ended September 30, 2013, the Company recorded stock and warrant based compensation of $32,183 and $3,253,197, respectively. For the nine months ended September 30, 2012, there was $135,061 stock based compensation expense (See Notes 7 and 8).

 

10

USE OF ESTIMATES

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimates.

 

 

NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS

 

Accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

 

NOTE 4 - RECLASSIFICATIONS

 

Certain prior period balances have been reclassified to conform to the current period's financial statement presentation. These reclassifications had no impact on previously reported results of operations or stockholders' deficiency.

 

NOTE 5 – SALES CONCENTRATION AND CONCENTRATION OF CREDIT RISK

 

CASH

 

Financial   instruments   that   potentially   subject   the   Company to concentrations of credit risk consist principally of cash. The Company maintains cash balances at one financial institution, which is insured by the Federal Deposit Insurance Corporation (“FDIC”). The FDIC insured institution insures up to $250,000 on account balances. The company has not experienced any losses in such accounts.

 

SALES

 

For the three and nine months ended September 30, 2013 three (3) customers each accounted for more than 10% of our business, as follows:

 

             
Customer   Sales % Three Months Ended September 30, 2013   Sales % Nine Months Ended September 30, 2013  

Accounts

Receivable Balance, September 30, 2013

A   51%   26% $ 18,282
B   15%   -   7,542
C   11%   -   211
D   11%   -   -
E   -   37%   -
F   -   11%   9,936

 

PURCHASES

 

For the three and nine months ended September 30, 2013 100% of our purchases were from one vendor related to the purchase of Chillo and C+Swiss drinks. As of September 30, 2013, the Company had an accounts payable of $10 to this vendor.

 

11

NOTE 6 – CONVERTIBLE DEBT

 

In December 2011 the Company issued a $50,000 convertible promissory note as part of a guaranty fee due (the “Guaranty Note”) to a Company that is affiliated with a former officer of the Company. Terms of the note included an eight percent per annum interest rate and the note matured on the one year anniversary on December 20, 2012. Additionally, the holder of the Note had the right to convert the note into shares of common stock of the Company at a conversion price equal to eighty percent (80%) of the lowest closing bid price of the common stock within five (5) days of the conversion. The beneficial conversion feature included in the Guaranty Note resulted in an initial debt discount and derivative liability of $36,765.

 

During the year ended December 31, 2012, the company made payments of $18,000, reducing the balance of the Guaranty Note to $32,000 as of December 31, 2012. As of December 31, 2012 the Company revalued the remaining conversion feature of the Guaranty Note at $13,209. On March 31, 2013 the Company and the noteholder elected to convert the remaining $32,000 balance of the note and accrued and unpaid interest of $6,060 into 3,699,280 shares of common stock. The fair value of derivative liability on the date of conversion totaling $13,209 was reclassed to additional paid in capital.

 

On November 28, 2012 the Company entered into a $23,500 convertible note agreement (the 2012 Note) with Asher Enterprises, Inc. (“Asher”). We received net proceeds of $20,000 from the 2012 Note after debt issuance costs of $2,500 paid for lender legal fees. These debt issuance costs will be amortized over the earlier of the terms of the Note or any redemptions and accordingly $2,203 and has been expensed as debt issuance costs (included in interest expense) for the nine months ended September 30, 2013.

 

The Company determined that the conversion feature of the 2012 Note represents an embedded derivative since the Note is convertible into a variable number of shares upon conversion. Accordingly, the Note is not considered to be conventional debt under EITF 00-19 and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of this derivative instrument has been recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to each Note. Such discount will be amortized from the date of issuance to the maturity dates of the Note. The change in the fair value of the liability for derivative contracts will be recorded in other income or expenses in the consolidated statements of operations at the end of each quarter, with the offset to the derivative liability on the balance sheet. The beneficial conversion feature included in the 2012 Note resulted in an initial debt discount of $23,500 and an initial loss on the valuation of derivative liabilities of $1,826 for a derivative liability initial balance of $25,326.

 

As of December 31, 2012, the Company revalued the embedded conversion feature of the November 2012 Note. For the period from November 28, 2012 through December 31, 2012, the Company increased the derivative liability of $25,326 by $55 resulting in a derivative liability balance of $25,381. As of March 31, 2013 the Company revalued the embedded conversion feature of the November 2012 Note and for the period from December 31, 2012 to March 31, 2013, the Company decreased the derivative liability of the 2012 Note by $11 resulting in a derivative liability balance of $25,370. During the quarter ended June 30, 2013, the Company issued 1,210,273 shares of common stock in satisfaction of the convertible note and $940 of accrued and unpaid interest. The shares were issued at approximately $0.02 per share. The fair value of derivative liability on the date of conversion totaling $25,382 was reclassed to additional paid in capital.

