Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the 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 x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨. No x
On June 30, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value (based on the closing sales price on that date) of the voting stock held by non-affiliates of the registrant was $18,218,077. Shares of common stock held by each current executive officer and director and by each person who is known by the registrant to own 5% or more of the outstanding common stock have been excluded from this computation in that such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not a conclusive determination for other purposes.
The number of outstanding shares of the registrant’s common stock as of March 31, 2014, was 199,437,262.
BLUE CALYPSO, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2013
OUR COMPANY
We develop and deliver advocacy marketing and analytics solutions and services for the business-to-consumer (B2C) marketplace leveraging mobile, social media, gamification and our intellectual property portfolio. We have developed a patented technology platform that enables brands to leverage customer and employee relationships to increase brand loyalty and drive revenue. We generate revenue from consulting fees, licensing and/or enforcement of such patented technologies. Our intellectual property portfolio consists of five patents and six pending patent applications that cover methods and systems for communicating advertisements and electronic offers between mobile and desktop communication devices. All of the patents and patent applications that cover the core of our business, i.e., a “System and method for peer-to-peer advertising between mobile communication devices”, have been developed internally by our Founder and Chief Technology Officer, Andrew Levi, and our Director of Innovation, Bradley Bauer, and assigned to our wholly owned subsidiary, Blue Calypso, LLC. In September 2013, we acquired proprietary mobile gamification technology and subsequently applied for two additional patents based upon the enhancement and integration of this technology into our platform.
Our proprietary technology platform enables businesses to leverage word-of-mouth marketing through the delivery of advertising campaigns, content and promotions across multiple social media channels using multiple device types. Our technology facilitates the connection of brands to consumers and enables them to customize and share brand content across the most popular social media channels. Our platform then tracks performance, monitors engagement and includes robust, real-time analytics that provide acute insight regarding the adoption, performance and return on investment of our client’s promotions. Our technology is designed to help clients spread their marketing messages, acquire new customers, increase awareness and drive product sales. For example, campaigns facilitated through our platform can encourage consumers to learn more about our client’s products, watch promotional videos about particular products or click to buy products. Our platform can also assist in increasing “Likes” on Facebook, “Followers” on Twitter and encourage consumers to join our client’s email list, newsletter or blogs. All of this is accomplished by encouraging advocates of a company to interact, personalize and share messages with their friends via social media channels such as Facebook, Twitter, and LinkedIn. Our clients are able to thank advocates for sharing, including offering incentives, coupons and other perks to consumer advocates who share the message. Our technology platform creates multiple opportunities for companies to interact with their most vocal brand advocates (influencers) and reward them for their loyalty.
Over the last five years, the world has seen social media, mobile technologies and digital advertising evolve dramatically and actually converge. Through this technological evolution, a sociological shift has occurred in how influential digital media can be when promoted within one’s social circles, “friend-to-friend.” We believe that people will actively endorse products with which they have a strong emotional connection or brand loyalty. When they do, these endorsements reach groups of like-minded individuals, as people generally associate with others of like mind. Social communities such as Facebook, Twitter, LinkedIn, Google+ and various blogs incorporate and build on this common idea. Our platform goes a step further, leveraging mobile and social technologies and rewarding the advocates for their loyalty and performance. We believe that we have created a platform that solves advertisers’ desire for targeted and personal messaging as well as mobile subscribers’ desire for content relevance in advertising.
Today large companies are becoming their own social media networks, disseminating content to their millions of advocates through email addresses, Facebook fans, Twitter followers, etc. These social media channels and mobile delivery capabilities have created a significant opportunity for companies to leverage their marketing assets by having their “fans” tell their friends about a company or product thus increasing adoption/conversion, reducing their media expenses and increasing their return on investment.
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Through mobile and social media, everyone has their own unique and significant audience. According to Facebook, the average user has 130 friends; Twitter states the average user has 300 followers; and on average an individual has 25 unique frequent contacts they communicate with weekly via text messages or mobile calls. Active participation in LinkedIn, Google+, Tumblr and/or a personal blog can further extend one’s direct social reach significantly. With our platform, advertiser content is not bound by any single app, social media community, website, carrier or device. Once the message is shared by an advocate, it can be accessed via texts, Twitter “tweets” LinkedIn or Facebook “posts.” As a result, our individual advocates have the capability to immediately reach hundreds or even thousands of people through their direct personal and digital social relationships.
As a by-product of campaign delivery and recipient interaction, we deliver real-time analytics and business intelligence capabilities, which provide advertisers the ability to see how campaigns are deployed, where they are getting the most traction, and which are seeing the most activity. The platform also allows advertisers to assess the conversational response to their messages which enables them to adjust their campaigns based on performance.
OUR PRODUCTS AND SERVICES
We have developed four core products that form the basis of our technology platform: SOCIALECHO™, EMGAGE™, POPSHARE™ and DASHTAGG™.
SOCIALECHO™ allows brands to leverage their customers and social media fans to spread their brand content through their social networks. SOCIALECHO allows brands to white label our technology and make branded content, such as promotions and offers available to their fans, employees, and customers. Should these advocates choose to, they can post these promotions and offers through social media channels with a personal message, a picture or video customizing the brand promotion. Then with one click the advocate can send their personalized message to the most popular social media channels like Facebook, Twitter and others. Our technology then tracks, monitors, and provides analytics within and across these multiple social media channels. Valuable information on receptivity to brand content and destination of shared content is delivered through our analytics. We generate revenue from this product through a one-time enterprise license per use of the technology per campaign.
EMGAGE™ enables brands to mobilize their employees to spread brand messages and promotions through their social networks. EMGAGE leverages our base technology of launching promotions but instead of consumers, engages an overlooked brand amplification resource within a company, the employee base. Much like SOCIALECHO, tracking, monitoring, and analytics are performed on these promotions as they spread across multiple social media platforms and provide valuable data to the brand. We are targeting companies with large employee bases as the key channel of message distribution. By offering employees incentives, employers can encourage their employees to let their friends know about upcoming products and promotions or company programs that can increase sales as well as improve employee morale. We generate revenue from this product through a one-time enterprise license per use of the technology per campaign.
POPSHARE™ launched in July 2013, allows companies to install our applet on their website and place POPSHARE on any page where a product is featured or where shopping cart functionality exists. POPSHARE helps the website viewers and buyers that like the products to easily share that branded content and customize it with a message, picture or video. Rather than a simple one-way share that is in use by most shopping carts today, POPSHARE’s individual customization significantly validates the share and demonstrates the consumer’s commitment to the product. POPSHARE thanks the customer for sharing and offers the client the ability to serve up a coupon or highlight upcoming promotions. As the content goes viral Blue Calypso provides the robust analytics to the brand on the shares as they proliferate across the social media platforms. We generate revenue from this product based upon a monthly license to use the applet on an ongoing basis.
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Until August 2012, Aztec Systems, Inc. provided administrative and technical support services to us, at which time we brought all services provided by Aztec Systems to us in house. Aztec Systems was owned by our founder, Chief Technology Officer and Director, Andrew Levi, until its sale on June 15, 2012. Aztec Systems owns and manages a certified data center that has delivered high-availability secure managed services and hosting to its customers for over ten years, which continues to service our secure data hosting needs.
Employees
As of December 31, 2013, we had a total of 10 full-time employees. We also utilize the services of independent contractors. We have no labor union contracts and believe relations with our employees are satisfactory.
Competition
We face formidable competition in every aspect of our business, particularly from other companies that seek to connect social communities via mobile technologies and provide them with relevant advertising and brand content. First and foremost, we consider ourselves a next generation social sharing, brand loyalty and rewards platform, so we believe our primary competitors are companies that embrace true brand loyalty, not just providers of discounted transactions. Currently, we consider our primary competitors to be Zuberance, Extole, MyLikes, WeReward (IZEA), and BzzAgent (recently acquired by Dunnhumby). Each of these companies is different in terms of size, market share and other unique attributes of their offering where all but BzzAgent are early stage and, with the exception of IZEA, are privately held so little detailed information is available. We believe that the social, mobile marketing and advertising space is large and has no first movers or any company with a notable share of the market. We believe that our approach to the market, value proposition to large brands, use of compelling rewards and incentives, combined with our strong intellectual property are clear differentiators in a nascent yet quickly evolving industry for social mobile word-of-mouth advertising and marketing.
We also face competition from other mobile and Internet advertising providers, including companies that are not yet known to us. We may compete with companies that sell products and services online, because these companies, like us, are trying to attract users to their websites to search for information about products and services. In addition to Internet companies, we face competition for advertising dollars from companies that offer traditional media advertising.
We believe that we compete favorably on the factors described above. However, product advertising, marketing, awareness and branding through social media sites is an extremely competitive space. As we expand our product offerings to include private branded products, employee engagement products, instant access products, as well as other technology offerings, we will continue to face new competitors. Further, as the technology marketplace is always expanding, new competitors continuously innovate, and can become a competitor in the future.
Government Regulation
Aspects of the digital marketing and advertising industry and how our business operates are highly regulated. We are subject to a number of domestic and, to the extent our operations are conducted outside the U.S., foreign laws and regulations that affect companies conducting business on the Internet and through other electronic means, many of which are still evolving and could be interpreted in ways that could harm our business. In particular, we are subject to rules of the Federal Trade Commission (“FTC”), the Federal Communications Commission (“FCC”) and potentially other federal agencies and state laws related to our advertising content and methods, the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or CAN-SPAM Act, which establishes certain requirements for commercial electronic mail messages and specifies penalties for the transmission of commercial electronic mail messages that follow a recipient’s opt-out request or are intended to deceive the recipient as to source or content, federal and state regulations covering the treatment of member data that we collect from endorsers.
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Our client's consumers/brand advocates communicate across email, mobile, social and/or web-based channels. These communications are governed by a variety of U.S. federal, state, and foreign laws and regulations. With respect to email campaigns, for example, in the United States, the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or the CAN-SPAM Act, establishes certain requirements for the distribution of “commercial” email messages for the primary purpose of advertising or promoting a commercial product, service, or Internet website and provides for penalties for transmission of commercial email messages that are intended to deceive the recipient as to source or content or that do not give opt-out control to the recipient. The U.S. Federal Trade Commission, a federal consumer protection agency, is primarily responsible for enforcing the CAN-SPAM Act, and the U.S. Department of Justice, other federal agencies, state attorneys general, and Internet service providers also have authority to enforce certain of its provisions.
The CAN-SPAM Act’s main provisions include:
§ prohibiting false or misleading email header information;
§ prohibiting the use of deceptive subject lines;
§ ensuring that recipients may, for at least 30 days after an email is sent, opt out of receiving future commercial email messages from the sender, with the opt-out effective within 10 days of the request;
§ requiring that commercial email be identified as a solicitation or advertisement unless the recipient affirmatively assented to receiving the message; and
§ requiring that the sender include a valid postal address in the email message.
The CAN-SPAM Act preempts most state restrictions specific to email marketing. However, some states have passed laws regulating commercial email practices that are significantly more punitive and difficult to comply with than the CAN-SPAM Act, particularly Utah and Michigan, which have enacted do-not-email registries listing minors who do not wish to receive unsolicited commercial email that markets certain covered content, such as adult content or content regarding harmful products. Some portions of these state laws may not be preempted by the CAN-SPAM Act.
Violations of the CAN-SPAM Act’s provisions can result in criminal and civil penalties, including statutory penalties that can be based in part upon the number of emails sent, with enhanced penalties for commercial email senders who harvest email addresses, use dictionary attack patterns to generate email addresses, and/or relay emails through a network without permission.
With respect to text message campaigns, for example, the CAN-SPAM Act and regulations implemented by the U.S. Federal Communications Commission pursuant to the CAN-SPAM Act, and the Telephone Consumer Protection Act, also known as the Federal Do-Not-Call law, among other requirements, prohibit companies from sending specified types of commercial text messages unless the recipient has given his or her prior express consent.
We, our clients and our client's consumers/brand advocates may all be subject to various provisions of the CAN-SPAM Act. If we are found to be subject to the CAN-SPAM Act, we may be required to change one or more aspects of the way we operate our business.
If we were found to be in violation of the CAN-SPAM Act, other federal laws, applicable state laws not preempted by the CAN-SPAM Act, or foreign laws regulating the distribution of commercial email, whether as a result of violations by our endorsers or any determination that we are directly subject to and in violation of these requirements, we could be required to pay penalties, which would adversely affect our financial performance and significantly harm our reputation and our business.
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In addition, because our services are accessible worldwide, certain foreign jurisdictions may claim that we are required to comply with their laws, including in jurisdictions where we have no local entity, employees, or infrastructure.
Corporate History
We were incorporated as a Nevada corporation on March 2, 2007 under the name JJ&R Ventures, Inc. for the purpose of developing and marketing an educational book series, consisting of books, presentations and flash cards focusing on healthy nutrition for children. On or about July 2011, we were presented with a business opportunity by the management of a privately held Texas company named Blue Calypso Holdings, Inc. that upon evaluation was determined to be more desirable than our previous business plan. As a result, we suspended our efforts in relation to our original business plan and entered into negotiations with Blue Calypso Holdings, Inc. to consummate a reverse merger transaction.
In contemplation of a possible transaction with Blue Calypso Holdings, Inc., we changed our name from “JJ&R Ventures, Inc.” to “Blue Calypso, Inc.” on July 21, 2011 and completed a three and four tenths (3.4) for one (1) forward stock split of our common stock.
