NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 and 2012
Note 1
Background
In September 2004, the Board of Directors
of iVoice, Inc., the former parent of the Company, resolved to pursue the separation of iVoice software business into three publicly
owned companies. SpeechSwitch, Inc. (“SpeechSwitch” or “Company”) was incorporated under the laws of New
Jersey on November 10, 2004 as a wholly owned subsidiary of iVoice, Inc. ("iVoice"). The Company received by assignment
all of the interests in and rights and title to, and assumed all of the obligations of, all of the agreements, contracts, understandings
and other instruments of iVoice Technology 3, Inc., a Nevada corporation and affiliate of the Company.
On August 4, 2005, the Company received
notice from the SEC that the registration statement to effectuate the spin-off of the SpeechSwitch from iVoice was declared effective
and the Company immediately embarked on the process to spin off the SpeechSwitch from iVoice.
On August 5, 2005, the spin-off transaction
was accomplished, by the assignment, contribution and conveyance of certain intellectual property, representing the software codes
of speech recognition, and certain accrued liabilities and related party debt into SpeechSwitch (the "Spin-off"). The
Class A Common Stock shares of the Company were distributed to iVoice shareholders in the form of a taxable special dividend distribution.
In June 2009 Kenneth P. Glynn acquired debt
owed by SpeechSwitch, Inc. to third party creditors and the company moved its headquarters from Matawan, NJ to Flemington, NJ.
On February 3, 2011, the Company changed its
name to Kenergy Scientific, Inc.
In November 2011, the Company opened its first
company-owned GreenSmart Store at the Flemington Marketplace in Flemington, NJ.
On February 4, 2013, the Company announced
that they would be closing their GreenSmart store and “would seek a new business entity acquisition to change its direction
and its financial status”. On March 1, 2013, the Company announced that they had closed the GreenSmart store and the goods
and contents were sold out at a 60% discount to loyal customers and debtors for a reduction of some debts.
On June 26, 2013, Kenneth Glynn executed a
non-binding Letter of Intent with Mina Mar Group Inc (“MMG”) that sets forth the general terms and conditions of an
agreement for MMG to purchase shares of stock in Kenergy Scientific, Inc. to acquire control of KNSC for the purpose of operating
two separate subsidiaries. One subsidiary is an EU and (Seychelles in transition) based financial services type organization Pan
Tuffa Holdings which operates and maintains a substantial size of operation of Internet based properties such as (SPOTFX) www.spotfx.com
(OPTIONS) www.optionese.com and (PRECIOUS METALS DEALER) www.trustvault.com. The second subsidiary is a Canadian based advertising
media company named Sparx Business Media Inc. The media company represents or acts as a sales agent with other advertising aggregators
for approximately 140 nationwide radio stations in Canada and markets such as Toronto Ottawa and Vancouver.
On July 2 2013, the Company announced that it secured certain complex
financing via the sale of preferred shares. The new majority preferred shareholder, and stakeholder Mina Mar Group Inc, a Canadian
based M&A and IR firm has provided significant support in terms of both personnel and resources.
On July 26, 2013, the Company terminated merger
discussions with PanTuffa Group and accepted the resignation of Charles Zein as President-Elect of Kenergy.
On August 8, 2013, the Company secured a $1 million dollar revolving
line of credit at 5% per annual interest rate with its preferred shareholder Mina Mar Group. The funds are used to fund daily operations,
develop the Sparx Media business and settle creditor debts. The balance of the amount drawn as on 30 September 2013 was $229,727
and the interest accrued is $3,750.
On August 14, 2013, the Company closed the merger with Sparx Business
Media Inc through issuance of 3,387,500 shares of Kenergy.
On September 13, 2013, the Company terminated the employment contract
with Manuel Canales and accepted the resignation of Andrea Zecevic and Hugo Rubio as Board Members. In addition Zoran Cvetojevic
was appointed Interim CEO.
Note 2
Business Operations
In June 2009, the Company entered into fields
of development of various products relating to solar power generating systems; portable solar powered products, such as cell phone
and PDA rechargers that are solar rechargeable; solar rechargeable lantern/flashlight devices; solar backpack rechargers; solar
power audio devices, such as radios; wind power generating systems; and, creative products based on proprietary positions, especially
in the area of healthcare.
From August 14, 2013, the Company commenced
operations of a wholly owned media company under the brand name Sparx Business Media Inc. and earned licensing revenue from Sparx.
OUR STRATEGY FOR GROWTH MAY INCLUDE JOINT VENTURES,
STRATEGIC ALLIANCES AND MERGERS AND ACQUISITIONS, WHICH COULD BE DIFFICULT TO MANAGE.
The successful execution of the growth strategy
may depend on many factors, including identifying suitable companies, negotiating acceptable terms, successfully consummating the
corporate relationships and obtaining the required financing on acceptable terms. The Company may be exposed to risks relating
to incorrect assessment of new businesses and technologies. The Company could face difficulties and unexpected costs during and
after the establishment of corporate relationships.
Acquisitions may be foreign acquisitions which
would add additional risks including political, regulatory and economic risks related to specific countries as well as currency
risks.
The documented difficulties with the transfer
agent coupled with the hostile creditors are making daily on- going operations next to impossible for the new management. The Company
was in talks with bankruptcy trustees and was considering seeking relief under Chapter 11. Subsequently, as of December 01, 2013,
the Company has resolved its differences with the transfer agent and is back to normal functionality.
Products and Services
The following description of our business is
intended to provide an understanding of our product and the direction of our initial marketing strategy. As the new product development
is in its early development stages, any focus described in the following pages may change and different initiatives may be pursued,
at the discretion of Management. The areas of development and activities include:
(a)
|
On June 18, 2009, the Company acquired rights and ownership from GlynnTech, Inc. of technology and pending patent applications relating to cancer treatment drug delivery systems, and the technology transfer into the Company included a prototype, numerous variations on designs, CAD drawings, pending patent applications, risk analysis studies, development history and presentation documents. The sale was “at cost” of GlynnTech, Inc. in the amount of $182,600.00. The Agreement called for the aggregate purchase price to be in various denominations of one-year notes. The business objective was to transfer a potentially significant profit opportunity from GlynnTech, Inc. to Kenergy Scientific, Inc. Three presentations had previously been made to pharmaceutical industry candidates and feedback indicated a high level of interest in potential purchase of this technology following FDA approval of this product.
|
(b)
|
In solar power energy production systems, the Company is reviewing numerous models of solar photovoltaic panels and converters, as well as unique aftermarket opportunities. The Company intends to partner with installers and market home, office and commercial solar panels through various media.
|
(c)
|
In the wind power energy production systems, third party companies will review various micro-turbine products to license and sell.
|
On purchase of controlling shares by Mina Mar
Group, the Company changed its business focus as a marketing media company through its subsidiary Sparx Business Media Inc. The
company manages social media networks and offers various customer service solutions for their corporate clients through a company
owned call centre. The media group also acts as a sales agent for a Delaware USA real estate timeshare and fractional ownership
company.
Sales and Marketing
In November 2011, the Company opened its first
company-owned GreenSmart retail store. On March 1, 2013, the Company announced that they had closed the GreenSmart store and the
goods and contents were sold out at a 60% discount to loyal customers and debtors for a reduction of some debts. There are currently
no plans to develop new retail stores in the future. The Company closed the store in June 2013 and disposed of the small inventory
items.
