|
6.
|
CONVERTIBLE
NOTES PAYABLE
|
The
Company has the following outstanding convertible notes payable as of December 31, 2017 and 2016:
Note
|
|
Note
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Original
Borrowing
|
|
|
Balance
at
December 31, 2017
|
|
|
Balance
at
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable (a)
|
|
April
3, 2016
|
|
April
4, 2018
|
|
|
12
|
%
|
|
$
|
600,000
|
|
|
$
|
680,268
|
|
|
$
|
680,268
|
|
Note
payable (b)
|
|
June
and August 2017
|
|
February
and March 2018
|
|
|
5
|
%
|
|
$
|
220,500
|
|
|
|
220,500
|
|
|
|
-
|
|
Note
payable (c)
|
|
Various
|
|
Various
|
|
|
5
|
%
|
|
$
|
320,000
|
|
|
|
320,000
|
|
|
|
-
|
|
Note
payable (d)
|
|
December
8, 2017
|
|
December
8, 2018
|
|
|
8
|
%
|
|
$
|
370,000
|
|
|
|
370,000
|
|
|
|
-
|
|
Note
payable (e)
|
|
December
13, 2017
|
|
September
20, 2018
|
|
|
8
|
%
|
|
$
|
105,000
|
|
|
|
105,000
|
|
|
|
-
|
|
Total
notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,695,768
|
|
|
|
680,268
|
|
Debt
discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(675,453
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
notes payable, net of debt discount
|
|
|
|
|
|
|
|
|
$
|
1,020,315
|
|
|
$
|
680,268
|
|
(a)
|
On
April 3, 2016, the Company issued a convertible note payable to Oceanside, a third party-lender, in the amount of $680,268
to consolidate all notes payable and accrued interest due to Oceanside as of that date. This note superseded and replaced
all previous notes and liabilities due to Oceanside from fiscals 2014 and 2015. The note is unsecured, bears interest at the
rate of 12% per annum, compounded annually and matured on December 30, 2016. In consideration, the Company granted Oceanside
the right to convert up to 30% of the amount of such note into shares of the Company’s common stock at $0.07 per share
and issued 2,429,530 warrants to purchase share of common stock at $0.07 per share until April 4, 2019. The Company determined
that the issuance of the warrants and the conversion feature that arose as part of the issuance of note, resulted in a debt
extinguishment for accounting purposes since the fair value of the warrants granted amounted to $164,344, which was more than
10% of the original value of the convertible note. As a result, on April 3, 2016, Company recorded the fair value of the new
note which approximates the original carrying value $680,268 and expensed the entire fair value of the warrants granted of
$164,344 as part of loss on debt extinguishment.
|
|
|
|
On
December 30, 2016, the Company entered into an extension agreement with Oceanside to extend the maturity date of the Note from
December 30, 2016 to August 4, 2017. All other terms of the Note remain unchanged. In consideration for Oceanside’s agreement
to extend the maturity date to August 4, 2017, the Company issued Oceanside 2,429,530 share purchase warrants, exercisable at
$0.08 per share until December 29, 2019 with a fair value of $159,491. The Company determined that the extension of the note’s
maturity resulted in a debt extinguishment for accounting purposes since the fair value of the warrants granted was more than
10% of the recorded value of the original convertible note. As a result, Company recorded the fair value of the new note which
approximates the original carrying value $680,260 and expensed the entire fair value of the warrants granted of $159,491 as part
of loss on debt extinguishment.
|
|
|
|
On
August 4, 2017, the Company entered into an extension agreement with Oceanside to extend
the maturity date of the Note to from August 4, 2017 to April 4, 2018. All other terms
of the Note remain unchanged. In consideration for Oceanside’s agreement to extend
the maturity date to August 4, 2018, the Company issued Oceanside 1,316,800 share purchase
warrants, exercisable at $0.15 per share until August 3, 2022 with a fair value of $170,855.
The Company determined that the extension of the note’s maturity resulted in a
debt extinguishment for accounting purposes since the fair value of the warrants granted
was more than 10% of the recorded value of the original convertible note. As a result,
Company recorded the fair value of the new note which approximates the original carrying
value $680,268 and expensed the entire fair value of the warrants granted of $170,855
as part of loss on debt extinguishment.
|
|
|
|
In
March 2018, the note was satisfied through the issuance of 4,589,506 shares of common stock
|
|
|
(b)
|
In
June and August of 2017, the Company issued unsecured convertible notes to Lucas Holdings
in the amount of $220,500 in exchange cash of $200,000, original discount (OID) of $10,500
and prepaid interest of $10,000. The notes bear interest rate of 5% per annum, matures
in February and March 2018, convertible to shares of common stock at a conversion price
of $0.25 per share and $0.10 per share. As part of the issuance, the Company also issued
warrants to purchase 330,000 shares of common stock at $0.30 per share and 50,000 shares
of common stock with a fair value $12,500. As a result, the Company recorded a debt discount
of $174,850 to account the OID and prepaid interest of $20,500 the relative fair value
of the warrants of $40,180, the fair value of the common shares of $12,500 and the beneficial
conversion feature of $101,670. The debt discount is being amortized to interest
expense over the term of the note.
