ITEM 1. BUSINESS
When used in this report, the terms “Global”, “Company”, “we”, “our or “us” mean, unless the context otherwise indicates, Global Future City Holding Inc. and its subsidiaries.
The following discussion should be read in conjunction with the Risk Factors presented in Item 1A
ITEM 1A. RISK FACTORS
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
We do not own any real property. Our principal executive offices are located at 2 Park Plaza, Suite 400, Irvine, CA 92614 where we are leasing approximately 5,824 square feet of office space. After completion of tenant improvements in January 2016, the lease commenced with a minimum term of 60 months and requires the following minimum annual payments, excluding property taxes and other common area costs: months 1 through 12 - $176,112; months 13 through 24 - $183,804; months 25 through 36 - $192,192; months 37 through 48 - $200,580; and months 49 through 60 - $209,664. As we have out-sourced manufacturing and product fulfillment, including product storage, we consider our leased office space adequate for the operation of our business.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Kevin McAllister
On June 3, 2016 (the “Filing Date”), Kevin McAllister (“Claimant”) filed a claim against the Company and its CFO and director, Michael Dunn, as an individual (collectively, the “Defendants”), for (i) breach of contract and (ii) fraud with the Superior Court of California, County of Orange, in Santa Ana, California. Claimant alleges that he entered into a written contract, a convertible promissory note (the “McAllister Note”), with the Company on or around December 4, 2014, but that the Company breached the McAllister Note by failing to make certain payments owed to Claimant under the terms of the note. Claimant is also alleging that Defendants agreed to perform its duties under the McAllister Note, but because Defendants have not performed or paid Claimant yet, Claimant alleges that Defendants never intended to pay the amounts owed under the McAllister Note. Furthermore, Claimant alleges that the Company has misrepresented information in its financial statements that the McAllister Note (and other debt), has or will be paid, when the Company allegedly refuses to pay such note (and other debt). Claimant is seeking approximately $182,583 in damages as well as costs of collection, attorney’s fees, punitive damages, and expenses.
On June 30, 2016, the Claimant and Defendants entered into a settlement agreement (the “Settlement Agreement”) whereby the Company agreed to pay Claimant $160,000 (the “Settlement Amount”) in full satisfaction of any and all claims related to the Action. The Settlement Amount was paid to Claimant on July 1, 2016. On July 7, 2016, a Request for Dismissal to dismiss the entire Action against the Defendants from all causes of action was filed with prejudice in the Superior Court of California, County of Orange, in Santa Ana, California. Although the Company settled the Action with Claimant, the Company believes that Claimant’s lawsuit was without merit.
Xinai Zhao re: Ning Liu
On September 29, 2016, Xinai Zhao (“Plaintiff”) filed a complaint (the “Complaint”) against Mr. Ning Liu, the Company’s former Chief Executive Officer, President, and Chairman of the Board, Grand Opus Co., Ltd., a California corporation, Goldenrise Development, Inc., a California corporation, and the Company (collectively, the “Defendants”) in the Superior Court of the State of California, County of Los Angeles (Central District) and is seeking to recover no less than $212,993 in damages.
The Complaint alleges, among other things, that in 2009 Mr. Liu sold a total of 150,000 shares in three separate Chinese companies, and 200,000 shares in China Yongxin Pharmaceuticals Inc. (“CYXN”), a Delaware corporation, to the Plaintiff under false and misleading information. The Complaint also alleges that after CYXN’s stock was suspended and delisted on the Nasdaq Smallcap Market, Mr. Liu provided Plaintiff with 100,000 shares of the Company’s common stock (the “Shares”) around June 2016 to help recoup her losses in these investments.
The Company believes that the Complaint has no merit as it pertains to the Company because (i) the Company never sold the Shares to the Plaintiff, (ii) the Shares were gifted to the Plaintiff by Mr. Liu to help recoup her losses, (iii) the Company is not Mr. Liu’s alter ego, and (iv) the Plaintiff’s claims stem from the sole actions of Mr. Liu prior to serving as a director and officer of the Company. As previously discussed, Mr. Liu has resigned as the Company’s Chief Executive Officer, President, and Chairman of the Board on October 21, 2016.
PRC vs. Ning Liu
On August 30, 2016, we reported on Form 8-K that our former Chief Executive Officer (“CEO”), President, and Chairman of the Board of Directors, Ning Liu, was detained in the People’s Republic of China (“PRC”). On October 21, 2016, because of his ongoing legal challenges in the PRC, Mr. Liu resigned from all his positions in our Company. Mr. Liu continues to be detained in the PRC. The charges against Mr. Liu are personal to him and our Company is in no way named as a defendant or subject to the charges. We have been informed by Mr. Liu’s attorney in the PRC that, on March 2, 2017, he was convicted in Hunan province for violations of the PRC’s multi-level marketing regulations and sentenced to 10 years in prison. We have likewise been informed by Mr. Liu’s attorney that he has an appeal hearing scheduled in Hunan Province in the near future and, if he is unsuccessful in that hearing, he can appeal to a national court in Beijing, China.
From time to time, our Company may become subject to various legal proceedings that are incidental to the ordinary conduct of our business. Although we cannot accurately predict the amount of any liability that may ultimately arise with respect to any of these matters, we make provisions for potential liabilities when we deem them probable and reasonably estimable.
Other than as disclosed herein, we know of no material, existing or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation and there are no proceedings in which our directors, officers or any affiliates, or any registered or beneficial shareholder is an adverse party or has a material interest adverse to our interest.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is currently quoted under the symbol “FTCY” on the OTCQB marketplace. The following table reflects on a per share basis the reported high and low bid prices of our Common Stock for each quarter for the period indicated as reported by the OTCQB. Such prices are inter-dealer prices without retail mark-up, mark-down, or commission and may not represent actual transactions.
YEAR ENDED DECEMBER 31, 2016
YEAR ENDED DECEMBER 31, 2015
The OTCQB is generally considered to be a less active and efficient market than the NASDAQ Global Market, the NASDAQ Capital Market, or any national exchange and does not provide investors with the liquidity that the NASDAQ Global Market, the NASDAQ Capital Market, or a national exchange would offer.
Holders of Common Stock
As of December 31, 2016, the approximate number of registered holders of our common stock was 540 (although we believe that the number of beneficial owners of our common stock is substantially greater since a significant number of shares are held in street name). As of December 31, 2016, the number of outstanding shares of our common stock was 48,781,586, and there were no shares of common stock subject to outstanding stock options.
Dividends
No dividends were declared on our common stock in the years ended December 31, 2016, and 2015, and we have no plans to pay dividends in the near future. Our dividend policy is subject to the discretion of our Board and depends upon a number of factors, including operating results, financial condition, and general business conditions. Holders of our common stock are entitled to receive dividends if and when declared by our Board out of funds legally available therefor. We may pay cash dividends if net income available to stockholders fully funds the proposed dividends, and the expected rate of earnings retention is consistent with capital needs, asset quality, and overall financial condition. However, at this time, we intend to reinvest earnings, when and if generated, in the continued development and operation of our business.
Equity Compensation Plan Information
On December 30, 2015, we elected to withdraw and terminate our Option Plan for employees, officers, and consultants of our Company. At the time of cancellation, there were no options outstanding, and 13,889 shares were remaining for future issuance. We will re-evaluate the implementation of an option plan in the future in our Board’s discretion.
Sales of Unregistered Securities
On February 26, 2016, we entered into a consulting agreement with a consultant, whereby we issued the consultant 50,000 shares of our common stock for services rendered. 25,000 of these shares were later returned to our Company under a separate agreement.
On September 30, 2016, we entered into a consulting agreement with a consultant, whereby we issued the consultant 25,000 shares of our common stock for services rendered.
On October 3, 2016, we sold 25,000 of our common stock to an accredited investor for a total of $25,000 ($1.00 per share).
In December 2016, we issued Promissory Notes with total face value of $350,000 to three (3) debt holders along with 150,000 shares of our common stock.
On December 8, 2016, we entered into a consulting agreement with a consultant, whereby we issued the consultant 150,000 shares of our common stock for services rendered.
In connection with the above stock issuances, we did not pay any underwriting discounts or commissions. None of the sales or issuances of securities described or referred to above was registered under the Securities Act. We had or one of our affiliates had a prior business relationship with each person or entity above, and no general solicitation or advertising was used in connection with the sales or issuances. In making the sales or issuances without registration under the Securities Act, we relied upon the exemption from registration contained in Section 4(a)(2) of the Securities Act.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The purpose of this section is to discuss and analyze our consolidated financial condition, liquidity and capital resources and results of operations. This analysis should be read in conjunction with the consolidated financial statements and related footnote disclosures contained in this report and the following “Cautionary Statement for Forward-Looking Information.”
Cautionary Statement for Forward-Looking Information
Statements included in this report may contain forward-looking statements. Such statements may relate, but are not limited, to projections of revenues, income or loss, development expenditures, plans for growth and future operations, competition and regulation, as well as assumptions relating to the foregoing. Such forward-looking statements are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted or quantified. When used in this report, the words “will,” “could,” “estimates,” “expects,” “anticipates,” “believes,” “plans,” “intends” and variations of such words and similar expressions are intended to identify forward-looking statements that involve risks and uncertainties. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements.
Factors that could cause actual results to differ materially from any results projected, forecasted, estimated or budgeted or may materially and adversely affect our actual results include, but are not limited to, those set forth in Item 1A. Risk Factors, and elsewhere in this report and in our other public filings with the SEC.
Undue reliance should not be placed on these forward-looking statements, which are applicable only as of the date hereof. Except as may be required by law, we undertake no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report or to reflect the occurrence of unanticipated events.
Summary of Business
We are a holding company focused in the area of consumer product sales.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States, which requires us to make estimates and assumptions in certain circumstances that affect amounts reported. In preparing these financial statements, management has made its best estimates and judgments of certain amounts, giving due consideration to materiality. We believe that of our significant accounting policies (more fully described in notes to the consolidated financial statements), the following are particularly important to the portrayal of our results of operations and financial position and may require the application of a higher level of judgment by our management, and as a result are subject to an inherent degree of uncertainty.
Estimates
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. We review our estimates on an on-going basis, including those related to long-lived assets, contingencies related to pending or threatened litigation, and the valuation of stock grants, options and warrants to purchase common stock. We base our estimates on our historical experience, knowledge of current conditions and our beliefs of what could occur in the future considering available information. Actual results may differ from these estimates, and material effects on our operating results and financial position may result. We believe the following critical accounting policies involve our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Revenue from product sales are recorded when the products are shipped and title passes to independent members. Net revenues are determined after deducting promotional and other allowances in accordance with ASC 605-50. Product sales to members are made pursuant to a member agreement that provides for transfer of both title and risk of loss upon our delivery to the carrier that completes delivery to the members. This is commonly referred to as “F.O.B. Shipping Point.” Amounts received for unshipped product are recorded as deferred revenue. Our sales arrangements do not contain right of inspection or customer acceptance provisions other than general rights of return. We estimate and accrue a reserve for product returns based on our return policies and historical experience, with the expense recorded as a reduction to revenue.
Cash receipts for enrollment packages include nonrefundable enrollment fees for all new members and an additional deposit for upgrading to a VIP status if a member so chooses under the terms of the compensation plan that was in effect during the second quarter of 2016 (the “Q2 Plan”). The nonrefundable enrollment fee is deferred and recognized over the term of the arrangement, generally twelve months.
