The accompanying notes are an integral part of these unaudited
consolidated financial statements.
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
The accompanying notes are an integral
part of these unaudited consolidated financial statements.
Notes to Interim Unaudited Consolidated
Financial Statements
For the Period Ended June 30, 2017
The following unaudited interim
consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, such interim financial statements do not include all the information and footnotes required by accounting principles
generally accepted in the United States for complete annual financial statements. The information furnished reflects all adjustments,
consisting only of normal recurring items which are, in the opinion of management, necessary in order to make the financial statements
not misleading. The balance sheet as of December 31, 2016 has been derived from the Company’s annual financial statements
that were audited by an independent registered public accounting firm, but does not include all of the information and footnotes
required for complete annual financial statements. The consolidated financial statements included in this Quarterly Report on Form
10-Q should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
Uses and Sources of Liquidity
At June 30, 2017, the Company had cash of $719,315, working capital of $424,376, and an accumulated deficit
of $22,558,884. Furthermore, the Company has a history of negative cash flow from operations, primarily due to heavy investment
in research and development and costs associated with maintaining a public entity. In October 2016, the company issued $3,000,000
in Convertible Notes Payable with a maturity date of October, 2017. As further discussed in Note 6 – Related Party Convertible
Notes Payable and Derivative Liability, the Company does not currently have the liquid resources to repay the notes. On August
3, 2017, the notes were extended to April 1, 2019 and reclassified as long term liability as of the balance sheet date. On August
2, 2017, the Company closed on a bank line of credit in the amount of $2,000,000 and guaranteed by the Company’s Chairman
and CEO and a private line of credit with a related party investor who is a significant shareholder in the amount of $2,000,000.
The Company expects this financial backing has strengthened the balance sheet to support the level of sales necessary to maintain
positive working capital and sufficient liquidity for operations.
The Company expects that it will
need to raise substantial additional capital to accomplish its business plan over the next several years. In addition, the Company
may wish to selectively pursue possible acquisitions of businesses, technologies, or products complementary to those of the Company
in the future in order to expand its presence in the marketplace and achieve operating efficiencies. The Company expects to seek
to obtain additional funding through a bank credit facility or private equity. There can be no assurance as to the availability
or terms upon which such financing and capital might be available.
2.
|
RELATED PARTY TRANSACTIONS
|
The Company accounts for related
party transactions in accordance with ASC 850 (“Related Party Disclosures”). A party is considered to be related to
the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under
common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate
families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls
or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties
might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or
operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly
influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate
interests is also a related party.
As of June 30, 2017 and December
31, 2016, there was $136,110 and $46,849 accrued interest payable, respectively, to related parties on convertible notes payable.
Inventories are stated at the
lower of cost or market, using the first-in first-out method. Cost includes materials, labor and manufacturing overhead related
to the purchase and production of inventories. We regularly review inventory quantities on hand, future purchase commitments with
our supplies, and the estimated utility of our inventory. If the review indicates a reduction in utility below carrying value,
we reduce our inventory to a new cost basis through a charge to cost of goods sold. Allowance for slow moving items increased $6,366
due to a type of aerostat material which was custom ordered. Inventory consists of the following at June 30, 2017 and December
31, 2016:
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
Raw Materials
|
|
$
|
102,587
|
|
|
$
|
48,014
|
|
|
Work in Progress
|
|
|
271,346
|
|
|
|
254,258
|
|
|
Finished Goods
|
|
|
271,988
|
|
|
|
160,819
|
|
|
Less valuation allowance
|
|
|
(9,572
|
)
|
|
|
(3,206
|
)
|
|
Total
|
|
$
|
636,349
|
|
|
$
|
459,885
|
|
4.