|
|
|
|
As
of December 31, 2017, outstanding balance of the note amounted to $220,500 and unamortized debt discount of $40,247.
|
|
|
|
In
March 2018, the entire notes were settled and converted to 1,543,000 shares of common stock.
|
|
|
(c)
|
On
September 26, 2017, we entered into the Purchase Agreement, dated September 15, 2017,
with Kodiak Capital Group, LLC (“Kodiak”). Under the Purchase Agreement,
the Company may from time to time, in our discretion, sell shares of our common stock
to Kodiak for aggregate gross proceeds of up to $2,000,000. Unless terminated earlier,
Kodiak’s purchase commitment will automatically terminate on the earlier of the
date on which Kodiak shall have purchased our shares pursuant to the Purchase Agreement
for an aggregate purchase price of $2,000,000, or September 15, 2019. We have no obligation
to sell any shares under the Purchase Agreement.
|
|
From
September 2017 through November 2017, the Company issued three convertible notes payable
totaling $320,000 in exchange for cash of $200,000, original issue discount (OID) of
$20,000 and settlement of financing expenses of $100,000 incurred by Kodiak pursuant
to the agreement. The notes are unsecured, maturities starting in March 2018 through
June 2018 and bear interest at a rate of 5% per annum. The notes are also convertible
to shares of common stock at price of $0.25 per share or 70% of 10-day VWAP prior to
conversion, whichever is lower. As part of the issuances, the Company also granted Kodiak
a five year, fully vested warrants to purchase 2,000,000 shares of common stock exercisable
at $0.15 and $0.20 per share.
|
|
|
|
The
Company determined that since the conversion floor of these notes had no limit to the
conversion price, the Company could no longer determine if it had enough authorized shares
to fulfil its conversion obligation. As such, pursuant to current accounting guidelines,
the Company determined that the conversion feature of these three notes created a derivative
with a fair value totaling $412,214 at the date of issuances. The Company accounted for
the fair value of the derivative up to the face amount of the notes of $320,000 as a
valuation discount to be amortized over the life of the note, and the excess of $92,214
being recorded as part of financing cost (see Note 8 further discussion). In addition,
the Company also recorded the notes’ original issue discount totaling $20,000 and
the $100,000 note payable issued to settle financing expenses related to Kodiak agreement
as part of financing costs.
|
|
|
|
As
of December 31, 2017, outstanding balance of the note amounted to $320,000, accrued interest
of $3,281 and unamortized debt discount of $191,740.
|
(d)
|
On
December 8, 2017, the Company issued unsecured convertible notes to EMA Financial and
Auctus Fund totaling $370,000 in exchange for cash of $323,000 and an original issue
discount of $47,000. The notes bear interest rate of 8% per annum and will mature on
December 8, 2018. The notes are also convertible to common shares at a conversion price
equal to the lower of: (i) the closing sale price of the Common Stock on the Principal
Market on the Trading Day immediately preceding the Closing Date, and (ii) 70% of either
the lowest sale price for the Common Stock on the Principal Market during the ten (10)
consecutive Trading Days including and immediately preceding the Conversion Date, or
the closing bid price.
|
|
|
|
The
Company determined that since the conversion floor had no limit to the conversion price,
that the Company could no longer determine if it had enough authorized shares to fulfil
the conversion obligation. As such, pursuant to current accounting guidelines, the Company
determined that the conversion feature of the note created a derivative with a fair value
of $565,252 at the date of issuance. The Company accounted for the fair value of the
derivative up to the face amount of the note of $370,000 as a valuation discount to be
amortized over the life of the note, and the excess of $195,252 being recorded as part
of financing cost. See Note 8 for discussion of derivative liability. In addition, the
Company also recorded the notes’ original issue discount of $47,000 as part of
financing costs.
|
As
part of the offering, the Company also granted EMA and Auctus a five-year warrant to acquire 2,400,000 shares of the Company’s
common stock with an exercise price of $0.11 per share. A total of 1,200,000 of these warrants contained full ratchet reset provision
in case a future offering at a price below $0.11 per share and included a fundamental transaction provision that could give rise
to an obligation to pay cash to the warrant holder. As such, pursuant to current accounting guidelines, the Company determined
that the warrant exercise price and fundamental transaction clause created a derivative with a fair value of $118,589 at the date
of issuance. The Company accounted for the fair value of the derivative as part of finance cost. See Note 8 for discussion of
derivative liability.
As
of December 31, 2017, outstanding balance of the notes amounted to $370,000, accrued interest of $1,866 and unamortized debt discount
of $343,636.