On September 1, 2011, in order to effectuate the reverse merger transaction, Blue Calypso Acquisition Corp., a wholly-owned subsidiary of ours, merged with and into Blue Calypso Holdings, Inc., with Blue Calypso Holdings, Inc. being the surviving corporation and becoming our wholly-owned subsidiary. In connection with this merger, we discontinued all of our prior operations and assumed the business of Blue Calypso Holdings, Inc. as our sole line of business. We refer to this merger transaction as the “reverse merger.”
Immediately following the closing of the reverse merger, we transferred all of our pre-merger assets and liabilities to JJ&R Ventures Holdings, Inc., a wholly-owned subsidiary, and transferred all of the outstanding stock of JJ&R Ventures Holdings, Inc. to Deborah Flores, our then majority stockholder and our former president, secretary, treasurer and sole director, in exchange for the cancellation of 51,000,000 shares of our common stock then owned by Ms. Flores.
On October 17, 2011, we merged with and into Blue Calypso, Inc., a Delaware corporation and wholly-owned subsidiary, for the sole purpose of changing our state of incorporation from Nevada to Delaware. We refer to this merger transaction as the “reincorporation merger.”
ITEM 1A. RISK FACTORS.
Investing in our common stock involves a high degree of risk. Before investing in our common stock, you should carefully consider the risks described below and the financial and other information included in this Annual report. If any of the following risks, or any other risks not described below, actually occur, it is likely that our business, financial condition, and/or operating results could be materially adversely affected. In such case, the trading price and market value of our common stock could decline and you may lose part or all of your investment in our common stock. The risks and uncertainties described below include forward-looking statements and our actual results may differ from those discussed in these forward-looking statements.
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The markets that we are targeting for revenue opportunities may change before we can access them.
The markets for traditional Internet and mobile web products and services that we target for revenue opportunities change rapidly and are being pursued by many other companies. Further, the barriers to entry are relatively low. Therefore, we cannot provide assurance that we will be able to realize our targeted revenue opportunities before they change or before other companies dominate the market. With the introduction of new technologies and the influx of new entrants to the market, we expect competition to persist and intensify in the future, which could harm our ability to increase sales, limit client attrition and maintain our prices.
We operate within a highly competitive and complex market, which could have an adverse effect on our business.
Product advertising, marketing, awareness and branding through social media sites is an extremely competitive and fragmented industry. The industry can be significantly affected by many factors, including changes in local, regional, and national economic conditions, changes in consumer preferences, brand name recognition, marketing and the development of new and competing products or new social media companies. We expect that existing businesses that compete with us and have greater financial resources will be able to undertake more extensive marketing campaigns and more aggressive advertising strategies than us, thereby generating more attention to their companies. These competitive pressures could have a material adverse effect on our business, prospects, financial condition, and results of operations.
We are presently reliant exclusively on a limited number of patented technologies.
We derive substantially all of our revenue from a relatively small number of key technologies. As new technological advances occur, many of our patented technologies may become obsolete before they are completely monetized. If we are unable to monetize our current patent assets for any reason, including obsolescence of our technology, the expiration of our patents or any other reason, we may be unable to acquire additional assets. If this occurs, our business and prospects would be materially harmed.
Any failure to protect or enforce our patent or other intellectual property rights could significantly impair our business.
Our ability to successfully operate our business depends largely on the validity and enforceability of our patent rights and the relevance of our patent rights to commercially viable products or services. Third parties have challenged, and we expect will continue to challenge, the infringement, validity and enforceability of certain of our patents. In some instances, our patent claims could be substantially narrowed or declared invalid, unenforceable, not essential or not infringed. We cannot assure you that the validity and enforceability of our patents will be maintained or that our patent claims will be applicable to any particular product or service. In addition, the U.S. Patent and Trademark Office, or the “USPTO,” could invalidate or render unenforceable our current or future patents (if any) or materially narrow the scope of their claims during the course of a re-examination. Any significant adverse finding as to the validity, enforceability or scope of certain of our patents and/or any successful design around certain of our patents could materially and adversely affect our ability to secure future settlements or licenses on beneficial terms, if at all, and otherwise harm our business.
The value of our patent assets may decline.
We will likely be required to spend significant time and resources to maintain the effectiveness of our issued patents by paying maintenance fees and making filings with the USPTO as well as prosecuting our patent applications. In the future, we may acquire patent assets, including patent applications, which require us to spend resources to prosecute the applications with the USPTO.
Despite efforts to protect our intellectual property rights, any of the following or similar occurrences may reduce the value of our intellectual property:
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| • | our applications for patents may not be granted and, if granted, may be challenged or invalidated; |
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| • | issued patents may not provide us with any competitive advantages versus potentially infringing parties; |
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| • | our efforts to protect our intellectual property rights may not be effective in preventing misappropriationof our technology; or |
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| • | our efforts may not prevent the development and design by others of products or technologies similar to or competitive with, or superior to those we acquire and/or prosecute. |
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Moreover, we may not be able to effectively protect our intellectual property rights in certain foreign countries where we may do business in the future or where competitors may operate. If we fail to maintain, defend or prosecute our patent assets properly, the value of those assets would be reduced or eliminated, and our business would be harmed.
We commenced legal proceedings against leading daily deal, social promotion and check-in applications and we expect such proceedings to be time-consuming, which may adversely affect our ability to operate our business.
We commenced legal proceedings against certain daily deal, social promotion and check-in applications (including Groupon, LivingSocial, Yelp, IZEA, MyLikes, and Foursquare), pursuant to which we alleged that such companies infringe on our patents. Certain of these defendants have substantially more resources than we do, which could make our litigation efforts more difficult. We reached settlement in our patent infringement disputes with MyLikes in July 2013 and with LivingSocial in August 2013.
We anticipate that certain of our ongoing legal proceedings may continue for several years and will require significant attention from our senior management. Disputes regarding the assertion of patents and other intellectual property rights are highly complex and technical. Once initiated, we may be forced to litigate against others to enforce or defend our intellectual property rights or to determine the validity and scope of other parties’ proprietary rights. The defendants or other third parties involved in the lawsuits in which we are involved may allege defenses and/or file counterclaims in an effort to avoid or limit liability and damages for patent infringement. If such defenses or counterclaims are successful, they may preclude our ability to derive licensing revenue from the patents. A negative outcome of any such litigation, or one or more claims contained within any such litigation, could materially and adversely impact our business. Our failure to monetize our patent assets could significantly harm our business and financial position.
While we believe that the patents we own are being infringed by certain leading daily deal, social promotion and check-in applications, there is a risk that a court will find the patents invalid, not infringed or unenforceable and/or that the U.S. Patent Office (USPTO) will either invalidate the patents or materially narrow the scope of their claims during the course of a re-examination. In addition, even with a positive trial court verdict, the patents may be invalidated, found not infringed or rendered unenforceable on appeal. This risk may occur either presently or from time to time in connection with future litigations we may bring. If this were to occur, it could have a material adverse effect on the viability of our company and our operations.
We believe that there are companies that have, and continue to, infringe our patents, but actually obtaining and collecting a judgment against such companies may be difficult or impossible. Patent litigation is inherently risky and the outcome is uncertain. Some of the parties we believe infringe on our patents are large and well-financed companies with substantially greater resources than ours. We believe that these parties would devote a substantial amount of resources in an attempt to avoid or limit a finding that they are liable for infringing our patents or, in the event liability is found, to avoid or limit the amount of associated damages. In addition, there is a risk that these parties may file re-examinations or other proceedings with the USPTO or other government agencies in an attempt to invalidate, narrow the scope or render unenforceable the patents we own.
Moreover, in connection with any of our present or future patent enforcement actions, it is possible that a defendant may request and/or a court may rule that we violated statutory authority, regulatory authority, federal rules, local court rules, or governing standards relating to the substantive or procedural aspects of such enforcement actions. In such event, a court may issue monetary sanctions against us or our operating subsidiaries or award attorneys’ fees and/or expenses to one or more defendants, which could be material, and if we or our subsidiaries are required to pay such monetary sanctions, attorneys’ fees and/or expenses, such payment could materially harm our operating results and financial position.
In addition, it is difficult in general to predict the outcome of patent enforcement litigation at the trial or appellate level. There is a higher rate of appeals in patent enforcement litigation than standard business litigation. The defendants in any patent action we bring in the United States may file an appeal to the Court of Appeals to the Federal Circuit and possibly in the United States Supreme Court. Such appeals are expensive and time-consuming, and the outcomes of such appeals are sometimes unpredictable, resulting in increased costs and reduced or delayed revenue.
Finally, we believe that the more prevalent patent enforcement actions become, the more difficult it will be for us to license our patents without engaging in litigation. As a result, we may need to increase the number of our patent enforcement actions to cause infringing companies to license the patent or pay damages for lost royalties. This will adversely affect our operating results due to the high costs of litigation and the uncertainty of the results.
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Further, effective protection of intellectual property rights may be unavailable or limited in some foreign countries. Our inability to adequately protect our proprietary rights would have an adverse impact on our ability to competitively market our platform on a world-wide basis.
We also rely on trade secrets law to protect our technology. Trade secrets, however, are difficult to protect. While we believe that we use reasonable efforts to protect our trade secrets, our or our strategic partners’ employees, consultants, contractors or advisors may unintentionally or willfully disclose our information to competitors. We seek to protect this information, in part, through the use of non-disclosure and confidentiality agreements with employees, consultants, advisors, and others. However, these agreements may be breached and we may not have adequate remedies for a breach. In addition, we cannot ensure that those agreements will provide adequate protection for our trade secrets, know-how or other proprietary information or prevent their unauthorized use or disclosure.
If our trade secrets become known to competitors with greater experience and financial resources, the competitors may copy or use our trade secrets and other proprietary information in the advancement of their products, methods or technologies. If we were to prosecute a claim that a third party had illegally obtained and was using our trade secrets, it could be expensive and time consuming and the outcome could be unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets than courts in the United States. Moreover, if our competitors independently develop equivalent knowledge, we would lack any contractual claim to this information, and our business could be harmed.
To the extent that consultants and key employees apply technological information independently developed by them or by others to our potential products, disputes may arise as to the proprietary rights of the information, which may not be resolved in our favor. Consultants and key employees that work with our confidential and proprietary technologies are required to assign all intellectual property rights in their discoveries to us. However, these consultants and key employees may terminate their relationship with us, and we cannot preclude them indefinitely from dealing with our competitors.
We may seek to internally develop additional new inventions and intellectual property, which would take time and would be costly. Moreover, the failure to obtain or maintain intellectual property rights for such inventions could lead to the loss of our investments in such activities.
Members of our management team have significant experience as inventors. As such, part of our business may include the internal development of new inventions or intellectual property that we will seek to monetize. However, this aspect of our business would likely require significant capital and would be time consuming. Such activities could also distract our management team from its present business initiatives, which could have a material and adverse effect on our business. There is also the risk that our initiatives in this regard would not yield any viable new inventions or technology, which would lead to a loss of our investments in time and resources in such activities.
In addition, even if we are able to internally develop new inventions, in order for those inventions to be viable and to compete effectively, we would need to develop and maintain a proprietary position with respect to such inventions and intellectual property. However, there are significant risks associated with any such intellectual property we may develop principally including the following:
· patent applications we file may not result in issued patents or may take longer than we expect to result in issued patents;
· we may be subject to interference proceedings;
· we may be subject to opposition proceedings in the U.S. or foreign countries;
· any patents that are issued to us may not provide meaningful protection;
· we may not be able to develop additional proprietary technologies that are patentable;
· other companies may challenge patents issued to us;
· other companies may have independently developed and/or patented (or may in the future independently develop and patent) similar or alternative technologies, or duplicate our technologies;
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· other companies may design around technologies we have developed; and
· enforcement of our patents would be complex, uncertain and very expensive.
We cannot be certain that patents will be issued as a result of any future applications, or that any of our patents, once issued, will provide us with adequate protection from competing products. For example, issued patents may be circumvented or challenged, declared invalid or unenforceable, or narrowed in scope. In addition, since publication of discoveries in scientific or patent literature often lags behind actual discoveries, we cannot be certain that we will be the first to make our additional new inventions or to file patent applications covering those inventions. It is also possible that others may have or may obtain issued patents that could prevent us from commercializing our products or require us to obtain licenses requiring the payment of significant fees or royalties in order to enable us to conduct our business. As to those patents that we may license or otherwise monetize, our rights will depend on maintaining our obligations to the licensor under the applicable license agreement, and we may be unable to do so. Our failure to obtain or maintain intellectual property rights for our inventions would lead to the loss of our investments in such activities, which would have a material and adverse effect on our company.
Moreover, patent application delays could cause delays in recognizing revenue from our internally generated patents and could cause us to miss opportunities to license patents before other competing technologies are developed or introduced into the market.
We could become involved in intellectual property disputes that create a drain on our resources and could ultimately impair our assets.
We do not knowingly infringe on any patents, copyrights or other intellectual property rights owned by other parties; however, in the event of an infringement claim, we may be required to spend a significant amount of money to defend a claim, develop a non-infringing alternative or to obtain licenses. We may not be successful in developing such an alternative or obtaining licenses on reasonable terms, if at all. Any litigation, even if without merit, could result in substantial costs and diversion of our resources and could materially and adversely affect our business and operating results.
Third-party intellectual property rights in our field are complicated and continuously evolving. We have not performed searches for third-party intellectual property rights that may raise freedom-to-operate issues, and we have not obtained legal opinions regarding commercialization of our potential products. As such, there may be existing patents that may affect our ability to commercialize our potential products.
