ITEM
1 – FINANCIAL STATEMENTS
nFÜSZ,
INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
|
|
(
Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
379,461
|
|
|
$
|
10,560
|
|
Prepaid
expenses
|
|
|
63,378
|
|
|
|
40,909
|
|
Accounts
receivable
|
|
|
2,500
|
|
|
|
-
|
|
Total
current assets
|
|
|
445,339
|
|
|
|
51,469
|
|
Deferred
offering costs
|
|
|
129,327
|
|
|
|
-
|
|
Property
and equipment, net
|
|
|
14,731
|
|
|
|
30,554
|
|
Other
assets
|
|
|
7,494
|
|
|
|
8,780
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
596,891
|
|
|
$
|
90,803
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
820,860
|
|
|
$
|
663,506
|
|
Accrued
officers’ salary
|
|
|
168,895
|
|
|
|
607,333
|
|
Accrued
interest (including $38,041 and $99,425 payable to related parties)
|
|
|
38,041
|
|
|
|
248,120
|
|
Deferred
revenue
|
|
|
2,694
|
|
|
|
-
|
|
Note
payable
|
|
|
-
|
|
|
|
125,000
|
|
Notes
payable - related party
|
|
|
352,229
|
|
|
|
1,964,985
|
|
Convertible
notes payable, net of discount of $0 and $675,443, respectively
|
|
|
-
|
|
|
|
1,020,315
|
|
Derivative
liability
|
|
|
673,376
|
|
|
|
1,250,581
|
|
Total
current liabilities
|
|
|
2,056,095
|
|
|
|
5,879,840
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
Notes
payable - related party
|
|
|
824,218
|
|
|
|
-
|
|
Total
long-term liabilities
|
|
|
824,218
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
2,880,313
|
|
|
|
5,879,840
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
deficit
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.0001 par value, 15,000,000 shares authorized, none issued or outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $0.0001 par value, 200,000,000 shares authorized, 175,176,248 and 119,118,513 shares issued and outstanding as of September
30, 2018 and December 31, 2017
|
|
|
17,518
|
|
|
|
11,912
|
|
Additional
paid-in capital
|
|
|
34,431,536
|
|
|
|
22,738,574
|
|
Common
stock issuable, 4,500,000 shares
|
|
|
-
|
|
|
|
430
|
|
Accumulated
deficit
|
|
|
(36,732,476
|
)
|
|
|
(28,539,953
|
)
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ deficit
|
|
|
(2,283,422
|
)
|
|
|
(5,789,037
|
)
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ deficit
|
|
$
|
596,891
|
|
|
$
|
90,803
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
nFÜSZ,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
September
30, 2018
|
|
|
September
30, 2017
|
|
|
September
30, 2018
|
|
|
September
30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
10,085
|
|
|
$
|
-
|
|
|
$
|
26,327
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
202,054
|
|
|
|
109,350
|
|
|
|
437,787
|
|
|
|
291,190
|
|
General
and administrative
|
|
|
472,538
|
|
|
|
1,082,131
|
|
|
|
5,251,967
|
|
|
|
3,052,161
|
|
Total
operating expenses
|
|
|
(674,592
|
)
|
|
|
(1,191,481
|
)
|
|
|
(5,689,754
|
)
|
|
|
(3,343,351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(664,507
|
)
|
|
|
(1,191,481
|
)
|
|
|
(5,663,427
|
)
|
|
|
(3,343,351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income / (Expense)
|
|
|
(12,818
|
)
|
|
|
21,920
|
|
|
|
(25,197
|
)
|
|
|
21,921
|
|
Change
in fair value of derivative liability
|
|
|
340,851
|
|
|
|
-
|
|
|
|
(839,872
|
)
|
|
|
-
|
|
Financing
costs
|
|
|
-
|
|
|
|
-
|
|
|
|
(171,739
|
)
|
|
|
-
|
|
Interest
expense (including $58,916 and $59,434 to related parties for three months and $175,846 and $176,364 to related parties for
nine months)
|
|
|
(58,916
|
)
|
|
|
(205,038
|
)
|
|
|
(321,637
|
)
|
|
|
(375,862
|
)
|
Interest
expense - amortization of debt discount
|
|
|
-
|
|
|
|
(81,959
|
)
|
|
|
(747,623
|
)
|
|
|
(174,981
|
)
|
Debt
extinguishment, net (including $1,074,602 and $172,456 to related parties for three months and $1,074,602 and $689,747 to
related parties for nine months)
|
|
|
(1,074,602
|
)
|
|
|
(424,331
|
)
|
|
|
(423,028
|
)
|
|
|
(977,201
|
)
|
Total
other expense
|
|
|
(805,485
|
)
|
|
|
(689,408
|
)
|
|
|
(2,529,096
|
)
|
|
|
(1,506,123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(1,469,992
|
)
|
|
$
|
(1,880,889
|
)
|
|
$
|
(8,192,523
|
)
|
|
$
|
(4,849,474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share - basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding - basic and diluted
|
|
|
153,322,179
|
|
|
|
108,542,493
|
|
|
|
146,164,472
|
|
|
|
102,376,462
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
nFÜSZ,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Unaudited)
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Common
Stock
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Issuable
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2017
|
|
|
119,118,513
|
|
|
$
|
11,912
|
|
|
$
|
22,738,574
|
|
|
$
|
430
|
|
|
|
(28,539,953
|
)
|
|
$
|
(5,789,037
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares
issued upon exercise of warrants
|
|
|
11,917,705
|
|
|
|
1,191
|
|
|
|
20,809
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,000
|
|
Common shares
issued upon exercise of options
|
|
|
487,620
|
|
|
|
49
|
|
|
|
34,084
|
|
|
|
-
|
|
|
|
-
|
|
|
|
34,133
|
|
Proceeds
from sale of common stock
|
|
|
17,459,067
|
|
|
|
1,746
|
|
|
|
2,976,754
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,978,500
|
|
Fair
Value of warrants issued for debt extension
|
|
|
-
|
|
|
|
-
|
|
|
|
1,074,602
|
|
|
|
|
|
|
|
|
|
|
|
1,074,602
|
|
Fair
value of common shares issued for services
|
|
|
4,790,181
|
|
|
|
479
|
|
|
|
1,547,380
|
|
|
|
(430
|
)
|
|
|
-
|
|
|
|
1,547,429
|
|
Fair
value of common stock issued upon conversion of debt
|
|
|
18,647,831
|
|
|
|
1,865
|
|
|
|
3,063,972
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,065,837
|
|
Fair
value of common stock issued upon conversion of accrued expenses
|
|
|
407,226
|
|
|
|
41
|
|
|
|
582,292
|
|
|
|
-
|
|
|
|
-
|
|
|
|
582,333
|
|
Common
shares issued upon exercise of put option
|
|
|
3,048,105
|
|
|
|
305
|
|
|
|
999,695
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000,000
|
|
Fair
value of vested stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
1,413,304
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,413,304
|
|
Stock
repurchase
|
|
|
(700,000
|
)
|
|
|
(70
|
)
|
|
|
(19,930
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,000
|
)
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,192,523
|
)
|
|
|
(8,192,523
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2018
|
|
|
175,176,248
|
|
|
$
|
17,518
|
|
|
$
|
34,431,536
|
|
|
$
|
-
|
|
|
|
(36,732,476
|
)
|
|
$
|
(2,283,422
|
)
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
nFÜSZ,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For
the Nine Months Ended
|
|
|
|
September
30, 2018
|
|
|
September
30, 2017
|
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(8,192,523
|
)
|
|
$
|
(4,849,474
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Share-based
compensation
|
|
|
2,960,733
|
|
|
|
1,824,045
|
|
Change
in fair value of derivative liability
|
|
|
839,872
|
|
|
|
-
|
|
Amortization
of debt discount
|
|
|
747,623
|
|
|
|
174,981
|
|
Conversion
of Series A
|
|
|
-
|
|
|
|
118,698
|
|
Debt
extinguishment costs, net
|
|
|
423,028
|
|
|
|
977,201
|
|
Financing
costs
|
|
|
171,739
|
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
15,823
|
|
|
|
16,090
|
|
Effect
of changes in assets and liabilities:
|
|
|
|
|
|
|
-
|
|
Accounts
payable, accrued expenses, and accrued interest
|
|
|
253,289
|
|
|
|
569,881
|
|
Deferred
revenue
|
|
|
2,694
|
|
|
|
-
|
|
Other
assets
|
|
|
1,286
|
|
|
|
7,256
|
|
Accounts
receivable
|
|
|
(2,500
|
)
|
|
|
2,468
|
|
Prepaid
expenses
|
|
|
(22,469
|
)
|
|
|
(15,680
|
)
|
Net
cash used in operating activities
|
|
|
(2,801,405
|
)
|
|
|
(1,174,534
|
)
|
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock
|
|
|
2,978,500
|
|
|
|
470,000
|
|
Proceeds
from exercise of put option
|
|
|
1,000,000
|
|
|
|
-
|
|
Proceeds
from convertible note payable
|
|
|
130,000
|
|
|
|
-
|
|
Proceeds
from option exercise
|
|
|
34,133
|
|
|
|
-
|
|
Proceeds
from warrant exercise
|
|
|
22,000
|
|
|
|
-
|
|
Proceeds
from series A preferred stock
|
|
|
-
|
|
|
|
555,000
|
|
Proceeds
/ (payment) of convertible notes payable
|
|
|
(845,000
|
)
|
|
|
300,000
|
|
Redemption
of series A preferred stock
|
|
|
-
|
|
|
|
(138,322
|
)
|
Repurchase
common stock
|
|
|
(20,000
|
)
|
|
|
-
|
|
Deferred
offering costs
|
|
|
(129,327
|
)
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
3,170,306
|
|
|
|
1,186,678
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash
|
|
|
368,901
|
|
|
|
12,144
|
|
|
|
|
|
|
|
|
|
|
Cash - beginning
of period
|
|
|
10,560
|
|
|
|
16,762
|
|
|
|
|
|
|
|
|
|
|
Cash
- end of period
|
|
$
|
379,461
|
|
|
$
|
28,906
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
369,597
|
|
|
$
|
171,375
|
|
Cash
paid for income taxes
|
|
$
|
800
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Conversion
of note payable and accrued interest to common stock
|
|
$
|
3,065,837
|
|
|
$
|
-
|
|
Common
stock issued to settle accrued officers salary
|
|
$
|
582,333
|
|
|
$
|
-
|
|
Fair
value of derivative liability, common shares, warrants and beneficial conversion feature of issued convertible note
|
|
$
|
150,000
|
|
|
$
|
196,953
|
|
Conversion
of notes payable to common stock
|
|
$
|
-
|
|
|
$
|
181,845
|
|
Common
stock issued to settle accounts payable
|
|
$
|
-
|
|
|
$
|
56,000
|
|
Conversion
of series A preferred stock
|
|
$
|
|
|
|
$
|
263,876
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
nFÜSZ,
INC.