(e)
|
On
December 14, 2017, the Company issued an unsecured convertible note to PowerUp Lending
in the amount of $105,000 in exchange for cash of $90,000 or an original issue discount
of $15,000. The note matures on September 20, 2018 and bears interest rate of 8% per
annum. The note is convertible to common shares at a conversion price equal to the Variable
Conversion Price, which is 70% multiplied by the Market Price. “Market Price”
means the lowest Trading Price (as defined below) for the Common Stock during the ten
(10) Trading Day period ending on the latest complete Trading Day prior to the Conversion
Date.
The
Company determined that since the conversion floor had no limit to the conversion price, that the Company could no longer
determine if it had enough authorized shares to fulfil the conversion obligation. As such, pursuant to current accounting
guidelines, the Company determined that the conversion feature of the note created a derivative with a fair value of $160,426
at the date of issuance. The Company accounted for the fair value of the derivative up to the face amount of the note
of $105,000 as a valuation discount to be amortized over the life of the note, and the excess of $55,426 being recorded
as part of financing cost. See Note 8 for discussion of derivative liability. In addition, the Company also recorded the
note’s original issue discount of $15,000 as part of financing costs.
As
of December 31, 2017, outstanding balance of the note amounted to $105,000, accrued interest of $414 and unamortized debt discount
of $99,822.
|
During
the year ended December 31, 2017, the Company amortized to interest expense a total of $294,397 related to the notes’ debt
discount and accrued interest of $143,145 pursuant to the terms of the note agreement.
|
7.
|
CONVERTIBLE
SERIES A PREFERRED STOCK
|
On
February 14, 2017, the Company entered into a Securities Purchase Agreement, (the “Purchase Agreement”) with an unaffiliated,
accredited investor (the “Purchaser”) for the sale and issuance of our Series A Preferred Stock (Series A PS). As
part of the agreement, the investor agreed to purchase a total of 1,050,000 shares of Series A Preferred Stock valued at $1,050,000
in exchange for cash of $1,000,000 or a discount of $50,000 in various tranches
The
Series A PS has the following rights and privileges:
|
●
|
25%
redemption premium;
|
|
●
|
Senior
rights in terms preference as to dividends, distributions and payments upon the liquidation, dissolution and winding up of
the Company;
|
|
●
|
Accrues
dividends at a rate of 5% per annum;
|
|
●
|
Mandatorily
redeemable at an installment basis starting August 13, 2017 in the amount of $63,000 plus accrued interest. The Company has
the option to redeem the Series A shares in cash or in shares of common stock based upon the Company’s 5-day Volume
Weighted Average Price (“VWAP”).
|
The
Company considered the guidance of ASC 480-10, Distinguishing Liabilities From Equity to determine the appropriate treatment of
the Series A shares. Pursuant to ASC 480-10, the Company determined that the Series A shares was an obligation to be settled,
at the option of the Company, in cash or in variable number of shares with a fixed monetary value that should be recorded as a
liability under ASC 480-10.
During
the year ended December 31, 2017, the Company issued 630,000 Series A shares in exchange for cash of $555,000 and a discount of
$75,000. Subsequent to the issuance of the Series A PS, the Company redeemed the entire Series A shares totaling $630,000 in exchange
for 2,862,006 shares of common stock with a fair value of $303,641 and cash payments totaling $543,465 for a total redemption
price of $847,106. As a result of this redemption, the Company recognized interest expenses of $217,106 to account for the 25%
redemption premium of $157,500, excess of the fair value of the common shares issued over the Series A shares of $45,607 and the
5% interest due of $13,999. In addition, the Company also amortized the entire $75,000 discount to interest expense. As of December
31, 2017, the entire Series A was fully redeemed, and no shares remained outstanding.
Under
authoritative guidance used by the FASB on determining whether an instrument (or embedded feature) is indexed to an entity’s
own stock, instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The Company has
issued certain convertible notes whose conversion price contains reset provisions based on a future offering price and/or whose
conversion price is based on a future market price. However, since the number of shares to be issued is not explicitly limited,
the Company is unable to conclude that enough authorized and unissued shares are available to share settle the conversion option.
In addition, the Company also granted certain warrants whose exercise price is subject to reset based on a future market price.
As
a result, the conversion option and warrants are classified as a liability and bifurcated from the debt host and accounted for
as a derivative liability in accordance with ASC 815 and will be re-measured at the end of every reporting period with the change
in value reported in the statement of operations.
Upon
issuance and at December 31, 2017, the derivative liabilities were valued using a probability weighted average Black-Scholes-Merton
pricing model with the following average assumptions:
|
|
Upon
Issuance
|
|
|
December
31, 2017
|
|
Stock
Price
|
|
$
|
0.09
|
|
|
$
|
0.10
|
|
Exercise
Price
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
Expected
Life
|
|
|
1.37
|
|
|
|
1.26
|
|
Volatility
|
|
|
183
|
%
|
|
|
189
|
%
|
Dividend
Yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk
Free Interest Rate
|
|
|
1.56
|
%
|
|
|
1.72
|
%
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
$
|
1,256,481
|
|
|
$
|
1,250,581
|
|
The
expected life of the conversion feature of the notes and warrants was based on the remaining contractual term of the notes and
warrants. The Company uses the historical volatility of its common stock to estimate the future volatility for its common stock.