In addition, because patent applications are published up to 18 months after their filing, and because applications can take several years to issue, there may be currently pending third-party patent applications that are unknown to us, which may later result in issued patents that result in challenges to our use of intellectual property.
If a third party claims that we infringe on its patents or other proprietary rights, we could face a number of issues that could seriously harm our competitive position, including:
· infringement claims, with or without merit, which can be costly and time consuming to litigate, delay any regulatory approval process and divert management’s attention from our core business strategy;
· substantial damages for past infringement, which we may have to pay if a court determines that our products or technologies infringe upon a competitor’s patent or other proprietary rights; and
· a court order prohibiting us from commercializing our potential products or technologies unless the holder licenses the patent or other proprietary rights to us, which such holder is not required to do.
Future competitive technology for advertising, branding and awareness campaigns in the mobile device market may render our technology obsolete.
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Newer technology may render our technology obsolete which would have a material adverse effect on our business and results of operations. In addition, in order to adapt to new technology, we may be required to collaborate with third parties to develop and deploy our services, and we may not be able to do so on a timely and cost-effective basis, if at all.
New legislation, regulations or court rulings related to enforcing patents could harm our business and operating results.
If Congress, the USPTO or courts implement new legislation, regulations or rulings that impact the patent enforcement process or the rights of patent holders, these changes could negatively affect our business model. For example, limitations on the ability to bring patent enforcement claims, limitations on potential liability for patent infringement, lower evidentiary standards for invalidating patents, increases in the cost to resolve patent disputes and other similar developments could negatively affect our ability to assert our patent or other intellectual property rights.
On June 4, 2013, the Obama administration issued a fact sheet detailing a set of legislative recommendations and executive actions aimed at addressing abusive patent infringement lawsuits brought by patent assertion entities (entities that use patents primarily to obtain license fees rather than to support the development or transfer of technology). The White House announced that its actions are intended to protect innovators from frivolous patent litigation, ensure high-quality patents, and improve incentives for future innovation in high tech patents. The Obama administration recommended that Congress pursue several legislative measures which would:
· Require patentees and applicants to disclose the real Party-in-Interest in USPTO proceedings and in patent lawsuits.
· Give courts more discretion to award fees to the winning parties in patent cases.
· Expand the USPTO’s program that allows the review and (possible invalidation) of business method patents.
· Protect off-the-shelf use of technology by end-user consumers and businesses by providing them with better legal protection against liability. This measure includes halting judicial proceedings against such end-users when an infringement suit has also been brought against a vendor, retailer, or manufacturer of the technology being used.
· Change the International Trade Commission's, or ITC, standard for awarding injunctions so that the ITC has more discretion in awarding injunctions to patentees. This would reflect recent changes in the law used by District Courts.
· Incentivize public filing of demand/threat letters to make them accessible and searchable to the public in order to help curb abusive suits.
· Ensure that the ITC has adequate flexibility in hiring judges.
The Obama administration also announced five executive actions that would help bring greater transparency to the patent system. These actions would:
· Identify the real party interest in USPTO proceedings. The USPTO will begin a rulemaking process to require patent applicants and owners to regularly update ownership information when they are involved in proceedings before the USPTO. The rules would require designating the ultimate parent entity in control of the patent or application.
· Provide additional training to patent examiners in the USPTO to scrutinize functional claiming, which the Obama administration believes will help clarify the scope of patents.
· Require the USPTO to provide education and outreach materials to end-users of technology about how to deal with demands from patent trolls.
· Institute new, high-profile events by the USPTO, the U.S. Department of Justice, or DOJ, and the Federal Trade Commission, or FTC, to develop new ideas and consensus around updates to patent policies and laws.
· Review and improve existing procedures that the Customs and Border Protection and the ITC use to evaluate the scope of ITC exclusion orders that prevent infringing goods from being brought into the U.S.
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In addition to these actions, Congress is also currently considering other legislation on patent reform. This legislation includes the bipartisan reintroduction of the SHIELD Act (Saving High-Tech Innovators from Egregious Legal Disputes Act of 2013) that would force non-practicing entities to pay for instituting patent lawsuits that are unsuccessful. The Patent Abuse Reduction Act is another recently introduced patent reform bill with similar provisions. As of the date of filing this Annual Report on Form 10-K, neither the SHIELD Act nor the Patent Abuse Reduction Act has been passed out of committee for consideration by the full House of Representatives or Senate.
Recently, United States patent laws were amended with the enactment of the Leahy-Smith America Invents Act, or the America Invents Act, which took effect on March 16, 2013. The America Invents Act includes a number of significant changes to U.S. patent law. In general, the legislation attempts to address issues surrounding the enforceability of patents and the increase in patent litigation by, among other things, establishing new procedures for patent litigation. For example, the America Invents Act changes the way that parties may be joined in patent infringement actions, increasing the likelihood that such actions will need to be brought against individual parties allegedly infringing by their respective individual actions or activities. At this time, it is not clear what, if any, impact the America Invents Act will have on the operation of our enforcement business. However, the America Invents Act and its implementation could increase the uncertainties and costs surrounding the enforcement of our patented technologies, which could have a material adverse effect on our business and financial condition.
Further, and in general, it is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become enacted as laws. Compliance with any new or existing laws or regulations could be difficult and expensive, affect the manner in which we conduct our business and negatively impact our business, prospects, financial condition and results of operations.
Our dependence on the continued growth in the use of the web and mobile smartphone networking could adversely affect our results of operations.
Our business depends on consumers continuing to increase their use of the mobile smartphone for social networking, to obtain product content, reward type offers as well as for conducting commercial transactions. The rapid growth and use of the smartphone as an information conduit is a relatively recent phenomenon. As a result, the acceptance and use of smartphones may not continue to develop at historical rates. Mobile web usage may be inhibited for a number of reasons, such as inadequate network infrastructure, security concerns, inconsistent quality of service and availability of cost-effective, high-speed service or smart mobile devices.
If mobile web usage grows, the mobile Internet infrastructure may not be able to support the demands placed on it by this growth or its performance and reliability may decline. In addition, websites and mobile networks have experienced interruptions in their service as a result of outages and other delays occurring throughout the Internet and mobile network infrastructure. If these outages and delays occur frequently in the future, web usage, as well as usage of our website, could grow more slowly or decline, which could adversely affect our results of operations.
Difficulty accommodating increases in the number of users of our services and Internet service problems outside of our control ultimately could result in the reduction of users.
Our website must accommodate a high volume of traffic and deliver frequently updated information. Our website may in the future experience slower response times or other problems for a variety of reasons. In addition, our website could experience disruptions or interruptions in service due to the failure or delay in the transmission or receipt of this information. In addition, our users depend on Internet service providers, online service providers and other website operators for access to our website. Each of them has experienced significant outages in the past, and could experience outages, delays and other difficulties due to system failures unrelated to our systems.
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In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our endorsers, and personally identifiable information of our endorsers and employees in our data center and on our network. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our network and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of information, disrupt our operations and the services we provide to customers, and damage our reputation, which could adversely affect our business, revenues and competitive position.
We could be subject to enforcement action or civil liability under federal and state law regarding privacy and the use and sharing of personal information.
Our business model includes the collection of certain personal information from our endorsers. Federal and state privacy laws regulate the circumstances under which we may use or share this information. We take steps to ensure our compliance with these laws, and we take steps to ensure compliance by those with whom we share personal information through non-disclosure agreements and contract provisions. Nonetheless, we may be subject to federal or state governmental enforcement action or civil litigation for improper use or sharing of personal identifying information. This risk could result in substantial costs to our business and materially and adversely affect our business and operating results. Further, if any party overcomes our physical, electronic, and procedural safeguards implemented to protect personal information, we may be subject to federal or state governmental enforcement action or civil litigation for inadequately protecting personal identifying information.
Our business method relies heavily on circulating endorsements, including through social media, which if conducted improperly, could subject our business to liability under Federal Trade Commission regulations.
The FTC adopted Guides Concerning the Use of Endorsements and Testimonials in Advertising, or Guides, on October 5, 2009. The Guides recommend that advertisers and publishers clearly disclose in third-party endorsements made online, such as in social media, if compensation was received in exchange for said endorsements. Because our business connects endorsers and advertisers, relies on endorsers sharing their brand endorsements within their digital social circles, and both we and endorsers may earn cash and other incentives, the Guides are relevant to our business.
We are currently taking several steps to ensure that our endorsers or other appropriate language indicate in social media posts that compensation or incentives are being provided to the endorsers. First, the media content provided to endorsers includes the phrase “paid” or “ad.” Our system generally provides for endorsers to post advertising content on social media in the exact form provided. An endorser would have to take steps to individually modify the content provided in order to delete the phrase “paid” or “ad.” Second, when registering as endorsers with us, endorsers are required to agree to abide by the terms and conditions regarding the use of our website and mobile platform. These terms and conditions specifically require compliance with the FTC Guides regarding paid endorsements, and contain other, general prohibitions against deceptive posts. The terms and conditions also allow us to terminate an endorser’s access to the system at any time for non-compliance with the terms and conditions, and it is our policy to terminate the accounts of endorsers for noncompliance with the Guides. Nonetheless, the FTC could potentially identify a violation of the Guides, which could subject us to a financial penalty or loss of endorsers or advertisers.
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Risks Relating to Our Common Stock
We have not paid dividends in the past and do not expect to pay dividends in the future. Any return on investment may be limited to the value of our common stock.
We have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if our stock price appreciates.
We have identified certain material weaknesses in the design or operation of internal control over financial reporting which could have adversely affected our ability to record, process, summarize and report financial data. Ineffective internal controls could impact our business and operating results. Any inability to report and file our financial results accurately and timely could harm our reputation and adversely impact the trading price of our common stock.
Effective internal control is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation with investors may be harmed. As a result, our small size and any current internal control deficiencies may adversely affect our financial condition, results of operation and access to capital.
As of December 31, 2013, we had identified certain matters that constituted a material weakness in our internal controls over financial reporting. Specifically, we have limited segregation of duties within our accounting and financial reporting functions. Segregation of duties within our company is limited due to the small number of employees that are assigned to positions that involve the processing of financial information.
On August 27, 2013, after consulting with our Audit Committee and with our newly appointed Independent Registered Public Accounting Firm, Marcum LLP, management changed its accounting for certain of our warrants and conversion features related to previously issued convertible notes and preferred stock which were recorded in periods prior to the engagement of Marcum LLP in order to comply with US GAAP. Such warrants and the embedded conversion options should have been reflected as liabilities on the consolidated balance sheets included in our previously filed Annual Report on Form 10-K for the year ended December 31, 2012 and the Quarterly Reports on Form 10-Q for the periods ended March 31, 2012, June 30, 2012, September 30, 2012 and March 31, 2013, rather than as a component of equity. In addition, we determined that we had not properly accreted compensation expense for certain restricted stock grants in 2012.
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Since the determination regarding this deficiency, we have devoted significant effort and resources to remediation and improvement of our internal control over financial reporting. While we had processes in place to identify and apply developments in accounting standards, we enhanced these processes to better evaluate our research of the nuances of complex accounting standards and engaged a third party financial reporting and consulting firm to assist the Company in its financial reporting compliance. Our enhancements included retaining a third party consultant, who is a technical accounting professional, to assist us in the interpretation and application of new and complex accounting guidance. The firm has been engaged to assist in the analysis of complex financial instruments. Management will continue to review and make necessary changes to the overall design of our internal control environment.
In addition, prior to the engagement of an outside financial reporting consultant in August 2013, we lacked adequately trained accounting personnel with appropriate expertise in complex transactions under United States generally accepted accounting principles. While we believe that the addition of a consultant with such experience has assisted us in mitigating this weakness as of December 31, 2013, we need to perform a full evaluation of our internal controls and procedures before we deem the weakness to be fully remediated. Management is currently in the process of determining how to implement a more effective system to insure that information required to be disclosed in our periodic reports has been recorded, processed, summarized and reported accurately. Our management acknowledges the existence of this problem, and intends to develop procedures to address them to the extent possible given limitations in manpower resources. While management is working on a plan, no assurance can be made at this point that the implementation of such controls and procedures will be completed in a timely manner or that they will be adequate once implemented.
Because we became public by means of a reverse merger, we may not be able to attract the attention of major brokerage firms.
There may be risks associated with us becoming public through a “reverse merger” with a shell company. Although the shell company did not have recent or past operations or assets and we performed a due diligence review of the shell company, there can be no assurance that we will not be exposed to undisclosed liabilities resulting from the prior operations of the shell company. Securities analysts of major brokerage firms and securities institutions may also not provide coverage of us because there were no broker-dealers who sold our stock in a public offering that would be incentivized to follow or recommend the purchase of our common stock. The absence of such research coverage could limit investor interest in our common stock, resulting in decreased liquidity. No assurance can be given that established brokerage firms will, in the future, want to cover our securities or conduct any secondary offerings or other financings on our behalf.
The public trading market for our common stock is volatile and may result in higher spreads in stock prices, which may limit the ability of our investors to sell their Shares at a profit, if at all.