 

On January 2, 2013, February 11, 2013, April 10, 2013 and July 29, 2013, the Company entered convertible note agreements (the 2013 Notes) with Asher for $37,500, $27,500, $27,500 and $65,000, respectively. We received net proceeds of $147,000 from the 2013 Notes after debt issuance costs of $10,500 paid for lender legal fees. These

12

debt issuance costs will be amortized over the earlier of the terms of the Note or any redemptions and accordingly $3,546 and $7,167 has been expensed as debt issuance costs (included in interest expense) for the three and nine months ended September 30, 2013. The beneficial conversion feature included in the 2013 Notes resulted in an initial debt discount of $157,500 and an initial loss on the valuation of derivative liabilities of $25,288 for a derivative liability initial balance of $182,788.

 

The fair value of the embedded conversion features of the 2013 Notes was calculated at each issue date utilizing the following assumptions:

 

 

 

 

 

Issuance Date

 

 

 

 

 

 

Fair Value

 

 

 

 

 

 

Term

 

 

 

 

Assumed Conversion Price

 

 

 

Market Price on Grant Date

 

 

 

 

Expected

Volatility Percentage

 

 

 

 

Risk free

Interest

Rate

1/3/13  $40,476 9 months $0.009 $0.0179 158% 0.12%
2/11/13 29,761 9 months $0.0439 $0.0884 172% 0.11%
4/18/13 39,473 9 months $0.0311 $0.045 171% 0.15%
7/29/13 73,078 9 months $0.0222 $0.0428 151% 0.11%

 

During the three months ended September 30, 2013, the Company issued 3,171,944 shares of common stock in satisfaction of $65,000 of the 2013 Notes and $2,600 of accrued and unpaid interest. The shares were issued at approximately $0.0213 per share. The fair value of the derivative liability on the dates of conversion totaling $67,600 was reclassified to paid-in-capital.

 

As of September 30, 2013 the Company revalued the embedded conversion feature of the remaining 2013 Notes. From their dates of issuance, the Company increased the derivative liability of the remaining 2013 Notes by $84,640 resulting in a derivative liability of $98,148. The fair value of the 2013 Notes was calculated at September 30, 2013 utilizing the following assumptions:

 

Note

Issuance

Date

 

 

Fair Value

 

 

Term

 Assumed Conversion  Price

Expected

Volatility Percentage

 

Risk free

Interest Rate

4/18/13 $29,179 3 months 0.0202 127% 0.02%
7/29/13   68,969 6 months 0.0202 127% 0.04%

 

The inputs used to estimate the fair value of the derivative liabilities are considered to be level 2 inputs within the fair value hierarchy.

 

A summary of the derivative liability balance as of December 31, 2012 and September 30, 2013 is as follows:

 

 

Fair Value

 

Derivative

Liability Balance

12/31/12

 

 

Initial Derivative Liability

 

 

Redeemed

Convertible

Notes

 

Fair value change- nine months ended 9/30/13

 

Derivative Liability Balance 9/30/13

Guaranty Note $13,209 - $(13,209) - -
2012 Note 25,381 - (25,381) - -
2013 Notes - $182,789 (67,600) $(17,040) $98,149
Total $38,590 $182,789* $(106,190) $(17,040) $98,149

 

13

*Comprised of $157,500, the discount on the face value of the convertible note and the initial derivative liability expense of $25,289 which is included in the derivative liability expense of $8,250 on the condensed statement of operations for the nine months ended September 30, 2013, included herein.

 

On May 20, 2013, the Company entered into a Securities Purchase Agreement with Typenex Co-Investment, LLC ("Typenex"), for the sale of an 8% convertible note in the principal amount of up to $667,500 (which includes Typenex legal expenses in the amount of $7,500 and a $60,000 original issue discount) (the “Company Note”) for $600,000, consisting of $100,000 paid in cash at closing (May 21, 2013) and five secured promissory notes, aggregating $500,000, bearing interest at the rate of 8% per annum. The first and second notes were funded on June 13, 2013 and September 19, 2013, respectively and the three remaining notes each maturing sixty (60) days following the occurrence of the Maturity Date (the “Investor Notes”). The Investor Notes may be prepaid, without penalty, all or portion of the outstanding balance along with accrued but unpaid interest at any time prior to maturity. The Company has no obligation to pay Typenex any amounts on the unfunded portion of the Note.

