NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND OPERATIONS
We engage in the development, production and distribution of organic dietary nutraceutical supplement products, principally in the United States of America. We are also engaged in the discovery, scientific evaluation and marketing of natural formulations that can be used in medical foods, nutraceuticals, cosmetics and other products developed and sold by Entia and by third parties.
We have a history of incurring net losses and net operating cash flow deficits. We are also developing new organic medical food products. At June 30, 2016, we had cash and cash equivalents of $17,758. These conditions raise substantial doubt about our ability to continue as a going concern. Based on planned financings, and results from future operations, we believe that we will have sufficient funds to continue operations through 2016.
In order for us to continue as a going concern beyond this point and ultimately to achieve profitability, we may be required to obtain capital from external sources, increase revenues and reduce operating costs. The issuance of equity securities will also cause dilution to our shareholders. If external sources of financing are not available or are inadequate to fund our operations, we will be required to reduce operating costs including personnel costs, which could jeopardize our future strategic initiatives and business plans. The accompanying consolidated financial statements have been prepared assuming that the Company continues as a going concern.
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 classification of liabilities that may result from the matters discussed herein.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and principles of consolidation
The accompanying consolidated unaudited interim financial statements and related notes have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) for interim financial information, and with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Unaudited interim results are not necessarily indicative of the results for the full year. These unaudited interim financial statements should be read in conjunction with the financial statements of the Company for the year ended December 31, 2015 and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the SEC.
All intercompany accounts have been eliminated for the purpose of the consolidated financial statement presentation.
Use of estimates
The preparation of consolidated financial statements in conformity with U.S. 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash
We consider all highly liquid, short-term investments with original maturities of three months or less when purchased to be cash equivalents.
Accounts receivable
Accounts receivable are recorded at the invoiced amount, net of allowance for doubtful accounts. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses based on specific identification of accounts in our existing accounts receivable. Outstanding account balances are reviewed individually for collectibility. We determine the allowance based on historical write-off experience, customer specific facts and economic conditions. Bad debt expense is included in general and administrative expenses, if any. We generally consider all accounts greater than 30 days old to be past due. Account balances are charged off against allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The allowance for doubtful accounts was $5,736 and $30,022 at June 30, 2016 and December 31, 2015, respectively.
Inventory
Inventory, which consists primarily of raw materials to be used in the production of our dietary supplement products, is stated at the lower of cost or market using the first-in, first-out method. We regularly review our inventory on hand and, when necessary, record a provision for excess or obsolete inventory.
Property and equipment
Property and equipment are recorded at cost. Additions and improvements that increase the value or extend the life of an asset are capitalized. Maintenance and repairs are expensed as incurred. Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the consolidated statement of operations. Depreciation is computed on a straight-line basis over the following estimated useful lives of the assets:
|
Office equipment
|
3 years
|
|
Production equipment
|
5 to 7 years
|
|
Equipment under capital lease
|
5 to 7 years
|
|
Leasehold improvements
|
Lesser of lease term or useful life of improvement
|
Patents
Patents, once issued or purchased, are amortized using the straight-line method over their economic remaining useful lives. All internally developed process costs incurred to the point when a patent application is to be filed are expensed as incurred and classified as research and development costs. Patent application costs, generally legal costs, are capitalized pending disposition of the individual patent application, and are subsequently either amortized based on the initial patent life granted, generally 15 to 20 years for domestic patents and five to 20 years for foreign patents, or expensed if the patent application is rejected. Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.
Licenses
Licenses that allow us to use certain technology in the production of our products are amortized on a straight-line basis over their remaining useful life (typically 15-17 years). Long-lived assets, including licenses, property and equipment and patents are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
We assess the recoverability of our long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives.
