Notes to the Audited Financial Statements
December 31, 2017 and 2016
NOTE 1. BUSINESS DESCRIPTION
Exactus was incorporated on January 18, 2008
as “Solid Solar Energy, Inc.” in the State of Nevada as
a for-profit Company.
On May 16, 2013, we
filed a certificate of amendment to the Company’s amended and
restated articles of incorporation to change our name to
“Spiral Energy Tech., Inc.” from Solid Solar Energy,
Inc. On February 29, 2016, we acquired all of the issued and
outstanding capital stock of Exactus BioSolutions, Inc.
(“Exactus BioSolutions”) pursuant to a Share Exchange
Agreement, dated February 29, 2016, with Exactus BioSolutions (the
“Share Exchange”). T
he Company issued 30 million shares of
newly-designated Series B-1 Preferred Stock to the shareholders of
Exactus BioSolutions in the Share Exchange, representing
approximately 87% of voting control of the Company upon
consummation of the Share Exchange. As a result of the Share
Exchange, Exactus BioSolutions became a wholly-owned subsidiary of
Exactus, Inc. Effective March 22, 2016, we changed our corporate
name to “Exactus, Inc.” via a merger with our
wholly-owned subsidiary, Exactus Acquisition
Corp.
Following the Share Exchange, we became a life
science company that plans to develop and commercialize
Point-of-Care (“POC”) diagnostics for measuring
proteolytic enzymes in the blood based on a proprietary detection
platform (the “New Business”). Our primary product, the
FibriLyzer, will employ a disposable test “biosensor”
strip combined with a portable and easy to use hand held detection
unit that provides a result in less than 30 seconds. The
initial markets we intend to pursue for the FibriLyzer are
(i) the management of hyperfibrinolytic states associate with
surgery and trauma, (ii) obstetrics, (iii) acute events such as
myocardial infarction and ischemic stroke, (iv) pulmonary embolism
and deep vein thrombosis and (v) chronic coronary disease
management. We expect to follow up the FibriLyzer with similar
technology, the MatriLyzer, to detect collagenase levels in the
blood for the detection of the recurrence of cancer.
We intend to file to gain regulatory approval to
sell our products in the United States, Canada and
Europe. Management intends to primarily focus on the
development and commercialization of the FibriLyzer and related
technology exclusively licensed by
Exactus.
Prior
to our acquisition of Exactus BioSolutions pursuant to the Share
Exchange, our primary business focus was on developing and
commercializing drone technology (the “Former
Business”).
NOTE 2. GOING CONCERN
These financial statements are presented on the basis that we will
continue as a going concern. The going concern concept contemplates
the realization of assets and satisfaction of liabilities in the
normal course of business. No adjustment has been made to the
carrying amount and classification of our assets and the carrying
amount of our liabilities based on the going concern uncertainty.
We have considered ASU 2014-15 in consideration of reporting
requirements of the going concern financial
statements.
Since our inception in 2008, we have generated
losses from operations and we anticipate that we will continue to
generate significant losses from operations for the foreseeable
future. As of December 31, 2017, our accumulated deficit was
$5,200,573 of which $736,959 was related to the Former
Business.
These conditions raise
substantial doubt about the ability of the Company to continue as a
going concern.
As of December
31, 2017, we had $161,215 of cash. We expect that these funds will
not be sufficient to enable us to complete the development of any
potential products, including the FibriLyzer and related
technology. Accordingly, we will need to obtain further funding
through public or private equity offerings, debt financing,
collaboration arrangements or other sources. The issuance of any
additional shares of common stock, preferred stock or convertible
securities could be substantially dilutive to our shareholders. In
addition, adequate additional funding may not be available to us on
acceptable terms, or at all. If we are unable to raise capital, we
will be forced to delay, reduce or eliminate our research and
development programs and may not be able to continue as a going
concern.
NOTE 3. SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
. The Financial
Statements and related disclosures have been prepared pursuant to
the rules and regulations of the SEC. The Financial
Statements have been prepared using the accrual basis of accounting
in accordance with Generally Accepted Accounting Principles
(“GAAP”) of the United States.
Use of
Estimates.
The Company
prepares its financial statements in conformity with accounting
principles generally accepted in the United States of America
("GAAP") which require 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 reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Significant estimates during the year ended
December 31, 2017 includes realization of prepaid expenses and
derivative liability.
Stock-Based
Compensation.
We recognize
compensation expense for stock-based compensation in accordance
with ASC Topic 718. For employee stock-based awards, we calculate
the fair value of the award on the date of grant using the
Black-Scholes method for stock options and the quoted price of our
common stock for unrestricted shares; the expense is recognized
over the service period for awards expected to vest. For
non-employee stock-based awards, we calculate the fair value of the
award on the date of grant in the same manner as employee awards,
however, the awards are revalued at the end of each reporting
period and the pro rata compensation expense is adjusted
accordingly until such time the nonemployee award is fully vested,
at which time the total compensation recognized to date equals the
fair value of the stock-based award as calculated on the
measurement date, which is the date at which the award
recipient’s performance is complete. The estimation of
stock-based awards that will ultimately vest requires judgment, and
to the extent actual results or updated estimates differ from
original estimates, such amounts are recorded as a cumulative
adjustment in the period estimates are revised. We consider many
factors when estimating expected forfeitures, including types of
awards, employee class, and historical
experience.
We
may issue restricted stock to consultants for various services.
Cost for these transactions are measured at the fair value of the
consideration received or the fair value of the equity instruments
issued, whichever is measurable more reliably measurable. The value
of the common stock is measured at the earlier of (i) the date at
which a firm commitment for performance by the counterparty to earn
the equity instruments is reached or (ii) the date at which the
counterparty's performance is complete.
Share-based
expense totaled $0 and $100,000 for the year ended December 31,
2017 and 2016, respectively.
Research and Development
Expenses.
We follow ASC
730-10, “Research and Development,” and expense
research and development costs when
incurred. Accordingly, third-party research and
development costs, including designing, prototyping and testing of
product, are expensed when the contracted work has been performed
or milestone results have been achieved. Indirect costs are
allocated based on percentage usage related to the research and
development. Research and development costs of $499,522 and
$369,344 were incurred for the year ended December 31, 2017 and
2016, respectively.
Revenue
Recognition
. We recognize
revenue when it is realized or realizable and estimable in
accordance with ASC 605, “Revenue
Recognition”. All revenue is recognized when (i)
persuasive evidence of an arrangement exists; (ii) the service or
sale is completed; (iii) the price is fixed or determinable; and
(iv) the ability to collect is reasonably
assured.
Derivatives and Hedging-
Contracts in Entity’s Own Equity.
In accordance with the provisions of ASC 815
“Derivatives and Hedging” the embedded beneficial
conversion features in the Convertible Loan Notes (Note 5) are not
considered to be indexed to our stock. As a result, these are
required to be accounted for as a derivative financial liability
and have been recognized as a liability on the balance sheets. The
fair value of the derivative financial liability is determined
using the Monte Carlo valuation model and is affected by changes in
inputs to that model including the Company’s stock price,
expected stock price volatility, the contractual term, and the
risk-free interest rate. The derivative financial liability is
subject to re-measurement at each balance sheet date and any
changes in fair value is recognized as a component in other income
(expenses) (Note 6).