Notes
to Condensed Consolidated Financial Statements
For the Nine months Ended September 30, 2018 and 2017
(Unaudited)
1.
|
DESCRIPTION
OF BUSINESS
|
Organization
Cutaia
Media Group, LLC (“CMG”) was organized on December 12, 2012, as a limited liability company under the laws of the
State of Nevada. On May 19, 2014, bBooth, Inc. was incorporated under the laws of the State of Nevada. On May 19, 2014, CMG merged
into bBooth, Inc. and, thereafter, bBooth, Inc. changed its name to bBooth (USA), Inc., effective as of October 16, 2014.
On
October 16, 2014, bBoothUSA was acquired by Global System Designs, Inc. (“GSD”), pursuant to a Share Exchange Agreement
entered into with GSD (the “Share Exchange Agreement”). GSD was incorporated in the state of Nevada on November 27,
2012. The acquisition was accounted for as a reverse merger transaction. In connection with the closing of the transactions contemplated
by the Share Exchange Agreement, GSD’s management was replaced by bBoothUSA’s management, and GSD changed its name
to bBooth, Inc. The operations of CMG and bBooth (USA), Inc. became known as, and are referred to herein as, “bBooth USA.”
Effective
April 21, 2017, we changed our corporate name from bBooth, Inc. to nFüsz, Inc. The name change was effected through a parent/subsidiary
short-form merger of nFüsz, Inc., our wholly-owned Nevada subsidiary, formed solely for the purpose of the name change, with
and into us. We were the surviving entity. To effectuate the merger, we filed Articles of Merger and a Certificate of Correction
(relative to the effective date of the name change merger) with the Secretary of State of the State of Nevada on April 4, 2017,
and April 17, 2017, respectively. The merger became effective on April 21, 2017. Our board of directors approved the merger, which
resulted in the name change on that date. In accordance with Section 92A.180 of the Nevada Revised Statutes, stockholder approval
of the merger was not required.
Our
Business
We
are an applications services provider marketing cloud-based business software products on a subscription basis. Our flagship product,
notifiCRM, is a Customer Relationship Management (“CRM”) application that is distinguishable from other CRM programs
because it utilizes interactive video as the primary means of communication between sales and marketing professionals and their
clients or prospects. notifiCRM allows our users to create, distribute, and post interactive videos that contain on-screen interactive
icons, buttons, and other elements, that when clicked, allow their prospects and customers to respond to our users’ call
to action in real-time, in the video, while the video is playing, without leaving or stopping the video. Our users report increased
sales conversion rates compared to traditional, non-interactive video. We developed the proprietary interactive video technology,
which serves as the basis for our cloud, Software-as-a-Service (SaaS) products and services that we market under the brand name
“notifi” and they are accessible on all mobile and desktop devices. No download is required to access and use our
applications. Our users also have access to detailed analytics in the application dashboard that reflect when the videos were
viewed, by whom, how many times, for how long, and what interactive elements were clicked-on in the video, among other things,
all of which assist our users in focusing their sales and marketing efforts by identifying which clients or prospects have interest
in the subject matter of the video.
Our
notifiCRM platform can accommodate any size campaign or sales organization, and it is enterprise-class scalable to meet the needs
of today’s global organizations. We are working with our vendors to ensure that it is so scalable based upon our current
agreements with them. We offer stand-alone versions of our notifiCRM product on a subscription basis to individual consumers,
sales-based organizations, consumer brands, marketing and advertising agencies, as well as to artists and social influencers.
We also offer notifiCRM through a network of partners and resellers that include Oracle/NetSuite and Marketo, who offer notifiCRM
to their respective clients and customers as an upgrade to their existing Oracle/NetSuite or Marketo subscriptions. notifiCRM
is fully integrated into each of their platforms and upon payment of the upgrade fee, is accessible through the respective dashboards
of Oracle/NetSuite and Marketo. We are actively developing integrations of notifiCRM into other popular marketing, CRM, and Enterprise
Resource Management (ERP) platforms.
Our
notifiMED application is designed for physicians and other healthcare providers to create more efficient and effective interactive
communications with patients. Patients are able to avoid unnecessary and inconvenient visits to their physicians’ or other
healthcare providers’ offices by viewing and responding to interactive videos through in-video, on-screen clicks that are
designed to assess the patients’ need for an office visit. If the patient’s responses to the interactive video indicate
that an office visit is either necessary or desirable, the patient can schedule the office visit right in through video in real
time. Patients can also download and print prescriptions, care instructions, and other physician distributed documents right from
and through the video. notifiMED is offered on a subscription basis.
Our
notifiEDU application is designed for teachers and school administrators for more effective communications with students, parents,
and faculty. notifiEDU allows teachers to deliver interactive lessons to students which are both more engaging and more effective.
notifiEDU allows teachers to communicate with students through their mobile devices and computers to deliver lessons and tests/quizzes
on the screen and in the video. The analytics capabilities of notifiEDU available on the dashboard of the teacher or school administrator
allows them to track which students watched the lesson, when, for how long, how many times, and track and report on test/quiz
results. notifiEDU is offered on a subscription basis.
Our
notifiTV and notifiLIVE products are also part of our proprietary interactive video platform that allows viewers to interact with
pre-recorded as well as live broadcast video content by clicking on links embedded in on-screen people, objects, graphics, or
sponsors’ signage. Viewers can experience our notifiTV and notifiLIVE interactive content and capabilities on most devices
available in the market today without the need to download special software or proprietary video players.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation
The
accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial
reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with
GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated
financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC. The condensed consolidated
balance sheet as of December 31, 2017 included herein was derived from the audited consolidated financial statements as of that
date.
In
the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary
to fairly present the Company’s financial position and results of operations for the interim periods reflected. Except as
noted, all adjustments contained herein are of a normal recurring nature. Results of operations for the fiscal periods presented
herein are not necessarily indicative of fiscal year-end results.
Principles
of Consolidation
The
consolidated financial statements include the accounts of nFüsz, Inc., (formerly bBooth, Inc.) and Songstagram, Inc., our
wholly owned subsidiary. All intercompany transactions and balances have been eliminated in consolidation.
Going
Concern
We
have incurred operating losses since inception and have negative cash flows from operations. We had a stockholders’ deficit
of $2,283,422 as of September 30, 2018 and incurred a net loss of $8,192,523 and utilized $2,801,405 of cash during the nine-month
period then ended September 30, 2018. These factors raise substantial doubt about the Company’s ability to continue as a
going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise
additional funds and implement its business plan. The financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern. In addition, the Company’s independent registered public accounting
firm, in its report on the Company’s December 31, 2017 consolidated financial statements, has raised substantial doubt about
the Company’s ability to continue as a going concern.
Our
continuation as a going concern is dependent on our ability to obtain additional financing until we can generate sufficient cash
flows from operations to meet our obligations. We intend to continue to seek additional debt or equity financing to continue our
operations. There is no assurance that we will ever be profitable or that debt or equity financing will be available to us. The
consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classifications of liabilities that may result should we be unable to continue
as a going concern.
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 at the date of the financial statements, and the reported amounts of revenues and
expenses during the reported periods. Significant estimates include assumptions made in valuing derivative liabilities, valuation
of debt and equity instruments, share-based compensation arrangements and realization of deferred tax assets. Amounts could materially
change in the future.
Revenue
Recognition
We
generate substantially all of our revenue from subscription services, which are comprised of subscription fees from customer accounts.
Subscription service arrangements are generally non-cancelable and do not provide for refunds to customers in the event of cancellations
or any other right of return. We record revenue net of sales or excise taxes.
In
May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and (ASC 606). The underlying principle
of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected.
ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which
includes (1) identifying the contract(s) or agreement(s) with a customer, (2) identifying our performance obligations in the contract
or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations,
and (5) recognizing revenue as each performance obligation is satisfied.
Under
ASC 606, revenue is recognized when performance obligations under the terms of a contract are satisfied, which occurs for the
Company upon shipment or delivery of products or services to our customers based on written sales terms, which is also when control
is transferred. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring the products
or services to a customer.
The
Company adopted the guidance of ASC 606 on January 1, 2018. The implementation of ASC 606 had no impact on the prior period financial
statements and no cumulative effect adjustment was recognized.
Derivative
Financial Instruments
The
Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported
in the consolidated statements of operations. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities
are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument
could be required within 12 months of the balance sheet date.
The
Company uses Level 2 inputs for its valuation methodology for the derivative liabilities as their fair values were determined
by using a probability weighted average Black-Scholes-Merton pricing model based on various assumptions. The Company’s derivative
liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded
in results of operations as adjustments to fair value of derivatives.
Share
Based Payments
The
Company issues stock options, common stock, and equity interests as share-based compensation to employees and non-employees. The
Company accounts for its share-based compensation to employees in accordance with FASB ASC 718 “Compensation – Stock
Compensation.” Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award,
and is recognized as expense over the requisite service period.
The
Company accounts for share-based compensation issued to non-employees and consultants in accordance with the provisions of FASB
ASC 505-50
“
Equity - Based Payments to Non-Employees
.”
Measurement of share-based payment transactions
with non-employees is based on the fair value of whichever is more reliably measurable: (
a
) the goods or services received;
or (
b
) the equity instruments issued. The final fair value of the share-based payment transaction is determined at the
performance completion date. For interim periods, the fair value is estimated, and the percentage of completion is applied to
that estimate to determine the cumulative expense recorded.
The
Company values stock compensation based on the market price on the measurement date. As described above, for employees this is
the date of grant, and for non-employees, this is the date of performance completion. The Company values stock options and warrants
using the Black-Scholes option pricing model.
Net
Loss Per Share
Basic
net loss per share is computed by using the weighted-average number of common shares outstanding during the period. Diluted net
loss per share is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive
potential common shares consist of incremental common shares issuable upon exercise of stock options. No dilutive potential common
shares were included in the computation of diluted net loss per share because their impact was anti-dilutive. As of September
30, 2018, the Company had a total of 33,984,605 options and 19,152,038 warrants outstanding. These shares were excluded from the
computation of net loss per share because they are anti-dilutive. As of September 30, 2017, the Company had total of 22,030,953
options and 24,461,413 warrants outstanding. These shares were excluded from the computation of net loss per share because they
are anti-dilutive.
Deferred
Offering Costs
Deferred
offering costs consist principally of legal, accounting and underwriters’ fees incurred related to the contemplated underwritten
public offering of the Company’s common stock. These deferred offering costs will be charged against the gross proceeds
received or will be charged to expense if the offering is not completed.
Recent
Accounting Pronouncements
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires
a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease
payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about
leasing arrangements. ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that
the cost of the lease is allocated over the lease term, generally on a straight-line basis. ASU 2016-02 requires classification
of all cash payments within operating activities in the statement of cash flows. Disclosures are required to provide the amount,
timing and uncertainty of cash flows arising from leases. A modified retrospective transition approach is required for lessees
for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented
in the financial statements, with certain practical expedients available. ASU 2016-02 is effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Company has
not yet evaluated the impact of the adoption of ASU 2016-02 on the Company’s financial statement presentation or disclosures.
In
July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic
480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features; (Part
II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and
Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception” (“ASU 2017-11”). ASU 2017-11
allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature)
is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with
down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value
of a down round feature only when it is triggered, and the strike price has been adjusted downward. For equity-classified freestanding
financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income
available to common stockholders in computing basic earnings per share. For convertible instruments with embedded conversion features
containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be
amortized to earnings. ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within
those fiscal years. Early adoption is permitted. The guidance in ASU 2017-11 can be applied using a full or modified retrospective
approach. The Company is currently evaluating the impact of the adoption of ASU 2017-11 on the Company’s financial statement
presentation or disclosures.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact
on the Company’s present or future consolidated financial statements.
3.
|
PROPERTY
AND EQUIPMENT
|
Property
and equipment consisted of the following as of September 30, 2018 and December 31, 2017.
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
|
|
(Unaudited)
|
|
|
|
|
Furniture
and fixtures
|
|
$
|
56,890
|
|
|
$
|
56,890
|
|
Office
equipment
|
|
|
50,669
|
|
|
|
50,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,559
|
|
|
|
107,559
|
|
Less:
accumulated depreciation
|
|
|
(92,828
|
)
|
|
|
(77,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,731
|
|
|
$
|
30,554
|
|
Depreciation
expense amounted to $15,823 and $16,090 for nine months ended September 30, 2018 and 2017, respectively.
|
On
March 21, 2015, the Company entered into an agreement with DelMorgan Group LLC (“DelMorgan”), pursuant to which
DelMorgan acted as the Company’s exclusive financial advisor. In connection with the agreement, the Company paid DelMorgan
$125,000, which was advanced by a third-party lender in exchange for an unsecured note payable issued by the Company bearing
interest at the rate of 12% per annum payable monthly beginning on April 20, 2015.
|
|
|
|
Effective
March 20, 2017, for no additional consideration the Company entered into an extension
agreement with the third-party lender to extend the maturity date of the Note to March
21, 2018. All other terms of the Note remain unchanged. As of December 31, 2017, the
balance due under the note was $125,000.
On
January 29, 2018, the Company settled the debt of $125,000 in exchange for 1,250,000 shares of its Common Stock. There
was no gain or loss recognized as the fair value of the common shares issued approximates the note payable settled.
|
5.
|
NOTES
PAYABLE – RELATED PARTIES
|
The
Company has the following related parties notes payable as of September 30, 2018 and December 31, 2017:
Note
|
|
Issuance
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Original
Borrowing
|
|
|
Balance
at
September 30,
2018
|
|
|
Balance
at
December 31,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Note
1 (A)
|
|
December
1, 2015
|
|
February
8, 2021
|
|
|
12.0
|
%
|
|
$
|
1,248,883
|
|
|
$
|
824,218
|
|
|
$
|
1,198,883
|
|
Note 2 (B)
|
|
December 1,
2015
|
|
February 8,
2021
|
|
|
12.0
|
%
|
|
|
189,000
|
|
|
|
-
|
|
|
|
189,000
|
|
Note 3 (C)
|
|
December 1,
2015
|
|
April 1, 2017
|
|
|
12.0
|
%
|
|
|
111,901
|
|
|
|
111,901
|
|
|
|
111,901
|
|
Note 4 (D)
|
|
April 4, 2016
|
|
December 4,
2018
|
|
|
12.0
|
%
|
|
|
343,326
|
|
|
|
240,328
|
|
|
|
343,326
|
|
Note
5 (E)
|
|
April
4, 2016
|
|
December
4, 2018
|
|
|
12.0
|
%
|
|
|
121,875
|
|
|
|
-
|
|
|
|
121,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
notes payable – related parties, net
|
|
|
|
|
|
|
|
|
|
|
1,176,447
|
|
|
|
1,964,985
|
|
Non-current
|
|
|
|
|
|
|
|
|
|
|
(824,218
|
)
|
|
|
-
|
|
Current
|
|
|
|
|
|
|
|
|
|
$
|
352,229
|
|
|
$
|
1,964,985
|
|
(A)
|
On
December 1, 2015, the Company issued a convertible note payable to Mr. Rory J. Cutaia,
the Company’s majority stockholder and Chief Executive Officer (CEO), to consolidate
all loans and advances made by Mr. Cutaia to the Company as of that date. The note bears
interest rate of 12% per annum, secured by the Company’s assets and matured on
August 1, 2018, as amended. Per the terms of the agreement, at Mr. Cutaia’s discretion,
he may convert up to $374,665 of outstanding principal, plus accrued interest thereon,
into shares of common stock at a conversion rate of $0.07 per share. As of December 31,
2017, total outstanding balance of the note amounted to $1,198,883.
On
August 8, 2018, we entered into an extension agreement with Mr. Cutaia to extend the maturity date of the note to February
8, 2021. All other terms of the note remain unchanged. In connection with the extension, we granted to Mr. Cutaia a three-year
warrant to purchase up to 2,446,700 shares of Common Stock at a price of $0.49 per share with a fair value of $1,074,602.
We determined that the extension of the note’s maturity date resulted in a debt extinguishment for accounting purposes
because the fair value of the warrants granted was more than 10% of the original value of the note. As result, we recorded
the fair value of the “new” note, which approximates the then-current carrying value of $1,198,833 of the
then-current note and expensed the entire fair value of the warrants granted of $1,074,602 as part of debt extinguishment.
On September 30, 2018, Mr. Cutaia converted the principal balance that was convertible ($374,665) into 5,352,357 shares
of Restricted Common Stock at $0.07 per share.
