UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: ~~September~~March 3031, ~~2016~~2017 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from N/A to N/A

Commission file number: 000-27145

SPENDSMART NETWORKS, INC.

(Name of small business issuer in its charter)

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

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

(877) 541-8398

(Issuer’s telephone number, including area code)

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

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

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

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

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

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

As of ~~November~~May 1125, ~~2016~~2017 there were 3945,~~275~~075,~~886~~571 shares outstanding of ~~the~~ the issuer’s common stock, par value $0.001 per share.

TABLE OF CONTENTS

PART I: Financial Information
Item 1 – Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015	2
	Condensed Consolidated Balance Sheets as of March 31, 2017 (unaudited) and December 31, 2016	2
	Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2016 and 2015 (unaudited)	3
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 (unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (unaudited)	4
	Condensed Consolidated Statements of Change in Stockholders’ Deficit for the nine months ended September 30, 2016 (unaudited)	5
	Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the three months ended March 31, 2017 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations		2221
Item 3 – Quantitative and Qualitative Disclosures about Market Risk		2824
Item 4 – Controls and Procedures		2824
PART II: Other Information
Item 1 – Legal Proceedings		3025
Item 1A – Risk Factors		3025
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		4225
Item 3 – Defaults upon Senior Securities		4225
Item 4 – Mine Safety Disclosures		4225
Item 5 – Other Information		4225
Item 6 – Exhibits		4225
Signatures		4326

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FORWARD LOOKING STATEMENTS

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

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Table of Contents

PART I: Financial Information

Item 1 – Financial Statements

SPENDSMART NETWORKS, INC.

Condensed Consolidated Balance Sheets

	September 30,	December 31,
	March 31,	December 31,
	2016	2015
	2017	2016
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$88185,~~045~~320	$~~470~~74,~~341~~523
Accounts receivable, net of allowance for doubtful accounts of $405,000 at September 30, 2016 and $295,759 at December 31, 2015	632,176	141,830
Accounts receivable, net of allowance for doubtful accounts of $669,461 at March 31, 2017 and $629,461 at December 31, 2016	332,204	292,368
Customer short-term notes receivable, net of allowance for doubtful accounts of $682,000 at September 30, 2016, and $632,422	105,417	276,168
Customer short-term notes receivable, net of allowance for doubtful accounts of $749,638 at March 31, 2017, and $767,138	17,037	26,850
Other current assets	58,389	11,100
at December 31, 2016
Total current assets	884,027	899,439
Other current assets	10,778	24,901
Total current assets	545,339	418,642
Long-term assets:
Customer long-term notes receivable, net of allowance for doubtful accounts of $348,000 at September 30, 2016, and $461,702 at December 31, 2015	119,696	199,669
Customer long-term notes receivable, net of allowance for doubtful accounts of $400,901 at March 31, 2017, and $399,401	5,987	15,264
Property and equipment, net of accumulated depreciation of $1,396,223 on September 30, 2016 and $1,035,960 on December 31, 2015	827,841	896,146
at December 31, 2016
Intangible assets, net of accumulated amortization of $771,434 on September 30, 2016 and $626,579 on December 31, 2015	1,425,720	1,570,575
Property and equipment, net of accumulated depreciation of $1,396,223 on March 31, 2017 and December 31, 2016	-	-
Other assets	18,274	18,274
Intangible assets, net of accumulated amortization of $833,001 on March 31, 2017 and $819,082 on December 31, 2016	385,081	399,000
Total long-term assets	2,391,531	2,684,664
Other assets	18,273	18,273
Other assets held for sale	-	-
TOTAL ASSETS	$954,680	$851,179
TOTAL ASSETS	$3,275,558	$3,584,103
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Convertible notes	$1,~~314~~829,~~280~~963	$1,~~817~~494,~~320~~174
Notes payable	-	70,262
Note payable, former CEO	65,000	65,000
Due to related party	65,000	100,000
Accounts payable and accrued liabilities	1,994,691	1,997,667
Accounts payable and accrued liabilities	1,889,480	1,867,233
Accrued interest payable	124,883	66,242
Accrued interest payable	55,843	23,090
Deferred revenue	740,196	748,774
Deferred revenue	814,064	751,912
Derivative liabilities - conversion option	44,659	88,242
Deferred acquisition related payable	-	10,000
Derivative liabilities - warrants	1,433,181	1,366,898
Cash received in connection with tender offer	-	661,424
Total current liabilities	6,232,573	5,826,997
Derivative liabilities - convertible options	2,711	179
Stockholders' deficit:
Derivative liabilities - warrants	2,343,255	-
Series C Preferred; $0.001 par value; 4,299,081 shares authorized; 3,443,061 and 3,443,061 shares issued and outstanding as of	3,444	3,444
Total current liabilities	6,484,633	5,301,420
March 31, 2017 and December 31, 2016, respectively
Total liabilities	6,484,633	5,301,420
Common stock; $0.001 par value; 300,000,000 shares authorized; 42,075,571 and 41,975,571 shares issued and outstanding as of	42,076	41,976
March 31, 2017 and December 31, 2016, respectively
Additional paid-in capital	94,721,131	94,438,312
Accumulated deficit	(100,044,544)	(99,459,550)
Total stockholders' deficit	(5,277,893)	(4,975,818)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$954,680	$851,179

Stockholders deficit:
Series C Preferred; $0.001 par value; 4,299,081 shares authorized; 3,690,729 and 3,700,729 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively	3,691	3,701
Common stock; $0.001 par value; 300,000,000 shares authorized; 39,275,886 and 20,458,761 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively	39,276	20,459
Additional paid-in capital	94,206,979	90,879,480
Accumulated deficit	(97,459,021)	(92,620,957)
Total stockholders' deficit	(3,209,075)	(1,717,317)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$3,275,558	$3,584,103

See accompanying notes to unaudited condensed consolidated financial statements.

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SPENDSMART NETWORKS, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

	For the three months ended September 30,		For the nine months ended September 30,
	For the three months ended March 31,
	2016	2015	2016	2015
	2017	2016
Revenues:
Mobile Marketing / Licensing	$1,~~528~~470,~~049~~828	$1,~~195~~430,~~576~~385	~~$4,569,678~~	~~$5,291,760~~
Total revenues	1,~~528~~470,~~049~~828	1,~~195~~430,~~576~~385	~~4,569,678~~	~~5,291,760~~
Operating expenses:
Selling and marketing	~~126~~123,~~777~~475	1398,~~955~~022	~~446,812~~	~~642,242~~
Personnel related	1,~~030~~233,~~774~~204	1,~~373~~463,~~065~~930	~~3,554,440~~	~~4,475,836~~
Mobile Platform Processing	~~301~~225,~~606~~595	~~433~~308,~~468~~914	~~909,649~~	~~1,036,965~~
Amortization of intangible assets	4813,~~285~~919	8448,~~660~~285	~~144,855~~	~~253,219~~
General and administrative	~~481~~314,~~280~~600	1703,~~332,498~~162	~~1,667,140~~	~~2,654,748~~
Bad debt	~~100~~35,~~531~~211	~~878~~26,~~472~~526	~~163,323~~	~~1,313,349~~
Change in fair value of earn-out liability	-	-	-	(58,754)
Total operating expenses	1,946,004	2,648,839
Total operating expenses	2,089,253	4,116,118	6,886,219	10,317,605
Loss from operations	(475,176)	(1,218,454)
Loss from operations	(561,204)	(2,920,542)	(2,316,541)	(5,025,845)
Non-operating income (expense):
Non-operating income (expense):
Interest income	3,882	14,319
Interest income	8,254	7,305	33,461	60,202
Interest expense	(74,211)	(62,192)
Interest expense	(33,733)	-	(104,323)	-
Amortization of debt discount	(16,789)	(267,028)
Other expense, net	(21,161)	-	(81,000)	-
Loss on extinguishment of debt	-	(288,618)
Amortization of debt discount	(28,143)	(188,972)	(388,683)	(325,910)
Inducement for exercise of warrants	-	(3,560,958)
Loss on extinguishment of debt	-	-	(415,689)	-
Change in fair value of derivatives	(22,700)	503,284
Inducement for exercise of warrants	-	-	(3,560,958)	-
Total non-operating income (loss)	(109,818)	(3,661,193)
Change in fair value of financial instruments	812,869	286,563	1,995,669	233,235
Net loss	$(584,994)	$(4,879,647)
Total non-operating income (loss)	738,086	104,896	(2,521,523)	(32,473)
Basic and diluted net loss per share	$(0.01)	$(0.15)
Net income (loss)	$176,882	$(2,815,646)	$(4,838,064)	$(5,058,318)
Basic and diluted weighted average common shares outstanding used in computing net income (loss) per share	42,038,904	31,725,292
Basic net income (loss) per share	$0.01	$(0.15)	$(0.13)	$(0.27)
Diluted net income (loss) per share	$(0.01)	$(0.15)	$(0.13)	$(0.27)
Basic weighted average common shares outstanding used in computing net income (loss) per share	39,315,995	18,840,637	36,877,988	18,667,766
Diluted weighted average common shares outstanding used in computing net income (loss) per share	51,454,161	18,840,637	36,877,988	18,667,766

See accompanying notes to unaudited condensed consolidated financial statements.

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SPENDSMART NETWORKS, INC. Condensed Consolidated Statement of Changes in Stockholders' Deficit For the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~ 2017 (unaudited)

	Series C Preferred Stock		Series A Preferred Stock		Common Stock		~~Additional Paid-in~~	~~Accumulated~~	~~Total Stockholder's~~
	Shares	Par Value	Shares	Par Value	Shares	Par Value	Paid-In Capital	Accumulated Deficit	Stockholders' Deficit
Balance as of December 31, 2015	3,700,729	$3,701	-	$-	20,458,761	$20,459	$90,879,480	$(92,620,957)	$(1,717,317)
Balance as of December 31, 2016	3,443,061	$3,444	-	$-	41,975,571	$41,976	$94,438,312	$(99,459,550)	$(4,975,818)
Conversions of preferred stock to common stock	(10,000)	(10)	-	-	60,000	60	(50)	-	-
Issuance of common stock for interest	-	-	-	-	100,000	100	1,900	-	2,000
Warrant exercises	-	-	-	-	17,895,859	17,896	2,308,566		2,326,462
Stock based compensation from stock options and warrants	-	-	-	-	-	-	280,919	-	280,919
Issuance of common stock for services	-	-	-	-	700,000	700	77,300	-	78,000
Net loss	-	-	-	-	-	-	-	(584,994)	(584,994)
Issuance of common stock for interest	-	-	-	-	161,266	161	13,339		13,500
Balance as of March 31, 2017	3,443,061	$3,444	-	$-	42,075,571	$42,076	$94,721,131	$(100,044,544)	$(5,277,893)
Warrant modification	-	-	-	-	-	-	43,895	-	43,895
Stock based compensation from stock options and warrants	-	-	-	-	-	-	884,449	-	884,449
Net loss	-	-	-	-	-	-	-	(4,838,064)	(4,838,064)
Balance as of September 30, 2016	3,690,729	$3,691	-	$-	39,275,886	$39,276	$94,206,979	$(97,459,021)	$(3,209,075)

See accompanying notes to unaudited condensed consolidated financial statements.

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SPENDSMART NETWORKS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	For the nine months ended
	For the three months ended
	September 30,
	March 31,
	2016	2015
	2017	2016
Cash flows from operating activities:
Net loss	$(4584,~~838,064~~994)	$(54,~~058~~879,~~318~~647)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation expense	~~360,262~~-	~~807~~110,~~002~~365
Amortization of intangible asset	~~144~~13,~~855~~919	~~253~~48,~~219~~285
Amortization of debt discount	~~388~~16,~~683~~789	~~325~~269,~~910~~028
Stock-based compensation	~~884~~280,~~449~~919	1433,~~053,508~~180
Issuance of common stock for services	912,~~500~~000	~~293~~132,~~166~~247
Change in fair value of financial instruments	(1,995,669)	(233,235)
Change in fair value of derivatives	22,700	(503,284)
Accrued interest income on notes receivable from third party	-	(27,339)
Accrued interest expenses on notes payable	58,641	71,739
Accrued interest expenses on notes payable	50,087	28,648
Inducement for exercise of warrants	-	3,560,958
Change in earn-out liability	-	(58,754)
Extinguishment of convertible debt	-	288,618
Inducement for exercise of warrants	3,560,958	-
Provision for bad debt	35,211	26,526
Extinguishment of convertible debt	415,689	-
Provision for bad debt	163,323	1,313,349
Changes in operating assets and liabilities:
Accounts receivable	(~~651~~83,~~880~~925)	(~~783~~144,~~913~~426)
Customer short-term notes receivable	7820,~~573~~191	~~(334~~47,~~023)~~231
Customer long-term notes receivable	~~170~~7,~~362~~777	~~(137~~77,~~461)~~258
Deferred revenue	62(8,~~152~~578)	(~~158~~90,~~118~~133)
Prepaid insurance	~~(47~~14,~~289)~~123	63,~~090~~675
Other assets	-	(18,741)
Accounts payable and accrued liabilities	(2,976)	(411,127)
Accounts payable and accrued liabilities	27,680	688,687
Net cash used in operating activities	(208,203)	(959,507)
Net cash used in operating activities	(1,134,329)	(2,040,323)
Cash flows from investing activities:
Proceeds from short-term notes receivable from third party	-	121,000
Software development costs	-	(179,647)
Payment of deferred acquisition payable-Intellectual Capital Mgmt, LLC	~~(10,000)~~-	(10,000)
Software development costs	(291,957)	(732,533)
Net cash used in investing activities	-	(189,647)
Purchase of property and equipment	-	(305,326)
Net cash used in investing activities	(301,957)	(926,859)
Cash flows from financing activities:
Net proceeds from warrant exercises related to tender offer	~~1,179,252~~-	-1,179,252
Proceeds from issuance of notes	-	200,000
Repayment of notes payable	-	(70,262)
Proceeds from issuance of related party financing	-	100,000
Repayment of notes to former CEO	-	(35,000)
Repayment of notes	(70,262)	(37,627)
Repayment of convertible notes	-	(200,000)
Repayment of notes to related parties	(35,000)	-
Proceeds from issuance of convertible debt	319,000	-
Repayment of convertible notes	(200,000)	-
Net cash provided by financing activities	319,000	873,990
Proceeds from issuance of convertible debt	180,000	1,488,500
Net increase (decrease) in cash and cash equivalents	110,797	(275,164)
Net cash provided by financing activities	1,053,990	1,750,873
Cash and cash equivalents at beginning of the period	74,523	470,341
Net decrease in cash and cash equivalents	(382,296)	(1,216,309)
Cash and cash equivalents at end of the period	$185,320	$195,177
Cash and cash equivalents at beginning of the period	470,341	1,242,155
Cash and cash equivalents at end of the period	$88,045	$25,846
Non-cash Investing and Financing Activities:
The Company had conversion of 47,500 shares of Series C preferred stock into 190,000 shares of common stock during the nine months ended September 30, 2015.
The Company issued 26,479,217 warrants in connection with the exercise of tender offer warrants during the three months ended March 31, 2016.
The Company issued 1,438,340 warrants in connection with convertible debt during the nine months ended September 30, 2015.
The Company had a debt discount of $30,470 in connection with convertible debt during the three months ended March 31, 2016.
The Company issued 26,479,217 warrants in connection with the exercise of tender offer warrants during the nine months ended September 30, 2016.
The Company issued 17,895,859 shares of Common Stock in connection with the exercise of tender offer warrants during the three months ended March 31, 2016.
The Company had a debt discount of $730,520 in connection with convertible debt during the nine months ended September 30, 2015.
The Company had a debt discount of $50,738 in connection with convertible debt during the nine months ended September 30, 2016.
The Company issued 17,895,859 shares of Common Stock in connection with the exercise of tender offer warrants during the nine months ended September 30, 2016.

See accompanying notes to unaudited condensed consolidated financial statements.

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SPENDSMART NETWORKS, INC. ~~Notes to Condensed Consolidated Financial Statements~~

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and Basis of Presentation

SpendSmart Networks, Inc. is a Delaware corporation (“the Company”). The Company brings value added products and mobile marketing solutions to consumers, merchants, businesses and ~~other~~government organizations. The Company is a publicly ~~businesses~~traded company trading on the OTCQB under the symbol “SSPC. ” The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary SpendSmart Networks, Inc., a California corporation (SpendSmart-CA). All material intercompany balances and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2015~~2016. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). All normal recurring adjustments which are necessary for the fair presentation of the results for the interim periods are reflected herein. Operating results for the ~~nine~~three-month ~~period~~periods ended ~~September~~March 3031, 2017 and 2016 are not necessarily indicative of ~~results~~ results to be expected for a full year.

2. Liquidity and Going Concern

As of December 31, ~~2015~~2016, the Company’s audited consolidated financial statements included an opinion containing an explanatory paragraph as to the uncertainty of the Company’s ability to continue as a going concern. The Company has continued to incur net losses through ~~September~~March 3031, ~~2016~~2017 and ~~has~~have yet to establish ~~profitable~~ profitable operations. These factors among others create a substantial doubt about the Company’s ability to continue as a going concern ~~at September 30, 2016~~. The Company’s unaudited consolidated financial statements as of and for the period ended ~~September~~March 3031, ~~2016~~2017 dodoes not contain any adjustments for this uncertainty.