Fair Value
Measurements
. We adopted
the provisions of ASC Topic 820, “Fair Value Measurements and
Disclosures”, which defines fair value as used in
numerous accounting pronouncements, establishes a framework for
measuring fair value, and expands disclosure of fair value
measurements. The guidance prioritizes the inputs used in measuring
fair value and establishes a three-tier value hierarchy that
distinguishes among the following:
●
Level 1—Valuations
based on unadjusted quoted prices in active markets for identical
assets or liabilities that the Company has the ability to
access.
●
Level 2—Valuations
based on quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or
liabilities in markets that are not active and models for which all
significant inputs are observable, either directly or
indirectly.
●
Level 3—Valuations
based on inputs that are unobservable and significant to the
overall fair value measurement.
Liabilities
are classified based on the lowest level of input that is
significant to the fair value measurements. The Company has not
transferred any liabilities between the classification
levels.
Cash and Cash
Equivalents
.
We consider all highly
liquid investments purchased with an original maturity of three
months or less to be cash equivalents. The carrying value of those
investments approximates their fair market value due to their short
maturity and liquidity. Cash and cash equivalents include cash on
hand and amounts on deposit with financial institutions, which
amounts may at times exceed federally insured limits.
As of December 31, 2017, we
had
cash and cash
equivalents of $161,215, and as of December 31, 2016, we had cash
and cash equivalents of $1,055,336.
Restricted
Cash.
The carrying amounts of
cash and cash equivalent items which are restricted as to
withdrawal or usage. Restrictions may include legally restricted
deposits held as compensating balances against borrowing
arrangements, contracts entered into with others, or entity
statements of intention with regard to particular deposits;
however, time deposits and short-term certificates of deposit are
not generally included in legally restricted deposits. At December
31, 2017 and 2016, the Company had no restrictions on
cash.
Long-Lived Assets Including
Other Acquired Intangible Assets.
Property and equipment is stated at cost.
Depreciation is computed by the straight-line method over
estimated useful lives, which is between 3 years for computer
equipment and 5-20 years for production equipment. The
carrying amount of all long-lived assets is evaluated periodically
to determine if adjustment to the depreciation and amortization
period or the unamortized balance is warranted.
Long-lived
assets such as property, equipment and identifiable intangibles are
reviewed for impairment whenever facts and circumstances indicate
that the carrying value may not be recoverable. When
required impairment losses on assets to be held and used are
recognized based on the fair value of the asset. The
fair value is determined based on estimates of future cash flows,
market value of similar assets, if available, or independent
appraisals, if required. If the carrying amount of the
long-lived asset is not recoverable from its undiscounted cash
flows, an impairment loss is recognized for the difference between
the carrying amount and fair value of the asset. When
fair values are not available, we estimate fair value by using the
expected future cash flows discounted at a rate commensurate with
the risk associated with the recovery of the assets. We
recognized impairment losses of $1,050,000 and $4,080 for the year
ended December 31, 2017 and 2016, respectively.
Related
Parties.
We follow ASC
850,
” Related Party
Disclosures,”
for
the identification of related parties and disclosure of related
party transactions.
Income
Taxes.
We account for income
taxes under ASC 740 “
Income
Taxes
.” Under
the asset and liability method of ASC 740, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statements
carrying amounts of existing assets and liabilities and their
respective tax basis. 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. Under ASC 740,
the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period the enactment
occurs. A valuation allowance is provided for certain
deferred tax assets if it is more likely than not that the Company
will not realize tax assets through future
operations.
Deferred tax
assets totaled $0 as of December 31, 2017 and
2016.
Earnings per
Share
. We compute basic and
diluted earnings per share amounts in accordance with ASC Topic
260, “
Earnings per
Share
.” Basic earnings
per share is computed by dividing net income (loss) available to
common shareholders by the weighted average number of common shares
outstanding during the reporting period. Diluted earnings per share
reflects the potential dilution that could occur if stock options
and other commitments to issue common stock were exercised or
equity awards vest resulting in the issuance of common stock that
could share in the earnings of the Company. As of December 31,
2017 and 2016, the Company had 17,863,168 and 14,784,001 dilutive
potential common shares, respectively.
Comprehensive Income
(Loss).
Comprehensive
income (loss) is defined as the change in equity during a period
from transactions and other events and circumstances from non-owner
sources. The Company is required to record all components of
comprehensive income (loss) in the financial statements in the
period in which they are recognized. Net income (loss) and other
comprehensive income (loss), net of their related tax effect,
arrived at a comprehensive income (loss). Other
comprehensive loss was $0 for the year ended December 31, 2017 and
2016.
Recently Adopted Accounting Pronouncements
In
November 2015, the FASB issued (ASU) 2015-17,
“Balance Sheet Classification of
Deferred Taxes.”
Currently deferred taxes for
each tax jurisdiction are presented as a net current asset or
liability and net noncurrent asset or liability on the balance
sheet. To simplify the presentation, the new guidance requires that
deferred tax liabilities and assets for all jurisdictions along
with any related valuation allowances be classified as noncurrent
in a classified statement of financial position. This guidance is
effective for interim and annual reporting periods beginning after
December 15, 2016, and early adoption is permitted. The
Company has adopted this guidance in the fourth quarter of the year
ended December 31, 2015 on a retrospective basis. The adoption
of this guidance did not have a material impact on the
Company’s financial position, results of operations or cash
flows, and did not have any effect on prior periods due to the full
valuation allowance against the Company’s net deferred tax
assets.
In
August 2014, the FASB issued ASU 2014-15, "Presentation of
Financial Statements – Going Concern (Subtopic 205-40),
effective for the annual period ending after December 15, 2016, and
for annual periods and interim periods thereafter. Early
application is permitted. This standard provides guidance about
management’s responsibility to evaluate whether there is
substantial doubt about an entity’s ability to continue as a
going concern and to provide related footnote disclosures. The
guidance is effective for annual reporting periods ending after
December 15, 2016, and early adoption is permitted. The
Company adopted this guidance on January 1, 2017. The Company
does not expect the adoption of this guidance to have any impact on
its financial position, results of operations or cash
flows.
In March 2016, the FASB issued ASU
2016-09,
Improvements to Employee
Share-Based Payment Accounting
,
which amends Accounting Standards Codification (“ASC”)
Topic 718, Compensation – Stock Compensation. ASU 2016-09
simplifies several aspects of the accounting for share-based
payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and
classification on the statement of cash flows. ASU 2016-09 is
effective for fiscal years beginning after December 15, 2016, and
interim periods within those fiscal years and early adoption is
permitted. The adoption of this guidance is not expected to have a
material impact on the Company's consolidated financial
statements.
In August 2016, the FASB issued ASU
2016-15,
Cash Flow Statements,
Classification of Certain Cash Receipts and Cash
Payments
, which addresses eight
specific cash flow classification issues with the objective of
reducing diversity in practice. The amendments are effective for
public business entities for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years. Early
adoption is permitted. The adoption of this guidance is not
expected to have a material impact on the Company's consolidated
financial statements.
Recent Accounting Pronouncements Issued But Not Adopted as of
December 31, 2017
Recent Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU No.