Our common stock trades in the over-the-counter market and is quoted on the Over-the-Counter Bulletin Board, or OTCBB, and in the Over-the-Counter Markets on the OTCQB. The over-the-counter market for securities has historically experienced extreme price and volume fluctuations during certain periods. These broad market fluctuations may adversely affect the market price of our common stock and result in substantial losses to our investors. In addition, the spreads on stock traded through the over-the-counter market are generally unregulated and higher than on national stock exchanges, which means that the difference between the price at which shares could be purchased by investors in the over-the-counter market compared to the price at which they could be subsequently sold would be greater than on these exchanges. Significant spreads between the bid and asked prices of the stock could continue during any period in which a sufficient volume of trading is unavailable or if the stock is quoted by an insignificant number of market makers. Historically our trading volume has been insufficient to significantly reduce this spread and we have had a limited number of market makers sufficient to affect this spread. These higher spreads could adversely affect investors who purchase the shares at the higher price at which the shares are sold, but subsequently sell the shares at the lower bid prices quoted by the brokers. Unless the bid price for the stock exceeds the price paid for the shares by the investor, plus brokerage commissions or charges, the investor could lose money on the sale. For higher spreads such as those on over-the-counter stocks, this is likely a much greater percentage of the price of the stock than for exchange listed stocks. There is no assurance that at the time an investor in our common stock wishes to sell the shares, the bid price will have sufficiently increased to create a profit on the sale.
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As of March 31, 2014, we have granted options to purchase 15,119,073 shares of common stock and have reserved 30,499,175 shares of our common stock for issuance upon the exercise of options pursuant to our 2011 Long-Term Incentive Plan. In addition, as of March 31, 2014, we have reserved for issuance 11,045,655 shares of our common stock for issuance upon conversion or outstanding convertible preferred stock and 12,004,578 shares of our common stock for issuance upon exercise of outstanding warrants. As of March 31, 2014, we have also reserved 3,000,000 shares of our common stock for issuance upon conversion of outstanding convertible debentures.
Because our directors and executive officers are among our largest stockholders, they can exert significant control over our business and affairs and have actual or potential interests that may depart from those of our other stockholders.
Our directors and executive officers own or control a significant percentage of our common stock. Additionally, the holdings of our directors and executive officers may increase in the future upon vesting or other maturation of exercise rights under any of the options or warrants they may hold or in the future be granted or if they otherwise acquire additional shares of our common stock. As of March 31, 2014, our officers and directors beneficially own approximately 28% of the outstanding shares of our common stock. The interests of such persons may differ from the interests of our other stockholders. As a result, in addition to their board seats and offices, such persons will have significant influence over and control all corporate actions requiring stockholder approval, irrespective of how our other stockholders may vote, including the following actions:
· to elect or defeat the election of our directors;
· to amend or prevent amendment of our certificate of incorporation or bylaws;
· to effect or prevent a merger, sale of assets or other corporate transaction; and
· to control the outcome of any other matter submitted to our stockholders for vote.
In addition, such persons’ stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
We owned no properties and had no property leases at December 31, 2013. We currently have one month to month sub-lease for office space at our current location.
On July 31, 2012, the Company filed suit against Groupon, Inc. in the Eastern District of Texas in Civil Action No. 6:12-cv-00486. The Company filed additional suits against Izea, Inc. on October 17, 2012; Yelp, Inc. on October 17, 2012; and Foursqaure Labs, Inc. on October 31, 2012 in Civil Action Nos. 6:12-cv-786, 6:12-cv-788, 6:12-cv-837, respectively. Each of these cases alleges that the defendants infringe U.S. Patent Nos. 7,664,516 entitled "Method and System for Peer-to-Peer Advertising Between Mobile Communication Devices" and 8,155,679 entitled "System and Method for Peer-to-Peer Advertising Between Mobile Communication Devices." The Company subsequently added U.S. Patent Nos. 8,438,055, 8,452,646, and 8,457,670 to the cases, alleging each defendant infringed the newly added patents. Each of the defendants have answered, denying infringement and claiming that the asserted patents are invalid. Groupon, Yelp, and Foursquare filed counterclaims for declaratory judgment that the asserted patents are invalid and not infringed. Yelp filed an additional counterclaim for declaratory judgment that the asserted patens are unenforceable. The Court subsequently consolidated the actions for at least pre-trial purposes. Groupon filed a motion to transfer the case against it to the U.S. District Court for the Northern District of California, which the Court denied on September 27, 2013.
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Between July 19, 2013 and October 3, 2013, Groupon filed petitions with the Patent Trial & Appeals Board (“PTAB”) requesting institution of Covered Business Method Review of all asserted claims. On December 19, 2013 and January 17, 2014, the PTAB issued decisions instituting review on all but four of the asserted claims. On January 14, 2014, the Company and all defendants filed a joint motion to stay the district court litigation. The Court granted the motion and stayed the case on January 16, 2014 pending a decision by the PTAB. Trial on the Covered Business Method Reviews at the PTAB is set for September 5, 2014. On February 3, 2014, Groupon filed a petition to the U.S. Court of Appeals for the Federal Circuit for mandamus on the district court's denial of its motion to transfer, which remains pending as of the date of this report.
The court dockets for each case, including the parties’ briefs are publicly available on the Public Access to Court Electronic Records website, or PACER, www.pacer.gov, which is operated by the Administrative Office of the U.S. Courts.
Other than as noted above, the Company is not a party to any pending legal proceeding nor is its property the subject of any pending legal proceeding that is not in the ordinary course of business or otherwise material to the financial condition of its business. Further, to the knowledge of management, no director or executive officer is party to any action in which any has an interest adverse to us.
ITEM 4. MINE SAFETY DISCLOSURES.
None.
Our common stock was originally approved for quotation on the OTC Bulletin Board on July 13, 2011 and since August 8, 2012, has been quoted under the trading symbol BCYP. The following table sets forth the high and low bid prices for our common stock for the periods indicated, as reported by the OTC Bulletin Board. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
|
|
|
| |||
|
| High | Low | |||
| Fiscal Year 2012 |
|
| |||
| First Quarter | $ | 1.05 | $ | 1.01 | |
| Second Quarter | $ | 0.92 | $ | 0.40 | |
| Third Quarter | $ | 0.98 | $ | 0.65 | |
| Fourth Quarter | $ | 0.85 | $ | 0.30 | |
| Fiscal Year 2013 |
|
| |||
| First Quarter | $ | 0.45 | $ | 0.13 | |
| Second Quarter | $ | 0.36 | $ | 0.12 | |
| Third Quarter | $ | 0.19 | $ | 0.12 | |
| Fourth Quarter | $ | 0.22 | $ | 0.14 | |
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The last reported sales price of our common stock on the OTC Bulletin Board on March 31, 2014, was $0.130 per share. As of March 31, 2014, there were approximately 50 holders of record of our common stock.
Dividends
We have not paid, nor declared, any cash dividends since our inception and do not intend to declare any such dividends in the foreseeable future. Our ability to pay cash dividends is subject to limitations imposed by Delaware law. Under Delaware law, cash dividends may be paid to the extent that a corporation’s assets exceed its liabilities and it is able to pay its debts as they become due in the usual course of business.
Securities Authorized for Issuance Under Equity Compensation Plans
On August 31, 2012, the board adopted, subject to stockholder approval, the Blue Calypso, Inc. 2011 Long-Term Incentive Plan, or the Plan. Our stockholders approved the Plan on September 9, 2011. The Plan is intended to enable us to remain competitive and innovative in our ability to attract, motivate, reward and retain the services of key employees, certain key contractors, and non-employee directors. The Plan provides for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights, and other awards which may be granted singly, in combination, or in tandem, and which may be paid in cash or shares of common stock. The Plan is expected to provide flexibility to our compensation methods in order to adapt the compensation of employees, contractors, and non-employee directors to a changing business environment, after giving due consideration to competitive conditions and the impact of federal tax laws. Subject to certain adjustments, the maximum number of shares of our common stock that may be delivered pursuant to awards under the Plan is 35,000,000 shares.
As of December 31, 2013, securities issued and securities available for future issuance under the Blue Calypso 2011 Long-Term Incentive Plan were as follows:
|
| Number of securities to be issued upon exercise of outstanding options, warrants and rights |
| Weighted-average exercise price of outstanding options, warrants and rights |
| Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| Equity compensation plans approved by security holders | 4,500,825 |
| $0.265 |
| 30,499,175 |
| Equity compensation plans not approved by security holders | 9,376,748 |
| $0.156 |
| — |
| Total | 13,877,573 |
| $0.191 |
| 30,499,175 |
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Recent Sales of Unregistered Securities
During the three months ended December 31, 2013, the Company issued an aggregate of 472,574 shares of Common Stock as settlement of certain accounts payable.
During the three months ended December 31, 2013, the Company granted options to purchase an aggregate of 280,000 shares of Common Stock pursuant to the Company’s 2011 Long-Term Incentive Plan. The options have a term of 10 years and are exercisable at an exercise price of $0.172 per share.
The foregoing securities were issued without registration under the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon an exemption from registration provided by Section 4(2) under the Securities Act. The securities may not be transferred or sold absent registration under the Securities Act or the availability of an applicable exemption therefrom.
ITEM 6. SELECTED FINANCIAL DATA.
Since we are a “smaller reporting company,” as defined by SEC regulation, we are not required to provide the information required by this Item.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements
The statements made herein for fiscal 2013 and beyond represent “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 and are subject to a number of risks and uncertainties. These include, among other risks and uncertainties, whether we will be able to generate sufficient cash flow from our operations or other sources to fund our working capital needs, maintain existing relationships with our lender, successfully introduce and attain market acceptance of any new products, attract and retain qualified personnel both in our existing markets and in new territories in an extremely competitive environment, and potential obsolescence of our technologies.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as otherwise required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained in this report to reflect any change in our expectations or any change in events, conditions or circumstances on which any of our forward-looking statements are based. We qualify all of our forward-looking statements by these cautionary statements.
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes thereto that are included in this Annual Report. In addition to historical information, the following discussion and analysis includes forward-looking information that involves risks, uncertainties, and assumptions. Actual results and the timing of events could differ materially from those anticipated by these forward looking statements as a result of many factors.
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Interest Expense. Interest expense was $2,015,145 for the year ended December 31, 2013 as compared to $1,188,782 for the year ended December 31, 2012. Interest expense was incurred related to the Company’s long-term debt obligations at various interest rates ranging from 8% to 10% and the amortization of debt discount aggregating $751,126. Also, there was interest in 2013 related to the warrant modification for reset provision of $1,027,381.
Cash Flows
Comparison of Year Ended December 31, 2013 and 2012
Cash used in operating activities during the year ended December 31, 2013 was $2,756,901, as compared to $1,930,737 for the year ended December 31, 2012. The change was due to an increase in net loss of $1,748,130. Cash used was impacted favorably by a non-cash loss on the settlement of notes payable of $6,810,982. This was offset by the net change in non-cash gain associated with the fair market value adjustment in derivative liabilities of $7,630,434.
Cash used in investing activities during the year ended December 31, 2013 was $205,515, as compared to $331,689 for the year ended December 31, 2012. The decrease in cash used in investing activities resulted primarily from a decrease in cash paid for software development expenses. We expect that cash used in investing activities to remain at the current level for the foreseeable future as we continue to expand our website service offerings.
During the year ended December 31, 2013, cash provided by financing was $4,038,500 as compared to $2,109,831 for the same period in 2012. In the current year, the Company secured an aggregate of $2.6 million in notes payable and $1.5 million from the sale of common stock associated with two private transactions. These monies were secured to address the cash requirements during the continued development stage of the business.
Going Concern
Our independent registered public accounting firm, in their report accompanying our consolidated financial statements for the year ended December 31, 2013, expressed substantial doubt about our ability to continue as a going concern due to our recurring losses from operations, negative cash flows from operating activities and our accumulated deficit. Our ability to continue as a going concern is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies, reduce expenditures, dispose of selective assets, and ultimately, generate additional revenue. The going concern opinion may also limit our ability to access certain types of financing, prevent us from obtaining financing on acceptable terms, and limit our ability to obtain new business due to potential customers’ concern about our ability to deliver products or services. We must raise capital to implement our project and stay in business.
Liquidity and Capital Resources
We are a development stage company and have incurred cumulative losses of $24,431,770 since beginning operations on September 11, 2009. At December 31, 2013, we had a cash balance of $1,294,882 and favorable working capital of $1,006,009.
On May 6, 2013, we entered into a securities purchase agreement with an accredited investor pursuant to which we issued and sold a 10% Convertible Debenture (the "May 2013 Debenture") in the principal amount of $2,400,000 and 1,200,000 shares of our common stock in consideration of gross proceeds of $2,400,000. The Debenture bears interest at a rate of 10% per annum, is due two years from the issuance date and is convertible into shares of our common stock at a conversion price of $0.25 per share. On September 13, 2013, we entered into a series of agreements with the holder of the May 2013 Debenture and certain of our outstanding warrants. Pursuant to such agreements, we agreed to provide for a temporary reduction in the conversion price of the May 2013 Debenture from $0.25 to $0.13 per share through December 31, 2013 and the holder agreed to the elimination of certain restrictive covenants in the May 2013 Debenture. In addition, we agreed to amend the terms of certain of our outstanding warrants in order to induce the holder to exercise such warrants as well as to eliminate the cashless exercise feature and certain anti-dilution protections contained in such warrants. In exchange, we agreed to provide for a temporary reduction in the exercise price of such warrants from $0.10 to $0.05 through the later of December 31, 2013 or 45 days after a registration statement covering the underlying shares is declared effective by the Securities and Exchange Commission. The registration statement covering such shares was declared effective by the SEC on November 25, 2013.