|
PROPERTY AND EQUIPMENT
|
Property and equipment is recorded
at cost when acquired. Depreciation is provided principally on the straight-line method over the estimated useful lives
of the related assets, which is 3-7 years for equipment, furniture and fixtures, hardware and software and leasehold improvements. During
the six months ended June 30, 2017, the Company invested $675 in shop machinery and equipment. Depreciation expense was $17,561
and $16,572 for the six months ended June 30, 2017 and 2016, respectively. Property and equipment consists of the following at
June 30, 2017 and December 31, 2016:
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
Shop machinery and equipment
|
|
$
|
87,704
|
|
|
$
|
87,029
|
|
|
Computers and electronics
|
|
|
35,270
|
|
|
|
35,270
|
|
|
Office furniture and fixtures
|
|
|
37,814
|
|
|
|
37,814
|
|
|
Leasehold improvements
|
|
|
19,514
|
|
|
|
19,514
|
|
|
|
|
|
180,302
|
|
|
|
179,627
|
|
|
Less - accumulated depreciation
|
|
|
(78,345
|
)
|
|
|
(60,784
|
)
|
|
|
|
$
|
101,957
|
|
|
$
|
118,843
|
|
On July 20, 2015, the Company,
through its wholly-owned subsidiary Drone AFS Corp., purchased substantially all the assets of Adaptive Flight, Inc. (“AFI”),
a Georgia corporation. The Company purchased assets, including, but not limited to, intellectual property, licenses and permits,
including commercial software licenses for the “GUST” (Georgia Tech UAV Simulation Tool) autopilot system and other
transferable licenses which include flight simulation and fault tolerant flight control algorithms. The Company paid $100,000 in
immediately available funds and $100,000 to be held in escrow. In addition, the Company issued 150,000 shares of unregistered common
stock valued at $8.40 per share, on a post-October 29, 2015 reverse stock split basis, on the date of agreement, to be held in
escrow.
The Company had a milestone of
twelve months to complete a technology integration plan, the non-completion of which could result in the return of the purchased
assets and termination of the Company’s obligations to release the escrow cash and shares. Additional milestones included
exclusive, no-cost and perpetual licenses to all contributing intellectual property included or related to the purchased assets.
As such time as all milestones were met, one-half of the escrow shares were to be released to AFI. Upon termination of the escrow
agreement, anticipated to be twelve months from the closing of the asset purchase, if all milestones had been met, the remaining
escrow shares would be released to AFI; but if all milestones have not been met, the escrow cash and escrow shares would be released
to the Company and the purchased assets would be returned to AFI. According to the terms of the Escrow Agreement, if the escrow
share value was less than $1,400,000, the Company must issue an additional number of unregistered shares, not to exceed 50,000
shares. At December 31, 2015, the value of the 150,000 shares was $3.23 per share, or $484,500. The Company recorded $161,500 as
an additional liability and expense at December 31, 2015 for the cost of 50,000 shares at $3.23 per share. On June 3, 2016, the
Integration Plan was deemed to be completed. At June 3, 2016, the value of the 150,000 shares was $3.01 per share, or $451,150.
The additional liability was reduced to $150,500 for the cost of 50,000 shares at $3.01 per share. The Company recorded the $11,000
reduction in the additional liability through the statement of operations at June 3, 2016. The Company began amortizing the $1,460,000
of purchased assets over a sixty month period on June 3, 2016 in the amount of $24,333 per month. Total amortization expense for
the six months ended June 30, 2017 was $146,000. The remaining unamortized balance of $1,143,667 is estimated be amortized in the
estimated amounts of $292,000 per year for 2017 through 2020 and $121,667 in 2021.
The asset acquisition did not
qualify as a business combination under ASC 805-10 and has been accounted for as a regular asset purchase.
6.
|
RELATED PARTY CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITY
|
On September 29, 2016, the Company
issued Convertible Promissory Notes Series 2016 due October 1, 2017 in the aggregate principal amount of $3,000,000 in a private
placement to the Chairman of the Board and the Chairman of the Strategic Advisory Board of the Company, both of whom are greater
than 10% shareholders of the Company. The notes bear interest at a rate of six percent (6%) per annum. The Company may prepay the
notes at any time without penalty. If the Company does not prepay a note in full or the holder does not convert the note before
the maturity date, the Company may pay the outstanding principal amount and any accrued and unpaid interest on the maturity date
with cash or with common stock or through a combination of cash and stock at the Company’s discretion. The conversion price
of the notes is the lesser of $3.00 per share or eight-five percent (85%) of the lowest per share purchase price of common stock
in the next sale of common stock in which the Company receives gross proceeds of an amount greater than or equal to $3,000,000.