2014-09,
Revenue from Contracts with
Customers (Topic 606)
. The ASU
creates a single source of revenue guidance for companies in all
industries. The new standard provides guidance for all revenue
arising from contracts with customers and affects all entities that
enter into contracts to provide goods or services to their
customers, unless the contracts are within the scope of other
accounting standards. It also provides a model for the measurement
and recognition of gains and losses on the sale of certain
nonfinancial assets. This guidance, as amended, must be adopted
using either a full retrospective approach for all periods
presented or a modified retrospective approach and will be
effective for fiscal years beginning after December 15, 2017 with
early adoption permitted. The Company will adopt this ASU effective
January 1, 2018 using the modified retrospective
method.
In February 2015, the FASB issued ASU No.
2016-02,
Leases (Topic
842)
, which amends the FASB
Accounting Standards Codification and creates Topic 842, "Leases."
The new topic supersedes Topic 840, "Leases," and increases
transparency and comparability among organizations by recognizing
lease assets and lease liabilities on the balance sheet and
requires disclosures of key information about leasing arrangements.
The guidance is effective for reporting periods beginning after
December 15, 2018. ASU 2016-02 mandates a modified retrospective
transition method. The Company plans to adopt this ASU on January
1, 2019 and is in the process of evaluating the impact of adopting
the guidance on its consolidated financial
statements.
In August 2016, the FASB issued ASU No.
2016-15,
Cash Flow Statements,
Classification of Certain Cash Receipts and Cash
Payments
, which addresses eight
specific cash flow classification issues with the objective of
reducing diversity in practice. The amendments are effective for
public business entities for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years. Early
adoption is permitted. The adoption of this guidance is not
expected to have a material impact on the Company's consolidated
financial statements.
In January 2017, the FASB issued ASU No.
2017-04,
Intangibles - Goodwill and
Other, Simplifying the Accounting for Goodwill
Impairment
. ASU 2017-04 removes
Step 2 of the goodwill impairment test, which requires a
hypothetical purchase price allocation. A goodwill impairment will
now be the amount by which a reporting unit’s carrying value
exceeds its fair value, not to exceed the carrying amount of
goodwill. All other goodwill impairment guidance will remain
largely unchanged. Entities will continue to have the option to
perform a qualitative assessment to determine if a quantitative
impairment test is necessary. This new guidance will be applied
prospectively and is effective for calendar year end companies in
2020. Early adoption is permitted for any impairment tests
performed after January 1, 2017. Adoption of this ASU is not
expected to have a material impact on the Company’s
consolidated financial statements.
In July 2017, the FASB issued ASU No. 2017-11,
which amends the FASB Accounting Standards Codification. Part I of
ASU No. 2017-11,
Accounting for Certain
Financial Instruments with Down Round Features
, changes the classification analysis of certain
equity-linked financial instruments (or embedded features) with
down round features. The guidance is effective for reporting
periods beginning after December 15, 2019 and interim periods
within those fiscal years. The Company is in the process of
evaluating the impact of adopting the guidance on its consolidated
financial statements.
NOTE 4. AGREEMENTS
Through the Share Exchange, the Company acquired
an exclusive license agreement (the “Licensing
Agreement”) between Exactus BioSolutions and Digital
Diagnostics Inc. (“Digital Diagnostics”) that the
Company recognized as an intangible
asset. Pursuant to the Licensing Agreement,
Digital Diagnostics granted to Exactus BioSolutions an exclusive
license to develop, produce and commercialize certain diagnostic
products, including the FibriLyzer and MatriLyzer, that utilize
certain intellectual property rights owned or licensed by Digital
Diagnostics. The Licensing Agreement provides for Exactus
BioSolutions and Digital Diagnostics to collaborate through the
various steps of the product and device development process,
including the development, regulatory approval and
commercialization stages. Exactus BioSolutions is required to pay
Digital Diagnostics, in cash and/or stock, an initial signing
payment, milestone fees triggered by the first regulatory clearance
or approval of each of the FibriLyzer and the MatriLyzer, and
various sales thresholds, and royalty payments based on the net
sales of the products, calculated on a product-by-product basis. In
2016, the Company paid $50,000 to Digital Diagnostics as part of
the initial signing payment under the Licensing Agreement and
$21,659 in legal expenses. As of December 31, 2016, the Company
accrued an additional $171,033 in licensing fees due to closing a
financing transaction in the fourth quarter of 2016, of which
$75,000 was paid during the first quarter of 2017. The Company
accrued the remaining $30,000 due for the initial signing fee
during the third quarter of 2017. The Company has also accrued
interest, per the Licensing Agreement, of $9,802 for the remaining
balance due as of December 31, 2017. As of December 31, 2017,
$134,802 remained due to Digital Diagnostics.
In the first quarter of 2018, the
Company paid the entire balance due to Digital Diagnostics.
No milestones have been met and no
milestone fees have been paid or accrued through December 31,
2017.
The
License Agreement is effective until such time as neither Digital
Diagnostics nor Exactus Biosolutions has any obligation to the
other under the Licensing Agreement in any country with respect to
any product. The Licensing Agreement may be terminated by the
Company effective upon at least six (6) months written notice if
regulatory approval has been obtained in the U.S. or in the
European Union, or upon at least three (3) months written notice if
regulatory approval has not been obtained in the U.S. or in the
European Union. Either party may terminate the Licensing Agreement
in the event the other party materially breaches the Licensing
Agreement, or becomes insolvent.
On
June 30, 2016, in order to conduct a clinical trial for the
FibriLyzer and other studies, the Company entered into a Master
Services Agreement (the “MSA”) with Integrium LLC
(“Integrium”) and PoC Capital, LLC (“PoC
Capital”). Under the MSA, Integrium has agreed to perform
clinical research services in support of the development of POC
diagnostics devices. Integrium is to conduct one or more
studies in compliance with FDA regulations and pursuant to the
Company’s specific service orders. PoC Capital
has agreed to fund up to the first $1,000,000 in study costs and
fees due to Integrium, with all fees in costs in excess of that
amount being the Company’s sole responsibility, in exchange
for 1,600,000 shares of the Company’s common stock, 1,733,334
shares of newly designated Series C Preferred Stock, and 1,666,667
warrants to purchase the Company’s common stock at a price of
$0.60 per share exercisable for three years. For the year ended
December 31, 2016 the Company had accounted $1,000,000 as prepaid
expenses on the balance sheet which was impaired during the year
ended December 31, 2017 due to cash constraints to manufacture
materials needed for trial. See Note 8 below for additional
information regarding the Company’s common stock, Series C
Preferred Stock and warrants.
NOTE
5. CONVERTIBLE LOAN NOTES
On
August 14, 2017, the Company entered into a Securities Purchase
Agreement (the “Securities Purchase Agreement”) under
which it agreed to sell an 8% convertible promissory note in an
aggregate principal amount of $110,000.00 (the “Initial
Note”) to Morningview Financial, LLC
(“Morningview”). The net proceeds of the sale of this
Initial Note, after deducting the Morningview’s discount and
the expenses payable by the Company, were $87,000. The Note will
mature on August 14, 2018.
At
any time on or after the earlier of (i) the date on which the
Registration Statement (defined below) has become effective or (ii)
170th calendar day after the issue date of the Initial Note,
Morningview has the option to convert all or any part of the
outstanding and unpaid principal amount and accrued and unpaid
interest of the Initial Note into shares of the Company’s
common stock at the Conversion Price. The “Conversion
Price” will be the lesser of (i) $0.25 and (ii) 60% of the
average of the three lowest trading prices of the Company’s
common stock during the twenty-day trading period prior to the
conversion. The Conversion Price is subject to further reduction
upon certain events specified in the Initial Note.