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On October 7, 2013, we entered into a securities purchase agreement with an accredited investor pursuant to which we issued and sold 7,700,000 shares of our common stock at a purchase price of $0.13 per share in consideration of gross proceeds of $1,001,000. On October 15, 2013, we entered into a securities purchase agreement with an accredited investor pursuant to which we issued and sold 3,846,154 shares of our common stock at a purchase price of $0.13 per share in consideration of gross proceeds of $500,000.
As of December 31, 2013, the May 2013 Debenture together with all accrued but unpaid interest thereon was converted into an aggregate of 19,400,000 shares of our common stock. On January 9, 2014, an aggregate of 11,200,000 warrants have been exercised in consideration of proceeds to the Company of $560,000. On January 9, 2014, we further extended the period during which the warrants were exercisable at the reduced exercise price until March 10, 2014. Following such date, the exercise price shall increase to $0.15 per share.
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since we are a “smaller reporting company,” as defined by SEC regulation, we are not required to provide the information required by this Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The required financial statements are included following the signature page of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this Annual Report on Form 10-K. 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. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
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Our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were not effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined In Exchange Act Rule 13a-15(f). The term “internal control over financial reporting” is defined as a process designed by, or under the supervision of, the registrant’s principal executive and principal financial officers, or persons performing similar functions, and effected by the registrant’s board of directors, management and other personnel,
· to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
· pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant;
· provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant; and
· provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the registrant’s assets that could have a material effect on the financial statements.
Our internal control system is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. In addition, because of changes in conditions, the effectiveness of internal control may vary over time.
As of December 31, 2013, management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992) (“COSO”) and identified material weaknesses. As of December 31, 2013, management conducted an evaluation of the effectiveness of our internal control over financial reporting and concluded that the material weaknesses identified below continue to exist and the Company’s internal control over financial reporting still was not effective. A “material weakness” is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of our annual or interim financial statement will not be presented or detected by our employees.
The specific material weaknesses that management identified in our internal controls as of December 31, 2013 that persist was the insufficient experience to account for and disclose complex transactions under US GAAP and a limited segregation of duties within our accounting and financial reporting functions due to the small number of employees assigned to positions that involve the processing of financial information. Although we are aware that segregation of duties within our company is limited, we believe (based on our current roster of employees and certain control mechanisms we have in place), that the risks associated with having limited segregation of duties is currently minimal.
The Company is a non-accelerated filer and is not subject to Section 404(b) of the Sarbanes Oxley Act. Accordingly, this Annual Report does not contain an attestation report of our independent registered public accounting firm regarding internal control over financial reporting, since the rules for smaller reporting companies provide for this exemption.
37
Restatement of Previously Issued Financial Statements. On August 26, 2013, after consulting with the Company’s Audit Committee and with the Company’s newly appointed Independent Registered Public Accounting Firm, Marcum LLP, management changed its accounting for certain of the Company’s warrants previously issued in connection with preferred stock and common stock and conversion features related to previously issued convertible notes which were recorded in periods prior to the engagement of Marcum LLP in order to comply with US GAAP. Such warrants and the embedded conversion options should have been reflected as liabilities on the consolidated balance sheets included in the original 10-K, rather than as a component of equity.
Specifically, the change in treatment of the warrants and the conversion feature embedded in certain convertible notes resulted in a change to the equity, and liability portions of the consolidated balance sheets as of March 31, 2012, June 30, 2012, September 30, 2012, December 31, 2012 and March 31, 2013 and resulted in a loss on the fair value of the derivative liabilities which impacted our results of operations and earnings (loss) per share as reported in our original 10-K and 10-Q filings.
Remediation plan. Since the determination regarding this deficiency, we have devoted significant effort and resources to remediation and improvement of our internal control over financial reporting. While we had processes in place to identify and apply developments in accounting standards, we enhanced these processes to better evaluate our research of the nuances of complex accounting standards and engaged a third party financial reporting consulting firm to assist the Company in its financial reporting compliance. Our enhancements included retaining a third party consultant, who is a technical accounting professional, to assist us in the interpretation and application of new and complex accounting guidance. The firm has been engaged to assist in the analysis of complex financial instruments. Management will continue to review and make necessary changes to the overall design of our internal control environment.
(b) Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2013, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Executive Officers and Directors
Set forth below is certain information regarding our current executive officers and directors. Each of the directors listed below was appointed to our board of directors to serve until our next annual meeting of stockholders or until his successor is elected and qualified. All directors hold office for one-year terms until the election and qualification of their successors.
| Name |
| Age |
| Position with the Company |
| Director/Officer |
|
|
|
|
|
|
|
|
| William Ogle |
| 46 |
| Chairman of the Board and Chief Executive Officer, Director |
| 2012 |
|
|
|
|
|
|
|
|
| Andrew Levi |
| 47 |
| Chief Technology Officer, Director |
| 2011 |
|
|
|
|
|
|
|
|
| Ian Wolfman |
| 40 |
| Director |
| 2012 |
|
|
|
|
|
|
|
|
| Charles Thomas |
| 47 |
| Director |
| 2012 |
|
|
|
|
|
|
|
|
| Andrew Malloy |
| 56 |
| Director |
| 2013 |
|
|
|
|
|
|
|
|
| David S. Polster |
| 61 |
| Chief Financial Officer |
| 2012 |
38
ITEM 11. EXECUTIVE COMPENSATION
2013 and 2012 Summary Compensation Table
The following table sets forth the compensation earned by the Company’s principal executive officer, and each of the Company’s two most highly compensated executive officers other than the principal executive officer whose compensation exceeded $100,000 (collectively, the “Named Executive Officers”), during the years ended December 31, 2013 and 2012.
| Stock Awards ($) | Option Awards ($) | Nonequity Incentive Plan Compensation ($) | Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | |||||
| Name and Principal | Salary ($) | Bonus ($) | Total ($) | ||||||
| Position | Year | ||||||||
| William Ogle | 2013 | 383,333 | 399,841 | 783,174 | |||||
| Chairman and Chief Executive Officer (1) | 2012 | 241,026 | 5,234,337 | 1,719,139 | 7,194,502 | ||||
| David Polster | 2013 | 101,125 | 10,610 | 111,735 | |||||
| Chief Financial Officer (2) | 2012 | 64,625 | 45,925 | 110,550 | |||||
| Andrew Levi | 2013 | 193,703 | 193,703 | ||||||
| Chief Technology Officer, | 2012 | — | — | ||||||
| Former Chairman and Chief Executive Officer (3) | 2011 | — | — | ||||||
| James Craig | 2012 | 18,974 | 18,974 | ||||||
| Former Chief Financial Officer (4) | |||||||||
(1) Mr. Ogle was appointed as our Chairman and Chief Executive Officer effective June 11, 2012.
(2) Mr. Polster was appointed as our Chief Financial Officer in March 2012.
(3) Mr. Levi served as our Chairman and Chief Executive Officer from September 1, 2011 through June 10, 2012. He currently serves as our chief technology officer.
(4) Mr. Craig served as our Chief Financial Officer from September 1, 2011 through February 7, 2012.
Employment Agreements
On June 1, 2012, we entered into an employment letter agreement with our Chief Executive Officer, William Ogle, which was effective on June 11, 2012. The agreement does not have a specified term and Mr. Ogle’s employment is on an at-will basis. The agreement provides that Mr. Ogle is entitled to an annual base salary of $400,000. He is also entitled to annual incentive-based compensation with a target value of 100% of his base salary with an upper limit of 200%, to be determined and administered by our board of directors. Such incentive-based compensation may be paid in the form of shares of our common stock or cash. Mr. Ogle was awarded a restricted stock award equal to 7% of our total issued and outstanding shares calculated as of June 11, 2012. The restricted stock award will vest: (i) one-third on the one year anniversary of the grant date, and (ii) the remaining two-thirds will vest pro rata in eight equal quarterly installments. Mr. Ogle may also be offered additional annual equity awards of up to 200% of his base salary subject to mutually agreeable and reasonable targets beginning in 2013. In addition, on June 11, 2012, pursuant to his employment letter agreement, we also granted to Mr. Ogle options to purchase 3% of the issued and outstanding shares of common stock of the Company on a fully-diluted basis. The options will be exercisable at an exercise price equal to $0.10 per share for a term of 10 years. Mr. Ogle will also be eligible to participate in the Company’s comprehensive medical and dental program. In the event that we terminate Mr. Ogle’s employment without cause or Mr. Ogle terminates his employment for good reason, we will pay him his base salary for a period of 12 months from the date of separation and he will be eligible to receive any incentive compensation subject to the applicable targets being achieved. During such severance period, we will pay the premiums for health insurance coverage substantially similar to the benefits provided to Mr. Ogle and his dependents as of the date of termination.
42
The following table sets forth the number and percentage of outstanding shares of common stock and other classes of our equity securities entitled to vote on all matters submitted to a vote by holders of common stock beneficially owned as of March 31, 2014, by (i) each of our directors and named executive officers; (ii) all persons who are known by us to be beneficial owners of 5% or more of our outstanding common stock; and (iii) all of our officers and directors as a group. The percentages of common stock beneficially owned are reported on the basis of regulations of the Securities and Exchange Commission governing the determination of beneficial ownership of securities. Under the rules of the Securities and Exchange Commission, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or to direct the voting of the security, or investment power, which includes the power to dispose of or to direct the disposition of the security. Unless otherwise noted, to our knowledge and subject to community property laws where applicable, each of the persons listed below has sole voting and investment power with respect to the shares indicated as beneficially owned by such person. Unless otherwise noted, each person’s address is c/o Blue Calypso, Inc. 19111 North Dallas Parkway, Suite 200, Dallas, Texas 75287.
| Name and Address of Beneficial Owner |
| Amount and Nature |
| Percentage |
|
|
|
|
|
|
|
|
| William Ogle 19111 North Dallas Parkway, Suite 200 Dallas, TX 75287 |
|
20,630,255 | (3) | 10.32 | % |
|
|
|
|
|
| |
| Andrew Levi 19111 North Dallas Parkway, Suite 200 Dallas, TX 75287 |
| 33,737,139 | (4) | 16.88 | % |
|
|
|
|
|
| |
| David Polster 19111 North Dallas Parkway, Suite 200 Dallas, TX 75287 |
| 283,333 | (5) | 0.14 | % |
|
|
|
|
|
| |
| Ian Wolfman 19111 North Dallas Parkway, Suite 200 Dallas, TX 75287 |
| 375,000 | (5) | 0.19 | % |
|
|
|
|
|
| |
| Charles Thomas 19111 North Dallas Parkway, Suite 200 Dallas, TX 75287 |
| 375,000 | (5) | 0.19 | % |
|
|
|
|
|
| |
| Andrew Malloy Dallas, TX 75287 |
| 225,000 | (5) | 0.11 | % |
|
|
|
|
|
| |
| Esousa Holdings LLC(6) 317 Madison Ave., Suite 1621 New York, NY 10017 |
| 12,487,350 | (7) | 6.25 | % |
|
|
|
|
|
| |
| All directors and executive officers as a group (5 persons) |
|
55,625,733 | 27.83 | % |
(1) Shares of common stock beneficially owned and the respective percentages of beneficial ownership of common stock assumes the exercise of all options, warrants and other securities convertible into common stock beneficially owned by such person or entity currently exercisable or exercisable within 60 days of March 31, 2014, except as otherwise noted. Shares issuable pursuant to the exercise of stock options and warrants exercisable within 60 days are deemed outstanding and held by the holder of such options or warrants for computing the percentage of outstanding common stock beneficially owned by such person, but are not deemed outstanding for computing the percentage of outstanding common stock beneficially owned by any other person.
(2) These percentages have been calculated based on 199,437,262 shares of common stock outstanding as of March 31, 2014.
(3) Includes (i) 5,608,218 shares issuable upon exercise of vested stock options, (ii) 500,000 shares issuable upon conversion of 10% convertible debentures, and 13,085,842 shares issued pursuant to a restricted stock grant.
(4) Includes (i) 250,000 shares issuable upon conversion of 10% convertible debentures, and (ii) 33,487,139 shares of common stock.
(5) Includes shares issuable upon exercise of vested stock options.(6)
(6) Rachel Glicksman, as managing director of Esousa Holdings LLC, has voting and dispositive control over such shares.
(7) Based upon a Schedule 13G/A filed by Esousa Holdings LLC on February 14, 2012.
45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Procedures for the Approval of Related Person Transactions
Our Audit Committee on a timely basis reviews and, if appropriate, approves all related person transactions. At any time in which an executive officer, director or nominee for director becomes aware of any contemplated or existing transaction that, in that person’s judgment may be a related person transaction, the executive officer, director or nominee for director is expected to notify the chairman of the Audit Committee of the transaction. Generally, the chairman of the Audit Committee reviews any reported transaction and may consult with outside legal counsel regarding whether the transaction is, in fact, a related person transaction requiring approval by the Audit Committee. If the transaction is considered to be a related person transaction, then the Audit Committee will review the transaction at its next scheduled meeting or at a special meeting of the committee.
Independent Directors
Our board of directors has determined that each of Messrs. Wolfman, Thomas and Malloy is independent within the meaning of applicable listing rules of the Nasdaq Stock Market and the rules and regulations promulgated by the Securities and Exchange Commission. We anticipate that we will add additional independent directors in the future.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
We have engaged Marcum LLP ("Marcum") as our registered independent public accounting firm for the audit of our financial statements for the year ended December 31, 2013. Our predecessor auditor, Montgomery Coscia Greilich LLP, Certified Public Accountants ("MCG") audited our financial statements for the year ended December 31, 2012, and the reviews of our financial statements contained in each of our quarterly reports on Form 10-Q during the years ended December 31, 2012 as well as our first quarter review for 2013.