Kenergy Scientific’s Management
On June 30, 2013, Kenneth Glynn resigned from his positions at Kenergy
Scientific, Inc., including President and Chairman of the Board, Ken Moser has simultaneously resigned from the Board of Directors.
The following individuals were elected to the Board of Directors
effective June 30, 2013
|
·
|
Zoran Cvetojevic Chairman of the Board and CEO
|
|
·
|
Jelena Cvetojevic
|
|
·
|
Andrea Zecevic
|
|
·
|
Hugo Rubi
|
Resignations:
|
·
|
Charles Zein President (Subsequently resigned on July 26, 2013)
|
|
·
|
Manuel Canales CEO / COO (Subsequently terminated on September 13, 2013)
|
|
·
|
Teresa Rubio Secretary and Treasurer (Subsequently resigned on July 4, 2013)
|
Note 3
Going Concern
The accompanying financial statements have
been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation
of the Company as a going concern.
For the nine months ended September 30, 2013,
the Company had a negative cash flow from operations, negative working capital and a loss from operations. These matters had raised
substantial doubt about the Company's ability to continue as a going concern. The new management that acquired controlling shares
of the Company recently, has provided financing to the Company through revolving line of credit from one of its group company and
has also recorded sales showing some positive signs of generating cash flow from operations.
Note 4
Summary of Significant Accounting Policies
a) Basis of Presentation
The accompanying condensed unaudited interim
financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC"). The condensed financial statements and notes are presented as permitted on Form 10-Q
and do not contain information included in the Company's annual statements and notes. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States
of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures
are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read
in conjunction with the December 31, 2012 unaudited financial statements and the accompanying notes thereto. The financial statements
that were reported in the Company’s Form 10-K for the fiscal year ended December 31, 2012 do not contain audited financial
statements audited by an independent registered public accounting firm. While management believes the procedures followed in preparing
these condensed financial statements are reasonable, the accuracy of the amounts are in some respects dependent upon the facts
that will exist, and procedures that will be accomplished by the Company later in the year. These results are not necessarily indicative
of the results to be expected for the full year.
These condensed unaudited financial statements
reflect all adjustments, including normal recurring adjustments, which, in the opinion of management, are necessary to present
fairly the operations and cash flows for the periods presented.
b) Use of Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
c) Revenue Recognition
The
Company used to derive its revenues from the sales of portable solar powered products, solar rechargeable lantern/flashlight devices,
solar backpack rechargers and clothing made from recycled products.
These products were sold
directly to consumers through website or by direct sales. Payment was made for the products prior to delivery.
The
Company has changed its business activity after
purchase of controlling
shares by Mina Mar Group. The Company changed its business focus as a marketing media company through its subsidiary Sparx Business
Media Inc. The company manages social media networks and offers various customer service solutions for their corporate clients
through a company owned call centre. The media group also acts as a sales agent for a Delaware USA real estate timeshare and fractional
ownership company.
d) Product Warranties
The
Company warranted its solar powered products from defects for 30 days from delivery to the customer.
The
Company estimated its warranty costs based on historical warranty claims experience in estimating potential warranty claims. Due
to no sales during the quarter, management has not included an accrual for potential warranty claims and do not expect to incur
any warranty costs in future. The Company is no longer in the business of power energy production systems or related products and
therefore now has no product warranty and does not need to accrue for any warranty claim.
e) Research and Development Costs
Research and development costs are charged
to expense as incurred.
f) Cash and Cash Equivalents
The Company considers all highly liquid investments
purchased with original maturities of three months or less to be cash equivalents. There were no cash equivalents at September
30, 2013 and December 31, 2012.
g) Intangible Assets
Development, registration and maintenance costs
associated with the filing and registration of patents were prepaid and amortized over the remaining life of the patent, not to
exceed 20 years.
As defined in ASC 360-10-35, “Impairment
or Disposal of Long-Lived Assets”, long-lived assets and certain identifiable intangibles to be held and used or disposed
of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The Company has adopted this statement and determined that as the new management has no
intention to continue the business relating to power production systems and its related products, the intangible assets no longer
has any value to the Company. The total book value of assets has been written off and charged to the statement of operations in
the current quarter.
h) Income Taxes
The Company accounts for income taxes
in accordance with ASC 740-10, “Income Taxes”, which requires an asset and liability approach to financial accounting
and reporting for income taxes. Deferred income taxes and liabilities are computed annually for differences between the financial
statement and the tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on
enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
i) Derivative Liabilities
The Company accounts for its embedded conversion
features in its convertible debentures in accordance ASC 815-10, "Derivatives and Hedging", which requires a periodic
valuation of their fair value and a corresponding recognition of liabilities associated with such derivatives, and ASC 815-40,
“Contracts in Entity’s Own Equity”. The recognition of derivative liabilities related to the issuance of convertible
debt is applied first to the proceeds of such issuance as a debt discount, at the date of issuance, and the excess of derivative
liabilities over the proceeds is recognized as “Loss on Valuation of Derivative” in other expense in the accompanying
financial statements. Any subsequent increase or decrease in the fair value of the derivative liabilities is recognized as “Other
expense” or “Other income”, respectively.
j) Fair Value of Instruments
The carrying amount reported in
the balance sheet for cash and cash equivalents, deposits, prepaid expenses, accounts payable, and accrued expenses approximate
fair value because of the immediate or short-term maturity of these financial instruments. The carrying amount reported for notes
payable approximates fair value because, in general, the interest on the underlying instruments fluctuates with market rates.
k) Concentrations of Credit Risk
Financial instruments
that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable and cash.
As of September 30, 2013 and December 31, 2012, the Company believes it has no significant risk related to its concentration within
its accounts receivable
.
Note 5
Income (Loss) Per Share
ASC 260, “Earnings Per Share”
requires presentation of basic earnings per share (“basic EPS”) and diluted earnings per share (“diluted EPS”).
The Company’s basic income (loss) per common share is based on net income or loss for the relevant period, divided by the
weighted average number of common shares outstanding during the period. Diluted income or loss per common share is based on net
income or loss, divided by the weighted average number of common shares outstanding during the year, including common share equivalents,
such as outstanding stock options.
The computation of diluted loss per share also does not assume conversion,
exercise or contingent exercise of securities due to the beneficial conversion of related party accounts as these shares that would
have an anti-dilutive effect.
The computation of
income (loss) per share is as follows:
|
|
Nine months Ended
|
|
|
September 30, 2013
|
|
September 30, 2012
|
Basic net income (loss) per share computation:
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
2,619,167
|
|
|
$
|
(6,440,359
|
)
|
Weighted-average common shares outstanding (see below)
|
|
|
3,426,257,524
|
|
|
|
143,106,635
|
|
Basic net income (loss) per share attributable to
common stockholders (see below)
|
|
$
|
0.00
|
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share computation
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
2,619,167
|
|
|
$
|
(6,440,359
|
)
|
Weighted-average common shares outstanding (see below)
|
|
|
3,426,257,524
|
|
|
|
143,106,635
|
|
Incremental shares attributable to the assumed conversion of
Convertible debenture and convertible promissory note
|
|
|
6,573,742,476
|
|
|
|
—
|
|
Total adjusted weighted-average shares
|
|
|
10,000,000,000
|
|
|
|
143,106,635
|
|
Diluted net income (loss) per share attributable to
common stockholders (see below)
|
|
$
|
0.00
|
|
|
$
|
(0.05
|
)
|
At September 30, 2013, the Company had common
stock equivalents of 27,931,196,389, but when added to the common stock outstanding, they are in excess of the authorized capital,
so the maximum authorized shares of 10,000,000,000 are shown for diluted earnings per common share calculations. At September 30,
2012 the Company had common stock equivalents of 1,625,949,715.