On
December 18, 2017, the Company further amended the Initial Note to
(i) increase the aggregate principal amount of the Initial Note to
$115,000 and (ii) extend the date by which the Company is required
to cause the Registration Statement to become effective to January
4, 2018. On January 4, 2018, the Company further amended the
Initial Note to (i) increase the aggregate principal amount of the
Initial Note to $125,000 and (ii) extend the date by which the
Company is required to cause the Registration Statement to become
effective to February 1, 2018.
On
September 27, 2017, pursuant to Securities Purchase Agreement, the
Company issued an 8% convertible promissory note (the
“Additional Note,” and together with the Initial Note,
the “Notes”) in an aggregate principal amount of
$27,500 to Morningview, with terms and conditions identical to the
initial Note. The net proceeds of this sale of the Initial Note,
after deducting Morningview’s discount and the expenses
payable by the Company, were $21,750.
The terms of the Notes require the Company to have
a registration statement permitting Morningview to resell the
shares of the Company’s common stock into which the Notes may
be converted (the “Registration Statement”) declared
effective by the SEC within 120 days of the issue date of the
Initial Note.
On December 18, 2017,
the Company further amended the Initial Note (the "Second Amendment
to Initial Note") to (i) increase the aggregate principal amount of
the Initial Note to $115,000 and (ii) extend the date by which the
Company is required to cause the Registration Statement to become
effective to January 4, 2018.
On January 4, 2018, the Company further amended
the Initial Note (the “Third Amendment to Initial
Note”) to (i) increase the aggregate principal amount of the
Initial Note to $125,000 and (ii) extend the date by which the
Company is required to cause the Registration Statement to become
effective to February 1, 2018. Starting in March 2018, the Company
is repaying the Note $25,000 a month.
On
December 29, 2017, the Company entered into a Securities Purchase
Agreement, dated as of December 21, 2017 (the "EMA Securities
Purchase Agreement"), under which it agreed to sell a 12%
convertible promissory note in an aggregate principal amount of
$65,000 (the "EMA Note") to EMA Financial, LLC ("EMA"). The net
proceeds of the sale of the EMA Note, after deducting the expenses
payable by the Company, were $62,400
The
EMA Note and the shares of the Company's common stock issuable upon
conversion of the EMA Note have not been, and will not be,
registered under the Securities Act. The Company offered and sold
the EMA Note to EMA in reliance on the exemption from registration
provided by Section 4(a)(2) of the Securities Act.
The
EMA Note is dated December 21, 2017 and provides the terms and
conditions of the Company's obligations to EMA. The EMA Note
will bear interest at a rate of 12% per annum and will mature on
December 21, 2018.
At any time after the
180
th
calendar
day after the issue date of the EMA Note, EMA has the option to
convert all or any part of the outstanding and unpaid principal
amount and accrued and unpaid interest of the EMA Note into shares
of the Company's common stock at the EMA Conversion Price.
The "EMA Conversion Price" will be the lesser of (i) the closing
sale price of the Company's common stock on the trading day
immediately preceding the date of conversion and (ii) 60% of either
the lowest sale price of the Company's common stock during the
twenty-day trading period prior to the conversion, or the closing
bid price, whichever is lower. The EMA Conversion Price is subject
to further reduction upon certain events specified in the EMA
Note.
On
December 29, 2017, the Company entered into a Securities Purchase
Agreement, dated as of December 26, 2017 (the "Auctus Securities
Purchase Agreement"), under which it agreed to sell a 12%
convertible promissory note in an aggregate principal amount of
$125,000 (the "Auctus Note") to Auctus Fund, LLC ("Auctus"). The
net proceeds of the sale of the Auctus Note, after deducting the
expenses payable by the Company, are expected to be
$112,250.
The
Auctus Note and the shares of the Company's common stock issuable
upon conversion of the Auctus Note have not been, and will not be,
registered under the Securities Act. The Company offered and sold
the Auctus Note to Auctus in reliance on the exemption from
registration provided by Section 4(a)(2) of the Securities
Act.
The
Auctus Note is dated December 26, 2017 and provides the terms and
conditions of the Company's obligations to Auctus. The Auctus
Note will bear interest at a rate of 12% per annum and will mature
on September 26, 2018.
At any time after the 180
th
calendar
day after the issue date of the Auctus Note, Auctus has the option
to convert all or any part of the outstanding and unpaid principal
amount and accrued and unpaid interest of the Auctus Note into
shares of the Company's common stock at the Auctus Conversion
Price. The "Auctus Conversion Price" will be the lesser of
(i) the lowest trading price of the Company's common stock during
the twenty-five-day trading period prior to the issue date of the
Auctus Note and (ii) 50% of the lowest trading price of the
Company's common stock during the twenty-five-day trading period
prior to the conversion. The Auctus Conversion Price is subject to
further reduction upon certain events specified in the Auctus
Note.
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Convertible
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Principal
Amount
|
$
332,500
|
$
-
|
Less unamortized
debt discount and debt issuance costs
|
(274,704
)
|
-
|
Current debt less
unamortized debt discount and
debt issuance
costs
|
$
57,796
|
$
-
|
During
the year ended December 31, 2017, the Company recognized $41,991 in
interest expense for the amortization of debt discounts and $10,804
for amortization of deferred issuance costs for the Notes issued on
August 14, 2017, September 27, 2017, December 21, 2017, and
December 26, 2017.
NOTE 6. FAIR VALUE MEASUREMENT
The guidance regarding
fair value measurements prioritizes the inputs used in measuring
fair value and establishes a three-tier value hierarchy that
distinguishes among the following:
●
Level 1—Valuations based on unadjusted quoted prices in
active markets for identical assets or liabilities that the Company
has the ability to access.
●
Level 2—Valuations based on quoted prices for similar
assets or liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are not
active and models for which all significant inputs are observable,
either directly or indirectly.
●
Level 3—Valuations based on inputs that are unobservable
and significant to the overall fair value measurement.
Liabilities are classified based on the lowest level of input that
is significant to the fair value measurements. The Company has not
transferred any liabilities between the classification
levels.
The Company estimates fair values of derivative liabilities
utilizing Level 3 inputs. The Company uses the Monte Carlo
valuation model for derivatives which embodies all of the requisite
assumptions (including trading volatility, remaining term to
maturity, market price, strike price, risk-free rates) necessary to
determine fair value of these instruments. The Company’s
derivative liabilities are marked-to-market with the changes in
fair value recorded as a component of change in fair value of
derivative liabilities in the Company’s condensed
consolidated statements of operations. Estimating fair values of
derivative liabilities requires the use of significant and
subjective inputs that may, and are likely to, change over the
duration of the instrument with related changes in internal and
external market factors.
The Company identified financial instruments, the conversion
options embedded in the Notes discussed in Note 6, which require
liability presentation at fair value. Each of these instruments
provide the holder with the right to convert into common stock at a
fixed discount market, subject to a cap on the conversion price.
These clauses cause uncertainty as to the number of shares issuable
upon conversion of convertible debt and accordingly require
liability presentation on the balance sheet in accordance with US
GAAP.
