Cleartronic, Inc. - Quarter Report: 2017 December (Form 10-Q)

The Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance of section 505-50-30 of  the FASB ASC.  Pursuant to FASB ASC Section 505-50-30, all transactions in which goods or services are the consideration received for the issuance of equity  instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more  reliably measurable.  The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.  

ADVERTISING COSTS

Advertising costs are expensed as incurred. The Company had advertising costs of $1,797 and $868 during the three months ended December 31, 2017 and 2016, respectively.

  RECENT ACCOUNTING PRONOUNCEMENTS

In February 2016, the FASB issued ASU 2016-02, Leases, which will amend current lease accounting to require lessees to recognize (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.

In April 2016, the FASB issued ASU 2016–10 Revenue from Contract with Customers (Topic 606): identifying Performance Obligations and Licensing “ .The amendments in this Update do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. Topic 606 includes implementation guidance on (a) contracts with customers to transfer goods and services in exchange for consideration and (b) determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The amendments in this Update are intended render more detailed implementation guidance with the expectation to reduce the degree of judgement necessary to comply with Topic 606. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.

NOTE 3   - GOING CONCERN

The Company's condensed consolidated financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company believes the Asset Purchase Agreement with Collabria will allow the Company to generate additional income from the sale of ReadyOp software and will assist in expanding the distribution of the AudioMate AM360 line of IP gateway devices. In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management is currently seeking funding from significant shareholders and outside funding sources sufficient to meet its minimal operating expenses. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its capital funding plans.

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

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NOTE 4   - NOTES PAYABLE TO STOCKHOLDERS

As of December 31, 2017 and September 30, 2017, the Company had unsecured notes payable to stockholders totaling $155,480 and $134,087, respectively. These notes range in interest from 8% to 15% which are payable quarterly. One note in the amount of $7,891 matured on December 31, 2017. In February 2018, the Company repaid the principal amount due on the note along with accrued interest. The remaining balance of the notes mature on December 31, 2018.

In November 2016, the Company repaid the principal amount of $15,000 of a note payable to a shareholder.

In October 2017, the Company repaid the principal amount of $7,891 of a note payable to a shareholder.

In October 2017, the Company issued two promissory notes to a shareholder and director in the amount of $15,000 each.  The notes bear 8% interest and mature on December 31, 2018.

Interest expense on the notes payable to stockholders was $3,418 and $5,178 for the three months ended December 31, 2017 and 2016, respectively.

NOTE 5 - EQUITY TRANSACTIONS

Preferred Stock Dividends

As of December 31, 2017 and September 30, 2017, the cumulative arrearage of undeclared dividends for Series A Preferred stock totaled $56,372 and $44,949, respectively.

Preferred stock issued for cash

In November 2016, the Company sold 525,746 shares of Series A Convertible Preferred stock to a private investor and director for $262,873 in cash.

Preferred stock issued for acquisition of assets

In November, 2016, the Board of Directors approved the Asset Purchase Agreement between the Company and Collabria LLC (“Collabria”). Under the terms of the Agreement, the Company acquired all of the intellectual property of Collabria, including its ReadyOp command, control and communication platform trade named ReadyOp (the “ReadyOp Platform”). In addition, the Company acquired Collabria’s customer base (“Collabria Client List”). The Company assumed no liabilities of Collabria under this Agreement. The terms of the Agreement called for the Company to issue 3,000,000 (Three million) shares of restricted Series E Convertible Preferred stock to Collabria with a fair value of $292,240. Shares of the Series E Convertible Preferred have the following conversion rights and provisions: After a period of two (2) years following the date of issuance, each one (1) share of Series E Preferred shall be convertible into one hundred (100) shares of fully paid and non-assessable Common Stock at the sole option of the holder of Series E Preferred.