Note 6
Intangible Assets
At September 30, 2013 and
December 31, 2012, intangible assets consist of the following:
|
|
|
2013
|
|
|
|
2012
|
|
Speech-enabled auto dialer
|
|
$
|
17,025
|
|
|
$
|
17,025
|
|
Cancer drug delivery system
|
|
|
182,600
|
|
|
|
182,600
|
|
“Green” trademark applications
|
|
|
2,145
|
|
|
|
2,145
|
|
Kenergy patent portfolio
|
|
|
54,870
|
|
|
|
54,870
|
|
Smart Bell
|
|
|
5,000
|
|
|
|
5,000
|
|
Less: accumulated amortization
|
|
|
(261,640
|
)
|
|
|
(107,019
|
)
|
Intangible assets, net
|
|
|
$ ----------
|
|
|
$
|
154,621
|
|
As defined in ASC 360-10-35,
“Impairment or Disposal of Long-Lived Assets”, long-lived assets and certain identifiable intangibles to be held and
used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The Company has adopted this statement and determined that as the new management
has no intention to continue the business relating to power production systems and its related products, the intangible assets
no longer has any value to the Company. The total book value of assets has been written off and charged to the statement of operations
in the current quarter.
Note 7
Income Taxes
Deferred income taxes will be determined using
the liability method for the temporary differences between the financial reporting basis and income tax basis of the Company's
assets and liabilities. Deferred income taxes will be measured based on the tax rates expected to be in effect when the temporary
differences are included in the Company's tax return. Deferred tax assets and liabilities are recognized based on anticipated future
tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective
tax bases.
At September 30, 2013 and December 31, 2012 deferred tax assets
consist of the following:
|
|
|
2013
|
|
|
|
2012
|
|
Deferred tax assets
|
|
$
|
1,056,000
|
|
|
$
|
986,000
|
|
Less: valuation allowance
|
|
|
(1,056,000
|
)
|
|
|
(986,000
|
)
|
Net deferred tax asset
|
|
$
|
0
|
|
|
$
|
0
|
|
At September 30, 2013 and December 31, 2012,
the Company had federal net operating loss carry forwards in the approximate amounts of $0 and $2,900,000, respectively, available
to offset future taxable income. The Company established valuation allowances equal to the full amount of the deferred tax assets
due to the uncertainty of the utilization of the operating losses in future periods.
Note 8
Related Party Transactions
On June 1, 2009 and June 2, 2009, the Company
issued two (2) one-year promissory notes in the aggregate of $37,000 to GlynnTech, Inc, for GlynnTech to assume a like amount of
current obligations that the Company was unable to pay from current operations. The debt was due on or before the 1
st
anniversary and was interest free.
On June 18, 2009, the Company acquired the
patent rights and technology relating to cancer drug delivery systems developed by GlynnTech, Inc. by the issuance of three (3)
$100,000 one-year promissory notes. The promissory notes were due on or before the 1
st
anniversary of the notes and
were interest free.
On December 28, 2009, the Company completed
the transfer of the patent rights and technology relating to cancer drug delivery systems developed by GlynnTech, Inc. by the issuance
of three (3) one-year promissory notes for the aggregate amount of $125,000. The promissory notes are due on or before the 1
st
anniversary of the notes and are interest free.
On June 17, 2009, Kenneth P. Glynn, President
and CEO of the Company, acquired debt owed by the Company to third party creditors as follows:
(1)
|
Promissory Note due to Jerome Mahoney dated August 5, 2005 having a balance on June 17, 2009 of $71,756 and accrued interest of $98,379;
|
(2)
|
Deferred Compensation due to Jerome Mahoney as of June 17, 2009 equal to $319,910;
|
(3)
|
Convertible promissory note to iVoice, Inc. dated March 5, 2008 having a balance on June 17, 2009, $79,936 and accrued interest of $4,344; and
|
(4)
|
Loan from iVoice Technology, Inc. to SpeechSwitch, Inc. in the amount of $3,600.
|
The outstanding promissory note, referred to
above, will bear interest at the rate of Prime plus 1.0% per annum on the unpaid balance until paid. Under the terms of the Promissory
Note, at the option of the Promissory Note holder, principal and interest can be converted into either (i) one share of SpeechSwitch
Class B Common Stock, par value $.01 per share, for each dollar owed, (ii) the number of shares of SpeechSwitch Class A Common
Stock calculated by dividing (x) the sum of the principal and interest that the Note holder has requested to have prepaid by (y)
eighty percent (80%) of the lowest issue price of Class A Common Stock since the first advance of funds under this Note, or (iii)
payment of the principal of this Promissory Note, before any repayment of interest. The Board of Directors of the Company maintains
control over the issuance of shares and may decline the request for conversion of the repayment into shares of the Company.
The amount of deferred compensation, referred
to above, was added to the outstanding promissory note for calculations of accrued interest and is payable in the form of cash,
debt, or shares of our Class B Common Stock.
On May 27, 2010, the Company issued an aggregate
of 7,057,328 (5,645,862,500 pre-reverse split) shares of Class A common stock and 10,000 shares of Class B common stock to Mr.
Glynn in settlement of $509,425 (items #1 and #2 above) of promissory notes and accrued interest due to Mr. Glynn. These shares
contain a restrictive legend which will limit Mr. Glynn from liquidating these into the open market.
On June 8, 2010 and June 22, 2010, the Company
executed two wrap-around agreements, in an aggregate of $337,000, to assign amounts due under these one-year promissory notes to
EPIC Worldwide, Inc. The Company was in default on the original notes and this allowed the Company to extend the payment terms
for an additional year while the Company attains alternate financing.
During the year ended December 31, 2012, the
Company issued an aggregate of 1,202,057,500 shares of Class A common stock to Mr. Glynn as repayment of $120,823 of deferred compensation
and accrued interest that Mr. Glynn earned in 2009 and 2010. These shares contain a restrictive legend which will limit Mr. Glynn’s
ability to liquidate these into the open market.
On July 1, 2012, the Company extended the Administrative
Services Agreement with GlynnTech, Inc to provide back office administrative support to the Company. The administrative services
agreement was for an initial term of one year and was extended for an additional one-year periods at the Company’s request.
The amended fees are $7,500 per month but may be reduced in scope or eliminated at any time upon 90 days’ prior written notice
by the Company to GlynnTech. Effective on June 1, 2013, certain intangible assets related to the Alternative Energy Portfolio patents
and patent applications were assigned to GlynnTech in exchange for a reduction of unpaid administrative service fees in the aggregate
value of $45,000.
Per agreement with GlynnTech, Inc, Kenergy
continued to sell the GreenSmart store products on a consignment basis to fulfill customer requirements. Per the agreement, Kenergy
retains a 10% retainer to offset administrative costs of processing the transactions. As of September 30, 2013, Kenergy owes $1,665
to GlynnTech for products sold.
