At June 30, 2019, the Company was in default
with the contractual payment terms with the unsecured term note payables (b), (c), (d) and (e) to an independent contractor, also
a minority shareholder.
Notes (a) and (g) reflect debt
investments made by the Company’s general counsel, who is also a principal shareholder, to the Company.
In
June 2019, as part of the Company’s debt restructuring initiative, the Company issued the holder of the notes a total
of 17,759 shares of the Company’s Series RX-1 preferred stock in exchange for the $7,000 and $10,000 notes payable,
inclusive of accrued interest (total $21,137). See Note 10.
Note (f) reflects two unsecured notes
payable for payment obligations owed to the Company’s general counsel, who is also a principal shareholder, for legal
services incurred by the Company for the years ended December 31, 2015 and 2014.
In June 2019, as
part of the Company’s debt restructuring initiative, the Company issued the holder of the notes a warrant for a total
of 110,416 shares of the Company’s Series RX-3 preferred stock in exchange for the $270,000 of debt owed, inclusive of
accrued interest (total $324,856). See Note 10.
Note (h) reflects two unsecured notes
payable for amounts due to the Company’s president and chief executive officer, who is also a principal shareholder,
for previously accrued base salary.
In June 2019, as part of the Company’s debt
restructuring initiative, the Company issued the holder of the notes a warrant for a total of 170,009 shares of the
Company’s Series RX-3 preferred stock in exchange for the $436,861 of debt owed, inclusive of accrued interest (total
$489,566). See Note 10.
Note (i) reflects two unsecured notes payable
for amounts due to the Company’s controller, who is also a shareholder, for previously accrued base salary.
In
June 2019, as part of the Company’s debt restructuring initiative, the Company issued the holder of the notes a warrant for
a total of 63,291 shares of the Company’s Series RX-3 preferred stock in exchange for the $162,614 of debt owed, inclusive
of accrued interest (total $182,413). See Note 10.
On December 24, 2018, and in connection with
the Company’s acquisition of Advanced Cement Sciences LLC, each holder of notes (f), (h) and (i) agreed to relinquish their
previous respective rights of conversion on the Company promissory notes held by them.
Notes Payable, Related Parties, Convertible
Notes payable, related parties, convertible
consisted of the following:
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
Note payable to a company controlled by an outside director
(also a principal shareholder), due on demand together with accrued interest at 4.5% APR, and convertible at $0.01 per share
of common stock.
|
|
|
(a)
|
|
|
$
|
—
|
|
|
$
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three notes payable ($30,000, $55,500 and $28,500) each to an outside
director (also a principal shareholder), due on demand together with accrued interest at 4.5% APR, and convertible at $0.01,
$0.007 and $0.015, respectively, per share of common stock.
|
|
|
(b)
|
|
|
|
—
|
|
|
|
114,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to a related party investor (by virtue of shareholding percentage, both actual and on an as-converted basis), due November 13, 2018 together with accrued interest at 10% APR, and convertible at $0.01 per share of common stock.
|
|
|
(c)
|
|
|
|
—
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to a related party investor (by virtue of shareholding percentage, both actual and on an as-converted basis), due March 4, 2017 together with accrued interest at 10% APR, and convertible at $0.01 per share of common stock.
|
|
|
(d)
|
|
|
|
—
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to a related party investor (by virtue of shareholding percentage, both actual and on an as-converted basis), due March 18, 2019 together with accrued interest at 10% APR, and convertible at $0.01 per share of common stock.
|
|
|
(e)
|
|
|
|
—
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to a related party investor (by virtue of shareholding percentage, both actual and on an as-converted basis), due May 12, 2019 together with accrued interest at 10% APR, and convertible at $0.01 per share of common stock.
|
|
|
(f)
|
|
|
|
—
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to a related party investor (by virtue of shareholding percentage, both actual and on an as-converted basis), due June 7, 2019 together with accrued interest at 10% APR, and convertible at $0.01 per share of common stock.
|
|
|
(g)
|
|
|
|
—
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to a related party investor (by virtue of shareholding percentage, both actual and on an as-converted basis), due July 28, 2019 together with accrued interest at 10% APR, and convertible at $0.01 per share of common stock.
|
|
|
(h)
|
|
|
|
—
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two notes payable ($20,500 and $9,500) each to an outside director (also a
minority shareholder), due on demand together with accrued interest at 4.5% APR, and convertible at $0.007 and $0.015,
respectively, per share of common stock.
|
|
|
(i)
|
|
|
|
—
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to the Company’s former vice president of research and
development (also a minority shareholder), due on demand together with accrued interest at 4.5% APR, and convertible at
$0.007 per share of common stock.
|
|
|
(j)
|
|
|
|
—
|
|
|
|
49,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to an independent contractor (also a minority shareholder),
due on demand together with interest at 4.5% APR, and convertible at $0.007 per share of common stock.