For members under the Q2 Plan, a VIP status upgrade is a deposit which is repayable to a member either in cash, product, or convertible into GX Coin. There is no revenue associated with a VIP status upgrade deposit initially; however, related party revenue is recognized on the commission earned when VIP members under the Q2 Plan convert their membership or rewards points into GX-Coin. A VIP status upgrade earns reward status points that are also subject to repayment in cash or convertible into GX Coin. Pursuant to ASC 605-50, a cost and liability for amounts owed in cash or cash equivalents benefits under nondiscretionary loyalty programs should be accrued with a related contra-revenue, as by transferring the right to cash or cash equivalent benefits, the entity effectively reduces the revenue from conversions of VIP status and related accrued benefits to GX Coin. Each VIP member entering the Q2 Plan through the second quarter of 2016 have elected to convert their respective deposit to GX-Coin by such time or during the third quarter of 2016. The Company recognizes revenue on the conversion upon the completion of our performance obligation as part of the conversion process, at which point all necessary revenue recognition criteria have been met.
Based on industry developments and best practices of direct selling programs, GX-Life implemented a revised compensation plan on July 15, 2016, and finalized and released such plan on August 1, 2016 (the “GX-Life Global Compensation Plan”). The GX-Life Global Compensation Plan removed the VIP status upgrade deposits and accordingly, the revenues from the conversion of VIP status upgrade deposits is expected to cease during the 2016 year after all deferrals are recognized. GX-Life will continue to generate revenue from the conversion of certain membership transactions to GX Coin where GX-Life is able to make a margin on the conversion.
From time to time, GX-Life may make modifications and enhancements to the GX-Life Global Compensation Plan to help motivate GX-Life Members. GX-Life may also enter into agreements for business or market development, which may result in additional compensation to specific GX-Life Members. GX-Life intends to continue to examine and adjust the GX-Life Global Compensation Plan to reflect marketplace competition, demand, and U.S. regulations and foreign jurisdictions. Because of this, GX-Life recognizes that the compensation and rewards available under the GX-Life Global Compensation Plan may be different across different jurisdictions.
Stock-Based Compensation
We account for stock-based compensation in accordance with ASC 718 - Compensation (“ASC 718”). ASC 718 requires that we account for all stock-based compensation transactions using a fair-value method and recognize the fair value of each award as an expense, generally over the service period. The fair value of stock grants is based upon the market price of our common stock at the grant date. We estimate the fair value of stock option awards, as of the grant date, using the Black-Scholes option-pricing model. The use of the Black-Scholes model requires that we make a number of estimates, including the expected option term, the expected volatility in the price of our common stock, the risk-free rate of interest and the dividend yield on our common stock. If our variable volatility assumptions were different, the resulting determination of the fair value of stock option awards could be materially different and our results of operations could be materially impacted.
Accounting for Equity Instruments Issued to Non-Employees
We account for any equity-based payments to non-employees under ASC 505 - Equity. The fair value of the equity instrument issued or committed to be issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of our common stock on the date the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to the statement of operations and credited to common stock and/or additional paid-in capital as appropriate.
Debt Issued with Common Stock
Debt issued with common stock is accounted for under the guidelines established by ASC 470-20 - Accounting for Debt with Conversion or Other Options. We record the relative fair value of common stock related to the issuance of convertible debt as a debt discount or premium. The discount or premium is subsequently amortized over the expected term of the convertible debt to interest expense.
Impairment of Long-Lived Assets
We review our long-lived assets in accordance with ASC 360-10-35, Impairment or Disposal of Long-Lived Assets. Under that directive, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Such group is tested for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. When such factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made.
Recent Accounting Pronouncements
From time to time, the FASB issues ASUs to amend the authoritative literature in ASC. Management believes that those issued to date that are not described below either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to us or (iv) are not expected to have a significant impact on our consolidated financial statements.
Revenue Recognition. In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers”. Under this guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The updated standard will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The updated standard will be effective for us beginning January 1, 2018. We are currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.
Financial Instruments. In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall”. The new guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. The guidance is effective for annual and interim periods beginning after December 15, 2017. The guidance on financial liabilities under the fair value option did not have a significant impact on our consolidated financial statements.
Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases, that requires organizations that lease assets, referred to as “lessees”, to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with lease terms of more than 12 months. ASU 2016-02 will also require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases and will include qualitative and quantitative requirements. The new standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those annual years, and early application is permitted. We are currently assessing the impact that this standard will have on our consolidated financial statements.
Share-Based Payments to Employees. In March 2016, the FASB ASU 2016-09, “Improvements to Employee Share-based Accounting”, new guidance to simplify and improve accounting for share-based payments. The amendments include income tax consequences, the accounting for forfeitures, classification of awards as either equity or liabilities and classification on the statement of cash flows. The guidance is effective for annual and interim periods beginning after December 15, 2016. We do not believe the adoption of this accounting guidance will have a material effect on our consolidated financial statements.
Cash Flow Classifications. In August 2016, the FASB issued ASU 2016-15 providing new guidance to reduce the diversity in practice in how certain transactions are classified in the statement of cash flows. The guidance adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The guidance is effective for annual and interim periods beginning after December 15, 2017. In November 2016, the FASB issued new guidance on restricted cash. The guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. The guidance is effective for annual and interim periods beginning after December 15, 2017. We are currently evaluating the impact this new guidance will have on our consolidated financial statements.
Results of Operations for the Years Ended December 31, 2016 and 2015
Net Revenues
Net sales were $3,507,513 for 2016 versus zero for 2015. The increase is directly related to the new member’s in our direct selling program and related deposits, membership and starter kit fees under the Q2 plan. The primary increase relates to $3,468,582 of related party commissions earned through the members’ conversion of deposits (including accrued rewards points) to GX-Coin during the period. We also recorded $20,206 in starter kit revenue and $18,725 of membership fees which we amortize over the requisite membership period of twelve months.
Cost of Net Revenues
Cost of net revenues for 2016 was $1,128,504 versus zero for 2015. The 2016 amount includes charges for inventory impairment totaling $1,122,520. Because of the legal challenges faced by Ning Liu in the PRC, as described above, we were forced to suspend our direct selling program in the fourth quarter of 2016 and revalue our inventory to its net realizable value. We currently are pursuing relationships with a number of sales organizations who can purchase our existing inventory for resale purposes in an attempt to establish a wholesale relationship with these organizations as well as liquidate large quantities of inventory to extract value prior the expiration date of certain products. This would allow us to take advantage of established sales networks and, if successful, create a sustainable stream of revenue.
Selling and Marketing Expenses
Selling and marketing expenses were $1,402,964 and $102,915 in 2016 and 2015, respectively. The increase in these expenses was primarily attributable to the ramping up of our direct selling program including the travel costs and promotion required to attract new members. The main categories of cost in 2016 are consulting - $374,503; travel - $615,173; advertising and promotion - $239,023; fulfillment - $99,860; and product design and development - $53,727. 2016 consulting fees include $179,750 in expenses which are stock-based for shares issued to consultants for product and market development. 2015 includes $65,000 of stock-based expenses (250,000 common shares) for marketing consulting concerning loyalty points in China.
General and Administrative Expenses
General and administrative expenses for 2016 were $4,363,683 compared to $1,036,108 for the comparable period in 2015. The increase in these expenses was primarily attributable to beginning the implementation of our business plan including hiring personnel, expanding office space and increasing the use of outside professionals. The 2016 period includes $1,516,584 in employee compensation and benefits versus approximately $335,000 in 2015. During 2015, our Company’s management was transitioning and no formal employment agreements had been put in place. Therefore minimal compensation and benefits were accrued in connection with services. Our former CEO agreed to forgo any compensation prior to the SPA closing as any salary would be forgiven as part of his separation agreement. Our former controller was paid as a consultant for services rendered at a fraction of a cost compared to his previous full-time salary. In addition to employee compensation and benefits, other main categories of expense in 2016 are consulting - $1,110,085; legal & accounting - $773,047; bad debts - $275,967; and rent - $154,694. The bad debts in 2016 primarily resulted from deposits with vendors that went out of business before delivering products to us. All of these major expense categories were considerably higher in 2016 that 2015. The 2016 employee compensation costs include $237,078 in stock-based compensation expense for shares issued to our employees.
Impairments
Our former CEO, Ning Liu, is currently detained in the PRC. In addition, we have been informed by Mr. Liu’s attorney in the PRC that, on March 2, 2017, he was convicted in Hunan Province for violations of the PRC’s multi-level marketing regulations and sentenced to 10 years in prison. Mr. Liu’s legal difficulties have had a severe adverse impact on our Company causing potential investors to look elsewhere for opportunities and existing stakeholders to distrust our brand. As a result, in the fourth quarter of 2016, we suspended our direct selling program which had been the main focus of our business plan and we abandoned our EB-5 program for lack of interest.
During 2016, we made significant advances to Great Coin to assist them in their development of a trading platform for the GX Coin, a digital currency we wished to use in a rewards program for our direct selling program which we have suspended. Our impairment of amounts due from related parties of $1,518,300 consists mainly of our advances to Great Coin. In addition, we impaired the remaining unamortized Service Contract with Great Coin of $280,000. Finally, we impaired our $250,000 investment in Powerdyne, our EB-5 investment.
Interest Expense
Interest expense in 2016 was $163,751 compared to $104,799 for the same period in 2015. The increase in interest expense during the 2016 period is primarily the result of the high cost of borrowing related to the $300,000 in promissory notes issued during the fourth quarter of the year.
Gain or Loss on Extinguishment of Debt
During 2016, we recorded a loss on extinguishment of debt of $9,627 related to the repayment of a note payable. The 2015 gain on extinguishment of debt totaling $333,823 consisted mainly of settlements and write-offs of notes payable, accounts payable and accrued expenses.
Liquidity and Capital Resources
As a result of recurring losses and negative cash flows there is a substantial doubt about the Company’s ability to continue as a going concern. The company intends to fund its operations with additional equity and/or debt financing, but Mr. Liu’s legal challenges in the PRC have made this extremely difficult. Management is also making efforts to sell our remaining inventory. If we cannot raise additional short term capital, we may consume all of our cash reserved for operations. There are no assurances that management will be able to raise capital on terms acceptable to our Company or at all. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that would be necessary if we are unable to continue as a going concern.
As of December 31, 2016, our principal source of liquidity is from cash proceeds from the issuance of notes payable. Previous sources of liquidity were proceeds received from our direct selling program activities, but that program has been suspended and may not be reactivated in the future. During the year ended December 31, 2016, we raised $2,658,086 in capital under our Form S-1 Registration Statement on file with the Securities and Exchange Commission. The S-1 is currently under review and we will not sell any shares under the S-1 until it is deemed effective by the SEC. Reference to the S-1 is not an offer to sell the securities described therein, and we are not soliciting an offer to buy the securities in any state where the offer or sale is not permitted.
At December 31, 2016, our cash and cash equivalents were $85,650 and we had negative working capital in excess of $2.0 million.
In 2016, we issued $300,000 in notes payable while also repaying $312,434 of notes payable and accrued interest.
We also received a $250,000 capital contribution from our former CEO in the form of a repayment of member deposits.
Cash Flows
The following table sets forth our cash flows for the year ended December 31:
Operating Activities
During the 2016 period, non-cash items include write-offs totaling $2,048,300 of our investment in Powerdyne, our Service contract with Great Coin, and amounts due from related parties, principally Great Coin. Also included is an inventory impairment charge of $1,122,520 related to our suspended direct selling program. Finally, this category also includes a loss on extinguishment of debt and expenses related to stock-based compensation and depreciation and amortization. The change in working capital primarily results from payments for inventory offset by increases in accounts payable, accrued expenses and membership deposits.
During the 2015 period, non-cash items include gain on extinguishment of debt, shares issued for compensation and services and depreciation. The change in working capital is primarily related to deposits made for inventory.