InThe ~~an effort to reduce overhead, the~~ Company ~~reduced~~is ~~salaries~~currently ~~by 10%~~exploring ~~during~~other ~~the~~financing ~~first~~means ~~nine months of 2016 and issued options equal~~ to ~~the value of the reduction. The Company also currently plans to attempt to~~ raise additional required capital ~~through~~which may include the sale of ~~unregistered~~ shares of the Company’s preferred or common stock. All additional amounts raised will be used for our future investing and operating cash flow needs ~~as well as payment of previous debts~~. However, there can be no assurance that we will be successful in consummating ~~such~~additional financing. This description of our ~~recent~~ ~~financing and~~ future plans for financing does not constitute an offer to sell or the solicitation of an offer to buy ~~our~~ securities, nor shall such securities be offered or sold in the United States absent registration or an applicable exemption from the registration requirements and certificates evidencing such shares contain a legend stating the same.

3. Reclassification

Certain reclassifications were made to the ~~2015~~2016 financial statement presentation to conform to the ~~2016~~2017 financial statement presentation. ~~These reclassifications relate to immaterial balances from discontinued operations, which have been included in respective balances from continuing operations.~~

4. Summary of Significant Accounting Policies

The condensed consolidated financial statements have been prepared in accordance with GAAP.

Loans Receivable and Accounts Receivable

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

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SPENDSMART NETWORKS, INC. Notes to Condensed Consolidated Financial Statements

(Unaudited)

Use of Estimates

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

Revenue Recognition

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

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

●	there is persuasive evidence of an arrangement;

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

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

●	The collection of the related fees is probable.

Signed agreements are used as evidence of an arrangement. Electronic delivery occurs when we provide the customer with access to the software. The Company assesses whether a fee is fixed or determinable at the outset of the arrangement, primarily based on the payment terms associated with the transaction. The Company ~~offered~~assesses extended payment terms in 2014 and 2015 with regards to the setup fee with typical terms of payment due between one and three years from delivery of license. The Company no longer offers extended payment terms. The Company assessed collectability of the set-up fee based on a number of factors such as collection history and creditworthiness of the licensee. If the Company determines that collectability is not probable, revenue is deferred until collectability becomes probable, generally upon receipt of cash.

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

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

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

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

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

~~(Unaudited)~~Debt discount and issuance costs

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

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

Cash and cash equivalents

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

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

Property and Equipment

Property and equipment had been recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets (generally three to five years). Costs incurred for maintenance and repairs are expensed as incurred and expenditures for major replacements and improvements are capitalized and depreciated over their estimated remaining useful lives. Depreciation expense for the three ~~and nine~~ months ended ~~September~~ 30March 31, 2017 ~~2016~~ and ~~2015~~2016 was $0 ~~and $0, and $628,999 and $535,286, respectively~~. Property and equipment has been fully depreciated as of ~~September~~March 3031, ~~2016~~2017.

Software Capitalization

The Company accounts for computer software used in the business in accordance with ASC 350 “Intangibles-Goodwill and Other”. ASC 350 requires computer software costs associated with internal use software to be charged to operations as incurred until certain capitalization criteria are met. Costs incurred during the preliminary project stage and the post-implementation stages are expensed as incurred. Certain qualifying costs incurred during the application development stage are capitalized as property, equipment and software. These costs generally consist of internal labor during configuration, coding, and testing activities. Capitalization begins when (i) the preliminary project stage is complete, (ii) management with the relevant authority authorizes and commits to the funding of the software project, and (iii) it is probable both that the project will be completed and that the software will be used to perform the function intended. We capitalized $~~291,957~~0 and $~~732~~179,~~533~~646, respectively, in software development related to programming and coding for new product development for the ~~nine~~three months ended ~~September~~ 30March 31, ~~2016~~2017 and 2016, ~~2015~~respectively. Software amortization expense for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2016~~2017 and ~~2015~~ 2016 was $~~128,765~~0 and $~~360~~110,~~262~~365, respectively. ~~and~~As ~~$82,456~~of ~~and~~March ~~$178~~31,~~003,~~ 2017 all software costs have been ~~respectively~~fully amortized.

Valuation of Long-Lived Assets

The Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the estimated fair value of the assets. There has not been any impairment recorded during the ~~period~~quarters ended ~~September~~March 3031, 2017 or 2016.

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Income Tax Expense Estimates and Policies

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

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

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

Stock-Based Compensation

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

Net ~~Income (~~Loss) per Share

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

~~For~~Derivatives ~~the~~- ~~three~~Warrant months ended September 30, 2016 diluted earnings per common share are computed by the numerator effected by the gain on the change in fair value of the warrant liability and the denominator is increased to include the number of additional potential common shares from the warrants underlying the warrant liability.Liability

~~Diluted~~The ~~earnings~~Company ~~per~~accounts for the common ~~shares~~stock ~~were~~warrants ~~calculated~~granted ~~using~~and still outstanding as of March 31, 2017 in connection with certain financing transactions (“Transactions”) in accordance with the guidance contained in ASC 815-40-15-7D, "Contracts in ~~following~~Entity's ~~net~~Own ~~income~~Equity" ~~and~~whereby ~~weighted~~under ~~average~~that ~~shares~~provision ~~outstanding~~they do not meet the criteria for equity treatment and must be recorded as a liability. Accordingly, the ~~three~~Company ~~months~~classifies ~~ended~~the ~~September~~warrant instrument 30as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, ~~2016~~and any change in fair value is recognized in the Company's statements of operations. The fair value of the warrants issued by the Company in connection with the Transactions has been estimated using a Monte Carlo simulation.

	Three Months Ended September 30, 2016
Net income	$176,882
Gain on the change in fair value of the warrant liability	(389,658)
Diluted earnings	$(212,776)

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

Weighted average number of common and common equivalent shares outstanding:
Basic number of common shares outstanding	39,315,995
Dilutive effect of warrants	12,138,166
Diluted number of common and common stock equivalent shares outstanding:	51,454,161

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

(Unaudited)

For the nine months ended September 30, 2016 and the three and nine months ended September 30, 2015, diluted net loss per common share is equal to the basic net loss per common share since all potentially dilutive securities are anti-dilutive.

	September 30,
	2016	2015
Convertible notes	8,719,640	1,512,500
Common stock options	19,726,842	8,666,833
Investor warrants	37,995,156	23,861,368
Compensation warrants	1,981,667	1,895,000
Excluded potentially dilutive securities	68,423,305	35,935,701

Derivatives - Warrant Liability

The Company accounts for the common stock warrants granted and still outstanding as of September 30, 2016 in connection with certain financing transactions (“Transactions”) in accordance with the guidance contained in ASC 815-40-15-7D, "Contracts in Entity's Own Equity" whereby under that provision they do not meet the criteria for equity treatment and must be recorded as a liability. Accordingly, the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company's statements of operations. The fair value of the warrants issued by the Company in connection with the Transactions has been estimated using a Monte Carlo simulation.

The Company accounted for certain of its outstanding warrants issued in fiscal 2010, 2012 and 2013 (“2010 Warrants,” “2012 Warrants” and “2013 Warrants, respectively) as derivative liabilities. The 2010 Warrants were determined to be ineligible for equity classification due to provisions of the respective instruments that may result in an adjustment to their conversion or exercise prices. The Company recognized gains of $0 and $47,209 in the fair value of derivatives for the nine months ended September 30, 2016 and 2015, respectively. The Company recognized a gain of $0 and $19,221 in the fair value of derivatives for the three months ended September 30, 2016 and 2015, respectively. These derivative liabilities which arose from the issuance of the 2010 Warrants resulted in an ending balance of derivative liabilities of $0 as of September 30, 2016 and December 31, 2015, respectively. These warrants expired in November 2015.

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SPENDSMART NETWORKS, INC. Notes to Condensed Consolidated Financial Statements

(Unaudited)

The Company accounts for certain of its outstanding warrants issued in fiscal 2016 (“2016 Warrants”) as derivative liabilities. The 2016 Warrants were determined to be ineligible for equity classification due to provisions of the respective instruments that may result in an adjustment to their conversion or exercise prices. The Company recognized gains of $1,756,087 and $0 in the fair value of derivatives for the nine months ended September 30, 2016 and 2015, respectively. The Company recognized gains of $781,085 and $0 in the fair value of derivatives for the three months ended September 30, 2016 and 2015, respectively. These derivative liabilities which arose from the issuance of the 2016 Warrants resulted in an ending balance of derivative liabilities of $2,343,255 and $0 as of September 30, 2016 and December 31, 2015, respectively.

Debt discount and issuance costs

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

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

Derivatives – Bifurcated Conversion Option in Convertible Notes

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

The Convertible Notes issued during the year ended December 31, ~~2015~~2016 and 2015 are subject to anti-dilution adjustments that allow for ~~the~~ the reduction in the Conversion Price, as defined in the agreement, in in the event the Company subsequently issues equity securities including Common Stock or any security convertible or exchangeable for shares of Common Stock for a price less than the current conversion price. The Company bifurcated and accounted for the conversion option in accordance with ASC 815 as a derivative liability~~, since this conversion feature is not considered to be indexed to the Company’s own stock~~.

The Company’s derivative liability has been measured at fair value at ~~September~~March 3031, ~~2016~~2017 using a Monte-Carlo Simulation. Inputs ~~into~~ into the model require estimates, including such items as estimated volatility of the Company’s stock, estimated probabilities of additional financing, risk-free interest rate, and the estimated life of the financial instruments being fair valued. In addition, since the conversion price contains an anti-dilution adjustment, the probability that the Conversion Price of the Notes would decrease as the share price decreased was also incorporated into the valuation calculation.

~~The~~ The Company ~~modified~~recognized ~~two~~gains ~~existing~~of ~~Notes~~$43,583 ~~during~~and ~~the~~$179 ~~first~~in ~~quarter~~the ~~2016~~fair value ~~and~~of ~~three~~derivatives ~~existing~~for ~~Notes~~the ~~during~~three ~~the~~months ~~second~~ended ~~quarter~~March 31, 2017 and 2016, respectively. ~~According to~~These ~~FASB~~derivative ~~ASC~~liabilities ~~470-50,~~which arose from the issuance ~~modification~~of isthe ~~accounted~~convertible ~~for~~notes asresulted ain ~~debt~~an ending balance of ~~extinguishment~~derivative liabilities of $44,659 ~~whereby~~and ~~the~~$88,242 ~~new~~as ~~debt~~of ~~instrument~~March is31, ~~initially~~2017 ~~recorded~~and atDecember ~~fair~~31, ~~value~~2016, ~~and~~respectively. ~~that~~Subsequent ~~amount~~changes isto ~~used~~the tofair value ~~determine~~of the ~~debt~~ ~~extinguishment~~derivative ~~gain~~liabilities orwill ~~loss~~continue to require adjustments to their carrying value that will be ~~recognized~~recorded ~~and~~as other income (in the ~~effective~~event that their value decreases) or as other ~~rate~~expense of(in the ~~new~~event ~~instrument~~that their value increases). WeThe ~~recognized~~fair avalue of ~~loss~~these liabilities is estimated using Monte Carlo pricing models that are based on the ~~extinguishment~~ ofindividual ~~debt~~characteristics of ~~$415~~the Company’s warrants,~~689,~~ ofpreferred ~~which~~and ~~$106~~common stock,~~766~~ ~~was~~as ~~related~~well as toassumptions ~~the~~for ~~repricing~~volatility, ofremaining ~~warrants~~expected ~~for~~life, ~~the~~risk-free ~~nine~~interest ~~months~~rate ~~ended~~and, ~~September~~in 30some cases, ~~2016~~credit spread.

The Company recognized a gain of $239,582 and $186,026 in the fair value of derivatives for the nine months ended September 30, 2016 and 2015, respectively. These derivative liabilities which arose from the issuance of the convertible notes resulted in an ending balance of derivative liabilities of $2,711 and $179 as of September 30, 2016 and December 31, 2015, respectively. Subsequent changes to the fair value of the derivative liabilities will continue to require adjustments to their carrying value that will be recorded as other income (in the event that their value decreases) or as other expense (in the event that their value increases). The fair value of these liabilities is estimated using Monte Carlo pricing models that are based on the individual characteristics of the Company’s warrants, preferred and common stock, as well as assumptions for volatility, remaining expected life, risk-free interest rate and, in some cases, credit spread.

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SPENDSMART NETWORKS, INC. Notes to Condensed Consolidated Financial Statements

Fair value of assets and liabilities

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

●

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

●

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

●

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

The Company’s financial instruments are cash and cash equivalents, accounts receivable, notes receivable, notes payable, accounts payable and derivative liabilities. The recorded values of cash equivalents, accounts receivable, notes receivable and accounts payable approximate their fair values based on their short-term nature. The fair value of derivative liabilities is estimated using option pricing models that are based on the individual characteristics of our warrants, preferred and common stock, the derivative liability on the valuation date as well as assumptions for volatility, remaining expected life, risk10-~~free interest rate and, in some cases, credit spread. The derivative liabilities and earn-out liabilities are the only Level 3 fair value measures.~~

A summary of quantitative information with respect to valuation methodology and significant unobservable inputs used for the Company’s warrant liabilities that are categorized within Level 3 of the fair value hierarchy as of September 30, 2016 and December 31, 2015 is as follows:

A summary of quantitative information with respect to valuation methodology and significant unobservable inputs used for the Company’s conversion options that are categorized within Level 3 of the fair value hierarchy as of September 30, 2016 is as follows:

Date of Valuation	September 30, 2016
Stock Price	$0.06
Volatility (Annual)	112.2%
Strike Price	$0.15 - $0.75
Risk-free Rate	0.86 - 0.85%
Maturity Date	10/2/16 - 6/26/19

At September 30, 2016 and December 31, 2015, the estimated Level 3 fair values of the liabilities measured on a recurring basis are as follows:

		Fair Value Measurements at September 30, 2016:
	Carrying Value	Level 1	Level 2	Level 3
Derivative liability-warrants liability	$2,343,255	-	-	$2,343,255
Derivative liability – convertible options	$2,711	-	-	$2,711
Total securities	$2,345,966	$-	$-	$2,345,966
		Fair Value Measurements at December 31, 2015:
	Carrying Value	Level 1	Level 2	Level 3
Earn-out liability	$-	$-	$-	$-
Derivative liability – convertible options	$179	$-	$-	$179
Total securities	$179	$-	$-	$179

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

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

The following tables present the activity for Level 3 liabilities for the nine months ended September 30, 2016:

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

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

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

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

		Fair Value Measurements at March 31, 2017:

	Carrying Value	Level 1	Level 2	Level 3

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

		Fair Value Measurements at December 31, 2016:

	Carrying Value	Level 1	Level 2	Level 3

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

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

Fair Value Measurements Using Level 3 Inputs

	WarrantDerivative Liability	ConversionNotes	Earn-outLiability	Total
		Conversion
Balance - December 31, 2015	$-	179	-	$179
	Warrant	Option
Additions during the period	4,099,342	242,114	-	4,341,456
	Derivative Liability	Derivative Liability	Earn-out Liability	Total
Total Unrealized (gains) or losses include in net loss	(1,756,087)	(239,582)	-	(1,995,669)
Balance - December 31, 2016	$1,366,898	88,242	-	$1,455,140
Additions during the period	-	-	-	-
Total (gains) or losses include in net loss	66,283	(43,583)	-	22,700
Settlements during the period	-	-	-	-
Transfers in and/or out of Level 3	-	-	-	-
Balance - September 30, 2016	$2,343,255	2,711	-	$2,345,966
Balance - March 31, 2017	$1,433,181	44,659	-	$1,477,840

Advertising

The Company expenses advertising costs as incurred. The Company has no existing arrangements under which the Company provides or receives advertising services from others for any consideration other than cash. Advertising expenses (primarily in the form of Internet direct marketing) totaled $4967,~~537~~421 and $~~102~~31,~~949~~809 for the three months ended ~~September~~March 3031, ~~2016~~2017 and ~~2015, respectively. Advertising expenses (primarily in the form of Internet direct marketing) totaled $125,607 and $255,517 for the nine months ended September 30,~~ 2016 ~~and 2015~~, respectively.

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Litigation

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

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

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

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

Intangible assets

Intangible assets currently consist of intellectual property/technology~~, customer~~ ~~lists, and trade-name/marks~~ acquired in business combinations under the purchase method of accounting are recorded at fair value net of accumulated amortization since the acquisition date. Amortization is calculated using the straight line method over the estimated useful lives atof ~~the~~10 ~~following annual rates:~~years.

