NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2016
NOTE 1 –
ORGANIZATION AND BASIS
OF PRESENTATION
Organization
Petrone Worldwide, Inc. (the “Company”)
was incorporated as Sheridan Industries, Inc. on December 14, 1998 in the State of Nevada. On December 31, 1998, the Company changed
its name to Diabetex International Corp. and effective February 18, 2014, the Company changed its name to Petrone Worldwide, Inc.
On January 29, 2014 and effective March 3,
2014, the Company entered into a purchase agreement (the “Purchase Agreement”) with Petrone Food Works, Inc. (“PFW”)
and the shareholder of PFW. Pursuant to the Purchase Agreement, the Company acquired 100% of PFW’s issued and outstanding
common stock from the PFW shareholder in exchange for the issuance of 11,760,542 shares of the Company’s common stock, representing
98.4% of the outstanding common stock, (the “Exchange”), after giving effect to a 1-for-500 reverse stock split (the
“Reverse Stock Split”) which resulted in 195,607 common shares outstanding prior to the Exchange for liabilities of
$30,000. Accordingly, the PFW shareholder became a shareholder of the Company and PFW became a subsidiary of the Company. The Exchange
has been accounted for as a reverse-merger and recapitalization since the stockholder of PFW obtained voting and management control
of the Company. PFW is the acquirer for financial reporting purposes and the Company is the acquired company. Consequently, the
assets and liabilities and the operations reflected in the historical financial statements prior to the Exchange are those of PFW
and was recorded at the historical cost basis of PFW, and the consolidated financial statements after completion of the Exchange
included the assets and liabilities of both the Company and PFW and the Company’s consolidated operations from the closing
date of the Exchange. All share and per share data in the accompanying consolidated financial statements have been retroactively
restated to reflect the effect of the Reverse Stock Split and recapitalization. PFW was formed under the laws of the State of Nevada
in October 2013.
The Company is in the hospitality industry
and is a supplier of tabletop kitchenware and hotel room products thru an exclusive licensing agreement with a leading supplier.
Additionally, in August 2016, the Company began providing logistic services to one customer.
Basis of Presentation and Principles of
Consolidation
The Company’s unaudited consolidated
financial statements include the financial statements of its wholly-owned subsidiary, Petrone Food Works, Inc. (inactive). All
significant intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements for the
three and nine months ended September 30, 2016 and 2015 have been prepared by us without audit pursuant to the rules and regulations
of the Securities and Exchange Commission. In the opinion of management, all adjustments necessary to present fairly our financial
position, results of operations, and cash flows as of September 30, 2016 and 2015, and for the periods then ended, have been made.
Those adjustments consist of normal and recurring adjustments. Certain information and note disclosures normally included in our
annual financial statements prepared in accordance with generally accepted accounting principles have been or omitted. The unaudited
consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for
the year ended December 31, 2015 and footnotes thereto included in the Company’s Annual Report on Form 10-K filed with the
SEC on September 9, 2016. The results of operations for the nine months ended September 30, 2016 are not necessarily indicative
of the results to be expected for the full year.
Going concern
These unaudited consolidated financial
statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. As reflected in the accompanying unaudited consolidated
financial statements, for the nine months ended September 30, 2016, the Company had a net loss of $698,946 and net cash used
in operations of $561,867. Additionally, the Company had an accumulated deficit, stockholders’ deficit and a working
capital deficit of $3,379,052, $21,282 and $21,282, respectively, at September 30, 2016. These factors raise substantial
doubt about the Company’s ability to continue as a going concern. Management cannot provide assurance that the Company
will ultimately achieve profitable operations or become cash flow positive, or raise additional debt and/or equity capital.
The Company is seeking to raise capital through additional debt and/or equity financings to fund its operations in the
future. Although the Company has historically raised capital from sales of equity and from the issuance of promissory notes,
there is no assurance that it will be able to continue to do so. If the Company is unable to raise additional capital or
secure additional lending in the near future, management expects that the Company will need to curtail its operations. These
consolidated financial statements do not include any adjustments related to the recoverability and classification of assets
or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going
concern.
