UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2017


[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A

Commission file number: 000-27145

SPENDSMART NETWORKS, INC.

(Name of small business issuer in its charter)

Delaware			33-0756798
(State or jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

805 Aerovista Pkwy, Suite 205
San Luis Obispo California			93401
(Address and of principal executive offices)			(Zip Code)

(877) 541-8398

(Issuer’s telephone number, including area code)

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

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

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of May 25, 2017 there were 45,075,571 shares outstanding of the issuer’s common stock, par value $0.001 per share.

TABLE OF CONTENTS

PART I: Financial Information

Item 1 – Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2017 (unaudited) and December 31, 2016	2
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 (unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (unaudited)	4
	Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the three months ended March 31, 2017 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3 – Quantitative and Qualitative Disclosures about Market Risk		24
Item 4 – Controls and Procedures		24

PART II: Other Information

Item 1 – Legal Proceedings		25
Item 1A – Risk Factors		25
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		25
Item 3 – Defaults upon Senior Securities		25
Item 4 – Mine Safety Disclosures		25
Item 5 – Other Information		25
Item 6 – Exhibits		25

Signatures		26

-i-

Table of Contents

FORWARD LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q may contain statements relating to future results of SpendSmart Networks, Inc. (including certain projections and business trends) that are “forward-looking statements.” Our actual results may differ materially from those projected as a result of certain risks and uncertainties. These risks and uncertainties include, but are not limited to, statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as “expects” or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, “plans”, “targets”, “estimates” or “intends”, or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved) are not statements of historical fact and may be “forward-looking statements.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results or achievements of our Company to be materially different from any future results or achievements of our Company expressed or implied by such forward-looking statements. Such factors include, among others, those set forth herein and those detailed from time to time in our other Securities and Exchange Commission (“SEC”) filings including those contained in our most recent Form 10-K. These forward-looking statements are made only as of the date hereof, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law. Our Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Our Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Also, there can be no assurance that our Company will be able to raise sufficient capital to continue as a going concern. Forward-looking statements may also include, but are not limited to, statements about our ability to grow our revenues, our history of losses, the impact of our debt obligations on our liquidity and financial condition, our need for additional financing, and dilution to our stockholders and price adjustments related to certain of our warrants including those with an exercise price related to certain performance metrics.

-1-

Table of Contents

PART I: Financial Information

Item 1 – Financial Statements

SPENDSMART NETWORKS, INC.

Condensed Consolidated Balance Sheets

	March 31,	December 31,
	2017	2016
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$185,320	$74,523
Accounts receivable, net of allowance for doubtful accounts of $669,461 at March 31, 2017 and $629,461 at December 31, 2016	332,204	292,368
Customer short-term notes receivable, net of allowance for doubtful accounts of $749,638 at March 31, 2017, and $767,138	17,037	26,850
at December 31, 2016
Other current assets	10,778	24,901
Total current assets	545,339	418,642

Long-term assets:
Customer long-term notes receivable, net of allowance for doubtful accounts of $400,901 at March 31, 2017, and $399,401	5,987	15,264
at December 31, 2016
Property and equipment, net of accumulated depreciation of $1,396,223 on March 31, 2017 and December 31, 2016	-	-
Intangible assets, net of accumulated amortization of $833,001 on March 31, 2017 and $819,082 on December 31, 2016	385,081	399,000
Other assets	18,273	18,273

TOTAL ASSETS	$954,680	$851,179

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Convertible notes	$1,829,963	$1,494,174
Note payable, former CEO	65,000	65,000
Accounts payable and accrued liabilities	1,994,691	1,997,667
Accrued interest payable	124,883	66,242
Deferred revenue	740,196	748,774
Derivative liabilities - conversion option	44,659	88,242
Derivative liabilities - warrants	1,433,181	1,366,898
Total current liabilities	6,232,573	5,826,997

Stockholders' deficit:
Series C Preferred; $0.001 par value; 4,299,081 shares authorized; 3,443,061 and 3,443,061 shares issued and outstanding as of	3,444	3,444
March 31, 2017 and December 31, 2016, respectively
Common stock; $0.001 par value; 300,000,000 shares authorized; 42,075,571 and 41,975,571 shares issued and outstanding as of	42,076	41,976
March 31, 2017 and December 31, 2016, respectively
Additional paid-in capital	94,721,131	94,438,312
Accumulated deficit	(100,044,544)	(99,459,550)
Total stockholders' deficit	(5,277,893)	(4,975,818)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$954,680	$851,179

See accompanying notes to unaudited condensed consolidated financial statements.

-2-

Table of Contents

SPENDSMART NETWORKS, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

	For the three months ended March 31,
	2017	2016
Revenues:
Mobile Marketing / Licensing	$1,470,828	$1,430,385
Total revenues	1,470,828	1,430,385

Operating expenses:
Selling and marketing	123,475	98,022
Personnel related	1,233,204	1,463,930
Mobile Platform Processing	225,595	308,914
Amortization of intangible assets	13,919	48,285
General and administrative	314,600	703,162
Bad debt	35,211	26,526
Total operating expenses	1,946,004	2,648,839

Loss from operations	(475,176)	(1,218,454)

Non-operating income (expense):
Interest income	3,882	14,319
Interest expense	(74,211)	(62,192)
Amortization of debt discount	(16,789)	(267,028)
Loss on extinguishment of debt	-	(288,618)
Inducement for exercise of warrants	-	(3,560,958)
Change in fair value of derivatives	(22,700)	503,284
Total non-operating income (loss)	(109,818)	(3,661,193)

Net loss	$(584,994)	$(4,879,647)

Basic and diluted net loss per share	$(0.01)	$(0.15)

Basic and diluted weighted average common shares outstanding used in computing net income (loss) per share	42,038,904	31,725,292

See accompanying notes to unaudited condensed consolidated financial statements.

-3-

Table of Contents

SPENDSMART NETWORKS, INC.

Condensed Consolidated Statement of Changes in Stockholders' Deficit

For the three months ended March 31, 2017

(unaudited)

	Series C Preferred Stock		Series A Preferred Stock		Common Stock
	Shares	Par Value	Shares	Par Value	Shares	Par Value	Paid-In Capital	Accumulated Deficit	Stockholders' Deficit
Balance as of December 31, 2016	3,443,061	$3,444	-	$-	41,975,571	$41,976	$94,438,312	$(99,459,550)	$(4,975,818)
Issuance of common stock for interest	-	-	-	-	100,000	100	1,900	-	2,000
Stock based compensation from stock options and warrants	-	-	-	-	-	-	280,919	-	280,919
Net loss	-	-	-	-	-	-	-	(584,994)	(584,994)
Balance as of March 31, 2017	3,443,061	$3,444	-	$-	42,075,571	$42,076	$94,721,131	$(100,044,544)	$(5,277,893)

See accompanying notes to unaudited condensed consolidated financial statements.