During the years ended December 31, 2013 and 2012, we were billed or expect to be billed by our independent registered public accounting firms the following fees:
Audit Fee
The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of our financial statements were $85,000 for fiscal year ended 2013 associated with Marcum and $54,548 for MCG. Audit fees for the fiscal year 2012 were from MCG and were $46,000.
46
Audit-Related Fees
The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit or review of our financial statements that are not reported above were $-0- for fiscal year ended 2013 and $-0- for fiscal year ended 2012. The fees for 2013 related to the restatement of the Company’s financial statements.
Tax Fees
The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, and tax planning were $6,000 for fiscal year ended 2013 from Marcum and $2,165 for fiscal year ended 2012 from MCG.
All Other Fees
The aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant, other than the services reported above were $0 for fiscal year ended 2013 and $0 for fiscal year ended 2012.
Our audit committee will evaluate and approve in advance, the scope and cost of the engagement of an auditor before the auditor renders audit and non-audit services.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
| Exhibit Number |
| Description |
| 2.1 |
| Agreement and Plan of Merger and Reorganization, dated as of September 1, 2011, by and among Blue Calypso, Inc., Blue Calypso Acquisition Corp., and Blue Calypso Holdings, Inc. (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed with the Securities and Exchange Commission on September 8, 2011) |
| 2.2 |
| Agreement and Plan of Merger, dated September 9, 2011, by and between Blue Calypso, Inc., a Nevada corporation, and Blue Calypso, Inc., a Delaware corporation (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed with the Securities and Exchange Commission on September 15, 2011) |
| 3.1 |
| Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed with the Securities and Exchange Commission on October 19, 2011) |
| 3.2 |
| Certificate of Designation of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.2 to Current Report on Form 8-K filed with the Securities and Exchange Commission on October 19, 2011) |
| 3.3 |
| Bylaws of Blue Calypso, Inc., a Delaware corporation, adopted September 9, 2011 (incorporated by reference to Exhibit 3.3 to Current Report on Form 8-K filed with the Securities and Exchange Commission on October 19, 2011) |
| 10.1 |
| 2011 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed with the Securities and Exchange Commission on September 8, 2011) |
| 10.2 |
| Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed with the Securities and Exchange Commission on September 8, 2011) |
| 10.3 |
| Form of Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed with the Securities and Exchange Commission on September 8, 2011) |
| 10.4 |
| Form Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K filed with the Securities and Exchange Commission on September 8, 2011) |
| 10.5 |
| Agreement of Conveyance, Transfer and Assignment of Assets and Assumption of Obligations, dated as of September 1, 2011 (incorporated by reference to Exhibit 10.5 to Current Report on Form 8-K filed with the Securities and Exchange Commission on September 8, 2011) |
| 10.6 |
| Stock Purchase Agreement, by and between Blue Calypso, Inc. and Deborah Flores, dated as of September 1, 2011 (incorporated by reference to Exhibit 10.6 to Current Report on Form 8-K filed with the Securities and Exchange Commission on September 8, 2011) |
| 10.7 |
| Securities Purchase Agreement, dated as of September 1, 2011, by and among Blue Calypso, Inc. and certain purchasers set forth therein (incorporated by reference to Exhibit 10.7 to Current Report on Form 8-K filed with the Securities and Exchange Commission on September 8, 2011) |
| 10.8 |
| Registration Rights Agreement, dated as of September 1, 2011, by and among Blue Calypso, Inc. and certain purchasers set forth therein (incorporated by reference to Exhibit 10.9 to Current Report on Form 8-K filed with the Securities and Exchange Commission on September 8, 2011) |
| 10.9 |
| Form of Warrant (incorporated by reference to Exhibit 10.10 to Current Report on Form 8-K filed with the Securities and Exchange Commission on September 8, 2011) |
| 10.10 |
| Letter Agreement, dated January 16, 2012, by and between Blue Calypso, Inc. and Aztec Systems, Inc. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on January 20, 2012) |
| 10.11 |
| Promissory Note, dated January 17, 2012, issued by Blue Calypso, Inc. to Aztec Systems, Inc. (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on January 20, 2012) |
| 10.12 |
| Securities Purchase Agreement, dated April 19, 2012, by and between Blue Calypso, Inc. and the Buyer thereto (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 24, 2012) |
| 10.13 |
| Senior Secured Convertible Note issued April 19, 2012 (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 24, 2012) |
| 10.14 |
| Common Stock Purchase Warrant issued April 19, 2012 (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 24, 2012) |
| 10.15 |
| Security Agreement, dated April 19, 2012, by and between the Company, Blue Calypso, LLC and the Buyer (incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 24, 2012) |
| 10.16 |
| Intellectual Property Security Agreement, dated April 19, 2012, by and between the Company, Blue Calypso, LLC, and the Buyer (incorporated by reference to Exhibit 10.5 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 24, 2012) |
| 10.17 |
| Subsidiary Guarantee, dated April 19, 2012, by Blue Calypso, LLC, in favor of the Buyer (incorporated by reference to Exhibit 10.6 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 24, 2012) |
| 10.18 |
| Form of Lock-Up Agreement (incorporated by reference to Exhibit 10.7 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 24, 2012) |
| 10.19 |
| Amendment No. 1 to Common Stock Purchase Warrant (incorporated by reference to Exhibit 10.8 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 24, 2012) |
| 10.20 |
| Stockholder’s Agreement, dated April 19, 2012, by and between Andrew Levi and the Company (incorporated by reference to Exhibit 10.9 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 24, 2012) |
| 10.21 |
| Letter Agreement dated June 1, 2012, between Blue Calypso, Inc. and Bill Ogle effective as of June 1, 2012 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 4, 2012) |
| 10.22 |
| Form of Subscription Agreement – June 2012 Private Placement (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on July 30, 2012) |
| 10.23 |
| Form of Warrant – June 2012 Private Placement (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on July 30, 2012) |
| 10.24 |
| Exchange Agreement dated November 9, 2012 between Blue Calypso, Inc. and Aztec Systems, Inc. (incorporated by reference to Exhibit 10.24 to our Quarterly Report on Form 10-Q for the period ended September 30, 2012 filed with the Securities and Exchange Commission on November 19, 2012) |
| 10.25 |
| 8% Convertible Note dated November 9, 2012 (incorporated by reference to Exhibit 10.24 to our Quarterly Report on Form 10-Q for the period ended September 30, 2012 filed with the Securities and Exchange Commission on November 19, 2012) |
| 10.26 |
| Amendment No. 1 to 8% Senior Secured Convertible Debentures between Blue Calypso, Inc. and the Holder dated April 29, 2013 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on May 3, 2013) |
| 10.27 |
| Amendment No. 2 to Common Stock Purchase Warrants between the Company and the Holder dated April 29, 2013 (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on May 3, 2013) |
| 10.28 |
| Amendment No. 2 to Common Stock Purchase Warrants between the Company and the Holder dated April 29, 2013 (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on May 3, 2013) |
| 10.29 |
| Securities Purchase Agreement dated May 6, 2013 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on May 6, 2013) |
| 10.30 |
| 10% Convertible Debenture dated May 6, 2013 (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on May 6, 2013) |
| 10.31 |
| Amendment No. 1 to 10% Convertible Debenture between Blue Calypso, Inc. and the Holder dated September 13, 2013 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on September 16, 2013) |
| 10.32 |
| Amendment No. 3 to Common Stock Purchase Warrants between the Company and the Holder dated September 13, 2013 (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on September 16, 2013) |
| 10.33 |
| Amendment No. 2 to Common Stock Purchase Warrant between the Company and the Holder dated September 13, 2013 (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on September 16, 2013) |
| 10.34 |
| Securities Purchase Agreement dated October 7, 2013 (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 11, 2013) |
| 10.35 |
| Amendment No. 4 to Common Stock Purchase Warrants between the Company and the Holder dated January 9, 2014 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on January 10, 2014) |
| 10.36 |
| Amendment No. 3 to Common Stock Purchase Warrant between the Company and the Holder dated January 9, 2014 (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on January 10, 2014) |
| 21.1 |
| List of subsidiaries (incorporated by reference to Exhibit 21.1 to our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission on April 16, 2012) |
| 31.1 |
| Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 |
| Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 |
| Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2 |
| Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 101.INS |
| XBRL Instance Document |
| 101.SCH |
| XBRL Taxonomy Extension Schema Document |
| 101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Blue Calypso, Inc., and Subsidiary
We have audited the accompanying consolidated balance sheets of Blue Calypso, Inc. and subsidiary (a development stage company, the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for each of the years then ended and the period from September 11, 2009 (inception) to December 31, 2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether these financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Blue Calypso, Inc. and subsidiary as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended and for the period from September 11, 2009 (inception) to December 31, 2012 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 12 to the consolidated financial statements, the Company has had recurring losses from operations, negative cash flows from operating activities and has an accumulated deficit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
As further discussed in Note 2 to the financial statements, restatement adjustments were made to the financial statements for the year ended December 31, 2012 and 2011 with regard to a loss on change in fair value of derivative liabilities of $10,284,733 for the year ended December 31, 2011 and a change in fair value of derivative liabilities of $1,668,082, an increase in interest expense related to derivative liabilities of $611,007 and an understatement of restricted stock expense of $1,017,786 for the year ended December 31, 2012.
/s/ Montgomery Coscia Greilich LLP
Plano, Texas
March 28, 2013 except for Note 4, which is dated October 9, 2013
F-2
| BLUE CALYPSO, INC. AND SUBSIDIARIES | ||||||||
| (a development stage company) | ||||||||
| CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From September 11,
2009 (date of inception)
Through December 31, 2013 | |
|
|
Year ended December 31, |
| ||||||
|
|
2013 |
|
2012 |
| ||||
| REVENUE | $ | 341,972 |
| $ | 74,584 |
| $ | 468,183 |
| Cost of revenue |
| 142,755 |
|
| 155,022 |
|
| 409,288 |
| Gross profit (loss) |
| 199,217 |
|
| (80,438) |
|
| 58,895 |
|
|
|
|
|
|
|
|
|
|
| OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
| Sales and marketing |
| 682,600 |
|
| 420,692 |
|
| 1,970,954 |
| General and administrative |
| 4,843,804 |
|
| 4,786,152 |
|
| 10,733,025 |
| Depreciation and amortization |
| 300,909 |
|
| 267,677 |
|
| 681,520 |
| Total operating expenses |
| 5,827,313 |
|
| 5,474,521 |
|
| 13,385,499 |
|
|
|
|
|
|
|
|
|
|
| Loss from operations |
| (5,628,097) |
|
| (5,554,959) |
|
| (13,326,603) |
|
|
|
|
|
|
|
|
|
|
| Other income (expense): |
|
|
|
|
|
|
|
|
| Change in fair value of derivative liabilities |
| 7,630,434 |
|
| 1,668,082 |
|
| (986,218) |
| Loss on settlement or modification of debt |
| (6,810,982) |
|
| - |
|
| (6,810,982) |
| Interest expense |
| (2,015,145) |
|
| (1,188,782) |
|
| (3,307,967) |
| Total other income (expense) |
| (1,195,693) |
|
| 479,300 |
|
| (11,105,167) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| NET LOSS | $ | (6,823,789) |
| $ | (5,075,659) |
| $ | (24,431,770) |
|
|
|
|
|
|
|
|
|
|
| Net loss per common share, basic and diluted | $ | (0.05) |
| $ | (0.04) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average common shares outstanding, basic and diluted |
| 144,270,454 |
|
| 133,060,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| See the accompanying notes to these consolidated financial statements | ||||||||
F-4
| BLUE CALYPSO, INC. AND SUBSIDIARIES | ||||||||||||||||||
| (a development stage company) | ||||||||||||||||||
| CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) | ||||||||||||||||||
| PERIOD FROM SEPTEMBER 11, 2009 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2013 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Deficit during
Development
Stage |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Paid in
Capital |
|
|
Total
Stockholders'
Deficiency | ||||
|
| Preferred Stock |
| Common Stock |
|
|
| ||||||||||||