Discount on convertible notes payable
We allocate the proceeds received from convertible notes between convertible notes payable and warrants, if applicable. The resulting discount for warrants is amortized using the effective interest method over the life of the debt instrument. After allocating a portion of the proceeds to the warrants, the effective conversion price of the convertible note payable can be determined. If the effective conversion price is lower than the market price at the date of issuance, a beneficial conversion feature is recorded as an additional discount to the convertible note payable. The beneficial conversion feature discount is amortized using the effective interest method over the life of the debt instrument. The amortization is recorded as interest expense on the consolidated statements of operations.
Fair value of financial instruments
The carrying amounts of our financial assets and liabilities, such as cash, accounts receivable and accounts payable, approximate their fair values (determined based on level 1 inputs in the fair value hierarchy) because of the short maturity of these instruments. Due to conversion features and other terms, it is not practical to estimate the fair value of notes payable and convertible notes. The carrying value of the Company’s line of credit would not differ significantly from fair value (based on level 2 inputs) if recalculated based on current interest rates.
Fair value measurements
We measure fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. We utilize a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
|
Level 1
|
|
Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
|
|
|
|
|
|
Level 2
|
|
Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
|
|
|
|
|
|
Level 3
|
|
Unobservable inputs where there is little or no market data, which require the reporting entity to develop its own assumptions.
|
We do not have any assets or liabilities measured at fair value on a recurring or a non-recurring basis. Consequently, we did not have any fair value adjustments for assets and liabilities measured at fair value at June 30, 2016 or December 31, 2015 nor any gains or losses reported in the consolidated statement of operations that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date for the periods ended June 30, 2016 and June 30, 2015.
Revenue recognition
We recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been performed, (iii) amounts are fixed or determinable and (iv) collectibility of amounts is reasonably assured.
Revenues from the sale of products, including shipping and handling fees but excluding statutory taxes collected from customers, as applicable, are recognized when shipment has occurred. We sell our products directly to customers. Persuasive evidence of an arrangement is demonstrated via order and invoice, product delivery is evidenced by a bill of lading from the third party carrier and title transfers upon shipment, the sales price to the customer is fixed upon acceptance of the order and there is no separate sales rebate, discount, or volume incentive. Allowances for product returns, primarily in connection with one distribution agreement, are provided at the time the sale is recorded. This allowance is based upon historical return rates for the Company and relevant industry patterns, which reflects anticipated returns of unopened product in its original packaging to be received over a period of 120 days following the original sale.
Shipping and handling costs
Amounts charged to customers for shipping products are included in revenues and the related costs are classified in cost of goods sold as incurred.
Advertising and promotion costs
Costs associated with the advertising and promotions of our products are expensed as incurred.
Equity instruments issued to parties other than employees for acquiring goods or services
We account for all transactions in which goods or services are the consideration received for the issuance of equity instruments based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur. Currently such transactions are primarily awards of warrants to purchase common stock.
The fair value of each warrant award is estimated on the date of grant using a Black-Scholes option-pricing valuation model.
The assumptions used to determine the fair value of our warrants are as follows:
|
·
|
The expected life of warrants issued represents the period of time the warrants are expected to be outstanding;
|
|
·
|
The expected volatility is generally based on the historical volatility of comparable companies’ stock over the contractual life of the warrant;
|
|
·
|
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the contractual life of the warrant; and
|
|
·
|
The expected dividend yield is based on our current dividend yield as the best estimate of projected dividend yield for periods within the contractual life of the warrant.
|
Income taxes
We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in our consolidated statements of income in the period that includes the enactment date.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in our consolidated financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Should they occur, our policy is to classify interest and penalties related to tax positions as income tax expense.
We did not record an income tax provision for the three and six months ended June 30, 2016 and 2015 as we had a net taxable loss (the benefit of which was fully reserved) in the periods.