Investing Activities
During the 2016 period, we made capital expenditures of $416,420. During the 2015 period, we paid $200,000 toward our acquisition of Powerdyne. We also made capital expenditures of $249,634 and paid $350,000 in connection with a Software License and Services Agreement with Great Coin.
Financing Activities
During the 2016 period, we received $2,683,086 in proceeds from the sale of common stock, primarily under our S-1 offering. We also received $300,000 in proceeds from the issuance of notes payable and $250,000 in a capital contribution from our former CEO. Offsetting this were repayments of notes receivable and accrued interest of $312,434 and advances to related parties, mainly Great Coin, of $1,497,055.
During the 2015 period, we received $3,000,000 from the sale of 6,000,000 shares of common stock, $150,000 from our former CEO for the acquisition of Powerdyne, $139,885 in connection with the Sky Rover SPA, and $48,293 in finalizing all issues with Lei Pei. We repaid $52,844 to a related party and a shareholder and paid $14,489 in deferred financing costs relating to our S-1 offering.
Off Balance Sheet Arrangements
We have no off balance sheet arrangements.
ITEM 7A
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
Page No.
Audited Consolidated Financial Statements for Global Future City Holding Inc.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Operations for the Years Ended December 31, 2016 and 2015
Consolidated Statements of Shareholders’ Deficit for the Years Ended December 31, 2016 and 2015
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016 and 2015
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Global Future City Holding Inc.
We have audited the accompanying consolidated balance sheets of Global Future City Holding Inc. and subsidiaries (collectively the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations, shareholders’ equity (deficit), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company was not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Global Future City Holding Inc. as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered losses from operations and has a significant working capital deficit, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 1. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ dbbmckennon
Newport Beach, California
April 17, 2017
GLOBAL FUTURE CITY HOLDING INC.
CONSOLIDATED BALANCE SHEETS
See accompanying Notes to Consolidated Financial Statements.
GLOBAL FUTURE CITY HOLDING INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying Notes to Consolidated Financial Statements.
GLOBAL FUTURE CITY HOLDING INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
See accompanying Notes to Consolidated Financial Statements.
GLOBAL FUTURE CITY HOLDING INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying Notes to Consolidated Financial Statements.
GLOBAL FUTURE CITY HOLDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Nature of Operations
Corporate History
Our Company was incorporated in the State of Nevada on October 12, 2000 under the name Cogen Systems, Inc. We changed our name to Snocone Systems, Inc. on December 6, 2001. On April 1, 2005, Snocone Systems, Inc. and its wholly-owned subsidiary, WYD Acquisition Corp., a California corporation (the “Merger Sub”), merged with Who’s Your Daddy, Inc. (“WYD”), an unrelated, privately held California corporation, whereby the Merger Sub merged with and into WYD. After the merger, WYD continued its corporate existence as a direct, wholly-owned subsidiary of Snocone Systems, Inc. under the laws of the State of California. On April 13, 2005, we changed our name to Who’s Your Daddy, Inc. and, effective June 1, 2010, we changed our name to FITT Highway Products, Inc. Effective October 29, 2013, we merged with F.I.T.T. Energy Products, Inc. (“FITT”) whereby FITT merged into our Company, with our Company being the surviving entity. Effective October 29, 2014 the name of our Company was changed to Global Future City Holding Inc. (the “Company” or “we”) and our trading symbol changed from “FHWY” to “FTCY.”
Detention of our Former Chief Executive Officer
On August 30, 2016, we reported on Form 8-K that our former Chief Executive Officer, President, and Chairman of the Board of Directors, Ning Liu, was detained in the People’s Republic of China (“PRC”) and we had begun investigating the facts and circumstances surrounding his detainment. On September 9, 2016, we filed Form 8-K reporting that Mr. Liu was taking a 30 day leave of absence from all positions he held with our Company. Finally, on October 21, 2016, because of his ongoing legal challenges in the PRC, Mr. Liu resigned from all his positions in our Company. Also on October 21, 2016, our Board of Directors appointed Michael R. Dunn to the positions of Chief Executive Officer (“CEO”), President and Chairman of the Board.
Mr. Liu continues to be detained in the PRC. We have been informed by Mr. Liu’s attorney in the PRC that, on March 2, 2017, he was convicted in Hunan province for violations of the PRC’s multi-level marketing regulations and sentenced to 10 years in prison. We have likewise been informed by Mr. Liu’s attorney that he has an appeal hearing scheduled in Hunan Province in the near future and, if he is unsuccessful in that hearing, he can appeal to a national court in Beijing China. This process could take months and it is very difficult to get reliable information on the particulars of Mr. Liu’s case to make any intelligent assessment as to the final outcome. While many of the facts of his detention and conviction are unclear, we have been informed that Mr. Liu allegedly raised capital through the sale of a digital coin, named Wan Fu Bi, all while representing himself as the CEO of our Company and an unaffiliated private company, Great Coin Inc. (“Great Coin”). As further described below, Great Coin, which was co-owned by Mr. Liu and Michael Dunn, is a technology company that developed the GX Coin, a digital currency, and a trading platform for the GX Coin. Through a February 2016 agreement with Great Coin, our Company’s direct-selling program members were able to convert a portion of their membership accounts into GX Coins. It is unclear whether investors in Wan Fu Bi believed it was the same as the GX Coin. Even though Mr. Liu was allegedly representing himself as the CEO of our Company and also of Great Coin, his activities were never authorized by either company, Wan Fu Bi has no affiliation with either company or Michael Dunn, and no funds resulting from the alleged activities were ever received by our Company, Great Coin or Michael Dunn.
While no actions have been filed against our Company as a result of Mr. Liu’s actions, his detention and legal challenges have had, and continue to have, a material adverse impact on us. We believe that potential investors in our Company and potential business partners have refused and or avoided doing business with us due to Mr. Liu’s actions. Our efforts to implement our direct selling program became significantly more difficult due to questions surrounding Mr. Liu’s detention. In addition, our investment in Global Future City Regional LLC, an EB-5 Regional Center, was significantly impaired due to Mr. Liu’s actions, and potential project partners decided to investigate their opportunities elsewhere.
While Mr. Liu is no longer involved with our Company, many potential investors and strategic partners, particularly those in the PRC, became distrustful of us, resulting in significant harm to our credibility, our brand and our ability to raise capital. As a result of Mr. Liu’s alleged actions, we were forced to suspend our direct selling program (the “GX-Life Direct Selling Program”) in the fourth quarter of 2016 and to abandon and write-off our investment in our EB-5 Regional Center line of business. We believe Mr. Liu’s alleged actions were the primary factor in our stock price falling from a high of $3.64 per share in the first quarter of 2016 to a low of $0.51 per share in the fourth quarter of 2016, causing us to experience significant lost opportunities to raise capital. In addition, after focusing a significant portion of our resources for several months attempting to redirect our marketing strategy to an online sales program with little success, we were forced to lay off a majority of our employees in January 2017 to reduce costs to a minimal level.
In response to Mr. Liu’s alleged actions and their significant harm to our Company, on March 20, 2017 we entered into a Stock Issuance Cancellation Agreement with Mr. Liu and certain of his affiliates (the “Stockholders”) under which the Stockholders agreed to return 8,349,906 common shares owned by them to our Company for cancellation. We retain the right in the future to bring actions against Mr. Liu for any and all further damages his alleged actions may have caused. In a separate agreement, Mr. Liu also relinquished his 50% ownership in Great Coin to Mr. Dunn and Mr. Dunn retains the right to bring future actions against Mr. Liu for any damages his alleged actions may have caused.
Description of Business
We are a holding company focused in the area of consumer product sales. We entered this market space through our October 2015 acquisition of GX-Life Global, Inc. (“GX-Life”). See Note 3. Through GX-Life, we sell high quality consumer products such as personal care, wellness, and quality-of-life products under the brand, “GX-Life”. Our sales, although limited, were previously made via a direct-selling membership program and through e-commerce channels. Our direct-selling program includes a reward program featuring a digital currency (the “GX Coin”) we access through an agreement with Great Coin, Inc. (“Great Coin”). See Note 6. During the fourth quarter of 2016, we suspended the direct-selling program for reasons associated with the detention of our CEO described above.
We currently are pursuing relationships with a number of sales organizations who can purchase our existing inventory for resale purposes in an attempt to establish a wholesale relationship with these organizations. This would allow us to take advantage of established sales networks and, if successful, create a sustainable stream of revenue. We believe this approach gives us the best opportunity for future success at the least cost. There is no assurance that we will be successful in this endeavor.
For a more detailed description of our business, please see the section titled, “Business Summary” under Part I, Item 1. Business.
As a result of recurring losses, negative cash flows from operations and working capital deficiency, there is a substantial doubt about the Company’s ability to continue as a going concern. We intend to fund our operations with additional equity and/or debt financing. Management is also making efforts to increase revenue generating activities though the pursuit of wholesale relationships with interested sales organizations. If we cannot raise additional short term capital, we may consume all of our cash reserved for operations. There are no assurances that management will be able to raise capital on terms acceptable to the Company or at all. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that would be necessary if we are unable to continue as a going concern.
2. Basis of Presentation and Significant Accounting Policies
The preparation of these financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts in the financial statements and disclosures of contingent assets and liabilities. On an on-going basis, we evaluate all of these estimates and assumptions. The most important of these estimates and assumptions relate to revenue recognition including reserves for right of return, inventory valuation, collectability of receivables, impairment assessments on long-lived assets, and the valuation of stock compensation and awards. Although these and other estimates and assumptions are based on the best available information, actual results could be different from these estimates. The policies discussed below include those that management has determined to be the most appropriate in preparing our consolidated financial statements.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Global Future City Holding Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Management makes estimates and assumptions that affect the amounts reported in the consolidated financial statements and footnotes. Actual results could differ from those estimates.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Our significant estimates relate to revenue recognition including reserves for right of return, inventory valuation, collectability of receivables, impairment assessments on long-lived assets, and the valuation of stock compensation and awards.
Concentrations of Credit Risks
We will invest any cash balances we may have through high-credit quality financial institutions. From time to time, we may maintain bank account levels in excess of FDIC insurance limits. If the financial institution in which we have our accounts has financial difficulties, any cash balances in excess of the FDIC limits could be at risk.
Cash and Cash Equivalents
We consider all highly liquid investments with original maturities of 90 days or less to be cash equivalents.
Allowances for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We consider the following factors when determining if collection of required payments is reasonably assured: customer credit-worthiness, past transaction history with the customer, and current economic industry trends. As of December 31, 2016 and 2015, there were no allowances for doubtful accounts.
Inventories
Inventories are valued at the lower of first-in, first-out, cost or market value (net realizable value). We regularly review our inventory quantities on hand and record a provision for excess and slow moving inventory based primarily on our estimated forecast of product demand and related product expiration dates.
Property and Equipment, net
Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful life of five years. Significant renewals and betterments are capitalized while maintenance and repairs are charged to expense as incurred. Leasehold improvements are amortized on the straight-line basis over the lesser of their estimated useful lives or the term of the related lease.
Internal Use Software
We incur software development costs to develop software programs to be used solely to meet our internal needs and cloud-based applications used to deliver our services. In accordance with ASC 350-40, Internal-Use Software, we capitalize development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the function intended.
Impairment of Long-Lived Assets
We review our long-lived assets in accordance with ASC 360-10-35, Impairment or Disposal of Long-Lived Assets. Under that directive, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Such group is tested for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. When such factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made.
Fair Value of Financial Instruments
We follow the guidance of ASC 820 - Fair Value Measurement and Disclosure. Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of our Company. Unobservable inputs are inputs that reflect our Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:
Level 1. Observable inputs such as quoted prices in active markets;
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Our financial instruments consisted primarily of (level 1) accounts payable, accrued expenses and deposits, and notes payable. The carrying amounts of our financial instruments generally approximate their fair values due to the short term nature of these instruments.