-4-

Table of Contents

SPENDSMART NETWORKS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	For the three months ended
	March 31,
	2017	2016
Cash flows from operating activities:
Net loss	$(584,994)	$(4,879,647)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation expense	-	110,365
Amortization of intangible asset	13,919	48,285
Amortization of debt discount	16,789	269,028
Stock-based compensation	280,919	433,180
Issuance of common stock for services	2,000	132,247
Change in fair value of derivatives	22,700	(503,284)
Accrued interest expenses on notes payable	58,641	71,739
Inducement for exercise of warrants	-	3,560,958
Extinguishment of convertible debt	-	288,618
Provision for bad debt	35,211	26,526
Changes in operating assets and liabilities:
Accounts receivable	(83,925)	(144,426)
Customer short-term notes receivable	20,191	47,231
Customer long-term notes receivable	7,777	77,258
Deferred revenue	(8,578)	(90,133)
Prepaid insurance	14,123	3,675
Accounts payable and accrued liabilities	(2,976)	(411,127)
Net cash used in operating activities	(208,203)	(959,507)

Cash flows from investing activities:
Software development costs	-	(179,647)
Payment of deferred acquisition payable-Intellectual Capital Mgmt, LLC	-	(10,000)
Net cash used in investing activities	-	(189,647)

Cash flows from financing activities:
Net proceeds from warrant exercises related to tender offer	-	1,179,252
Repayment of notes payable	-	(70,262)
Repayment of notes to former CEO	-	(35,000)
Repayment of convertible notes	-	(200,000)
Proceeds from issuance of convertible debt	319,000	-
Net cash provided by financing activities	319,000	873,990

Net increase (decrease) in cash and cash equivalents	110,797	(275,164)

Cash and cash equivalents at beginning of the period	74,523	470,341
Cash and cash equivalents at end of the period	$185,320	$195,177

Non-cash Investing and Financing Activities:
The Company issued 26,479,217 warrants in connection with the exercise of tender offer warrants during the three months ended March 31, 2016.
The Company had a debt discount of $30,470 in connection with convertible debt during the three months ended March 31, 2016.
The Company issued 17,895,859 shares of Common Stock in connection with the exercise of tender offer warrants during the three months ended March 31, 2016.

See accompanying notes to unaudited condensed consolidated financial statements.

-5-

Table of Contents

SPENDSMART NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and Basis of Presentation

SpendSmart Networks, Inc. is a Delaware corporation (“the Company”). The Company brings value added products and mobile marketing solutions to consumers, merchants, businesses and government organizations. The Company is a publicly traded company trading on the OTCQB under the symbol “SSPC.” The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary SpendSmart Networks, Inc., a California corporation (SpendSmart-CA). All material intercompany balances and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). All normal recurring adjustments which are necessary for the fair presentation of the results for the interim periods are reflected herein. Operating results for the three-month periods ended March 31, 2017 and 2016 are not necessarily indicative of results to be expected for a full year.

2. Liquidity and Going Concern

As of December 31, 2016, the Company’s audited consolidated financial statements included an opinion containing an explanatory paragraph as to the uncertainty of the Company’s ability to continue as a going concern. The Company has continued to incur net losses through March 31, 2017 and have yet to establish profitable operations. These factors among others create a substantial doubt about the Company’s ability to continue as a going concern. The Company’s unaudited consolidated financial statements as of and for the period ended March 31, 2017 does not contain any adjustments for this uncertainty.

The Company is currently exploring other financing means to raise additional required capital which may include the sale of shares of the Company’s preferred or common stock. All additional amounts raised will be used for our future investing and operating cash flow needs. However, there can be no assurance that we will be successful in consummating additional financing. This description of our future plans for financing does not constitute an offer to sell or the solicitation of an offer to buy securities.

3. Reclassification

Certain reclassifications were made to the 2016 financial statement presentation to conform to the 2017 financial statement presentation.

4. Summary of Significant Accounting Policies

Loans Receivable and Accounts Receivable

The Company extended credit to its licensees in the normal course of business and performs credit evaluations of its customers. Loans and accounts receivable are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts that are outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time loan and accounts receivable are past due and the customer's current ability to pay its obligation to the Company. The Company writes off loans and accounts receivable when they become uncollectible. The Company is no longer entering into notes with its customers.

-6-

Table of Contents

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, fair value of financial instruments, at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates. Significant estimates inherent in the preparation of the accompanying consolidated financial statements include recoverability and useful lives of intangible assets, the valuation allowance related to the Company's deferred tax assets, the allowance for doubtful accounts related and notes and accounts receivable, the fair value of stock options and warrants granted to employees, consultants, directors, investors and placement agents, and notes and warrant tender offer.

Revenue Recognition

The Company generates revenues primarily in the form of set up fees, license fees, messaging, equipment and marketing services fees and value added mobile marketing and mobile commerce services. License fees are charged monthly for support services. Set-up fees primarily consist of fees for website development services (including support and unspecified upgrades and enhancements when and if they are available), training and professional services that are not essential to functionality. The Company offers two licenses consisting of our Engage license and our Thrive license. The Company now offers both licenses in a combined package known as the Customer Loyalty System License (“CLS”).

The Company recognizes revenues when all of the following conditions are met:

●	there is persuasive evidence of an arrangement;

●	the products or services have been delivered to the customer;

●	the amount of fees to be paid by the customer is fixed or determinable; and

●	The collection of the related fees is probable.

Signed agreements are used as evidence of an arrangement. Electronic delivery occurs when we provide the customer with access to the software. The Company assesses whether a fee is fixed or determinable at the outset of the arrangement, primarily based on the payment terms associated with the transaction. The Company assesses collectability of the set-up fee based on a number of factors such as collection history and creditworthiness of the licensee. If the Company determines that collectability is not probable, revenue is deferred until collectability becomes probable, generally upon receipt of cash.

License arrangements may also include set-up fees for website development, delivery of tablets, professional services and training services, which are typically delivered within 30-60 days of the contract term. In determining whether set-up fee revenues should be accounted for separately from license revenues, we evaluate whether the set-up fees are considered essential to the functionality of the license using factors such as the nature of our products; whether they are ready for use by the customer upon receipt; the nature of our implementation services, which typically do not involve significant customization to or development of the underlying software code; the availability of services from other vendors; whether the timing of payments for license revenues is coincident with performance of

services; and whether milestones or acceptance criteria exist that affect the realizability of the license fee. Substantially all of our set-up fee arrangements are recognized as the services are performed. Payments received in advance of services performed are deferred and recognized when the related services are performed.

We do not offer refunds and therefore have not recorded any sales return allowance for any of the periods presented. Upon a periodic review of outstanding accounts and notes receivable, amounts that are deemed to be uncollectible are written off against the allowance for doubtful accounts.

-7-

Table of Contents

Deferred revenue consists substantially of amounts invoiced in advance of revenue recognition for our products and services described above. We recognize deferred revenue as revenue only when the revenue recognition criteria are met.

Debt discount and issuance costs

Debt issuance costs, including the value of warrants issued in connection with debt financing and fees or costs paid to lender are presented in the condensed consolidated balance sheets as a direct deduction from the carrying amount of that debt.

The Company amortizes the discount to interest expense over the term of the respective debt using the effective interest method.

Cash and cash equivalents

The Company considers all investments with an original maturity of three months or less to be cash equivalents. Cash equivalents primarily represent funds invested in money market funds, bank certificates of deposit and U.S. government debt securities whose cost equals fair market value.

From time to time, the Company has maintained bank balances in excess of insurance limits. The Company has not experienced any losses with respect to cash. Management believes the Company is not exposed to any significant credit risk with respect to its cash and cash equivalents.

Property and Equipment

Property and equipment had been recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets (generally three to five years). Costs incurred for maintenance and repairs are expensed as incurred and expenditures for major replacements and improvements are capitalized and depreciated over their estimated remaining useful lives. Depreciation expense for the three months ended March 31, 2017 and 2016 was $0. Property and equipment has been fully depreciated as of March 31, 2017.