Amendment to the Articles of Incorporation

In November 2016, the Board of Directors voted to amend the Company’s Articles of Incorporation to designate the Series A and Series E Convertible Preferred Stock setting forth the rights and preferences of the Series A and E Convertible Preferred Stock, par value $.00001 per share. Among other things, the Certificate of Designation for the Series A Preferred (i) provides for liquidation rights. Among other things, the Certificate of Designation of the Series E Preferred Stock; (i) provides that each share of Series E Preferred Stock shall be one hundred votes for any election or other vote placed before the shareholders of the Corporation

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NOTE 6 - RELATED PARTY TRANSACTIONS

The Company leases its office space from another entity that is also a stockholder. Rent expense paid to the related party was $11,355 and $10,839 for the three months ended December 31, 2017 and 2016, respectively.

In December 2016, the Board of Directors accepted the resignation of Larry M. Reid as Chief Executive Officer of the corporation and appointed Mr. Reid as Chief Financial Officer. The Board also appointed Michael M. Moore as Chief Executive Officer.

Under the terms of an employment agreement effective on November 28, 2016, Mr. Moore as CEO receives an annual salary of $200,000. The term of agreement is for a one-year period beginning on the effective date and shall automatically renew and continue in effect for additional one-year periods.

Under the terms of an employment agreement effective on March 13, 2015, Mr. Reid as CFO receives an annual salary of $96,000. The term of agreement is for a one-year period beginning on the effective date and shall automatically renew and continue in effect for additional one-year periods.

In November 2016, the Company sold 525,746 shares of Series A Convertible Preferred stock to a private investor and director for $262,873 in cash.

In November 2016, the Company repaid the principal amount of $15,000 of a note payable to a shareholder.

In October 2017, the Company repaid the principal amount of $7,891 of a note payable to a shareholder.

In September 2017, the Company issued a promissory note to a shareholder and director in the amount of $35,000. The note bears interest at 8% per annum and matures on December 31, 2018.

In October 2017, the Company issued two promissory notes to a shareholder and director in the amounts of $15,000 each. The notes bear interest at 8% per annum and mature on December 31, 2018.

In November 2016, the Company cancelled its Licensing Agreement with Collabria LLC of Tampa, Florida (”Collabria”) and acquired all of the intellectual property related to Collabria’s command and control software, trade-named ReadyOp. In addition the Company acquired Collabria’s client list. In exchange for these assets the Company issued Collabria 3,000,000 shares of the Company’s restricted Series E Convertible Preferred stock with a fair value of $292,240. The Company assumed none of Collabria’s liabilities.   

NOTE 7 -    COMMITMENTS AND CONTINGENCIES

Obligation Under Operating Lease

The Company leases approximately 1,700 square feet for its principal offices in Boca Raton, Florida at a monthly rental of approximately $3,200. The lease, which provides for annual increases of base rent of 4%, expires on November 30, 2018. The Company also subleases office space for a satellite office in Tampa, Florida for engineering and support staff. The current sublease is month to month and has a base rent of $2,000 per month.

Rent expense incurred during the three months ended December 31, 2017 and 2016 was $11,355 and $10,839, respectively.

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Revenue and Accounts Receivable Concentration

No customer accounted for more than 10% of the Company’s revenue for the three months ended December 31, 2017. Approximately 38% of the Company's revenues for the three months ended December 31, 2016 was derived from four customers. As of December 31, 2017 four customers accounted for approximately 60% of the Company’s total outstanding accounts receivable. As of December 31, 2016, two customers accounted for approximately 83% of the Company’s total outstanding accounts receivable.

Major Supplier and Sole Manufacturing Source

During 2014, the Company developed a proprietary interoperable communications solution. The Company relies on no major supplier for its products and services. The Company has contracted with a single local manufacturing facility to provide completed circuit boards used in the assembly of its IP gateway devices. Interruption to the manufacturing source presents additional risk to the Company. The Company believes that other commercial facilities exist at competitive rates to match the resources and capabilities of its existing manufacturing source.