PETRONE WORLDWIDE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2016
NOTE 2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of consolidated financial statements
in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates. Significant estimates for the nine months ended September 30, 2016 and 2015 include estimates
of current and deferred income taxes and deferred tax valuation allowances, the fair value of derivative liabilities, and the fair
value of non-cash equity transactions.
Fair value of financial instruments and fair value measurements
FASB ASC 820 —
Fair Value Measurements
and Disclosures,
defines fair value as the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. FASB ASC 820 requires disclosures about the fair value
of all financial instruments, whether or not recognized, for financial statement purposes. Disclosures about the fair value of
financial instruments are based on pertinent information available to the Company on September 30, 2016. Accordingly, the estimates
presented in these financial statements are not necessarily indicative of the amounts that could be realized on disposition of
the financial instruments. FASB ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation
techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable
inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels
of the fair value hierarchy are as follows:
Level 1- Inputs are unadjusted quoted prices
in active markets for identical assets or liabilities available at the measurement date.
Level 2- Inputs are quoted prices for similar
assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not
active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.
Level 3- Inputs are unobservable inputs that
reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset
or liability based on the best available information.
The carrying amounts reported in the consolidated
balance sheets for cash and cash equivalents, accounts receivable, loans, accounts payable, accrued expenses, and other payables
approximate their fair market value based on the short-term maturity of these instruments.
The Company analyzes all financial and non-financial
instruments with features of both liabilities and equity under the FASB’s accounting standard for such instruments. Under
this standard, financial and non-financial assets and liabilities are classified in their entirety based on the lowest level of
input that is significant to the fair value measurement. The Company accounts for one instrument at fair value using level 3 valuation.
|
|
At September 30, 2016
|
|
At December 31, 2015
|
Description
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
Derivative liability
|
|
|
—
|
|
|
|
—
|
|
|
$
|
2,093
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
73,236
|
|
A roll forward of the level 3 valuation
financial instruments is as follows:
|
|
Derivative Liability
|
Balance at December 31, 2015
|
|
$
|
73,236
|
|
Reclassification of derivative liability to equity
|
|
|
(13,728
|
)
|
Change in fair value included in net loss
|
|
|
(57,415
|
)
|
Balance at September 30, 2016
|
|
$
|
2,093
|
|
ASC
825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities
at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable,
unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that
instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value
option to any outstanding instruments.
PETRONE WORLDWIDE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2016
NOTE 2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash and cash equivalents
For purposes of the consolidated statements
of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the purchase date
and money market accounts to be cash equivalents.
Accounts receivable
The Company recognizes an allowance for losses
on accounts receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis
of historical bad debt experience, current receivables aging, and expected future write-offs, as well as an assessment of specific
identifiable customer accounts considered at risk or uncollectible. The expense associated with the allowance for doubtful accounts
is recognized as general and administrative expense.
Advances to Supplier
Advances to supplier represent the advance
payments for the purchase of product from supplier.
Impairment of long-lived assets
In accordance with ASC Topic 360, the Company
reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets
may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted
future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between
the asset’s estimated fair value and its book value.
Derivative liabilities
The Company has certain financial instruments
that are embedded derivatives associated with capital raises. The Company evaluates all its financial instruments to determine
if those contracts or any potential embedded components of those contracts qualify as derivatives to be separately accounted for
in accordance with FASB ASC 810-10-05-4 and 815-40. This accounting treatment requires that the carrying amount of any
embedded derivatives be recorded at fair value at issuance and marked-to-market at each balance sheet date. In the event
that the fair value is recorded as a liability, as is the case with the Company, the change in the fair value during the period
is recorded as either income or expense. Upon conversion or exercise, the derivative liability is marked to fair value at the conversion
date and then the related fair value is reclassified to equity.