Software Capitalization

The Company accounts for computer software used in the business in accordance with ASC 350 “Intangibles-Goodwill and Other”. ASC 350 requires computer software costs associated with internal use software to be charged to operations as incurred until certain capitalization criteria are met. Costs incurred during the preliminary project stage and the post-implementation stages are expensed as incurred. Certain qualifying costs incurred during the application development stage are capitalized as property, equipment and software. These costs generally consist of internal labor during configuration, coding, and testing activities. Capitalization begins when (i) the preliminary project stage is complete, (ii) management with the relevant authority authorizes and commits to the funding of the software project, and (iii) it is probable both that the project will be completed and that the software will be used to perform the function intended. We capitalized $0 and $179,646, respectively, in software development related to programming and coding for new product development for the three months ended March 31, 2017 and 2016, respectively. Software amortization expense for the three months ended March 31, 2017 and 2016 was $0 and $110,365, respectively. As of March 31, 2017 all software costs have been fully amortized.

Valuation of Long-Lived Assets

The Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the estimated fair value of the assets. There has not been any impairment recorded during the quarters ended March 31, 2017 or 2016.

-8-

Table of Contents

Income Tax Expense Estimates and Policies

As part of the income tax provision process of preparing the Company’s financial statements, the Company is required to estimate the Company’s provision for income taxes. This process involves estimating current tax liabilities together with assessing temporary differences resulting from differing treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Management then assesses the likelihood that the Company deferred tax assets will be recovered from future taxable income and to the extent believed that recovery is not likely, a valuation allowance is established. Further, to the extent a valuation allowance is established and changes occur to this allowance in a financial accounting period, such changes are recognized in the Company’s tax provision in the Company’s condensed consolidated statement of operations. The Company’s use of judgment in making estimates to determine the Company’s provision for income taxes, deferred tax assets and liabilities and any valuation allowance is recorded against our net deferred tax assets.

The Company recognizes the benefit of an uncertain tax position taken or expected to be taken on the Company’s income tax returns if it is “more likely than not” that such tax position will be sustained based on its technical merits. The Company does not have any unrecognized tax benefits or accrued penalties and interest. If such matters were to arise, the Company would recognize interest and penalties related to income tax matters in income tax expense.

Stock-Based Compensation

The Company accounts for stock based compensation arrangements through the measurement and recognition of compensation expense for all stock based payment awards to employees and directors based on estimated fair values. The Company uses the Black-Scholes option valuation model to estimate the fair value of the Company’s stock options and warrants at the date of grant. The Black-Scholes option valuation model requires the input of subjective assumptions to calculate the value of options and warrants. The Company uses historical company data among other information to estimate the expected price volatility and the expected forfeiture rate and not comparable company information.

Net Loss per Share

The Company calculates basic earnings per share (“EPS”) by dividing the Company’s net loss and comprehensive net loss applicable to common shareholders by the weighted average number of common shares outstanding for the period, without considering common stock equivalents. Diluted EPS is computed by dividing net income or net loss and comprehensive net loss applicable to common shareholders by the weighted average number of common shares outstanding for the period and the weighted average number of dilutive common stock equivalents, such as options and warrants. Options and warrants are only included in the calculation of diluted EPS when their effect is dilutive.

Derivatives - Warrant Liability

The Company accounts for the common stock warrants granted and still outstanding as of March 31, 2017 in connection with certain financing transactions (“Transactions”) in accordance with the guidance contained in ASC 815-40-15-7D, "Contracts in Entity's Own Equity" whereby under that provision they do not meet the criteria for equity treatment and must be recorded as a liability. Accordingly, the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company's statements of operations. The fair value of the warrants issued by the Company in connection with the Transactions has been estimated using a Monte Carlo simulation.

The Company accounts for certain of its outstanding warrants issued in fiscal 2010, 2012 and 2013 (“2010 Warrants,” “2012 Warrants” and “2013 Warrants, respectively) as derivative liabilities. These warrants were determined to be ineligible for equity classification due to provisions of the respective instruments that may result in an adjustment to their conversion or exercise prices. The Company recognized gains of $0 and $0 in the fair value of derivatives for the three months ended March 31, 2017 and 2016, respectively. These derivative liabilities which arose from the issuance of these warrants resulted in an ending balance of derivative liabilities of $0 as of March 31, 2017 and December 31, 2016, and expired in 2016.

-9-

Table of Contents

The Company accounts for certain of its outstanding warrants issued in fiscal 2016 (“2016 Warrants”) as derivative liabilities. The 2016 Warrants were determined to be ineligible for equity classification due to provisions of the respective instruments that may result in an adjustment to their conversion or exercise prices. The Company recognized a loss of $66,283 and a gain of $503,105 in the fair value of these derivatives for the three months ended March 31, 2017 and 2016, respectively. These derivative liabilities which arose from the issuance of the 2016 Warrants resulted in an ending balance of derivative liabilities of $1,433,181 and $1,366,898 as of March 31, 2017 and December 31, 2016, respectively.

Derivatives – Bifurcated Conversion Option in Convertible Notes

The Company does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has issued Convertible Notes with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by ASC 815, Accounting for Derivative Financial Instruments and Hedging Activities, in certain instances, these instruments are required to be carried as derivative liabilities, at fair value, in our financial statements.

The Convertible Notes issued during the year ended December 31, 2016 and 2015 are subject to anti-dilution adjustments that allow for the reduction in the Conversion Price, as defined in the agreement, in the event the Company subsequently issues equity securities including Common Stock or any security convertible or exchangeable for shares of Common Stock for a price less than the current conversion price. The Company bifurcated and accounted for the conversion option in accordance with ASC 815 as a derivative liability.

The Company’s derivative liability has been measured at fair value at March 31, 2017 using a Monte-Carlo Simulation. Inputs into the model require estimates, including such items as estimated volatility of the Company’s stock, estimated probabilities of additional financing, risk-free interest rate, and the estimated life of the financial instruments being fair valued. In addition, since the conversion price contains an anti-dilution adjustment, the probability that the Conversion Price of the Notes would decrease as the share price decreased was also incorporated into the valuation calculation.

The Company recognized gains of $43,583 and $179 in the fair value of derivatives for the three months ended March 31, 2017 and 2016, respectively. These derivative liabilities which arose from the issuance of the convertible notes resulted in an ending balance of derivative liabilities of $44,659 and $88,242 as of March 31, 2017 and December 31, 2016, respectively. Subsequent changes to the fair value of the derivative liabilities will continue to require adjustments to their carrying value that will be recorded as other income (in the event that their value decreases) or as other expense (in the event that their value increases). The fair value of these liabilities is estimated using Monte Carlo pricing models that are based on the individual characteristics of the Company’s warrants, preferred and common stock, as well as assumptions for volatility, remaining expected life, risk-free interest rate and, in some cases, credit spread.