On August 3, 2017, the conversion
price of the notes was modified to $1.00 per share and the maturity date was extended to April 1, 2019.
Under ASC 815, these notes require
liability classification and must be measured at fair value at the end of each reporting period.
The
following table sets forth, by level within the fair value hierarchy, the Company’s financial liabilities that were accounted
for at fair value as of June 30, 2017 and December 31, 2016:
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities as of June 30, 2017
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
780,165
|
|
|
$
|
780,165
|
|
|
Derivative liabilities as of December 31, 2016
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,832,013
|
|
|
$
|
1,832,013
|
|
The
following table represents the change in the fair value of the derivative liabilities during the six months ended June 30, 2017
and the year ended December 31, 2016:
|
Fair value of derivative liabilities as of December 31, 2015
|
|
$
|
0
|
|
|
Fair value of derivative liability at September 30, 2016 recorded as debt discount
|
|
|
2,394,974
|
|
|
Change in fair value of derivative liabilities
|
|
|
(562,961
|
)
|
|
Fair value of derivative liabilities as of December 31, 2016
|
|
$
|
1,832,013
|
|
|
Change in fair value of derivative liabilities
|
|
|
(1,051,848
|
)
|
|
Fair value of derivative liabilities as of June 30, 2017
|
|
$
|
780,165
|
|
The amortization of the debt discount is $1,092,492 and $302,818 for the six months ended June 30, 2017
and the year ended December 31, 2016, respectively. The $3,000,000 payable associated with the Convertible Promissory Notes Series
2016 due October 1, 2017 is $2,000,336 as of June 30, 2017, net of a $999,664 debt discount which is being amortized over the life
of the loan using the effective interest method. On August 3, 2017 the notes were amended to extend the maturity date to April
1, 2019 and, accordingly, they have been reclassified as long term liability as of June 30, 2017.
In September 2016, the Company issued
1,349,000 shares of restricted common stock outside of the 2015 Equity Plan to Jay Nussbaum, Felicia Hess, Daniyel Erdberg, Kendall
Carpenter, Mike Silverman and Reginald Brown pursuant to Stock Award Agreements. The shares will vest upon consummation of a significant
equity and/or debt financing of at least $5,000,000 provided that the holder remains engaged by the Company through the vesting
date. On August 3, 2017, these awards were modified as described further in Footnote #12. Stock based compensation of $970,067
was recognized during the six months ended June 30, 2017.
In May 2016, the Company issued
150,000 shares of common stock with monthly vesting provisions to Strategic Advisory Board members, Dr. Philip Frost and Steven
Rubin, for 12 months of services. The advisors can earn a pro rata portion of the shares, calculated based on the twelve-month
vesting period, in the event the service agreements are terminated prior to the expiration date as described in the agreements.
These shares vested during May 2017. The Company recognized a total of $29,500 and $75,000 expense for the pro rata portion of
shares earned by the two members during the six months ended June 30, 2017 and 2016, respectively.
In April 2016, the Company issued
an aggregate of 1,150,000 shares of common stock outside of the 2015 Equity Plan to Jay Nussbaum, Felicia Hess, Daniyel Erdberg,
Kendall Carpenter, and Kevin Hess pursuant to Stock Award Agreements. Stock based compensation of $1,115,500 was recognized during
the six months ended June 30, 2016 on the awards which fully vested on September 29, 2016. That same month, the Company issued
100,000 shares of stock to a director who subsequently resigned and forfeited the shares. The Company recognized a total of $24,250
stock compensation during the six months ended June 30, 2016.
On September 4, 2015, the Company
issued 450,000 shares of restricted common stock to four management employees and one director pursuant to stock award agreements.
Stock based compensation of $604,440 was recognized during the six months ended June 30, 2016.