Employment Agreements

In December 2016, the Board of Directors accepted the resignation of Larry M. Reid as Chief Executive Officer of the corporation and appointed Mr. Reid as Chief Financial Officer. The Board also appointed Michael M. Moore as Chief Executive Officer.

Under the terms of an employment agreement effective on November 28, 2016, Mr. Moore as CEO receives an annual salary of $200,000. The term of agreement is for a one-year period beginning on the effective date and shall automatically renew and continue in effect for additional one-year periods.

Under the terms of an employment agreement effective on March 13, 2015, Mr. Reid as CFO receives an annual salary of $96,000. The term of agreement is for a one-year period beginning on the effective date and shall automatically renew and continue in effect for additional one-year periods.

Exclusive Licensing Agreement

On May 5, 2017, the Company entered into an Exclusive Licensing Agreement with Sublicensing Terms (the “Agreement”) with the University of Southern Florida Research Foundation, Inc. (“USFRF”) relating to an exclusive license of certain patent rights in connection with one of USFRF’s U.S. Patent Applications. Both parties recognize that the research and development work provided by the Company was sufficient for USFRF to enter into the Agreement with the Company.

The Agreement is effective April 25, 2017 and continues until the later of the date that no Licensed Patent remains a pending application or an enforceable patent or the date on which the Licensee’s obligation to pay royalties expires.

The Company paid USFRF a License Issue Fee of $3,000 and $7,253.50 as reimbursement of expenses associated with the filing of the Licensed Patent. The Company agreed to complete the first commercial sale of products to the retail customer on or before January 31, 2019 or USFRF has the right to terminate the agreement. In addition, the Company agreed that it will have made and tested a prototype by August 31, 2018 or USFRF has the right to terminate the agreement. The company agreed to pay USFRF a royalty of 3% for sales of all Licensed Products and Licensed Processes and agreed to pay USFRF minimum royalty payments as follows:

  -and every year thereafter on the same date, for the life of the agreement until it is terminated.

In the event the Company proposes to sell any Equity Securities, then USFRF will have the right to purchase 5% of the securities issued in such offering on the same terms and conditions are offered to other purchasers in such financing.

NOTE 8 –     SUBSEQUENT EVENTS

In February 2018, the Company repaid $7,891 of principal and $248 of accrued interest as payment in full of a promissory note to a shareholder that matured on December 31, 2017.

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

FORWARD-LOOKING STATEMENTS

The information set forth in this Management’s Discussion and Analysis contains certain “forward-looking statements,” including, among others (i) expected changes in our revenues and profitability, (ii) prospective business opportunities, and (iii) our strategy for financing our business. Forward-looking statements are statements other than historical information or statements of current condition. Some forward-looking statements may be identified by use of terms such as “believes,” “anticipates,” “intends,” or “expects.” These forward-looking statements relate to our plans, objectives, and expectations for future operations. Although we believe that our expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of our knowledge of our business and operations, in light of the risks and uncertainties inherent in all future projections, the inclusion of forward-looking statements in this prospectus should not be regarded as a representation that our objectives or plans will be achieved. In light of the risks and uncertainties, there can be no assurance that actual results, performance, or achievements will not differ materially from any future results, performance, or achievements expressed or implied by such forward-looking statements. The foregoing review of important factors should not be construed as exhaustive. We undertake no obligation to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events.

Overview

Cleartronic, Inc. (the “Company,” formerly GlobalTel IP, Inc.) was incorporated in Florida on November 15, 1999. The Company operates through two wholly owned subsidiaries, VoiceInterop, Inc. and ReadyOp Communications, Inc.

VoiceInterop, Inc., designs, builds sells and installs unified group communication solutions for public and private enterprises. VoiceInterop also manufactures and markets a line of IP Gateways under the trade name AudioMate AM360. These gateways are sold direct to enterprises by the Company and indirectly through authorized dealers in North America and a number of foreign countries.