Fair value of assets and liabilities

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value for applicable assets and liabilities, we consider the principal or most advantageous market in which we would transact and we consider assumptions market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. This guidance also establishes a fair value hierarchy to prioritize inputs used in measuring fair value as follows:

●

Level 1: Observable inputs such as quoted prices in active markets;

●

Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

●

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

-10-

Table of Contents

The Company’s financial instruments are cash and cash equivalents, accounts receivable, notes receivable, notes payable, accounts payable and derivative liabilities. The recorded values of cash equivalents and accounts payable approximate their fair values based on their short-term nature. The fair value of derivative liabilities is estimated using option pricing models that are based on the individual characteristics of our warrants, preferred and common stock, the derivative liability on the valuation date as well as assumptions for volatility, remaining expected life, risk-free interest rate and, in some cases, credit spread. The derivative liabilities and earn-out liabilities are the only Level 3 fair value measures.

A summary of quantitative information with respect to valuation methodology and significant unobservable inputs used for the Company’s warrant derivative liabilities that are categorized within Level 3 of the fair value hierarchy as of March 31, 2017 and December 31, 2016 is as follows:

Date of Valuation	March 31, 2017	December 31, 2016
Stock Price	0.02	0.02
Volatility (Annual)	142%	140%
Number of assumed financings	1	1
Total shares outstanding	42,475,571	41,975,571
Strike Price	0.01	0.01
Risk-free Rate	1.34%	1.34%
Maturity Date	7/15/2019	7/15/2019
Expected Life	N/A	N/A

A summary of quantitative information with respect to valuation methodology and significant unobservable inputs used for the Company’s conversion option derivative that are categorized within Level 3 of the fair value hierarchy as of March 31, 2017 and December 31, 2016 is as follows:

Date of Valuation	March 31, 2017	December 31, 2016
Stock Price	0.02	0.02
Volatility (Annual)	48%	140%
Strike Price	N/A	N/A
Risk-free Rate	1.33%	1.40%
Maturity Date	7/7/2017	5/5/2017

-11-

Table of Contents

At March 31, 2017 and December 31, 2016, the estimated Level 3 fair values of the liabilities measured on a recurring basis are as follows:

		Fair Value Measurements at March 31, 2017:

	Carrying Value	Level 1	Level 2	Level 3

Earn out liability	$-	$-	$-	$-
Warrant derivative liability	1,433,181	-	-	1,433,181
Conversion option derivative liability	44,659	-	-	44,659
Total	$1,477,840	$-	$-	$1,477,840

		Fair Value Measurements at December 31, 2016:

	Carrying Value	Level 1	Level 2	Level 3

Earn out liability	$-	$-	$-	$-
Warrant derivative liability	1,366,898	-	-	1,366,898
Conversion option derivative liability	88,242	-	-	88,242
Total	$1,455,140	$-	$-	$1,455,140

The following tables present the activity for Level 3 liabilities for the three months ended March 31, 2017:

Fair Value Measurements Using Level 3 Inputs

		Conversion
	Warrant	Option
	Derivative Liability	Derivative Liability	Earn-out Liability	Total
Balance - December 31, 2016	$1,366,898	88,242	-	$1,455,140
Additions during the period	-	-	-	-
Total (gains) or losses include in net loss	66,283	(43,583)	-	22,700
Settlements during the period	-	-	-	-
Transfers in and/or out of Level 3	-	-	-	-
Balance - March 31, 2017	$1,433,181	44,659	-	$1,477,840

Advertising

The Company expenses advertising costs as incurred. The Company has no existing arrangements under which the Company provides or receives advertising services from others for any consideration other than cash. Advertising expenses (primarily in the form of Internet direct marketing) totaled $67,421 and $31,809 for the three months ended March 31, 2017 and 2016, respectively.

-12-

Table of Contents

Litigation

From time to time, the Company may become involved in litigation and other legal actions. The Company estimates the range of liability related to any pending litigation where the amount and range of loss can be estimated. The Company records its best estimate of a loss when the loss is considered probable. Where a liability is probable and there is a range of estimated losses with no best estimate in the range, the Company records a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated.

On July 8, 2015, Intellectual Capital Management, LLC dba SMS Masterminds and SpendSmart Networks, Inc. were named in a potential class-action lawsuit entitled Peter Marchelos, et al v. Intellectual Capital Management, et al, filed in the United States District Court Eastern District of New York relating to alleged violations of the Telephone Consumer Protection Act of 1991. This litigation involves the same licensee and merchant as a previous lawsuit and the same attorneys represent the plaintiffs in this action. The claim of one of the two plaintiffs was resolved for $1,701. The Company believes the Plaintiff’s allegations have no merit.

The company was served with a lawsuit in February 2017 alleging breach of contract by Bryan Sarlitt. The action relates to the acquisition of TechXpress in 2014 and additional compensation that Mr. Sarlitt is claiming. The Company believes the Plaintiff’s allegations have no merit.

There are no other legal claims currently pending or threatened against us that in the opinion of our management would be likely to have a material adverse effect on our financial position, results of operations or cash flows.

Intangible assets

Intangible assets currently consist of intellectual property/technology acquired in business combinations under the purchase method of accounting are recorded at fair value net of accumulated amortization since the acquisition date. Amortization is calculated using the straight line method over the estimated useful lives of 10 years.

The Company reviews its finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of finite-lived intangible asset may not be recoverable. Recoverability of a finite-lived intangible asset is measured by a comparison of its carrying amount to the undiscounted future cash flows expected to be generated by the asset. If the asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset, which is determined based on discounted cash flows. Amortization of intangible assets was $13,919 and $48,285 for the three months ended March 31, 2017 and 2016, respectively.

The Company evaluates the recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable. Such circumstances could include, but are not limited to (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. The Company measures the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value. The fair value is measured based on quoted market prices, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. The evaluation of asset impairment requires the Company to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. During the year ended December 31, 2016, the Company recorded an impairment loss of $979,072 related to an intangible asset.

Recently Issued Accounting Pronouncements

On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, as amended, (Topic 606), with an effective date for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016. The Company is evaluating the impact, if any, the pronouncement will have on both historical and future financial positions and results of operations, with an expected completion date of June 30, 2017.

-13-

Table of Contents

In February 2016, the FASB issued ASU 2016-02, Leases which amended guidance for lease arrangements in order to increase transparency and comparability by providing additional information to users of financial statements regarding an entity's leasing activities. The revised guidance seeks to achieve this objective by requiring reporting entities to recognize lease assets and lease liabilities on the balance sheet for substantially all lease arrangements. The guidance, which is required to be adopted in the first quarter of 2019, will be applied on a modified retrospective basis beginning with the earliest period presented. Early adoption is permitted. We are currently evaluating the impact of adopting this guidance on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" (ASU 2016-13), that requires entities to use a new impairment model based on expected losses. Under this new model an entity would recognize an impairment allowance equal to its current estimate of credit losses on financial assets measured at amortized cost. ASU 2016-13 is effective for us beginning January 1, 2020 with early adoption permitted January 1, 2019. Credit losses under the new model will consider relevant information about past events, current conditions and reasonable and supportable forecasts, resulting in recognition of lifetime expected credit losses. We are currently evaluating the impact of adopting this guidance on our consolidated financial statements.

Segments

The Company operates in one reportable segment. Accordingly, no segment disclosures have been presented herein.

5. Accounts Receivable, Short-Term and Long-Term Notes Receivable

Management reviews accounts receivable, short-term and long-term notes receivable on a monthly basis to determine if any receivables are potentially uncollectible. An allowance for doubtful accounts is determined based on a combination of historical experience, length of time outstanding, customer credit worthiness, and current economic trends. We recorded a bad debt expense of $35,211 during the three months ended March 31, 2017 and wrote off uncollectable accounts during the three months ended March 31, 2017 in the amount of $11,211. As of March 31, 2017, the Company has recorded an allowance for doubtful accounts of $1,820,000.