The
fair value of the Initial Note on the date of issuance and on
December 31, 2017 was estimated using the Monte Carlo valuation
model. This method of valuation involves using inputs such as the
fair value of the Company’s common stock, stock price
volatility, and risk–free interest rates. Due to the nature
of these inputs, the valuation of the Initial Note is considered a
Level 3 measurement. The following assumptions were used on August
14, 2017 (issuance date) and December 31, 2017:
|
|
|
Volatility
|
303.93
%
|
333.89
%
|
Risk-free
interest rate
|
1.23
%
|
1.31
%
|
Common
stock closing price
|
$
0.20
|
$
0.20
|
Based on these assumptions, the Company recorded a
$240,000 derivative liability on the issuance date of the Initial
Note.
The initial fair values of the embedded debt
derivative $87,000 was allocated as a debt discount with the
remainder $153,000 was charged to current period operations as
derivative expenses
. The derivative
liability for the Initial Note was adjusted to fair market value of
$264,000 as of December 31, 2017.
The
fair value of the Additional Note on the date of issuance and on
December 31, 2017 was also estimated using the Monte Carlo
valuation model. The following assumptions were used on September
27, 2017 (issuance date) and December 31, 2017:
|
|
|
Volatility
|
319.5
%
|
326.65
%
|
Risk-free
interest rate
|
1.33
%
|
1.31
%
|
Common
stock closing price
|
$
0.12
|
$
0.20
|
Based on these assumptions, the Company recorded a
$46,000 derivative liability on the issuance date of the Additional
Note.
The initial fair values of the embedded debt
derivative $21,750 was allocated as a debt discount with the
remainder $24,250 was charged to current period operations as
derivative expenses
. The derivative
liability for the Additional Note was adjusted to fair market value
of $63,000 as of December 31, 2017.
The
fair value of the EMA note on the date of issuance and on December
31, 2017 was also estimated using the Monte Carlo valuation model.
The following assumptions were used on December 21, 2017 (issuance
date) and December 31, 2017:
|
|
|
Volatility
|
300.94
%
|
303.97
%
|
Risk-free
interest rate
|
1.73
%
|
1.76
%
|
Common
stock closing price
|
$
0.20
|
$
0.20
|
Based on these assumptions, the Company recorded a
$163,000 derivative liability on the issuance date of the EMA
Note.
The initial fair values of the embedded debt
derivative $56,800 was allocated as a debt discount with the
remainder $106,200 was charged to current period operations as
derivative expenses
. The derivative
liability for the EMA Note was adjusted to fair market value of
$169,000 as of December 31, 2017.
The
fair value of the Auctus Note on the date of issuance and on
December 31, 2017 was also estimated using the Monte Carlo
valuation model. The following assumptions were used on December
26, 2017 (issuance date) and December 31, 2017:
|
|
|
Volatility
|
320.69
%
|
326.65
%
|
Risk-free
interest rate
|
1.19
%
|
1.53
%
|
Common
stock closing price
|
$
0.20
|
$
0.20
|
Based on these assumptions, the Company recorded a
$427,000 derivative liability on the issuance date of the Auctus
Note.
The initial fair values of the embedded debt
derivative $102,250 was allocated as a debt discount with the
remainder $324,750 was charged to current period operations as
derivative expenses
. The derivative
liability for the Auctus Note was adjusted to fair market value of
$434,000 as of December 31, 2017.
The
Company recorded change in fair value of the derivative liability
on debt to market resulting in non-cash, non-operating loss of
$54,000 and $0 for the years ended December 31, 2017 and 2016,
respectively, under derivative expenses.
During
the year ended December 31, 2017, the Company accrued $4,495 as
interest expenses on the above convertible notes.
The
following table provides a summary of changes in fair value of the
Company’s Level 3 financial liabilities as of December 31,
2016 and December 31, 2017:
|
|
|
|
|
|
Balance, December
31, 2016
|
$
-
|
Initial fair value
at note issuances
|
876,000
|
Extinguishment of
derivative liability
|
-
|
Mark-to-market at
December 31, 2017
|
54,000
|
|
|
Balance, December
31, 2017
|
$
930,000
|
Net loss for the
year included in earnings relating to the liabilities held at
December 31, 2017
|
$
54,000
|
NOTE 7. INCOME TAXES
As
of December 31, 2017, the Company has a deferred tax asset,
resulting from benefits of net operating loss carry forward
generated from inception, which expire in varying amounts between
2028 and 2037.
The tax
reform bill that Congress voted to approve Dec. 20, 2017, also
known as the “Tax Cuts and Jobs Act”, made sweeping
modifications to the Internal Revenue Code, including a much lower
corporate tax rate, changes to credits and deductions, and a move
to a territorial system for corporations that have overseas
earnings.
The act
replaced the prior-law graduated corporate tax rate, which taxed
income over $10 million at 35%, with a flat rate of
21%.
The
Company has not reviewed the all of the changes the “Tax Cuts
and Jobs Act” will apply to the Company, but is reviewing
such changes. Due to the continuing loss position of the Company,
such changes should not be material.
The
carry-forwards may be further subject to the application of Section
382 of the Internal Revenue Code of 1986. The Company’s past
sales and issuances of common and preferred stock have likely
resulted in ownership changes as defined by Section 382 of the
Code. The Company has not conducted a Section 382 study to date. It
is possible that a future analysis may result in the conclusion
that a substantial portion, or perhaps substantially all, of the
NOLs and credits will expire due to the limitations of Sections 382
and 383 of the Code. As a result, the utilization of the NOLs and
tax credits may be limited and a portion of the carry-forwards may
expire unused. The Company has provided a valuation allowance to
offset the deferred tax assets due to the uncertainty of realizing
the benefits of the net deferred tax asset.
The
provision for income taxes differs from the amounts which would be
provided by applying the statutory federal income tax rate of 21%
to the net income (loss) before provision for income taxes. As of
December 31, 2017, there was approximately $810,000 in deferred tax
assets, which were off-set by an equal valuation
allowance.
The
Company has not taken positions contrary to the Internal Revenue
Code, however, the tax years of 2013 through 2017 remain subject to
audit by the Internal Revenue Service.
The
tax effects of temporary differences that give rise to the
Company’s net deferred tax asset as of December 31, 2017 and
2016 are as follows:
|
|
|
|
|
|
Current tax
benefit
|
$
(810,000
)
|
$
(544,000
)
|
Valuation
allowance
|
810,000
|
544,000
|
Total tax
expense
|
$
-
|
$
-
|
|
|
|
|
|
|
Balance
forward
|
$
794,500
|
$
250,500
|
Change in deferred
tax asset
|
490,500
|
544,000
|
Total deferred tax
asset
|
1,285,000
|
794,500
|
Valuation
allowance
|
(1,285,000
)
|
(794,500
)
|
Total tax
expense
|
$
-
|
$
-
|
NOTE 8. EQUITY TRANSACTIONS
Recapitalization
and Change in Control
On
February 29, 2016, the Company consummated the Share Exchange,
which resulted in a change in control of the Company. As part of
this transaction, the Company acquired a $50,000 license agreement
and $1,292 in cash and assumed liabilities of $51,000. The Company
initially reported an issuance of 32 million shares of newly
designated Series B-1 Preferred Stock to the shareholders of
Exactus BioSolutions in the Share Exchange. Due to an anticipated
pre-acquisition investment in Exactus BioSolutions that was not
made, the final total issued shares of Series B-1 Preferred Stock
was 30 million.