  

The Note bears interest at the rate of 8% per annum. All interest and principal must be repaid on June 16, 2014. The Note is convertible into common stock, at Typenex’s option, at a price of $0.055 per share. In the event the Company elects to prepay all or any portion of the Note, the Company is required to pay to Typenex an amount in cash equal to 125% multiplied by the sum of all principal, interest and any other amounts owing.

 

Typenex has agreed to restrict its ability to convert the Note and receive shares of common stock such that the number of shares of common stock held by them in the aggregate and their affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock. The Note is a debt obligation arising other than in the ordinary course of business, which constitutes a direct financial obligation of the Company. The Note also provides for penalties and rescission rights if we do not deliver shares of our common stock upon conversion within the required timeframes.

 

The Company claims an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Act) for the private placement of these securities pursuant to Section 4(2) of the Act and/or Regulation D promulgated there under since, among other things, the transaction did not involve a public offering, Typenex is an accredited investor and had access to information about the Company and their investment, Typenex took the securities for investment and not resale, and the Company took appropriate measures to restrict the transfer of the securities.

 

NOTE 7 – RELATED PARTY TRANSACTIONS

 

Management fees and stock compensation expense

 

Effective January 1, 2011, the Company has agreed to annual compensation of $90,000 for its CEO, which was increased to $150,000 annually, effective January 1, 2013. Effective January 1, 2013, the Company has agreed to annual compensation of $96,000 for the CFO. For the three and nine months ended September 30, 2013, the Company expensed $61,500 and $184,500 included in Administrative and Management Fees in the Unaudited Condensed Consolidated Statements of Operations, included herein. As of September 30, 2013, the Company owed the CEO $13,550 and the CFO $46,000.

 

In August 2012, the Company issued 250,000 shares of Class B Preferred Stock to the President, valued at $177,667 and recorded the amount as deferred stock compensation to be amortized over one year. As of June 30, 2013, the Company accepted the resignation of Mr. Rodriguez as an Officer and Director of the Company. The

14

Company has cancelled the Preferred Stock and returned the shares to the treasury of the Company for failure to complete the Employment Agreement and SweetMD transaction. Therefore, the Company stopped amortizing the deferred compensation during the quarter ended June 30, 2013, and recorded an entry to eliminate the remaining unamortized compensation of $29,611 with the corresponding entry to additional paid in capital. The Company recognized expenses $22,207 and $192,472 for the three and nine months ended September 30, 2013.

 

In June 2013, Mr. Friedman agree to exchange 30,335,000 shares of common stock in partial consideration for the issuance of 450,000 shares of Class B preferred stock (see note 8).

 

Agreements with prior management

 

In December 2011 the Company issued a $50,000 convertible promissory note (see Note 6) as part of a guaranty fee due to a Company that is affiliated with a former officer of the Company. Terms of the note include an eight percent per annum interest rate and the note matured on the one year anniversary on December 20, 2012. Additionally, the holder of the Note has the right to convert the note into shares of common stock of the Company at a conversion price equal to eighty percent (80%) of the lowest closing bid price of the common stock within five (5) days of the conversion. On March 31, 2013, the Company and the noteholder elected to convert the remaining balance of the note of $32,000 and accrued and unpaid interest of $6,060 into 3,699,280 shares of common stock.

 

Also in December 2011, the Company agreed to pay an additional $50,000 in common stock, which is included in accounts payable and accrued expenses on the September 30, 2013 and December 31, 2012 consolidated balance sheets.

 

NOTE 8 – COMMON AND PREFERRED STOCK

 

Common Stock

 

On March 19, 2013, the Company issued 250,000 shares of restricted common stock, to Empire Relations Holdings, LLC, as consideration under a consulting agreement dated March 7, 2013 for public and financial relations services. The fair value was $15,500 based on the closing stock price of $0.062 per share on the measurement date as the shares are non-refundable and no future performance obligation exists.

 

On March 31, 2013, the Company agreed to issue 3,699,280 shares of common stock upon the conversion of the remaining balance of $32,000 of the guaranty note and accrued and unpaid interest of $6,060 (see notes 6 and 7).

 

Previously the Company appointed Mr. Jayme Canton to be an advisor to the Company’s Board of Directors. In April 2013, the Company agreed to issue to Mr. Canton 2,000,000 shares of common stock, a warrant to purchase 3,000,000 shares of common stock at an exercise price of $0.05 per share with an expiration date on the third year anniversary of the grant, and 250,000 shares of common stock to be issued at the end of each calendar quarter beginning on June 30, 2013 and ending on the earlier of March 31, 2015 (the term of Canton’s advisor role) or the date Canton is no longer serving as an advisor to the board of directors. The Company included $9,975 and $19,750 in stock based compensation expense for the three and nine months ended for September 30, 2013, respectively, for the shares issued as of September 30, 2013, based upon the market price of the common stock on the grant dates.