As of December 31, 2016 and 2015, we did not have any level 2 or 3 assets or liabilities.
Deferred Rent
Our Company accounts for lease rentals that have escalating rents on a straight-line basis over the life of each lease. This accounting generally results in a deferred liability (for the lease expense) recorded on the balance sheet.
Debt Issued with Common Stock
Debt issued with common stock is accounted for under the guidelines established by ASC 470-20 - Accounting for Debt With Conversion or Other Options. We record the relative fair value of common stock related to the issuance of convertible debt as a debt discount or premium. The discount or premium is subsequently amortized to interest expense over the expected term of the convertible debt.
Convertible Debt
We account for free-standing derivative instruments and hybrid instruments that contain embedded derivative features in accordance with ASC Topic 815, Accounting for Derivative Instruments and Hedging Activities, as well as related interpretations of this topic. In accordance with this topic, derivative instruments and hybrid instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. We determine the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, giving consideration to all of the rights and obligations of each instrument. We record all of these liabilities at their fair value at issuance and adjust the liabilities quarterly to reflect changes in their fair value.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Due to historical net losses, a valuation allowance has been established to offset the deferred tax assets.
Revenue Recognition
Revenue from product sales are recorded when the products are shipped and title passes to independent members. Net revenues are determined after deducting promotional and other allowances in accordance with ASC 605-50. Product sales to members are made pursuant to a member agreement that provides for transfer of both title and risk of loss upon our delivery to the carrier that completes delivery to the members. This is commonly referred to as “F.O.B. Shipping Point.” Amounts received for unshipped product are recorded as deferred revenue. Our sales arrangements do not contain right of inspection or customer acceptance provisions other than general rights of return. We estimate and accrue a reserve for product returns based on our return policies and historical experience, with the expense recorded as a reduction to revenue.
Cash receipts for enrollment packages include nonrefundable enrollment fees for all new members and an additional deposit for upgrading to a VIP status if a member so chooses under the terms of the compensation plan that was in effect during the second quarter of 2016 (the “Q2 Plan”). The nonrefundable enrollment fee is deferred and recognized over the term of the arrangement, generally twelve months.
For members under the Q2 Plan, a VIP status upgrade is a deposit which is repayable to a member either in cash, product, or convertible into GX Coin. There is no revenue associated with a VIP status upgrade deposit initially; however, related party revenue is recognized on the commission earned when VIP members under the Q2 Plan convert their membership or rewards points into GX-Coin. A VIP status upgrade earns reward status points that are also subject to repayment in cash or convertible into GX Coin. Pursuant to ASC 605-50, a cost and liability for amounts owed in cash or cash equivalents benefits under nondiscretionary loyalty programs should be accrued with a related contra-revenue, as by transferring the right to cash or cash equivalent benefits, the entity effectively reduces the revenue from conversions of VIP status and related accrued benefits to GX Coin. Each VIP member entering the Q2 Plan through the second quarter of 2016 have elected to convert their respective deposit to GX-Coin by such time or during the third quarter of 2016. The Company recognizes revenue on the conversion upon the completion of our performance obligation as part of the conversion process, at which point all necessary revenue recognition criteria have been met.
Based on industry developments and best practices of direct selling programs, GX-Life implemented a revised compensation plan on July 15, 2016, and finalized and released such plan on August 1, 2016 (the “GX-Life Global Compensation Plan”). The GX-Life Global Compensation Plan removed the VIP status upgrade deposits and accordingly, the revenues from the conversion of VIP status upgrade deposits is expected to cease during the 2016 year after all deferrals are recognized.
From time to time, GX-Life may make modifications and enhancements to the GX-Life Global Compensation Plan to help motivate GX-Life Members. GX-Life may also enter into agreements for business or market development, which may result in additional compensation to specific GX-Life Members. GX-Life intends to continue to examine and adjust the GX-Life Global Compensation Plan to reflect marketplace competition, demand, and U.S. regulations and foreign jurisdictions. Because of this, GX-Life recognizes that the compensation and rewards available under the GX-Life Global Compensation Plan may be different across different jurisdictions.
Shipping and Handling
Shipping and handling costs are recorded as a cost of net revenue and are expensed as incurred.
Net Income (Loss) per Share
We present basic income (loss) per share (“EPS”) and diluted EPS on the face of the consolidated statement of operations. Basic loss per share is computed as net loss divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants, and other convertible securities. At December 31, 2016 and 2015, we had no outstanding options or warrants to purchase any of our common shares, respectively. As of December 31, 2016 and 2015, we had convertible debt; however, the effects of the convertible debt would have been anti-dilutive due to loss in the period.
Stock-Based Compensation
We account for our stock-based compensation in accordance with ASC 718 - Stock Compensation. We account for all stock-based compensation using a fair-value method on the grant date and recognize the fair value of each award as an expense over the requisite vesting period.
Accounting for Equity Instruments Issued to Non-Employees
We account for our equity-based payments to non-employees under ASC 505 - Equity. The fair value of the equity instrument issued or committed to be issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of our common stock on the date the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to the statement of operations and credited to common stock and/or additional paid-in capital as appropriate.
Fees Paid in a Cloud Computing Arrangement
In April 2015, the FASB issued ASU No. 2015-05 “Intangibles-Goodwill and Other-Internal-Use Software.” The standard amended the existing accounting standards for intangible assets and provides explicit guidance to customers in determining the accounting for fees paid in a cloud computing arrangement, wherein the arrangements that do not convey a software license to the customer are accounted for as service contracts. The pronouncement is effective for reporting periods beginning after December 15, 2015. We early adopted ASU 2015-05 and applied service contract treatment to the Software License and Service Agreement (Note 6) as we do not have the right to take possession of the software, and thus the contract is deemed a service contract.
Recent Accounting Pronouncements
From time to time, the FASB issues ASUs to amend the authoritative literature in ASC. Management believes that those issued to date that are not described below either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to us or (iv) are not expected to have a significant impact our consolidated financial statements.
Revenue Recognition. In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers”. Under this guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The updated standard will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The updated standard will be effective for us beginning January 1, 2018. We are currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.
Financial Instruments. In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall”. The new guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. The guidance is effective for annual and interim periods beginning after December 15, 2017. The guidance on financial liabilities under the fair value option did not have a significant impact on our consolidated financial statements.
Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases, that requires organizations that lease assets, referred to as “lessees”, to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with lease terms of more than 12 months. ASU 2016-02 will also require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases and will include qualitative and quantitative requirements. The new standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those annual years, and early application is permitted. We are currently assessing the impact that this standard will have on our consolidated financial statements.
Share-Based Payments to Employees. In March 2016, the FASB ASU 2016-09, “Improvements to Employee Share-based Accounting”, new guidance to simplify and improve accounting for share-based payments. The amendments include income tax consequences, the accounting for forfeitures, classification of awards as either equity or liabilities and classification on the statement of cash flows. The guidance is effective for annual and interim periods beginning after December 15, 2016. We do not believe the adoption of this accounting guidance will have a material effect on our consolidated financial statements.
Cash Flow Classifications. In August 2016, the FASB issued ASU 2016-15 providing new guidance to reduce the diversity in practice in how certain transactions are classified in the statement of cash flows. The guidance adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The guidance is effective for annual and interim periods beginning after December 15, 2017. In November 2016, the FASB issued new guidance on restricted cash. The guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. The guidance is effective for annual and interim periods beginning after December 15, 2017. We are currently evaluating the impact this new guidance will have on our consolidated financial statements.
3. Acquisitions
Sky Rover Stock Purchase Agreement
On April 17, 2015, our Company and Sky Rover Holdings, Ltd., a corporation formed under the laws of the Republic of Seychelles (“Sky Rover”) completed the closing of a Stock Purchase Agreement (the “SPA”) whereby certain unaffiliated parties that contributed cash, E-Gold coin (“EGD”) crypto-assets, and other consideration to complete the SPA (including the shares issued to Mr. Lei Pei as described below) (collectively, the “Acquiring Shareholders”) cumulatively acquired 30,400,000 of the outstanding shares of stock of our Company (approximately 87.3%) in exchange for our receipt of $400,000 in cash and the contribution of 4,000,000 EGD to our wholly-owned subsidiary, Global Modern Enterprise Limited, a Hong Kong entity (the “EGD Subsidiary”). To complete the transaction, 29,868,649 of the common shares acquired were conveyed by certain affiliated and unaffiliated existing shareholders and 3,371,351 were newly issued. Prior to the closing, Sky Rover advanced $539,885, consisting of the $400,000 purchase price and $139,885 towards reimbursement of certain corporate costs. Additionally, Sky Rover’s officer, Mr. Lei Pei, provided the initial down payment for the purchase of Powerdyne.
In connection with the closing of the SPA, Mr. Lei Pei purchased 6,000,000 newly-issued shares of our common stock for $3,000,000 in cash in a separate transaction that closed on March 30, 2015, which was meant to provide working capital for our anticipated expansion programs. On August 17, 2015, Mr. Pei, resigned from our Company as its Chief Executive Officer, Chief Financial Officer and Chairman.
Also in connection with the share purchase by Sky Rover, we intended to market and deploy the EGD through a reward program (“Rewarded EGD”). In order to ensure compliance with existing securities regulations, on February 10, 2015 we filed a Request for No-Action Relief (the “No-Action Letter”) with the Securities and Exchange Commission (“SEC”) to obtain clarification that the SEC will not recommend enforcement action against our Company and its related subsidiaries regarding our use of the EGD. Despite several inquiries made by our Company, we did not receive a substantive response from the SEC on the No-Action Letter. This led management to elect to rescind the previous contribution of EGD and to focus on the acquisition of GX-Life as described below. As a result, on October 9, 2015, we withdrew the No-Action Letter from consideration by the SEC.
The acquisition of the EGD is considered an asset purchase for accounting purposes based on the guidance of ASC 805 - Business Combinations, as the EGD does not have features of a business nor does it have any operations. Due to management’s election to effectively rescind the contribution of EGD and to focus on the acquisition of GX-Life Global, we recorded the value of the EGD as of the date of acquisition at $0.
GX-Life Acquisition
On October 2, 2015, we completed a Share Exchange Agreement with GX-Life, whereby we spun-off 100% of our ownership interest in the EGD Subsidiary (including 4,000,000 EGD) in exchange for 100% of the outstanding common stock of GX-Life. GX-Life is a consumer products business, which was primarily owned by our former CEO, Ning Liu, and our current CEO, Michael Dunn. As part of their marketing strategy, GX-Life had developed a robust, scalable network marketing platform that utilizes iMatrix’s software to support direct selling opportunities throughout the world. In a related transaction, on October 2, 2015, the former shareholders of GX-Life sold all of their interests in the EGD Subsidiary to the Acquiring Shareholders in the Sky Rover SPA in exchange for 21,280,000 shares of our Company’s common stock previously acquired in the Sky Rover SPA. Collectively these two transactions are referred to as the “GX-Life Transactions”. As a result of the GX-Life Transactions, much of the Sky Rover SPA has been effectively unwound and the 4,000,000 EGD crypto-assets are no longer owned or controlled by our Company or any of our subsidiaries.
The GX-Life Transactions effectuated a change in control of our Company, as the former shareholders of GX-Life acquired 21,280,000 shares of our common stock representing an aggregate voting power of 45.9%. Individually, (i) Michael Dunn acquired an additional 24.1% voting power of our common stock, (ii) Ning Liu acquired 2.6% voting power of our common stock, and (iii) Tomoe Masuya acquired an additional 26.65% voting power of our common stock. The former shareholders of GX-Life Global are all unaffiliated from one another, and none of them have a beneficial interest or hold any ownership interest in each other's entity and disclaim status as a "group" as defined by SEC Rules.