The
Company has considered the guidance pursuant to Rule 11-01(d) of
Regulation S-X and related interpretations and has concluded the
acquisition of Exactus BioSolutions pursuant to the Share
Exchange is the acquisition of an asset and not of a
business. The license agreement and shareholder loans
have been accounted for and recorded at historical
cost.
Concurrently
with the closing of the Share Exchange, the Company closed a
private offering of Series B-2 Preferred Stock. The
Company sold a total of 2,084,000 shares of Series B-2 Preferred
Stock at an offering price of $0.25 per share, for an aggregate
subscription price of $521,000. The Company originally reported a
total of 2,884,000 shares of Series B-2 preferred stock being
issued in the offering. Due to: (i) an anticipated investment for
1,000,000 shares which was not made, and (ii) an additional
subscription for 200,000 shares for which documentation had not
been completed at that time, however, the final total issued shares
of Series B-2 Preferred Stock was 2,084,000. The shares sold in the
offering included 400,000 shares of Series B-2 preferred stock
issued to extinguish a $100,000 loan and 204,000 shares of Series
B-2 preferred stock issued to former creditors of Exactus
BioSolutions in exchange for their release of $51,000 in debt owed
by Exactus. After accounting for these issuances, net
cash proceeds from the offering were $370,000. No
underwriting discounts or commissions have been or will be paid in
connection with the sale of Series B-2 Preferred
Stock.
Also
on February 29, 2016, the Company entered into Exchange Agreements
with certain holders of common stock holding an aggregate of
393,314 post-split (11,636,170 pre-split) shares of common
stock. Under the Exchange Agreements, these shareholders
exchanged their common stock for a total of 4,558,042 shares of
Series A Preferred Stock. These exchanges consisted of: (i)
thirteen common stock holders holding 10,894,070 (pre-split) shares
of common stock who exchanged their common stock for 3,458,042
shares Series A Preferred Stock, resulting in a (pre-split)
exchange ratio of approximately 1 for 3.15, and (ii) one
shareholder who, under a separately negotiated agreement, exchanged
742,100 (pre-split) shares common stock for 1,100,000 shares of
Series A Preferred Stock, resulting at a (pre-split) exchange ratio
of approximately 1.48 for 1. Immediately following such
share exchanges, the Company repurchased 50,000 shares of Series A
Preferred Stock from a shareholder for a total price of
$50,000.
Reverse Stock Split
Effective
March 22, 2016, the Company performed a reverse split of common
stock on a 1 for 29.5849 basis, pursuant to the prior approval by
the Board of Directors and a majority of
shareholders. On March 22, 2016, the effective date of
the reverse split, the Company had approximately 3,608,715 shares
of common stock issued and outstanding, which were split into
121,978 shares of common stock. The par value of the common stock
was unchanged at $0.0001 per share, post-split. All per share
information in the condensed financial statements gives retroactive
effect to the 1 for 29.5849 reverse stock split that was effected
on March 22, 2016.
Preferred Stock
The
Company’s authorized preferred stock consists of 50,000,000
shares with a par value of $0.0001. On February 17,
2016, the Board of Directors voted to designate a class of
preferred stock entitled Series A Preferred Stock, consisting of up
to five million (5,000,000) shares, par value
$0.0001. The shares of Series A Preferred Stock were
automatically converted to 4,508,042 shares of common stock on
March 30, 2016, thirty (30) days after the closing of the Share
Exchange and offering of Series B-2 Preferred Stock. As
a result, there are 4,558,042 Series A preferred stock issued and
zero outstanding as of December 31, 2016.
Also
on February 17, 2016, the Company’s Board of Directors voted
to designate a class of preferred stock entitled Series B-2
Convertible Preferred Stock (“Series B-2 Preferred
Stock”), consisting of up to six million (6,000,000) shares,
par value $0.0001, with a stated value of $0.25 per
share. With respect to rights on liquidation, winding up
and dissolution, holders of Series B-2 Preferred Stock will be paid
in cash in full, before any distribution is made to any holder of
common or other classes of capital stock, an amount of $0.25 per
share. Shares of Series B-2 Preferred Stock have no dividend rights
except as may be declared by the Board in its sole and absolute
discretion, out of funds legally available for that purpose. Shares
of Series B-2 Preferred Stock are convertible, at the option of the
holder, into shares of common stock on a one (1) for one (1)
basis. Holders of Series B-2 Preferred Stock have the
right to vote as-if-converted to common stock on all matters
submitted to a vote of the holders of the Company’s common
stock.
For so long as any shares of Series B-2 Preferred Stock are
issued and outstanding, the Corporation shall not issue any notes,
bonds, debentures, shares of preferred stock, or any other
securities that are convertible to common stock unless such
conversion rights are at a fixed ratio or a fixed monetary price
(Note 9).
On February 29, 2016, the Company issued 2,084,000
shares of Series B-2 Preferred Stock.
On August 1, 2016, the Company closed a
private offering of Series B-2 Preferred Stock. The
Company sold a total of 500,000 shares of Series B-2 Preferred
Stock to accredited investors at an offering price of $0.25 per
share, for an aggregate subscription price of
$125,000. No underwriting discounts or commissions have
been paid in connection with the sale of the Series B-2 Preferred
Stock
.
Effective
October 13, 2016, the Company amended the Certificate of
Designation for its Series B-2 Preferred Stock to increase the
number of shares of the Series B-2 Preferred Stock from 6,000,000
to 10,000,000 shares. There were no other changes to the terms of
the Company’s Series B-2 Preferred Stock.
On
October 27, 2016, the Company closed a private offering of Series
B-2 Preferred Stock. The Company sold a total of
6,000,000 shares of Series B-2 Preferred Stock to accredited
investors at an offering price of $0.25 per share, for an aggregate
subscription price of $1,500,000. No underwriting
discounts or commissions have been or will be paid in connection
with the sale of the Series B-2 Preferred Stock.
On
January 26, 2017, the Company closed a private offering of Series
B-2 Preferred Stock. The Company sold a total of 100,000
shares of Series B-2 Preferred Stock to accredited investors at an
offering price of $0.25 per share, for an aggregate subscription
price of $25,000. No underwriting discounts or
commissions have been or will be paid in connection with the sale
of the Series B-2 Preferred Stock.
As
of December 31, 2017 and 2016, 8,684,000 and 8,584,000 shares,
respectively, of Series B-2 Preferred Stock are issued and
outstanding.
On
February 29, 2016, the Company’s Board of Directors voted to
designate a class of preferred stock entitled Series B-1
Convertible Preferred Stock (“Series B-1 Preferred
Stock”), consisting of up to thirty-two million (32,000,000)
shares, par value $0.0001. With respect to rights on
liquidation, winding up and dissolution, the Series B-1 Preferred
Stock ranks pari passu to the class of common stock.
Shares of Series B-1 Preferred Stock have no dividend rights except
as may be declared by the Board in its sole and absolute
discretion, out of funds legally available for that purpose. Shares
of Series B-1 Preferred Stock are convertible, at the option of the
holder, into shares of common stock on a one (1) for one (1) basis.