As
of September 30, 2018, outstanding balance of the note amounted to $824,218.
|
(B)
|
On
December 1, 2015, the Company issued a convertible note with Mr. Cutaia in the amount
of $189,000 representing a portion of Mr. Cutaia’s accrued salary for 2015. The
note was unsecured, bears interest rate of 12% per annum, matured in August 1, 2018,
as amended, and convertible to shares of common stock at a conversion price of $0.07
per share. As of December 31, 2017, outstanding balance of the note amounted to $189,000.
On
September 30, 2018, Mr. Cutaia converted the entire unpaid balance of $189,000 into 2,700,000 restricted shares of our
Common Stock at $0.07 per share.
|
(C)
|
On
December 1, 2015, the Company issued a note payable to a former member of the Company’s
Board of Directors, in the amount of $111,901 representing unpaid consulting fees as
of November 30, 2015. The note is unsecured, bears interest rate of 12% per annum and
matured in April 2017.
As
of September 30, 2018, and the date of this report, the note is past due. The Company is currently in negotiations with
the note holder to settle the note payable.
|
|
|
(D)
|
On
April 4, 2016, the Company issued a convertible note to Mr. Cutaia, in the amount of
$343,326, to consolidate all advances made by Mr. Cutaia to the Company from December
2015 through March 2016. The note bears interest rate of 12% per annum, secured by the
Company’s assets and will mature on December 4, 2018, as amended. A total of 30%
of the note principal or $102,998 can be converted to shares of common stock at a conversion
price $0.07 per share. As of December 31, 2017, outstanding balance of the note amounted
to $343,326
On
September 30, 2018 Mr. Cutaia converted the 30% of the principal balance that was convertible ($102,998) into 1,471,397
restricted shares of our Common Stock at $0.07 per share.
As
of September 30, 2018, outstanding balance of the note amounted to $240,328.
|
(E)
|
On
April 4, 2016, the Company issued a convertible note payable to Mr. Cutaia in the amount
of $121,875, representing his unpaid salary from December 2015 through March 2016. The
note was unsecured, bears interest at the rate of 12% per annum, matures on December
4, 2018, as amended, and convertible to common stock at a conversion price of $0.07 per
share. As of December 31, 2017, outstanding balance of the note amounted to $121,8750.
For
the period ended September 30, 2018 Mr. Cutaia converted $121,875 of debt into 1,741,071 shares of Restricted Common Stock.
|
Total
interest expense for notes payable to related parties was $175,846 and $176,364 for nine months ended September 30, 2018 and 2017,
respectively.
6.
|
CONVERTIBLE
NOTES PAYABLE
|
The
Company has the following convertible notes payable as of September 30, 2018 and December 31, 2017:
Note
|
|
Note
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Original
Borrowing
|
|
|
Balance
at
September 30,
2018
|
|
|
Balance
at
December 31,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Note
payable
|
|
April
3, 2016
|
|
April
4, 2018
|
|
|
12
|
%
|
|
$
|
600,000
|
|
|
$
|
-
|
|
|
$
|
680,268
|
|
Note
payable
|
|
June and August
2017
|
|
February and
March 2018
|
|
|
5
|
%
|
|
$
|
220,500
|
|
|
|
-
|
|
|
|
220,500
|
|
Note
payable
|
|
Various
|
|
Various
|
|
|
5
|
%
|
|
$
|
320,000
|
|
|
|
-
|
|
|
|
320,000
|
|
Note
payable
|
|
December 8,
2017
|
|
December 8,
2018
|
|
|
8
|
%
|
|
$
|
370,000
|
|
|
|
-
|
|
|
|
370,000
|
|
Note
payable
|
|
December
13, 2017
|
|
September
20, 2018
|
|
|
8
|
%
|
|
$
|
105,000
|
|
|
|
-
|
|
|
|
105,000
|
|
Total
notes payable
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
1,695,768
|
|
Debt
discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
(675,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
notes payable, net of debt discount
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
1,020,315
|
|
During
2016 through 2017, the Company issued convertible notes payable to unrelated, third-party creditors/investors totaling $1,695,768.
The notes bore an average interest rate of 8% per annum, secured by the Company’s assets, mature starting February 2018
through January 2019 and are convertible to shares of common stock based upon a discounted market price. As of December 31, 2017,
outstanding balance of the notes payable and unamortized debt discount amounted to $1,695,768 and $675,453, respectively.
During
the period ended September 30, 2018, the Company issued similar convertible notes payable totaling $150,000 in exchange for cash
of $130,000. The notes were secured by the Company’s assets, bore interest of 8% per annum, matures in January 2019 and
convertible to common shares at a conversion price equal to 70% of the Company’s 10-day VWAP. 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 fulfill the conversion obligation. As such, pursuant to current accounting guidelines, the Company determined that the
conversion feature of the notes created a derivative with a fair value of $252,778 at the date of issuance. The Company accounted
for the fair value of the derivative up to the face amount of the note of $150,000 as a valuation discount to be amortized over
the life of the note, and the excess of $102,778 being recorded as financing cost (see Note 7 for discussion of derivative liability).
In addition, the Company also recorded the notes’ original issue discount of $20,000 as a financing cost.
As
part of the convertible note offering during the period ended September 30, 2018, the Company also granted a five-year warrant
to acquire 1,000,000 shares of the Company’s common stock with an exercise price of $0.14 per share. A total of 500,000
warrants that were granted included a full ratchet reset provision in case of a future offering at a price below $0.14 per share
and a fundamental transaction provision that could give rise to an obligation to pay cash to the warrant holder and a reset. 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 $48,961 at the date of issuance. The Company accounted for the fair value of
the derivative as financing cost. See Note 7 for discussion of derivative liability.
During
the period ended September 30, 2018, the Company settled outstanding debt of $845,000 through the payment of cash. In addition,
Company issued 6,133,006 shares of common stock with fair value of $2,151,297 in settlement of outstanding convertible notes of
$900,760 and accrued interest of $161,475 ($1,062,235 in the aggregate) The Company recorded a loss of $1,067,242 to account the
difference in the fair value of the shares issued in excess of the aggregate amount of debt converted.
Furthermore,
upon settlement of the debt, the Company amortized the remaining debt discount of $747,623 to interest expense. As of September
30, 2018, all convertible notes payable and unpaid interest had been paid or settled.
Total
interest expense for convertible notes payable for the nine months ended September 30, 2018 and 2017 was $144,541 and $40,481,
respectively.
Under
authoritative guidance used by the FASB on determining whether an instrument (or embedded feature) is indexed to an entity’s
own stock, instruments that do not have fixed settlement provisions are deemed to be derivative instruments. The Company has issued
certain convertible notes whose conversion prices contains reset provisions based on a future offering price and/or whose conversion
prices are based on future market prices. 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 that included a fundamental transaction provision that could give rise to an obligation
to pay cash to the warrant holder.
As
a result, the conversion option and warrants are classified as liabilities and are 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.
The
derivative liabilities were valued using a probability weighted average Black-Scholes-Merton pricing model with the following
average assumptions:
|
|
September
30, 2018
|
|
|
Upon
Issuance
|
|
|
December
31, 2017
|
|
Stock
Price
|
|
$
|
0.40
|
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
Exercise
Price
|
|
$
|
0.13
|
|
|
$
|
0.08
|
|
|
$
|
0.06
|
|
Expected
Life
|
|
|
4.23
|
|
|
|
2.33
|
|
|
|
1.26
|
|
Volatility
|
|
|
221
|
%
|
|
|
193
|
%
|
|
|
189
|
%
|
Dividend
Yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk-Free
Interest Rate
|
|
|
1.89
|
%
|
|
|
1.18
|
%
|
|
|
1.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
$
|
673,376
|
|
|
$
|
301,739
|
|
|
$
|
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. As of December
31, 2017, the Company had recorded a derivative liability of $1,250,581.
During
the period ended September 30, 2018, the Company recorded an additional derivative liability totaling $301,739 as a result of
the issuance of convertible notes and warrants. The Company also extinguished derivative liability of $1,718,816 upon the conversion
and payment of outstanding convertible notes payable, which was recorded as part of gain on extinguishment of debt. In addition,
the Company also recorded a change in fair value of $839,872 to account the change in fair value of these derivative liabilities
up to the dates of the extinguishment and at September 30, 2018. At September 30, 2018, the fair value of the derivative liability
amounted to $673,376.
The
Company’s common stock activity for the nine months ended September 30, 2018 is as follows:
Common
Stock
Shares
Issued from Stock Subscription
– During the period ended September 30, 2018, the Company issued 17,459,067 shares
of common stock to investors for net cash proceeds of $2,978,500 at prices ranging from $0.06 per share to $1.00 per share.
Shares
Issued for Services
– During the period ended September 30, 2018, the Company issued 4,790,181 shares of common
stock to employees and vendors for services rendered with a fair value of $1,547,429. These shares of common stock were valued
based on market value of the Company’s stock price at the date of grant or agreement. Included in these issuances were 4,500,000
shares of common stock with a fair value of $1,539,000 granted to officers and a director of the Company for services rendered.
Shares
Issued from Conversion of Note Payable
– During the period ended September 30, 2018, the Company issued 18,647,831
shares of common stock upon conversion of notes payable and accrued interest (see Notes 4, 5 and 6).
Shares
Issued for Accrued Salary
– On March 28, 2018, the Company converted $582,333 of the CEO’s accrued salary
into 407,226 shares of common stock with a fair value of $582,333 at the date of conversion.