The expected dividend yield was based on the fact that the Company has not paid dividends in the past and does not expect to pay
dividends in the future. The risk-free interest rate was based on rates established by the Federal Reserve Bank.
During
the year ended, the Company recorded derivative liability totaling $1,256,481 as a result of the issuance of convertible notes
and warrants. At December 31, 2017, the estimated fair value of the derivative liability amounted to $1,250,581, as such, the
Company recognized a gain of $5,900 to account the change in fair value between the reporting periods.
The
following were common stock transactions during the year ended December 31, 2017:
Shares
Issued from Stock Subscription
– The Company issued stock subscription to investors. For the year ended December
31, 2017, the Company issued 11,182,143 common shares for a net proceed of $796,000. As part of the offering, the Company granted
an investor warrants to purchase 100,000 shares of common stock. The exercise price of the 100,000 share purchase warrants is
$0.40 per share, expire on May 21, 2019 and were fully vested on grant date.
Shares
Issued for Services
– The Company issued common shares to vendors for services rendered and are expensed based on
fair market value of the stock price at the date of grant. For the year ended December 31, 2017, the Company issued 8,280,435
shares of common stock to vendors and recorded stock compensation expense of $1,647,160.
The
Company granted its two officers and lead director a total of 4,500,000 common shares for services rendered since January 1, 2017
through the date of grant in March 2018. Approximately $441,000 has been recognized as part of stock compensation expense related
to this award for the year ended December 31, 2017.
Shares
Issued for Preferred Stock
- During the year ended December 31, 2017, the Company redeemed 630,000 shares of Series A
Preferred stock with a value of $630,000 in exchange for 2,862,006 shares of common stock with a fair value of $303,641 (see Note 7).
Shares
Issued for Conversion of Debt
- During the year ended December 31, 2017, the Company issued 1,026,195 shares of common
stock with fair value of $181,845 as settlement of a note payable (see Note 4).
Shares
Issued as Part of Put Notice
– In September 2017, the Company entered into the Purchase Agreement with Kodiak Capital
Group, LLC (“Kodiak”). As provided in the Purchase Agreement, from time to time, in our own discretion, we may require
Kodiak to purchase shares of common stock from time to time by delivering a put notice (“Put Notice”) to Kodiak specifying
the total number of shares to be purchased (such number of shares multiplied by the Purchase Price described below, equals the
“Investment Amount”); provided there must be a minimum of ten trading days between delivery of each Put Notice. We
may determine the Investment Amount provided that such amount may not be less than $25,000. Our ability to issue Put Notices to
Kodiak and require Kodiak to purchase our common stock is not contingent on the trading volume of our common stock. Kodiak will
have no obligation to purchase shares under the applicable Purchase Agreement to the extent that such purchase would cause Kodiak
to own more than 9.99% of our then-issued and outstanding common stock (the “Beneficial Ownership Limitation”). Under
the Purchase Agreement, the Company may sell shares of its common stock to Kodiak at a discounted rate of 80% based upon a 5-day
average trading price prior to sale, for aggregate gross proceeds of up to $2,000,000.
The
Company also agreed to grant Kodiak warrants to purchase shares of common stock up to 4 million shares at $0.25 per share. The
warrants will only be granted to Kodiak in proportion to the proceeds received from the exercise of the Put Notice.
In
November 2017, the Company issued a Put Notice to Kodiak and issued 656,168 shares of common stock in exchange for cash of $50,000.
In addition, the Company also issued Kodiak the prorated warrants to purchase 100,000 shares of common stock at $0.25 per share.
Shares
Issued for Accounts Payable
- The Company amended an agreement with a vendor and issued 400,000 shares of common stock
as full and final payment to the vendor on accounts payable owed of $30,000. The fair value of the shares was $56,000 at the date
of issuance, and as such, the Company recorded a loss on debt extinguishment of $26,000.
Shares
Issued with Note Payable
– In June 2017, as part of a note payable issuance, the Company granted the note holder
50,000 shares of common stock with a fair value of $12,500 (see Note 6).
The
following were common stock transactions during the year ended December 31, 2016.
Shares
Issued with Note Payable
– In December 2016, as part of a note payable issuance, the Company granted the note holder
240,000 shares of common stock with a fair value of $21,600.
Stock
Repurchases
– On January 28, 2016, the Company entered into stock repurchase agreements with three former employees
and consultants to acquire an aggregate total of 9,011,324 shares of the Company’s common stock at a price of $0.02 per
share on or before April 15, 2016. In accordance with the terms of the Repurchase Agreements, the Company repurchased 8,311,324
shares for total of $166,226 during the year ended December 31, 2016.
Shares
Issued from Stock Subscription
– The Company issued stock subscription to investors. For the year ended December
3, 2016, the Company issued 31,335,556 common shares for a net proceed of $1,524,030.