Notes receivable aged over 30 days past due are considered delinquent and notes receivable aged over 60 days past due with known collection issues are placed on non-accrual status. Interest revenue is not recognized on notes receivable while on non-accrual status. Cash payments received on non-accrual receivables are applied towards the principal. When notes receivable on non-accrual status are again less than 60 days past due, recognition of interest revenue for notes receivable is resumed. The Company charges interest rates on notes receivable averaging 13%. The Company recorded $3,882 in interest income for the three months ended March 31, 2017.

The allowance for doubtful accounts on long-term receivables is the Company's best estimate of the amount of probable credit losses related to the Company's existing note receivables. The allowance for doubtful accounts is the Company's best estimate of probable credit losses related to trade receivables and notes receivable based upon the aging of the receivables, historical collection data, internal assessments of credit quality and the economic conditions in the business subprime industry, as well as in the economy as a whole. The Company charges off uncollectable amounts against the reserve in the period in which it determines they are uncollectable. Unearned income on notes receivable is amortized using the effective interest method. The Company determines the allowance for doubtful accounts related to notes receivable based upon a reserve for known collection issues, as well as a reserve based upon aging, both of which are based upon history of such losses and current economic conditions. Based upon the Company's methodology, the notes receivable balances with reserves and the reserves associated with those balances are as follows:

	March 31, 2017

	Gross		Reserve		Net
	Current	Long-Term	Current	Long-Term	Current	Long-Term
Customer Notes Receivable	766,675	406,888	749,638	400,901	17,037	5,987
Accounts Receivable	1,001,665	-	669,461	-	332,204	-

	December 31, 2016

	Gross		Reserve		Net
	Current	Long-Term	Current	Long-Term	Current	Long-Term
Customer Notes Receivable	793,988	414,665	767,138	399,401	26,850	15,264
Accounts Receivable	921,829	-	629,461	-	292,368	-

-14-

Table of Contents

The roll forward of the allowance for doubtful accounts related to notes receivable and accounts receivable is as follows:

	Notes Receivable Reserve		Accounts Receivable Reserve
	Current	Long-Term	Current
Balance at December 31, 2016	$767,138	$399,401	$629,461
Incremental (Reduction in) Provision	(10,378)	1,500	44,089
Recoveries	-	-	-
Charge offs	(7,122)	-	(4,089)
Balance at March 31, 2017	$749,638	$400,901	$669,461

The allowance for doubtful accounts as a percentage of total receivables was approximately 84% as of March 31, 2017 and approximately 84% as of December 31, 2016.

6. Common Stock and Warrants

Common stock

During the three months ended March 31, 2017, the Company issued 100,000 shares of common stock and recognized $2,000 expense for services rendered.

During the three months ended March 31, 2016, the company issued 1,669,205 shares of common stock and recognized expense of $132,247 for services rendered.

Tender Offer and Debt Conversion

Between December 11, 2015 and February 3, 2016, the Company entered into agreements with investors, pursuant to which on February 3, 2016, warrant holders exercised 12,270,846 Warrants to purchase an aggregate of 12,270,846 shares of our common stock for gross proceeds of $1.84 million. The Company issued new warrants to purchase an aggregate of 26,479,217 shares of common stock at an exercise price of $0.15 per share, in consideration for the immediate exercise of the warrants.

The Warrants have a cash settlement feature; as a result, they were classified as a derivative liability and recorded at fair value. Fair value of the Warrants, in the total amount of $3,918,924 was calculated using the Monte-Carlo model, using the following assumptions: 68.7% expected volatility, a risk-free interest rate of 0.91%, estimated life of 3 years and no dividend yield. The fair value of the common stock was $0.148. The transaction was accounted for as an inducement. ASC 470-20-40 addresses the accounting for altered conversion privileges, including the issuance of warrants or other securities (not provided for in the original conversion terms) to induce conversion. As a result of this transaction, the Company recognized an inducement expense of $3,560,958 equal to the fair value of all securities and other consideration transferred in the transaction in excess of the fair value of securities issuable pursuant to the original conversion terms, as of the date of the conversion.

In connection with the tender offer, investors converted $843,751 in Convertible Notes at a conversion price of $0.15 per share into 5,625,013 shares of our common stock.

-15-

Table of Contents

7. Convertible Promissory Notes

During the three months ended March 31, 2017, the Company issued five Convertible Promissory Notes aggregating $319,000 to related parties. The Convertible Promissory Notes bear an interest at the rate of 9%, have a six month maturity date, and a voluntary conversion into an upcoming financing in the event the Company closes the financing and receives gross proceeds totaling at least $200,000. The conversion rate will be at the same terms of the financing. We recorded $3,815 in interest expense for the three months ended March 31, 2017.

During the year ended December 31, 2016, the Company issued two Convertible Promissory Notes to the Daniel Jonathan Blech Trust DTD 9/01/2005 in the amount of $100,000 each. Mr. Blech, a member of the Company’s board of directors, is the trustee. The Convertible Promissory Notes bear interest at the rate of 9% has six-month maturity date, and a voluntary conversion into an upcoming financing in the event the Company closes the financing and receives gross proceeds totaling at least $200,000. The conversion rate will be at the same terms of the financing. We recorded $5,817 in interest expense for the three months ended March 31, 2017.

On July 19, 2016, the Company issued the following Convertible Promissory Notes: Joe Proto ($40,000), John Eyler ($40,000), Francis J. Liddy ($20,000), Isaac Blech ($40,000), and Transpac Investments Ltd. ($40,000). All of the individuals listed are members of the board of directors. The Convertible Promissory Notes bear interest at the rate of 9%, have a six month maturity date, and a mandatory conversion into an upcoming financing in the event the Company closes the financing and receives gross proceeds totaling at least $200,000. The conversion rate will be at the same terms of the financing. We recorded $4,050 in interest expense for the three months ended March 31, 2017.

During the year ended December 31, 2015, the Company closed on a private offering and issued and six 9% Convertible Promissory Notes with principal amounts of $300,000, $262,500, $275,000, $75,000, $50,000, and $150,0000 (the “Notes”) and warrants to purchase 400,002, 350,002, 366,667, 66,667, 100,001, and 200,001 shares of the Company’s common stock (the “Warrant”), respectively. The Company also agreed to provide piggy-back registration rights to the holders of the Units. The Notes have a term of twelve (12) months, pay interest semi-annually at 9% per annum and can be voluntarily converted by the holder into shares of common stock at an exercise price of $0.75 per share, subject to adjustments for stock dividends, splits, combinations and similar events as described in the Notes. In addition, if the Company issues or sells common stock at a price below the conversion price then in effect, the conversion price of the Notes shall be adjusted downward to such price but in no event shall the conversion price be reduced to a price less than $0.50 per share. The Warrants have an exercise price of $0.75 per share and have a term of four years. The holders of the Warrants may exercise the Warrants on a cashless basis for as long as the shares of common stock underlying the Warrants are not registered on an effective registration statement. The relative fair value ascribed to the 1,483,340 warrants issued was approximately $337,118 and was recorded to additional paid-in capital. The embedded conversion feature was bifurcated and accounted for as a derivative liability at approximately $393,000 on the day of issuance. The remaining proceeds were allocated based on the relative fair value of the debt and the warrant, and accordingly, approximately $730,520 of debt discount was recorded and was amortized over the initial term of the debt using the effective interest method. These notes were modified in second quarter 2016 and again in fourth quarter 2016. See below for further discussion.