On June 1, 2015, the Company issued
50,000 shares of restricted common stock with monthly vesting provisions to the Chairman of the Board for twenty-four months services
pursuant to a Director Agreement. The Chairman can earn a pro rata portion of the shares, calculated on a twenty-four month vesting
period, in the event the Chairman relinquishes his position and Board seat prior to the expiration date of the Director Agreement.
These shares vested on June 1, 2017. The Company recognized a total of $135,000 expense for the portion of such shares earned by
the Chairman during the six months ended June 30, 2017 and 2016, respectively.
On April 24, 2017, the holder
of Series A preferred stock converted a total of 100,100 shares of Series A for an aggregate of 250,250 shares of restricted common
stock in accordance with their conversion rights which includes a blocker with respect to individual ownership percentages.
All of the preferred stock of
the Company is convertible into common shares. The Series A stock conversion ratio is 1 to 2.5 common shares. All preferred stock
has voting rights equal to the number of shares it would have on an ‘as if converted’ basis subject to any ownership
limitations governing such preferred shares. All preferred stock is entitled to dividends rights equal to the number of shares
it would have on an ‘as if converted’ basis. None of the preferred stock is redeemable, participating nor callable.
The Company analyzed the embedded
conversion option for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined
that the conversion option should be classified as equity.
On April 24, 2017, the holder
of Series A preferred stock converted a total of 100,100 shares of Series A for an aggregate of 250,250 shares of restricted common
stock in accordance with their conversion rights which includes a blocker with respect to individual ownership percentages.
9.
|
EMPLOYEE STOCK OPTIONS
|
One June 1, 2015, the Company
issued an option award to an employee for 37,500 shares vesting over three years with an exercise price of $10.80 and expiration
date of May 4, 2019. During the six months ended June 30, 2017 and 2016, $37,734 and $80,226 compensation expense was recognized
on these 37,500 options, respectively.
On January 9, 2017, the Company
issued an option to purchase 100,000 shares of common stock with an exercise price of $2.90 per share to a director. The option
vests 50,000 after one year from grant date and another 50,000 two years from grant date with an expiration date of four years
from grant date provided that the Director is still providing service to the Company.
The Company used the Black-Scholes
option pricing model to estimate the fair value on the date of grant of the 100,000 options granted during the six months ended
June 30, 2017.
The following table summarizes
the assumptions used to estimate the fair value of the 100,000 stock options granted during the six months ended June 30, 2017
on the date of grant.
|
|
|
2017
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
Expected volatility
|
|
|
100
|
%
|
|
Risk-free interest rate
|
|
|
1.50
|
%
|
|
Expected life of options
|
|
|
2.50-3.00 years
|
|
Under the Black-Scholes option
pricing model, the fair value of the 100,000 options granted during the six months ended June 30, 2017 is estimated at $174,173
on the date of grant. During the six months ended June 30, 2017, $64,530 compensation expense was recognized on these 100,000 options.
During 2016, the Company granted
65,000 common stock options to employees for service provided. Of these, 50,000 options were granted to two employees and were
immediately vested with an exercise price of $2.91 and the expiration date is April 27, 2019. One of these employees terminated
and did not exercise her 10,000 options resulting in the expiration of the option. Another 5,000 options were immediately vested
and were granted with an exercise price of $3.77 and the expiration date is July 29, 2019. Another employee received 10,000 options
with two-year vesting and an exercise price of $3.00 and an expiration date of December 6, 2019. The employee who received 5,000
options in July 2016 was terminated and did not exercise his options resulting in the expiration of a total of 5,000 options. The
Company recognized $95,649 in compensation for the first six months ended June 30, 2016 on these options.
The Company used the Black-Scholes
option pricing model to estimate the fair value on the date of grant of the 10,000 stock-based awards that continue to vest during
the six months ended June 30, 2017.