|
|
|
(k)
|
|
|
|
—
|
|
|
|
25,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable in the name of a son of an outside director (also a principal
shareholder), due on demand together with accrued interest at 4.5% APR, and convertible at $0.05 per share of common
stock.
|
|
|
(l)
|
|
|
|
—
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two notes payable ($81,250 and $77,500) each to an independent contractor
(also a minority shareholder), due on demand together with interest at 4.5% APR, and convertible at $0.01 per share of common
stock.
|
|
|
(m)
|
|
|
|
—
|
|
|
|
158,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to an investor (also a minority shareholder), due on demand
together with interest at 10% APR, and convertible at $0.01 per share of common stock.
|
|
|
(n)
|
|
|
|
—
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to a related party investor (by virtue of shareholding percentage, both actual and on an as-converted basis), due June 15, 2018 together with accrued interest at 10% APR, and convertible at $0.01 per share of common stock.
|
|
|
(o)
|
|
|
|
—
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
—
|
|
|
$
|
1,327,450
|
|
Notes (a), (b) and (l) reflect amounts due
to a single outside director of the Company, who also is a principal shareholder, based on such director having (i) made certain
vendor obligation payments directly on behalf of and for the benefit of the Company, (ii) having advanced certain funds to the
Company at various dates for general working capital purposes, and (iii) having accrued director’s fees earned through June
30, 2017. In June 2019, as part of the Company’s debt restructuring initiative, the Company issued the holder of note (a)
a total of 65,396 shares of the Company’s Series RX-1 preferred stock in exchange for $60,000 of debt owed, inclusive of
accrued interest (total $73,560). The Company also issued the holder of note (b) a total of 32,367 shares of the Company’s
Series RX-1 preferred stock and a warrant for the total of 187,396 shares of the Company’s Series RX-2 preferred stock in
exchange for the cumulative $114,000 of debt owed, inclusive of accrued interest (total $130,281). In addition, the Company has
recorded accounts payable, related parties, in the amount of $18,426 to the holder of notes (a), (b), and (l). See Note 10.
Notes (c), (e) through (h) and (o) reflect
amounts due to a certain related party investor and principal shareholder for convertible debt investments made from time to time
as indicated. In June 2019, as part of the Company’s debt restructuring initiative, the Company issued the holder of the
notes a total of 822,639 shares of the Company’s Series RX-1 preferred stock in exchange for the cumulative $800,000 of debt
owed, inclusive of accrued interest (total $1,070,974). See Note 10.
Note (d) reflects an amount due to a certain
related party investor and principal shareholder for convertible debt investments made from time to time as indicated. In June
2019, as part of the Company’s debt restructuring initiative, the Company issued the holder of the note a total of 52,325
shares of the Company’s Series RX-1 preferred stock in exchange for $50,000 of debt owed, inclusive of accrued interest (total
$69,041). See Note 10.
Notes (i) reflects two notes payable for amounts
due to an outside director, who is also a minority shareholder, for accrued director’s fees earned through June 30, 2017.
In June 2019, as part of the Company’s debt restructuring initiative, the Company issued the holder of the notes a warrant
for a total of 66,966 shares of the Company’s Series RX-2 preferred stock in exchange for $30,000 of debt owed, inclusive
of accrued interest (total $33,483). See Note 10.
Note (j) reflects amounts due to the Company’s
former vice president of research and development, who is also a minority shareholder, for previously accrued wages. In May 2019,
the holder of the note exercised the right to convert the $49,000 note, inclusive of accrued interest (total $55,237) into 7,890,958
shares of common stock at the conversion rate of $0.007 per share per the terms of the note. See Note 10.
Note (k) reflects amounts due to an independent
contractor who was President of one of RexPro’s divisions prior to the merger with RexPro and a current minority shareholder
of the Company, for past earnings. In June 2019, as part of the Company’s debt restructuring initiative, the Company issued
the holder of the note a warrant for a total of 58,006 shares of the Company’s Series RX-2 preferred stock in exchange for
$25,700 of debt owed, inclusive of accrued interest (total $29,003). See Note 10.
Note (m) reflects two notes payable for amounts
due to an independent contractor, who is also minority shareholder, for previously accrued business development services. On October
31, 2018, the holder of one note with an original face value of $137,500 exercised the right to convert $60,000 of the note into
six million shares (6,000,000) of common stock at the conversion rate of $0.01 per share per the terms of the note. In June 2019,
as part of the Company’s debt restructuring initiative, the Company issued the holder of the notes a warrant for a total
of 337,320 shares of the Company’s Series RX-2 preferred stock in exchange for $158,780 of debt owed, inclusive of accrued
interest (total $168,660). See Note 10.
Note (n) reflects an amount due to a
certain
related party investor, who is also a minority shareholder,
for a convertible debt investment.