 

15

On April 23, 2013 the Company issued a Convertible Note to an unaffiliated third party in exchange and for the cancellation of a litigation contingency of $46,449, which was acquired by the third party. Also on April 23, 2013, the Company issued 1,750,000 shares of common stock in satisfaction of the April 23, 2013 Convertible Note. The shares were issued at $0.0265 per share, and the Company recorded a beneficial conversion feature expense of $29,561.

 

On June 26, 2013, B. Michael Friedman, the Company’s CEO exchanged 30,335,000 shares of common stock for 450,000 shares of Class B Preferred Stock. The Company reduced accrued compensation due Mr. Freidman of $100,022 and recognized stock based compensation expense of $2,821,275.

 

On July 8, 2013, the Company issued 1,857,143 shares of common stock in satisfaction of the January 2, 2013 Asher convertible note of $37,500 and accrued and unpaid interest of $1,500. The shares were issued at $0.021 per share.

 

On August 22, 2013 and August 27, 2013, the Company issued in the aggregate 1,314,801 shares of common stock in satisfaction of the February 11, 2013 note of $27,500 and accrued and unpaid interest of $1,100. The shares were issued at $0.021 per share.

 

Preferred Stock

 

As of December 31, 2012, the Company had 800,000 shares of Series B Preferred Stock (the “Class B Preferred Stock”), par value $0.01 outstanding. On June 12, 2013, pursuant to Rodriguez’s resignation, non-execution of the employment agreement dated August 10, 2012 and the failure to close the transaction between the Company and SweetMD, Inc., the Company cancelled the book entry of Rodriguez’s 250,000 shares of Class B Preferred Stock.

 

Subsequent to the issuance of 450,000 shares of Class B Preferred Stock as above, there are 1,000,000 shares of Class B Preferred Stock outstanding as of September 30, 2013.

 

The rights, preferences and restrictions of the Class B Preferred Stock as amended, state; i)Each share of the Class B Convertible Preferred Stock shall automatically convert (the “Conversion”) into shares of the Corporation’s common stock at the moment there are sufficient authorized and unissued shares of common stock to allow for the Conversion. The Class B Convertible Preferred Stock will convert in their entirety, simultaneously to equal one half (1/2) the amount of shares of common stock outstanding on a fully diluted basis immediately prior to the Conversion. The Conversion shares will be issued pro rata so that each holder of the Class B Convertible Preferred Stock will receive the appropriate number of shares of common stock equal to their percentage ownership of their Class B Convertible Preferred Stock and ii) all of the outstanding shares of the Class B Preferred Stock in their entirety will have voting rights equal to the amount of shares of common stock outstanding on a fully diluted basis immediately prior to any vote. The shares eligible to vote will be calculated pro rata so that each holder of the Class B Convertible Preferred Stock will be able to vote the appropriate number of shares of common stock equal to their percentage ownership of their Class B Convertible Preferred Stock. The Class B Convertible Preferred Stock shall have a right to vote on all matters presented or submitted to the Corporation’s stockholders for approval in pari passu with holders of the Corporation’s common stock, and not as a separate class.

 

Warrants

 

On April 26, 2013 and in connection with the appointment of Mr. Jayme Canton to the Company’s advisory board, the Company issued a warrant to Mr. Canton to purchase 3,000,000 shares of common stock. The warrant expires on the three year anniversary and has an exercise price of $0.05 per share. The Company valued the warrant at $124,200 based on the Black Scholes formula and the following assumptions:

 

16

Estimated market value of common stock on measurement date: $0.04

Exercise price: $0.05

Risk free interest rate: 11%

Term in years: 3 years

Expected volatility: 223%

Expected dividends: 0.00%

 

A summary of the activity of the Company’s outstanding warrants at January 1, 2013 and September 30, 2013 is as follows:

 

    Warrants   Weighted-average exercise price   Weighted-average grant date fair value
Outstanding and exercisable at January 1, 2013   -   -   -
Granted   3,000,000     $         0.05   $          0.0414
Expired   -   -   -
Exercised   -   -   -
             
Outstanding and exercisable at September 30, 2013   3,000,000    $         0.05   $         0.0414

 

 

NOTE 9 – INCOME TAXES

 

Deferred income taxes reflect the net tax effects of operating loss and tax credit carry forwards and temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. Due to the uncertainty of the Company’s ability to realize the benefit of the deferred tax assets, the deferred tax assets are fully offset by a valuation allowance at September 30, 2013 and 2012.