Net loss per common share
Basic and diluted net loss per share has been computed by dividing our net loss by the weighted average number of common shares issued and outstanding. Convertible preferred stock, options and warrants to purchase our common stock as well as debt which is convertible into common stock are anti-dilutive and therefore are not included in the determination of the diluted net loss per share for three and six months ended June 30, 2016 and 2015. The following table presents a reconciliation of basic loss per share and excluded dilutive securities:
|
|
|
For the Three Months Ended June 30,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(401,631
|
)
|
|
$
|
(1,069,336
|
)
|
|
$
|
(674,226
|
)
|
|
$
|
(1,589,844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
28,138,527
|
|
|
|
23,319,184
|
|
|
|
28,128,779
|
|
|
|
19,814,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock warrants
|
|
|
19,233,692
|
|
|
|
17,791,007
|
|
|
|
19,233,692
|
|
|
|
17,791,007
|
|
|
Series A convertible preferred stock
|
|
|
1,885,630
|
|
|
|
1,928,070
|
|
|
|
1,885,630
|
|
|
|
1,928,070
|
|
|
Stock options
|
|
|
2,856,970
|
|
|
|
2,896,470
|
|
|
|
2,856,970
|
|
|
|
2,896,470
|
|
|
Convertible debt including interest
|
|
|
3,858,770
|
|
|
|
95,438
|
|
|
|
3,858,770
|
|
|
|
95,438
|
|
|
Excluded dilutive securities
|
|
|
27,835,062
|
|
|
|
22,710,985
|
|
|
|
27,835,062
|
|
|
|
22,710,985
|
|
Reclassifications
Certain reclassifications have been made to prior period financial statements and footnotes in order to conform to the current period's presentation.
Segments
We have determined that we operate in one segment for financial reporting purposes.
Recently issued accounting pronouncements
In May 2014, the FASB issued new accounting guidance related to revenue recognition. This new standard will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for Entia beginning after December 15, 2017 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We are evaluating the impact of adopting this new accounting standard on our financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update requires organizations to recognize lease assets and lease liabilities on the balance sheet and also disclose key information about leasing arrangements. This ASU is effective for annual reporting periods beginning on or after December 15, 2018, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual period. We are currently evaluating the impact the adoption of this ASU will have on our consolidated financial statements.
NOTE 3 – INVENTORY
Inventory consists of the following at:
|
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
Raw materials
|
|
$
|
197,113
|
|
|
$
|
219,074
|
|
|
Finished goods
|
|
|
22,031
|
|
|
|
27,313
|
|
|
|
|
|
219,144
|
|
|
|
246,387
|
|
|
Less reserve for excess and obsolete inventory
|
|
|
(151,064
|
)
|
|
|
(151,064
|
)
|
|
|
|
|
68,080
|
|
|
|
95,323
|
|
|
Less current portion
|
|
|
(13,080
|
)
|
|
|
(40,323
|
)
|
|
|
|
$
|
55,000
|
|
|
$
|
55,000
|
|
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, consists of the following at:
|
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
Office equipment
|
|
$
|
31,658
|
|
|
$
|
31,658
|
|
|
Production equipment
|
|
|
90,899
|
|
|
|
90,899
|
|
|
Leasehold improvements
|
|
|
16,328
|
|
|
|
16,328
|
|
|
|
|
|
138,885
|
|
|
|
138,885
|
|
|
Less: accumulated depreciation
|
|
|
(113,471
|
)
|
|
|
(106,199
|
)
|
|
|
|
$
|
25,414
|
|
|
$
|
32,686
|
|
NOTE 5 - PATENTS AND LICENSES, NET
Our identifiable long-lived intangible assets are patents and prepaid licenses. Patent and license amortization is $1,099 and $3,370 for the three months ended June 30, 2016 and 2015, respectively and $2,198 and $6,740 for the six months ended June 30, 2016 and 2015, respectively.