On July 1, 2012, the Company consented to the
assignment of one of the GlynnTech, Inc promissory notes from GlynnTech to Charles Basner in the amount of $50,000. All terms of
the original note are unchanged.
The aggregate value of the GlynnTech promissory
notes are $75,000 at June 30, 2013 and December 31, 2012. For the nine months ended September 30, 2013, the Company calculated
$3,532 as imputed interest at a rate of 6.25% which was charged to interest expenses and credited to Additional paid-in capital.
On June 26, 2013, the Company issued a Promissory
Note to Mr. Glynn for $180,000 representing earned and unpaid deferred compensation.
On June 30, 2013, Mr. Glynn assigned the remaining
balance of his notes and deferred compensation to Mina Mar Group pursuant to the terms of the LOI between himself and Mina Mar
Group executed on May 31, 2013. The outstanding balance at September 30, 2013 was $0.
Note 9
Convertible Promissory
Note (Related Party)
The Company had entered into a temporary administrative
services agreement with iVoice in 2004. The administrative services agreement continued on a month-to-month basis until December
31, 2008 at which point the agreements were suspended by mutual consent of the parties.
In March 2008, the administrative services
agreement was amended to provide that accrued and unpaid administrative services shall be segregated and converted into a Convertible
Promissory Note. The principal and interest shall be due and payable as follows: (a) interest shall accrue monthly on the unpaid
balance and shall be paid annually, and (b) principal shall be payable on demand.
On
March 5, 2008, the Company converted its outstanding accounts payable to
iVoice, Inc. for unpaid administrative services in the amount of $50,652 into a convertible promissory note at the rate of prime
plus 1 percent per annum. Additional amounts of $42,209 were added to this note based on any unpaid administrative services, and
will accrue interest at the above specified rate from date of advance until paid.
On June 17, 2009, Kenneth P. Glynn (a related
party) acquired this debt from iVoice, Inc. The Note holder may elect payment of the principal and/or interest, at the its sole
discretion, owed pursuant to this Note by requiring the Company to issue either: (i) one Class B common stock share of the Company
par value $.01 per share, for each dollar owed, (ii) the number of Class A common stock shares of the Company calculated by dividing
(x) the sum of the principal and interest that the Note holder has decided to have paid by (y) eighty percent (80%) of the lowest
issue price of Class A common stock since the first advance of funds under this Note, or (iii), payment of the principal of this
Note, before any repayment of interest.
On June 19, 2013, the Company issued an aggregate
of 2,200,000,000 shares of Class A common stock to Mr. Glynn as repayment of $88,000 of convertible debt and accrued interest.
These shares contain a restrictive legend which will limit Mr. Glynn’s ability to liquidate these into the open market.
On June 26, 2013, the Company issued a Promissory
Note to Mr. Glynn for $180,000 representing earned and unpaid deferred compensation. This note matures on July 1, 2013 and upon
default becomes convertible into Class A common stock at a conversion price of 50% of the lowest closing price of the last ten
trading days prior to notice of conversion. As of September 30, 2013, the outstanding balance on the Promissory Note was $180,000
plus accrued interest of $0.
Note 10
Convertible Debenture and Derivative Liability
On March 30, 2007, the Company issued a Secured
Convertible Debenture (the "Debenture") to YA Global Investments (f/k/a/ Cornell Capital Partners) (“YA Global”)
for the sum of $1,000,000 in exchange for a previously issued notes payable for the same amount. The Debenture has a term of three
years, and pays interest at the rate of 5% per annum. YA Global has the right to convert a portion or the entire outstanding principal
into the Company's Class A Common Stock at a Conversion Price equal to eighty percent (80%) of the lowest closing Bid Price of
the Common Stock during the five (5) trading days immediately preceding the Conversion Date. YA Global may not convert the Debenture
into shares of Class A Common Stock if such conversion would result in YA Global beneficially owning in excess of 4.99% of the
then issued and outstanding shares of Class A Common Stock. The Conversion Price and number of shares of Class A Common Stock issuable
upon
conversion of the Debenture are subject to certain exceptions and adjustment for stock splits and combinations and other dilutive
events. Subject to the terms and conditions of the Debenture, the Company has the right to redeem ("Optional Redemption")
a portion or all amounts outstanding under this Debenture prior to the Maturity Date at any time provided that as of the date of
the Holder's receipt of a Redemption Notice (i) the Closing Bid Price of the of the Common Stock, as reported by Bloomberg, LP,
is less than the Conversion Price and (ii) no Event of Default has occurred. The Company shall pay an amount equal to the principal
amount being redeemed plus a redemption premium ("Redemption Premium") equal to twenty percent (20%) of the principal
amount being redeemed, and accrued interest, (collectively referred to as the "Redemption Amount"). During the time that
any portion of this Debenture is outstanding, if any Event of Default has occurred, the full principal amount of this Debenture,
together with interest and other amounts owing in respect thereof, to the date of acceleration shall become at the Holder's election,
immediately due and payable in cash, provided however, the Holder may request (but shall have no obligation to request) payment
of such amounts in Common stock of the Company. Furthermore, on addition to any other remedies, the Holder shall have the right
(but not the obligation) to convert this Debenture at any time after (x) an Event of Default or (y) the Maturity Date at the Conversion
Price then in-effect. The debenture is secured by substantially all of the assets of the Company.
On July 26, 2010, the convertible debenture
with YA Global Investments, LP was amended and restated in order to replace the existing debenture with five (5) debentures of
$208,707.74 each. The term of the debentures were amended to extend the due date until July 29, 2011. The amendments had the effect
of reclassifying $156,199 of non-interest bearing accrued interest into the secured convertible debentures.
During the year ended December 31, 2010, YA
Global Investments, LP assigned the debentures that it held to E-Lionheart Associates, LLC (“E-Lionheart”) with an
aggregate value of $1,043,539. This was done in conjunction with the execution of a Securities Purchase Agreement with E-Lionheart
whereby E-Lionheart will purchase from the Company up to $500,000 of convertible debentures which will provide new financing for
the Company. The new convertible debentures are due on August 9, 2011 and have conversion rights essentially the same as YA Global.
During the year ended December 31, 2011, the
Company issued an additional 577,597 (462,077,400 pre-reverse split) shares of Class A common stock to E-Lionheart for repayment
valued at $143,244. The difference in the market value and the reduction in debt of $46,208 was charged to beneficial interest
in the amount of $97,036.
On July 29, 2011 and August 9, 2011, the Company
had defaulted on the terms of the E-Lionheart Convertible Debentures and as such, the full principal amount of these Debentures,
together with interest and other amounts owing in respect thereof, shall become at the Holder's election, immediately due and payable
in cash, provided however, the Holder may request (but shall have no obligation to request) payment of such amounts in Common stock
of the Company.
As of September 30, 2013, the outstanding balance
on the E-Lionheart Convertible Debentures was $626,123. During the calendar year 2011, the Company notified E-Lionheart that the
Company was disputing the balances due upon this debenture due to miscalculations of the effective conversion rates used by E-Lionheart
and as of the date of this filing, the dispute has not been settled.