In
June 2019, as part of the Company’s debt restructuring initiative, the Company issued the holder of the note a total of
20,483 shares of the Company’s Series RX-1 preferred stock in exchange for $20,000 of debt owed, inclusive of accrued
interest (total $22,580). See Note 10.
For the six months ended June 30, 2019, the
Company did not receive any proceeds from the issuance of notes payable. For the year ended December 31, 2018, the Company received
proceeds from the issuance of notes payable to related parties in the amount of $20,000 and convertible notes payable to related
parties in the amount of $70,000 (total $90,000).
NOTE 7 – GAIN ON INTANGIBLE ASSET
In February 2019, the Company entered
into an agreement with Ducora, Inc., a Florida corporation engaged in the direct marketing of certain consumer products
(“Ducora”), to assign and sell to Ducora a patent owned by the Company, together with certain related and
proprietary trade secret information, the subject of which is a process for producing a certain coating product usable on
automobiles and motorcycles, among other potential surfaces. At December 31, 2018, the Company did not have a value assigned
to the intangible assets consisting of the patent and proprietary trade secret information. In exchange for the conveyance of
this intellectual property, which was effective immediately upon execution of the agreement, the Company received a one-time
cash payment in the amount of $150,000. As a result, the Company recognized a gain on the sale of an intangible asset of
$150,000 on our Condensed Consolidated Statement of Operations for the six months ended June 30, 2019.
NOTE 8 – GAIN ON DEBT SETTLEMENT
In June 2019, the Company finalized a debt restructuring initiative with the Company’s then debtholders. In particular to one of the Company’s
previous investors who held a note payable and was not a related party or shareholder of the Company, the note holder agreed to
settle such note in exchange for the Company’s Series RX-1 preferred stock. As a result, the Company recognized a gain on
debt settlement of $34,925 on our Condensed Consolidated Statement of Operations for the six months ended June 30, 2019.
NOTE 9 – GAIN ON DERIVATIVE-BASED RESTRUCTURING OF SERVICE-RELATED
OBLIGATIONS
In June 2019, pursuant to certain securities
exchange agreements and securities purchase agreements between the Company and certain of its directors and current and former
employees, and in exchange for an aggregate $490,658 in debt owed to such parties as of such dates, inclusive of accrued interest,
(a portion of which debt had been convertible into Company common stock in accordance with its stated terms and the remainder
of which had not), the Company issued to such individuals warrants to purchase a total of 981,316 shares of Company Series RX-2
preferred stock at a price per share of $0.50 for a gain of $182,523. Also in June 2019, pursuant to certain securities exchange
agreements and securities purchase agreements between the Company and certain of its outside professional consultants and employees,
and in exchange for a gain of $1,397,644 in debt owed to such parties as of such dates, inclusive of accrued interest, (a portion
of which debt had at one point in time been convertible into Company common stock in accordance with its stated terms and the
remainder of which had not), the Company issued to such individuals warrants to purchase a total of 481,212 shares of Company
Series RX-3 preferred stock at a price per share of $5.00. In connection with this serial restructuring of service-related obligations
taken as a whole, and based on the relevant accounting guidance, the Company recognized a gain on restructuring of service-related
obligations of $1,580,167 on our Condensed Consolidated Statement of Operations for the six months ended June 30, 2019.
NOTE 10 – STOCKHOLDERS’ DEFICIT
Common
Stock
In May 2019, the Company’s former vice
president of research and development (also a shareholder) held a convertible note and elected to convert such note, together with
all then-accrued interest, totaling $55,237 into 7,890,958 shares of common stock. See Note 6.
COMMON
STOCK WARRANTS
The Company did
not issue common stock warrants for the six months ended June 30, 2019 and 2018 and no common stock warrants were exercised.
As of June 30, 2019, there were no common stock warrants outstanding.