	Useful Lives
IP/technology	10
Trade-name/marks	10

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

The Company ~~reviews~~evaluates ~~its~~the ~~finite-lived~~recoverability ~~intangible~~of ~~assets~~identifiable ~~for~~intangible ~~impairment~~assets whenever events or changes in circumstances indicate that ~~the~~an intangible asset’s carrying amount ofmay ~~finite-lived~~not ~~intangible~~be ~~asset~~recoverable. Such ~~may~~circumstances could include, but are not limited to (1) a besignificant ~~recoverable.~~decrease ~~Recoverability~~in the market value of an asset, (2) a significant ~~finite-lived~~adverse ~~intangible~~change ~~asset~~in the extent or manner in which an asset is ~~measured~~used, byor a(3) ~~comparison~~an accumulation of ~~its~~costs significantly in excess of the amount originally expected for the acquisition of an asset. The Company measures the carrying amount toof the asset against the estimated undiscounted future cash flows ~~expected~~associated with toit. beShould ~~generated~~the bysum of the expected future net cash flows be ~~asset.~~less Ifthan the ~~asset~~carrying isvalue ~~considered~~of tothe beasset ~~impaired~~being evaluated, ~~the~~ an impairment to loss would be recognized. isThe ~~measured~~impairment byloss would be calculated as the amount by which the carrying ~~amount~~ value of the asset exceeds ~~the~~its fair value. ofThe ~~the~~fair ~~asset~~value is measured based on quoted market prices, ~~which~~if isavailable. If quoted market prices are not ~~determined~~available, the estimate of fair value is based on various valuation techniques, including the discounted ~~cash~~value of estimated future cash flows. ~~Amortization~~The evaluation of asset impairment requires the Company to ~~intangible~~make ~~assets~~assumptions ~~was~~about ~~$144,855~~future ~~and~~cash ~~$253,219~~flows ~~for~~over the ~~nine~~life ~~months~~of the asset ~~ended~~being ~~September~~evaluated. ~~30,~~These ~~2016~~assumptions ~~and~~require ~~2015,~~significant ~~respectively,~~judgment and actual ~~$48,285~~results may differ from assumed and ~~$84,660~~ ~~for~~estimated amounts. During the ~~three~~year ~~months~~ ended ~~September~~December 3031, 2016, ~~and~~the ~~2015~~Company recorded an impairment loss of $979,072 related to an intangible ~~respectively~~asset.

~~According~~Recently toIssued ~~the Financial~~ Accounting Standards Board Accounting Standards Codification (“ASC”) 360 (“ASC 360”), a long-lived asset (group) that is held and used should be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount (book value) of the long-lived asset (group) might not be recoverable (i.e. information indicates that an impairment might exist). As a result, companies are not required to perform an impairment analysis (i.e. test the asset (group) for recoverability and potentially measure an impairment loss) if indicators of impairment are not present. Instead, entities would assess the need the need for an impairment write-down only if an indicator of impairment is present. Companies are responsible for routinely assessing whether impairment indicators are present.Pronouncements

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

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SPENDSMART NETWORKS, INC. Notes to Condensed Consolidated Financial Statements

(Unaudited)

Recently Issued Accounting Pronouncements

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

OnIn ~~May~~June 282016, ~~2014,~~ the FASB issued ASU ~~2014~~2016-0913, ~~Revenue~~"Financial ~~from~~Instruments ~~Contracts~~– ~~with~~Credit ~~Customers~~Losses as(Topic ~~amended~~326): Measurement of Credit Losses on Financial Instruments" (~~Topic~~ASU ~~606~~2016-13), ~~with~~that anrequires ~~effective~~entities to use ~~date~~a ~~for~~new ~~annual~~impairment ~~reporting~~model ~~periods~~based ~~beginning~~on ~~after~~expected ~~December~~losses. ~~15,~~Under this new ~~2017,~~model ~~including~~an ~~interim~~entity ~~periods~~would ~~within~~recognize ~~that~~an ~~reporting~~impairment ~~period,~~allowance ~~for~~equal to ~~public~~its ~~business~~current ~~entities~~estimate of credit losses on financial assets measured at amortized cost. ~~Earlier~~ASU ~~application~~2016-13 is ~~permitted~~effective ~~only~~for asus beginning ofJanuary ~~annual~~1, ~~reporting~~2020 ~~periods~~with ~~beginning~~early ~~after~~adoption ~~December~~permitted ~~15,~~January ~~2016~~1, 2019. ~~including~~Credit ~~interim~~losses ~~reporting~~under ~~periods~~the ~~within~~new ~~that~~model ~~reporting~~will ~~period.~~consider relevant ~~The~~information ~~Company~~about ispast ~~evaluating~~events, ~~the~~current ~~impact,~~conditions ifand ~~any~~reasonable and supportable forecasts, resulting in recognition of lifetime expected credit losses. We are currently evaluating the ~~pronouncement~~impact of ~~will~~adopting ~~have~~this guidance on our ~~financial~~consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (“ASU 2014-15”), which states management should evaluate whether there are conditions or events, considered in the aggregate, that raise a substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management’s evaluation should be based on relevant conditions and events that are known and likely to occur at the date that the financial statements are issued. ASU 2014-15 will be effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter, however, early application is permitted. Management does not expect the adoption of ASU 2014-15 to have a material impact on the Company’s consolidated financial statements, although there may be additional disclosures upon adoption.

On March 30, 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 will take effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early application permitted. Management does not expect the adoption of ASU 2016-09 to have a material impact on the Company’s consolidated financial statements, although there may be additional disclosures upon adoption.

Segments

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

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

Management reviews accounts receivable, short-term and long-term notes receivable on a monthly basis to determine if any receivables are potentially uncollectible. An allowance for doubtful accounts is determined based on a combination of historical experience, length of time outstanding, customer credit worthiness, and current economic trends. We recorded a bad debt expense of $~~163~~35,~~323~~211 during the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2017 and wrote off ~~uncollectable~~ uncollectable accounts during the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~ 2017 in the amount of $~~119~~11,~~006~~211. As of ~~September~~March 3031, ~~2016~~2017, the Company ~~had~~has recorded an allowance for doubtful accounts of $1,~~435~~820,000.

Notes receivable aged over 30 days past due are considered delinquent and notes receivable aged over 60 days past due with known collection issues are placed on non-accrual status. Interest revenue is not recognized on notes receivable while on non-accrual status. Cash payments received on non-accrual receivables are applied towards the principal. When notes receivable on non-accrual status are again less than 60 days past due, recognition of interest revenue for notes receivable is resumed. The Company charges interest rates on notes receivable averaging 1413%. The Company recorded $333,~~461~~882 in interest income for the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2017.

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

	March 31, 2017

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

	December 31, 2016

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

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SPENDSMART NETWORKS, INC. Notes to Condensed Consolidated Financial Statements

(Unaudited)

	September 30, 2016
	Gross		Reserve		Net
	Current	Long-Term	Current	Long-Term	Current	Long-Term
Customer Notes Receivable	787,417	467,696	682,000	348,000	105,417	119,696
Accounts Receivable	1,037,176	-	405,000	-	632,176	-

	December 31, 2015
	Gross		Reserve		Net
	Current	Long-Term	Current	Long-Term	Current	Long-Term
Customer Notes Receivable	908,590	661,371	632,422	461,702	276,168	199,669
Accounts Receivable	437,589	-	295,759	-	141,830	-

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

	Notes Receivable		Accounts Receivable
	Notes Receivable Reserve		Accounts Receivable Reserve
	Current	Long-Term	Current
Balance at December 31, 2015	$632,422	$461,702	$295,759
Balance at December 31, 2016	$767,138	$399,401	$629,461
Incremental Provision	92,178	(90,389)	161,534
Incremental (Reduction in) Provision	(10,378)	1,500	44,089
Recoveries	-	-	~~800~~-
Charge offs	(427,~~600~~122)	~~(23,313)~~-	(534,~~093~~089)
Balance at September 30, 2016	$682,000	$348,000	$405,000
Balance at March 31, 2017	$749,638	$400,901	$669,461

The allowance for doubtful accounts as a percentage of total receivables was approximately 6384% as of ~~September~~March 3031, ~~2016~~2017 and approximately 6984% as of December 31, ~~2015~~2016.

The Company received a Secured Convertible Promissory Note (the “Note”) for a principal amount of $410,000 from a third party in September 2014. The Note bears interest at the rate of 5.25% per annum and matured in four months. For the nine months ended September 30, 2015, the Company had recorded $12,846 of interest income from this Note. $121,000 of the principal amount was paid during the nine months ended 2015. The remaining Note balance of $322,513 was written off as of the year ended December 31, 2015.

6. Common Stock and Warrants

Common stock

During the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2017, the ~~company~~Company issued 17100,~~895,859 shares of common stock related to the tender offer. The Company issued 700,~~000 shares of common stock ~~related to services rendered~~ and recognized ~~expense of~~ $782,000 ~~and issued 161,266 shares of common stock related to interest due and recognized~~ expense ~~of $13,500. 10,000 shares of Series C Stock converted to~~for ~~60,000~~services ~~shares of common shares during the nine months ended September 30, 2016~~rendered.

During the ~~nine~~three months ended ~~September~~March 3031, ~~2015~~2016, the company issued ~~didn’t~~1,669,205 ~~issue~~shares ~~any~~of common stock ~~for~~and ~~services.~~recognized ~~41,500~~expense ~~shares~~ of ~~Series~~ ~~C Stock converted to 166~~$132,~~000 common shares during the nine~~247 ~~months~~for ~~ended~~services ~~September 30, 2015~~rendered.

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SPENDSMART NETWORKS, INC. Notes to Condensed Consolidated Financial Statements

(Unaudited)

Tender Offer and Debt Conversion

Between December 11, 2015 and February 3, 2016, the Company entered into agreements with investors, pursuant to which on February 3, 2016, warrant holders exercised 12,270,846 Warrants to purchase an aggregate of 12,270,846 shares of our common stock for gross proceeds of $1.84 million. The Company issued new warrants to purchase an aggregate of 26,479,217 shares of common stock at an exercise price of $0.15 per share, in consideration for the immediate exercise of the warrants. In August, 2016, the exercise price on 13,209,609 of these warrants was reduced to $0.01, as the Company had not met its six month targets related to these warrants. The following paragraph discusses the accounting treatment related to this reduction.

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

In connection with the tender offer, investors converted $843,751 in Convertible Notes at a conversion price of $0.15 per share into 5,625,013 shares of our common stock ~~during the first quarter, 2016~~.

On July 19, 2016, the Company issued the following Convertible Promissory Notes: Joe Proto ($40,000), John Eyler ($40,000), Francis J. Liddy ($20,000), Isaac Blech ($40,000), and Transpac Investments Ltd. ($40,000). All of the individuals listed are members of the board of directors. The Convertible Promissory Notes bear interest at the rate of 9%, have a six month maturity date, and a mandatory conversion into an upcoming financing in the event the Company closes the financing and receives gross proceeds totaling at least $200,000. The conversion rate will be at the same terms of the financing. We recorded $1,598 in interest expense for the three and nine months ended September 30, 2016.-15-

~~On March~~Table ~~30 and 31, 2015, the Company closed on a private offering and issued and sold 11.25 units (the “Units”) to investors with each such Unit consisting~~ of a 9% Convertible Promissory Note with the principal face value of $50,000 (the “Notes”) and a warrant to purchase 66,667 shares of the Company’s common stock (the “Warrant”). The Company also agreed to provide piggy-back registration rights to the holders of the Units. The Notes have a term of twelve (12) months, pay interest semi-annually at 9% per annum and can be voluntarily converted by the holder into shares of common stock at an exercise price of $0.75 per share, subject to adjustments for stock dividends, splits, combinations and similar events as described in the Notes. In addition, if the Company issues or sells common stock at a price below the conversion price then in effect, the conversion price of the Notes shall be adjusted downward to such price but in no event shall the conversion price be reduced to a price less than $0.50 per share. The Warrants have an exercise price of $1.00 per share and have a term of four years. The holders of the Warrants may exercise the Warrants on a cashless basis for as long as the shares of common stock underlying the Warrants are not registered on an effective registration statement. The Company raised gross proceeds of $562,500 and issued warrants to acquire 750,004 shares of common stock. The relative fair value ascribed to the 750,004 warrants issued was $171,875 and was recorded to additional paid-in capital.Contents

~~The embedded conversion feature was bifurcated and accounted for as a derivative liability at $164,300 on the day of issuance~~7. ~~The remaining~~Convertible ~~proceeds~~Promissory were allocated based on the relative fair value of the debt and the warrant, and accordingly, $336,175 of debt discount was recorded at issuance and was amortized over the term of the debt using the effective interest method. The amount of debt discount amortized for the nine months ended September 30, 2016 was $119,479.Notes

OnDuring ~~March 29, 2016,~~ the ~~Company~~three ~~amended~~months ~~the~~ended March 3031, ~~2015~~2017, 9%the Company issued five Convertible Promissory ~~Note~~Notes ~~with~~aggregating ~~a principal amount of~~ $~~300~~319,000 ~~as follows: the maturity date was extended~~ to ~~September 29, 2016, the~~related ~~conversion price was lowered to $0~~parties.15 ~~per~~The ~~share,~~Convertible ~~the~~Promissory ~~provision limiting~~Notes ~~the~~bear ~~conversion~~an ~~price~~interest ~~adjustment~~at ~~to that of~~ the ~~Series C~~ ~~Preferred~~rate ~~Stock~~of ~~was removed~~9%, ~~and~~have ana ~~option~~six tomonth ~~be repaid prior to the~~ maturity date, inand ~~the~~a ~~event the Company raises capital in excess~~voluntary ofconversion ~~three~~into ~~million~~an ~~dollars~~upcoming ~~was~~financing ~~added. The Company also amended the warrant issued~~ in ~~conjunction with~~ the ~~Convertible~~event ~~Promissory Note reducing~~ the ~~exercise price to $0.15 and issued a new warrant to~~Company ~~purchase~~closes ~~400,002 shares of~~ the ~~Company's~~financing ~~common stock with a $0.15 exercise price~~ and areceives ~~three~~gross ~~year~~proceeds ~~expiration.~~totaling ~~According~~at toleast ~~FASB ASC 470-50~~$200,000. ~~the~~The ~~modification~~conversion israte ~~accounted~~will ~~for~~be ~~as a debt extinguishment, whereby the new debt instrument is initially recorded~~ at ~~fair value, and that amount is used to determine~~ the ~~debt~~ ~~extinguishment~~same ~~gain~~terms ~~or loss to be recognized and the effective rate~~ of the ~~new instrument~~ financing. We ~~recognized~~recorded a$3,815 ~~loss~~in oninterest ~~the extinguishment~~expense ~~of debt of $147,566~~ for the ~~nine~~ three months ended ~~September~~ 30March 31, ~~2016~~2017.

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

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

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

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

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

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

OnDuring ~~March 30, 2016,~~ the ~~Company~~year ~~amended~~ended ~~the~~December ~~March 30~~31, 2015, 9%the Company issued Convertible Promissory ~~Note~~Notes ~~with~~to ainvestors in the principal amount of $~~262~~150,~~500~~000, ~~as follows:~~$150,000, ~~the~~$287,333, ~~maturity~~and ~~date~~$48,000. ~~was~~The ~~extended~~Notes tofeature ~~September 30, 2016, the~~a mandatory conversion ~~price~~feature ~~was~~obligating ~~lowered~~the holder to ~~$0.15~~participate and ~~per~~apply ~~share,~~ the ~~provision limiting~~principal ~~the~~and ~~conversion~~interest ~~price~~into ~~adjustment~~a to“Qualified Financing” ~~that~~meaning ofa ~~the~~financing ~~Series~~taking ~~C Preferred~~place ~~Stock~~prior ~~was~~to ~~removed~~January 31, ~~and~~2016, anwherein ~~option~~the toCompany bereceives ~~repaid~~gross ~~prior~~proceeds tototaling at ~~the~~least ~~maturity~~$1,000,000. ~~date~~In in the event the ~~Company~~entire ~~raises~~principal ~~capital~~plus ~~in excess~~accrued ofinterest ~~three~~under ~~million~~this ~~dollars~~Note ~~was~~is ~~added.~~not ~~The~~eligible ~~Company~~for ~~also~~conversion ~~amended~~into ~~the~~a ~~warrant~~Qualified ~~issued~~Financing, inthen ~~conjunction~~any ~~with~~remaining ~~the~~balance ~~Convertible~~of ~~Promissory~~this Note shall ~~reducing~~be ~~the~~converted ~~exercise~~into ~~price~~restricted tocommon ~~$0.15~~stock ~~and~~at ~~issued~~the aprice ~~new~~of ~~warrant to~~the ~~purchase~~Qualified ~~350,002~~Financing ~~shares~~and ofHolder ~~the~~shall ~~Company's~~receive ~~common~~three ~~stock~~(3) ~~with~~times ~~a $0.15~~any ~~exercise~~warrant ~~price~~coverage ~~and~~provided afor ~~three~~in ~~year~~the ~~expiration~~Qualified Financing. ~~According~~The toNotes ~~FASB~~bear ~~ASC~~interest ~~470-50,~~at ~~the~~nine ~~modification~~percent isper ~~accounted~~annum ~~for~~and ashas a ~~debt extinguishment,~~maturity ~~whereby~~date ~~the~~of six ~~new~~months. ~~debt~~The ~~instrument~~embedded isconversion ~~initially recorded~~feature atof ~~fair~~the ~~value,~~note was bifurcated and ~~that~~accounted ~~amount~~for isas ~~used~~a toderivative ~~determine~~liability ~~the~~at ~~debt~~approximately ~~extinguishment~~$17,379 ~~gain~~on orthe ~~loss~~day toof beissuance. ~~recognized~~As ~~and~~part ~~the~~of ~~effective~~the ~~rate~~closing of the ~~new~~Tender ~~instrument.~~Offer, Wethese ~~recognized~~notes aconverted ~~loss~~into ~~on the~~4,291,679 ~~extinguishment~~shares of ~~debt~~common ofstock ~~$141,052~~and ~~for~~ the ~~nine~~investors ~~months~~received ~~ended~~12,875,037 ~~September~~warrants ~~30,~~with ~~2016~~a three year term at an exercise price of $0.15.