In accordance with ASC 815, "Derivatives
and Hedging", the Company determined that the conversion feature of the Debenture met the criteria of an embedded derivative,
and therefore the conversion feature of this Debenture needed to be bifurcated and accounted for as a derivative. The fair value
of the embedded conversion was estimated at the date of issuance using the Black-Scholes model with the following assumptions:
risk free interest rate: 5.6%; expected dividend yield: 0%: expected life: 3 years; and volatility: 165.62%. The accounting guidance
instructs that the conversion options are a derivative liability. As such, in March 2007 the Company recorded the conversion options
as a liability, recorded a debt discount of $1,000,000, and charged Other Expense - Loss on Valuation of Derivative for $124,479,
resulting primarily from calculation of the conversion price. For the six months ended June 30, 2013, the Company recorded a Gain
on Valuation of Derivative in the amount of $1,154,814. For the year ended December 31, 2012, the Company recorded a Loss on Valuation
of Derivative in the amount of $613,148. The Company has not done valuation of derivative during the quarter.
On August 9, 2010, the Company entered
into a securities purchase agreement with E-Lionheart to purchase up to $500,000 of convertible debentures from the Company. Amounts
due under this debenture are due on or before August 9, 2011 and pays interest at the rate of 5% per annum. E-Lionheart has the
right to convert a portion or the entire outstanding principal into the Company's Class A Common Stock at a Conversion Price equal
to eighty percent (90%) of the lowest closing Bid Price of the Common Stock during the five (5) trading days immediately preceding
the Conversion Date. E-Lionheart may not convert the Debenture into shares of Class A Common Stock if such conversion would result
in YA Global beneficially owning in excess of 4.99% of the then issued and outstanding shares of Class A Common Stock.
On August 9, 2011, the Company had defaulted
on the terms of this Debenture and as such, the full principal amount of this Debentures, together with interest and other amounts
owing in respect thereof, shall become at the Holder's election, immediately due and payable in cash, provided however, the Holder
may request (but shall have no obligation to request) payment of such amounts in Common stock of the Company.
In accordance with ASC 815, "Derivatives
and Hedging", the Company determined that the conversion feature of the Debenture met the criteria of an embedded derivative,
and therefore the conversion feature of this Debenture needed to be bifurcated and accounted for as a derivative. The fair value
of the embedded conversion was estimated at the date of issuance using the Black-Scholes model with the following assumptions:
risk free interest rate: 2.25%; expected dividend yield: 0%: expected life: 1 years; and volatility: 301.66% to 308.06%. The accounting
guidance instructs that the conversion options are a derivative liability. As such, on the issue dates, the Company recorded the
conversion options as a liability and recorded a debt discount of $143,408. For the six months ended June 30, 2013, the Company
recorded a Gain on Valuation of Derivative in the amount of $816,899 on the fluctuation in the current market prices. For the year
ended December 31, 2012, the Company recorded a Loss on Valuation of Derivative in the amount of $450,598 on the fluctuation in
the current market prices. The Company has not done valuation of derivative during the quarter.
On August 26, 2011 and November 22, 2011, the
Company issued two convertible promissory notes, in an aggregate of $65,000, to Asher Enterprises, Inc. (“Asher”).
Amounts due under these notes are due on or before May 30, 2012 and August 28, 2012, respectively, and pays interest at the rate
of 8% per annum. Asher has the right to convert a portion or the entire outstanding principal into the Company's Class A Common
Stock at a Conversion Price equal to fifty five percent (55%) of the Average of the lowest three (3) Trading Prices of the Common
Stock during the ten (10) Trading Day period immediately preceding the Conversion Date. Asher may not convert the note into shares
of Class A Common Stock if such conversion would result in Asher beneficially owning in excess of 4.99% of the then issued and
outstanding shares of Class A Common Stock.
On March 13, 2012, the Company amended the
terms of the August 26, 2011 note to change the Variable Conversion Price to equal thirty five (35%) multiplied by the average
of the lowest two Trading Prices of the Common Stock during the thirty (30) Trading Day period immediately preceding the Conversion
Date.
During the year ended December 31, 2012 the
Company issued an aggregate of 63,885,238 shares of Class A common stock to Asher for repayment of debt valued at $105,230. The
difference in the market value and the reduction in debt of $25,600 was charged to beneficial interest in the amount of $79,630.
During the nine months ended September 30, 2013 the Company issued an additional 363,852,814 shares of Class A common stock to
Asher for repayment of debt valued at $113,498. The difference in the market value and the reduction in debt and accrued interest
of $30,200 was charged to beneficial interest in the amount of $83,298.
As of September 30, 2013 and December 31, 2012,
the outstanding balance on these Convertible Promissory Notes was $10,700 and $39,400, respectively.
In accordance with ASC 815, "Derivatives
and Hedging", the Company determined that the conversion feature of the Debenture met the criteria of an embedded derivative,
and therefore the conversion feature of this Debenture needed to be bifurcated and accounted for as a derivative. The fair value
of the embedded conversion was estimated at the date of issuance using the Black-Scholes model with the following assumptions:
risk free interest rate: 2.25%; expected dividend yield: 0%: expected life: .75 years; and volatility: 212.29%. The accounting
guidance instructs that the conversion options are a derivative liability. As such, on the issue dates, the Company recorded the
conversion options as a liability, recorded a debt discount of $65,000, and charged Other Expense - Loss on Valuation of Derivative
for $24,294. For the six months ended June 30, 2013, the Company recorded a Gain on Valuation of Derivative in the amount of $129,917
on the fluctuation in the current market prices. For the year ended December 31, 2012, the Company recorded a Gain on Valuation
of Derivative in the amount of $83,610 on the fluctuation in the current market prices. The Company has not done valuation of derivative
during the quarter.
On June 8, 2010 and June 22, 2010, the Company
executed two wrap-around agreements, in an aggregate of $337,000, to assign amounts due under various Promissory Notes due to GlynnTech,
Inc to EPIC Worldwide, Inc. (the “Investor”). The wrap-around agreements also modified the original terms to extend
the due dates by one year, to include provisions to allow the Investor to convert the amounts due into common stock at a 50% discount
of the average three deep bid on the day of conversion and to increase the interest rate to 15% after a 60 day interest free period.
On June 22, 2011, the Company had defaulted
on the terms of the 2nd wrap-around agreements and as such, the default interest rate was increased retroactively to 24.99% on
the remaining balance of the debt.
On March 6, 2012, the Company consented to
the cancelation of the wrap around agreement with EPIC Worldwide and the reassignment of a new wrap around agreement with ATG,
Inc. for $50,000 plus accrued interest of $26,050. Concurrent with the cancelation of the wrap around agreement, the Company also
recorded a Gain on Valuation of Derivative in the amount of $154,201 on the retirement of the derivative liability.
On March 6, 2012, the Company consented to
the reassignment of the outstanding balance of the EPIC Worldwide wrap around agreements to ATG, Inc. (“ATG”). The
outstanding balance of principal and accrued interest was $76,050. ATG subsequently entered into an Assignment and Assumption Agreement
with UAIM Corporation (“UAIM”) to assign $10,000 of these funds from ATG to UAIM. Amounts due under these agreements
are due on or before March 6, 2013 and pays interest at the rate of 15% per annum. ATG and UAIM have the right to convert a portion
or the entire outstanding principal into the Company's Class A Common Stock at a Conversion Price equal to $0.0005 per share. ATG
and UAIM may not convert these agreements into shares of Class A Common Stock if such conversion would result in ATG or UAIM beneficially
owning in excess of 4.99% of the then issued and outstanding shares of Class A Common Stock.