PreFERRED
Stock
In June, 2019, pursuant to certain securities
exchange agreements and securities purchase agreements between the Company and various private investors, and in exchange for
an aggregate $1,826,180 in debt owed to such parties, inclusive of accrued interest, (a portion of which debt had been convertible
into Company common stock in accordance with its stated terms and the remainder of which had not), the Company issued to such
private investors a total of 1,418,615 shares of Company Series RX-1 Preferred Stock of which $1,791,000 was recorded in additional
paid-in capital as this debt restructuring was for related parties and approximately $35,000 was recorded as a gain on settlement
for a non-related party. The following table summarizes the Series RX-1 Preferred Stock Transactions:
Series RX-1 Preferred Stock Debt Holder
|
|
Aggregate Principal and Interest Consideration Exchanged/Paid
|
|
Total Number of Series RX-1 Preferred Shares Issued
|
|
Total Number of Common Shares Into Which Shares are Convertible (Before Any Potential Adjustment)
|
Related party investor (also a shareholder)
|
|
$
|
69,041
|
|
|
|
52,325
|
|
|
|
5,232,500
|
|
Related party investor (also a shareholder)
|
|
|
458,729
|
|
|
|
324,262
|
|
|
|
32,426,200
|
|
Company’s outside director (also a shareholder)
|
|
|
73,560
|
|
|
|
65,396
|
|
|
|
6,539,600
|
|
Company’s outside director (also a shareholder)
|
|
|
36,583
|
|
|
|
32,367
|
|
|
|
3,236,700
|
|
Company’s outside director (also a shareholder)
|
|
|
22,510
|
|
|
|
20,351
|
|
|
|
4,070,200
|
|
Related party investor (also a shareholder)
|
|
|
22,580
|
|
|
|
20,483
|
|
|
|
2,048,300
|
|
Company’s general counsel (also a shareholder)
|
|
|
37,251
|
|
|
|
33,873
|
|
|
|
3,387,300
|
|
Related party investor (also a shareholder)
|
|
|
1,070,974
|
|
|
|
822,639
|
|
|
|
82,263,900
|
|
Non-related party investor
|
|
|
34,952
|
|
|
|
26,568
|
|
|
|
2,656,800
|
|
Combined Total
|
|
$
|
1,826,180
|
|
|
|
1,418,615
|
|
|
|
141,861,500
|
|
The Company used the Option Pricing
Method to determine the fair value of the issued and outstanding shares of RX-1 Preferred Stock as this series of preferred
stock has a liquidation preference over the Company’s other classes of stock. Based on the calculations within the
Option Pricing Method, the fair value of the outstanding 1,418,615 shares of RX-1 Preferred Stock is $674,103. Of those
individuals who were issued shares of the Company’s RX-1 Preferred Stock, all were deemed related parties except for
one individual. For the related party individuals, the difference between the fair value of the RX-1 Preferred Stock and the
aggregate principal and interest of the debt liabilities then owed totaling $1,789,836 was recognized as additional paid in
capital. For the non-related party individual, the difference between the fair value of the RX-1 Preferred Stock and the
aggregate principal and interest of the debt liability then owed was recognized as a gain. As a result, the Company
recognized a gain on debt settlement of $34,925 on our Condensed Consolidated Statement of Operations for the six months
ended June 30, 2019. See Note 8.
PREFERRED
STOCK WARRANTS
Series
RX-2 Warrants
In June 2019, pursuant to certain securities
exchange agreements and securities purchase agreements between the Company and certain of its directors and current and former
employees, and in exchange for an aggregate $490,658 in debt owed to such parties, inclusive of accrued interest, (a portion of
which debt had been convertible into Company common stock in accordance with its stated terms and the remainder of which had not),
the Company issued to such individuals warrants to purchase a total of 981,316 shares of Company Series RX-2 Preferred Stock at
a price per share of $0.50 (collectively, the “Series RX-2 Warrants”). The Series RX-2 Warrants are exercisable at
any time prior to the earlier of (i) the effectiveness of any capital reorganization of the Company, any reclassification of the
capital stock of the Company, any consolidation or merger of the Company with or into another corporation (other than a consolidation
or merger in which the Company is the surviving entity), or any transfer of all or substantially all of the assets of the Company,
or other similar occurrence involving the Company, or (ii) December 31, 2021. If all Series RX-2 warrants are exercised to purchase
a total of 981,316 shares of Series RX-2 Preferred Stock at $0.50 per share, the amount of cash realizable by the Company is $490,658.
The following table summarizes the transactions for the Series RX-2 Warrants:
Series RX-2 Preferred Stock Warrant Debt Holder
|
|
Aggregate Principal and Interest Consideration Exchanged/Paid
|
|
Total Number of RX- 2 Shares For Which Warrants Issued Are Exercisable
|
|
Total Number of Common Shares Into Which Shares are Convertible (Before Any Potential Adjustment)
|
|
Related party employee (also a shareholder)
|
|
$
|
29,003
|
|
|
|
58,006
|
|
|
|
5,800,600
|
|
|
Company’s outside director (also a shareholder)
|
|
|
149,021
|
|
|
|
298,042
|
|
|
|
29,804,200
|
|
|
Company’s outside director (also a shareholder)
|
|
|
51,924
|
|
|
|
103,848
|
|
|
|
10,384,800
|
|
|
Related party consultant (also a shareholder)
|
|
|
87,009
|
|
|
|
174,018
|
|
|
|
17,401,800
|
|
|
Related party consultant (also a shareholder)
|
|
|
81,651
|
|
|
|
163,302
|
|
|
|
16,330,200
|
|
|
Related party consultant (also a shareholder)
|
|
|
92,050
|
|
|
|
184,100
|
|
|
|
18,410,000
|
|
|
Combined Total
|
|
$
|
490,658
|
|
|
|
981,316
|
|
|
|
98,131,600
|
|
|
The Company used the Black Scholes
Method to determine the fair value of the outstanding Series RX-2 Warrants as the underlying preferred stock does not grant
its holders any additional economic value over common stock holders, there is no liquidation preference and no one holder
would control the Company upon exercise. Based on the calculations within the Black Scholes Method, the fair value of the
outstanding Series RX-2 Warrants to purchase a total of 981,316 shares of RX-2 Preferred Stock is $308,133. All individuals
who were issued Series RX-2 Warrants were deemed related parties and all amounts then owned, aggregate of principal and
interest, were for services performed on behalf of the Company and those services were previously recognized as an expense
(such as directors fees or contractor fees) to the Company. As a result, the Company recognized a gain on restructuring of
service-related obligations of $182,523 (part of total $1,580,167) on our Condensed Consolidated Statement of Operations for
the six months ended June 30, 2019. See Note 9.