 

As of September 30, 2013, the Company had a tax net operating loss carry forward of approximately $846,000. Any unused portion of this carry forward expires in 2030. Utilization of this loss may be limited in the event of an ownership change pursuant to IRS Section 382.

     

 

NOTE 10 – CONTINGENCIES AND COMMITMENTS

 

Effective on April 1, 2013, the Company entered into a three year agreement to rent office space in Detroit, Michigan. Totaling approximately 2,500 square feet, the space will also be used to operate the Company’s Certification Station business. The monthly rent under this lease was $2,200 per month.

 

17

Effective August 28, 2013, the Company and the landlord amended the office lease allowing the Company to move to a new location in downtown Detroit. The Company now occupies 3,657 square feet and the monthly rent is $3,047. Effective April 1, 2014, the monthly rent will be $3,200 and effective April 1, 2015 the monthly rent will increase to $3,352. Effective May 15, 2013, the Company signed a month to month lease for warehouse space and logistics for the shipping of the Company’s Chillo drink products for $850 per month.

 

Rent expense for the three and nine months ended September 30, 2013 was $9,788 and $24,019, respectively.

 

The Company is not aware of any legal proceedings against it as of September 30, 2013. No contingencies have been provided for in the financial statements.

 

NOTE 11 – GOING CONCERN

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As of September 30, 2013 the Company had an accumulated deficit of $8,679,839 and a working capital deficit of $362,329. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

NOTE 12 – SEGMENT REPORTING

 

Description of segments

 

During the nine months ended September 30, 2013, the Company had operated in two reportable segments: accounts receivable processing and financing and wholesale sales. Prior to April 1, 2013, the Company was receiving fees as the agent of record for fees pursuant to the ACS agreement. Beginning in the quarter ended June 30, 2013, the Company began wholesaling products (Chillo drinks). The accounting policies of the segments are the same as those described in the Note 1.  The Company’s reportable segments are strategic business units that offer products. 

 

For the nine months ended September 30, 2013, segment results are as follows:

    Processing fees    Wholesale    

 

Corporate

    Total 
Net revenues  $49,818   $85,598   $—     $135,416 
Cost of sales   —      69,880    —      69,880 
Operating costs   47,900    16,704    349,577    414,181 
Other non-cash items:                    
Stock-based compensation   —      —      3,253,197    3,253,197 
Other expense   —      —      180,703    180,703 
Segment gain or ( loss)   1,918    (986)   (3,783,477)   (3,782,545)
Segment assets   —      62,500    179,896    242,396 

 

NOTE 13 – SUBSEQUENT EVENTS

 

On November 12, 2013, the Board of Directors of the Company approved by unanimous written consent a 1-for-10 reverse stock split (the “Reverse Stock Split”) and to decrease the authorized common stock of the Company. Pursuant to the Reverse Stock Split, each ten (10) shares of the Company’s Common Stock will be automatically converted, without any further action by the Stockholders, into one share of Common Stock. No fractional shares of Common Stock will be issued as the result of the Reverse Stock Split. Instead, the Company will issue to the Stockholders one additional share of Common Stock for each fractional share. The Company filed Form DEF 14c on November 6, 2013 and anticipates that the effective date of the Reverse Stock Split will be in December 2013.

 

18

The Company believes that, among other reasons, the number of outstanding shares of Common Stock have contributed to a lack of investor interest in the Company and has made it difficult for the Company to attract new investors and potential candidates. The Board believes that the Reverse Stock Split could bring additional business opportunities to the Company and increase the stock price of our Common Stock and that the higher stock price could help generate interest in the Company by investors and provide business opportunities. We have no current plans, proposals, or arrangements to engage in any corporate transactions that would require the issuance of additional securities made available pursuant to this proposal.

 

However, the effect of the Reverse Stock Split, if any, upon the stock price for our Common Stock cannot be predicted, and the history of similar stock split combinations for companies like us is varied. Further, we cannot assure you that the stock price of our Common Stock after the Reverse Stock Split will rise in proportion to the reduction in the number of shares of Common Stock outstanding as a result of the Reverse Stock Split because, among other things, the stock price of our Common Stock may be based on our performance and other factors as well.

 

The Common Stock issued pursuant to the Reverse Stock Split will remain fully paid and non-assessable. The Reverse Stock Split shall not affect any rights, privileges or obligations with respect to the shares of Common Stock existing prior to the Reverse Stock Split, nor does it increase or decrease the market capitalization of the Company. The Reverse Stock Split is not intended as, and will not have the effect of, a “going private transaction” under Rule 13e-3 of the Exchange Act. We will continue to be subject to the periodic reporting requirements of the Exchange Act.