Shares
Issued for Services
– The Company issued common shares to consultants and vendors for services rendered and are
expensed based on fair market value of the stock on the date of grant, or as the services were performed. For the year ended December
31, 2016, the Company issued 6,388,334 shares of common stock for services and recorded stock compensation expense of $726,789.
Shares
Issued to Board of Directors
– The Company issued common shares to board of directors for services rendered and
are expensed based on fair market value of the stock price at the date of grant. For the year ended December 31, 2016, the Company
issued 1,150,000 shares to board of directors and recorded stock compensation expense of $116,682.
Effective
October 16, 2014, the Company adopted the 2014 Stock Option Plan (the “Plan”) under the administration of the Board
of Directors to retain the services of valued key employees and consultants of the Company.
A
summary of option activity for the years ended December 31, 2017 and 2016 are presented below.
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Life
(Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2015
|
|
|
7,656,250
|
|
|
$
|
0.66
|
|
|
|
4.87
|
|
|
$
|
-
|
|
Granted
|
|
|
5,860,000
|
|
|
|
0.09
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(2,985,297
|
)
|
|
|
0.93
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at December 31, 2016
|
|
|
10,530,953
|
|
|
$
|
0.33
|
|
|
|
4.03
|
|
|
$
|
-
|
|
Granted
|
|
|
13,210,000
|
|
|
|
0.17
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(1,900,000
|
)
|
|
|
0.16
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at December 31, 2017
|
|
|
21,840,953
|
|
|
$
|
0.26
|
|
|
|
2.09
|
|
|
$
|
137,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested December
31, 2017
|
|
|
12,286,613
|
|
|
$
|
0.28
|
|
|
|
|
|
|
$
|
44,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2017
|
|
|
9,357,620
|
|
|
$
|
0.36
|
|
|
|
|
|
|
$
|
24,166
|
|
The
following were stock options transactions during the year ended December 31, 2017:
During
the year ended December 31, 2017, the Company granted stock options to employees and consultants to purchase a total 13,210,000
shares of common stock for services rendered. The options have an average exercise price of $0.17 per share, expire in five years
and vest over a period of three years from grant date. Total fair value of these options at grant date was approximately $1,781,000
using the Black-Scholes Option Pricing model with the following average assumptions: life of 4years; risk free interest rate of
1.92%; volatility of 230% and dividend yield of 0%.
The
total stock compensation expense recognized relating to vesting of these stock options for the years ended December 31, 2017 amounted
to $418,389. As of December 31, 2017, total unrecognized stock-based compensation expense was $837,120 which is expected to be
recognized as an operating expense through August 2020.
The
following were stock options transactions during the year ended December 31, 2016:
During
the year ended December 31, 2016, the Company granted stock options to employees and consultants to purchase a total 5,860,000
shares of common stock for services rendered. The options have an average exercise price of $0.09 per share, expire in five years
and vest over a period of three years from grant date. Total fair value of these options at grant date was approximately $462,000
using the Black-Scholes Option Pricing model with the following average assumptions: life of 5 years; risk free interest rate
of 1.23%; volatility of 123% and dividend yield of 0%.
The
total stock compensation expense recognized relating to the vesting of these stock options for the years ended December 31, 2016
amounted to $457,881.
The
Company has the following warrants as of December 31, 2017 and 2016 are presented below:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Life
(Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2015
|
|
|
10,967,879
|
|
|
$
|
0.12
|
|
|
|
3.57
|
|
|
$
|
-
|
|
Granted
|
|
|
7,487,385
|
|
|
|
0.08
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at December 31, 2016
|
|
|
18,455,264
|
|
|
$
|
0.10
|
|
|
|
2.62
|
|
|
$
|
-
|
|
Granted
|
|
|
9,981,149
|
|
|
|
0.19
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at December 31, 2017
|
|
|
28,436,413
|
|
|
$
|
0.13
|
|
|
|
2.79
|
|
|
$
|
457,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested December
31, 2017
|
|
|
28,436,413
|
|
|
|
|
|
|
|
|
|
|
$
|
457,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2017
|
|
|
28,436,413
|
|
|
|
|
|
|
|
|
|
|
$
|
457,530
|
|
The
following were stock warrant transactions during the year ended December 31, 2017:
On
April 1, 2017, Company granted warrants to a consultant to purchase 375,000 shares of common stock at an exercise price of $0.12
per share. The warrants expire on March 31, 2019 and were fully vested on the grant date. The total share-based compensation expense
recognized relating to these warrants for the year ended December 31, 2017 amounted to $26,696.
On
May 22, 2017, the Company issued warrants to purchase 100,000 shares of common stock as part of an equity offering (see Note 9).
The exercise price of the 100,000 share purchase warrants is $0.40 per share, expire on May 21, 2019 and were fully vested on
grant date.
In
May and August 2017, the Company entered into extension agreements with Mr. Cutaia to extend the maturity date of Secured Notes.