|
| Shares |
|
Amount |
| Shares |
|
Amount |
|
|
| ||||||||
| Balance, September 11, 2009 (date of inception) | - |
| $ | - |
| - |
| $ | - |
| $ | - |
| $ | - |
| $ | - |
| Net loss | - |
|
| - |
| - |
|
| - |
|
| - |
|
| (23,653) |
|
| (23,653) |
| Balance, December 31, 2009 | - |
|
| - |
| - |
|
| - |
|
| - |
|
| (23,653) |
|
| (23,653) |
| Shares issued at $0.001 per share on March 10, 2010 | - |
|
| - |
| 65,448,269 |
|
| 6,545 |
|
| (5,525) |
|
| - |
|
| 1,020 |
| Affiliate payable converted to equity on March 31, 2010 | - |
|
| - |
| - |
|
| - |
|
| 21,958 |
|
| - |
|
| 21,958 |
| Shares issued on June 10, 2010 for future services | - |
|
| - |
| 5,133,183 |
|
| 513 |
|
| (513) |
|
| - |
|
| - |
| Shares issued on September 20, 2010 for future services | - |
|
| - |
| 1,604,124 |
|
| 160 |
|
| (160) |
|
| - |
|
| - |
| Stock based compensation | - |
|
| - |
| - |
|
| - |
|
| 22 |
|
| - |
|
| 22 |
| Net loss | - |
|
| - |
| - |
|
| - |
|
| - |
|
| (389,035) |
|
| (389,035) |
| Balance, December 31, 2010 | - |
|
| - |
| 72,185,576 |
|
| 7,218 |
|
| 15,782 |
|
| (412,688) |
|
| (389,688) |
| Shares issued on January 10, 2011 for future services | - |
|
| - |
| 1,283,299 |
|
| 128 |
|
| (128) |
|
| - |
|
| - |
| Shares issued on April 29, 2011 for future services | - |
|
| - |
| 1,283,299 |
|
| 128 |
|
| (128) |
|
| - |
|
| - |
| Shares cancelled as of July 25, 2011 | - |
|
| - |
| (2,887,423) |
|
| (288) |
|
| 288 |
|
| - |
|
| - |
| Shares issued upon debt conversion | - |
|
| - |
| 28,135,234 |
|
| 2,814 |
|
| 1,562,274 |
|
| - |
|
| 1,565,088 |
| Shares issued upon reverse merger | - |
|
| - |
| 24,974,700 |
|
| 2,498 |
|
| (2,498) |
|
| - |
|
| - |
| Shares issued on September 8, 2011 for future services | - |
|
| - |
| 320,825 |
|
| 32 |
|
| (32) |
|
| - |
|
| - |
| Shares issued upon debt conversion | 1,500,000 |
|
| 150 |
| - |
|
| - |
|
| 1,499,850 |
|
| - |
|
| 1,500,000 |
| Shares issued on December 30, 2011for future services | - |
|
| - |
| 1,550,115 |
|
| 155 |
|
| (155) |
|
| - |
|
| - |
| Donated capital | - |
|
| - |
| - |
|
| - |
|
| 4,249 |
|
| - |
|
| 4,249 |
| Stock based compensation | - |
|
| - |
| - |
|
| - |
|
| 5,473 |
|
| - |
|
| 5,473 |
| Allocation of proceeds from warrants as of December 31, 2011 | - |
|
| - |
| - |
|
| - |
|
| (712,827) |
|
| - |
|
| (712,827) |
| Net loss | - |
|
| - |
| - |
|
| - |
|
| - |
|
| (12,119,634) |
|
| (12,119,634) |
| Balance, December 31, 2011 | 1,500,000 |
| $ | 150 |
| 126,845,625 |
| $ | 12,685 |
| $ | 2,372,148 |
| $ | (12,532,322) |
| $ | (10,147,339) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, January 1, 2012 | 1,500,000 |
| $ | 150 |
| 126,845,625 |
| $ | 12,685 |
| $ | 2,372,148 |
| $ | (12,532,322) |
| $ | (10,147,339) |
| Sale of preferred stock at $1.00 per share | 200,000 |
|
| 20 |
| - |
|
| - |
|
| 199,980 |
|
| - |
|
| 200,000 |
| Restricted shares – net cancellations | - |
|
| - |
| (1,700,529) |
|
| (171) |
|
| 171 |
|
| - |
|
| - |
| Sale of common stock at $0.50 per share | - |
|
| - |
| 890,000 |
|
| 90 |
|
| 448,916 |
|
| - |
|
| 449,006 |
| Shares issued as settlement of accounts payable at $0.33 per share | - |
|
| - |
| 1,068,105 |
|
| 107 |
|
| 354,788 |
|
| - |
|
| 354,895 |
| Return of common shares from founder | - |
|
| - |
| (1,968,105) |
|
| (197) |
|
| 197 |
|
| - |
|
| - |
| Reclassification of warrants as derivative liabilities | - |
|
| - |
| - |
|
| - |
|
| (1,003,920) |
|
| - |
|
| (1,003,920) |
| Fair value of warrants issued in connection with debt | - |
|
| - |
| - |
|
| - |
|
| 416,528 |
|
| - |
|
| 416,528 |
| Beneficial conversion feature associated with notes payable | - |
|
| - |
| - |
|
| - |
|
| 614,696 |
|
| - |
|
| 614,696 |
| Stock based compensation | - |
|
| - |
| - |
|
| - |
|
| 3,149,374 |
|
| - |
|
| 3,149,374 |
| Net loss | - |
|
| - |
| - |
|
| - |
|
| - |
|
| (5,075,659) |
|
| (5,075,659) |
| Balance, December 31, 2012 | 1,700,000 |
| $ | 170 |
| 125,135,096 |
| $ | 12,514 |
| $ | 6,552,878 |
| $ | (17,607,981) |
|
| (11,042,419) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance-January 1, 2013 | 1,700,000 |
| $ | 170 |
| 125,135,096 |
| $ | 12,514 |
| $ | 6,552,878 |
| $ | (17,607,981) |
|
| (11,042,419) |
| Conversion of note payable-former Affiliate to equity at $0.15 per share | - |
|
| - |
| 3,686,634 |
|
| 369 |
|
| 552,994 |
|
| - |
|
| 553,363 |
| Conversion of preferred shares to common shares at $0.0679 per share | (949,932) |
|
| (95) |
| 13,991,162 |
|
| 1,399 |
|
| (1,304) |
|
| - |
|
| - |
| Return of shares from Founder | - |
|
| - |
| (16,572,980) |
|
| (1,658) |
|
| 1,658 |
|
| - |
|
| - |
| Conversion of notes payable and accrued interest into common stock at $0.03 per share | - |
|
| - |
| 20,000,000 |
|
| 2,000 |
|
| 542,106 |
|
| - |
|
| 544,106 |
| Shares issued to third party as debt discount in connection with notes payable at $0.18 per share | - |
|
| - |
| 1,200,000 |
|
| 120 |
|
| 229,571 |
|
| - |
|
| 229,691 |
| Shares issued as deferred financing costs in connection with notes payable at $0.172 per share | - |
|
| - |
| 1,000,000 |
|
| 100 |
|
| 171,900 |
|
| - |
|
| 172,000 |
| Subtotal | 750,068 |
| $ | 75 |
| 148,439,912 |
| $ | 14,844 |
| $ | 8,049,803 |
| $ | (17,607,981) |
| $ | (9,543,259) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance forward | 750,068 |
| $ | 75 |
| 148,439,912 |
| $ | 14,844 |
| $ | 8,049,803 |
| $ | (17,607,981) |
| $ | (9,543,259) |
| Shares issued to acquire software at $0.15 per share | - |
|
| - |
| 1,000,000 |
|
| 100 |
|
| 149,900 |
|
| - |
|
| 150,000 |
| Vesting of restricted stock units at $0.40 per share (prior year expense of $872,387) | - |
|
| - |
| 6,673,127 |
|
| 667 |
|
| 1,783,347 |
|
| - |
|
| 1,784,014 |
| Sale of common stock associated with two private transactions at $0.13 per share | - |
|
| - |
| 11,546,154 |
|
| 1,155 |
|
| 1,499,845 |
|
| - |
|
| 1,501,000 |
| Conversion of notes payable and accrued interest into common stock at $0.13 per share | - |
|
| - |
| 19,400,000 |
|
| 1,940 |
|
| 2,518,060 |
|
| - |
|
| 2,520,000 |
| Shares issued in settlement of accounts payable at $0.235 per share | - |
|
| - |
| 1,178,069 |
|
| 118 |
|
| 276,921 |
|
| - |
|
| 277,039 |
| Reclassification of derivative liabilities to equity | - |
|
| - |
| - |
|
| - |
|
| 6,384,814 |
|
| - |
|
| 6,384,814 |
| Reclassification of warrants as derivative liabilities | - |
|
| - |
| - |
|
| - |
|
| (2,013,972) |
|
| - |
|
| (2,013,972) |
| Loss on debt modification of notes payable | - |
|
| - |
| - |
|
| - |
|
| 6,810,982 |
|
| - |
|
| 6,810,982 |
| Stock based compensation | - |
|
| - |
| - |
|
| - |
|
| 551,483 |
|
| - |
|
| 551,483 |
| Beneficial conversion feature associated with notes payable | - |
|
| - |
| - |
|
| - |
|
| 268,210 |
|
| - |
|
| 268,210 |
| Net loss | - |
|
| - |
| - |
|
| - |
|
| - |
|
| (6,823,789) |
|
| (6,823,789) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance-December 31, 2013 | 750,068 |
| $ | 75 |
| 188,237,262 |
| $ | 18,824 |
| $ | 26,279,393 |
| $ | (24,431,770) |
| $ | 1,866,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to these consolidated financial statements
F-5
BLUE CALYPSO, INC. AND SUBSIDIARIES
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provide the Company with a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company's own stock. The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). The Company assesses classification of its common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required.
The Company’s free standing derivatives consisted of warrants to purchase common stock that were issued in connection with its private placement transactions (see Note 4) and embedded conversion options with convertible notes. The Company evaluated these derivatives to assess their proper classification in the consolidated balance sheets as of December 31, 2013 and 2012 using the applicable classification criteria enumerated under GAAP. The Company determined that certain common stock purchase warrants and the embedded conversion features do not contain fixed settlement provisions. The exercise price of such warrants is subject to adjustment in the event that the Company subsequently issues equity securities or equity linked securities with exercise prices lower than the exercise price in these warrants. The convertible notes contained a conversion feature such that the Company could not ensure it would have adequate authorized shares to meet all possible conversion demands.
As such, the Company was required to record the warrants and debt derivatives which do not have fixed settlement provisions as liabilities and mark to market all such derivatives to fair value at the end of each reporting period.
The Company has adopted a sequencing policy that reclassifies contracts (from equity to assets or liabilities) with the most recent inception date first. Thus any available shares are allocated first to contracts with the most recent inception dates.
Stock-Based Compensation
The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. Stock-based compensation expense is recorded by the Company in the same expense classifications in the consolidated statements of operations, as if such amounts were paid in cash.
Advertising
The Company's advertising costs are expensed as incurred. Advertising expense was $13,589 and $128,007 for the years ended December 31, 2013 and 2012, respectively, and $378,845 for the period from September 11, 2009 (inception) through December 31, 2013.
Recent Accounting Pronouncements
There are various 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.
Subsequent Events
The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the consolidated financial statements, except as disclosed below.
F-11
BLUE CALYPSO, INC. AND SUBSIDIARIES
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment include the following:
|
| December 31, 2013 |
| December 31, 2012 | ||
| Office Equipment | $ | 23,781 |
| $ | 23,781 |
| Less: Accumulated depreciation |
| (13,772) |
|
| (7,153) |
| Property and equipment, net | $ | 10,009 |
| $ | 16,628 |
Depreciation expense was $6,619 and $4,756 for the years ended December 31, 2013 and 2012, respectively and $13,772 for the period from September 11, 2009 (inception) through December 31, 2013.
NOTE 6 – INTANGIBLE ASSETS
Intangible assets consist of the following:
|
| December 31, 2013 |
| December 31, | ||
| Capitalized Software Development Costs | $ | 1,631,921 |
| $ | 1,276,406 |
| Less: Accumulated amortization |
| (647,247) |
|
| (352,957) |
| Net capitalized development costs | $ | 984,674 |
| $ | 923,449 |
During the year ended December 31, 2013, the Company issued 1,000,000 shares of its common stock valued at $150,000 to acquire certain software technology. The shares were valued based upon the volume weighted average price of the Company’s for the thirty days prior to the closing of the transaction. The Company recorded the fair value of the shares issued as an intangible asset with an estimated useful life of 5 years.
Amortization expense relating to the capitalized development costs was $294,290 and $226,503 for the year ended December 31, 2013 and 2012, respectively, and $647,247 for the period from September 11, 2009 (inception) through December 31, 2013.
The estimated future amortization of intangible assets over the remaining weighted average useful life of approximately 4 years is as follows:
| 2014 | $ | 327,333 |
| 2015 |
| 304,148 |
| 2016 |
| 212,497 |
| 2017 |
| 100,829 |
| Thereafter |
| 39,867 |
|
| $ | 984,674 |
F-14
BLUE CALYPSO, INC. AND SUBSIDIARIES
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
May 6, 2013 Convertible Debentures
On May 6, 2013, the Company issued a convertible debenture in exchange for cash proceeds of $2,400,000 (the “May 2013 Debenture”). The May 2013 Debenture bears interest at a rate of 10% per annum, is due two years from the issuance date and is convertible into shares of the Company’s common stock at the option of the holder at a conversion price of $0.25 per share. In connection with the May 2013 Debenture, the Company granted the note holder an aggregate of 1,200,000 shares of common stock with a grant date fair value of $254,400. The aggregate grant date fair value of the common stock was applied to the principal amount of the May 2013 Debenture to determine the debt discount. Accordingly, the Company allocated $229,691 of the proceeds to the relative fair value of the common stock on the grant date and recorded such amount as a debt discount on the date of the transaction.
On September 13, 2013, the Company modified certain terms of the May 2013 Debenture in order to induce the holder to convert the May 2013 Debenture into shares of the Company’s common stock as well as to eliminate certain restrictive covenants in the May 2013 Debenture. In exchange, the Company provided for a temporary reduction in the conversion price of the May 2013 Debenture to $0.13 per share through December 31, 2013, after which the conversion price will revert back to the original conversion price of $0.25 per share. In December 2013, the holder elected to convert the convertible debenture of $2,400,000 and related accrued interest of $120,000 at the conversion price of $0.13 per share for an aggregate of 19,400,000 shares of the Company’s common stock. In accordance with ASC 470-20, the fair value of the consideration was measured and recognized as an expense on the date that the inducement offer is accepted by the holder. In connection with the debt modification, the Company recorded a loss on debt modification of $1,351,400 representing the difference between the fair value of the aggregate shares issuable under the new conversion price and the original conversion terms of the May 2013 Debenture.