Series RX-3 Warrants
In June 2019, pursuant to certain securities
exchange agreements and securities purchase agreements between the Company and certain of its outside professional consultants
and employees, and in exchange for an aggregate $1,397,647 in debt owed to such parties, inclusive of accrued interest, (a portion
of which debt had at one point in time been convertible into Company common stock in accordance with its stated terms and the remainder
of which had not), the Company issued to such individuals warrants to purchase a total of 481,212 shares of Company Series RX-3
Preferred Stock at a price per share of $5.00 (collectively, the “Series RX-3 Warrants”). Except in the event that
certain intervening corporate events trigger acceleration, the rights of the recipients of Series RX-3 Warrants shall only vest
and become exercisable as follows:
|
▪
|
until such time following the date of any Series RX-3 Warrant, if at all, that the gross profit of the Company as reported in the Company’s consolidated and audited financial statements contained within its Annual Report on Form 10-K (the “Form 10-K”) filed with the U.S. Securities and Exchange Commission (the “SEC”) for any then preceding fiscal year during which such Series RX-3 Warrant is outstanding (“Reported Annual Gross Profit”), equals or exceeds $1,000,000, such Series RX-3 Warrants shall not be exercisable for any shares of Series RX-3 Preferred Stock;
|
|
▪
|
upon achievement for the first time following the date of any Series RX-3 Warrant, if at all, of a Reported Annual Gross Profit equal to or exceeding $1,000,000, then such Series RX-3 Warrant shall become exercisable for twenty-five percent (25%) of the number of shares of Series RX-3 Preferred Stock for which it is stated to be exercisable in the aggregate as of the date of the filing of the Form 10-K in which the corresponding financial statements have been included;
|
|
▪
|
upon achievement for the first time following the date of any Series RX-3 Warrant, if at all, of a Reported Annual Gross Profit equal to or exceeding $2,000,000, then such Series RX-3 Warrant shall become exercisable for twenty-five percent (25%) of the number of shares of Series RX-3 Preferred Stock for which it is stated to be exercisable in the aggregate as of the date of the filing of the Form 10-K in which the corresponding financial statements have been included;
provided, however
, that, if the achievement of the Reported Annual Gross Profit hurdle set forth in subsection (ii) above shall occur concurrently with the achievement of the Reported Annual Gross Profit hurdle set forth in this subsection (iii), then and in such event, the vesting of the exercise rights relative to shares of Series RX-3 Preferred Stock under such Series RX-3 warrant shall be cumulative (i.e. fifty percent [50%]);
|
|
▪
|
upon achievement for the first time following the date of any Series RX-3 Warrant, if at all, of a Reported Annual Gross Profit equal to or exceeding $4,000,000, then such Series RX-3 Warrant shall become exercisable for twenty-five percent (25%) of the number of shares of Series RX-3 Preferred Stock for which it is stated to be exercisable in the aggregate as of the date of the filing of the Form 10-K in which the corresponding financial statements have been included;
provided, however
, that, if the achievement of the Reported Annual Gross Profit hurdle set forth in subsection (ii) and/or (iii) above shall occur concurrently with the achievement of the Reported Annual Gross Profit hurdle set forth in subsection (iv), then and in such event, the vesting of the exercise rights relative to shares of Series RX-3 Preferred Stock under such Series RX-3 Warrant shall be cumulative (i.e. either fifty percent [50%] or seventy-five percent [75%], as applicable);
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upon achievement for the first time following the date of any Series RX-3 Warrant, if at all, of a Reported Annual Gross Profit equal to or exceeding $8,000,000, then such Series RX-3 Warrant shall become exercisable for twenty-five percent (25%) of the number of shares of Series RX-3 Preferred Stock for which it is stated to be exercisable in the aggregate as of the date of the filing of the Form 10-K in which the corresponding financial statements have been included;
provided, however
, that, if the achievement of the Reported Annual Gross Profit hurdle set forth in subsection (ii), (iii), and/or (iv) above shall occur concurrently with the achievement of the Reported Annual Gross Profit hurdle set forth in this subsection (v), then and in such event, the vesting of the exercise rights relative to shares of Series RX-3 Preferred Stock under such Series RX-3 Warrant shall be cumulative (i.e. either fifty percent [50%], seventy-five percent [75%], or one hundred percent [100%], as applicable).