In accordance with ASC 805, we have included the financial results of GX-Life in our consolidated financial statements as of the date of acquisition. The assets and liabilities of GX-Life assumed on the acquisition date were recorded at fair value, which approximated the carrying value, and are included in the consolidated financial information post-merger. Following is a summary of the assets and liabilities assumed as of the acquisition date:
Following is pro-forma revenue and earnings information for the year ended December 31, 2015 assuming both our Company and GX-Life had been combined as of September 1, 2015, the date of formation of GX-Life. Amounts are unaudited:
Our direct-selling program includes a reward program featuring a digital currency (the “GX Coin”) we access through an agreement with Great Coin, Inc. (“Great Coin”). See Note 6.
Powerdyne Acquisition
On March 26, 2015, we entered into a Membership Interest Purchase and Sale Agreement with Powerdyne, Inc., an entity which owned 100% of the membership interests in Global Future City Regional Center, LLC, formerly Powerdyne LLC (“Powerdyne” or “Regional Center”). Powerdyne is an EB-5 Regional Center (USCIS ID Number 1215250671) that was approved by the USCIS on March 28, 2013. The purchase price was $250,000, of which $150,000 was contributed by our former CEO Lei Pei. The acquisition closed on March 27, 2015. As an EB-5 Regional Center, we intended to attract and pool investments from qualified foreign investors for the purpose of job creation within a defined geographic region.
The purchase of Powerdyne is considered an asset purchase for accounting purposes based on the guidance of ASC 805 - Business Combinations, as Powerdyne does not have features of a business nor does it have any operations. Through the Powerdyne acquisition, we acquired the right to issue licenses to projects such that the projects will benefit from its regional center approved status.
We have been unable to find an EB-5 investment project that meets our internal criteria and, given the difficulties caused by Mr. Liu’s alleged actions discussed in Note 1, we believe our investment in the Regional Center became significantly impaired. Consequently, during the fourth quarter of 2016 we commenced evaluating alternative strategies to utilize or sell the Regional Center. Because of the inactivity of the Regional Center, the USCIS has deemed it frozen and the value the license would have to a third party may be minimal. We may not be able to utilize or find a buyer for the EB-5 Regional Center and cannot determine at this point whether it has any value at all. Accordingly, a full impairment was deemed necessary.
We have included the capitalized amount as a separate line item in the accompanying consolidated balance sheet as of December 31, 2016 and 2015 and a separate line for the impairment in the accompanying consolidated statements of operations.
4. Inventories
Inventories on hand at December 31, 2016 consist of finished goods. Because of the difficulties associated with Mr. Liu’s legal challenges in the PRC, we have suspended our direct-selling program and reduced the value of our inventory to its net realizable value resulting in an impairment charge of $1,122,520 during 2016. The impairment estimate was based on the movement of products to date, negotiations with third party to purchase certain inventory, and expiration dates of perishable goods that our Company may have difficulty selling in a timely manner. In addition, we had made deposits of $242,777 for future deliveries of inventory to companies that went out of business or declared bankruptcy. During the fourth quarter of 2016 we wrote-off these deposits as bad debts as the ability to receive inventory or recoup deposits is in doubt.
Deposits for inventories at December 31, 2015 are down payments for products of our new direct-selling business which were shipped to us in the first quarter of 2016.
5. Property and Equipment, net
Property and equipment, net consist of the following at December 31:
Depreciation expense was $95,482 and $6,367 for the years ended December 31, 2016 and 2015, respectively.
6. Service Contract - Related Party
As described in Note 3 under the caption Sky Rover Stock Purchase Agreement, we had previously intended to market the EGD through a reward program. GX-Life determined that incorporating a crypto-asset other than EGD into a reward program for its direct selling program would be important to its success. As a result, on October 21, 2015, GX-Life entered into a $2.5 million Subscription Agreement with Great Coin under which it made an initial purchase of 700,000 GX Coins for $350,000. However, the purchase was never consummated because the Subscription Agreement was subsequently superseded and replaced by way of a February 17, 2016 Software License and Services Agreement with Great Coin (the “Services Contract”) under which Great Coin granted a license for the GX Coins for an upfront license fee of $350,000 which was deemed paid by the payment made in October 2015 and the remaining obligations under the Subscription Agreement were canceled. The agreement was accounted for under ASU 2015-05 as documented in Note 2. The GX Coins are a digital currency, a form of crypto-asset, which we are incorporating into a reward program for our consumer products sales programs.
Under the Services Contract, which has a term of 10 years, members of our direct selling program may elect to convert certain membership account balances into GX Coins at agreed-to conversion rates. When a member converts status or reward points, we will record revenues, excluding the conversion fee payable to Great Coin, equal to 80% of the conversion amount, up to $4,000,000 in total conversion amounts, and 50% of the conversion amount thereafter.
We had classified the $350,000 as a separate line item in our consolidated balance sheet and began amortizing it on a straight-line basis over the expected period of benefit. However, given the difficulties we’ve experienced as a result of Mr. Liu’s detention in the PRC as described in Note 1, our efforts to implement our direct selling program became significantly more difficult and we decided to suspend our direct selling program. Accordingly, although the agreement remains in place and the platform run by the Great Coin remains operational, the usage of the Service Contract has been suspended, as it is no longer being integrated with our suspended direct selling program and therefore provides no future economic benefit to the Company based on current circumstances. As a result, during the fourth quarter of 2016, we have impaired the remaining unamortized balance of the Service Contract of $280,000.
7. Accrued Expenses
Accrued expenses consist of the following at December 31:
8. Accrued Compensation
Accrued compensation consists of the following at December 31:
As further discussed in Note 13, in 2016, we issued common stock to certain of our employees as part of the condition of their employment. During the fourth quarter of 2016, the employees earned common stock valued at $34,079 which is included in the table above under Accrued other compensation.
We have delinquent Federal and State payroll taxes incurred mainly under previous management during the years 2006 through 2008. In 2015 we made payments of $52,597 against the Federal obligation. Additionally, based on an accounting received from the Internal Revenue Service (“IRS”), we determined that our accrual for past-due Federal payroll taxes was overstated due to collections made, which were unknown to us, from other responsible parties along with lower than estimated interest and penalties. As a result, at December 31, 2015, we reduced our liability by $60,000, with $6,000 reducing interest expense accrued during 2015 and $54,000 recorded as a gain on extinguishment of debt. In January 2016, we received approval from the IRS for a 4-year payment plan to repay this obligation with the first payment scheduled for April 2016. Due to the reduced availability of capital, we are delinquent with respect to this payment plan and are in contact with the IRS about adjusting the plan.
In 2014, in order to facilitate the investment by Sky Rover discussed in Note 1, we entered into settlement agreements with our former CEO and Controller under which they agreed to forgive all accrued but unpaid salary once all closing conditions of the Sky Rover SPA had been met. During the three months ended March 31, 2015, when all closing conditions of the Sky Rover SPA became effective, our former Chief Executive Officer and former Controller forgave all accrued compensation owed to them in accordance with settlement agreements which, along with the related accrued payroll taxes, totaled $1,673,774. This amount has been recorded as contributed capital in the accompanying consolidated financial statements due to the related party nature of the transaction.
9. Membership Deposits and Accrued Benefits
Membership deposits and accrued benefits activity for the years ended December 31, 2016 and 2015 consists of the following:
During 2016, our former CEO repaid certain member deposits totaling $250,000 ($240,400 in member deposits and $8,600 in enrollment fees and prepaid product purchases). We have accounted for this repayment as contributed capital.
Member conversions to GX Coins were made in conformity with the provisions of the Service Contract discussed in Note 6.
The balance at December 31, 2016 consists of the following:
10. Notes Payable
Notes payable consists of the following at December 31:
Acquisition Note - Powerdyne
This obligation arose in connection with our acquisition of Powerdyne (see Note 3). Remaining payments on this note were made in 2016.
Promissory Notes
In the fourth quarter of 2016, we issued promissory notes to three individuals with face values totaling $300,000. The notes are to be repaid from proceeds from the sale of our inventory, with 50% of the proceeds payable on a pari passu basis to each note holder.
In lieu of a stated interest rate, each note contains the following bonus payment provisions:
1.For each $25,000 invested, the note holder receives 12,500 shares of restricted common stock of our Company.
2.For each $25,000 invested, the note holder receives a cash bonus of:
a.$5,000 if note is repaid between zero and 30 days
b.$10,000 if note is repaid between 31 and 60 days
c.$15,000 if note is repaid between 61 and 90 days
All principal and accrued but unpaid bonus payments are due 90 days from the date of each note. As of the date of this filing, no inventory has been sold and no payments have been made under the notes. As a result, the notes are in default.
The note holders were issued 150,000 shares of our common stock under these notes. We have valued the shares at $87,312, their relative fair market value on the issue date of each note (the date the share obligation arose) and recorded a debt discount for that amount. We are amortizing the debt discount over the 90-day length of the note and we recognized an interest expense of $13,765 in 2016 in connection therewith. The remaining discount of $73,547 will be amortized in the first quarter of 2017.
Settled and Restructured Notes Payable
During the fourth quarter of 2014 and the first quarter of 2015, we reached settlements (“Settlement Agreements”) with virtually all of our noteholders holding debt acquisition promissory notes and bridge notes (original through bridge #3). In the restructuring of the notes payable, our noteholders agreed to a) forgo payment of nearly all of the interest which had been accrued but unpaid as of the dates of each settlement agreement, b) a new interest rate of 10% per annum, c) a new maturity date of August 1, 2015, and d) a Company option to convert into free-trading shares of our common stock at any time the common stock has a closing bid price per share of $1.00 or more for 20 consecutive trading days after the closing of the Sky Rover SPA. Certain noteholders also agreed to relinquish to Sky Rover shares of their common stock they received with their original notes, contingent upon the Sky Rover SPA closing which occurred on April 17, 2015. In addition, holders of the restructured convertible promissory notes also agreed to forgo any additional principal (over and above the original principal) payable under their notes. These notes are no longer convertible at the option of the holder. As a result of these settlements, we recorded gains on extinguishment of debt totaling $35,403 in 2015.
Convertible Promissory Notes - Debt Acquisition
These notes originated during the first quarter of 2013 with original face values totaling $150,000. In the fourth quarter of 2014, we entered into Settlement Agreements with the holders of these notes, with the same terms as described under the above caption Settled and Restructured Notes Payable. During the years ended December 31, 2016 and 2015, we repaid $5,000 and $0, respectively, on these notes.
Note Payable - Original Bridge
These notes which originated in 2009 and 2010 had an original face value totaling $245,000. In the fourth quarter of 2014, we entered into Settlement Agreements with the holders of these notes, with the same terms as described under the above caption Settled and Restructured Notes Payable.
Note Payable - Bridge Loan #1
These notes which originated in 2010 and 2011 had an original face value totaling $580,000. In the fourth quarter of 2014, we entered into Settlement Agreements with the holders of $345,000 face value of these notes, with the same terms as described under the above caption Settled and Restructured Notes Payable. During 2016 and 2015, we repaid $125,000 and $0, respectively, on these notes.
Note Payable - Bridge Loan #2
These notes originated in 2012 and had an original face value totaling $175,000. We entered into Settlement Agreements in the fourth quarter of 2014 with holders of $150,000 face value of these notes, and in the first quarter of 2015 with holders of $25,000 face value of these notes, all with the same terms as described under the above caption Settled and Restructured Notes Payable. During 2016 and 2015, we repaid $90,000 and $0, respectively, on these notes.