Revenue recognition
Pursuant to the guidance of ASC Topic 605,
the Company recognizes sales when persuasive evidence of an arrangement exists, delivery has occurred or services have been provided,
the purchase price is fixed or determinable and collectability is reasonably assured. For product sale, the Company’s standard
terms are “ex works”, with title transferring to its customer at the Company suppliers’ loading docks or upon
embarkation with risk of loss being assumed by the customer at the shipping point. The Company has a small percentage of sales
with other terms, and revenue is recognized in accordance with the terms of the related customer purchase order. Shipping and handling
costs billed to customers are recognized in revenue. For logistics services performed, the Company recognizes revenue upon performance
and completion of services rendered.
Cost of sales
Cost of sales includes inventory costs, materials
and supplies costs, and shipping and handling costs incurred.
Shipping and handling costs
For the nine months ended September 30, 2016
and 2015, shipping and handling costs incurred for product shipped to customers are included in cost of sales and amounted to $33,569
and $127,785, respectively. Shipping and handling costs charged to customers are included in sales.
PETRONE WORLDWIDE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2016
NOTE 2 –
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Advertising costs
All costs related to advertising of the Company’s
products are expensed in the period incurred.
Income taxes
The Company accounts for income tax using the
liability method prescribed by ASC 740, “
Income Taxes
”. Under this method, deferred tax assets and liabilities
are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax
rates that will be in effect in the year in which the differences are expected to reverse. The Company records a valuation allowance
to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all,
of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income
or loss in the period that includes the enactment date.
The Company follows the accounting guidance
for uncertainty in income taxes using the provisions of Accounting Standards Codification (ASC) 740
“Income Taxes
”.
Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not
the position will be sustained upon examination by the tax authorities. As of September 30, 2016 and December 31, 2015, the Company
had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. The Company recognizes
interest and penalties related to uncertain income tax positions in other expense. The Company did not record such interest or
penalties for the nine months ended September 30, 2016 and 2015.
Stock-based compensation
Stock-based compensation is accounted for based
on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the financial statements of the cost
of employee and director services received in exchange for an award of equity instruments over the period the employee or director
is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement
of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
Pursuant to ASC Topic 505-50, for share-based
payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The
expense is recognized over the service period of the award. Common stock awards issued to consultants represent common stock granted
to non-employees in exchange for services at fair value. The measurement dates for such awards are set at the dates that the contracts
are entered into as the awards are non-forfeitable and vest immediately. The measurement date fair value is then recognized over
the service period as if the Company has paid cash for such service.
Loss per share of common stock
ASC 260 “Earnings Per Share”, requires
dual presentation of basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator
of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted
EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Basic net loss per
common share is computed by dividing net loss available to common shareholders by the weighted average number of shares of common
shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted average
number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period.
Additionally, potentially dilutive common shares consist of common stock issuable upon conversion of convertible debt. These common
stock equivalents may be dilutive in the future
.
Potentially dilutive common shares were excluded from the computation of
diluted shares outstanding as they would have an anti-dilutive impact on the Company’s net losses and consisted of the following:
|
|
September 30,
2016
|
|
September 30,
2015
|
Convertible notes
|
|
|
207,097
|
|
|
|
230,769
|
|
|
|
|
|
|
|
|
|
|
PETRONE WORLDWIDE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2016
NOTE 2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Segment reporting
The Company uses “the
management approach” in determining reportable operating segments. The management approach considers the internal organization
and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance
as the source for determining the Company’s reportable segments. The Company’s chief operating decision maker is the
Chairman and chief executive officer (“CEO”) of the Company, who reviews operating results to make decisions about
allocating resources and assessing performance for the entire Company. The Company classified the reportable operating segments
into (i) the sale and distribution of products to the hospitality industry segment, and (ii) logistics services segment.
Recent accounting pronouncements
In May 2014, the FASB
issued an update ("ASU 2014-09")
Revenue from Contracts with Customers.
ASU 2014-09 establishes a single
comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of
the existing revenue recognition guidance. ASU 2014-09 requires an entity to recognize revenue when it transfers promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services and requires certain additional disclosures. ASU 2014-09 is effective for interim and annual
reporting periods in fiscal years that begin after December 15, 2016. The Company is currently evaluating the impact of the
adoption of ASU 2014-09 on its consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15,
Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern,
that will require management
to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances.