Shares
Issued Upon Exercise of Put Option
– In January and February 2018, the Company issued Put Notices to Kodiak and
issued 3,048,105 shares of common stock in exchange for cash of $1,000,000. In addition, the Company also issued Kodiak the prorated
warrants to purchase 2,000,000 shares of common stock at $0.25 per share.
Shares
Repurchased
. For the period ended September 30, 2018, the Company repurchased 700,000 shares of common stock from investors
for $20,000.
Stock
Options
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.
At
its discretion, the Company grants share option awards to certain employees and non-employees, as defined by ASC 718, Compensation—Stock
Compensation, under the 204 Stock Option Plan (the “Plan”) and accounts for its share-based compensation in accordance
with ASC 718.
A
summary of option activity for the nine months ended September 30, 2018 is presented below.
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at December 31, 2017
|
|
|
21,840,953
|
|
|
$
|
0.33
|
|
|
|
4.03
|
|
|
|
|
|
Granted
|
|
|
16,831,272
|
|
|
|
0.46
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(487,620
|
)
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(4,200,000
|
)
|
|
|
0.34
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2018
|
|
|
33,984,605
|
|
|
$
|
0.26
|
|
|
|
3.06
|
|
|
$
|
3,992,194
|
|
Exercisable
at September 30, 2018
|
|
|
11,304,808
|
|
|
$
|
0.35
|
|
|
|
|
|
|
$
|
2,994,627
|
|
During
the nine months ended September 30, 2018, the Company granted stock options to employees and consultants to purchase a total 16,831,272
shares of common stock for services rendered. The options have an average exercise price of $0.46 per share, expire in five years
and vest on grant date or over a period of three years from grant date. Total fair value of these options at grant date was approximately
$8,019,558 using the Black-Scholes Option Pricing model.
During
the period ended September 30, 2018, 487,620 options were exercised resulting in the issuance of 487,620 shares of common stock.
The Company received cash of $34,133 upon exercise of the options.
The
total stock compensation expense recognized relating to vesting of stock options for the nine months ended September 30, 2018
amounted to $1,413,304. As of September 30, 2018, total unrecognized stock-based compensation expense was $5,944,834, which is
expected to be recognized as part of operating expense through September 2021.
The
fair value of share option award is estimated using the Black-Scholes method based on the following weighted-average assumptions:
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2018
|
|
|
|
2017
|
|
Risk-free
interest rate
|
|
|
2.73%
- 2.99
|
%
|
|
|
1.77%
- 1.93
|
%
|
Average
expected term (years)
|
|
|
5
years
|
|
|
|
5
years
|
|
Expected
volatility
|
|
|
184%
-190
|
%
|
|
|
157
%-171
|
%
|
Expected
dividend yield
|
|
|
-
|
|
|
|
-
|
|
The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of measurement corresponding with the
expected term of the share option award; the expected term represents the weighted-average period of time that share option awards
granted are expected to be outstanding giving consideration to vesting schedules and historical participant exercise behavior;
the expected volatility is based upon historical volatility of the Company’s common stock; and the expected dividend yield
is based on the fact that the Company has not paid dividends in the past and does not expect to pay dividends in the future.
Warrants
The
Company has the following warrants outstanding as of September 30, 2018 all of which are exercisable:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Life
(Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2017
|
|
|
28,436,413
|
|
|
$
|
0.13
|
|
|
|
2.79
|
|
|
$
|
-
|
|
Granted
|
|
|
5,446,700
|
|
|
|
0.34
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(48,000
|
)
|
|
|
0.10
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(14,683,075
|
)
|
|
|
0.09
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at September 30, 2018
|
|
|
19,152,038
|
|
|
$
|
0.22
|
|
|
|
3.03
|
|
|
$
|
3,827,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at September 30, 2018
|
|
|
19,152,038
|
|
|
|
|
|
|
|
|
|
|
$
|
3,827,516
|
|
During
the period ended September 30, 2018, 14,683,075 warrants were exercised resulting in the issuance of 11,917,705 shares of common
stock. The Company received cash of $22,000 upon exercise of the warrants.
During
the nine months ended September 30, 2018, the Company granted warrants to note holders to purchase a total of 1,000,000 shares
of common stock. The warrants are exercisable at an average price of $0.14 per share and will expire in January 2023. A total
of 500,000 warrants that had been granted were accounted as derivative liability (see Note 6).
On
February 21, 2018, the Company granted 2,000,000 warrants as part of the exercise of our put option with Kodiak. The exercise
price of the 2,000,000 warrants is $0.25 per share and they expire on February 20, 2023.
On
August 8, 2018 the Company granted 2,446,700 warrants to extend the maturity date of the $1,248,833 Secured note (see note 5).
The fair market value of the warrants totaling $1,074,602 was accounted as part of debt extinguishment.
During
the nine months ended September 30, 2018, a total of 14,683,075 warrants were exercised in cash and cashless exercises for 11,917,705
shares of common stock at a weighted average exercise price of $0.09. As part of these exercises, the Company also received $22,000
upon the exercise of these warrants.
9.
|
COMMITMENTS
AND CONTINGENCIES
|
Litigation
On
April 24, 2018, EMA Financial, LLC, a New York limited liability company (“EMA”), commenced an action against us,
styled
EMA Financial, LLC, a New York limited liability company, Plaintiff, against nFUSZ, Inc., Defendant
, United States
District Court, Southern District of New York, case number 1:18-cv-03634-NRB. The Complaint sets forth four causes of action and
seeks relief consisting of: (1) money damages, (2) injunctive relief, (3) liquidated damages; and declaratory relief. All of the
claims stem from our refusal to honor EMA’s exercise notice in connection with a common stock purchase warrant that we had
granted to it. We believe EMA’s allegations are entirely without merit.
The
circumstances giving rise to the dispute are as follows: On or about December 5, 2017, we issued a warrant to EMA as part of the
consideration we were required to provide in connection with a contemporaneous convertible loan EMA made to us. The loan, which
was evidenced by a convertible Note, was for a term of one year. Our refusal to honor the warrant exercise notice was due to our
good faith belief that EMA’s interpretation of the cashless exercise provision of the warrant was,
inter alia
, (i)
contrary to our direct conversations and agreements made with EMA prior to, and during the preparation of the loan and warrant
agreements; (2) wholly inconsistent with industry norms, standards, and practices; (3) was contrary to the cashless exercise method
actually adopted by EMA’s co-lender in the same transaction; and (4) was the result of a single letter mistakenly transposed
in the cashless exercise formula drafted by EMA which if adopted, would result in a gross and unintended windfall in favor of
EMA and adverse to us. Moreover, as set forth in our response to EMA’s allegations, EMA’s interpretation of the cashless
exercise provision would have resulted in it being issued more
shares
of our common stock than it would have received if it exercised the warrant for cash (instead of less), and more than the amount
of shares reflected on the face of the warrant agreement itself. The loan underlying the transaction was repaid, in full, approximately
three months after it was issued, on March 8, 2018, together with all accrued interest, prior to any conversion or attempted conversion
of the Note.
On
July 20, 2018, we filed an Answer to the Complaint, along with certain Affirmative Defenses, as well as Counterclaims seeking,
inter alia
, to void the entire transaction for violation of New York’s criminal usury laws and, alternatively, for
reformation of the warrant conversion formula set forth in the Warrant Agreement so as to be consistent with the parties’
intent and custom and practice in the industry. We intend to vigorously defend the action, as well as vigorously prosecute our
counterclaims against EMA. The action is still pending.
We
know of no other material pending legal proceedings to which we or any of our subsidiaries is a party or to which any of our assets
or properties, or the assets or properties of any of our subsidiaries, are subject and, to the best of our knowledge, no adverse
legal activity is anticipated or threatened. In addition, we do not know of any such proceedings contemplated by any governmental
authorities.
Board
of Directors
The
Company has committed an aggregate of $270,000 in annual compensation to its three independent board members commencing
on the date the Company is listed on the NASDAQ. The members will serve on the board until the annual meeting for the year in
which their term expires or until their successors have been elected and qualified.
Subsequent
to September 30, 2018, a total of 4,600,000 warrants were exercised in cashless exercises for 4,206,111 shares of common stock
at a weighted average exercise price of $0.21.
Subsequent
to September 30, 2018, the Company granted stock options to employees and consultants to purchase a total 2,125,000 shares of
common stock for services rendered. The options have an average exercise price of $0.50 per share, expire in five years and vest
on grant date or over a period of three years from grant date. Total fair value of these options at grant date was $1,021,764
using the Black-Scholes Option Pricing model.
On
October 19, 2018, we issued an unsecured convertible note (the “Note”) to an otherwise unaffiliated third-party
entity in the aggregate principal amount of $1,500,000 in exchange for net proceeds of $1,241,500, after an Original Issue
Discount of $150,000 and legal and financing expenses of $108,500. In addition, we issued 1,450,000 shares of our Common Stock.
The Note is convertible into shares of our Common Stock only on or after the occurrence of an uncured “Event of Default.”