During the second quarter 2016, the Company amended four of the outstanding 9% Convertible Promissory Notes with principal amounts of $275,000, $75,000, 50,000, and $150,000 as follows: the maturity dates were extended to November 5, 2016, September 2, 2016, November 22, 2016, and September 26, 2016, respectively; the conversion price was lowered to $0.15 per share, the provision limiting the conversion price adjustment to that of the Series C Preferred Stock was removed, and an option to be repaid prior to the maturity date in the event the Company raises capital in excess of three million dollars was added. The Company also amended the warrant issued in conjunction with the Convertible Promissory Note reducing the exercise price to $0.15 and issued new warrants to purchase 666,669 shares of the Company's common stock with a $0.15 exercise price and a three year expiration. According to FASB ASC 470-50, the modification is accounted for as a debt extinguishment, whereby the new debt instrument is initially recorded at fair value, and that amount is used to determine the debt extinguishment gain or loss to be recognized and the effective rate of the new instrument. We recognized a loss on the extinguishment of debt of $415,689 for the year ended December 31, 2016.

-16-

Table of Contents

During the fourth quarter 2016, the Company amended six of the outstanding 9% Convertible Promissory Notes with principal amounts of $300,000, $262,500, $275,000, $75,000, $50,000, and $150,000 as follows: the maturity dates were extended to May 5, 2017; the interest rate for the extension period was increased to 15%; the conversion price was changed to the per share price at the time of the next financing of $2,000,000 or greater. According to FASB ASC 470-50, the modification is accounted for as a debt extinguishment, whereby the new debt instrument is initially recorded at fair value, and that amount is used to determine the debt extinguishment gain or loss to be recognized and the effective rate of the new instrument. We recognized a loss on the extinguishment of debt of $58,032 for the year ended December 31, 2016.

On July 15, 2015, the Company issued a Convertible Promissory Note in the principal amount of $400,000 inclusive of interest. The Note is for a term of six months. The Note bears interest at twelve percent per annum. The Note is secured by the assets of the Company. The Note may be converted into shares of the Company’s common stock at $0.75 per share. The Company also issued the holder warrants to purchase 500,000 shares of the Company’s common stock. The proceeds were allocated based on the relative fair value of the debt and the warrant. The warrants have an exercise price of $0.75 per share and have a term of two years. The relative fair value ascribed to the 500,000 warrants issued was approximately $49,000 and was recorded to additional paid-in capital. This amount will be amortized over the term of the debt using the effective interest rate method. As part of the closing of the Tender Offer, $200,000 of these notes converted into 1,333,334 shares of common stock and the investor received common stock and 1,333,333 warrants with a three year term at an exercise price of $0.15. The remaining $200,000 of notes was paid in February 2016.

During the year ended December 31, 2015, the Company issued Convertible Promissory Notes to investors in the principal amount of $150,000, $150,000, $287,333, and $48,000. The Notes feature a mandatory conversion feature obligating the holder to participate and apply the principal and interest into a “Qualified Financing” meaning a financing taking place prior to January 31, 2016, wherein the Company receives gross proceeds totaling at least $1,000,000. In the event the entire principal plus accrued interest under this Note is not eligible for conversion into a Qualified Financing, then any remaining balance of this Note shall be converted into restricted common stock at the price of the Qualified Financing and Holder shall receive three (3) times any warrant coverage provided for in the Qualified Financing. The Notes bear interest at nine percent per annum and has a maturity date of six months. The embedded conversion feature of the note was bifurcated and accounted for as a derivative liability at approximately $17,379 on the day of issuance. As part of the closing of the Tender Offer, these notes converted into 4,291,679 shares of common stock and the investors received 12,875,037 warrants with a three year term at an exercise price of $0.15.

8. Convertible Preferred Stock

Series A Preferred Stock

At March 31, 2017 and December 31, 2016, the Company had 0 shares of Series A Cumulative Convertible Preferred Stock (the “Series A Stock”) outstanding.

Series B Preferred Stock

At March 31, 2017 and December 31, 2016, the Company had 0 shares of Series B convertible preferred stock (“Series B Stock”) outstanding.

Series C Convertible Preferred Stock

At March 31, 2017 and December 31, 2016, the Company had 3,443,061 shares of Series C convertible preferred stock (“Series C Stock”) outstanding that were issued to investors for $3.00 per share. No shares of Series C Stock converted to common shares during the three months ended March 31, 2017.

-17-

Table of Contents

9. Net Loss per Share Applicable to Common Stockholders

Options, warrants, and convertible debt outstanding were all considered anti-dilutive for the three months ended March 31, 2017 and 2016 due to net losses.

The following securities were not included in the diluted net income (loss) per share calculation because their effect was anti-dilutive as of the periods presented:

	For the three months ended March 31,
	2017	2016
Convertible notes	91,498,100	4,645,054
Common stock options	30,846,946	17,088,129
Investor warrants	37,806,931	37,960,774
Compensation warrants	1,285,000	2,098,333
Excluded potentially dilutive securities	161,436,977	61,792,290

10. Stockholders’ Equity

Stock Options and Warrants

Warrant activity (including warrants issued to investors and for consulting and advisory services) for the three months ended March 31, 2017 and 2016 was as follows:

	For the three months ended
	March 31,
	2017	2016
Beginning balance outstanding	39,818,347	26,397,410
Warrants issued during the period:
Expired during the period	(726,416)	(546,667)
Exercised during the period	-	(12,270,853)
In connection with tender offer exercise	-	26,479,217
Ending balance outstanding	39,091,931	40,059,107

Stock option activity during the following periods was as follows:

	For the three months ended
	March 31,
	2017	2016
Beginning balance outstanding	26,865,017	10,337,113
Options issued during the period	4,698,759	6,836,016
Options expired during the period	(716,830)	(85,000)
Ending balance outstanding	30,846,946	17,088,129

-18-

Table of Contents

The numbers and exercise prices of all options and warrants outstanding at March 31, 2017 are as follows:

Shares Issuable	Weighted Average Exercise Price	Expiration Fiscal Period
652,516	7.85	2nd Qtr, 2017
536,500	1.14	3rd Qtr, 2017
1,162,088	6.45	4th Qtr, 2017
10,000	6.60	1st Qtr, 2018
755,000	0.26	4th Qtr, 2018
36,973,317	0.31	1st Qtr, 2019
1,850,007	0.44	2nd Qtr, 2019
1,309,002	0.92	3rd Qtr, 2019
2,603,000	1.15	4th Qtr, 2019
8,273,172	0.15	1st Qtr, 2020
1,475,789	0.18	4th Qtr, 2020
3,288,713	0.12	1st Qtr, 2021
1,427,605	0.09	2nd Qtr, 2021
1,189,668	0.06	3rd Qtr, 2021
3,600,407	0.02	4th Qtr, 2021
4,698,759	0.02	1st Qtr, 2022
133,334	7.05	4th Qtr, 2022
69,938,877	0.47

Stock-based Compensation

Results of operations for the three months ended March 31, 2017 and 2016 include stock based compensation costs totaling $280,919 and $433,180, respectively, all of which was charged to personnel related expenses.