Note Payable - Bridge Loan #3
These notes originated in 2013. In the fourth quarter of 2014, we entered into Settlement Agreements with the holder of these notes, with the same terms as described under the above caption Settled and Restructured Notes Payable, with the exception that the modified note does not contain a conversion option.
11. Related Parties
During 2016, we made net advances to Great Coin in the amount of $1,494,002, mainly for the purpose of their development of the GX Coin trading platform which could be used by our direct-selling members as part of our reward program. In addition, our former CEO, Mr. Ning Liu, became responsible for credit card charges totaling $24,298 which were unrelated to our business and unauthorized. Because of the legal difficulties encountered by Mr. Liu in the PRC discussed in Note 1, it has become extremely difficult for Great Coin to raise capital needed to repay these advances. In addition, the reduced activity on the trading platform, related to the suspension of our direct selling program in the fourth quarter, reduces the ability for Great Coin to generate revenue from transactional activity. As a result, while we will continue to pursue collection from the applicable parties, during the fourth quarter of 2016, we reserved $1,518,300 representing the total of these advances as it is unclear whether any of these advances will be collectable.
Advances from related party consist of net advances made by our CEO, Michael Dunn.
12. Commitments and Contingencies
On October 16, 2015, we entered into a lease agreement for 5,824 square feet of office space in Irvine, California. The lease has a minimum term of 60 months and requires the following minimum annual payments, excluding property taxes and other common area costs: months 1 through 12 - $176,112; months 13 through 24 - $183,804; months 25 through 36 - $192,192; months 37 through 48 - $200,580; and months 49 through 60 - $209,664. Tenant improvements made by the landlord were completed at the end of January 2016, at which time we moved into the space and our lease commenced. Accordingly, the annual payments as just described also substantially reflect the five-year payout schedule through 2020. Annual rent expense for the years ended December 31, 2016 and 2015 was $150,907 and $33,335, respectively.
Due to the escalating rent we have recorded a deferred rent liability of $16,358 as of December 31, 2016 which equates to the accumulated difference between the amount paid each month and the expense on a straight-line basis over the lease term.
13. Capital Stock
S-1 Registration Statement
On May 8, 2015, we filed a Form S-1 Registration Statement with the SEC for the initial registration of 10 million shares of our common stock at $3.50 per share, as amended on June 8, 2016, and amended further on June 19, 2016 (collectively the “S-1”). The S-1 was declared effective by the SEC on July 6, 2015.
The Company has filed and continues to file Post-Effective Amendments to keep the S-1 current and effective. However, as of the date of this filing, the S-1 is currently ineffective and under review by the SEC.
The summary below details the Post-Effective Amendments we have filed with the SEC as of the date of this filing:
· On October 8, 2015, we submitted Post-Effective Amendment No. 1 to the S-1 incorporating new information resulting from certain transactions in connection with GX-Life, and the resignation of our former CEO, Lei Pei. The Post-Effective Amendment No. 1 was declared effective by the SEC on October 19, 2015.
· On December 2, 2015, we submitted Post-Effective Amendment No. 2 to the S-1 incorporating certain information contained in our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015, that was filed with the SEC on November 17, 2015. The Post-Effective Amendment No. 2 was declared effective by the SEC on December 22, 2015.
· On May 4, 2016, we submitted Post-Effective Amendment No. 3 to the S-1 incorporating certain information contained in our Annual Report on Form 10-K for the year ended December 31, 2015, that was filed with the SEC on April 13, 2016, information contained in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016, that was filed with the SEC on May 16, 2016, and certain changes in circumstances involving the development and utilization of GX Coin in GX-Life’s Direct Selling Program. We disclosed in this Post-Effective Amendment that we had sold 1,013,500 shares of our common stock under this prospectus. This was due to the fact that subsequent to March 31, 2016, and while the S-1 was still effective, we had received written and verbal commitments to purchase 1,000,000 shares under the S-1 for a total of US$3,500,000. However, certain investors either did not (i) transmit their respective funds to purchase their shares, or (ii) provide the appropriate written documentation to the Company prior to the S-1 becoming ineffective. As a result, we were only able to appropriately document the sale of 759,453 shares under the S-1 for a total of US$2,658,086, and sold an additional 48,104 shares to certain individuals in exchange for noncash consideration.
· On July 22, 2016, we submitted Amendment No. 1 to Post-Effective Amendment No. 3 with the SEC to maintain the registration of 9,192,443 shares of our Common Stock. The S-1 is currently under review and we will not sell any shares under the S-1 until it is deemed effective by the SEC. Reference to the S-1 is not an offer to sell the securities described therein, and we are not soliciting an offer to buy the securities in any state where the offer or sale is not permitted.
S-8 Registration Statements
On July 29, 2016, we filed a Form S-8 Registration Statement (“S-8”) with the SEC to register 32,500 shares of our common stock at $1.69 per share. On October 5, 2016, we filed an S-8 with the SEC to register 33,500 shares of our common stock at $1.01 per share. The S-8’s were deemed effective as of the filing date pursuant to Rule 462 of the Securities Act.
Preferred Stock
We have authorized the issuance of a total of 20,000,000 shares of our preferred stock, each share having a par value of $0.001.
Common Stock
We have authorized the issuance of 150,000,000 shares of our common stock, each share having a par value of $0.001. As discussed under the above caption S-1 Registration Statement, during 2016 we sold 759,453 shares for net proceeds of $2,658,086. In addition, during 2016 we sold 25,000 shares of our restricted common stock to an investor for net proceeds of $25,000.
Effective April 17, 2015 in connection with the closing of the Sky Rover SPA, Sky Rover's designees received 33,240,000 shares of our common stock of which 3,371,351 were newly issued and 29,868,649 were conveyed by certain affiliated and unaffiliated existing shareholders to complete the transaction. All shares were considered to be part of the $400,000 acquisition price to acquire the stock per the terms described in Note 3. Prior to the closing of the Sky Rover SPA, Mr. Lei Pei purchased 6,000,000 newly-issued shares of our common stock for $3,000,000 in cash in a separate transaction that closed on March 30, 2015.
Common Stock Issued for Services
Employee Services
During 2016, we issued 97,000 shares of our common stock to certain of our employees for services relating to conditions of their employment. 66,000 of these shares were issued under Form S-8 as described above and 31,000 of these shares were issued under our S-1 Registration Statement. The shares were valued at $237,077 based on our Company’s stock price and we recorded general and administrative expense of that amount in connection with the share issuance. No shares were issued for employee services in 2015.
Non-Employee Services
During 2016, we issued 203,000 shares of our common stock for consulting services rendered. 3,000 of these shares were issued under our S-1 Registration Statement and 200,000 of these shares were restricted. We recorded general and administrative expense of $179,570 in connection with the share issuances based on the fair market value (quoted market price) of our common stock on the dates of issuance.
During 2015, we issued 250,000 shares of our common stock for consulting services related to marketing. The shares were valued at $65,000 based on the fair market value (quoted market price) of our common stock on the dates of issuance. We recorded selling and marketing expense of $65,000 in connection with the share issuances.
Common Stock Issued to Extinguish Debt
During 2016, we entered into a settlement agreement with a vendor under which we issued 14,104 shares of our common stock to settle $49,364 of outstanding amounts due. The shares were issued under our S-1 Registration Statement. No gain or loss was recorded with respect to this settlement.
During 2015, we entered into settlement agreements with two vendors under which we issued 25,000 shares of our common stock to settle $49,189 of outstanding amounts due. We recorded a gain of on extinguishment of debt of $2,089 on these settlements based on the fair market value (quoted market price) of our common stock on the date of issuance.
Contributed Capital
As discussed in Note 9, during 2016 our former CEO repaid certain member deposits totaling $250,000 which we have we have accounted for as contributed capital.
During 2015, our former Chief Executive Officer, Michael Dunn and our former Controller forgave accrued compensation due to each of them. In connection with these transactions, we recorded contributed capital of $1,673,774.
Also in 2015, we recorded the following transactions as contributed capital:
Warrants and Stock Options
During the years ended December 31, 2016 and 2015, there were no warrants or stock options outstanding and there was no expense related to warrants or stock options.
On December 30, 2015, we elected to withdraw and terminate our Option Plan for employees, officers, and consultants of our Company. At the time of cancellation, there were no options outstanding and 13,889 shares were remaining for future issuance. We will re-evaluate the implementation of an option plan in the future at the Board of Director’s discretion.
14. Income Taxes
Reconciliations of the U.S. federal statutory rate to the actual tax rate are as follows for the years ended December 31:
The major components of the deferred taxes are as follows at December 31:
Based on federal tax returns filed or to be filed through December 31, 2016, we had available approximately $8,322,000 in U.S. tax net operating loss carryforwards, pursuant to the Tax Reform Act of 1986, which assesses the utilization of a Company’s net operating loss carryforwards resulting from retaining continuity of its business operations and changes within its ownership structure. Net operating loss carryforwards expire in 20 years for federal income tax reporting purposes. For Federal income tax purposes, the net operating losses begin to expire in 2026. State net operating loss carryforwards through December 31, 2016 are approximately $8,197,000 and begin to expire in 2030. We have relied on the issuance of common stock to fund certain operating expenses.
With the finalization of our merger with FITT, we experienced a change in ownership as defined in Section 382 of the Internal Revenue Code. As a result, our net operating loss carryforwards for federal income tax reporting became significantly limited based on the fair value of our Company on the date of change in ownership. Such change is expected to provide benefit to us only upon the attainment of profitability.
Due to the Sky Rover and GX-Life transactions (Note 1) there has been a significant change in ownership. A change in ownership requires management to compute the annual limitation under Section 382 of the Internal Revenue Code. The amount of benefits we may receive from the operating loss carry forwards for income tax purposes is further dependent, in part, upon the tax laws in effect, our future earnings, and other future events, the effects of which cannot be determined.
During the years ended December 31, 2016 and 2015, our valuation allowance increased by $2,054,420 and $403,358, respectively.
The United States Federal return years 2013 through 2016 are still subject to tax examination by the United States Internal Revenue Service, however, we do not currently have any ongoing tax examinations. We are subject to examination by the California Franchise Tax Board for the years 2013 through 2016 and currently do not have any ongoing tax examinations.
15. Agreements
Mo Feng Yi Consulting Agreement
On November 24, 2015 we entered into a Consulting Agreement with Mo Feng Yi (“Consultant”), an individual with extensive contacts and business relationships in Asia. Under the agreement, which has a term of 6 months, Consultant agreed to provide various business and market development services for our direct-selling business. The agreement required us to pay Consultant $200,000 in 2015 in two equal installments for services provided.
On February 23, 2016, we amended the agreement to provide for an additional payment of $100,000 in February 2016 for continued service.
Alicia Xie Geiser Consulting Agreements
On December 1, 2015, we entered into a Consulting Agreement with Alicia Xie Geiser (“Consultant”), an individual with extensive contacts and business relationships in Asia. Under the agreement, which has a term of 6 months, Consultant agreed to provide various business and market development services for our direct-selling business. The agreement requires us to pay Consultant $10,000 per month. During 2016 and 2015, we recorded general and administrative expenses of $40,000 and $10,000, respectively, in connection with this agreement.
On September 21, 2016, we entered into another Consulting Agreement with Consultant under which Consultant agreed to provide advice and assistance with respect to our capital market positioning. Consultant also agreed to help us broaden the market support for our securities and introduce us to prospective investors. Under the agreement, which had a one-month term, we agreed to issue Consultant 25,000 shares of our restricted common stock which we valued at $29,750, the fair market value at the date of issuance. In 2016, we recorded a general and administrative expense of the same amount in connection with this agreement.