The licenses are being amortized over an economic useful life of 17 years. The gross carrying amounts and accumulated amortization related to these intangible assets consist of the following at:
|
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
Licenses and amortizable patents
|
|
$
|
97,244
|
|
|
$
|
97,244
|
|
|
Unamortized patents
|
|
|
186,510
|
|
|
|
179,393
|
|
|
Accumulated amortization
|
|
|
(46,251
|
)
|
|
|
(44,053
|
)
|
|
Patents and licenses, net
|
|
$
|
237,503
|
|
|
$
|
232,584
|
|
NOTE 6 – ACCRUED EXPENSES
Accrued expenses (included with accounts payable) consists of the following at:
|
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
Executive compensation
|
|
$
|
505,490
|
|
|
$
|
327,285
|
|
|
Other accruals
|
|
|
130,436
|
|
|
|
38,022
|
|
|
|
|
$
|
635,926
|
|
|
$
|
365,307
|
|
NOTE 7 – NOTES PAYABLE
Notes payable consists of the following:
|
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
Notes payable - current
|
|
|
|
|
|
|
|
5.86% unsecured, $781 due monthly
|
|
|
-
|
|
|
|
2,687
|
|
|
4.15% unsecured, $3,436 due monthly
|
|
|
9,189
|
|
|
|
36,374
|
|
|
8.95% unsecured, $314 due monthly
|
|
|
1,802
|
|
|
|
-
|
|
|
10% unsecured due on February 16, 2017.
|
|
|
10,000
|
|
|
|
-
|
|
|
|
|
$
|
20,991
|
|
|
$
|
39,061
|
|
|
Convertible notes payable, net
|
|
|
|
|
|
|
|
$55,000, 8% secured due on December 26, 2016, net of discount related to warrant, convertible into common stock at $0.10 per share. Existing note of $50,000 was converted into the new note with $5,000 of accrued interest being added to principal. Remaining $4,500 in accrued interest was forgiven and reported as a gain on extinguishment of debt on the statement of operations.
|
|
$
|
52,387
|
|
|
$
|
50,000
|
|
|
6% unsecured, convertible into common stock at $2.00 per share, due on demand
|
|
|
50,000
|
|
|
|
50,000
|
|
|
$11,333, 8% unsecured due December 2018, net of discount related to warrant, convertible into common stock at $0.10 per share. Existing note of $10,000 was converted into the new note with $1,333 of accrued interest being added to principal.
|
|
|
10,738
|
|
|
|
10,000
|
|
|
$11,000, 8% unsecured due October 2018, net of discount related to warrant, convertible into common stock at $0.10 per share. Existing note of $10,000 was converted into the new note with $1,000 of accrued interest being added to principal. Remaining $208 in accrued interest was forgiven and reported as a gain on extinguishment of debt on the statement of operations.
|
|
|
10,422
|
|
|
|
10,000
|
|
|
$50,000, 8% unsecured due November 25, 2018, net of discount related to warrant, convertible into common stock at $0.10 per share.
|
|
|
47,506
|
|
|
|
46,981
|
|
|
$15,000, 8% unsecured due November 2018, net of discount related to warrant, convertible into common stock at $0.10 per share. Existing 0% note of $15,000 exchanged into new note.
|
|
|
14,212
|
|
|
|
15,000
|
|
|
$50,000, 8% unsecured due March 2019, net of discount related to warrant, convertible into common stock at $0.10 per share.
|
|
|
47,200
|
|
|
|
-
|
|
|
$25,000, 8% unsecured due March 2019, net of discount related to warrant, convertible into common stock at $0.10 per share.
|
|
|
23,600
|
|
|
|
-
|
|
|
$100,000, 8% unsecured due April 2019, net of discount related to warrant, convertible into common stock at $0.10 per share.
|
|
|
95,417
|
|
|
|
-
|
|
|
$25,000, 8% unsecured due June 2019, net of discount related to warrant, convertible into common stock at $0.10 per share.
|
|
|
24,300
|
|
|
|
-
|
|
|
Total Convertible notes payable
|
|
|
375,782
|
|
|
|
181,981
|
|
|
Less: Current Portion
|
|
|
(102,387
|
)
|
|
|
(181,981
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
273,395
|
|
|
$
|
-
|
|
|
Convertible notes payable, net, related party
|
|
|
|
|
|
$25,000, 8% unsecured due May 2019, net of discount related to warrant, convertible into common stock at $0.10 per share.