Holders of Series B-1 Preferred Stock have the right to vote
as-if-converted to common stock on all matters submitted to a vote
of holders of the Company’s common stock. On February 29,
2016, the Company issued 30,000,000 shares of Series B-1 Preferred
Stock, of which 2,800,000 remain outstanding as of December 31,
2017 and 2016.
On
June 30, 2016, pursuant to the MSA summarized in Note 4, the
Company’s Board of Directors approved a Certificate of
Designation authorizing 1,733,334 shares of new Series C Preferred
Stock, par value $0.0001. The Series C Preferred Stock
ranks equally with our common stock with respect to liquidation
rights and is convertible to common stock on a 1 for 1
basis. The conversion rights of holders of the Series C
Preferred Stock are limited such that no holder may convert any
shares of preferred stock to the extent that such holder,
immediately following the conversion, would own in excess of 4.99%
of our issued and outstanding shares of common
stock. This limitation may be increased to 9.99% upon 61
days written notice by a holder of the Series C Preferred Stock to
the Company. On June 30, 2016, the Company issued
1,733,334 shares of Series C Preferred Stock to PoC Capital valued
at $511,334 as prepaid expenses on the balance sheet. As of
December 31, 2017 and 2016, 1,733,334 shares of Series C Preferred
Stock are issued and outstanding
Common Stock
The
Company’s authorized common stock consists of 200,000,000
shares with a par value of $0.0001.
The
Company automatically converted all outstanding shares of Series A
Preferred Stock to common stock on March 30, 2016. As a
result, 4,508,042 shares of common stock were issued in exchange of
4,508,042 shares of Series A Preferred Stock.
Certain
shareholders converted their shares of Series B-1 Preferred Stock
to common stock on June 15, 2016. As a result,
27,200,000 shares of common stock were issued in exchange of
27,200,000 shares of Series B-1 Preferred Stock.
On
June 30, 2016, pursuant to the MSA summarized in Note 4, the
Company issued 1,600,000 shares of common stock to PoC Capital
valued at $480,000 as prepaid expenses on the balance
sheet.
P
ursuant to a services
agreement with IRTH Communications, LLC (“IRTH”) in
which IRTH agreed to perform certain investor relations, financial
communications, and strategic consulting services, the Company
issued $100,000 of our common stock, or 141,844 shares, to IRTH on
November 18, 2016 in partial consideration for those services. On
December 13, 2016, the Company issued an additional 500,000 shares
of common stock to IRTH pursuant to an addendum to the services
agreement and in consideration of certain additional services,
including telemarketing and investor outreach services, to be
provided by IRTH.
On
February 22, 2017, the Company and IRTH agreed that IRTH would not
provide the additional services
pursuant to an addendum
to a services agreement
and the
500,000 shares of common stock issued on December 13, 2016 were
returned to the Company and retired.
On October 19, 2017, the Company issued 1,500,000 shares of its
common stock to IRTH to settle $41,685 of outstanding advertising
and promotion expenses and accounted for a debt settlement loss of
$78,315.
There
were 35,071,862 and 34,071,862 common shares issued and outstanding
at December 31, 2017 and 2016, respectively.
Warrants and Options
On
June 30, 2016, pursuant to the MSA summarized in Note 4, the
Company issued warrants to purchase 1,666,667 common stock shares
for a price of $0.60 per share exercisable for three years to PoC
Capital.
These
warrants have a grant date fair value of $0.0052 per warrant,
determined using the Black-Scholes method based on the following
assumptions: (1) risk free interest rate of 0.71%; (2) dividend
yield of 0%; (3) volatility factor of the expected market price of
our common stock of 27.2%; and (4) an expected life of the warrants
of 3 years.
The
Company has recorded a prepaid expense on these warrants of $8,667
as of June 30, 2016.
There
were 1,666,667 warrants outstanding at December 31, 2017 and
2016.
NOTE 9. COMMITMENTS AND CONTINGENCIES
In
the ordinary course of business, we enter into agreements with
third parties that include indemnification provisions which, in our
judgment, are normal and customary for companies in our industry
sector. These agreements are typically with business partners,
clinical sites, and suppliers. Pursuant to these agreements, we
generally agree to indemnify, hold harmless, and reimburse
indemnified parties for losses suffered or incurred by the
indemnified parties with respect to our product candidates, use of
such product candidates, or other actions taken or omitted by us.
The maximum potential amount of future payments we could be
required to make under these indemnification provisions is
unlimited. We have not incurred material costs to defend lawsuits
or settle claims related to these indemnification provisions. As a
result, the estimated fair value of liabilities relating to these
provisions is minimal. Accordingly, we have no liabilities recorded
for these provisions as of December 31, 2017, and
2016.
Per clause
7,
No
Variable Rate Convertible Securities, in the subscription
agreements of Series B-2 Preferred Stock
,
for so long
as any shares of Series B-2 Preferred Stock are issued and
outstanding, the Corporation shall not issue any notes, bonds,
debentures, shares of preferred stock, or any other securities that
are convertible to common stock unless such conversion rights are
at a fixed ratio or a fixed monetary price. The Company issued
variable convertible notes during the yearwhich is in violation of
this clause (Note 5). The Company kept the Series B-2 holders
informed of the Company’s cash needs though out the year and
Series B-2 holders had the opportunity to participate in
convertible loan notes. Subsequently, the Company's largest
Series B holder participated into two note purchase agreements on
March 22, 2018 (Note 11).
On
January 20, 2017, Robert F. Parker (the “petitioner”)
filed a petition in the Supreme Court of the State of New York,
County of New York (the “Court”), naming, among others,
the Company and Ezra Green, a former shareholder, director and
officer of the Company, as respondents. The petition was received
by the Company on February 7, 2017. The petitioner previously had a
judgment entered in his favor and against Clear Skies Solar, Inc.
and its wholly owned subsidiary Clear Skies Group, Inc. (together,
“Clear Skies”), in the amount of $331,132 with
interest accruing at a rate of 9% per year from November 21, 2014
(the “Judgment”). The Judgment remains outstanding. The
petition alleged, among other things, that through a series of
allegedly fraudulent conveyances occurring before the Judgment was
entered against Clear Skies, the major assets of Clear Skies, which
were comprised of various patents, were transferred from Clear
Skies to Carbon 612 Corporation (“Carbon”), and from
Clear Skies and Carbon to the Company. The petition further
alleged, among other things, that the transfers were without
fair consideration and rendered Clear Skies, the
judgment-debtor, insolvent. The petitioner sought the entry of a
judgment against the Company and the other respondents in the
amount of the outstanding Judgment, with all accrued interest,
reasonable attorneys’ fees and costs and
disbursements.
The
parties reached an agreement on settlement and the Court entered
the parties’ joint stipulation of discontinuance with
prejudice on September 6, 2017. The settlement agreement requires
co-defendant Ezra Green to make an initial payment with subsequent,
additional payments over time. The Company has agreed, in exchange
for the dismissal of all claims with prejudice, to pay up to
$20,000, at $1,000 per month beginning in January 2018 at the
earliest, if co-defendant Ezra Green defaults on his subsequent
payment obligations under the terms of the settlement agreement.
The Company’s liability is capped at $20,000 in total,
memorialized in a confession of judgment note, plus statutory
interest if the plaintiff must file suit against the Company to
collect on the confession of judgment note.