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Once vested pursuant to the foregoing schedule,
the Series RX-3 Warrants are exercisable in accordance with their terms at any time prior to the earlier of (i) the effectiveness
of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger
of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving entity),
or any transfer of all or substantially all of the assets of the Company, or other similar occurrence involving the Company, or
(ii) December 31, 2029. If all Series RX-3 warrants are exercised to purchase a total of 481,212 shares of Series RX-3 Preferred
Stock at $5.00 per share, the amount of cash realizable by the Company is $2,406,060. The following table summarizes the transactions
for the Series RX-3 Warrants:
Series RX-3 Preferred Stock Warrant Debt Holder
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Aggregate Principal and Interest Consideration Exchanged/Paid
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Total Number of RX- 3 Shares For Which Warrants Issued Are Exercisable
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Total Number of Common Shares Into Which Shares are Convertible (Before Any Potential Adjustment)
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Company’s controller (also a shareholder)
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$
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235,775
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81,806
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81,806,000
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Company’s president and chief executive officer (also a shareholder)
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609,716
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211,733
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211,733,000
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Company’s general counsel (also a shareholder)
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552,156
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187,673
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187,673,000
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Combined Total
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$
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1,397,647
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481,212
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481,212,000
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The Company used the Black Scholes
Method to determine the fair value of the outstanding Series RX-3 Warrants as the underlying preferred stock does not grant
its holders any additional economic value over common stock holders, there is no liquidation preference and no one holder
would control the Company upon exercise. Based on the calculations within the Black Scholes Method, the fair value of the
outstanding Series RX-3 Warrants to purchase a total of 481,212 shares of RX-3 Preferred Stock is $1,737,175. All individuals
who were issued Series RX-3 Warrants were deemed related parties and all amounts then owned, aggregate of principal and
interest, were for services performed on behalf of the Company and those services were previously recognized as an expense
(such as salaries and wages or contractor fees) to the Company. Although the initial fair value of the RX-3 Warrants is
greater than the amounts then owed, and because the RX-3 Warrants carry milestones as described above to be met before any of
the warrants shall vest and become exercisable, no expense is to be recognized until if and when the vesting of the RX-3
Warrants becomes probable. No vesting has occurred as of June 30, 2019 and it is not probable as of the date. As a result,
the Company recognized a gain on restructuring of service-related obligations of $1,397,644 (part of total $1,580,167) on our
Condensed Consolidated Statement of Operations for the six months ended June 30, 2019. See Note 9.
For the six months ended June 30, 2019, no
Series RX-2 Warrants nor Series RX-3 Warrants were exercised.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings
and claims that may arise in the ordinary course of business. In the opinion of management, the amount of potential liability the
Company is likely to be found liable for otherwise incur as a result of these actions is not so much as would materially affect
the Company’s financial condition.
In July, 2014, the Company entered into an
employment agreement with the Company’s president and chief executive officer. The agreement provides for a base annual salary
of $162,500, a term of three (3) years, and contains a provision for an incentive-based cash bonus equal to one and one half percent
(1.5%) of free cash flow (as calculated pursuant to a stated formula) up to a maximum of $500,000 for any single fiscal year. As
of June 30, 2019 and December 31, 2018, no amounts for bonuses had been earned or accrued under this provision. In addition to
the bonus provision and the annual base salary, the employment agreement provides for payment of previously accrued base salary
in the amount of $0 and vested deferred vacation compensation in the amount of $12,500 as of June 30, 2019 and are included in
accrued payroll. The agreement further provides for severance compensation equal to the then base salary until the expiration of
the term of the agreement. There is no severance compensation in the event of voluntary termination or termination for cause. In
May 2017, the Company’s board of director’s, including the compensation committee thereof, reviewed the employment
agreement for Mr. Malone and extended the term thereof, otherwise due to expire on July 23, 2017, through July 23, 2020.
The Company occupies an office building
for its corporate headquarters located in Lake Park, Florida. In January 2015, the Company renewed a short-term lease
agreement with a shareholder for this 8,560 square foot facility under a five year lease agreement ending December 31, 2019
with an option to renew for one successive term of five years at the then current occupancy rates. The monthly rent,
including sales and use taxes, is $7,429. In accordance with the terms of the leasehold agreement, the Company is responsible
for all utilities, repairs and maintenance.
Total rent expense for the six months ended
June 30, 2019 and 2018 for this facility, before adjustments of reclassified facilities cost for research and development, totaled
$43,277 and $42,077, respectively.
NOTE 12 – RELATED PARTY TRANSACTIONS
The Company’s executive officers and
employees, from time to time, make payments for materials and various expense items (including business related travel) in the
ordinary course of business via their personal credit cards in lieu of checks drawn on Company accounts. The Company does not provide
its employees or executive officers with corporate credit cards.