For purposes of accounting for stock based compensation, the fair value of each option and warrant award is estimated on the date of grant using the Black-Scholes-Merton option pricing formula. Compensation expense is recognized over the service period. The following weighted average assumptions were utilized for the calculations during the three months ended March 31, 2017 and 2016:

	For the three months ended
	March 31,
	2017	2016
Expected life (in years)	2.50 years	2.874 years
Weighted average volatility	202.30%	108.81%
Forfeiture rate	26.07%	13.58%
Risk-free interest rate	1.38%	.96%
Expected dividend rate	0.00%	0.00%

-19-

Table of Contents

The weighted average expected option and warrant term for employee stock options granted reflects the application of the simplified method set out in SEC Staff Accounting Bulletin No. 107, Share-Based Payment (SAB 107). The simplified method defines the life as the average of the contractual term of the options and the weighted average vesting period for all options. The Company utilized this approach as its historical share option exercise experience does not provide a reasonable basis upon which to estimate an expected term. Expected volatilities are based on the historical volatility of the Company’s stock. The Company estimated the forfeiture rate based on our expectation for future forfeitures and (for the purpose of computing stock based compensation given the contractual vesting of the Company’s options and warrants outstanding) the Company assumes that all options and warrants will vest. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield in effect at or near the time of grant. The Company has never declared or paid dividends and has no plans to do so in the foreseeable future.

In February 2017, the Company modified 7,888,172 in outstanding stock options to our former CEO upon his resignation. The new terms extended the exercise date to February 10, 2020 and accelerated vesting on any unvested options. The cancellation and reissuance of these stock options was treated as a modification under ASC 718 and, accordingly, total stock-based compensation expense related to these awards increased $128,807 during the three months ended March 31, 2017.

As of March 31, 2017, $231,130 of total unrecognized compensation cost related to unvested stock based compensation arrangements is expected to be recognized over a weighted-average period of 15.5 months.

11. Notes Payable

On August 26, 2015, the Company entered into a Business Promissory Note and Security Agreement with Bank of Lake Mills for the principal sum of $200,000 and a daily interest rate of 0.22%. The total repayment amount including interest and principal was $244,637 to be paid pro-rata weekly ending February 22, 2016. For the three months ended March 31, 2016, we recorded interest expense related to the note of $4,947 and we paid approximately $70,262 in principal repayments related to the Note. As of February 25, 2016, the note had been fully repaid.

12. Due to Related Party

On August 14, 2015 and September 28, 2015, the Company entered into Loan Agreements with Alex Minicucci, our former CEO, for the principal sum of $65,000 and $35,000, respectively. The Loans include an interest rate of 7%. The $35,000 Loan was repaid in February 2016. For the year three months ended March 31, 2017 and 2016, we recorded interest expense related to the loans of $1,132 and $1,343, respectively. The Company extended the terms related to the $65,000 loan to May 10, 2017.

13. Subsequent Events

On April 18, 2017, the Company issued a Convertible Promissory Note to the Daniel Jonathan Blech Trust DTD 9/01/2005 in the amount of $45,000. Mr. Blech, a member of the Company’s board of directors, is the trustee. The Convertible Promissory Note bears interest at the rate of 9% has six-month maturity date, and a voluntary conversion into an upcoming financing in the event the Company closes the financing and receives gross proceeds totaling at least $200,000. The conversion rate will be at the same terms of the financing.

On May 3, 2017, the Company amended one May 5, 2015 9% Convertible Promissory Note with a principal amount of $275,000 as follows: the maturity date was extended to July 7, 2017 and in the event the borrower completes an asset sale or capital raise of more than $275,000, then the Notes shall automatically immediately become due and payable.

On May 15, 2017, the Company amended one May 5, 2015 9% Convertible Promissory Note with a principal amount of $262,500 as follows: the maturity date was extended to July 7, 2017 and in the event the borrower completes an asset sale or capital raise of more than $275,000, then the Notes shall automatically immediately become due and payable.

-20-

Table of Contents

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein. In addition to historical information, the following Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed in this Quarterly Report and our other periodic reports filed with the Securities and Exchange Commission.

Business Overview

We are a national full-service mobile and loyalty marketing agency that offers a means for small and large business owners alike to better connect with their consumers and generate sales. We do business under the name “SMS Masterminds.” The core of our business involves two licenses which include, among other things, a proprietary SaaS (software as a service) system, proprietary marketing and sales training materials and mobile-responsive website building software.

With our mobile and loyalty marketing programs and proprietary responsive website building software, we provide proprietary loyalty systems and a suite of digital engagement and marketing services that help local merchants build relationships with consumers and drive revenues. These services are sold, implemented and supported both internally and by a network of certified digital marketing specialists, aka “Certified Masterminds,” who drive revenue and consumer relationships for merchants via loyalty programs, custom mobile-responsive websites, review generation and management, social media engagement, mobile marketing, mobile commerce and financial tools, such as reward systems. We enter into licensing agreements for our proprietary loyalty and mobile marketing solutions and custom mobile-responsive website building tools with “Certified Masterminds” which sell and support the technology in their respective markets. We provide extensive training materials, best practice guides and other resources to our licensees, including access to a “Mentor”, who is an existing successful “Mastermind”.

The licensees also utilize digital loyalty tablets provided to their merchants. The loyalty tablets are proprietary tablet devices set up in physical retail locations where Consumers can enter their mobile phone number to “opt-in” to receive notifications from the merchant and participate in the merchant’s loyalty program.

Our business strategy consists of delivering and managing:

(i)

Loyalty platforms

a. Merchant funded rewards

b. Loyalty rewards tablet/kiosk

c. Proprietary rewards management system

(ii)

Mobile marketing technology

a. Text and email promotion messaging

b. Customer analytics and propensity marketing

c. Patent pending ‘automated engagement’ engine

d. Text2Win sweepstakes features

(iii)

Enterprise level loyalty and mobile marketing consulting

a. Monthly hands on reviews by our “Certified Masterminds”

b. Campaign creation and optimization

c. Localized support

(iv)

Proprietary mobile-responsive website building platform

a. Software allowing licensees and merchants to create and administer their websites

b. Audits of existing merchant websites

c. Integration of social media streams and consumer reviews into websites

-21-

Table of Contents

Corporate History

On February 11, 2014, we acquired substantially all of the assets of Intellectual Capital Management, LLC, dba “SMS Masterminds.” On September 18, 2014, we acquired substantially all of the web related assets of TechXpress, Inc., a California corporation. TechXpress provides personalized website, eCommerce and mobile app development services as well as marketing tools and analytics.

Results of Operations

Comparison of Results of Operations for the Three Months Ended March 31, 2017 and 2016

Revenue

The Company had total revenues of $1,470,828 and $1,430,385 for the three months ended March 31, 2017 and 2016, respectively.

Our revenues increased $40,443 over the prior year due to increased licensee onboarding compared to the first quarter of 2016.

Selling and marketing expenses

Selling and marketing expenses were $123,475 and $98,022 for the three months ended March 31, 2017 and 2016, respectively. The increase of $25,453 was mostly due to our continued focus on marketing efforts on those territories where we had a better opportunity to expand into immediately.

Personnel related expenses

Personnel related expenses were $1,233,204 and $1,463,930 for the three months ended March 31, 2017 and 2016, respectively. This amounted to a decrease of $230,726 or a 15.8% decrease. Overall decreases in personnel related expenses were due to lower stock compensation expense of approximately $215,000 together with lower payroll costs. Other personnel related expenses include employer taxes, employee benefits and other employee related costs.