During the year ended December 31, 2012, the
Company issued an aggregate of 11,200,000 shares of Class A common stock for repayment of $5,600 of convertible debenture in lieu
of cash pursuant to the terms of the wrap around agreement.
As of September 30, 2013, the outstanding
balance on these agreements was $70,450.
In accordance with ASC 815, "Derivatives
and Hedging", the Company determined that the conversion feature of the Debenture met the criteria of an embedded derivative,
and therefore the conversion feature of this Debenture needed to be bifurcated and accounted for as a derivative. The fair value
of the embedded conversion was estimated at the date of issuance using the Black-Scholes model with the following assumptions:
risk free interest rate: 2.25%; expected dividend yield: 0%: expected life: 1.00 years; and volatility: 295.14. The accounting
guidance instructs that the conversion options are a derivative liability. As such, on the issue dates, the Company recorded the
conversion options as a liability, recorded a debt discount of $76,050, and charged Other Expense - Loss on Valuation of Derivative
for $2,925,649. For the six months ended June 30, 2013, the Company recorded a Gain on Valuation of Derivative in the amount of
$43,396 on the fluctuation in the current market prices. For the year ended December 31, 2012, the Company recorded a Gain on Valuation
of Derivative in the amount of $2,954,881 on the fluctuation in the current market prices. The Company has not done valuation of
derivative during the quarter.
On February 16, 2012, March 14, 2012 and November
27, 2012, the Company issued an additional three (3) convertible promissory notes, in an aggregate of $60,000, to Asher Enterprises,
Inc. (“Asher”). Amounts due under these notes are due on or before November 21, 2012, December 19, 2012 and March 1,
2014, respectively, and pays interest at the rate of 8% per annum. Asher has the right to convert a portion or the entire outstanding
principal into the Company's Class A Common Stock at a Conversion Price equal to fifty five percent (55%) of the Average of the
lowest two (2) Trading Prices of the Common Stock during the twenty (20) Trading Day period immediately preceding the Conversion
Date. Asher may not convert the note into shares of Class A Common Stock if such conversion would result in Asher beneficially
owning in excess of 4.99% of the then issued and outstanding shares of Class A Common Stock.
As of September 30, 2013, the outstanding balance
on these Convertible Promissory Notes were $60,000.
In accordance with ASC 815, "Derivatives
and Hedging", the Company determined that the conversion feature of the Debenture met the criteria of an embedded derivative,
and therefore the conversion feature of this Debenture needed to be bifurcated and accounted for as a derivative. The fair value
of the embedded conversion was estimated at the date of issuance using the Black-Scholes model with the following assumptions:
risk free interest rate: 2.25%; expected dividend yield: 0%: expected life: .75 and 1.19 years; and volatility: 278.05%, 301.94%
and 473.96%, respectively. The accounting guidance instructs that the conversion options are a derivative liability. As such, on
the issue dates, the Company recorded the conversion options as a liability, recorded a debt discount of $60,000, and charged Other
Expense - Loss on Valuation of Derivative for $115,115. For the six months ended June 30, 2013, the Company recorded a Gain on
Valuation of Derivative in the amount of $147,208 on the fluctuation in the current market prices. For the year ended December
31, 2012, the Company recorded a Loss on Valuation of Derivative in the amount of $214,003 on the fluctuation in the current market
prices. The Company has not done valuation of derivative during the quarter.
In conjunction with the consent and assignment
of $45,000 of the Basner note (see Note 11) to Southridge Partners II LP (“Southridge Allonges”), the Company consented
to provide Southridge with the right to convert a portion or the entire outstanding principal into the Company's Class A Common
Stock at a Conversion Price equal to sixty percent (60%) of the lowest closing bid price of the Common Stock during the five (5)
trading days immediately preceding the Conversion Date. Southridge may not convert the note into shares of Class A Common Stock
if such conversion would result in Southridge beneficially owning in excess of 9.99% of the then issued and outstanding shares
of Class A Common Stock.
During the year ended December 31, 2012, the
Company issued an aggregate of 58,102,182 shares of Class A common stock for repayment of $45,000 of convertible debt to Southridge
in lieu of cash pursuant to the terms of the Securities Transfer Agreement.
In accordance with ASC 815, "Derivatives
and Hedging", the Company determined that the conversion feature of the Southridge Allonge met the criteria of an embedded
derivative, and therefore the conversion feature of this debenture needed to be bifurcated and accounted for as a derivative. The
fair value of the embedded conversion was estimated at the date of issuance using the Black-Scholes model with the following assumptions:
risk free interest rate: 2.25%; expected dividend yield: 0%: expected life: .25 years; and volatility: 368.97%. The accounting
guidance instructs that the conversion options are a derivative liability. As such, on the issue dates, the Company recorded the
conversion options as a liability in the aggregate of $75,519, recorded a debt discount in the aggregate of $45,000, and charged
Other Expense - Loss on Valuation of Derivative in the aggregate for $30,519. For the six months ended June 30, 2013, the Company
recorded a Loss on Valuation of Derivative in the amount of $5,535 on the fluctuation in the current market prices. For the year
ended December 31, 2012, the Company recorded a Gain on Valuation of Derivative in the amount of $42,589 on the fluctuation in
the current market prices. The Company has not done valuation of derivative during the quarter.
On January 30, 3013 and March 11, 2013, the
Company issued two convertible promissory notes, in an aggregate of $10,000, to Southridge Partners II LP (“Southridge Debt”).
Amounts due under these notes are due on or before January 31, 2014 and March 31, 2014, respectively. Southridge has the right
to convert a portion or the entire outstanding principal into the Company's Class A Common Stock at a Conversion Price equal to
the lesser of (a) $0.01 or (b) fifty percent (50%) of the lowest closing bid price during the twenty (20) trading days immediately
preceding the Conversion Date.
As of September 30, 2013, the outstanding balance
on the Southridge Debt was $10,000.
In conjunction with the consent and assignment
of $93,700 of the Basner notes, DeJonge notes and Opal notes (see Note 11) to Star City Capital, LLC (“Star City Allonges”),
the Company consented to provide Star City with the right to convert a portion or the entire outstanding principal into the Company's
Class A Common Stock at a Conversion Price equal to fifty percent (50%) of the lowest closing bid price of the Common Stock during
the five (5) trading days immediately preceding the Conversion Date. Star City may not convert the note into shares of Class A
Common Stock if such conversion would result in Star City beneficially owning in excess of 9.99% of the then issued and outstanding
shares of Class A Common Stock.
During the year ended December 31, 2012, the
Company issued an aggregate of 132,365,250 shares of Class A common stock for repayment of $24,969 of convertible debt and interest
to Star City in lieu of cash pursuant to the terms of the various Securities Transfer Agreements.
During the nine months ended September 30,
2013, the Company issued an aggregate of 918,100,200 shares of Class A common stock for repayment of $48,553 of convertible debt
and interest to Star City in lieu of cash pursuant to the terms of the various Securities Transfer Agreements.
As of September 30, 2013, the outstanding balance
on the Star City Allonges was $17,170.