During the second quarter 2015, the Company closed on private offerings and issued and sold 11.00 units (the “Units”) to investors with each such Unit consisting of a 9% Convertible Promissory Note with the principal face value of $50,000 (the “Notes”) and a warrant to purchase 66,667 shares of the Company’s common stock (the “Warrant”). The Company also agreed to provide piggy-back registration rights to the holders of the Units. The Notes have a term of twelve (12) months, pay interest semi-annually at 9% per annum and can be voluntarily converted by the holder into shares of common stock at an exercise price of $0.75 per share, subject to adjustments for stock dividends, splits, combinations and similar events as described in the Notes. In addition, if the Company issues or sells common stock at a price below the conversion price then in effect, the conversion price of the Notes shall be adjusted downward to such price but in no event shall the conversion price be reduced to a price less than $0.50 per share. The Warrants have an exercise price of $1.00 per share and have a term of four years. The holders of the Warrants may exercise the Warrants on a cashless basis for as long as the shares of common stock underlying the Warrants are not registered on an effective registration statement. The Company raised gross proceeds of $550,000 and issued warrants to acquire 733,336 shares of common stock. The relative fair value ascribed to the 750,004 warrants issued was $171,875 and was recorded to additional paid-in capital.

The embedded conversion feature was bifurcated and accounted for as a derivative liability at $228,700 on the day of issuance. The remaining proceeds were allocated based on the relative fair value of the debt and the warrant, and accordingly, $394,345 of debt discount was recorded at issuance and is being amortized over the term of the debt using the effective interest method. The amount of debt discount amortized for the nine months ended September 30, 2016 was $164,290.

During the second quarter 2016, the Company amended three of the outstanding 9% Convertible Promissory Notes with principal amounts of $275,000, $75,000 and $150,000 as follows: the maturity dates were extended to November 5, 2016, September 2, 2016, and September 26, 2016, respectively; the conversion price was lowered to $0.15 per share, the provision limiting the conversion price adjustment to that of the Series C Preferred Stock was removed, and an option to be repaid prior to the maturity date in the event the Company raises capital in excess of three million dollars was added. The Company also amended the warrant issued in conjunction with the Convertible Promissory Note reducing the exercise price to $0.15 and issued new warrants to purchase 666,669 shares of the Company's common stock with a $0.15 exercise price and a three year expiration. According to FASB ASC 470-50, the modification is accounted for as a debt extinguishment, whereby the new debt instrument is initially recorded at fair value, and that amount is used to determine the debt extinguishment gain or loss to be recognized and the effective rate of the new instrument. We recognized a loss on the extinguishment of debt of $127,071 for the second quarter 2016.

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

On October 5, 2015, the Company issued a Convertible Promissory Note to an investor in the principal amount of $150,000. The Note features a mandatory conversion feature obligating the holder to participate and apply the principal and interest into a “Qualified Financing” meaning a financing taking place prior to January 31, 2016, wherein the Company receives gross proceeds totaling at least $1,000,000. In the event the entire principal plus accrued interest under this Note is not eligible for conversion into a Qualified Financing, then any remaining balance of this Note shall be converted into restricted common stock at the price of the Qualified Financing and Holder shall receive three (3) times any warrant coverage provided for in the Qualified Financing. The Note bears interest at nine percent per annum and has a maturity date of six months. The embedded conversion feature of the note was bifurcated and accounted for as a derivative liability at approximately $17,127 on the day of issuance. As part of the closing of the Tender Offer, these notes converted into 1,029,918 shares of common stock and the investor received 3,089,754 warrants with a three year term at an exercise price of $0.15.

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SPENDSMART NETWORKS, INC. Notes to Condensed Consolidated Financial Statements

(Unaudited)

On November 12, 2015, the Company issued a Convertible Promissory Note to an investor in the principal amount of $150,000. The Note features a mandatory conversion feature obligating the holder to participate and apply the principal and interest into a “Qualified Financing” meaning a financing taking place prior to January 31, 2016, wherein the Company receives gross proceeds totaling at least $1,000,000. In the event the entire principal plus accrued interest under this Note is not eligible for conversion into a Qualified Financing, then any remaining balance of this Note shall be converted into restricted common stock at the price of the Qualified Financing and Holder shall receive three (3) times any warrant coverage provided for in the Qualified Financing. The Note bears interest at nine percent per annum and has a maturity date of six months. The embedded conversion feature of the note was bifurcated and accounted for as a derivative liability at approximately $50 on the day of issuance. As part of the closing of the Tender Offer, these notes converted into 1,000,987 shares of common stock and the investor received 3,002,961 warrants with a three year term at an exercise price of $0.15.

On November 13, 2015, the Company issued Convertible Promissory Notes to five investors in the principal amount of $287,333. The Notes feature a mandatory conversion feature obligating the holder to participate and apply the principal and interest into a “Qualified Financing” meaning a financing taking place prior to January 31, 2016, wherein the Company receives gross proceeds totaling at least $1,000,000. In the event the entire principal plus accrued interest under this Note is not eligible for conversion into a Qualified Financing, then any remaining balance of this Note shall be converted into restricted common stock at the price of the Qualified Financing and Holder shall receive three (3) times any warrant coverage provided for in the Qualified Financing. The Notes bears interest at nine percent per annum and has a maturity date of six months. The embedded conversion feature of the notes was bifurcated and accounted for as a derivative liability at approximately $172 on the day of issuance. As part of the closing of the Tender Offer, these notes converted into 1,937,105 shares of common stock and the investors received 5,811,315 warrants with a three year term at an exercise price of $0.15.

On November 16, 2015, the Company issued a Convertible Promissory Note to an investor in the principal amount of $48,000. The Note features a mandatory conversion feature obligating the holder to participate and apply the principal and interest into a “Qualified Financing” meaning a financing taking place prior to January 31, 2016, wherein the Company receives gross proceeds totaling at least $1,000,000. In the event the entire principal plus accrued interest under this Note is not eligible for conversion into a Qualified Financing, then any remaining balance of this Note shall be converted into restricted common stock at the price of the Qualified Financing and Holder shall receive three (3) times any warrant coverage provided for in the Qualified Financing. The Note bears interest at nine percent per annum and has a maturity date of six months. The embedded conversion feature of the note was bifurcated and accounted for as a derivative liability at approximately $30 on the day of issuance. As part of the closing of the Tender Offer, these notes converted into 323,669 shares of common stock and the investor received 971,007 warrants with a three year exercise term at an exercise price of $0.15.

8. Convertible Preferred Stock

Series A Preferred Stock

At ~~September~~March 3031, ~~2016~~2017 and December 31, ~~2015~~2016, the Company had 0 ~~shares~~ shares of Series A Cumulative Convertible Preferred Stock (the “Series A Stock”) outstanding.

Series B Preferred Stock

At ~~September~~March 3031, ~~2016~~2017 and December 31, ~~2015~~2016, the Company had 0 ~~shares~~ shares of Series B convertible preferred stock (“Series B Stock”) outstanding.

Series C Convertible Preferred Stock

At ~~September~~March 3031, ~~2016~~2017 and December 31, ~~2015~~2016, the Company had ~~3,690,729~~ ~~and~~ 3,~~700~~443,~~729~~ 061 shares, ~~respectively,~~ of Series C convertible preferred stock (“Series C Stock”) outstanding that were issued to investors for $3.00 ~~per~~ per share. ~~10,000~~No shares of Series C Stock converted to ~~60,000~~common shares ~~common stock~~ during the ~~nine~~three months ended ~~September 30,~~March ~~2016~~31, 2017.

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~~SPENDSMART NETWORKS, INC~~9. ~~Notes to~~ ~~Condensed~~Net ~~Consolidated~~Loss ~~Financial~~per ~~Statements~~Share Applicable to Common Stockholders

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

9. Net Income (Loss) per Share Applicable to Common Stockholders

Options, warrants, and convertible debt outstanding were all considered anti-dilutive for the nine months ended September 30, 2016 and 2015 due to net losses.

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

	For the nine months ended September 30,
	For the three months ended March 31,
	2016	2015
	2017	2016
Convertible notes	891,~~719~~498,~~640~~100	14,~~512~~645,~~500~~054
Common stock options	1930,~~726~~846,~~842~~946	817,~~666~~088,~~833~~129
Investor warrants	37,~~995~~806,~~156~~931	2337,~~861~~960,~~368~~774
Compensation warrants	1,~~981~~285,~~667~~000	12,~~895~~098,~~000~~333
Excluded potentially dilutive securities	68161,~~423~~436,~~305~~977	3561,~~935~~792,~~701~~290

10. Stockholders’ Equity

Stock Options and Warrants

Warrant activity (including warrants issued to investors and for consulting and advisory services) for the ~~nine~~three months ended ~~September~~ 30March 31, ~~2016~~2017 and ~~2015~~2016 was as follows:

	For the nine months ended
	For the three months ended
	September 30,
	March 31,
	2016	2015
	2017	2016
Beginning balance outstanding	2639,~~397~~818,~~410~~347	2326,~~933~~397,~~922~~410
Expired during the year	(2,045,624)	(160,894)
Warrants issued during the period:
Exercised during the year	(12,270,853)	-
Expired during the period	(726,416)	(546,667)
Issued in connection with issuance of convertible notes	1,416,673	1,983,340
Exercised during the period	-	(12,270,853)
Issued in connection with tender offer exercise	26,479,217	-
In connection with tender offer exercise	-	26,479,217
Ending balance outstanding	39,~~976~~091,~~823~~931	2540,~~756~~059,~~368~~107

~~-19-~~ Stock option activity during the following periods was as follows:

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

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~~SPENDSMART NETWORKS,~~The ~~INC.~~numbers and exercise prices of all options and warrants ~~Notes to~~outstanding ~~Condensed~~at ~~Consolidated~~March ~~Financial~~31, ~~Statements~~2017 are as follows:

(Unaudited)

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

Effective July 22, 2016, the Company cancelled the following stock and stock options granted to its board of directors on March 21, 2016: (a) Joseph Proto, 350,000 restricted shares of common stock; (b) John Eyler, options to purchase 464,331 shares of common stock; (c) Pat Kolenik 350,000 restricted shares of common stock; (d) Chris Leong, options to purchase 464,331 shares of common stock, and (e) Isaac Blech, options to purchase 663,330 shares of common stock.

The numbers and exercise prices of all options and warrants outstanding at September 30, 2016 are as follows:

Shares Outstanding	Weighted Average Exercise Price	Expiration Fiscal Period
158,476	8.37	4th Qtr, 2016
34,749	7.99	1st Qtr, 2017
1,349,183	6.90	2nd Qtr, 2017
536,500	1.14	3rd Qtr, 2017
1,162,088	6.45	4th Qtr, 2017
10,000	6.60	1st Qtr, 2018
750,000	0.25	4th Qtr, 2018
37,548,317	0.37	1st Qtr, 2019
1,850,007	0.44	2nd Qtr, 2019
1,324,002	0.93	3rd Qtr, 2019
2,603,000	1.15	4th Qtr, 2019
486,250	0.92	1st Qtr, 2020
1,704,446	0.19	4th Qtr, 2020
4,785,376	0.12	1st Qtr, 2021
2,592,997	0.09	2nd Qtr, 2021
2,674,940	0.06	3rd Qtr, 2021
133,334	7.05	4th Qtr, 2022
59,703,665

Stock-based Compensation

Results of operations for the three months ended ~~September~~March 3031, ~~2016~~ 2017 and 2016 ~~2015~~ include stock based compensation costs totaling $~~192~~280,~~842 and~~919 and $~~199~~433,~~207~~180, respectively, all of which was charged to personnel related expenses.

~~Results~~For purposes of ~~operations~~accounting for ~~the~~stock ~~nine~~based ~~months~~compensation, ~~ended~~the ~~September~~fair value ~~30,~~of ~~2016~~ each option and ~~2015~~warrant ~~include~~award ~~stock~~is ~~based~~estimated ~~compensation~~on ~~costs~~the ~~totaling~~date ~~$884,449~~of ~~and~~grant ~~$1,053,508,~~using ~~respectively,~~the ~~all~~Black-Scholes-Merton ofoption ~~which~~pricing ~~was~~formula. Compensation ~~charged~~expense tois ~~personnel related~~recognized ~~expenses~~over the service period. The following weighted average assumptions were utilized for the calculations during the three months ended March 31, 2017 and 2016:

For purposes of accounting for stock based compensation, the fair value of each option and warrant award is estimated on the date of grant using the Black-Scholes-Merton option pricing formula. Compensation expense is recognized over the service period. The following weighted average assumptions were utilized for the calculations during the nine months ended September 30, 2016 and 2015:

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

	For the nine months ended
	September 30,
	2016	2015
Expected life (in years)	2.66 years	2.89 years
Weighted average volatility	146.05%	108.92%
Forfeiture rate	19.51%	14.21%
Risk-free interest rate	.88%	.97%
Expected dividend rate	0.00%	0.00%

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SPENDSMART NETWORKS, INC. Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

AsIn ofFebruary ~~September 30~~2017, ~~2016,~~the ~~$497~~Company modified 7,~~800~~888,172 ofin ~~total~~outstanding stock ~~unrecognized~~options to our former CEO upon his resignation. The new terms ~~compensation~~extended ~~cost~~the ~~related~~exercise date to ~~unvested~~February ~~stock~~10, ~~based~~2020 ~~compensation~~and accelerated ~~arrangements~~vesting ison ~~expected~~any tounvested beoptions. ~~recognized~~The ~~over~~cancellation and reissuance of these stock options was treated as a ~~weighted~~modification under ASC 718 and, accordingly, total stock-~~average~~based compensation expense related to ~~period~~these ofawards ~~16.7~~increased $128,807 during the three months ended March 31, 2017.

OnAs ~~August~~of 26March 31, ~~2015~~2017, ~~the Company entered into a Business Promissory Note and Security Agreement with Bank of Lake Mills for the principal sum of~~ $~~200~~231,~~000~~130 ~~and a daily interest rate~~ of ~~.22%. The~~ total ~~repayment~~unrecognized ~~amount including interest and principal was~~compensation ~~$244,637~~cost related to beunvested ~~paid~~stock ~~pro-rata~~based ~~weekly~~compensation ~~ending~~arrangements ~~February 22, 2016. For~~is ~~the~~expected ~~three and nine months ended September 30, 2016, we recorded interest expense related~~ to ~~the~~be ~~note~~recognized ofover $0a ~~and~~weighted-average ~~$4,947, respectively.~~period As of ~~February 25, 2016, the note has been fully~~15.5 ~~repaid~~months.

11. Notes Payable

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

12. Due to Related Party

On August 14, 2015 and September 28, 2015, the Company entered into Loan Agreements with Alex Minicucci, our former CEO, for the principal sum of $65,000 and $35,000, respectively. The Loans include an interest rate of 7%. The $35,000 Loan was repaid in February 2016. For the ~~three~~ ~~and~~year ~~nine~~three months ended ~~September~~March 3031, 2017 and 2016, we recorded interest expense related to the loans of $1,~~138~~ 132 and $31,~~413~~343, respectively. The Company extended the terms related to the $65,000 loan to May 10, 2017.

13. Subsequent Events

On ~~November~~On 10April 18, ~~2016~~2017, the Company ~~amended~~issued ~~one~~a ofConvertible Promissory Note to the ~~outstanding~~Daniel ~~9% Convertible~~Jonathan ~~Promissory~~Blech ~~Notes~~Trust ~~with~~DTD a9/01/2005 ~~principal~~in the amount of $~~150~~45,000. ~~as follows:~~Mr. ~~the~~Blech, ~~maturity~~a ~~date~~member ~~was~~of ~~extended~~the toCompany’s ~~May~~board 5of directors, ~~2017;~~is the trustee. The Convertible Promissory Note bears interest ~~rate~~at ~~for~~ the ~~extension~~rate ~~period~~of ~~was~~9% ~~increased~~has tosix-month ~~15%;~~maturity ~~the~~date, and a voluntary conversion ~~price~~into ~~was~~an ~~changed~~upcoming tofinancing in the ~~per~~event ~~share~~the Company ~~price~~closes at the ~~time~~financing ~~of the~~and ~~next~~receives ~~financing~~gross ofproceeds totaling at least $2200,000~~,000~~. orThe ~~greater~~conversion rate will be at the same terms of the financing.

On ~~November 8~~May 3, ~~2016~~2017, the Company amended one ofMay ~~the~~5, ~~outstanding~~2015 9% ~~Convertible~~ Convertible Promissory ~~Notes~~Note with a principal amount of $275,000 as follows: the maturity date was extended to ~~May~~July 57, 2017; ~~the interest~~and ~~rate~~in ~~for~~ the ~~extension~~event ~~period was increased to 15%;~~ the ~~conversion~~borrower ~~price~~completes ~~was~~an ~~changed~~asset tosale ~~the~~or ~~per~~capital ~~share~~raise ~~price at the time~~ of ~~the~~ ~~next~~more ~~financing of~~ than $2275,000,~~000~~ orthen ~~greater.~~the ~~50,000~~Notes ~~shares~~shall ~~of common~~automatically ~~stock~~immediately ~~were~~become ~~issued~~due and ~~to the borrower~~payable.