The following table summarizes
the assumptions used to estimate the fair value of the 10,000 outstanding stock options granted during 2016 on the date of grant:
|
|
|
2016
|
|
|
|
|
|
Expected dividend
yield
|
|
|
0
|
%
|
|
Expected volatility
|
|
|
102
|
%
|
|
Risk-free interest
rate
|
|
|
1.24-1.38
|
%
|
|
Expected life of
options
|
|
|
2.00-2.50 years
|
|
Under the Black-Scholes option
price model, fair value of the options granted during 2016 is estimated at $16,889 on the date of grant. During the six months
ended June 30, 2017, $6,236 compensation expense was recognized on these 10,000 options.
The following table represents
stock option activity as of and for the six months ended June 30, 2017:
|
|
|
Number of Options
|
|
|
Weighted
Average
Exercise Price per Share
|
|
|
Weighted Average Contractual Life in Years
|
|
|
Aggregate
Intrinsic Value
|
|
|
Outstanding – December 31, 2016
|
|
|
442,500
|
|
|
$
|
5.81
|
|
|
$
|
1.72
|
|
|
|
|
|
|
Exercisable – December 31, 2016
|
|
|
407,500
|
|
|
$
|
5.57
|
|
|
$
|
1.65
|
|
|
$
|
0
|
|
|
Granted
|
|
|
100,000
|
|
|
$
|
2.90
|
|
|
|
|
|
|
|
|
|
|
Exercised or Vested
|
|
|
12,500
|
|
|
$
|
10.80
|
|
|
|
|
|
|
|
|
|
|
Cancelled or Expired
|
|
|
(7,500
|
)
|
|
$
|
4.18
|
|
|
|
|
|
|
|
|
|
|
Outstanding – June 30, 2017
|
|
|
535,000
|
|
|
$
|
5.29
|
|
|
|
1.18
|
|
|
$
|
0
|
|
|
Exercisable – June 30, 2017
|
|
|
412,500
|
|
|
$
|
5.75
|
|
|
|
1.17
|
|
|
$
|
0
|
|
The Company did not issue any
warrants during the six months ended June 30, 2017.
For the year 2016, 60,000 common
stock purchase warrants were granted to four consultants for services provided. Each warrant was granted with the exercise price
of $2.91, which immediately vested, and the expiration date is April 27, 2019. The Company recognized $114,779 in compensation
cost during the six months ended June 30, 2016.
During 2016, 10,472 warrants
expired that were issued in 2011 with exercise prices ranging between $141.00 and $404.50 on a post-reverse split basis.
The Company used the Black-Scholes
warrant pricing model to estimate the fair value on the re-measurement dates of the 12,500 warrants that continue to vest during
the six months ended June 30, 2017.
The following table summarizes
the assumptions used to estimate the fair value of the 12,500 warrants granted during 2015 as of re-measurement dates:
|
|
|
2017
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
Expected volatility
|
|
|
107
|
%
|
|
Risk-free interest rate
|
|
|
1.53
|
%
|
|
Expected life of warrants
|
|
|
1.0 years
|
|
Under the Black-Scholes warrant
pricing model, fair value of the 12,500 warrants granted during 2015 is estimated at $0 as of re-measurement dates. During the
six months ended June 30, 2017, $(4,899) compensation expense was recognized on these 12,500 warrants. During the six months
ended June 30, 2016, $4,995 compensation expense was recognized on these warrants.
The following table represents
warrant activity as of and for the period ended June 30, 2017:
|
|
|
Number of Warrants
|
|
|
Weighted
Average
Exercise Price per Share
|
|
|
Weighted Average Contractual Life in Years
|
|
|
Aggregate
Intrinsic Value
|
|
|
Outstanding – December 31, 2016
|
|
|
183,737
|
|
|
$
|
7.35
|
|
|
|
2.70
|
|
|
|
|
|
|
Exercisable – December 31, 2016
|
|
|
171,237
|
|
|
$
|
7.15
|
|
|
|
2.79
|
|
|
$
|
0
|
|
|
Granted
|
|
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
Outstanding – June 30, 2017
|
|
|
183,737
|
|
|
$
|
7.35
|
|
|
|
2.21
|
|
|
$
|
0
|
|
|
Exercisable – June 30, 2017
|
|
|
183,737
|
|
|
$
|
7.35
|
|
|
|
2.21
|
|
|
$
|
0
|
|
11.