In consideration for Mr. Cutaia’s agreement to extend the maturity dates, the Company granted Mr. Cutaia a total of 3,084,349
share purchase warrants, exercisable at $0.15 per share and $0.36 per share that will expire starting May 2020 (see Note 5).
In
August 2017, the Company entered into extension agreement with a noteholder to extend the maturity date of note payable. In consideration,
the Company granted the note holder 1,316,800 share purchase warrants, exercisable at $0.15 per share that will expire in August
2020 (see Note 6).
From
June 2017 through December 2017, the Company issued warrants to note holders purchase a total of 4,830,000 shares of common stock.
The warrants are exercisable at an average price of $0.15 per share and will expire starting June 2020 up to December 2022. A
total 1.2 million of these warrants were accounted as derivative liability (see Note 6 and 8).
On
September 16, 2017, the Company issued 275,000 share purchase warrants in full settlement and release of a disputed, unasserted
claim. The exercise price of the 275,000 share purchase warrants is $0.08 per share and expire on March 15, 2018. The warrants
were fully vested on grant date with a fair value of $10,057 which was recorded as part of loss on debt extinguishment.
The
total expense recognized relating to the vesting of these stock warrants for the year ended December 31, 2017 amounted to $26,696.
The
following were stock warrant transactions during the year ended December 31, 2016:
On
April 4, 2016, the Company issued a secured convertible note to Mr. Cutaia, in the amount of $343,326, which represents additional
sums that the he advanced to the Company during the period from December 2015 through March 2016, and is addition to all pre-existing
loans made by, and notes held by the CEO. In consideration for this agreement the Company issued 2,452,325 share purchase warrants,
exercisable at $0.07 per share until April 4, 2019.
On
April 4, 2016, the Company issued an unsecured convertible note payable to Oceanside Strategies, Inc. (“Oceanside”)
in the amount of $680,268. In consideration for Oceanside’s agreement to convert the prior notes from current demand notes
and extend the maturity date to December 4, 2016, we granted Oceanside d 2,429,530 share purchase warrants, exercisable at $0.07
per share until April 4, 2019.
On
December 30, 2016, the Company entered into an extension agreement with Oceanside to extend the maturity date of the April 2016
Note to August 4, 2017. In consideration for Oceanside’s agreement to extend the maturity date to August 4, 2017 the Company
issued Oceanside 2,429,530 share purchase warrants, exercisable at $0.08 per share until December 29, 2019.
Significant
components of the Company’s deferred tax assets and liabilities are as follows:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Net
operating loss carry-forwards
|
|
$
|
3,464,000
|
|
|
$
|
4,149,000
|
|
Share based
compensation
|
|
|
(704,000
|
)
|
|
|
(518,000
|
)
|
Non-cash
interest and financing expenses
|
|
|
(833,000
|
)
|
|
|
(343,000
|
)
|
Other
temporary differences
|
|
|
(108,000
|
|
|
|
(55,000
|
)
|
Less:
Valuation allowance
|
|
|
(1,819,000
|
)
|
|
|
(3,233,000
|
)
|
Deferred
tax assets, net
|
|
$
|
-
|
|
|
$
|
-
|
|
The
items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes
were as follows:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Statutory
federal income tax rate
|
|
|
(34.0
|
%)
|
|
|
(34.0
|
%)
|
State
taxes, net of federal benefit
|
|
|
(5.8
|
%)
|
|
|
(5.8
|
%)
|
Non-deductible
items
|
|
|
(0.1
|
%)
|
|
|
(0.1
|
%)
|
Effect
of change in tax rate
|
|
|
12
|
%
|
|
|
-
|
|
Change
in valuation allowance
|
|
|
27.9
|
%
|
|
|
39.9
|
%
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
ASC
740 requires that the tax benefit of net operating losses carry forwards be recorded as an asset to the extent that management
assesses that realization is “more likely than not.” Realization of the future tax benefits is dependent on the Company’s
ability to generate sufficient taxable income within the carry forward period. Because of the Company’s recent history of
operating losses, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax
benefits is currently not likely to be realized and, accordingly, has provided a 100% valuation allowance against the asset amounts.
Any
uncertain tax positions would be related to tax years that remain open and subject to examination by the relevant tax authorities.
The Company has no liabilities related to uncertain tax positions or unrecognized benefits as of the year end December 31, 2017
or 2016. The Company has not accrued for interest or penalties associated with unrecognized tax liabilities.
On
December 22, 2017, the Tax Cuts and Jobs Act (the “TCJ Act”) was enacted into law. The TCJ Act provides for significant
changes to the U.S. Internal Revenue Code of 1986, as amended (the “Code”), that impact corporate taxation requirements,
such as the reduction of the federal tax rate for corporations from 35% to 21% and changes or limitations to certain tax deductions.