Primarily, we will be in default if we do not repay the principal amount of the Note, as required. The other Events of Default
are standard for the type of transaction represented by the related Securities Purchase Agreement and the Note. The conversion
price in effect on any date on which some or all of the principal of the Note is to be converted shall be a price equal to 70%
of the lowest VWAP during the ten trading days immediately preceding the date on which the third party provided its notice of
conversion. Upon an Event of Default, we will owe the third party an amount equivalent to 110% of the then-outstanding principal
amount of the Note in addition to of all other amounts, costs, expenses, and liquidated damages that might also be due in respect
thereof. We have agreed that, on or after the occurrence of an Event of Default, we will reserve and keep available that number
of shares of our Common Stock that is at least equal to 200% of the number of such shares that
potentially
would be issuable pursuant to the terms of the SPA and the Note (assuming conversion in full of the Note and on any date of determination).
As of the issue date, the Note was convertible into an aggregate of 5,603,706 shares of Common Stock. The Company
determined that, because the conversion price is unknown, the Company could not determine if it had enough authorized
shares to fulfill 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 $1,674,106 at the date of issuance. The Company
accounted for the fair value of the derivative up to the face amount of the note of $1,500,000 as a valuation discount to be amortized
over the life of the Note, and the excess of $174,106 being recorded as financing cost. In addition, the Company also recorded
the Note’s original issue discount of $285,500 as a financing cost.
On
October 30, 2018, we issued two unsecured convertible notes to one current investor and one otherwise unaffiliated
third-party in the aggregate principal amount of $400,000 in exchange for net proceeds of $400,000. The notes bear interest
at a rate of 5% per annum and will mature on April 29, 2019. These notes, upon the Company’s consummation of the
contemplated underwritten public offering of the Company’s common stock, all, and not less than all, of (i) the principal
and (ii) the accrued interest hereunder shall be converted into shares of the Company’s common stock that shall have been
registered therein. The per-share conversion price shall be seventy-five percent (75%) of the offering price of
the Common Stock, as reflected on the cover of the definitive prospectus that the Company shall file with the Securities and Exchange
Commission upon its acceleration of effectiveness of the contemplated underwritten public offering of the Company’s common
stock. As of the issue date, the notes were convertible into an aggregate of 1,523,809 shares of Common Stock. The
Company determined that, because the conversion price is unknown, that the Company could not determine if it had
enough authorized shares to fulfill the conversion obligation. As such, pursuant to current accounting guidelines, the Company
determined that the conversion feature of the notes created a derivative with a fair value of $383,966 at the date of issuance.
The Company accounted for the fair value of the derivative as a financing cost.
On
November 8, 2018, we, and our two wholly-owned merger subsidiaries, entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with Sound Concepts, Inc., a Utah corporation, its shareholders, and a shareholders’ representative, pursuant
to which we will acquire Sound Concepts through a two-step merger, consisting of merging one of our merger subsidiaries with and
into Sound Concepts (with Sound Concepts surviving the “first step” of the merger) and, immediately thereafter, merging
Sound Concepts with and into our other merger subsidiary (with that subsidiary surviving the “second step” of the
merger). We will pay $25,000,000 of value to the shareholders of Sound Concepts, payable through a combination of a $15,000,000
cash payment by us and the issuance of shares of our common stock with a fair market value of $10,000,000. The purchase price
is not subject to any closing working capital adjustment or post-closing working capital adjustment.
Each
of the parties to the Merger Agreement made customary representations, warranties, and indemnities subject to, in some cases,
exceptions and qualifications as will be set forth in a disclosure schedule to the Merger Agreement. Each of the parties also
agreed to certain covenants and other agreements, including, among others, (i) covenants requiring Sound Concepts and its shareholders
to not solicit other acquisition bids or proposals and (ii) covenants regarding non-solicitation and non-competition.
Completion
of the acquisition is subject to the satisfaction or waiver of certain conditions. In addition to customary closing conditions,
our obligation to complete the acquisition is conditioned upon the consummation of an underwritten public offering of our common
stock and receipt by us of offering proceeds that will be used to pay for all or a portion of the cash portion of the merger consideration.
Nothing herein shall constitute an offer to sell or the solicitation of an offer to buy any of the securities in our anticipated
offering of shares of our Common Stock.
Currently,
we anticipate the closing of the Sound Concepts acquisition to occur in the first quarter of fiscal 2019; however, there can be
no assurance that it will close in the first quarter of fiscal 2019, or at all.
The
Merger Agreement may be terminated under certain circumstances, including, but not limited to: (i) the mutual written consent
of Sound Concepts and us; (ii) by us if there has been a breach, inaccuracy in, or failure to perform any representation, warranty,
covenant, or agreement made by Sound Concepts or its shareholders pursuant to the Merger Agreement that would give rise to the
failure of any of the closing conditions and such breach, inaccuracy, or failure has not been cured within 10 days of Sound Concepts’
receipt of written notification of such breach from us; provided, that, we (or our merger subsidiaries) are not then in material
breach of any provision of the Merger Agreement; (iii) by us if our closing conditions have not been, or if it becomes apparent
that any of such conditions will not be, fulfilled by February 14, 2019, unless such failure is due to our failure to perform
or comply with any of the covenants, agreements, or conditions required to be performed or complied with by it prior to the closing
of the acquisition; (iv) by Sound Concepts if there has been a breach, inaccuracy in, or failure to perform any representation,
warranty, covenant, or agreement made by us (or our merger subsidiaries) pursuant to the Merger Agreement that would give rise
to the failure of any of the closing conditions and such breach, inaccuracy, or failure has not been cured within 10 days of our
receipt of written notice of such breach from Sound Concepts; provided, that neither Sound Concepts or its shareholders is then
in material breach of any provision of the Merger Agreement; (v) by Sound Concepts if any of Sound Concepts’ or its shareholders’
closing conditions have not been, or if it becomes apparent that any of such conditions will not be, fulfilled by January 31,
2019, unless such failure is due to Sound Concepts’, or its shareholders’, failure to perform or comply with any of
the covenants, agreements, or conditions to be performed or complied with by it or them prior to the Closing of the acquisition;
and (vi) by Sound Concepts or us if (1) there is any law that makes consummation of the transactions contemplated by the Merger
Agreement illegal or otherwise prohibited or (2) any governmental authority issued a governmental order restraining or enjoining
the transactions contemplated by the Merger Agreement, and such governmental order has become final and non-appealable.
ITEM
2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking
Statements
The
following discussion and analysis of the results of operations and financial condition of nFüsz for the three- and nine-month
periods ended September 30, 2018 and 2017, should be read in conjunction with the financial statements and related notes and the
other financial information that are included elsewhere this Quarterly Report. This discussion includes forward-looking statements
based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions.
Forward-looking statements are statements not based on historical fact and which relate to future operations, strategies, financial
results, or other developments. Forward-looking statements are based upon estimates, forecasts, and assumptions that are inherently
subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control
and many of which, with respect to business decisions, are subject to change. These uncertainties and contingencies can affect
actual results to differ materially from those expressed in any forward-looking statements made by us, or on our behalf. We disclaim
any obligation to update forward-looking statements. Actual results and the timing of events could differ materially from those
anticipated in these forward-looking statements as a result of a number of factors. We use words such as “anticipate,”
“estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,”
“believe,” “intend,” “may,” “will,” “should,” “could,”
and similar expressions to identify forward-looking statements.
As
used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” and “nFüsz”
refer to nFüsz, Inc., a Nevada corporation unless otherwise specified.
Overview
Cutaia
Media Group, LLC (“CMG”) was organized on December 12, 2012, as a limited liability company under the laws of the
State of Nevada. On May 19, 2014, bBooth, Inc. was incorporated under the laws of the State of Nevada. On May 19, 2014, CMG merged
into bBooth, Inc. and, thereafter, bBooth, Inc. changed its name to bBooth (USA), Inc., effective as of October 16, 2014.
On
October 16, 2014, bBoothUSA was acquired by Global System Designs, Inc. (“GSD”), pursuant to a Share Exchange Agreement
entered into with GSD (the “Share Exchange Agreement”). GSD was incorporated in the state of Nevada on November 27,
2012. The acquisition was accounted for as a reverse merger transaction. In connection with the closing of the transactions contemplated
by the Share Exchange Agreement, GSD’s management was replaced by bBoothUSA’s management, and GSD changed its name
to bBooth, Inc. The operations of CMG and bBooth (USA), Inc. became known as, and are referred to herein as, “bBooth USA.”
Effective
April 21, 2017, we changed our corporate name from bBooth, Inc. to nFüsz, Inc. The name change was effected through a parent/subsidiary
short-form merger of nFüsz, Inc., our wholly-owned Nevada subsidiary, formed solely for the purpose of the name change, with
and into us. We were the surviving entity. To effectuate the merger, we filed Articles of Merger and a Certificate of Correction
(relative to the effective date of the name change merger) with the Secretary of State of the State of Nevada on April 4, 2017,
and April 17, 2017, respectively. The merger became effective on April 21, 2017. Our board of directors approved the merger, which
resulted in the name change on that date. In accordance with Section 92A.180 of the Nevada Revised Statutes, stockholder approval
of the merger was not required.
Results
of Operations
Three
Months Ended September 30, 2018 as Compared to the Three Months Ended September 30, 2017
Revenues
Subscription
revenues for the three months ended September 30, 2018 were $10,085, compared to $0 for the three months ended September 30, 2017.
The increase in subscription revenues were primarily attributable to the Company’s SaaS platform that was launched during
the fourth quarter of fiscal 2017. There was no similar transaction in the third quarter of 2017.