In accordance with ASC 815, "Derivatives
and Hedging", the Company determined that the conversion feature of the Star City Allonge met the criteria of an embedded
derivative, and therefore the conversion feature of this debenture needed to be bifurcated and accounted for as a derivative. The
fair value of the embedded conversion was estimated at the date of issuance using the Black-Scholes model with the following assumptions:
risk free interest rate: 2.25%; expected dividend yield: 0%: expected life: .25 years; and volatility: 373.96%. The accounting
guidance instructs that the conversion options are a
derivative liability. As such, on the issue date, the Company recorded the
conversion options as a liability of an aggregate of $38,090, recorded a debt discount of an aggregate of $25,000, and charged
Other Expense - Loss on Valuation of Derivative for an aggregate of $13,090. For the six months ended June 30, 2013, the Company
recorded a Gain on Valuation of Derivative in the amount of $65,513 on the fluctuation in the current market prices. For the year
ended December 31, 2012, the Company recorded a Loss on Valuation of Derivative in the amount of $24,595 on the fluctuation in
the current market prices. The Company has not done valuation of derivative during the quarter.
In conjunction with the consent and assignment
of $8,400 of the DeJonge notes (see Note 11) to Vera Group, LLC (“Vera Group”), the Company consented to provide Vera
Group with the right to convert a portion or the entire outstanding principal into the Company's Class A Common Stock at a Conversion
Price equal to fifty percent (50%) of the lowest closing bid price of the Common Stock during the twenty (20) trading days immediately
preceding the Conversion Date. Vera Group may not convert the note into shares of Class A Common Stock if such conversion would
result in Vera Group beneficially owning in excess of 9.99% of the then issued and outstanding shares of Class A Common Stock.
On March 31, 2013, the Company issued a 10%
Convertible Promissory Note to Vera Group. Amount due under this note is due on or before March 31, 2014. Vera Group with the right
to convert a portion or the entire outstanding principal into the Company's Class A Common Stock at a Conversion Price equal to
fifty percent (50%) of the lowest closing bid price of the Common Stock during the twenty (20) trading days immediately preceding
the Conversion Date. Vera Group may not convert the note into shares of Class A Common Stock if such conversion would result in
Vera Group beneficially owning in excess of 9.99% of the then issued and outstanding shares of Class A Common Stock.
During the nine months ended September 30,
2013, the Company issued an aggregate of 169,190,000 shares of Class A common stock for repayment of $8,460 of convertible debt
and interest to Vera Group in lieu of cash pursuant to the terms of the various Securities Transfer Agreements.
As of September 30, 2013, the outstanding balance
on the Vera Group was $5,000.
In accordance with ASC 815, "Derivatives
and Hedging", the Company determined that the conversion feature of the Southridge Allonge met the criteria of an embedded
derivative, and therefore the conversion feature of this debenture needed to be bifurcated and accounted for as a derivative. The
fair value of the embedded conversion was estimated at the date of issuance using the Black-Scholes model with the following assumptions:
risk free interest rate: 2.25%; expected dividend yield: 0%: expected life: 1.13 years; and volatility: 464.43%. The accounting
guidance instructs that the conversion options are a derivative liability. As such, on the issue date, the Company recorded the
conversion options as a liability of an aggregate of $19,868, recorded a debt discount of an aggregate of $5,000, and charged Other
Expense - Loss on Valuation of Derivative for an aggregate of $14,868. For the six months ended June 30, 2013, the Company recorded
a Gain on Valuation of Derivative in the amount of $10,484 on the fluctuation in the current market prices.
Note 11 Promissory Notes
On June 15, 2011, the Company issued a promissory
note, in an aggregate of $25,000, to Stuart W. DeJonge (“DeJonge”). Amounts due under this note are due on or before
January 15, 2012 and pays interest at the rate of 9% per annum. On January 15, 2012, the Company defaulted on this note and as
such, the lender may take whatever action he may elect to recover his loss while continuing to accrue 9% interest. In February
2013, the Company consented to the assignment an aggregate of
$28,770 of the DeJonge note and accrued interest to affiliates of
Star City Capital, LLC and Vera Group, LLC. On February 27, 2013, the Company issued replacement promissory notes, in the aggregate
of $20,000. On May 7, 2013, the Company issued a replacement promissory note that provides conversion rights in the event of default
after February 28, 2014. As of September 30, 2013, the outstanding balance on the new DeJonge notes was $20,000 and accrued interest
of $1,062.
On July 12, 2011, the Company issued a promissory
note, in an aggregate of $15,000, to Opal Marketing Corp. (“Opal”). Amounts due under this note are due on or before
March 15, 2012 and pays interest at the rate of 7% per annum. On March 15, 2012, the Company defaulted on this note and as such,
the lender may take whatever action he may elect to recover his loss while continuing to accrue 7% interest. On February 19, 2013,
the Company consented to the assignment of $15,000 of the Opal note to affiliates of Star City Capital, LLC. As of September 30,
2013, the outstanding balance on the Opal Marketing Corp. note was $0 and accrued interest of $1,671.
On July 22, 2011, the Company issued a promissory
note, in an aggregate of $100,000, to Charles M. Basner (“Basner”). Amounts due under this note are due on or before
March 22, 2012 and pays interest at the rate of 7% per annum. On March 22, 2012, the Company defaulted on this note and as such,
the lender may take whatever action he may elect to recover his loss while continuing to accrue 7% interest. During the year ended
December 31, 2012 and the six months ended June 30, 2013, the Company consented to the assignment an aggregate of $100,000 of the
Basner note to Southridge Partners II LP and to Star City Capital, LLC. During the year ended December 31, 2012 and the six months
ended June 30, 2013, the Company issued replacement promissory notes, in the aggregate of $91,600. On May 7, 2013, the Company
issued a replacement promissory note that provides conversion rights in the event of default after February 4, 2014. On July 1,
2012, the Company consented to the assignment of one of the GlynnTech, Inc promissory notes from GlynnTech to Charles Basner in
the amount of $50,000. All terms of the original note are unchanged. On May 7, 2013, the Company issued a replacement promissory
note that provides conversion rights in the event of default after July 1, 2013. As of September 30, 2013, the aggregate balance
on the Basner notes was $141,600 and accrued interest of $16,758.
On July 22, 2012, the Company issued a promissory
note, in an aggregate of $25,000, to Fred Erxleben. Amounts due under this note are due on or before January 25, 2013 and pays
interest at the rate of 10% per annum. On January 25, 2013, the Company defaulted on this note and as such, the lender may take
whatever action he may elect to recover his loss while continuing to accrue 10% interest. As of September 30, 2013, the outstanding
balance on the Fred Erxleben note was $25,000 and accrued interest of $2,979.
Note 12
Capital Stock
Pursuant to Kenergy Scientific's certificate
of incorporation, as amended, as of June 30, 2013, the Company is authorized to issue 1,000,000 shares of Preferred Stock, par
value of $1.00 per share, 10,000,000,000 shares of Class A Common Stock, no par value per share, 50,000,000 shares of Class B Common
Stock, par value $0.01 per share, and 20,000,000 shares of Class C Common Stock, par value $0.01 per share. Below is a description
of Kenergy Scientific's outstanding securities, including Preferred Stock, Class A Common Stock, Class B Common Stock, and Class
C Common Stock.
On March 5, 2012, the Company amended its Certificate
of Incorporation to increase the number of authorized Class A Common Stock Shares to 625,000,000, as authorized by the Board of
Directors and adopted by the shareholders on February 15, 2012. The effect of this amendment was to increase the authorized shares
from 125,000,000 to 625,000,000.