The
Company is currently assessing the extensive changes under the TCJ Act and its overall impact on the Company; however, based on
its preliminary assessment of the reduction in the federal corporate tax rate from 35% to 21% to become effective on January 1,
2018, the Company currently expects that its effective tax rate for 2018 will be between 20% and 23%. Such estimated range is
based on management’s current assumptions with respect to, among other things, the Company’s earnings, state income
tax levels and tax deductions. The Company’s actual effective tax rate in 2018 may differ from management’s estimate.
As
of December 31, 2017, the Company had federal and state net operating loss carry forwards of approximately $12.8 million, which
may be available to offset future taxable income for tax purposes. These net operating losses carry forwards begin to expire in
2034. This carry forward may be limited upon the ownership change under IRC Section 382.
|
13.
|
ACCRUED
OFFICERS SALARY
|
Accrued
Officers Salary at December 31, 2017 and 2016 consist of unpaid salaries of $607,333 and $200,028, respectively to the Company’s
Chief Executive Officer (CEO), who is also the owner of approximately 32% of the Company’s outstanding common shares, and
the Company’s Chief Financial Officer.
|
14.
|
COMMITMENTS
AND CONTINGENCIES
|
Operating
Leases
The
Company leased office space in West Hollywood, California under an operating lease which provided for monthly rent of $6,700 through
July 31, 2016. In June 2016, the Company moved its offices to a new location in Los Angeles, California under a new operating
lease which provides for monthly rent of $2,950 through June 25, 2017. In June 2017, the Company moved its offices to larger space
within the same complex under a new operating lease which provides for monthly rent of $4,743 through April 30, 2018. The Company
had total rent expense for the year ended December 31, 2017 and 2016 of $51,734 and $68,328, respectively which is recorded as
part of General and Administrative expenses in the Statement of Operations.
Employment
Agreements
On
November 21, 2014, we entered into an executive employment agreement effective November 1, 2014 with Rory J. Cutaia, our president,
chief executive officer, secretary and treasurer. Pursuant to the terms of the employment agreement, we have agreed to pay Mr.
Cutaia an annual salary of $325,000, which will be increased each year by 10%, subject to the annual review and approval of our
board of directors. Notwithstanding the foregoing, a mandatory increase of not less than $100,000 per annum will be implemented
on our company achieving EBITDA break-even. In addition to the base salary, Mr. Cutaia will be eligible to receive an annual bonus
in an amount up to $325,000, based upon the attainment of performance targets to be established by our board of directors, in
its discretion.
The
initial term of the employment agreement is five years, and, upon expiration of the initial five-year term, it may be extended
for additional one-year periods on ninety days prior notice.
In
the event that: (i) Mr. Cutaia’s employment is terminated without cause, (ii) Mr. Cutaia is unable to perform his duties
due to a physical or mental condition for a period of 120 consecutive days or an aggregate of 180 days in any 12 month period;
or (iii) Mr. Cutaia voluntarily terminates the employment agreement upon the occurrence of a material reduction in his salary
or bonus, a reduction in his job title or position, or the required relocation of Mr. Cutaia to an office outside of a 30 mile
radius of Los Angeles, California, Mr. Cutaia will:
|
(a)
|
receive
monthly payments of $27,083, or such sum as is equal to Mr. Cutaia’s monthly base compensation at the time of such termination,
whichever is higher, and
|
|
|
|
|
(b)
|
be
reimbursed for COBRA health insurance costs, in each case for 36 months from the date of such termination or to the end of
the term of the agreement, whichever is longer.
|
In
addition, Mr. Cutaia will have any and all of his unvested stock options immediately vest, with full registration rights; and
any unearned and unpaid bonus compensation, expense reimbursement, and all accrued vacation, personal sick days, etc., be deemed
earned, vested and paid immediately. As a condition to receiving the foregoing, Mr. Cutaia will be required to execute a release
of claims, and a non-competition and non-solicitation agreement having a term which is the same as the term of the monthly severance
payments described above.
Litigation
We
do not have any pending litigation. On September 19, 2016 an action captioned Multicore Technologies, an Indian Corporation, plaintiff,
v. Rocky Wright, an individual, bBooth, Inc., a Nevada corporation, and Blabeey, Inc, a Nevada corporation, defendants was filed
in the United States District Court for the Central District of California, Case No. 2:16-cv-7026 DSF (AJWx).
On
September 15, 2017, the litigation was dismissed by plaintiff as against us in exchange for our guarantee of two payments to be
made by another defendant in the action totaling $5,000, for which we have a right of off-set against any sums we may owe such
party for services currently being rendered to us by such party. That defendant made the two payments and we have no further obligations,
actual or contingent in this matter.