Operating
Expenses
Research
and development expenses were $202,054 for the three months ended September 30, 2018, as compared to $109,350 for the three months
ended September 30, 2017. The increase was primarily due to an increase in fees for coders dedicated to software development enhancements
and modifications.
General
and administrative expenses for the three months ended September 30, 2018 and 2017 were $472,538 and $1,082,131, respectively.
The decrease was primarily due to a decrease in stock-based compensation expense of $1,113,167 offset by an increase in professional
services, marketing and labor related costs associated with growth of the Company. The significant decrease in stock-based compensation
is attributed the termination of certain consulting relationships during the third quarter of 2018.
Other
expense, net, for the three months ended September 30, 2018 amounted to $805,485 which included a loss on debt extinguishment
of $1,074,602, interest expense of $58,916, and other expense of $12,817, all offset by a change in fair value of derivative
liability of $(340,851). The amount of other expense, net, was higher in the third quarter of 2018 due an increase in debt extinguishment
of $650,271, all offset by a change in fair value of derivative liability of $(340,851), lower interest expense $(146,122),
and no amortization of debt discount in the third quarter of 2018.
Nine
Months Ended September 30, 2018 compared to the Nine Months Ended September 30, 2017.
Revenues
Subscription
revenues for the nine months ended September 30, 2018 were $26,327, compared to $0 for the nine months ended September 30, 2017.
The increase in subscription revenues were primarily attributable to the Company’s SaaS platform that was launched during
the fourth quarter of fiscal 2017. There was no similar transaction in the first nine months of 2017.
Operating
Expenses
Research
and development expenses were $437,787 for the nine months ended September 30, 2018, as compared to $291,190 for the nine months
ended September 30, 2017. The increase was primarily due to an increase in fees for coders dedicated to software development enhancements
and modifications.
General
and administrative expenses for the nine months ended September 30, 2018 and 2017 were $5,251,967 and $3,052,161, respectively.
The increase was primarily due to an increase in stock-based compensation expense of $1,137,489 and an increase in labor related
costs, marketing, professional services, and travel associated with growth of the Company. The increase in stock-based compensation
was due to increase in the price of the Company’s common stock offset by the termination of certain consulting relationships.
The price of the Company’s common stock increased from $0.10 per share at December 31, 2017 to $0.40 per share at September
30, 2018, or an average price of $0.72 per share during the period ended September 30, 2018. In the prior period, the average
price of the Company’s common stock was $0.82 per share.
Other
expense, net, for the nine months ended September 30, 2018 amounted to $2,529,096, which represented a change in fair value of
derivative liability of $839,872, interest expense for amortization of debt discount of $747,623, debt extinguishment of $423,028,
interest expense of $321,637 on outstanding notes payable, $171,739 of financing costs attributed to derivative liabilities, and
other expense of $25,197. The amount of other expense, net, was higher in 2018 due to the payoff off and conversion of debt plus
a change in derivative liability that did not occur during 2017.
Modified
EBITDA
In
addition to our GAAP results, we present Modified EBITDA as a supplemental measure of our performance. However, Modified EBITDA
is not a recognized measurement under GAAP and should not be considered as an alternative to net income, income from operations,
or any other performance measure derived in accordance with GAAP or as an alternative to cash flow from operating activities
as a measure of liquidity. We define Modified EBITDA as net income (loss), plus interest expense, depreciation and amortization,
stock-based compensation, financing costs and changes in fair value of derivative liability.
Management
considers our core operating performance to be that which our managers can affect in any particular period through their management
of the resources that affect our underlying revenue and profit generating operations that period. Non-GAAP adjustments to our
results prepared in accordance with GAAP are itemized below. Readers are encouraged to evaluate these adjustments and the reasons
we consider them appropriate for supplemental analysis. In evaluating Modified EBITDA, readers should be aware that in the future
we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Modified
EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
|
|
For
the three months Ended
|
|
|
For
the nine months Ended
|
|
|
|
9/30/2018
|
|
|
9/30/2017
|
|
|
9/30/2018
|
|
|
9/30/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,469,992
|
)
|
|
$
|
(1,880,889
|
)
|
|
$
|
(8,192,523
|
)
|
|
$
|
(4,849,474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Compensation Expense
|
|
|
(495,860
|
)
|
|
|
617,308
|
|
|
|
2,960,733
|
|
|
|
1,824,045
|
|
Change
in fair value of derivative liability
|
|
|
(340,851
|
)
|
|
|
-
|
|
|
|
839,872
|
|
|
|
-
|
|
Amortization
of debt discount
|
|
|
-
|
|
|
|
81,957
|
|
|
|
747,623
|
|
|
|
174,981
|
|
Interest
expense
|
|
|
58,916
|
|
|
|
205,040
|
|
|
|
321,637
|
|
|
|
375,862
|
|
Financing
costs
|
|
|
-
|
|
|
|
-
|
|
|
|
171,739
|
|
|
|
-
|
|
Depreciation
|
|
|
5,329
|
|
|
|
5,422
|
|
|
|
15,823
|
|
|
|
16,090
|
|
Gain
on debt extinguishment, net
|
|
|
1,074,602
|
|
|
|
424,330
|
|
|
|
423,028
|
|
|
|
977,201
|
|
Total
EBITDA adjustments
|
|
|
302,136
|
|
|
|
1,334,057
|
|
|
|
5,480,455
|
|
|
|
3,368,179
|
|
Modified
EBITDA
|
|
$
|
(1,167,856
|
)
|
|
$
|
(546,832
|
)
|
|
$
|
(2,712,068
|
)
|
|
$
|
(1,481,295
|
)
|
The
$621,024 decrease in modified EBITDA for the three months ended September 30, 2018 compared to the same period in 2017, resulted
from the increase in labor-related costs, marketing, professional services, and travel associated with growth of the Company.
The
$1,230,773 decrease in modified EBITDA for the nine months ended September 30, 2018 compared to the same period in 2017, resulted
from the increase in labor-related costs, marketing, professional services, and travel associated with growth of the Company.
We
present Modified EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods
on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition,
we use Modified EBITDA in developing our internal budgets, forecasts and strategic plan; in analyzing the effectiveness of our
business strategies in evaluating potential acquisitions; and in making compensation decisions and in communications with our
board of directors concerning our financial performance. Modified EBITDA has limitations as an analytical tool, which includes,
among others, the following:
|
●
|
Modified
EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
|
|
|
|
|
●
|
Modified
EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
|
|
|
|
|
●
|
Modified
EBITDA does not reflect future interest expense, or the cash requirements necessary to service interest or principal payments,
on our debts; and
|
|
|
|
|
●
|
Although
depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced
in the future, and the Modified EBITDA does not reflect any cash requirements for such replacements.
|
Liquidity
and Capital Resources
Going
Concern
We
have incurred operating losses since inception and have negative cash flows from operations. As of September 30, 2018, we had
a stockholders’ deficit of $2,283,422 and incurred a net loss of $8,192,523 during the nine-month period ended September
30, 2018. We also utilized $2,801,405 in cash during the period ended September 30, 2018. As a result, our continuation as a going
concern is dependent on our ability to obtain additional financing until we can generate sufficient cash flows from operations
to meet our obligations. We intend to continue to seek additional debt or equity financing, including the contemplated underwritten
public offering of our common stock to continue our operations.
Our
condensed consolidated financial statements have been prepared on a going concern basis, which implies we may not continue to
meet our obligations and continue our operations for the next fiscal year. The continuation of our Company as a going concern
is dependent upon our ability to obtain necessary debt or equity financing to continue operations until our Company begins generating
positive cash flow.
There
is no assurance that we will ever be profitable or that debt or equity financing will be available to us in the amounts, on terms,
and at times deemed acceptable to us, if at all. The issuance of additional equity securities by us would result in a significant
dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available,
would increase our liabilities and future cash commitments. If we are unable to obtain financing in the amounts and on terms deemed
acceptable to us, we may be unable to continue our business, as planned, and as a result may be required to scale back or cease
operations for our business, the result of which would be that our stockholders would lose some or all of their investment. The
consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classifications of liabilities that may result should we be unable to continue
as a going concern.
Overview
As
of September 30, 2018, we had cash of $379,461. We estimate our operating expenses for the next three months may continue to exceed
any revenues we generate, and we may need to raise capital through either debt or equity offerings to continue operations. We
are in the early stages of our business. We are required to fund growth from financing activities, and we intend to rely on a
combination of equity and debt financings. Due to market conditions and the early stage of our operations, there is considerable
risk that we will not be able to raise such financings at all, or on terms that are not dilutive to our existing stockholders.
We can offer no assurance that we will be able to raise such funds. If we are unable to raise the funds we require for all of
our planned operations, we may be forced to reallocate funds from other planned uses and may suffer a significant negative effect
on our business plan and operations, including our ability to develop new products and continue our current operations. As a result,
our business may suffer, and we may be forced to reduce or discontinue operations.