During the year ended December 31, 2013, the Company recognized $229,691 in amortization of the deferred debt discount relating to the May 2013 Debenture. In connection with the May 2013 Debenture, the Company incurred fees payable to a third party aggregating $62,500, and issued an aggregate of 1,000,000 shares with a grant date fair value of $172,000 to a third-party. Such amounts were recognized as Deferred Financing Costs on the date of the transaction, and were amortized over the term of the May 2013 Debenture. During the year ended December 31, 2013, the Company recognized $234,500 in amortization of the deferred financing costs relating to the May 2013 Debenture.
NOTE 8 - WARRANT DERIVATIVE LIABILITIES
The Company issued warrants in conjunction with the issuance of convertible debentures and the sale of Series A Convertible Preferred and Common Stock. These warrants contained certain reset provisions. Therefore, in accordance with ASC 815-40, the Company classified the fair value of the warrant as a liability at the date of issuance. Subsequent to the initial issuance date, the Company is required to adjust the warrant to fair value as an adjustment to current period operations.
During 2012, the Company reclassified additional paid in capital to warrant liabilities in the amount of $1,003,920 related reset provisions on warrants.
On April 19, 2013, the reset provisions of an aggregate of 22,091,310 warrants expired. Accordingly, the fair value at the date of expiration of $4,027,945 was reclassified from liabilities to equity.
On April 29, 2013, in connection with an amendment to the Secured Convertible Debentures, the Company reinstated the reset provisions of an aggregate of 11,045,655 warrants and extended their term from August 31, 2016 to April 30, 2018. The fair value of the modified warrants of $3,041,342 was recorded as a liability with $2,013,972 reclassified from equity (based on original terms) and $1,027,381 charged to current period interest (based on term modifications). The fair values were determined using the binomial lattice model.
On September 13, 2013, in connection with an amendment to the Secured Convertible Debentures, the Company modified the terms of 11,045,655 warrants as described above, 2,945,508 warrants issued on March 31, 2012 and 6,500,000 warrants issued on April 12, 2012, reducing the exercise prices from $0.10 per share to $0.05 per share; and eliminating the embedded reset provisions. Accordingly, the Company determined the change in fair values of $64,017 to current period expense and reclassified the adjusted liability to equity of $2,356,869. The fair values were determined using the binomial lattice model.
As of December 31, 2013, the Company had outstanding 487,235 warrants with embedded reset provisions. See Note 4).
F-16
BLUE CALYPSO, INC. AND SUBSIDIARIES
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
Employee options
During the year ended December 31, 2013, the Company granted options to purchase an aggregate of 4,908,530 shares of common stock to certain employees. These options vest over a 2 or 3 year period, have a term of 10 years, and contain exercise prices between $0.14 and $0.24 per share. The options had an aggregate grant fair date value of $538,727.
During the year ended December 31, 2012, the Company granted options to purchase an aggregate of 8,223,543 shares of common stock to certain employees. These options vest immediately to over a 2 year or 3 year period, have a term of 10 years, and contain exercise prices between $0.68 and $1.01 per share. The options had an aggregate grant fair date value of $1,396,521.
The following table summarizes the stock option activity for the years ended December 31, 2013 and 2012:
|
|
| Shares |
| Weighted-Average |
| Weighted-Average |
| Aggregate Intrinsic | |||
| Outstanding at January 1, 2012 |
| - |
|
|
|
|
|
|
|
|
|
| Grants |
| 8,223,543 |
| $ | 0. 1866 |
|
| 10.00 |
| $ | - |
| Exercised |
| - |
|
|
|
|
|
|
|
|
|
| Forfeitures or expirations |
| (1,333,000) |
| $ | 0.1036 |
|
|
|
|
|
|
| Outstanding at January 1, 2013 |
| 6,890,543 |
| $ | 0.2027 |
|
| 9.35 |
| $ | - |
| Grants |
| 4,908,530 |
| $ | 0.2323 |
|
| 10.00 |
| $ | - |
| Exercised |
| - |
|
|
|
|
|
|
|
|
|
| Forfeitures or expirations |
| (941,500) |
|
| 0.8215 |
|
|
|
|
|
|
| Outstanding at December 31, 2013 |
| 10,857,573 |
| $ | 0.1627 |
|
| 8.8 |
| $ | 259,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Vested and expected to vest at December 31, 2013 |
| 10,857,573 |
| $ | 0.1627 |
|
| 8.8 |
| $ | 259,558 |
| Exercisable at December 31, 2013 |
| 5,865,436 |
| $ | 0.1000 |
|
| 8.4 |
| $ | 251,426 |
The following table presents information related to employee stock options at December 31, 2013:
| Options Outstanding |
| Options Exercisable | |||||
|
|
|
|
| Weighted Average Remaining Life In Years |
|
| |
|
|
|
|
|
| Exercisable Number of Options | ||
| Exercise Price |
| Number of Options |
|
| |||
|
|
|
| |||||
| $ | 0.00-0.10 |
| 5,929,043 |
| 8.4 |
| 5,822,102 |
|
| 0.11-0.25 |
| 4,858,530 |
| 9.3 |
| 20,000 |
|
| 0.26-0.75 |
| 70,000 |
| 8.7 |
| 23,334 |
|
|
|
| 10,857,573 |
| 8.7 |
| 5,865,436 |
As of December 31, 2013, stock-based compensation of $375,428 remains unamortized and is expected to be amortized over the weighted average remaining period of 2 years.
Non-employee options
During the year ended December 31, 2013, the Company granted options to purchase an aggregate of 750,000 shares of common stock to certain consultants. These options vest over a 3 year period, have a term of 10 years, and contain an exercise price of $0.14 to $0.24 per share. The vested options had an aggregate grant date fair value of $75,615.
During the year ended December 31, 2012, the Company granted options to purchase an aggregate of 1,650,000 shares of common stock to certain consultants. These options vest over a 1 year, 2 year or 3 year period, have a term of 10 years, and contain an exercise price of $0.14 to $0.24 per share. The vested options had an aggregate grant date fair value of $904,080.
F-18
BLUE CALYPSO, INC. AND SUBSIDIARIES
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
The following table summarizes the warrant activity for the two years ended December 31, 2013:
|
|
|
|
|
|
|
| Weighted-Average Remaining Contractual Term |
|
Aggregate
Intrinsic
Value | |
|
|
|
|
|
Weighted-Average
Exercise Price |
|
| ||||
|
|
Shares |
|
|
| ||||||
| Outstanding at January 1, 2012 |
| 22,091,310 |
| $ | 0.05 |
| 4.5 |
|
|
|
| Issued |
| 10,404,443 |
|
| 0.134 |
| 4.3 |
| $ | - |
| Exercised |
| - |
|
|
|
|
|
|
|
|
| Forfeitures or expirations |
| - |
|
|
|
|
|
|
|
|
| Outstanding at January 1, 2013 |
| 32,495,753 |
| $ | 0.0769 |
| 4.4 |
| $ | - |
| Grants |
| - |
|
|
|
|
|
| $ | - |
| Exercised |
| - |
|
|
|
|
|
|
|
|
| Forfeitures or expirations |
| - |
|
|
|
|
|
|
|
|
| Outstanding at December 31, 2013 |
| 32,495,753 |
| $ | 0.0769 |
| 3.4 |
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
| Vested and expected to vest at December 31, 2013 |
| 32,495,753 |
| $ | 0.0769 |
| 3.4 |
| $ | - |
| Exercisable at December 31, 2013 |
| 32,495,753 |
| $ | 0.0769 |
| 3.4 |
| $ | - |
On April 19, 2012, in connection with the issuance of a senior secured 8% convertible debenture, the Company issued 6,500,000 warrants to purchase the Company’s common stock at $0.10 per share, expiring five years from the date of issuance. These warrants contained certain reset provisions (see Note 8)
On June 13, 2012, in connection with the sale of the Company’s common stock, the Company issued 445,000 warrants to purchase the Company’s common stock at an exercise price of $0.75 per share for two years from the date of issuance.
During the year ended December 31, 2012, in connection with the settlement of outstanding accounts payable, the Company issued an aggregate of 487,235 warrants to purchase the Company’s common stock at an exercise price of $0.50 per share for two years from the date of issuance. The fair value of the warrants were determined by Black-Scholes option pricing model.
During the year ended December 31, 2012, in consideration of a portion of the investment banking fees associated with the common stock private placement, the Company issued 26,700 warrants to purchase the Company’s common stock at an exercise price of $0.75 per share for two years from the date of issuance. The fair value of the warrants were determined by Black-Scholes option pricing model. The assumptions used in the valuation of warrants were as follows:
| Risk-free interest rate |
| 0.77 to 1.75 | % |
| Life of warrant |
| 4.75 to 4.01 years |
|
| Expected stock price volatility |
| 91.31% to 102.46 | % |
| Expected dividend yield | $ | 0.0 |
|
The risk-free interest rate is based on the yield of Daily U.S. Treasury Yield Curve Rates with terms equal to the life of the warrants as of the grant date. The expected stock price volatility is based on comparable companies’ historical stock price volatility since the Company does not have sufficient historical volatility data because its equity shares have been publicly traded for only a limited period of time.
F-21
BLUE CALYPSO, INC. AND SUBSIDIARIES
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
NOTE 10 – RELATED PARTY TRANSACTIONS
Aztec was an affiliate of the Company that provided administrative and technical support services to the Company. The majority owner of Aztec was also the majority stockholder of the Company until the sale of Aztec on June 15, 2012. During the year ended December 31, 2013, Aztec converted convertible debentures aggregating $522,891 and accrued interest aggregating approximately $30,000 into 3,686,634 shares of common stock. Concurrently with this issuance a shareholder cancelled 3,686,634 shares of his common stock and returned them to the Company. During the year ended December 31, 2013, the Company recorded amortization of the debt discount relating to this note aggregating approximately $254,162.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Operating leases
The Company leases office space under a month to month operating lease with no minimum future rental payments. The operating lease does not involve contingent liabilities. Rental expense under the operating lease totaled $36,857 and $30,534 for the years ended December 31, 2013 and 2012, respectively and $80,511 from September 11, 2009 (inception to date) through December 31, 2013.
Litigation
On July 31, 2012, the Company filed suit against Groupon, Inc. in the Eastern District of Texas in Civil Action No. 6:12-cv-00486. The Company filed additional suits against Izea, Inc. on October 17, 2012; Yelp, Inc. on October 17, 2012; and Foursqaure Labs, Inc. on October 31, 2012 in Civil Action Nos. 6:12-cv-786, 6:12-cv-788, 6:12-cv-837, respectively. Each of these cases alleges that the defendants infringe U.S. Patent Nos. 7,664,516 entitled "Method and System for Peer-to-Peer Advertising Between Mobile Communication Devices" and 8,155,679 entitled "System and Method for Peer-to-Peer Advertising Between Mobile Communication Devices." The Company subsequently added U.S. Patent Nos. 8,438,055, 8,452,646, and 8,457,670 to the cases, alleging each defendant infringed the newly added patents. Each of the defendants have answered, denying infringement and claiming that the asserted patents are invalid. Groupon, Yelp, and Foursquare filed counterclaims for declaratory judgment that the asserted patents are invalid and not infringed. Yelp filed an additional counterclaim for declaratory judgment that the asserted patents are unenforceable. The Court subsequently consolidated the actions for at least pre-trial purposes. Groupon filed a motion to transfer the case against it to the U.S. District Court for the Northern District of California, which the Court denied on September 27, 2013.
Between July 19, 2013 and October 3, 2013, Groupon filed petitions with the Patent Trial & Appeals Board (“PTAB”) requesting institution of Covered Business Method Review of all asserted claims. On December 19, 2013 and January 17, 2014, the PTAB issued decisions instituting review on all but four of the asserted claims. On January 14, 2014, the Company and all defendants filed a joint motion to stay the district court litigation. The Court granted the motion and stayed the case on January 16, 2014 pending a decision by the PTAB. Trial on the Covered Business Method Reviews at the PTAB is set for September 5, 2014. On February 3, 2014, Groupon filed a petition to the U.S. Court of Appeals for the Federal Circuit for mandamus on the district court's denial of its motion to transfer, which remains pending as of the date of this report.
On July 25, 2013, the Company entered into a Settlement Agreement and a License Agreement with MyLikes, Inc. to resolve the patent litigation that was pending in the U.S. District Court for the Eastern District of Texas, Tyler Division (Blue Calypso, Inc. v. MyLikes Inc. Case Nos. 6:12-CV-838, 6:13-cv-00376, 6:13-cv-00428 and 6:13-cv-00457). Pursuant to the Settlement Agreement and License Agreement, MyLikes has agreed to pay the Company the equivalent of a 3.5% royalty for use of the Company’s patents.
On August 16, 2013, the Company dismissed its patent infringement action against Living Social, Inc. (Civil Action No. 2:12cv518-JRG United States District Court for the Eastern District of Texas) pursuant to the terms of an otherwise confidential settlement and license agreement.
As part of the Company's settlement with Living Social, the Company's attorney is entitled to additional compensation for the value of certain non-monetary arrangements. As of December 31, 2013, the payment of such compensation is not probable or measurable.
In the normal course of business the Company may be involved in legal proceedings, claims and assessments arising in the ordinary course of business. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Legal fees for such matters are expensed as incurred and we accrue for adverse outcomes as they become probable and estimable.
F-22