Amounts due these officers and directors
(including one of the Company’s directors, the president and chief executive officer, and the controller) are included in
accounts payable, related parties
, on the Condensed Consolidated Balance Sheets.
As of June 30, 2019, one of the Company’s
directors held five, separate convertible notes issued by the Company. These convertible notes reflected a portion of the aggregate
amount that such outside director is owed by the Company for a combination of (i) certain vendor payments made by him on the Company’s
behalf, (ii) cash previously advanced to the Company for working capital, and (iii) director’s fees earned through June 30,
2017. One of these notes, in the face amount of $60,000, was issued to a company controlled by the director, was due on demand,
together with accrued interest at 4.5% APR, and was convertible at $0.01 per share of common stock. Another of these notes, issued
to the director personally, was in the face amount of $30,000, was similarly due on demand, together with accrued interest at 4.5%
APR, and was convertible at $0.01 per share of common stock. The third of these notes, also issued to the director personally,
was in the face amount of $55,500, was due on demand, together with accrued interest at 4.5% and was convertible at $0.007 per
share of common stock. The fourth note, issued in the name of the director’s son, was in the face amount of $20,000, was
due on demand, together with accrued interest at 4.5% and was convertible at $0.005 per share of common stock. The fifth note,
issued to the director personally, was in the face amount of $28,500, was similarly due on demand, together with accrued interest
at 4.5% APR, and was convertible at $0.015 per share of common stock. In June 2019, in exchange for the five separate convertible
notes mentioned above, the Company issued a total of 118,114 shares of the Company’s Series RX-1 preferred stock in exchange
for a cumulative $110,000 of debt owed, inclusive of accrued interest (total $132,653) and a warrant for a total of 187,395 shares
of the Company’s Series RX-2 preferred stock total in exchange for a cumulative $84,000 of debt owed, inclusive of accrued
interest (total $93,698). In addition, the Company issued a warrant for a total of 110,647 shares of the Company’s Series
RX-2 preferred stock in exchange for previously accrued director’s fees earned through December 31, 2018 in the amount of
$54,000, inclusive of accrued interest (total $55,323). See Note 10.
As of June 30, 2019, the Company’s general
counsel held five notes issued by the Company. One such note reflected an amount due for legal services provided for the year ended
December 31, 2014 in the amount of $150,000. This note was payable by the Company on demand, together with accrued interest at
4.5% APR. Another of these notes reflected an amount due for legal services provided for the year ended December 31, 2015 in the
amount of $120,000. This note was similarly payable on demand, together with accrued interest at 4.5% APR. A third note was in
the amount of $10,000, reflects funds advanced to the Company for working capital, was due on demand, together with accrued interest
at 12% APR. The fourth note of $7,000 reflected funds advanced to the Company for working capital on the basis of a 15-day repayment
obligation. The final note in the amount of $15,752, reflected funds advanced to Advanced Cement Sciences LLC for working capital.
No terms were set for this fifth note. On December 24, 2018, and in connection with the Company’s acquisition of Advanced
Cement Sciences LLC, the Company’s general counsel agreed to relinquish the previous respective rights of conversion on the
first three notes mentioned above. In June 2019, in exchange for the five separate notes mentioned above, the Company issued a
total of 33,873 shares of the Company’s Series RX-1 preferred stock in exchange for a cumulative $32,752 of debt owed, inclusive
of accrued interest (total $37,251) and a warrant for a total of 110,416 shares of the Company’s Series RX-3 preferred stock
in exchange for a cumulative of $270,000 of debt owed (total $324,856). In addition, the Company issued a warrant for a total of
77,257 shares of the Company’s Series RX-3 preferred stock total in exchange for previously accrued contractor fees earned
through December 31, 2018 in the amount of $221,875, inclusive of accrued interest (total $227,300). See Note 10.
As of June 30, 2019,
the Company had issued a total of seven (7) convertible notes to a certain related party investor and significant shareholder.
The first such note was in the amount of $100,000, was due on November 13, 2018, together with accrued interest at 10% APR, and
was convertible at $0.01 per share of common stock. The second such note was also in the amount of $100,000, was due on March 18,
2019, together with accrued interest at 10% APR, and was convertible at $0.01 per share of common stock. The third such note was
in the amount of $50,000, was due on May 12, 2019, together with accrued interest at 10% APR, and was convertible at $0.01 per
share of common stock. The fourth such note was in the amount of $200,000, was due on June 7, 2019, together with accrued interest
at 10% APR, and was convertible at $0.01 per share of common stock. The fifth such note was in the amount of $300,000, was due
on July 28, 2019, together with accrued interest at 10% APR, and was convertible at $0.01 per share of common stock.