|
|
$
|
23,820
|
|
|
$
|
-
|
|
|
|
|
$
|
23,820
|
|
|
$
|
-
|
|
|
Notes payable, related party
|
|
|
|
|
|
|
|
$10,000, 10% unsecured due on February 18, 2017
|
|
$
|
10,000.00
|
|
|
$
|
-
|
|
|
|
|
$
|
10,000.00
|
|
|
$
|
-
|
|
Line of Credit
On March 25, 2014, we entered into an unsecured line of credit arrangement that renews annually unless terminated by either party. The line of credit is $60,000 with an interest rate of prime plus 3.00%, resulting in an interest rate of 6.5% at June 30, 2016. There are no loan covenants applicable to this line of credit and the amounts outstanding are $59,945 and $58,195 as of June 30, 2016 and December 31, 2015, respectively
NOTE 8 – RELATED PARTY TRANSACTIONS
Debt agreements from board member
On May 20, 2016, our Chief Executive Officer personally invested in our 8% convertible debenture (with an attached warrant), the principal portion of which is due and payable by us on May 19, 2019.
On February 18, 2016, we entered into a 10% unsecured note due on February 18, 2017 with Marvin Hausman.
NOTE 9 – STOCKHOLDERS’ EQUITY (DEFICIT)
Preferred Stock
On May 26, 2011, our board of directors designated 350,000 shares of preferred stock as Series A preferred stock, $0.001 par value. The Series A preferred stock is entitled to a liquidation preference in the amount of $5 per share, votes on an as converted basis with the common stock on all matters as to which holders of common stock shall be entitled to vote, and is currently convertible into common stock on a one-for-ten basis.
Common stock
The Company is authorized to issue 150,000,000 shares of common stock at $0.001 par value.
Stock incentive plan
On September 17, 2010, our Board of Directors adopted the 2010 Stock Incentive Plan (“Plan”). The Plan provides for the grant of options to purchase shares of our common stock, and stock awards consisting of shares of our common stock, to eligible participants, including directors, executive officers, employees and consultants of the Company. As of December 31, 2015, we have reserved 4,700,000 shares of common stock for issuance under the Plan with an annual increase in shares of 50,000 as of January 1 of each year; commencing January 1, 2012. We currently have reserved for issuance 4,750,000 shares as of January 1, 2016.
A summary of option activity under the stock option plan as of June 30, 2016 and changes during the quarter then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Exercise
|
|
|
Contractual Term
|
|
|
Intrinsic
|
|
|
|
|
Shares
|
|
|
Range
|
|
|
Price
|
|
|
(Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2015
|
|
|
2,898,220
|
|
|
$
|
0.09 - $1.00
|
|
|
$
|
0.43
|
|
|
|
11.25
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2015
|
|
|
2,661,493
|
|
|
$
|
0.20 - $1.00
|
|
|
$
|
0.42
|
|
|
|
11.66
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Expired/Forfeited
|
|
|
41,250
|
|
|
$
|
0.40 - $1.00
|
|
|
$
|
0.60
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2016
|
|
|
2,856,970
|
|
|
$
|
0.09 - $0.81
|
|
|
$
|
0.42
|
|
|
|
11.34
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, June 30, 2016
|
|
|
2,673,299
|
|
|
$
|
0.09 - $0.81
|
|
|
$
|
0.60
|
|
|
|
11.71
|
|
|
|
-
|
|
The range of exercise prices for options outstanding under the 2010 Stock Incentive Plan at June 30, 2016 are as follows:
|
Number of
|
|
|
Exercise
|
|
|
shares
|
|
|
Price
|
|
|
|
20,000
|
|
|
$
|
0.09
|
|
|
|
190,000
|
|
|
$
|
0.20
|
|
|
|
300,000
|
|
|
$
|
0.30
|
|
|
|
55,000
|
|
|
$
|
0.38
|
|
|
|
1,386,670
|
|
|
$
|
0.40
|
|
|
|
10,000
|
|
|
$
|
0.45
|
|
|
|
610,300
|
|
|
$
|
0.50
|
|
|
|
160,000
|
|
|
$
|
0.60
|
|
|
|
15,000
|
|
|
$
|
0.62
|
|
|
|
100,000
|
|
|
$
|
0.75
|
|
|
|
10,000
|
|
|
$
|
0.81
|
|
|
|
2,856,970
|
|
|
|
|
|
At June 30, 2016, the Company had 1,893,030 unissued shares available under the Plan. Also, at June 30, 2016, the Company had $75,586 of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 11 years.