On November 28, 2012, the Company amended
its Certificate of Incorporation to increase the number of authorized Class A Common Stock Shares to 4,000,000,000, as authorized
by the Board of Directors and adopted by the shareholders on November 15, 2012. The effect of this amendment was to increase the
authorized shares from 625,000,000 to 4,000,000,000.
On June 11, 2013, the Company amended its Certificate
of Incorporation to increase the number of authorized Class A Common Stock Shares to 10,000,000,000, as authorized by the Board
of Directors and adopted by the shareholders on April 1, 2013. The purpose of this amendment was to increase the authorized shares
from 4,000,000,000 to 10,000,000,000.
a) Preferred Stock
As of June 30, 2013, Kenergy Scientific has
issued 75,000 shares of Preferred Stock to Southridge Partners II LP (the “Investor”), pursuant to the terms of the
Equity Purchase Agreement. These shares shall be convertible at the option of the Investor into shares of the Company’s common
stock at a conversion price equal to seventy percent (70%) of the average of the two (2) lowest Closing Prices for the five (5)
trading days immediately preceding a conversion notice. The Preferred Stock shall have no registration rights.
For
the year ended December 31, 2012, the Company had the following transactions in its
Preferred stock:
i)
|
The Company issued 75,000 shares of Preferred Stock, $1.00 par value, to Southridge Partners II LP, pursuant to the terms of the Equity Purchase Agreement finalized on July 16, 2012
|
For
the nine months ended September 30, 2013, the Company had the following transactions in its
Preferred stock:
i)
|
The Company issued an aggregate of 86,304,147 shares of Class A common stock in exchange for an aggregate of 12,730 shares of Preferred Stock, $1.00 par value, to Southridge Partners II LP, pursuant to the terms of the Equity Purchase Agreement finalized on July 16, 2012
|
b) Class A Common Stock
As of September 30,
2013 and December 31, 2012, there are 10,000,000,000 and 4,000,000,000 shares, respectively, of Class A Common Stock authorized,
no par value, and 5,217,475,719 and 1,480,028,558 shares, respectively, were issued and outstanding.
Each holder of Class A Common Stock is entitled
to receive ratably dividends, if any, as may be declared by the Board of Directors out of funds legally available for payment of
dividends. The Company has never paid any dividends on its common stock and does not contemplate doing so in the foreseeable future.
The Company anticipates that any earnings generated from operations will be used to finance its growth objectives.
For the nine months
ended September 30, 2013, the Company had the following transactions in its Class A common stock:
(a)
|
The Company issued an aggregate of 363,852,814 shares of Class A common stock for repayment of convertible debenture and accrued interest in lieu of cash, valued at $113,498. The difference in the market value and the reduction in debt of $30,200 was charged to beneficial interest in the amount of $83,298.
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(b)
|
The Company issued an aggregate of 918,100,200 shares of Class A common stock for repayment of convertible debenture and accrued interest in lieu of cash, valued at $173,198. The difference in the market value and the reduction in debt of $48,553 was charged to beneficial interest in the amount of $124,645.
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(c)
|
The Company issued an aggregate of 169,190,000 shares of Class A common stock for repayment of convertible debenture and accrued interest in lieu of cash, valued at $23,735. The difference in the market value and the reduction in debt of $8,460 was charged to beneficial interest in the amount of $15,275.
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(d)
|
The Company has issued an aggregate of 86,304,147 shares of Class A common stock upon conversion of an aggregate of 12,730 shares of Convertible Preferred Shares with Southridge Partners pursuant to the terms of the Equity Purchase Agreement finalized on July 16, 2012.
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(e)
|
The Company issued 2,200,000,000 shares of Class A common stock to Mr. Glynn as repayment of $88,000 of deferred compensation and accrued interest that Mr. Glynn earned in 2009, 2010 and 2011. These shares contain a restrictive legend which will limit Mr. Glynn’s ability to liquidate these into the open market.
|
c) Class B Common Stock
As of September 30, 2013, there are 50,000,000
shares of Class B Common Stock authorized, par value $.01 per share
and 10,000 shares were issued and
outstanding
. Each holder of Class B Common Stock has voting rights equal to 100 shares of Class A Common Stock. A holder
of Class B Common Stock has the right to convert each share of Class B Common Stock into the number of shares of Class A Common
Stock determined by dividing the number of Class B Common Stock being converted by a 20% discount of the lowest price that Kenergy
Scientific, Inc. had ever issued its Class A Common Stock. Upon liquidation, dissolution, or winding-up, holders of Class B Common
Stock will be entitled to receive distributions.
d) Class C Common Stock
As of September 30, 2013, there are 20,000,000
shares of Class C Common Stock authorized, par value $.01 per share. Each holder of Class C Common Stock is entitled to 1,000 votes
for each share held of record. Shares of Class C Common Stock are not convertible into Class A Common Stock. Upon liquidation,
dissolution or wind-up, the holders of Class C Common Stock are not entitled to receive the Company’s net assets pro rata.
As of September 30, 2013, no shares were issued or outstanding.
Note 13
Additional paid-in
capital
As of September 30, 2013, the Company has owed
as much as $437,000 to a related party director of the Company. The loans are non-interest bearing, unsecured and due at various
times up to December 28, 2010 and are included in the loans payable, related party balance. However, ASC 835-30 “Imputation
of Interest” has been applied to impute the interest on loan from June 1, 2009 as there was no interest rate stipulated in
the agreements. An accumulation of $45,620 has been imputed as interest over the periods and as per ASC 835-30, has been credited
to Additional paid-in capital.
Note 14
Stock Options
During 2005, the Company adopted the 2005 Stock
Incentive Plan and the 2005 Directors’ and Officers’ Stock Incentive Plan (“Plan”) in order to attract
and retain qualified personnel. Under the Plans, the Board of Directors, in its discretion may grant stock options (either incentive
or non-qualified stock options) to officers, directors and employees. The Company has not issued any stock options as of September
30, 2013.
Note 15
New Accounting Pronouncements
There were various other updates recently issued,
most of which represented technical corrections to the accounting literature or application to specific industries and are not
expected to a have a material impact on the Company's financial position, results of operations or cash flows.
Note 16
Fair Value Measurements
ASC 825-10 defines fair value 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 measurements for assets and liabilities required or permitted to be recorded
at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions
that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk
of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be
used to measure fair value:
Level 1 - Quoted prices in active markets for
identical assets or liabilities.
Level 2 - Observable inputs other than Level
1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived
principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs to the valuation
methodology that are significant to the measurement of fair value of assets or liabilities.
To the extent that valuation is based on models
or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain
cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure
purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed is determined based on the
lowest level input that is significant to the fair value measurement.
Items recorded or measured at fair value on
a recurring basis in the accompanying financial statements consisted of the following items as of September 30, 2013 and December
31, 2012.
September 30, 2013
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Convertible debentures
|
|
$ -
|
|
$ -
|
|
$1,279,598
|
|
$1,279,598
|
Total Liabilities
|
|
$ -
|
|
$ -
|
|
$1,279,598
|
|
$1,279,598
|
December 31, 2012
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Convertible debentures
|
|
$ -
|
|
$ -
|
|
$1,269,018
|
|
$1,269,018
|
Total Liabilities
|
|
$ -
|
|
$ -
|
|
$1,269,018
|
|
$1,269,018
|
Note 17
Subsequent Events
No significant subsequent event that need to
be recorded.