The
sixth such note was in the amount of $50,000, was due on demand, together with interest at 10% APR, and was convertible at $0.01
per share of common stock. And the seventh such note was in the amount of $50,000, was due on June 15, 2018, together with interest
at 10% APR, and was convertible at $0.01 per share of common stock.
In June 2019, the Company issued
a total of 874,964 shares of the Company’s Series RX-1 preferred stock in exchange for the cumulative $850,000 of debt owed,
inclusive of accrued interest (total $1,140,015). See Note 10.
As of June 30, 2019, one of the Company’s
directors previously held two convertible notes issued by the Company. The first note, issued to the director personally for director’s
fees earned through September 15, 2016, was in the face amount of $20,500, due on demand, together with accrued interest at 4.5%
APR, and was convertible at $0.007 per share of common stock. The second note, issued to the director for director’s fees
earned through June 30, 2017, was in the face amount of $9,500, was similarly due on demand, together with accrued interest at
4.5% APR, and was convertible at $0.015 per share of common stock. In June 2019, the Company issued a warrant for a total of 66,966
shares of the Company’s Series RX-2 preferred stock in exchange for $30,000 of debt owed, inclusive of accrued interest (total
$33,483). In addition, the Company issued a warrant for a total of 36,882 shares of the Company’s Series RX-2 preferred stock
in exchange for previously accrued director’s fees earned through December 31, 2018 in the amount of $18,000, inclusive of
accrued interest (total $18,441). See Note 10.
The Company accrued payroll earned, by related
parties, during the six months ended June 30, 2019 and the year ended December 31, 2018, respectively, in the total amount of $0
and $182,396 for the Company’s president and chief executive officer and controller.
As of June 30, 2019,
the Company’s president and chief executive officer previously held two notes issued by the Company. The first note represented
previously accrued base salary earned through September 15, 2016 in the amount of $349,329, was due on demand, together
with accrued interest at 4.5% APR. The second note represented previously accrued base salary earned through June 30, 2017 in the
amount of $87,532, was due on demand, together with accrued interest at 4.5% APR
. On December 24, 2018,
and in connection with the Company’s acquisition of Advanced Cement Sciences LLC, the Company’s president and chief
executive officer agreed to relinquish the previous respective rights of conversion on these two notes. In June 2019, the Company
issued a warrant for a total of 170,009 shares of the Company’s Series RX-3 preferred stock in exchange for the $436,861
of debt owed for the two notes, inclusive of accrued interest (total $489,566). In addition, the Company issued a warrant for a
total of 41,724 shares of the Company’s Series RX-3 preferred stock in exchange for previously accrued base salary earned
through December 31, 2018 in the amount of $117,327, inclusive of accrued interest (total $120,150).
See Note 10.
As of June 30, 2019,
the Company’s controller previously held two notes issued by the Company. The first note represented
previously accrued
base salary earned through September 15, 2016 in the amount of $134,604, was due on demand, together with accrued interest at 4.5%
APR
. The second note represented previously accrued base salary earned through June 30, 2017
in the amount of $28,010, was due on demand, together with accrued interest at 4.5% APR.
On December
24, 2018, and in connection with the Company’s acquisition of Advanced Cement Sciences LLC, the Company’s controller
agreed to relinquish the previous respective rights of conversion on these two notes. In June 2019, the Company issued a warrant
for a total of 63,291 shares of the Company’s Series RX-3 preferred stock in exchange for the $162,614 of debt owed for the
two notes, inclusive of accrued interest (total $182,413). In addition, the Company issued a warrant for a total of 18,515 shares
of the Company’s Series RX-3 preferred stock in exchange for previously accrued base salary earned through December 31, 2018
in the amount of $52,108, inclusive of accrued interest (total $53,362).
See Note 10.
As of June 30, 2019,
an independent contractor
who had been the president of one of EcoSmart’s divisions prior to the merger with the Company,
who is also shareholder of the Company, previously held one convertible note representing accrued earnings in the amount of $25,700.
In June 2019, the Company issued the holder of the note a warrant for a total of 58,006 shares of the
Company’s Series RX-2 preferred stock in exchange for $25,700 of debt owed, inclusive of accrued interest (total $29,003).
See Note 10.
During the six months ended June 30, 2019
and 2018, the Company recorded revenue for sales to related parties (also minority shareholders) in the amount of $29,077 and
$54,780, respectively. For the six months ended June 30, 2019, one related party accounted for approximately 9% of Company revenue,
a second related party accounted for approximately 8%, and, as a group, the sales to related parties accounted for approximately
17% of Company revenues. These revenues are recorded as revenue, related party on the Company’s Condensed Consolidated Statements
of Operations.
NOTE 13 – DISCONTINUED OPERATIONS
As of June 30, 2019 and December 31, 2018,
the Company has presented $114,368 of Accrued royalties in discontinued operations. The royalties pertain to the Company’s
sale of the QuickVerse
®
product line in 2011. See Note 1.