Warrants – Consulting and Debt Agreements
Outstanding warrants to purchase common stock are as follows:
|
Date of Issue
|
|
Number of shares
purchasable
|
|
|
Exercise Price
|
|
|
Expiration
|
|
|
As of December 2015
|
|
|
18,826,637
|
|
|
$
|
0.36 - $10.00
|
|
|
09/2016 - 10/2024
|
|
|
January-16
|
|
|
257,055
|
|
|
$
|
0.125
|
|
|
|
01/2019
|
|
|
April-16
|
|
|
100,000
|
|
|
$
|
0.125
|
|
|
|
04/2019
|
|
|
May-16
|
|
|
25,000
|
|
|
$
|
0.125
|
|
|
|
05/2019
|
|
|
June-16
|
|
|
25,000
|
|
|
$
|
0.01 - $1.00
|
|
|
05/2019 - 03/2029
|
|
|
Total as of June 30, 2016
|
|
|
19,233,692
|
|
|
|
|
|
|
|
|
|
We use the Black-Scholes option-pricing model to determine the fair value of warrants on the date of grant. In determining the fair value of warrants, we employed the following key assumptions:
|
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
Risk-Free interest rate
|
|
|
0.64% - 0.65
|
%
|
|
|
0.28% - 2.97
|
%
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Volatility
|
|
|
125.15% - 131.14
|
%
|
|
|
166.10%-204.66
|
%
|
|
Expected life
|
|
3 years
|
|
|
3-7 years
|
|
|
Weighted average price
|
|
$
|
0.125
|
|
|
$
|
0.39
|
|
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Leases
The Company has a lease agreement on its headquarters facilities that expires in May 2018. The lease terms include a base monthly rental rate of $3,343 per month, increasing to $3,410 in August 2016, and then $3,478 in August 2017. The Company has analyzed the requirement to straight-line the full value of the lease agreement over the life of the lease and has determined that there is no need to book a deferred rent liability as the amount is immaterial.
Employment Agreements
During 2015, the Company entered into employment agreements with its CEO, COO/CFO and CSO. Commencement of payment of the base salaries under these employment agreements was, and continues to be, conditional on fundraising results. Management determined that no base salary for the CEO or CSO would be accrued or paid for 2015, based primarily upon the financial needs of the Company through the end of that year. Payment of base salary commenced for the COO/CFO in December 2015 and we commenced accrual of salaries for the CEO and CSO on January 1, 2016.
Litigation
During first and second quarter 2016, we were involved in arbitration with a former employee who had made claims against us, along with other potential allegations seeking approximately $93,000, plus punitive damages. The Company was notified on August 21, 2016 that the arbitrator ruled that the Company will have to pay the former employee $93,074 plus accrued interest of 9% per annum, totaling $4,188 through June 30, 2016. We have accrued this amount and it is included in the accounts payable and accrued expenses on the balance sheet.
NOTE 11 – SUBSEQUENT EVENTS
During third quarter 2016, the Company received $75,000 in short-term debt financing from two individual investors and from an investment fund. The terms of the notes are 10% per annum and the notes are due in third quarter 2017. Attached to the notes are five-year warrants for the purchase of a total of 300,000 shares of common stock at $0.10 per share. The notes are also convertible at the lenders discretion into a particular future financing offered by the Company, if and when such financing occurs.