On ~~November~~ 7May 15, ~~2016~~2017, the Company ~~issued~~amended aone ~~Convertible~~May ~~Promissory~~5, ~~Note to~~2015 ~~the Daniel Jonathan Blech Trust DTD~~ 9~~/01/2005~~% ~~in the amount of~~Convertible ~~$100,000.~~Promissory ~~Mr.~~Note ~~Blech,~~with a ~~member~~principal ofamount ~~the board~~ of ~~directors~~$262,500 isas ~~the trustee.~~follows: ~~The Convertible Promissory Note bears an interest at~~ the ~~rate of 9%, has a six month~~ maturity date, ~~and~~was aextended ~~voluntary conversion~~to ~~into~~July an7, ~~upcoming~~2017 ~~financing~~and in the event the ~~Company~~ ~~closes~~borrower ~~the~~completes ~~financing~~an ~~and~~asset ~~receives~~sale ~~gross~~or ~~proceeds~~capital ~~totaling~~raise atof ~~least~~more than $~~200~~275,000., ~~The~~then ~~conversion rate will be at~~ the ~~same~~Notes ~~terms~~shall ofautomatically ~~the financing.~~immediately ~~The~~become ~~note is subordinate to the notes issued in~~due ~~2015~~and payable.

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

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

Business Overview

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

With our mobile and loyalty marketing programs and proprietary responsive website building software, we provide proprietary loyalty systems and a suite of digital engagement and marketing services that help local merchants build relationships with consumers and drive revenues. These services are sold, implemented and supported both internally and by a network of certified digital marketing specialists, aka “Certified Masterminds,” who drive revenue and consumer relationships for merchants via loyalty programs, custom mobile-responsive websites, review generation and management, social media engagement, mobile marketing, mobile commerce and financial tools, such as reward systems. We enter into licensing agreements for our proprietary loyalty and mobile marketing solutions and custom mobile-responsive website building tools with “Certified Masterminds” which sell and support the technology in their respective markets. We provide extensive training materials, best practice guides and other resources to our licensees, including access to a “Mentor”, who is an existing successful “Mastermind”. The licensees also utilize digital loyalty tablets provided to their merchants. The loyalty tablets are proprietary tablet devices set up in physical retail locations where Consumers can enter their mobile phone number to “opt-in” to receive notifications from the merchant and participate in the merchant’s loyalty program.

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

Our business strategy consists of delivering and managing:

(i) Loyalty platforms a. Merchant funded rewards

~~Loyalty~~b. ~~platforms~~Loyalty rewards tablet/kiosk

ac. Proprietary rewards management system

Merchant funded rewards

Loyalty rewards tablet/kiosk

Proprietary rewards management system

(ii)

Mobile marketing technology

a. Text and email promotion messaging

~~Text~~b. ~~and~~Customer ~~email~~analytics ~~promotion~~and ~~messaging~~propensity marketing

bc. Patent pending ‘automated engagement’ engine

~~Customer~~d. ~~analytics~~Text2Win ~~and~~sweepstakes ~~propensity marketing~~features

Patent pending ‘automated engagement’ engine

Text2Win sweepstakes features

(iii)

Enterprise level loyalty and mobile marketing consulting

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

~~Monthly~~b. ~~hands~~Campaign oncreation ~~reviews~~and ~~by our “Certified Masterminds”~~optimization

bc. Localized support

Campaign creation and optimization

Localized support

(iv)

Proprietary mobile-responsive website building platform

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

~~Software~~b. Audits ~~allowing~~of ~~licensees~~existing ~~and~~merchant ~~merchants to create and administer their~~ websites

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

~~Audits of existing merchant websites~~-21-

Integration of social media streams and consumer reviews into websites

Corporate History

On February 11, 2014, we acquired substantially all of the assets of Intellectual Capital Management, LLC, dba “SMS Masterminds.” On September 18, 2014, we acquired substantially all of the web related assets of TechXpress, Inc., a California corporation. TechXpress provides personalized website, eCommerce and mobile app development services as well as marketing tools and analytics. On November 26, 2014, in an effort to reduce expenses as well as focus our resources on our mobile marketing and related software technology programs and platforms, we began the wind down of the prepaid card division of the company which was effectively completed in January 2015.

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Corporate History

Results of Operations

Comparison of Results of Operations for the Three Months Ended ~~September~~March 3031, ~~2016~~2017 and ~~2015~~2016

Revenue

The Company had total revenues of $1,~~528~~470,~~049~~828 and $1,~~195~~430,~~576~~385 for the three months ended ~~September~~March 3031, ~~2016~~2017 and ~~2015~~2016, respectively.

Our revenues increased $~~332~~40,~~473~~443 over the prior year due to increased licensee ~~clients~~onboarding compared to the ~~third~~first quarter of ~~2015~~2016.

Selling and marketing expenses

Selling and marketing expenses were $~~126~~123,~~777~~475 and $1398,~~955~~022 for the three months ended ~~September~~March 3031, ~~2016~~2017 and ~~2015~~2016, respectively. The increase of $~~112~~25,~~822~~453 was mostly due to our continued focus on marketing efforts on those territories where we had a better opportunity to expand into immediately.

Personnel related expenses

Personnel related expenses were $1,~~030~~233,~~774~~204 and $1,~~373~~463,~~065~~930 for the three months ended ~~September~~March 3031, ~~2016~~2017 and ~~2015~~2016, respectively. This amounted to a decrease of $~~342~~230,~~291~~726 or a 2415.98% decrease. Overall decreases in personnel related expenses were due to lower ~~option~~stock ~~grants~~compensation inexpense ~~2016 made to employees~~of ~~and~~approximately ~~directors~~$215,000 ~~coupled~~together with lower payroll costs. ~~due~~Other personnel torelated ~~decreased~~expenses include employer taxes, employee ~~headcount~~benefits and other employee related costs.

Processing expenses

Processing expenses were $~~301~~225,~~606~~595 and $~~433~~308,~~468~~914 for the three months ended ~~September~~March 3031, ~~2016~~2017 and ~~2015~~2016, respectively. ~~These~~This ~~include~~resulted ~~text~~in a ~~messages,~~decrease ~~kiosk~~of ~~tablets~~$83,319 ~~and~~or ~~servers~~a 27.0% decrease. Decreases in processing expenses were the result of our lower subscription server costs.

Amortization of intangible assets

Amortization of intangible assets was $4813,~~285~~919 and $8448,~~660~~285 for the three months ended ~~September~~March 3031, ~~2016~~2017 and ~~2015~~2016, respectively. ~~The~~This resulted in a decrease of $3634,~~375 was mainly~~ 366, due to ~~our~~ ~~SMS~~the ~~and~~majority ~~TechXpress~~of our intangible ~~asset~~assets ~~impairments~~being atfully amortized as of December 31, ~~2015~~ ~~and the lower remaining amortization~~2016.

General and administrative expenses

General and administrative expenses totaled $~~481~~314,~~280~~600 and $1703,~~322,498~~162 for the three months ended ~~September~~March 3031, ~~2016~~2017 and ~~2015~~2016, respectively. This ~~The~~resulted ~~majority~~in a decrease of ~~this~~$388,562 ~~difference~~or ~~related~~a to55.3% ~~the accelerated~~decrease. ~~deprecation~~We ~~that~~had increases ~~was~~in ~~taken~~insurance expense during the ~~third~~ quarter, offset by ~~2015,~~decreases ~~for~~in ~~our~~investor ~~office~~relations ~~equipment~~consulting, software amortization, and ~~kiosks~~travel.

Bad debt expense

Bad debt expenses totaled $~~100~~35,~~531~~211 and $~~878~~26,~~472~~526 for the three ~~months~~ months ended ~~September~~March 3031, ~~2016~~2017 and ~~2015~~2016, respectively. ~~This~~We ~~decrease~~recorded bad ofdebt ~~$777,941~~write-offs ~~was~~ due to ~~increased~~ ~~reserves~~non-performing ~~on our allowance for doubtful~~ accounts ~~in 2015~~.

~~Earn~~-~~out liability expense~~22-

The change in fair value of Earn-out liability expenses totaled $0 for the three months ended September 30, 2016 and 2015, respectively. We recorded the change in earn-out liability due to our updated operating assumptions in the underlying valuation related to the SMS acquisition.

Comparison of Non-operating Income and Expense for the Three Months Ended September 30, 2016 and 2015

For the three months ended September 30, 2016 and 2015, net interest income totaled $8,254 and $7,305, respectively. This was due to the remaining balances on our financed accounts.

For the three months ended September 30, 2016 and 2015, interest expense totaled $33,733 and $0, respectively. This related to our convertible notes and our notes payable financings during 2016.

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~~For~~Comparison ~~the~~of ~~three~~Non-operating ~~months~~Income ~~ended~~and ~~September~~Expense ~~30,~~for ~~2016~~the ~~and~~Three ~~2015, other~~Months ~~expense~~Ended ~~totaled~~March ~~$21~~31,~~161~~ 2017 and ~~$0, respectively.~~2016

For the three months ended ~~September~~March 3031, ~~2016~~2017 and ~~2015~~2016, ~~amortization~~ ofnet ~~debt~~interest income ~~discount~~ totaled $283,~~143~~882 and $~~188~~14,~~972~~319, respectively. This was due to the ~~convertible~~lowered ~~notes~~remaining ~~financings~~balances ~~in 2016~~on ~~and~~our ~~2015~~financed accounts.

~~During~~For the three months ended ~~September~~March 3031, ~~2016~~2017 and ~~2015~~2016, weinterest ~~recognized~~expense atotaled ~~gain and loss from the change in the fair value of derivative liabilities of~~ $~~812~~74,~~869~~211 and $~~286~~62,~~563~~192, respectively. ~~These~~ ~~derivative~~This ~~liabilities~~related ~~are the fair value of warrants issued~~to inour ~~fiscal~~convertible ~~2010~~notes ~~with anti-dilution privileges~~ and ~~warrants~~our ~~issued~~notes ~~in fiscal~~payable ~~2012 with certain registration privileges and the warrants~~financings ~~issued in 2016 in connection with the tender offer with a cash settlement feature~~outstanding.

~~Comparison~~For ofthe ~~Net~~three ~~Income~~months ~~(Loss)~~ended ~~and~~March ~~Net~~31, ~~Income~~2017 ~~(Loss)~~and ~~per~~2016, ~~Share~~amortization ~~for~~of ~~the~~debt ~~Three~~discount ~~Months~~totaled ~~Ended~~$16,789 ~~September~~and 30$267,028, ~~2016~~respectively. ~~and~~This decrease ~~2015~~was due to the convertible notes financings in 2017.

For the three months ended ~~September~~March 3031, ~~2016~~2017 and ~~2015~~2016, ~~our~~we ~~net income~~recognized (a loss) ~~was~~on ~~$176,882~~extinguishment ~~and~~of ~~($2,815,646),~~debt ~~respectively.~~of ~~Our basic net income (loss) per share was~~ $0~~.01~~ and ($~~0.15) for the three months ended September 30~~288, ~~2016 and 2015~~618, respectively. ~~Common~~This ~~stock~~decrease ~~equivalents~~was ~~and outstanding options and warrants were not included in the calculations~~ due to ~~their~~the ~~effect~~convertible ~~being anti-dilutive.~~notes ~~Our~~modifications ~~diluted net income (loss) per share was ($0.01)~~in ~~and~~2016 ~~($0.15)~~compared ~~for~~to ~~the~~no ~~three~~modifications ~~months~~in ~~ended September 30, 2016 and 2015, respectively~~2017.

~~Comparison~~For ofthe ~~Results~~three ofmonths ~~Operations~~ended ~~for~~March ~~the~~31, ~~Nine~~2017 ~~Months~~and ~~Ended~~2016, inducement for ~~September~~exercise ~~30,~~of ~~2016~~warrants expense totaled $0 and ~~2015~~$3,650,958, respectively. This decrease was due to the inducement given to exercise warrants in 2016.

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

~~The~~Comparison ~~Company~~of ~~had~~Net ~~total~~Loss ~~revenues~~and ofNet ~~$4,569,678~~Loss ~~and~~per ~~$5,291,760~~Share for the ~~nine~~ ~~months~~Three ~~ended~~Months Ended ~~September~~March 3031, ~~2016~~ 2017 and ~~2015, respectively.~~2016

~~Our~~For ~~revenues~~the ~~decreased~~three ~~$722,082~~months ~~over~~ended ~~the~~March ~~prior~~31, ~~year~~2017 ~~due~~and to2016, ~~lower overall~~our ~~licensee~~net ~~acquisitions~~loss was ~~compared~~$584,994 toand ~~the~~$4,879,647, ~~first~~respectively. ~~nine~~Our ~~months~~basic ofand diluted ~~2015.~~net ~~This~~loss per share was ~~due~~$0.01 toand ~~the~~$0.15 ~~high~~for ~~number~~the ofthree ~~customer~~months ~~financings~~ended ~~completed~~March in31, ~~2015~~2017 ~~for~~and ~~new~~2016, ~~sales~~respectively. InCommon ~~2016,~~stock weequivalents ~~stopped~~and outstanding ~~financing~~options ~~new sales~~and towarrants ~~licensees~~were not included in ~~order~~the calculations due to ~~reduce~~their ~~our~~effect ~~bad~~being ~~debt losses~~anti-dilutive.

Selling and marketing expenses

Selling and marketing expenses were $531,812 and $642,242 for the nine months ended September 30, 2016 and 2015, respectively. The decrease of $110,430 was mostly due to lower marketing expenses in the first two quarters of 2016 compared to the first two quarters of 2015.

Personnel related expenses

Personnel related expenses were $3,554,440 and $4,475,836 for the nine months ended September 30, 2016 and 2015, respectively. This amounted to a decrease of $921,396 or a 20.6% decrease. Overall decreases in personnel related expenses were due to lower option grants in 2016 made to employees and directors coupled with lower payroll costs due to decreased headcount.

Processing expenses

Processing expenses were $909,649 and $1,036,965 for the nine months ended September 30, 2016 and 2015, respectively. These include text messages, kiosk tablets, and servers.

Amortization of intangible assets

Amortization of intangible assets was $144,855 and $253,219 for the nine months ended September 30, 2016 and 2015, respectively. The decrease of $108,364 was mainly due to our SMS and TechXpress intangible asset impairments at December 31, 2015 and the lower remaining amortization.

General and administrative expenses

General and administrative expenses totaled $1,667,140 and $2,654,748 for the nine months ended September 30, 2016 and 2015, respectively. The majority of this difference related to the accelerated deprecation that was taken during the third quarter 2015, for our office equipment and kiosks.

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Bad debt expense

Bad debt expenses totaled $163,323 and $1,313,349 for the nine months ended September 30, 2016 and 2015, respectively. This decrease of $1,150,026 was due to increased reserves on our allowance for doubtful accounts in 2015 resulting from previous financings.

Earn-out liability expense

The change in fair value of Earn-out liability expenses totaled $0 and ($58,754) for the nine months ended September 30, 2016 and 2015, respectively. We recorded the change in earn-out liability due to our updated operating assumptions in the underlying valuation related to the SMS acquisition.

Comparison of Non-operating Income and Expense for the Nine Months Ended September 30, 2016 and 2015

For the nine months ended September 30, 2016 and 2015, net interest income totaled $33,461 and $60,202, respectively. This was due to the lowered remaining balances on our financed accounts.

For the nine months ended September 30, 2016 and 2015, interest expense totaled $104,323 and $0, respectively. This related to our convertible notes and our notes payable financings during 2016.

For the nine months ended September 30, 2016 and 2015, other expense totaled $81,000 and $0, respectively.

For the nine months ended September 30, 2016 and 2015, amortization of debt discount totaled $388,683 and $325,910, respectively. This increase was due to the increased number of convertible notes financings in 2016 compared to 2015.

For the nine months ended September 30, 2016 and 2015, we recognized a loss on extinguishment of debt of $415,689 and $0, respectively. This increase was due to the convertible notes modifications completed in 2016.

For the nine months ended September 30, 2016 and 2015, tender offer expense totaled $3,560,958 and $0, respectively. This increase was due to the inducement given to exercise warrants in 2016.

During the nine months ended September 30, 2016 and 2015, we recognized a gain from the change in the fair value of derivative liabilities of $1,995,669 and $233,235, respectively. These derivative liabilities are the fair value of warrants issued in fiscal 2010 with anti-dilution privileges and warrants issued in fiscal 2012 with certain registration privileges and the warrants issued in 2016 in connection with the tender offer with a cash settlement feature.

Comparison of Net Loss and Net Loss per Share for the Nine Months Ended September 30, 2016 and 2015

For the nine months ended September 30, 2016 and 2015, our net loss was $4,838,064 and $5,058,318, respectively. Our basic and diluted net loss per share was ($0.13) and ($0.27) for the nine months ended September 30, 2016 and 2015, respectively. Common stock equivalents and outstanding options and warrants were not included in the calculations due to their effect being anti-dilutive.

Liquidity and Capital Resources

We have primarily financed our operations to date through the sale of unregistered equity. At ~~September~~March 3031, 2016, our total current ~~assets~~ assets were $~~884~~545,~~027~~339. Total current liabilities were $6,~~484~~232,~~633~~573, ~~and~~long-term liabilities were $0, and our stockholders’ deficit totaled ( $35,~~209~~277,~~075)~~893.

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

We had aan ~~decrease~~increase in cash for the ~~year~~three month period ended March 31, 2017 of $~~382~~110,~~000~~797. We had cash outlays relating to payments of ~~notes~~operating ~~payable~~expenses ~~and accounts payable~~ of approximately $~~278~~208,~~000,~~203 ~~software development outlays of approximately $292,000, and increases in net receivables of $403,000~~ offset by cash provided by ~~warrant~~issuance ~~exercises~~of inconvertible ~~connection with~~debt ~~our tender offer~~ of approximately ~~$1,179,000 and notes payable~~ of $~~180~~319,000.

Our cash and cash equivalents balance at ~~September~~March 3031, ~~2016~~2017 totaled $88185,~~045~~320.