Private Consulting Group Consulting Agreement
On February 26, 2016, we entered into a Consulting Agreement with Private Consulting Group (“Consultant”) under which Consultant agreed to provide business and financial consulting services including advice and assistance with our capital market positioning and identifying prospective institutional purchasers for our equity securities. The agreement has a term of 7 months and requires that we pay Consultant $10,000 per month and issue Consultant 50,000 restricted shares of our common stock. Because of Consultant’s inability to completely perform the services, we paid only $30,000 and issued only 25,000 shares. The shares were valued at $65,250, their fair market value on the date of issuance. In connection with this agreement, we recorded a general and administrative expense in 2016 totaling $95,250.
iMatrix Software, Inc. Consulting Agreement
On February 17, 2016, we entered into a Consulting Agreement with iMatrix Software, Inc. (“Consultant”) under which Consultant agreed to provide services to assist in developing and expanding our direct-selling business. The agreement has a minimum term of 3 months and requires that we pay Consultant $18,000 per month and issue Consultant 3,000 registered and free-trading shares of our common stock. The shares were valued at $8,070, their fair market value on the date of issuance. In connection with this agreement, we recorded a general and administrative expense in 2016 totaling $116,070.
Mitchell Morrison Consulting Agreement
On April 1, 2016, we entered into a Consulting Agreement with Mitchell Morrison (“Consultant”) under which Consultant agreed to provide business and financial consulting services including advice and assistance with our capital market positioning and identifying prospective institutional purchasers for our equity securities. The agreement has no stated term, is cancellable by either party on 30 days’ notice, and requires that we pay Consultant $15,000 on execution of the agreement and $10,000 per month. During 2016, we recorded a general and administrative expense totaling $15,000 in connection with this agreement as it was cancelled shortly after its inception.
Juan Lopez Consulting Agreement
On December 8, 2016, we entered into a Consulting Agreement with Juan Lopez (“Consultant”) under which Consultant agreed to assist us in developing a marketing plan for the promotion and sale of our products outside the direct-selling area. The agreement has a term of 4 months and requires that we issue Consultant 150,000 restricted shares, all of which were vested as of the date of the agreement. We have valued the shares based on their fair market value on the date of issue and recorded a selling and marketing expense in the amount of $76,500.
16. Subsequent Events
Promissory Note
On January 27, 2016, we issued a promissory note to an individual with a face value of $50,000. The note has the same terms as the notes described in Note 10 under the caption Promissory Notes including the issuance of 25,000 shares of our restricted common stock.
Stock Issuance Cancellation Agreement
Due to Mr. Liu’s legal challenges in the PRC, as described in Note 1, the following actions were taken.
On March 20, 2017, we entered into a Stock Issuance Cancellation Agreement with, Master Power Holdings Group and Big Name Group Co. Ltd., a British Virgin Islands corporation controlled by Mr. Ning (Sam) Liu (“Mr. Liu”), the Company’s former Chief Executive Officer, (collectively the “Shareholders”). Pursuant to the Agreement, the Shareholders agreed to cancel and return to treasury an aggregate 8,349,906 shares of common stock (representing 17.12% of the current issued and outstanding common stock) as consideration for the significant hardship suffered by the Company as a result of Mr. Liu’s legal challenges.
Upon the closing of the Agreement, which took place on March 20 2017 (the “Closing”), the Shareholders surrendered their stock certificates representing an aggregate 8,349,906 shares of common stock with all necessary documentation to the Company’s transfer agent for cancellation.
Additionally, Mr. Liu entered into an agreement to cancel his share ownership in Great Coin, a company that provides the platform and cryptocurrency (GX-COIN) used by our wholly-owned subsidiary, GX-Life Global, Inc. (“GX-Life”). Prior to the cancellation, Mr. Liu owned 50.0% of Great Coin and Michael Dunn, our Chief Executive Officer and member of our Board of Directors, owned the other 50.0% of Great Coin. After the cancellation, Mr. Dunn owns 100% of Great Coin.
ITEM 9
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A
ITEM 9A CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our President and Chief Financial Officer (the “Certifying Officer”) has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of period covered by this report. Based upon such evaluation, the Certifying Officer concluded that our disclosure controls and procedures were effective as of December 31, 2016.
Management’s Report on Internal Control over Financial Reporting
Our management, including the Certifying Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipt and expenditures are being made only in accordance with authorizations of management and our Board; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations. A system of internal control may become inadequate over time because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Our management assessed the effectiveness of our internal control over financial reporting as December 31, 2016 using the criteria set forth by the Commission of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, our management concluded that our internal control over financial reporting disclosure controls and procedures were effective as of December 31, 2016.
Changes in Internal Control and Financial Reporting
There have been no changes in our internal control over financial reporting in the fiscal year ended December 31, 2016, which were identified in connection with our management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management's report in this annual report.
ITEM 9A(T) CONTROLS AND PROCEDURES
This Item is not applicable to us.
ITEM 9B
ITEM 9B OTHER INFORMATION
On October 21, 2016, Ning Liu resigned as the Company’s Chief Executive Officer, President, and Chairman of the Board. On August 17, 2015, the following individuals resigned from their respective positions with our Company: Lei Pei, our former CEO, former CFO, and former Chairman; Junfei Ren, our former Secretary and former Director; and Xiang Ling Yun, a former Director. Concurrent with the resignations, Ning Liu, who was our President, was appointed to the positions of Chairman and CEO, and Michael R. Dunn, who was the Executive Vice President of Finance, was appointed to the positions of Chief Financial Officer, Chief Operating Officer, and Secretary and Treasurer.
PART III
ITEM 10
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Name
Age
Position(s) and Office(s)
Michael R. Dunn
Current Chief Operating Officer, Chief Financial Officer, Secretary, Treasurer, Executive VP of Finance, Director. Former Chief Executive Officer.
There are no family relationships among our Company’s directors and executive officers.
Directors
Number of Directors. Our board of directors currently consists of two individuals.
Director Qualifications. While the selection of directors is a complex and subjective process that requires consideration of many intangible factors, we believe that candidates should generally meet the following criteria:
· Broad training, experience and a successful track record at senior policy-making levels in business, government, technology, accounting, law, consulting and/or administration;
· The highest personal and professional ethics, integrity and values;
· Commitment to representing the long-term interests of our Company and all of its shareholders;
· An analytical and objective perspective, strength of character, and the mature judgment essential to effective decision-making;
· Expertise that is useful to our Company and complementary to the background and experience of other Board members; and
· Sufficient time to devote to Board activities and to enhance their knowledge of our business, operations, and industry.
The Board believes that our current directors meet these criteria above. In addition, as outlined below, the directors bring a strong and unique background and set of skills to the Board, giving the Board as a whole competence and experience in a wide variety of areas. We believe that the Board as a whole and our directors possess the necessary qualifications and skills to effectively advise management on strategy, monitor our performance, and serve our best interests and the best interests of our shareholders.
A brief description of the background and business experience of our Company’s management, executive officers, and directors is set forth below:
Michael R. Dunn, our current Executive Vice President of Finance, Chief Financial Officer, Chief Operating Officer, Secretary and Treasurer and member of our Board of Directors, previously served as Chief Executive Officer and Chairman of our Board of Directors from May 28, 2008 until April 17, 2015. He joined our Company, which was considered a turn-around project, in order to work on the reduction of significant Company debt, obtain major capital infusion, provide a rationalization of our product line, and establish a more effective product distribution.
From December 1995 through 2010, Mr. Dunn was the Chief Executive Officer of Bankers Integration Group, Inc., an e-commerce company serving the automotive finance and insurance industry. In mid-1995 through 2006, Mr. Dunn started a company that generated a $60 million auto portfolio that was sold to a subsidiary of General Motors. Mr. Dunn interfaced with the top CEOs of automotive companies, including Harold Poling, the former CEO and Chairman of Ford Motor Company, and Bob Eaton, the former Chairman and CEO of Daimler Chrysler. Mr. Dunn secured $22.2 million in equity financing for Bankers Integration Group, plus an additional $20.8 million and $1.9 million in debt and lease financing, respectively. Bankers Integration Group, Inc. filed for Chapter 11 bankruptcy protection in October of 2007, and Mr. Dunn acted as the Trustee and coordinated the sale of the assets. The case was closed on November 17, 2010. Mr. Dunn also served as Chairman and Chief Executive Officer of Mountaineer Gaming, a gaming and entertainment company, where he coordinated the design and implementation of a $10 million renovation of the racetrack, and put into service over 700 new video lottery machines. The park had over 450 employees while Mr. Dunn was Chairman and CEO of the public company. He was instrumental in raising investor capital of approximately $17 million, plus an additional $17 million in construction loan and equipment lease financing. Mr. Dunn has vast experience as being the owner, manager, and director of various businesses, both large and small. Mr. Dunn attended La Crosse State University, Wisconsin, in business and has extensive training in business management and leadership.
Legal Proceedings
On August 30, 2016, we reported on Form 8-K that our former Chief Executive Officer (“CEO”), President, and Chairman of the Board of Directors, Ning Liu, was detained in the People’s Republic of China (“PRC”). On October 21, 2016, because of his ongoing legal challenges in the PRC, Mr. Liu resigned from all his positions in our Company. Mr. Liu continues to be detained in the PRC. The charges against Mr. Liu are personal to him and our Company is in no way named as a defendant or subject to the charges. We have been informed by Mr. Liu’s attorney in the PRC that, on March 2, 2017, he was convicted in Hunan province for violations of the PRC’s multi-level marketing regulations and sentenced to 10 years in prison. We have likewise been informed by Mr. Liu’s attorney that he has an appeal hearing scheduled in Hunan Province in the near future and, if he is unsuccessful in that hearing, he can appeal to a national court in Beijing, China.
Other than the foregoing, none of our directors, executive officers, promoters or control persons has been involved in any of the following events during the past ten years:
·any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
·any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
·being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
·being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires our directors, officers and persons who own more than 10% of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities. Officers, directors and greater than 10% shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.
We believe that the following filings were either made late or not filed pursuant to Section 16(a) of the Exchange Act:
·Our former CEO, Mr. Liu, indirectly owns 1,235,906 shares of our common stock. Although he acquired these shares on April 17, 2015, a Form 3 was not filed until October 8, 2015.
·A 10% shareholder owns 7,114,000 shares of our common stock. This shareholder originally acquired 9,120,000 shares of our common stock back on April 17, 2015, subsequently transferred 1,001,000 of the 9,120,000 shares on May 11, 2015, and transferred another 1,005,000 shares on July 30, 2015. A form 3 reflecting these transactions was filed on October 8, 2015.
·Our current CFO, Mr. Dunn, acquired 9,347,047 shares of our common stock on October 2, 2015. However, a Form 4 reflecting this transaction was filed on October 8, 2015.
·A 10% shareholder acquired 9,647,047 shares of our common stock on October 2, 2015. However, a Form 4 reflecting this transaction was filed on October 8, 2015.
·On April 17, 2015, Junfei Ren was appointed as Secretary and a member of the Board, but no Form 3 was filed on her behalf. However, we believe that Ms. Ren did not own any shares at the time of her appointment, and she has resigned from her positions back on August 17, 2015.
·On April 17, 2015, Xiang Ling Yun was appointed as a member of the Board, but no Form 3 was filed on her behalf. However, we believe that Ms. Yun did not own any shares at the time of her appointment, and she has resigned from the Board back on August 17, 2015.
Committees of the Board of Directors
We do not have a separately designated audit, compensation, or nominating committee of our Board and the function customarily delegated to these committees are performed by our full Board. We are not a “listed company” under SEC rules, and are therefore not required to have separate committees comprised of independent directors.