 

By reducing the number of issued and outstanding shares of Common Stock, more shares of Common Stock are available for issuance as a result of the Reverse Stock Split. The Board believes that the availability of more shares of Common Stock for issuance will allow the Company greater flexibility in pursuing financing from investors and issuing shares of Common Stock in exchange for financing, meeting business needs as they arise, taking advantage of favorable opportunities, and responding to a changing corporate environment.

 

The Company’s Board believes that the decrease in authorized Common Stock could reduce the potential dilutive effect of the Reverse Stock Split by reducing the availability of new common shares for future issuance and could help generate interest in the Company by investors and provide business opportunities. We have no current plans, proposals or arrangements to engage in any corporate transactions that would require the issuance of additional securities made available pursuant to this proposal.

 

The decrease in authorized Common Stock shall not affect any rights, privileges or obligations with respect to the shares of Common Stock existing prior to the decrease in authorized Common Stock, nor does it increase or decrease the market capitalization of the Company. The decrease in authorized Common Stock is not intended, as, and will not have the effect of, “a going private transaction” under Rule 13e-3 of the Exchange Act. We will continue to be subject to the periodic reporting requirements of the Exchange Act.

 

The decrease in authorized Common Stock will become effective on the date that we file the Certificate of Amendment to the Articles of Incorporation of the Company (the “Amendment”) with the Secretary of State of the State of Delaware. We intend to file Amendment with the Secretary of State of Delaware promptly after the twentieth (20th) day following the date on which this Information Statement is mailed to the Stockholders.

 

19

Prior to filing the amendment to the Certificate of Incorporation reflecting the Reverse Stock Split and decrease in the authorized Common Stock, the Company must first notify the Financial Industry Regulatory Authority (“FINRA”) by filing the issuer Company Related Action Notification Form no later than ten (10) days prior to our anticipated record date for the Reverse Stock Split. Our failure to provide such notice may constitute fraud under Section 10 of the Exchange Act.

 

On October 16, 2013, the Company issued a convertible promissory note to Asher for $70,000 under the same terms of the 2013 Notes described in Note 6.

 

On October 21, 2013, the Company issued 1,722,892 shares of common stock in satisfaction of the April 18, 2013 Asher convertible note of $27,500 and accrued and unpaid interest of $1,100. The shares were issued at approximately $0.016 per share.

 

The Company’s Management performed an evaluation of the Company’s activity through the date these financials were issued to determine if they must be reported. The Management of the Company determined that there were no other reportable subsequent events to be disclosed.

 

 

 

 

 

 

20

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

 

The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2012 and 2011, included in our annual report on Form 10-K filed with the SEC on April 13, 2013.

 

The independent auditors reports on our financial statements for the years ended December 31, 2012 and 2011 includes a “going concern” explanatory paragraph that describes substantial doubt about our ability to continue as a going concern. Management’s plans in regard to the factors prompting the explanatory paragraph are discussed below and also in Note 11 to the condensed consolidated financial statements filed herein.

 

(a) Liquidity and Capital Resources.

 

For the nine months ended September 30, 2013, net cash used in operating activities was $266,636 compared to $25,543 for the nine months ended September 30, 2012. The company had a net loss $3,782,545 for the nine months ended September 30, 2013 compared to a net loss of $330,388 for the nine months ended September 30, 2012. The net loss for the nine months ended September 30, 2013 was impacted by stock and warrant compensation expense of $3,253,197 comprised of $2,821,275 of preferred stock compensation, the amortization of deferred stock compensation of $192,472 from the previous issuance of Series B preferred stock, $124,200 warrant based compensation for the issuance of a warrant to purchase 3,000,000 shares of common stock to our advisor to the board of directors, $80,000 for the one time issuance of 2,000,000 shares of common stock to the same advisor, 500,000 shares of common stock (with an additional 250,000 shares to be issued each quarter the advisor continues his relationship with the Company) valued at $19,750 and $15,500 for the issuance of 250,000 shares for services provided to the Company. Additional non-cash expenses for the nine months ended September 30, 2013 were the amortization of the initial discounts of $103,517 on the convertible notes, the initial derivative liability expense and the change in the fair value of the derivatives of $25,288, amortization of deferred financing fees of $26,396 also related to the convertible promissory notes and a beneficial conversion feature related to the conversion of the contingent liability to common stock of $29,561.

 

During the nine months ended September 30, 2013, net cash provided by financing activity was $420,500. This was comprised of issuance of convertible promissory notes of $157,500, proceeds of $300,000 related to the Typenex convertible note (see note 6 to the condensed consolidated unaudited financial statements contained herein) and the payment of deferred financing fees of $37,000.