In November, 2016, the Board of Directors approved the Asset Purchase Agreement between the Company and Collabria LLC (“Collabria”). Under the terms of the Agreement, the Company acquired all of the intellectual property of Collabria, including its ReadyOp command, control and communication platform trade named ReadyOp™ (the “ReadyOp Platform”). In addition, the Company acquired Collabria’s customer base (“Collabria Client List”). The Company assumed no liabilities of Collabria under this Agreement. The terms of the Agreement called for the Company to issue 3,000,000 (Three million) shares of the registrant’s Series E Convertible Preferred stock to Collabria. Shares of the Series E Convertible Preferred have the following conversion rights and provisions: After a period of two (2) years following the date of issuance, each one (1) share of Series E Preferred shall be convertible into one hundred (100) shares of fully paid and non-assessable Common Stock at the sole option of the holder of Series E Preferred.  As a result of this Agreement the Licensing Agreement between Collabria and the Company was cancelled effective November 30, 2016. The ReadyOp software will be marketed, sold and supported through the Company’s subsidiary ReadyOp Communications, Inc.

Results of Operations – Three Months Ended December 31, 2017 and 2016

Revenues

Revenues increased approximately 102% to $202,758 for the three months ended December 31, 2017 as compared to $100,000 for the three months ended December 31, 2016. This increase was due to the additional revenue generated by our subsidiary ReadyOp Communications, Inc. Sales of ReadyOp software and hardware amounted to approximately $180,140 for the three months ended December 31, 2017 compared with $43,317 in the same period in 2016. This increase was due to a 565% increase in sales of ReadyOp software from $23,917 to $159,140 and a 8% increase in sales of ReadyOp hardware from $19,400 to $21,000 for the three months ended December 31, 2016 and 2017, respectively. Sales of AudioMate AM360IP gateways and other hardware decreased approximately 83% to $5,766 from $34,491 for the three months ended December 31, 2017 and 2016, respectively. Total revenue for VoiceInterop declined approximately 60% to $22,618 for the three months ended December 31, 2017 as compared to $56,684 for the three months ended December 31, 2016. This decrease was primarily due to a decline in sales of AudioMate gateways from $33,534 in the period ended December 31, 2016 to $2,780 for the period ended December 31, 2017.

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Cost of Revenues

Cost of revenues was $38,571 for the three months ended December 31, 2017 as compared to $37,522 for the three months ended December 31, 2016, an increase of approximately 3%. This increase  was primarily due costs associated with ReadyOp software $27,546 in the period ended December 31, 2017 to $4,783 in the period ended December 31, 2016, partially offset by a 73% decrease in costs associated with AM360 IP Gateways from $30,385 to $8,088 for the periods ended December 31, 2016 and 2017, respectively.

Operating Expenses

Operating expenses for the three months ended December 31, 2017 were $292,791 compared to $424,438 for the three months ended December 31, 2016, a decrease of approximately 31%. The decrease was primarily due to the amortization expense of $240,332 associated with writing off the Collabria licensing agreement in the three months ended December 31, 2016. Selling expenses increased approximately 39% to $83,609 in the three months ended December 31, 2017 from $60,293 in the same period in 2016. This increase was primarily due to marketing personnel salaries associated with ReadyOp sales.. Administrative expenses increased approximately 23% to $117,845 in the three months ended December 31, 2017 from $95,653 in the same period in 2016. This increase was primarily due to increased administrative salaries along with payroll administration expenses.

Loss from Operations

Loss from operations for the three months ended December 31, 2017 was $128,604 compared to a loss of $361,960 for the three months ended December 31, 2016. The decrease in loss from operations in 2017 versus 2016 was primarily due to the amortization expense of $249,792  associated with writing off of the Collabria licensing agreement in the three month period ended December 31, 2016.  Gross margins were approximately 80% for the three months ended December 31, 2017 as compared to 62% for the three months ended December 31, 2016. The increase was primarily due to the higher margins generated from sales of ReadyOp software.  