We
know of no material proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder
is a party adverse to our company or any of our subsidiaries or has a material interest adverse to our company or any of our subsidiaries.
|
(i)
|
In
January 2018, the Company issued unsecured convertible notes to Auctus Fund (Auctus) and EMA Financial (EMA) that total $150,000
in exchange for cash of $130,000 or an original issue discount of $20,000. The notes mature in January 2019 and bear interest
at a rate of 8% per annum. The notes are also convertible to common shares at a conversion price equal to the lower of: (i)
the closing sale price of the Common Stock on the Principal Market on the Trading Day immediately preceding the Closing Date,
and (ii) 70% of either the lowest sale price for the Common Stock on the Principal Market during the ten (10) consecutive
Trading Days including and immediately preceding the Conversion Date, or the closing bid price. As part of the offering, the
Company also granted Auctus and EMA five-year warrants to acquire a total of 1,000,000 shares of the Company’s common
stock with an exercise price of $0.14 per share.
|
|
|
|
|
|
The
Company determined that the conversion feature of the notes and the warrants issued are subject to derivative liability accounting
with a fair value of $301,739 at the date of issuance. The Company will account the fair value of the derivative up to the
face amount of the notes of $150,000 as a valuation discount to be amortized over the life of the note, and the excess of
$151,739 being recorded as a finance cost. In addition, the Company will also record financing costs of $20,000 to account
the original issue discount of the notes.
|
|
(ii)
|
From
January 2018 through March 2018, the Company granted 106,847 shares of common stock and stock options to purchase 906,272
shares of common stock with a total fair value of $181,157. These equity instruments were granted to employees for services
to be rendered and settlement of debt. The stock options granted vest over a period of 3 years with an average exercise price
of $0.26 per share.
|
|
|
|
|
(iii)
|
From
January 2018 through March 2018, the Company issued 7,383,006 shares of common stock and paid $976,120 in cash to settle outstanding
notes payable totaling $1,870,769 and accrued interest of $147,097. As a result, the Company will record interest expense
of $893,120 to expense the unamortized debt discount and prepayment interest, gain of $1,248,809 to extinguish the corresponding
derivative liability related to these notes payable and loss on debt extinguishment of $1,090,057.
|
|
|
|
|
(iv)
|
From
January 2018 through March 2018, the Company issued 20,469,028 shares of common stock in exchange for cash of $3,300,500 or
an average selling price of $0.16 per share. As part of the sale, one investor and current note holder agreed to cancel a
note payable amounting to $100,000 that was issued in November 2017. As a result, the Company will record a gain on extinguishment
of $158,396 to account the extinguishment of derivative liability of $136,226 and unamortized debt discount of $77,830. In
connection with certain of such sales of shares of common stock, the referenced cancellation of a note payable, and the above-referenced
settlement in cash of certain outstanding notes, we may be in a dispute with such investor in respect of the applicability
of that cash settlement, as distinguished from such investor’s desire to convert one or both of such settled notes into
shares of common stock. In connection therewith, we have reserved 200,000 shares of common.
|
|
|
|
|
(v)
|
On
March 28, 2018 the Company converted the CEO’s accrued salary of $582,333 into 407,226 restricted shares of common stock
at a price of $1.43 per share, which represents the closing price of the Company’s shares as reported on OTC markets
on March 28, 2018.
|
|
|
|
|
(vi)
|
Subsequent
to December 31, 2017, 4,641,667 shares of common stock that were subject to vesting schedules and previously accounted for
were issued.
|
The
effect of the transactions discussed above are summarized and presented in the following unaudited proforma balance sheet:
nFÜSZ,
INC.
CONSOLIDATED
PROFORMA BALANCE SHEET
|
|
December
31, 2017
|
|
|
Proforma
|
|
|
|
As
Reported
|
|
|
As
Adjusted
|
|
|
|
|
|
|
(unaudited)
|
|
Assets
|
|
|
|
|
|
|
Cash
|
|
$
|
10,560
|
|
|
$
|
2,464,940
|
|
Other
current assets
|
|
|
40,909
|
|
|
|
40,909
|
|
Total
long term assets
|
|
|
39,334
|
|
|
|
39,334
|
|
Total
Assets
|
|
$
|
90,803
|
|
|
$
|
2,545,183
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
1,518,959
|
|
|
$
|
789,529
|
|
Notes
payable
|
|
|
125,000
|
|
|
|
-
|
|
Notes
payable - Related Party
|
|
|
1,964,985
|
|
|
|
1,964,985
|
|
Convertible
notes payable
|
|
|
1,020,315
|
|
|
|
-
|
|
Derivative
liability
|
|
|
1,250,581
|
|
|
|
167,285
|
|
Total
Current Liabilities
|
|
|
5,879,840
|
|
|
|
2,921,799
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Deficit
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
11,912
|
|
|
|
14,704
|
|
Additional
Paid In Capital
|
|
|
22,738,574
|
|
|
|
28,915,290
|
|
Common
Stock Issuable
|
|
|
430
|
|
|
|
430
|
|
Accumulated
Deficit
|
|
|
(28,539,953
|
)
|
|
|
(29,307,039
|
)
|
Total
Stockholders’ Deficit
|
|
|
(5,789,037
|
)
|
|
|
(376,616
|
)
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Deficit
|
|
$
|
90,803
|
|
|
$
|
2,545,183
|
|