 

21

For the nine months ended September 30, 2013, cash and cash equivalents increased by $151,355 compared to a decrease of $2,543 for the nine months ended September 30, 2012. Ending cash and cash equivalents at September 30, 2013 was $153,247 compared to $1,892 at December 31, 2012.

 

We have limited cash and cash equivalents on hand. We presently maintain our daily operations and capital needs through the sale of our products. We will need to raise funds to continue to be able to support our operating expenses and to meet our other obligations as they become due. Sources available to us that we may utilize include the sale of unsecured convertible debentures from unaffiliated investors which may cause dilution to our stockholders. The company expects to increase sales of additional products over the course of this fiscal year.

 

(b) Results of Operations

 

Results of operations for the three and nine months ended September 30, 2013 vs. September 30, 2012

 

REVENUES

 

Revenues during the three and nine months ended September 30, 2013 were comprised of the following:

 

    2013   2012
    Three months ended September 30   Nine months ended September 30   Three months ended September 30   Nine months ended September 30
Cloud based software $ 14,946 $ 22,860 $ - $ -
ACS   -   49,818   -   -
Chillo products   32,385   62,738   -   -
Processing fees   -   -   781   50,239
Total $ 47,331 $ 135,416 $ 781 $ 50,239

 

In April 2013, Alternative Capital Solutions (“ACS”) and the Company terminated their agreements and accordingly, the Company will no longer be receiving fees related to the ACS agreement. During 2013, the Company entered into an exclusive distributorship agreement with Chill Drinks, LLC (See Note 1) for sales of Chill Drink’s products to dispensaries. Sales began in April 2013. Also during the quarter ending June 30, 2013 the Company began generating revenues related to its’ cloud based patient software (See note 1) and anticipates to begin a monthly recurring revenue model, whereby dispensaries will pay up to $400 per month for access to the Company’s cloud based patient software. Additionally through the Company’s cloud based patient software, the Company will be selling a patient digital health record storage system for an annual fee. The Company will be introducing additional products in the forthcoming quarters to supplement the initial products.

 

Revenues from 2012 period were all related to merchant processing fees the Company received from medical dispensaries. Effective July 1, 2012, the merchant processing fees ceased as a result of Mastercard and Visa declining to accept credit card charges from medical dispensaries.

OPERATING EXPENSES

 

Operating expenses were $156,378 and $3,667,378 for the three and nine months ended September 30, 2013 compared to $161,479 and $282,905 for the three and nine months ended September 30, 2012. The expenses were comprised of:

 

22

 

 

    2013   2012
Description   Three months ended September 30   Nine months ended September 30   Three months ended September 30   Nine months ended September 30
Administration and management fees $ 66,449 $ 201,630 $ 17,579 $ 78,367
Stock compensation expense, management   9,975   3,126,655   135,062   135,062
Stock compensation expense, other   22,208   126,542   -   -
Professional and consulting fees   9,950   58,821   4,100   11,500
Commissions    -   31,200   -   8,512
Advertising and promotional expenses    9,043   17,914   -   -
Rent and occupancy costs   5,341   24,124   3,582   15,265
General and other administrative    33,412   80,492   1,156   34,199
Total $ 156,378 $ 3,667,378 $ 161,479 $ 282,905

 

Administration and management fees increased as a result of the increase of the amount accrued for the salaries for our CEO from $22,500 for the three and nine months ended September 30, 2012 to $37,500 and $112,500 for the three and nine months ended September 30, 2013, compensation recorded for our CFO of $24,000 and $72,000 for the three and nine months ended September 30, 2013.

 

Stock compensation expense, management was comprised of $2,821,275 of preferred stock compensation, $124,200 warrant based compensation for the issuance of a warrant to purchase 3,000,000 shares of common stock to our advisor to the board of directors, $80,000 for the one time issuance of 2,000,000 shares of common stock to the same advisor, 500,000 shares of common stock (with an additional 250,000 shares to be issued each quarter the advisor continues his relationship with the Company) valued at $19,750. Stock compensation expense, other for 2013 includes the amortization of deferred stock compensation of $22,208 (three months) and $111,042 (nine months) from the previous issuance of Series B preferred stock and $15,500 (for the nine months ended September 30, 2013) for the issuance of 250,000 shares for services provided to the Company.

 

Professional and consulting fees increased for the three and nine month periods in 2013 compared to 2012 as a result of investor relation costs of $7,150 and $29,546 for the three and nine months ended September 30, 2013, respectively, compared to $6,200 for the nine months ended September 30, 2012. Professional fees of $2,500 and $9,775 were incurred for the three and nine months ended September 30, 2013, respectively, compared to $4,100 and $11,250 for the three and nine months ended September 30, 2012. Consulting fees of $19,200 were incurred for the nine months ended September 30, 2013, of which $16,700 was pursuant to the ACS agreement. Commissions of $31,200 were also incurred for the nine months ended September 30, 2013 pursuant to the ACS Agreement.