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Going Concern

As ~~noted~~of ~~above~~December ~~(and~~31, by2016, ~~our~~the ~~independent~~Company’s ~~registered~~audited ~~public accounting~~consolidated ~~firm~~financial instatements ~~their~~included ~~report~~an onopinion ~~our~~containing ~~consolidated~~an ~~financial~~explanatory paragraph ~~statements~~ as ~~of and~~to ~~for~~ the ~~year~~uncertainty ~~ended~~of ~~December~~the ~~31,~~Company’s ~~2015), there exists substantial doubt about our~~ ability to continue as a going concern. The Company has continued to incur net losses through ~~September~~March 3031, ~~2016~~2017 and ~~has~~ have yet to establish profitable operations. These factors among others create a substantial doubt about ~~the~~our ~~Company’s~~ ability to continue as a going concern ~~at September 30, 2016~~. Our condensed consolidated financial statements at ~~September~~March 3031, ~~2016~~2017 do not ~~contain~~ contain any adjustments related to the outcome of this uncertainty.

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

Contractual Obligations

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

Critical Accounting Policies Involving Management Estimates and Assumptions

~~Management’s~~There ~~discussion~~were ~~and~~no ~~analysis~~changes offrom our ~~financial condition~~Annual ~~and~~Report ~~results~~on ofForm ~~operations~~10-K ~~are~~for ~~based upon our consolidated financial statements which are prepared in accordance with accounting principles that are generally accepted in~~ the ~~United~~ ~~States~~year ~~(“U.S.~~ended ~~GAAP”).~~December ~~The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities~~31, ~~related disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period~~2016. We continually evaluate our estimates and judgments and we base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.

In preparing our consolidated financial statements in conformity with U.S. GAAP, we must make a variety of estimates that affect the reported amounts and related disclosures. We have identified the following accounting policies that we believe require application of management’s most subjective judgments, often requiring the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Our significant accounting policies are described in more detail in the notes to consolidated financial statements included elsewhere in this filing. If actual results differ significantly from our estimates and projections, there could be a material effect on our financial statements.

Revenue Recognition

We generate revenues primarily in the form of set up fees, recurring license fees, messaging, equipment and marketing services fees and value added mobile marketing and mobile commerce services. License fees are charged monthly for our support services. Set-up fees primarily consist of fees for website development services (including support and unspecified upgrades and enhancements when and if they are available), training and professional services that are not essential to functionality.

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We recognize revenues when all of the following conditions are met:

●

there is persuasive evidence of an arrangement;

●

the products or services have been delivered to the customer;

●

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

●

the collection of the related fees is probable.

Signed agreements are used as evidence of an arrangement. Electronic delivery occurs when we provide the customer with access to the software via a username and password. We assess whether a fee is fixed or determinable at the outset of the arrangement, primarily based on the payment terms associated with the transaction. The Company offered extended payment terms in 2014 and 2015 with regards to the setup fee with typical terms of payment due between one and three years from delivery of license. We assessed collectability of the set-up fee based on a number of factors such as collection history and creditworthiness of the customer. If we determine that collectability is not probable, revenue is deferred until collectability becomes probable, generally upon receipt of cash.

License arrangements may also include set-up fees such as website development, delivery of tablets, professional services and training services, which are typically delivered within 90 days of the contract term. In determining whether set-up fee revenues should be accounted for separately from license revenues, we evaluate whether the set-up fees are considered essential to the functionality of the license using factors such as the nature of our products; whether they are ready for use by the customer upon receipt; the nature of our implementation services, which typically do not involve significant customization to or development of the underlying software code; the availability of services from other vendors; whether the timing of payments for license revenues is coincident with performance of services; and whether milestones or acceptance criteria exist that affect the realization of the license fee. Substantially all of our set-up fees arrangements are recognized as the services are performed. Payments received in advance of services performed are deferred and recognized when the related services are performed.

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

Stock Based Compensation

We account for stock based compensation arrangements through the measurement and recognition of compensation expense for all stock based payment awards to employees and directors based on estimated fair values. We use the Black-Scholes option valuation model to estimate the fair value of our stock options and warrants at the date of grant. The Black-Scholes option valuation model requires the input of subjective assumptions to calculate the value of options and warrants. We use historical company data among other information to estimate the expected price volatility and the expected forfeiture rate and not comparable company information, due to the lack of comparable publicly traded companies that exist in our industry.

Derivatives

We account for certain of our outstanding warrants and bifurcated conversion options as derivative liabilities. These derivative liabilities are ineligible for equity classification due to provisions of the instruments that may result in an adjustment to their conversion or exercise prices. The fair value of these liabilities is estimated using option pricing models that are based on the individual characteristics of our warrants, price for our preferred and common stock on the valuation date as well as assumptions for volatility, remaining expected life, risk-free interest rate and, in some cases, credit spread.

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Recent Accounting Pronouncements

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

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of ~~September 30,~~March ~~2016~~31, 2017.

Item 3—Quantitative and Qualitative Disclosures about Market Risk

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

Item 4 – Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities and Exchange Commission Act of 1934 reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by Securities and Exchange Commission Rule 13a-15(e) and 15d-15(e), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer concluded that our disclosure controls and procedures were not operating effectively as of ~~September~~March 3031, ~~2016~~2017. Our disclosure controls and procedures were not effective because of the “material weakness” described below.

~~-28-~~ Based on management's evaluation as of March 31, 2017, our management identified the material weaknesses set forth below in our internal control over financial reporting:

(i)

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

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

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

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~~Based~~To onremediate ~~management's~~these ~~evaluation~~control asweaknesses, ofwe ~~September~~intend ~~30,~~to ~~2016~~implement segregation of duties, ~~our~~a system of internal reviews and checks and ~~management~~balances ~~identified~~to ~~the~~strengthen ~~material~~our ~~weaknesses~~controls. We ~~set~~intend ~~forth~~to ~~below~~develop inand ~~our~~implement ~~internal~~a ~~control~~written ~~over~~set ~~financial~~of ~~reporting:~~policies and procedures for our operations.

Our company's management concluded that in light of the material weaknesses described above, our company did not maintain effective internal control over financial reporting as of March 31, 2017 based on the criteria set forth in Internal Control—Integrated Framework (i2013) issued by the COSO.

●

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

●

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

To remediate these control weaknesses, we intend to implement segregation of duties, a system of internal reviews and checks and balances to strengthen our controls during 2017. We intend to develop and implement a written set of policies and procedures for our operations.

Our company's management concluded that in light of the material weaknesses described above, our company did not maintain effective internal control over financial reporting as of September 30, 2016 based on the criteria set forth in Internal Control—Integrated Framework (2013) issued by the COSO.

Changes in Internal Controls over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred since the year ended December 31, ~~2015~~2016 for the ~~nine~~three month period ended ~~September~~March 3031, ~~2016~~2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II: Other Information

Item 1 – Legal Proceedings

From time to time and in the course of business, we may become involved in various legal proceedings seeking monetary damages and other relief. The amount of any ultimate liability from such claims cannot be determined. On January 1, 2014, Intellectual Capital Management, LLC dba SMS Masterminds was named in a potential class-action lawsuit titled Telford v. Intellectual Capital, et al, filed in the United States District Court Eastern District of New York relating to alleged violations of the Telephone Consumer Protection Act of 1991 (the “TCPA”). The Company believed the Plaintiff’s allegations had no merit but based upon the economics of continued litigation, the Company resolved the lawsuit in May 2015 for the sum of $34,612, and the action is no longer pending. On July 8, 2015, Intellectual Capital Management, LLC dba SMS Masterminds and SpendSmart Networks, Inc. were named in a potential class-action lawsuit entitled Peter Marchelos, et al v. Intellectual Capital Management, et al, filed in the United States District Court Eastern District of New York relating to alleged violations of the Telephone Consumer Protection Act of 1991. This litigation involves the same licensee and merchant as ~~the~~a ~~Telford~~ previous lawsuit and the same attorneys represent the plaintiffs in this action. The claim of one of the two plaintiffs was resolved for $1,701. The Company believes the Plaintiff’s allegations have no merit. There are no other legal claims currently pending or threatened against us that in the opinion of our management would be likely to have a material adverse effect on our financial position, results of operations or cash flows.

Item 1A – Risk Factors

See “Item ~~Investment in our common stock involves a high degree of risk~~1A. ~~You should~~Risk ~~carefully consider the risks described below together with all of the other information included~~ Factors” in ~~this herein before making an investment decision. If any of the following risks actually occur,~~ our ~~business,~~Annual ~~financial~~Report ~~condition~~on ~~or results of~~Form ~~operations~~10-K ~~could~~for ~~suffer. In that case,~~ the ~~market~~year ~~price~~ended ofDecember ~~our common stock could decline~~31, ~~and you may lose all or part of your investment~~2016.

~~Risks~~Item ~~Related~~2 –Unregistered toSales ~~Our~~of Equity ~~Business~~Securities and Use of Proceeds

OUR FAILURE TO OBTAIN ADDITIONAL ADEQUATE FINANCING WOULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.

We cannot be certain that we will ever generate sufficient revenues and gross margin to achieve profitability in the future. Our failure to significantly increase revenues or to raise additional adequate and necessary financing would seriously harm our business and operating results. We have incurred significant costs in building, launching and marketing our Products as well as in our acquisition of substantially all of the assets of SMS Masterminds. We anticipate incurring additional expenses relating to customer account acquisitions, marketing, and building our infrastructure. If we fail to achieve sufficient revenues and gross margin with our Products, or our revenues grow more slowly than anticipated, or if our operating or capital expenses increased more than is expected or cannot be reduced in the event of lower revenues, our business will be materially and adversely affected and an investor could suffer the loss of a significant portion or all of his investment in our Company.

THERE ARE RISKS ASSOCIATED WITH THE ACQUISITION OF SMS MASTERMINDS.

An integral part of our current, proposed growth strategy was the consummation of the acquisition of substantially all of the assets of Intellectual Capital Management dba SMS Masterminds. The SMS Masterminds transaction involved a number of risks and presented financial, managerial and operational challenges, including: increased expenses, including legal, administrative and compensation expenses resulting from newly hired employees; increased costs to integrate personnel, customer base and business practices of the acquired assets; adverse effects on reported operating results due to possible write-down of goodwill associated with the acquisition; and dilution to stockholders due to the issuance of securities in the proposed transaction.

THERE ARE RISKS ASSOCIATED WITH THE ACQUISITION OF THE TECHXPRESS WEB BUSINESS.

Part of our growth strategy was the consummation of the acquisition of substantially all of the web assets of TechXpress. The TechXpress transaction involved a number of risks and presented financial, managerial and operational challenges, including: diversion of management’s attention from running the existing business; increased expenses, including legal, administrative and compensation expenses resulting from newly hired employees; increased costs to integrate personnel, customer base and business practices of the acquired assets; adverse effects on reported operating results due to possible write-down of goodwill associated with the acquisition; and dilution to stockholders due to the issuance of securities.

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WE FACE COMPETITION FROM OTHER MOBILE AND LOYALTY SYSTEMS.

We face competition from other companies with similar product offerings. Many of these companies have longer operating histories, greater name recognition and substantially greater financial, technical and marketing resources than us. Many of these companies also have more extensive customer bases, broader customer relationships and broader industry alliances than us, including relationships with many of our potential customers. Increased competition from any of these sources could result in our failure to achieve and maintain an adequate level of customers and market share to support the cost of our operations.

WE HAVE LIMITED RESOURCES TO DEVELOP OUR PRODUCT OFFERINGS.

Our ability to successfully access the capital markets at the same time that our Company has required funding for the development and marketing of our product offerings is challenging. This has caused and will likely continue to cause us to restrict funding of the development of our products and to favor the development of one product offering over the other based on their relative estimated potentials for commercial success as evaluated by our management. We may require additional debt and/or equity financing to pursue our growth strategy. Given our limited operating history and existing losses, there can be no assurance that we will be successful in obtaining additional financing. Furthermore, the issuance by us of any additional securities pursuant to any future fundraising activities undertaken by us would dilute the ownership of existing shareholders and may reduce the price of our common stock. Furthermore, debt financing, if available, will require payment of interest and may involve restrictive covenants that could impose limitations on our operating flexibility. Our current focus is our Mobile and Loyalty Marketing program. The failure of this program to be commercially successful would substantially harm our business and results of operations. Our failure to successfully obtain additional future funding may jeopardize our ability to continue our business and operations. Furthermore, in the future we may determine that it is in the best interest of our Company to severely curtail, license, jointly develop with a third party or sell one of our product offerings, which may be on terms which limit the revenue potential of the product offering to our Company.

WE RELY ON THIRD-PARTY SUPPLIERS AND DISTRIBUTORS THAT ARE SPECIFIC TO OUR BUSINESS SUCH AS CELLULAR SERVICE PROVIDERS, INTERNET SERVICE PROVIDERS, PROGRAMMERS, AND SOCIAL NETWORKS.

We will be dependent on other companies to provide necessary products and services in connection with key elements of our business. Any interruption in our ability to utilize these services, or comparable quality replacements would severely harm our business and results of operations. Should any of these adverse contingencies result, they could substantially harm our business and results of operations and an investor could suffer the loss of a significant portion or all of his investment in our Company.

CHANGES IN LAWS AND REGULATIONS TO WHICH WE ARE SUBJECT, OR TO WHICH WE MAY BECOME SUBJECT, MAY INCREASE OUR COSTS OF OPERATION, DECREASE OUR OPERATING REVENUES AND DISRUPT OUR BUSINESS.

Changes in laws and regulations or the interpretation or enforcement thereof may occur that could increase our compliance and other costs of doing business, require significant systems redevelopment, or render our products or services less profitable or obsolete, any of which could have an adverse effect on our results of operations. We could face more stringent Telephone Consumer Protection Act regulations, as well as more stringent compliance with which could be expensive and time consuming. Changes in laws and regulations governing the way our products and services are sold or in the way those laws and regulations are interpreted or enforced could adversely affect our ability to distribute our products and the cost of providing those products and services. If onerous regulatory requirements were imposed on the sale of our products and services, the requirements could lead to a loss of merchants and subscribers, which in turn could materially and adversely impact our operations.

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THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT MAY HAVE A SIGNIFICANT ADVERSE IMPACT ON OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

In July 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (“DFA”). The DFA, as well as regulations promulgated thereunder, could have a significant adverse impact on the Company’s business, results of operations and financial condition.

The DFA has resulted in increased scrutiny and oversight of consumer financial services and products, primarily through the establishment of the Consumer Financial Protection Bureau (“CFPB”) within the Federal Reserve. The CFPB has broad rulemaking and enforcement authority over providers of pre-paid cards, among other credit providers. The CFPB has the authority to write regulations under federal consumer financial protection laws, and to enforce those laws. The CFPB regulations have yet to be fully promulgated and depending on how the CFPB functions, it could have a material adverse impact on our business. The impact this new regulatory regime will have on the Company’s business is uncertain at this time.

Many provisions of the DFA require the adoption of rules to implement. In addition, the DFA mandates multiple studies, which could result in additional legislative or regulatory action. Therefore, the ultimate consequences of the DFA and its impact on our Company’s business, results of operations and financial condition remain uncertain.

WE ARE SUBJECT TO VARIOUS PRIVACY RELATED REGULATIONS, INCLUDING THE GRAMM-LEACH-BLILEY ACT WHICH MAY INCLUDE AN INCREASED COST OF COMPLIANCE.

We are subject to various laws, rules and regulations related to privacy, information security and data protection, including the Gramm-Leach-Bliley Act, and we could be negatively impacted by these laws, rules and regulations. The Gramm-Leach-Bliley Act guidelines require, among other things, that each financial institution develop, implement and maintain a written, comprehensive information security program containing safeguards that are appropriate to the financial institution’s size and complexity, the nature and scope of the financial institution’s activities and the sensitivity of any customer information at issue. Our management believes that we are currently operating in compliance with these regulations. However, continued compliance with these laws, rules and regulations regarding the privacy, security and protection of customer and employee data, or the implementation of any additional privacy rules and regulations, could result in higher compliance and technology costs for our Company.

OUR BUSINESS COULD SUFFER IF THERE IS A DECLINE IN THE USE OF SMS SERVICES OR THERE ARE ADVERSE DEVELOPMENTS WITH RESPECT TO THE SMS SERVICES INDUSTRY IN GENERAL.

As the mobile services industry evolves, consumers may find SMS services to be less attractive than other mobile messaging and communication services. Consumers might not use SMS services if less expensive services and technologies are offered. If consumer acceptance of SMS services as a form of communication does not continue to develop or develops more slowly than expected or if there is a shift form of mobile communications it could have a material adverse effect on our financial position and results of operations.

A DATA SECURITY BREACH COULD EXPOSE US TO LIABILITY AND PROTRACTED AND COSTLY LITIGATION, AND COULD ADVERSELY AFFECT OUR REPUTATION AND OPERATING REVENUES.