|
COMMITMENTS AND CONTINGENCIES
|
On May 16, 2016, Banco Popular
North America (“Banco”) filed a lawsuit in Duval County, Florida in the Circuit Court of the Fourth Judicial Circuit
against Aerial Products Corporation d/b/a Southern Balloon Works (“Aerial Products”), Kevin M. Hess, LTAS, and the
Company to collect on a delinquent Small Business Administration loan that Banco made in 2007 to Aerial Products with Mr. Hess
as the personal guarantor. LTAS and the Company filed an Answer on June 30, 2016 and Responses to Interrogatories on December 16,
2016. It is our position that neither LTAS nor the Company are continuations of Aerial Products, and LTAS and the Company have
denied all allegations made by Banco and will vigorously defend that position. The Company has evaluated the probability of loss
as possible but the range of loss is unable to be estimated.
Other than the Banco matter, there
are no material claims, actions, suits, proceedings inquiries, labor disputes or investigations pending.
Revolving Line of Credit from City National Bank
of Florida
On August 2, 2017, the Company issued a promissory note to City National Bank of Florida (“CNB”)
in the principal amount of $2,000,000, the CNB Note. The note evidences a revolving line of credit with advances that may be requested
by the Company until the maturity date of August 2, 2018 so long as no event of default exists under the note, the Company or Mr.
Nussbaum does not cease doing business, Mr. Nussbaum does not seek to revoke or modify his guarantee of the Note, the Company does
not misapply the proceeds of this loan or CNB in good faith does not believe itself insecure. The CNB Note bears interest at a
variable rate equal to 0.250 percentage points over the Wall Street Journal Prime Rate payable monthly. The Company will pay to
CNB a late charge of 5.0% of any monthly payment not received by Lender within 10 calendar days after its due date. The Company
may prepay the note at any time without penalty. In the event of a default, the interest rate will increase to the highest lawful
rate. The Company is obligated to maintain depository accounts with CNB with a minimum average annual balance of $600,000. In the
event the Company does not maintain this account balance, CNB may charge the Company a fee equal to 2% of the deficiency as additional
interest under the note. The CNB Note is personally guaranteed by Mr. Nussbaum, the Company’s Chief Executive Officer pursuant
to written guarantee in favor of CNB (the “CNB Guarantee”). Mr. Nussbaum and the Company are obligated to maintain
an unencumbered liquidity of no less than $6,000,000 in the form of cash, repurchase agreements, certificates of deposit or marketable
securities acceptable to CNB. In addition, to secure our obligations under the note, we entered into a security agreement in favor
of CNB (the “Security Agreement”) encumbering all of our accounts, inventory and equipment along with an assignment
of a bank account we maintain at CNB with an approximate balance of $90,000.
Indemnification Agreement
On August 3, 2017, the Company
entered into an Indemnification Agreement with Mr. Nussbaum in order to indemnify and defend him to the fullest extent permitted
by law for any claim, expense or obligation which might arise as a result of his guarantee of the CNB Note.
Series 2017 Secured Convertible Note
On the Effective Date, the Company
issued a Secured Convertible Promissory Note Series 2017 due August 2, 2018 in the aggregate principal amount of $2,000,000 (the
“Series 2017 Convertible Note”) in a private placement to Frost Nevada Investments Trust (“Frost Nevada”).
Frost Nevada is a trust that is controlled by Dr. Frost, a substantial shareholder of the Company. The note evidences a revolving
line of credit with advances that may be requested by the Company until the maturity date of August 2, 2018 so long as no event
of default exists under the loan. The Company may request advances of principal under this note equal to and at the same time as
it requests advances, if any, pursuant to the CNB Note. The note bears interest at a variable rate equal to 0.250 percentage points
over the Wall Street Journal Prime Rate. The Company may prepay the notes at any time without penalty. If the Company does not
prepay the note in full or the holder does not convert the note before the maturity date, the Company may pay the outstanding principal
amount and any accrued and unpaid interest on the maturity date with cash or with common stock or through a combination of cash
and stock at Frost Nevada’s discretion. The conversion price under the note is $1.00 per share subject to proportional adjustment
in the event of stock splits, stock dividends and similar corporate events. The Series 2017 Convertible Note is secured by a security
interest in all of the Company’s assets. This security interest is subordinate to the security interest of CNB discussed
above.