 

General and other administrative costs for the three and nine months ended September 30, 2013, were $33,412 and $80,492, respectively, compared to $1,156 and $34,199 for the three and nine months ended September 30, 2012, respectively. Expenses for the nine months ended September 30, 2013, include public company filing and transfer agent fees of $19,976, travel and entertainment costs of $24,140, internet and web based service costs of $10,677, office supplies of $5,261 and $20,438 of other general and administrative costs.

 

23

OTHER INCOME (EXPENSE)

 

Other expense for the three and nine months ended September 30, 2013 was $27,850 and $180,703, respectively, compared to $86,161 and $98,417 for the three and nine months ended September 30, 2012. Included in the current period is interest expense of $53,268 (three months) and $175,828 (nine months), comprised of $41,519 (three months) and $103,517 (nine months) related to the amortization of the initial discount on convertible promissory notes, $10,311 (three months) and $26,396 (nine months) for the amortization of the deferred financing costs and $2,158 (three months) and $16,354 (nine months) for the interest expense on the face value of the notes. Also included in other expenses for the nine months ended September 30, 2013 was $25,288 for the initial derivative liability expense for the embedded derivative in newly issued convertible notes and a (decrease)of $17,038 for the fair value change on the derivative liability associated with the convertible promissory notes. Other expenses for the three and nine months ended September 30, 2012 included interest expense of $35,045 (three months) and $127,981 (nine months). Interest expense was comprised of $31,449 (three months) and $113,255 (nine months) related to the amortization of the initial discount on convertible promissory notes, $1,806 (three months) and $7,352 (nine months) for the amortization of the deferred financing costs and $1,790 (three months) and $7,374 (nine months) for the interest expense on the face value of the notes. For the three months ended September 30, 2012 the fair value change in the derivative associated with convertible promissory notes resulted in an expense of $51,116 and for the nine months ended September 30, 2012, expenses were partially offset for the fair value change (decrease) of $33,072 in the derivative liability associated with convertible promissory notes.

 

OFF BALANCE SHEET ARRANGEMENTS

 

None

 

Critical Accounting Policies

 

See Note 2 to the condensed consolidated financial statements included herein.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable to smaller reporting companies.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures.


We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC. This information is accumulated to allow our management to make timely decisions regarding required disclosure. Our President, who serves as our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report and he determined that our disclosure controls and procedures were ineffective due to a control deficiency. During the period we did not have additional personnel to allow segregation of duties to ensure the completeness or accuracy of our information. Due to the size and operations of the Company, we are unable to remediate this deficiency until we acquire or merge with another company.

 

24

Changes in Internal Control Over Financial Reporting


During the quarter ended June 30, 2013, there were no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

 

Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

 

 

 

25

 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. RISK FACTORS

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Act of 1934 and are not required to provide the information under this item.

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

On July 8, 2013, the Company issued 1,857,143 shares of common stock in satisfaction of a convertible note of $37,500 and accrued and unpaid interest of $1,500. The shares were issued at approximately $0.021 per share.

 

On August 22, 2013 and August 27, 2013, the Company issued 688,073 and 626,728, respectively, shares of common stock in satisfaction of a convertible note of $27,500 and $1,100 of accrued and unpaid interest. The shares were issued at approximately $0.022 per share.

 

On September 30, 2013, the Company issued 250,000 shares of common stock to Canton for advisory services for the three months ended September 30, 2013.

 

The issuance of the shares was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) thereof. The consultant was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.

 

ITEM 3. Defaults upon Senior Securities

 

None.

 

Item 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. Other Information

 

None

 

26

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

 

(a) Exhibit index

 

31.1 Certification of Chief Executive Officer, and Director Pursuant to Section 302 of the Sarbanes-Oxley Act.

 

31.2 Certification of Chief Financial Officer, and Director Pursuant to Section 906 of the Sarbanes-Oxley Act.

 

32.1 Certification of Chief Executive Officer, and Director Pursuant to Section 302 of the Sarbanes-Oxley Act.

 

32.2 Certification of Chief Financial Officer, and Director Pursuant to Section 906 of the Sarbanes-Oxley Act.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: November 19, 2013

MEDISWIPE, INC.

 

By: /s/ B. Michael Friedman
  B. Michael Friedman
  Chief Executive Officer and Director
  (Principal Executive Officer)

 

27