We, as part of the processing of payment from our licensees, and the banks that previously issued our cards, network acceptance members and/or third-party processors receive, transmit and store confidential customer and other information in connection with payments related to our licensees as well as the previous sales and uses of our prepaid cards. Encryption software and the other technologies used to provide security for storage, processing and transmission of confidential customer and other information may not be effective to protect against data security breaches by third parties. The risk of unauthorized circumvention of such security measures has been heightened by advances in computer capabilities and the increasing sophistication of hackers. Improper access to our or these third parties’ systems or databases could result in the theft, publication, deletion or modification of confidential customer and other information. A data security breach of the systems on which sensitive cardholder data and account information are stored could lead to fraudulent activity involving our products and services, reputational damage and claims or regulatory actions against us. If we are sued in connection with any data security breach, we could be involved in protracted and costly litigation. If unsuccessful in defending that litigation, we might be forced to pay damages and/or change our business practices or pricing structure, any of which could have a material adverse effect on our operating revenues and profitability. We would also likely have to pay (or indemnify the banks that issue our cards for) fines, penalties and/or other assessments imposed as a result of any data security breach. Further, a significant data security breach could lead to additional regulation, which could impose new and costly compliance obligations. In addition, a data security breach at the bank that issues our cards, network acceptance members or third-party processors could result in significant reputational harm to us and cause the use and acceptance of our cards to decline, either of which could have a significant adverse impact on our operating revenues and future growth prospects.

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OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGY SURROUNDING OUR SMS MESSAGING, WEB TOOLS, WEBSITE BUILDING TOOLS AND PREPAID CARDS IS UNCERTAIN.

Our future success may depend significantly on our ability to protect our proprietary rights to the intellectual property upon which our products and services will be based. Any patents we obtain in the future may be challenged by re-examination or otherwise invalidated or eventually be found unenforceable. Both the patent application process and the process of managing patent disputes can be time consuming and expensive. Competitors may attempt to challenge or invalidate our patents, or may be able to design alternative techniques or devices that avoid infringement of our patents, or develop products with functionalities that are comparable to ours. In the event a competitor infringes upon our patent or other intellectual property rights, litigation to enforce our intellectual property rights or to defend our patents against challenge, even if successful, could be expensive and time consuming and could require significant time and attention from our management. We may not have sufficient resources to enforce our intellectual property rights or to defend our patents against challenges from others.

WE ARE DEPENDENT UPON CONSUMER TASTES WITH RESPECT TO PREFERRED METHODS OF MOBILE COMMUNICATION FOR THE SUCCESS OF OUR PRODUCTS AND SERVICES.

Our product offerings’ acceptance by consumers and their consequent generation of revenues will depend upon a variety of unpredictable factors, including:

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Public taste, which is always subject to change;

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The quantity and popularity of other communication platforms; and

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The fact that the sales methods chosen for the products and services we market may be ineffective.

For any of these reasons, our programs may be commercially unsuccessful. If we are unable to market products which are commercially successful, we may not be able to recoup our expenses and/or generate sufficient revenues. In the event that we are unable to generate sufficient revenues, we may not be able to continue operating as a viable business and an investor could suffer the loss of a significant portion or all of his investment in our Company.

THE MOBILE ADVERTISING MARKET MAY DETERIORATE OR DEVELOP MORE SLOWLY THAN EXPECTED, WHICH COULD HARM OUR BUSINESS.

Advertising on mobile connected devices is an emerging industry sector. Advertisers have historically spent a smaller portion of their advertising budgets on mobile media as compared to traditional advertising methods, such as television, newspapers, radio and billboards, or internet advertising such banner ads. Future demand and market acceptance for mobile advertising is uncertain. Many advertisers still have limited experience with mobile advertising and may continue to devote larger portions of their advertising budgets to more traditional offline or online personal computer-based advertising, instead of shifting additional advertising resources to mobile advertising. In addition, our current and potential advertiser clients may ultimately find mobile advertising to be less effective than traditional advertising media or marketing methods or other technologies for promoting their products and services, and they may even reduce their spending on mobile advertising from current levels as a result. If the market for mobile advertising deteriorates, or develops more slowly than expected, we may not be able to increase our revenue.

SMS MASTERMINDS IS ONE OF THE DEFENDANTS NAMED IN A POTENTIAL CLASS-ACTION LAWSUIT FILED IN THE UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK RELATING TO ALLEGED VIOLATIONS OF THE TELEPHONE CONSUMER PROTECTION ACT.

From time to time and in the course of business, we may become involved in various legal proceedings seeking monetary damages and other relief. The amount of any ultimate liability from such claims cannot be determined. On January 1, 2014, Intellectual Capital Management, LLC dba SMS Masterminds was named in a potential class-action lawsuit titled Telford v. Intellectual Capital, et al, filed in the United States District Court Eastern District of New York relating to alleged violations of the Telephone Consumer Protection Act of 1991 (the “TCPA”). The Company believed the Plaintiff’s allegations had no merit but based upon the economics of continued litigation, the Company resolved the lawsuit in May 2015 for the sum of $34,612, and the action is no longer pending. On July 8, 2015, Intellectual Capital Management, LLC dba SMS Masterminds and SpendSmart Networks, Inc. were named in a potential class-action lawsuit entitled Peter Marchelos, et al v. Intellectual Capital Management, et al, filed in the United States District Court Eastern District of New York relating to alleged violations of the Telephone Consumer Protection Act of 1991. This litigation involves the same licensee and merchant as the Telford lawsuit and the same attorneys represent the plaintiffs in this action. The claim of one of the two plaintiffs was resolved for $1,701. The Company believes the Plaintiffs’ allegations have no merit and is vigorously defending the action. Because this lawsuit is in an early stage, we are unable to predict the outcome of the lawsuit and the possible loss or range of loss, if any, associated with its resolution or any potential effect the lawsuit may have on our operations. There are no other legal claims currently pending or threatened against us that in the opinion of our management would be likely to have a material adverse effect on our financial position, results of operations or cash flows.

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IF MOBILE CONNECTED DEVICES, THEIR OPERATING SYSTEMS OR CONTENT DISTRIBUTION CHANNELS, INCLUDING THOSE CONTROLLED BY OUR PRIMARY COMPETITORS, DEVELOP IN WAYS THAT PREVENT OUR ADVERTISING FROM BEING DELIVERED TO OUR USERS, OUR ABILITY TO GROW OUR BUSINESS WILL BE IMPAIRED.

Our mobile marketing business model depends upon the continued compatibility of our mobile advertising platform with most mobile connected devices, as well as the major operating systems that run on them. The design of mobile devices and operating systems is controlled by third parties with whom we do not have any formal relationships. These parties frequently introduce new devices, and from time to time they may introduce new operating systems or modify existing ones.

OUR MOBILE MARKETING SERVICES ARE PROVIDED ON MOBILE COMMUNICATIONS NETWORKS THAT ARE OWNED AND OPERATED BY THIRD PARTIES WHO WE DO NOT CONTROL AND THE FAILURE OF ANY OF THESE NETWORKS WOULD ADVERSELY AFFECT OUR ABILITY TO DELIVER OUR SERVICES TO OUR CUSTOMERS.

Our mobile marketing and advertising platform is dependent on the reliability of mobile operators who maintain sophisticated and complex mobile networks. Such mobile networks have historically, and particularly in recent years, been subject to both rapid growth and technological change. If the network of a mobile operator with which we are integrated should fail, including because of new technology incompatibility, the degradation of network performance under the strain of too many mobile consumers using it, or a general failure from natural disaster or political or regulatory shut-down, we will not be able provide our services to customers through such mobile network. This in turn, would impair our reputation and business, potentially resulting in a material, adverse effect on our financial results.

THE SUCCESS OF OUR MOBILE MARKETING BUSINESS DEPENDS, IN PART, ON WIRELESS CARRIERS CONTINUING TO ACCEPT OUR CUSTOMERS' MESSAGES FOR DELIVERY TO THEIR SUBSCRIBER BASE.

We depend on wireless carriers to deliver our customers' messages to their subscriber base. Wireless carriers often impose standards of conduct or practice that significantly exceed current legal requirements and potentially classify our messages as "spam," even where we do not agree with that conclusion. In addition, the wireless carriers use technical and other measures to attempt to block non-compliant senders from transmitting messages to their customers; for example, wireless carriers block short codes or Internet Protocol addresses associated with those senders. There can be no guarantee that our, or short codes registered to us, will not be blocked or blacklisted or that we will be able to successfully remove ourselves from those lists. Although our services typically require customers to opt-in to a campaign, minimizing the risk that its customers' messages will be characterized as spam, blocking of this type could interfere with its ability to market products and services of its customers and communicate with end users and could undermine the effectiveness of our customers' marketing campaigns. To date we have not experienced any material blocking of our messages by wireless carriers, but any such blocking could have an adverse effect on our business and results of operations.

MOBILE CONNECTED DEVICE USERS MAY CHOOSE NOT TO ALLOW ADVERTISING ON THEIR DEVICES.

The success of our mobile marketing business model depends on our ability to deliver targeted, highly relevant ads to consumers on their mobile connected devices. Targeted advertising is done primarily through analysis of data, much of which is collected on the basis of user-provided permissions. This data might include a device's location or data collected when device users view an advertisement or video or when they click on or otherwise engage with an advertisement. Users may elect not to allow data sharing for targeted advertising for a number of reasons, such as privacy concerns, or pricing mechanisms that may charge the user based upon the amount or types of data consumed on the device. Users may also elect to opt out of receiving targeted advertising from our platform. In addition, the designers of mobile device operating systems are increasingly promoting features that allow device users to disable some of the functionality, which may impair or disable the delivery of ads on their devices, and device manufacturers may include these features as part of their standard device specifications. Although we are not aware of any such products that are widely used in the market today, as has occurred in the online advertising industry, companies may develop products that enable users to prevent ads from appearing on their mobile device screens. If any of these developments were to occur, our ability to deliver effective advertising campaigns on behalf of our advertiser clients would suffer, which could hurt our ability to generate revenue.

WE MAY NOT BE ABLE TO ENHANCE OUR MOBILE MARKETING AND ADVERTISING PLATFORM TO KEEP PACE WITH TECHNOLOGICAL AND MARKET DEVELOPMENTS, OR TO REMAIN COMPETITIVE AGAINST POTENTIAL NEW ENTRANTS IN OUR MARKETS.

The market for mobile marketing and advertising services is emerging and is characterized by rapid technological change, evolving industry standards, frequent new product introductions and short product life cycles. Our current platform or platforms we may offer in the future may not be acceptable to marketers and advertisers. To keep pace with technological developments, satisfy increasing customer requirements and achieve acceptance of our marketing and advertising campaigns, we will need to enhance our current mobile marketing solutions and continue to develop and introduce on a timely basis new, innovative mobile marketing services offering compatibility, enhanced features and functionality on a timely basis at competitive prices. Our inability, for technological or other reasons, to enhance, develop, introduce and deliver compelling mobile marketing services in a timely manner, or at all, in response to changing market conditions, technologies or customer expectations could have a material adverse effect on our operating results or could result in our mobile marketing services platform becoming obsolete. Our ability to compete successfully will depend in large measure on our ability to maintain a technically skilled development and engineering staff and to adapt to technological changes and advances in the industry, including providing for the continued compatibility of our mobile marketing services platform with evolving industry standards and protocols. In addition, as we believe the mobile marketing market is likely to grow substantially, other companies which are larger and have significantly more capital to invest than us may emerge as competitors. New entrants could seek to gain market share by introducing new technology or reducing pricing. This may make it more difficult for us to sell our products and services, and could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses or the loss of market share or expected market share, any of which may significantly harm our business, operating results and financial condition.

OUR SALES EFFORTS WITH LICENSEES REQUIRES SIGNIFICANT TIME AND EXPENSE.

Attracting new licensees requires substantial time and expense, and we may not be successful in establishing new relationships or in maintaining or advancing current relationships. Further, it may be difficult for our licensees to identify, engage and market to potential merchant clients who do not currently spend on mobile advertising or are unfamiliar with our current services or platform. Furthermore, many merchant’s purchasing and design decisions typically require input from multiple internal constituencies.

The novelty of our services and our business model often requires us to spend substantial time and effort educating potential licensees about our offerings, including providing demonstrations and comparisons against other available services. This process can be costly and time-consuming. If we are not successful in streamlining our sales processes with licensees or successfully assisting licensees in selling to merchants, our ability to grow our business may be adversely affected.

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IF WE CANNOT INCREASE THE CAPACITY OF OUR MOBILE ADVERTISING TECHNOLOGY PLATFORM TO MEET MERCHANT OR DEVICE USER DEMAND, OUR BUSINESS WILL BE HARMED.

We must be able to continue to increase the capacity of our technology platform in order to support substantial increases in the number of merchants and device users, to support an increasing variety of advertising formats and to maintain a stable service infrastructure and reliable service delivery for our mobile advertising campaigns. If we are unable to efficiently and effectively increase the scale of our mobile advertising platform to support and manage a substantial increase in the number of merchants and mobile device users, while also maintaining a high level of performance, the quality of our services could decline and our reputation and business could be seriously harmed. In addition, if we are not able to support emerging mobile advertising formats or services preferred by advertisers, we may be unable to obtain new advertising clients or may lose existing advertising clients, and in either case our revenue could decline.

SYSTEM FAILURES COULD SIGNIFICANTLY DISRUPT OUR OPERATIONS AND CAUSE US TO LOSE ADVERTISER CLIENTS OR ADVERTISING INVENTORY.

Our success depends on the continuing and uninterrupted performance of our own internal systems, which are utilized to send messages, and monitor the performance of advertising campaigns. Our revenue depends on the technological ability of our platform to deliver ads. Sustained or repeated system failures that interrupt our ability to provide services to clients, including technological failures affecting our ability to deliver ads quickly and accurately and to process mobile device users' responses to ads, could significantly reduce the attractiveness of our services to advertisers and reduce our revenue. Our systems are vulnerable to damage from a variety of sources, including telecommunications failures, power outages, malicious human acts and natural disasters. In addition, any steps we take to increase the reliability and redundancy of our systems may be expensive and may not be successful in preventing system failures.

ACTIVITIES OF LICENSEES OR MERCHANTS COULD DAMAGE OUR REPUTATION OR GIVE RISE TO LEGAL CLAIMS AGAINST US.

A merchant’s promotion of their products and services may not comply with federal, state and local laws, including, but not limited to, laws and regulations relating to mobile communications. Failure of a licensee or merchant to comply with federal, state or local laws or our policies could damage our reputation and expose us to liability under these laws. We may also be liable to third parties for content in the ads it delivers if the artwork, text or other content involved violates copyrights, trademarks or other intellectual property rights of third parties or if the content is defamatory, unfair and deceptive, or otherwise in violation of applicable laws. Although we generally receive assurance from licensees that ads are lawful and that they have the right to use any copyrights, trademarks or other intellectual property included in a communication, and although we are normally indemnified by the licensees, a third party or regulatory authority may still file a claim against us. Any such claims could be costly and time-consuming to defend and could also hurt our reputation within the mobile advertising industry. Further, if we are exposed to legal liability, we could be required to pay substantial fines or penalties, redesign our business methods, discontinue some of its services or otherwise expend significant resources.

SOFTWARE AND COMPONENTS THAT WE INCORPORATE INTO OUR MOBILE ADVERTISING PLATFORM MAY CONTAIN ERRORS OR DEFECTS, WHICH COULD HARM OUR REPUTATION AND HURT ITS BUSINESS.

We use a combination of custom and third-party software, including open source software, in building our mobile advertising platform. Although we test software before incorporating it into our platform, we cannot guarantee that all of the third-party technology that we incorporate will not contain errors, bugs or other defects. We continue to launch enhancements to our mobile advertising platform, and cannot guarantee any such enhancements will be free from these kinds of defects. If errors or other defects occur in technology that we utilize in our mobile advertising platform, it could result in damage to our reputation and losses in revenue, and we could be required to spend significant amounts of additional resources to fix any problems.

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OUR INABILITY TO USE SOFTWARE LICENSED FROM THIRD PARTIES, OR OUR USE OF OPEN SOURCE SOFTWARE UNDER LICENSE TERMS THAT INTERFERE WITH OUR PROPRIETARY RIGHTS, COULD DISRUPT OUR BUSINESS.

Our technology platform incorporates software licensed from third parties, including some software, known as open source software, which we use without charge. Although we monitor our use of open source software, U.S. or foreign courts have not interpreted the terms of many open source licenses to which we are subject, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide our platform to our clients. In the future, we could be required to seek licenses from third parties in order to continue offering our platform, which licenses may not be available on terms that are acceptable to us, or at all. Alternatively, we may need to re-engineer our platform or discontinue use of portions of the functionality provided by our platform. In addition, the terms of open source software licenses may require us to provide software that we develop to others on unfavorable license terms. Our inability to use third-party software could result in disruptions to our business, or delays in the development of future offerings or enhancements of existing offerings, which could impair our business.

IF OUR MOBILE MARKETING AND ADVERTISING SERVICES PLATFORM DOES NOT SCALE AS ANTICIPATED, OUR BUSINESS WILL BE HARMED.

We must be able to continue to scale to support potential ongoing substantial increases in the number of users in our actual commercial environment, and maintain a stable service infrastructure and reliable service delivery for our mobile marketing and advertising campaigns. In addition, we must continue to expand our service infrastructure to handle growth in customers and usage. If our mobile marketing services platform does not efficiently and effectively scale to support and manage a substantial increase in the number of users while maintaining a high level of performance, the quality of our services could decline and our business will be seriously harmed. In addition, if we are unable to secure data center space with appropriate power, cooling and bandwidth capacity, we may not be able to efficiently and effectively scale our business to manage the addition of new customers and overall mobile marketing campaigns.

IF A PORTION OF OUR BUSINESS MODEL IS DEEMED TO BE A FRANCHISE OUR BUSINESS COULD BE INTERUPTED.

Although our business model related to the Mobile and Loyalty Program is based upon a license, we cannot guarantee that any state’s franchise department will not find our model to be a franchise and require a transition to said model with possible associated penalties, fees, costs, and business delays and interruptions.