Amendments to Related Party Convertible Promissory
Notes
On August 3, 2017 (the “Effective
Date”), the Company entered into amendments (the “Convertible Note Amendments”) with the owners and holders of
the following convertible promissory notes issued by the Company (the “Convertible Notes”):
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Convertible Promissory Note in the original principal amount of $1,500,000 issued by the Company on September 29, 2016 to Frost
Gamma Investments Trust (“Frost Gamma”). Frost Gamma is a trust that is controlled by Dr. Phillip Frost, a substantial
shareholder of the Company; and
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Convertible Promissory Note in the original principal amount of $1,500,000 issued by the Company on September 29, 2016 to Jay
H. Nussbaum, the Company’s Chief Executive Officer and Chairman of the Board of Directors.
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The Convertible Note Amendments
extend the maturity date for each of the Convertible Notes to April 1, 2019 (the “Maturity Date”) and revise the conversion
price to mean $1.00 per share subject to proportional adjustment in the event of stock splits, stock dividends and similar corporate
events. Consistent with the original terms of the Convertible Notes, interest accrues at the rate of 6% interest per annum and
is payable on the Maturity Date. The accrued interest is payable at the holders’ option in cash or shares of our common stock
valued at the $1.00 per share conversion price. The Convertible Note Amendments provide that an event of default in the City National
Bank Loan will be treated as an event of default under the Convertible Notes.
Amendments to Restricted Stock Agreements
On the Effective Date, the Company
entered into amendments (the “RSA Amendments”) with the holders of 1,349,000 shares of restricted common stock awarded
to them by the Company pursuant to the terms of a Restricted Stock Agreement (the “RSA”). Pursuant to the RSA Amendments,
the restrictions set forth in the RSA lapse upon the earlier of (i) consummation of a significant equity and/or debt financing
from which the Company receives gross proceeds of at least $7,000,000 or (ii) a change in control (as defined in the RSA Amendment),
provided that, in either case, the holder remains engaged by the Company through the date of such event.
Independent Contractor Agreements
On the Effective Date, the Company
entered into an amendment to the August 24, 2014 Independent Contractor Agreements it entered into with Dr. Philip Frost and Steven
Rubin who serve as members of the Company’s Strategic Advisory Board (the “SAB Amendments”). The SAB Amendments
extend the term of the agreements from May 1, 2017 until April 30, 2018 and provide for the following equity based compensation:
(a) for Dr. Frost, a warrant to purchase 2,000,000 shares of the Company’s Common Stock (the “Frost Warrant”)
and an award of 150,000 shares of the Company’s unregistered restricted Common Stock and (b) for Mr. Rubin, an award of 100,000
shares of the Company’s unregistered restricted Common Stock. The restricted stock vests upon the occurrence of a change
of control (as defined in the SAB Amendments). The Warrant has a term of five years and exercise price of $1.00 per share subject
to proportional adjustment in the event of stock splits, stock dividends and similar corporate events.
Options issued
On August 3, 2017, upon
approval of the Company’s board of directors, the Company issued outside its 2015 Equity Plan, 5,240,000 options to
purchase the Company’s common stock to officers, directors and employees for services provided. Jay Nussbaum was issued
2,000,000 options, Felicia Hess was issued 1,200,000 options, Dan Erdberg was issued 1,140,000 options, Kendall Carpenter was
issued 275,000 options, Directors David Aguilar, Mike Haas and General Wayne Jackson were issued 110,000, 10,000 and 10,000
options, respectively. The remaining 495,000 options were issued to employees and consultants. These stock options
immediately vested, are exercisable at an exercise price of $1.00 per share and expire on August 3, 2021.