Other Income (Expenses)

Other income increased to $12,095 during the three months ended December 31, 2017 compared with $0.00 for the three months ended December 31, 2016.  The other income was generated from the fees generated from collecting accounts receivable for a third party. Interest and other expenses   decreased approximately 34% to $3,418 for the three months ended December 31, 2017 as compared with interest and other expenses of $5,178 in the three months ended December 31, 2016.

Net Loss Attributable to Common Shareholders

Net loss attributable to common shareholders was $131,350 for the three months ended December 31, 2017 compared to a net loss attributable to common shareholders of $371,532 for the three months ended December 31, 2016. Net loss per common share was $0.00 and $0.00 for the three months ended December 31, 2017 and 2016, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $45,873 for the three month ended December 31, 2017 compared to $30,538 for the three months ended December 31, 2016. This increase was mainly attributable to the increase in amortization expense and accounts payable.

Net cash provided by financing activities was $22,109 for the three months ended December 31, 2017 compared to $247,873 for the three months ended December 31, 2016. This decrease  was primarily due to the proceeds from the sale of Preferred stock in the three months ended December 31, 2016 compared to no equity sales in the three months ended December 31, 2017.

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Recent loans to the Company by a shareholder and director  has given us the ability to operate short term without the need to raise additional capital. We will continue to make a concentrated effort to restructure the company through the issuance of Preferred stock in exchange for cancellation of debt and issuance of stock in lieu of cash paid for services. There can be no assurance that the Company’s efforts in this restructure will be successful or that present flow of cash will be sufficient to meet current and future obligations.

We have incurred losses since our inception and continue to require additional capital to fund operations and development. As such, our ability to pay our already incurred obligations is mostly dependent on the Company being able to have substantially increased revenues and raising substantial additional capital through the sale of its equity or debt securities. There can be no assurance that the Company will be successful in accomplishing any of the foregoing.

We believe that in order to fund our business plan, we will need approximately $864,000 in new equity or debt capital.  In the past, in addition to revenues and deferred revenues, we have obtained funds from the private sale of our debt and equity securities.  We have also had discussions with several securities broker-dealers with respect to a private or public offering of our securities.  Although none of such discussions has resulted in any funding, we intend to continue to have such discussions in the future.  We also intend to continue to seek private financing from certain of our existing stockholders and others.

Our current operating expenses are approximately $72,000 per month.  In order for us to cover our monthly operating expenses, we must generate approximately $115,000 per month in revenue.  Accordingly, in the absence of sufficient revenues, we must raise $72,000 in equity or debt capital each month to cover our overhead expenses.  In order to remain in business for one year without any revenues, we must secure $864,000 in equity or debt capital.  If we are unsuccessful in securing sufficient capital or revenues, we will be unable to continue our business activities.

Critical Accounting Estimates

See “Management's Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended September 30, 2017 for information regarding our critical accounting estimates

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

An evaluation was conducted by our chief executive officer (“CEO”) and chief financial officer (“CFO”) of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of December 31, 2017. Based on that evaluation, the CEO and CFO concluded that our controls and procedures were effective as of such date to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.

Management is aware that there is a lack of segregation of duties due to the small number of employees dealing with general administrative and financial matters. However, at this time management has decided that considering the abilities of the employees now involved and the control procedures in place, the risk associated with such lack of segregation is low and the potential benefits of adding employees to clearly segregate duties do not justify the substantial expenses associated with such increases. Management may reevaluate this situation as circumstances dictate.

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Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings.

There have been no material developments during the quarter ended December 31, 2017 in any material pending legal proceedings to which we are a party or of which any of our property is the subject.

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

None

Item 3.  Defaults upon Senior Securities.

None.

Item 5.  Other Information.

None.

Item 6.  Exhibits.

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SIGNATURES

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

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