In management’s opinion, we have incurred a
probable loss as set forth by accounting principles generally
accepted in the United States, estimated the loss to be $20,000,
and recorded the appropriate accounting entries which are reflected
in our financial statements.
NOTE 10. RELATED PARTY CONSIDERATIONS
Some
of the officers and directors of the Company are involved in other
business activities and may, in the future, become involved in
other business opportunities that become available. They may face a
conflict in selecting between the Company and other business
interests. We have not formulated a policy for the resolution of
such conflicts.
On November 20, 2017, Dr. Dimitrov provided a
notice dated November 21, 2017 to the Company stating that he was
resigning from the Board, effective immediately. Dr. Dimitrov
indicated that his resignation from the Board was based on the
deteriorating relationship between the Company and Digital
Diagnostics over the non-payment of fees owed by the Company
pursuant to the licensing agreement between the Company and Digital
Diagnostics. Dr. Dimitrov currently serves as the President of
Digital Diagnostics, and the Company has licensed the right to
develop, produce and commercialize certain diagnostic products,
including the FibriLyzer and MatriLyzer, utilizing certain
intellectual property rights owned or licensed by Digital
Diagnostics. Dr. Dimitrov believes that, in light of these
concerns, his role as both a Director of the Company and the
President of Digital Diagnostics creates a conflict of interest and
has decided to focus his time and energy on doing what is best for
the shareholders of Digital Diagnostics. For the year ended
December 31, 2017 and 2016, the Company accrued $30,000 and
$171,033, respectively, in licensing fees expenses to Digital
Diagnostics. As of December 31, 2017 and 2016, $126,032 and
$171,032, respectively, are shown as accrual under accounts
payable.
The
Company has also accrued interest at 3% over the prime rate, per
the Licensing Agreement, of $9,802 for the remaining balance due as
of December 31, 2017
.
The Company paid $75,000 and $50,000
during the years ended December 31, 2017 and 2016.
In the first quarter of 2018, the
Company paid the entire balance due to Digital
Diagnostics.
For
the years ended December 31, 2017 and 2016, $300,000 and $251,096,
respectively, was recognized in Research and Development expenses
for consulting provided by Dr. Dimitrov. As of December 31, 2017
and 2016, $275,000 and $101,095, respectively, are shown as accrual
under accounts payable. During the year ended December 31, 2017 and
2016, $125,000 and $150,000, respectively was paid.
On
June 28, 2017, the Company issued to two of the Company’s
executive officers a promissory note in the principal amount up to
$100,000, which amount may be drawn upon by the Company as bridge
financing for general working capital purposes. The promissory note
accrues interest at a rate of 8.0% per annum and matures on the
earlier of (i) one (1) year from the date of the promissory note,
and (ii) the closing the sale of the Company’s securities in
a single transaction or a series of related transactions from which
at least $500,000 of gross proceeds are raised. As of December 31,
2017, the Company has drawn $48,000 on the promissory note and
recorded as a note payable. During the year ended December 31,
2017, the Company accrued $1,967 as interest expenses on the above
notes payable.
NOTE 11. SUBSEQUENT EVENTS
In accordance with authoritative guidance, we have evaluated any
events or transactions occurring after December 31, 2017, the
balance sheet date, through the date of filing of this report and
note that there have been no such events or transactions that would
require recognition or disclosure in the consolidated financial
statements as of and for the year ended December 31, 2017, except
as disclosed below.
Common Stock
On February 9, 2018, the Company issued 1,718,675 shares of its
common stock to settle $91,306 of outstanding legal expenses and
accounted for a debt settlement loss of $252,429.
Series D Preferred Stock
The Company has filed the Series D Certificate of Designation with
the Nevada Secretary of State to designate and offer for sale 200
shares of the Company’s preferred stock as the Series D
Preferred Stock (the “Series D”) to certain accredited
investors, including affiliates of the Company (collectively the
“Investors”), with a maximum offering amount
of $2,200,000 (the “Offering”).
Up to 200 shares of Series D are being offered at a purchase price
of $10,000 per share. The Company is offering 70 shares of the 200
authorized Series D shares as re-payment for outstanding
obligations of the Company at an effective re-payment price of
$12,500 per share. To date the Company has received $550,000 in
connection with the Offering including $50,000 in cash for 5 shares
of Series D Preferred Stock and $500,000 in debt re-payment for 40
shares of Series D Preferred Stock. The Company intends to use the
proceeds from the Offering immediately for general corporate
purposes, including working capital.
Pursuant to the terms of the Series D Subscription Agreement,
immediately following the consummation of an offering of the
Company’s Common Stock for which the gross proceeds of the
offering exceed $5,000,000 (a “Qualified Offering”),
each share of Series D automatically converts into 200,000 shares
of Common Stock (the “Conversion Shares”). The Company
agreed that within 45 days of a Qualified Offering the Company
shall file a registration statement with the SEC registering the
Conversion Shares for resale by the Investors.
Series B-2 Preferred Stock Warrants
On March 14, 2018 (the “Warrant Date”), the Board of
Directors of the Company approved the issuance of up to 5,045,404
two-year Warrants to purchase shares of the Company’s Common
Stock to the holders of the Company’s Series B 2 Preferred
Stock (each a “B-2 Holder”). The Warrants are
exercisable at of $0.05 per share. Each B-2 Holder shall be issued
Warrants to purchase 0.581 shares of Common Stock for each share of
Series B-2 Preferred Stock (the “Series B-2”) held by
the B-2 Holder.
On March 20, 2018, the Company issued Warrants to purchase up to
3,486,000 shares of the Company’s Common Stock, to MS, who is
a B-2 Holder. The Company intends to issue an additional 1,559,404
Warrants to the B-2 Holders.
MagnaSci Fund, L.P., Promissory Notes
On March 22, 2018, the Company entered into two note purchase
agreements (together “NPA”), under which the Company
issued MagnaSci Fund, L.P. (“MS”) two convertible
promissory notes (collectively the “Notes”) with a
total principal amount of $100,000. The Notes bear interest at a
rate of 5% per annum and will mature on February 1, 2023 (the
“Maturity Date”).
If a Qualified Financing occurs prior to the Maturity Date, then
the outstanding principal balance of the Notes, together with all
accrued and unpaid interest thereon, shall be automatically
converted into a number of shares of the Company’s common
stock at $0.05 per Share. The Notes offers MS registration rights
wherein the Company agrees that within 45 days of a Qualified
Offering, prior to the Maturity Date, the Company shall file a
registration statement with the SEC registering for resale the
shares of Company’s common stock into which the Notes are
convertible.
Convertible Loan Note
On March 22, 2018, The Company entered into a securities purchase
agreement, effective March 16, 2018, with an investor pursuant to
which the Company issued and sold a convertible promissory note
(the “Note”) to the investor in the aggregate principal
amount of $58,500 original issue discount of 10%, and received
gross proceeds of $48,000. The Note matures on the earlier of (i)
December 16, 2018, or (ii) the date in which a registration
statement for the shares underlying the Note is declared effective
(either the “Maturity Date”). The Note bears interest
at 9% per annum. Beginning June 16, 2018, the investor may elect to
convert the Note into shares of common stock of the Company at the
lower of (i) $0.25 per share or (ii) 51% of the lowest trading
price of the Company’s common stock during the 25 day period
prior to the conversion, subject to adjustment (the
“Conversion Price”).