Subsequent
to September 30, 2018, the Company issued $1,900,000 in convertible notes netting $1,614,480. As of November 14, 2018, we had
cash of $1,326,805. We expect to use the proceeds of the notes:
|
●
|
As
a bridge to fund our operations prior to the consummation of the contemplated underwritten
public offering of our common stock in connection with our NASDAQ listing application
(although we cannot provide you with any assurance that the contemplated public offering
will close or that our Common Stock will be uplisted to The NASDAQ Stock Market);
|
|
|
|
|
●
|
To
provide additional funding as required for our pre-closing integration activities in
connection with our pending acquisition of Sound Concepts, Inc.;
|
|
|
|
|
●
|
To
fund the ongoing costs associated with the integration of our software with the Salesforce.com,
Inc., platform;
|
|
|
|
|
●
|
To
fund the ongoing costs associated with the integration of our software with Microsoft
Outlook, Microsoft Dynamics, and the Microsoft Office 365 platform, among other ongoing
initiatives with Microsoft Corporation;
|
|
|
|
|
●
|
To
fund the ongoing costs associated with the integration of our software with the Odoo
platform;
|
|
|
|
|
●
|
To
fund our ongoing development costs associated with the adaptation of our notifiMED product for certain clinical trial initiatives;
|
|
|
|
|
●
|
To
fund our ongoing development costs associated with the development and adaptation of our notifiLIVE for Facebook Live and
Instagram users; and
|
|
|
|
|
●
|
To
fund our general corporate working capital needs, including the costs of additional staff to facilitate the foregoing initiatives.
|
Cash
Flows – Operating
For
the nine months ended September 30, 2018, our cash flows used in operating activities amounted to $2,801,405, compared
to cash used during the nine months ended September 30, 2017 of $1,174,534. The change is due to an increase in business activity,
which resulted in an additional consulting expenses, salary, and various operating expenses in the first nine months of 2018 compared
to the first nine months of 2017. In addition, the Company paid accrued interest as part of the convertible debt repayments
in the first quarter of our 2018 fiscal year and reduction in outstanding accounts payable.
Cash
Flows – Financing
Our
cash provided by financing activities for the nine months ended September 30, 2018 amounted to $3,170,306, which represented $2,978,500
of proceeds received from the issuances of our common stock, $1,000,000 of proceeds from the issuance of shares of our common
stock from the exercise of a put option, $130,000 of proceeds from the issuance of convertible debt, $34,133 of proceeds from
the exercise of options, and $22,000 of proceeds from the exercise of warrants, offset by $845,000 of convertible debt payments,
$129,327 of deferred offering costs, and the repurchase of common stock equal to $20,000. Our cash provided by financing activities
for the nine months ended September 30, 2017 amounted to $1,186,678, which represented $555,000 of proceeds received from the
issuance of convertible Series A preferred stock, $470,000 of proceeds received from the issuances of common stock, and $300,000
of proceeds from the issuance of convertible notes payable, offset by $138,322 redemption of Series A preferred stock. All shares
of Series A preferred stock have been converted and we filed a Certificate of Elimination / Withdrawal with the state of Nevada
to eliminate that series.
Warrant
Liability
As
of September 30, 2018, total liabilities are $2,880,313, of which $673,376 is attributable to certain outstanding warrants to
purchase up to 1.7 million shares of common stock that are accounted for as derivative liability (see Note 7 Derivative Liability
to the attached unaudited consolidated financial statements). Without the derivative liability, total liabilities would have been
$2,206,937, of which $1,383,383 is related party debt and accruals.
As
of September 30, 2018, the derivative liability of $673,376 relates to outstanding warrants to purchase up to 1.7 million shares
of common stock issued in December 2017 and January 2018. Due to certain adjustments that may be paid to the exercise price of
the warrants if the Company issues or sells rights, options, or warrants to holders of its common stock (and not to the
warrant holders) entitling them to subscribe for or purchase shares of its common stock at a price that is less than the closing
price at the record date of such issuance, the warrants have been classified as a liability, as opposed to equity, in accordance
with ASC 815-10 as it was determined that the warrants were not indexed to our common stock.
Notes
Payable
The
Company has the following outstanding notes payable to related parties at September 30, 2018 that are due in the current year:
Payable
to:
|
|
Issuance
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Original
Borrowing
|
|
|
Balance
at
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rory
Cutaia (A)
|
|
December
1, 2015
|
|
February
8, 2021
|
|
|
12.0
|
%
|
|
$
|
1,248,883
|
|
|
$
|
824,218
|
|
Rory
Cutaia (B)
|
|
December
1, 2015
|
|
February
8, 2021
|
|
|
12.0
|
%
|
|
|
189,000
|
|
|
|
-
|
|
Past
Director
|
|
December
1, 2015
|
|
April
1, 2017
|
|
|
12.0
|
%
|
|
|
111,901
|
|
|
|
111,901
|
|
Rory
Cutaia (C)
|
|
April
4, 2016
|
|
December
4, 2018
|
|
|
12.0
|
%
|
|
|
343,326
|
|
|
|
240,328
|
|
Rory
Cutaia (D)
|
|
April
4, 2016
|
|
December
4, 2018
|
|
|
12.0
|
%
|
|
|
121,875
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
notes payable – related parties
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,176,447
|
|
(A)
|
Per
the terms of the agreement, at Mr. Cutaia’s discretion (our Chief Executive Officer), he may convert up to $374,665
of outstanding principal, plus accrued interest thereon, into shares of common stock at a conversion rate of $0.07 per share.
On August 8, 2018 the Company entered into an extension agreement with Mr. Cutaia to extend the maturity date of the note
to and including February 8, 2021. In consideration for extending the Note the Company issued Mr. Cutaia 2,446,700 warrants.
On September 30, 2018, Mr. Cutaia converted the principal balance that was convertible ($374,665) into 5,352,357 restricted
shares of our Common Stock at $0.07 per share.
|
|
|
(B)
|
The
entire note can be converted to shares of common stock at a per-share conversion price of $0.07. On September 30, 2018, Mr.
Cutaia converted the entire unpaid balance of $189,000 into 2,700,000 restricted shares of our Common Stock at $0.07 per share.
|
|
|
(C)
|
A
total of 30% of the note principal can be converted to shares of common stock at a conversion price $0.07 per share. On September
30, 2018 Mr. Cutaia converted the 30% of the principal balance that was convertible ($102,998) into 1,471,397 restricted shares
of our Common Stock at $0.07 per share.
|
|
|
(D)
|
The
entire note can be converted to shares of common stock at a per-share conversion price of $0.07. On September 30, 2018, Mr.
Cutaia converted the entire balance of $121,875 into 1,741,071 restricted shares of our Common Stock.
|
Off
Balance Sheet Arrangements
We
have no off-balance sheet arrangements.
Contractual
Obligations
We
are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), and are not required to provide the information under this Item.
Critical
Accounting Policies
Our
financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which
require that we make certain assumptions and estimates that affect the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of net revenue and expenses during each reporting period.
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 at the date of the financial
statements, and the reported amounts of revenues and expenses during the reported periods. Significant estimates include valuation
of derivative liability, valuation of debt and equity instruments, share-based compensation arrangements, and realization of deferred
tax assets. Amounts could materially change in the future.
Derivative
Financial Instruments
The
Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported
in the consolidated statements of operations. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities
are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument
could be required within 12 months of the balance sheet date.
The
Company uses Level 2 inputs for its valuation methodology for the derivative liabilities as their fair values were determined
by using a probability weighted average Black-Scholes-Merton pricing model based on various assumptions. The Company’s derivative
liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded
in results of operations as adjustments to fair value of derivatives.
Share-Based
Payment
The
Company issues stock options, warrants exercisable for shares of common stock, common stock, and equity interests as share-based
compensation to employees and non-employees.
The
Company accounts for its share-based compensation to employees in accordance FASB ASC 718 “Compensation – Stock Compensation.”
Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized
as expense over the requisite service period.
The
Company accounts for share-based compensation issued to non-employees and consultants in accordance with the provisions of FASB
ASC 505-50
“
Equity - Based Payments to Non-Employees
.”
Measurement of share-based payment transactions
with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or
(b) the equity instruments issued. The final fair value of the share-based payment transaction is determined at the performance
completion date. For interim periods, the fair value is estimated, and the percentage of completion is applied to that estimate
to determine the cumulative expense recorded.
The
Company values stock compensation based on the market price on the measurement date. As described above, for employees this is
the date of grant, and for non-employees, this is the date of performance completion.
The
Company values stock options using the Black-Scholes option pricing model. Assumptions used in the Black-Scholes model to value
options issued during the nine months ended September 30, 2018 and 2017 are as follows:
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2018
|
|
|
|
2017
|
|
Risk-free
interest rate
|
|
|
2.73%
- 2.99
|
%
|
|
|
1.77%
- 1.93
|
%
|
Average
expected term (years)
|
|
|
5
years
|
|
|
|
5
years
|
|
Expected
volatility
|
|
|
184%
-190
|
%
|
|
|
157%-171
|
%
|
Expected
dividend yield
|
|
|
-
|
|
|
|
-
|
|
The
risk-free interest rate is based on rates established by the Federal Reserve Bank. The expected term represents the weighted-average
period of time that share option awards are expected to be outstanding giving consideration to vesting schedules and historical
participant exercise before. The Company uses the historical volatility of its common stock to estimate the future volatility
for its common stock. The expected dividend yield is based on the fact that the Company has not customarily paid dividends in
the past and does not expect to pay dividends in the future.
Recently
Issued Accounting Pronouncements
For
a summary of our recent accounting policies, refer to Note 2 of our unaudited condensed consolidated financial statements included
under Item 1 – Financial Statements in this Form 10-Q.