The Board does not have a nominations committee because the Board does not believe that a defined policy with regard to the consideration of candidates recommended by stockholders is necessary at this time because the functions of such committee are adequately performed by our Board. There are no specific minimum qualifications that the Board believes must be met by a candidate recommended by the Board. Currently, the entire Board decides on nominees, on the recommendation of any member of the Board, followed by the Board’s review of the candidates’ resumes and interviews of candidates. Based on the information gathered, the Board then makes a decision on whether to recommend the candidates as nominees for director. We do not pay any fee to any third party, or parties, to identify or evaluate or assist in identifying or evaluating potential nominees.
The Board does not have an audit committee. However, for certain purposes of the rules and regulations of the SEC and in accordance with the Sarbanes-Oxley Act of 2002, our Board is deemed to be its audit committee and as such functions as an audit committee and performs some of the same functions as an audit committee including: (i) selection and oversight of our independent accountant; (ii) establishing procedures for the receipt, retention, and treatment of complaints regarding accounting, internal controls, and auditing matters; and (iii) engaging outside advisors. Our Board has determined that its members do not include a person who is an “audit committee financial expert” within the meaning of the rules and regulations of the SEC. Our Board has determined that each of its members is able to read and understand fundamental financial statements and has substantial business experience that results in that member’s financial sophistication. Accordingly, our Board believes that each of its members has sufficient knowledge and experience to fulfill the duties and obligations of an audit committee. Furthermore, our Board has determined that the cost of hiring a financial expert to act as one of our directors and to be a member of an audit committee or otherwise perform audit committee functions outweighs the benefits of having a financial expert on an audit committee.
The Board does not have a compensation committee because the Board believes that it is not necessary to have a compensation committee at this time because the functions of such committee are adequately performed by our Board.
Meetings of the Board of Directors
Our Board conducts business through meetings or by unanimous written consents of the Board. Such actions by written consent of all directors are, according to Nevada corporate law and our bylaws, valid and effective as if they had been passed at a meeting of the directors duly called and held. The Board of Directors as of December 31, 2016, consisted of a sole Director - Michael Dunn. Mr. Dunn does not qualify as an “independent director” pursuant to the rules and regulations of the SEC. During the fiscal year ended December 31, 2016, the Board held no formal meetings, and the Board acted by unanimous written consent on multiple occasions.
Code of Ethics
We have adopted a Code of Ethics that applies to our principal executive officer, principal financial officer, and principal accounting officer. Our Code of Ethics was an exhibit to our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 and filed with the SEC on April 16, 2007.
ITEM 11
ITEM 11 EXECUTIVE COMPENSATION
Summary Compensation Table
Set forth below is a summary of compensation for our principal executive officer and our two most highly compensated officers other than our principal executive officer (collectively, the “named executive officers”) for our last two fiscal years. There have been no annuity, pension or retirement benefits ever paid to our officers, directors or employees.
With the exception of reimbursement of expenses incurred by our named executive officers during the scope of their employment and unless expressly stated otherwise in a footnote below, none of the named executive officers received other compensation, perquisites and/or personal benefits in excess of $10,000.
(1)Joined us April 17, 2015 and resigned October 21, 2016.
(2)Joined us May 28, 2008. For 2016, $40,000 Mr. Dunn’s salary was accrued and not paid.
Employment Agreements
None.
Director Compensation
On October 15, 2009 the Board of Directors approved a program to compensate our outside directors at the rate of $3,000 per calendar quarter in cash or in equivalent value of shares of our common stock. All directors are entitled to reimbursement of expenses incurred in the performance of their duties as directors, including their attendance at Board of Directors meetings.
During 2016 and 2015, there were no outside directors and therefore not director’s fees were paid or accrued.
Grants of Plan Based Awards
There were no grants of plan-based awards during our last fiscal year.
ITEM 12
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information concerning our best estimate of the beneficial stock ownership of our common stock as of the date of this report pending the resolution of the issues note above. The information is presented with respect to: (i) each person who is known to us to beneficially own more than 5% of our common stock; (ii) each officer and director; and (iii) all directors and officers as a group; based upon 40,431,680 shares of outstanding common stock.
*Less than 1%.
(1) c/o our address, 2 Park Plaza, Suite 400, Irvine, CA 92614, unless otherwise noted.
(2) Except as otherwise indicated, we believe that the beneficial owners of common stock listed above, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for purposes of computing the percentage of any other person.
ITEM 13
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Director Independence
For purposes of determining director independence, we have applied the definitions set out in NASDAQ Rule 5605(a)(2). The OTCBB on which shares of common stock are quoted does not have any director independence requirements. The NASDAQ definition of “Independent Director” means a person other than an Executive Officer or employee of the Company or any other individual having a relationship which, in the opinion of the Company's Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
According to the NASDAQ definition, Mr. Dunn is not an independent director because he is also an executive officer of the Company. According to the NASDAQ definition, we have no independent directors.
Related Party Transactions
As detailed in our Notes to Financial Statements, the following relating party transactions have occurred.
Settlement Agreement
On September 19, 2014, in order to facilitate the investment by Sky Rover discussed in Note 1, we entered into settlement agreements with Michael Dunn, our former CEO, under which he agreed to forgive all accrued but unpaid salary once all closing conditions of the Sky Rover SPA had been met. In addition, Mr. Dunn gave up his right to any severance payment which would be due him under his employment agreement upon the closing of the Sky Rover SPA. The settlement agreement stipulated that Mr. Dunn would be allowed to retain no less than 2,000,000 of his then-held common shares. During the three months ended March 31, 2015, when all closing conditions of the Sky Rover SPA became effective, the terms of the settlement agreement became effective.
Sky Rover; GX-Life Share Exchange Agreement
In connection with the Sky Rover SPA, and subsequently in connection with the Share Exchange Agreement with GX-Life, certain parties may have formed a “group” under Section 13(d)(3) of the Exchange Act, and certain current and former executive officers and directors have varying degrees of affiliation which may have resulted in related party transactions. These affiliations are as follows:
In connection with the Sky Rover SPA, the following parties acquired a total of 30,400,000 shares of our common stock:
·Future Continental Limited - 7,000,000 shares;
·Discover Future Limited - 7,000,000 shares;
·Global Future Development Limited - 7,280,000 shares; and
·Master Power Holdings Group - 9,120,000 shares.
Future Continental Limited, Discover Future Limited, Global Future Development Limited, and Master Power Holdings Group collectively acquired 30,400,000 shares in our Company in connection with the Sky Rover SPA. By virtue of the manner in which these acquiring shareholders acquired the shares, they may be deemed to have formed a “group” within the meaning of Section 13(d)(3) of the Exchange Act. However, each of these acquiring shareholders disclaims beneficial ownership of the shares beneficially owned by each other party.
In addition, a few of our former executive officers and directors had affiliations with the acquiring shareholders which may be classified as related party transactions. Namely, 1) Junfei Ren, our former Secretary and director, is the sole officer of Global Future Development Limited, but has no voting control over the entity, and 2) our former officer and director Lei Pei is the COO and a director of Sky Rover as well as a minority shareholder.
However, on October 2, 2015, our Company via its former EGD Subsidiary, entered into a Share Exchange Agreement with GX-Life whereby we spun-off 100% of its then ownership interests in the EGD Subsidiary and 4,000,000 EGD in exchange for 100% of the outstanding common stock of GX-Life. In a related transaction, on October 2, 2015, the former shareholders of GX-Life Global sold all of their interests in the EGD Subsidiary to the acquiring shareholders in the Sky Rover SPA in exchange for 21,280,000 shares of our Company previously acquired in the Sky Rover SPA.
Michael Dunn and Ning Liu were shareholders in GX-Life, and acquired shares in our Company as a result of the series of transactions discussed in the preceding paragraphs. In addition, Masuya Tomoe, an affiliate shareholder, was also a shareholder in GX-Life which acquired Company shares as a result of the foregoing transactions.
Other than the foregoing, none of the directors or executive officers of the Company, nor any person who owned of record or was known to own beneficially more than 5% of the Company’s outstanding shares of its Common Stock, nor any associate or affiliate of such persons or companies, has any material interest, direct or indirect, in any transaction that has occurred during the past fiscal year, or in any proposed transaction, which has materially affected or will affect the Company.
With regard to any future related party transaction, we plan to fully disclose any and all related party transactions in the following manner:
· Disclosing such transactions in reports where required;
· Disclosing in any and all filings with the SEC, where required;
· Obtaining disinterested directors consent; and
· Obtaining shareholder consent where required.
Review, Approval or Ratification of Transactions with Related Persons
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 14
ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES
dbbmckennon (the “Independent Auditors”) were our independent auditors and examined our consolidated financial statements for the years ended December 31, 2016 and 2015, respectively. The Independent Auditors performed the services listed below and billed us, or are expected to bill us, the aggregate fees listed below for the years ended December 31, 2016 and 2015.
Audit Fees
The Independent Auditors billed us, or are expected to bill us, aggregate fees of approximately $76,413 for the fiscal year ended December 31, 2016 and approximately $75,065 for the fiscal year ended December 31, 2015 for professional services rendered for their audit of our annual financial statements and their reviews of our financial statements included in our quarterly reports on Form 10-Q during these periods.
Audit-Related Fees
The Independent Auditors billed us aggregate fees of approximately $9,965 and $0 for the fiscal years ended December 31, 2016 and 2015, respectively, for audit- related professional services.
Tax Fees
The Independent Auditors billed us aggregate fees of approximately $5,700 and $0 for the fiscal years ended December 31, 2016 and 2015, respectively, for professional services for tax compliance, tax advice and tax planning during this fiscal year period.
All Other Fees
The Independent Auditors did not bill us any fees for either of the years ended December 31, 2016 or 2015 for any other professional services.
Board of Directors Pre-Approval Policies and Procedures
Our Board of Directors has policies and procedures that require the pre-approval by the Board of all fees paid to, and all services performed by, our independent accounting firms. The fees and services provided as noted above were authorized and approved by the Board in compliance with the pre-approval policies and procedures described herein.
PART IV
ITEM 15
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES
*Filed concurrently herewith
(1) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on April 7, 2005.
(2) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on June 19, 2013.
(3) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on October 29, 2014.
(4) Incorporated by reference from our Registration Statement on Form 10SB filed with the Commission on January 18, 2002.
(5) Incorporated by reference from our Schedule 14C Definitive Information Statement file with the Commission on June 28, 2005.
(6) Incorporated by reference from our Schedule 14C Definitive Information Statement file with the Commission on June 21, 2010.
(7) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on July 21, 2010.
(8) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on August 26, 2009.
(9) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on May 9, 2014.
(10) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on September 23, 2014.
(11) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on February 20, 2015.
(12) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on March 30, 2015.
(13) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on April 20, 2015.
(14) Incorporated by reference form our Quarterly Report on Form 10-Q filed with the Commission on September 9, 2015.
(15) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on October 8, 2015.
(16) Incorporated by reference from our Annual Report on Form 10-K filed with the Commission on April 13, 2016
(17) Incorporated by reference from our Amendment No. 1 to Post-Effective Amendment No. 3 on July 22, 2016
(18) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on November 17, 2015
(19) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on March 20, 2017
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.
GLOBAL FUTURE CITY HOLDING INC.
DATED: April 17, 2017 /s/ Michael R. Dunn
By: Michael R. Dunn
Its: Chief Executive Officer (Principal Executive Officer)
/s/ Michael R. Dunn
By: Michael R. Dunn
Its: Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
In accordance with the Exchange Act, this report has been signed below by the following person(s) on behalf of the registrant and in the capacities and on the date(s) indicated.
DATED: April 17, 2017 /s/ Michael R. Dunn
By: Michael R. Dunn
Its: Chief Executive Officer, Chief Financial Officer and sole director