OUR BUSINESS PRACTICES WITH RESPECT TO DATA MAY GIVE RISE TO LIABILITIES OR REPUTATIONAL HARM AS A RESULT OF GOVERNMENTAL REGULATION, LEGAL REQUIREMENTS OR INDUSTRY STANDARDS RELATING TO CONSUMER PRIVACY AND DATA PROTECTION.

In the course of providing services, we transmit and store information related to mobile devices and the ads we place with that user's consent. Federal, state and international laws and regulations govern the collection, use, retention, sharing and security of data that we collect across our mobile marketing platform. We strive to comply with all applicable laws, regulations, policies and legal obligations relating to privacy and data protection. However, it is possible that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Any failure, or perceived failure, by us to comply with U.S. federal, state, or international laws, including laws and regulations regulating privacy or consumer protection, could result in proceedings or actions against us by governmental entities or others. From time to time, there are several ongoing lawsuits filed against companies in our industry alleging various violations of privacy-related laws. These proceedings could hurt our reputation, force us to spend significant amounts in defense of these proceedings, distract our management, increase our costs of doing business, adversely affect the demand for our services and ultimately result in the imposition of monetary liability.

The regulatory framework for privacy issues worldwide is evolving, and various government and consumer agencies and public advocacy groups have called for new regulation and changes in industry practices, including some directed at the mobile industry in particular. It is possible that new laws and regulations will be adopted in the United States and internationally, or existing laws and regulations may be interpreted in new ways, that would affect our business, particularly with regard to location-based services, collection or use of data to target ads and communication with consumers via mobile devices.

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The U.S. government, including the Federal Trade Commission, or FTC, and the Department of Commerce, has announced that it is reviewing the need for greater regulation of the collection of consumer information, including regulation aimed at restricting some targeted advertising practices. The FTC has also proposed revisions to the Children's Online Privacy Protection Act, or COPPA, that could, if adopted, create greater compliance burdens on us. COPPA imposes a number of obligations, such as obtaining parental permission, on website operators to the extent they collect certain information from children who are under 13 years old. The proposed changes would broaden the applicability of COPPA, including the types of information that would be subject to these regulations, and could apply to information that we or our clients collect through mobile devices or apps that is not currently subject to COPPA.

As we expand our operations globally, compliance with regulations that differ from country to country may also impose substantial burdens on its business. In particular, the European Union has traditionally taken a broader view as to what is considered personal information and has imposed greater obligations under data privacy regulations. In addition, individual EU member countries have had discretion with respect to their interpretation and implementation of the regulations, which has resulted in variation of privacy standards from country to country. In January 2012, the European Commission announced significant proposed reforms to its existing data protection legal framework, including changes in obligations of data controllers and processors, the rights of data subjects and data security and breach notification requirements. The EU proposals, if implemented, may result in a greater compliance burden if SMS Masterminds delivers ads to mobile device users in Europe. Complying with any new regulatory requirements could force us to incur substantial costs or require us to change our business practices in a manner that could compromise our ability to effectively pursue its growth strategy.

In addition to compliance with government regulations, we voluntarily participate in several trade associations and industry self-regulatory groups that promulgate best practices or codes of conduct addressing the provision of location-based services, delivery of promotional content to mobile devices, and tracking of device users or devices for the purpose of delivering targeted advertising. We could be adversely affected by changes to these guidelines and codes in ways that are inconsistent with our practices or in conflict with the laws and regulations of U.S. or international regulatory authorities. If we are perceived as not operating in accordance with industry best practices or any such guidelines or codes with regard to privacy, our reputation may suffer and we could lose relationships with advertiser or developer partners.

WE DEPEND ON THIRD PARTY PROVIDERS FOR A RELIABLE INTERNET INFRASTRUCTURE AND THE FAILURE OF THESE THIRD PARTIES, OR THE INTERNET IN GENERAL, FOR ANY REASON WOULD SIGNIFICANTLY IMPAIR OUR ABILITY TO CONDUCT OUR BUSINESS.

We outsource all of our data center facility management to third parties who host the actual servers and provide power and security in multiple data centers in each geographic location. These third party facilities require uninterrupted access to the Internet. If the operation of our servers is interrupted for any reason, including natural disaster, financial insolvency of a third party provider, or malicious electronic intrusion into the data center, our business would be significantly damaged. As has occurred with many Internet-based businesses, on occasion in the past, we have been subject to "denial-of-service" attacks in which unknown individuals bombarded its computer servers with requests for data, thereby degrading the servers' performance. While we have historically been successful in relatively quickly identifying and neutralizing these attacks, we cannot be certain that we will be able to do so in the future. If either a third party facility failed, or our ability to access the Internet was interfered with because of the failure of Internet equipment in general or we become subject to malicious attacks of computer intruders, our business and operating results will be materially adversely affected.

Financial Risks

OUR FINANCIAL STATEMENTS HAVE BEEN PREPARED ASSUMING THAT OUR COMPANY WILL CONTINUE AS A GOING CONCERN.

The factors described herein raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from this uncertainty. The report of our independent registered public accounting firm included an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern in their audit report for the years ended December 31, 2015 and 2014. If we cannot generate the required revenues and gross margin to achieve profitability or obtain additional capital on acceptable terms, we will need to substantially revise our business plan or cease operations and an investor could suffer the loss of a significant portion or all of his investment in our Company.

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CURRENT MACRO-ECONOMIC CONDITIONS COULD ADVERSELY AFFECT THE FINANCIAL VIABILITY OF OUR COMPANY.

Continuing recessionary conditions in the global economy threaten to cause further tightening of the credit and equity markets and more stringent lending and investing standards. The persistence of these conditions could have a material adverse effect on our access to further needed capital. In addition, further deterioration in the economy could adversely affect our corporate results, which could adversely affect our financial condition and operations.

WE DO NOT EXPECT TO PAY DIVIDENDS FOR THE FORESEEABLE FUTURE, AND WE MAY NEVER PAY DIVIDENDS AND, CONSEQUENTLY, THE ONLY OPPORTUNITY FOR INVESTORS TO ACHIEVE A RETURN ON THEIR INVESTMENT IS IF A TRADING MARKET DEVELOPS AND INVESTORS ARE ABLE TO SELL THEIR SHARES FOR A PROFIT OR IF OUR BUSINESS IS SOLD AT A PRICE THAT ENABLES INVESTORS TO RECOGNIZE A PROFIT.

We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends for the foreseeable future. Our payment of any future dividends will be at the discretion of our Board of Directors after taking into account various factors, including but not limited to our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. In addition, our ability to pay dividends on our common stock may be limited by state law. Accordingly, we cannot assure investors any return on their investment, other than in connection with a sale of their shares or a sale of our business. At the present time there is a limited trading market for our shares. Therefore, holders of our securities may be unable to sell them. We cannot assure investors that an active trading market will develop or that any third party will offer to purchase our business on acceptable terms and at a price that would enable our investors to recognize a profit.

OUR NET OPERATING LOSS (“NOL”) CARRY-FORWARD IS LIMITED.

We have recorded a valuation allowance amounting to our entire net deferred tax asset balance due to our lack of a history of earnings, possible statutory limitations on the use of tax loss carry-forwards generated in the past and the future expiration of our NOL. This gives rise to uncertainty as to whether the net deferred tax asset is realizable. Internal Revenue Code Section 382, and similar California rules, place a limitation on the amount of taxable income that can be offset by carry-forwards after a change in control (generally greater than a 50% change in ownership). As a result of these provisions, it is likely that given our acquisition of The SpendSmart Payments Company-CA, SMS Masterminds, and TechXpress, future utilization of the NOL will be severely limited. Our inability to use our Company’s historical NOL, or the full amount of the NOL, would limit our ability to offset any future tax liabilities with its NOL.

Corporate and Other Risks

LIMITATIONS ON DIRECTOR AND OFFICER LIABILITY AND INDEMNIFICATION OF OUR COMPANY’S OFFICERS AND DIRECTORS BY US MAY DISCOURAGE STOCKHOLDERS FROM BRINGING SUIT AGAINST AN OFFICER OR DIRECTOR.

Our Company’s articles of incorporation and bylaws provide, with certain exceptions as permitted by governing state law, that a director or officer shall not be personally liable to us or our stockholders for breach of fiduciary duty as a director, except for acts or omissions which involve intentional misconduct, fraud or knowing violation of law, or unlawful payments of dividends. These provisions may discourage stockholders from bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders on our behalf against a director.

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WE ARE RESPONSIBLE FOR THE INDEMNIFICATION OF OUR OFFICERS AND DIRECTORS.

Should our officers and/or directors require us to contribute to their defense, we may be required to spend significant amounts of our capital. Our articles of incorporation and bylaws as well as an indemnification agreement also provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney's fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of our Company. This indemnification policy could result in substantial expenditures, which we may be unable to recoup. If these expenditures are significant, or involve issues which result in significant liability for our key personnel, we may be unable to continue operating as a going concern.

OUR EMPLOYEES, EXECUTIVE OFFICERS, DIRECTORS AND INSIDER STOCKHOLDERS BENEFICIALLY OWN OR CONTROL A SUBSTANTIAL PORTION OF OUR OUTSTANDING COMMON STOCK, WHICH MAY LIMIT YOUR ABILITY AND THE ABILITY OF OUR OTHER STOCKHOLDERS, WHETHER ACTING ALONE OR TOGETHER, TO PROPOSE OR DIRECT THE MANAGEMENT OR OVERALL DIRECTION OF OUR COMPANY.

Additionally, this concentration of ownership could discourage or prevent a potential takeover of our Company that might otherwise result in an investor receiving a premium over the market price for his shares. Approximately half of our outstanding shares of common stock is beneficially owned and controlled by a group of insiders, including our employees, directors and executive officers. Accordingly, our employees, directors, executive officers and insider shareholders may have the power to control the election of our directors and the approval of actions for which the approval of our stockholders is required. If you acquire shares of our common stock, you may have no effective voice in the management of our Company. Such concentrated control of our Company may adversely affect the price of our common stock. Our principal stockholders may be able to control matters requiring approval by our stockholders, including the election of directors, mergers or other business combinations. Such concentrated control may also make it difficult for our stockholders to receive a premium for their shares of our common stock in the event we merge with a third party or enter into different transactions which require stockholder approval. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock.

WE ARE DEPENDENT FOR OUR SUCCESS ON A FEW KEY EMPLOYEES.

Our inability to retain those employees would impede our business plan and growth strategies, which would have a negative impact on our business and the value of your investment. Our success depends on the skills, experience and performance of key members of our Company. Each of those individuals may voluntarily terminate his employment with our Company at any time. Were we to lose one or more of these key employees, we would be forced to expend significant time and money in the pursuit of a replacement, which would result in both a delay in the implementation of our business plan and the diversion of limited working capital. We do not maintain a key man insurance policy on any of our key employees.

SHOULD WE BE SUCCESSFUL IN TRANSITIONING TO A COMPANY GENERATING SIGNIFICANT REVENUES, WE MAY NOT BE ABLE TO MANAGE OUR GROWTH EFFECTIVELY, WHICH COULD ADVERSELY AFFECT OUR OPERATIONS AND FINANCIAL PERFORMANCE.

The ability to manage and operate our business as we execute our growth strategy will require effective planning. Significant rapid growth could strain our internal resources, leading to a lower quality of customer service, reporting problems and delays in meeting important deadlines resulting in loss of market share and other problems that could adversely affect our financial performance. Our efforts to grow could place a significant strain on our personnel, management systems, infrastructure and other resources. If we do not manage our growth effectively, our operations could be adversely affected, resulting in slower growth and a failure to achieve or sustain profitability.

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Capital Market Risks

OUR COMMON STOCK IS THINLY TRADED, SO YOU MAY BE UNABLE TO SELL AT OR NEAR ASK PRICES OR AT ALL IF YOU NEED TO SELL YOUR SHARES TO RAISE MONEY OR OTHERWISE DESIRE TO LIQUIDATE YOUR SHARES.

There is limited market activity in our stock and we may be too small to attract the interest of many brokerage firms and analysts. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained. While we are trading on OTCQB, the trading volume we will develop may be limited by the fact that many major institutional investment funds, including mutual funds, as well as individual investors follow a policy of not investing in over-the-counter stocks and certain major brokerage firms restrict their brokers from recommending over-the-counter stocks because they are considered speculative, volatile, thinly traded and the market price of the common stock may not accurately reflect the underlying value of our Company. The market price of our common stock could be subject to wide fluctuations in response to quarterly variations in our revenues and operating expenses, announcements of new products or services by us, significant sales of our common stock, including “short” sales, the operating and stock price performance of other companies that investors may deem comparable to us, and news reports relating to trends in our markets or general economic conditions.

THE APPLICATION OF THE “PENNY STOCK” RULES TO OUR COMMON STOCK COULD LIMIT THE TRADING AND LIQUIDITY OF THE COMMON STOCK, ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK AND INCREASE YOUR TRANSACTION COSTS TO SELL THOSE SHARES.

As long as the trading price of our common stock is below $5 per share, our common stock will be subject to the “penny stock” rules, unless we otherwise qualify for an exemption from the “penny stock” definition. The “penny stock” rules impose additional sales practice requirements on certain broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). These regulations, if they apply, require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. The Financial Industry Regulatory Authority, or FINRA, has adopted sales practice requirements which may also limit a stockholder's ability to buy and sell our stock. In addition to the "penny stock" rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. These regulations may have the effect of limiting the trading activity of our common stock, reducing the liquidity of an investment in our common stock and increasing the transaction costs for sales and purchases of our common stock as compared to other securities. The stock market in general and the market prices for penny stock companies in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance. Stockholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include 1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; 2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; 3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; 4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and 5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. The occurrence of these patterns or practices as well as the regulatory disclosure requirements set forth above could increase the volatility of our share price, may limit investors’ ability to buy and sell our securities and have an adverse effect on the market price for our shares of common stock.

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WE MAY NOT BE ABLE TO ATTRACT THE ATTENTION OF MAJOR BROKERAGE FIRMS, WHICH COULD HAVE A MATERIAL ADVERSE IMPACT ON THE MARKET VALUE OF OUR COMMON STOCK.

Security analysts of major brokerage firms may not provide coverage of our common stock since there is no incentive to brokerage firms to recommend the purchase of our common stock. The absence of such coverage limits the likelihood that an active market will develop for our common stock. It will also likely make it more difficult to attract new investors at times when we require additional capital.

WE MAY BE UNABLE TO LIST OUR COMMON STOCK ON NASDAQ OR ON ANY SECURITIES EXCHANGE.

Although we intend to apply to list our common stock on NASDAQ in the future, we cannot assure you that we will be able to meet the initial listing standards, including the minimum per share price and minimum capitalization requirements, or that we will be able to maintain a listing of our common stock on this trading. Until such time as we qualify for listing on NASDAQ or another national securities exchange, our common stock will continue to trade on OTCQB or another over-the-counter quotation system where an investor may find it more difficult to dispose of shares or obtain accurate quotations as to the market value of our common stock. In addition, rules promulgated by the SEC impose various practice requirements on broker-dealers who sell securities that fail to meet certain criteria set forth in those rules to persons other than established customers and accredited investors. Consequently, these rules may deter broker-dealers from recommending or selling our common stock, which may further affect the liquidity of our common stock. It would also make it more difficult for us to raise additional capital.

FUTURE SALES OF OUR EQUITY SECURITIES COULD PUT DOWNWARD SELLING PRESSURE ON OUR SECURITIES, AND ADVERSELY AFFECT THE STOCK PRICE.

There is a risk that this downward pressure may make it impossible for an investor to sell his or her securities at any reasonable price, if at all. Future sales of substantial amounts of our equity securities in the public market, or the perception that such sales could occur, could put downward selling pressure on our securities, and adversely affect the market price of our common stock.

WE HAVE IDENTIED A MATERIAL WEAKNESS IN OUR INTERNAL CONTROL OVER FINANCIAL REPORTING. IF WE FAIL TO DEVELOP OR MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROLS, WE MAY NOT BE ABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS OR PREVENT FRAUD. AS A RESULT, CURRENT AND POTENTIAL STOCKHOLDERS COULD LOSE CONFIDENCE IN OUR FINANCIAL REPORTING, WHICH WOULD HARM OUR BUSINESS AND THE TRADING PRICE OF OUR STOCK.

During the preparation of our consolidated financial statements for the year ended December 31, 2015, we and our independent registered public accounting firm identified deficiencies in our internal control over financial reporting, as defined in the standards established by the Public Company Accounting Oversight Board. See “Report of Management on Internal Control over Financial Reporting.” Management determined the control deficiencies constitute a material weakness in our internal control over financial reporting.

The existence of a material weakness could result in errors in our financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in the trading price of our stock.

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

None not previously disclosed.

Item 3 – Defaults ~~u pon~~ upon Senior Securities

Not applicable.

Item 4 – Mine Safety Disclosures

Not applicable.

Item 5 – Other Information

Not applicable.

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Item 6 – Exhibits

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

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

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

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

*		Filed as an exhibit to this report

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SIGNATURES

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

The SpendSmart Networks, Inc., a Delaware corporation By: /s/ LUKE WALLACE Luke Wallace, Chief Executive Officer ~~November~~June 142, ~~2016~~2017 By: /s/ BRETT SCHNELL Brett Schnell, Chief Financial Officer ~~November~~June 142, ~~2016~~2017

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Filing Compare · SPENDSMART NETWORKS, INC.