Processing expenses

Processing expenses were $225,595 and $308,914 for the three months ended March 31, 2017 and 2016, respectively. This resulted in a decrease of $83,319 or a 27.0% decrease. Decreases in processing expenses were the result of our lower subscription server costs.

Amortization of intangible assets

Amortization of intangible assets was $13,919 and $48,285 for the three months ended March 31, 2017 and 2016, respectively. This resulted in a decrease of $34,366, due to the majority of our intangible assets being fully amortized as of December 31, 2016.

General and administrative expenses

General and administrative expenses totaled $314,600 and $703,162 for the three months ended March 31, 2017 and 2016, respectively. This resulted in a decrease of $388,562 or a 55.3% decrease. We had increases in insurance expense during the quarter offset by decreases in investor relations consulting, software amortization, and travel.

Bad debt expense

Bad debt expenses totaled $35,211 and $26,526 for the three months ended March 31, 2017 and 2016, respectively. We recorded bad debt write-offs due to non-performing accounts.

-22-

Table of Contents

Comparison of Non-operating Income and Expense for the Three Months Ended March 31, 2017 and 2016

For the three months ended March 31, 2017 and 2016, net interest income totaled $3,882 and $14,319, respectively. This was due to the lowered remaining balances on our financed accounts.

For the three months ended March 31, 2017 and 2016, interest expense totaled $74,211 and $62,192, respectively. This related to our convertible notes and our notes payable financings outstanding.

For the three months ended March 31, 2017 and 2016, amortization of debt discount totaled $16,789 and $267,028, respectively. This decrease was due to the convertible notes financings in 2017.

For the three months ended March 31, 2017 and 2016, we recognized a loss on extinguishment of debt of $0 and $288,618, respectively. This decrease was due to the convertible notes modifications in 2016 compared to no modifications in 2017.

For the three months ended March 31, 2017 and 2016, inducement for exercise of warrants expense totaled $0 and $3,650,958, respectively. This decrease was due to the inducement given to exercise warrants in 2016.

During the three months ended March 31, 2017 and 2016, we recognized a loss from the change in the fair value of derivative liabilities of $22,700 and a gain of $503,284, respectively. These derivative liabilities are the fair value of warrants issued in fiscal 2010 with anti-dilution privileges, warrants issued in 2012 with certain registration privileges, warrants issued in 2016 with provisions that adjust conversion or exercise price, and the fair value of the bifurcated conversion options in convertible notes issued in 2015.

Comparison of Net Loss and Net Loss per Share for the Three Months Ended March 31, 2017 and 2016

For the three months ended March 31, 2017 and 2016, our net loss was $584,994 and $4,879,647, respectively. Our basic and diluted net loss per share was $0.01 and $0.15 for the three months ended March 31, 2017 and 2016, respectively. Common stock equivalents and outstanding options and warrants were not included in the calculations due to their effect being anti-dilutive.

Liquidity and Capital Resources

We have primarily financed our operations to date through the sale of unregistered equity. At March 31, 2016, our total current assets were $545,339. Total current liabilities were $6,232,573, long-term liabilities were $0, and our stockholders’ deficit totaled $5,277,893.

We need to raise additional funding through additional financing means and there can be no assurance that we will be successful in raising such funds. This description of our recent financing and our future plans does not constitute an offer to sell or the solicitation of an offer to buy our securities, nor shall such securities be offered or sold in the United States absent registration or an applicable exemption from the registration requirements and certificates evidencing such shares contain a legend stating the same.

We had an increase in cash for the three month period ended March 31, 2017 of $110,797. We had cash outlays relating to payments of operating expenses of approximately $208,203 offset by cash provided by issuance of convertible debt of approximately $319,000.

Our cash and cash equivalents balance at March 31, 2017 totaled $185,320.

Going Concern

As of December 31, 2016, the Company’s audited consolidated financial statements included an opinion containing an explanatory paragraph as to the uncertainty of the Company’s ability to continue as a going concern. The Company has continued to incur net losses through March 31, 2017 and have yet to establish profitable operations. These factors among others create a substantial doubt about our ability to continue as a going concern. Our condensed consolidated financial statements at March 31, 2017 do not contain any adjustments related to the outcome of this uncertainty.

-23-

Table of Contents

Contractual Obligations

With the exception of employment agreements and lease agreements described elsewhere herein, we have no outstanding contractual obligations through the date of this report that are not cancellable at our Company’s option.

Critical Accounting Policies Involving Management Estimates and Assumptions

There were no changes from our Annual Report on Form 10-K for the year ended December 31, 2016.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of March 31, 2017.

Item 3—Quantitative and Qualitative Disclosures about Market Risk

Intentionally omitted pursuant to Item 305(e) of Regulation S-K.

Item 4 – Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities and Exchange Commission Act of 1934 reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by Securities and Exchange Commission Rule 13a-15(e) and 15d-15(e), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer concluded that our disclosure controls and procedures were not operating effectively as of March 31, 2017. Our disclosure controls and procedures were not effective because of the “material weakness” described below.

Based on management's evaluation as of March 31, 2017, our management identified the material weaknesses set forth below in our internal control over financial reporting:

(i)

The Company's process for internally reporting material information in a systematic manner to allow for timely filing of material information is ineffective, due to its inherent limitations from being a small company, and there exist material weaknesses in internal control over financial reporting that contribute to the weaknesses in our disclosure controls and procedures. These weaknesses include:

●	insufficient segregation of duties and oversight of work performed in our finance and accounting function due to limited personnel; and

●	lack of controls in place to ensure that all material transactions and developments impacting the financial statements are reflected.

-24-

Table of Contents

To remediate these control weaknesses, we intend to implement segregation of duties, a system of internal reviews and checks and balances to strengthen our controls. We intend to develop and implement a written set of policies and procedures for our operations.

Our company's management concluded that in light of the material weaknesses described above, our company did not maintain effective internal control over financial reporting as of March 31, 2017 based on the criteria set forth in Internal Control—Integrated Framework (2013) issued by the COSO.

Changes in Internal Controls over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred since the year ended December 31, 2016 for the three month period ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II: Other Information

Item 1 – Legal Proceedings

Item 1A – Risk Factors

See “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.

Item 2 –Unregistered Sales of Equity Securities and Use of Proceeds

None not previously disclosed.

Item 3 – Defaults upon Senior Securities

Not applicable.

Item 4 – Mine Safety Disclosures

Not applicable.

Item 5 – Other Information

Not applicable.

-25-

Table of Contents

Item 6 – Exhibits

Exhibit No.		Description
31.1*		Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, by Chief Executive Officer

32.1*		Certification pursuant to 18 U.S.C. §1350 by Chief Executive Officer

31.2*		Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, by Chief Financial Officer

32.2*		Certification pursuant to 18 U.S.C. §1350 by Chief Financial Officer

*		Filed as an exhibit to this report

-26-

Table of Contents

SIGNATURES

In accordance with the requirements of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	The SpendSmart Networks, Inc., a Delaware corporation
	By: /s/ LUKE WALLACE
	Luke Wallace, Chief Executive Officer
	June 2, 2017

	By: /s/ BRETT SCHNELL
	Brett Schnell, Chief Financial Officer
	June 2, 2017

-27-

SPENDSMART NETWORKS, INC. 10-Q