In connection with each annual and interim period, management will assess if there is substantial doubt about an entity’s
ability to continue as a going concern within one year after the issuance date. Substantial doubt exists if it is probable that
the entity will be unable to meet its obligations within one year after the issuance date. The new standard defines substantial
doubt and provides example indicators. Disclosures will be required if conditions give rise to substantial doubt. However, management
will need to assess if its plans will alleviate substantial doubt to determine the specific disclosures. This standard is effective
for public entities for annual periods ending after December 15, 2016. Earlier application of this standard is permitted. This
standard is not expected to have a material effect on our financial position, results of operations and cash flows.
In November 2015, the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes
(“ASU 2015-17”), which requires entities to present deferred
tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. The ASU simplifies the current guidance in
ASC Topic 740,
Income Taxes
, which requires entities to separately present deferred tax assets and liabilities as current
and noncurrent in a classified balance sheet. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016,
and interim periods within those annual periods. Early adoption is permitted for all entities as of the beginning of an interim
or annual reporting period. The Company does not expect the impact of ASU 2015-17 to be material to our consolidated financial
statements.
In February 2016, the FASB issued its new lease
accounting guidance in ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize
for all leases (with the exception of short-term leases) a lease liability, which is a lessee’s obligation to make lease
payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s
right to use, or control the use of, a specified asset for the lease term. The new standard is effective for annual periods beginning
after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact
of the adoption of this ASU to the Company’s consolidated financial statements and related disclosures.
In March 2016, the FASB issued its new
stock compensation guidance in ASU No. 2016-09 (Topic 718). First, under the new guidance, companies will be required to
recognize the income tax effects of share-based awards in the income statement when the awards vest or are settled (i.e.,
additional paid-in capital (“APIC”) or APIC pools will be eliminated). In addition, the new guidance allows a
withholding amount of awarded shares with a fair value up to the amount of tax owed using the maximum, instead of the
minimum, statutory tax rate without triggering liability classification for the award. Lastly, the new guidance allows
companies to elect whether to account for forfeitures of share-based payments by (1) recognizing forfeitures of awards as
they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to
change, as is currently required. The new standard is effective for annual periods beginning after December 15, 2016,
including interim periods within those fiscal years. Early adoption is permitted. The result of adopting this guidance is not
expected to have a material impact on the Company’s consolidated financial statements.
PETRONE WORLDWIDE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2016
NOTE 2 –
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting pronouncements (continued)
There are no other recently issued accounting
standards that apply to us or that are expected to have a material impact on our results of operations, financial condition, or
cash flows
NOTE 3 –
CONVERTIBLE NOTES
In 2013 and on July 1, 2014, the Company entered
into two convertible promissory note agreements with individuals in the amount of $20,000 and $10,000, respectively. The notes
were non-interest bearing, unsecured and were due on demand. The notes are convertible into shares of stock of the Company at the
market price on the date of conversion. Pursuant to ASC Topic 470-20 (Debt with conversion and other options), since these convertible
notes had fixed conversion price at market, the Company determined it had a fixed monetary amounts that can be settled for the
debt. Accordingly, no derivative liability was calculated. On December 22, 2015, the Company entered into a debt purchase and assignment
agreement with one of the debt holders whereby a convertible note in the principal amount of $10,000 became convertible at $.0025
per common share and the note was converted into 4,000,000 shares of the Company’s common stock. At September 30, 2016, one
note remains due in the principal amount of $20,000.
On December 28, 2015, the Company entered into
a secured convertible promissory note (the “Convertible Note”) with Firstfire Global Opportunities Fund LLC (the “Lender”),
with a principal amount of $230,000, which amount is the $200,000 purchase price plus a 15% original issue discount equal to $30,000.
Additionally, the lender deducted legal fees of $10,000 and the Company received net proceeds of $190,000. The unpaid principal
and interest is secured by the Company’s common stock, bears interest computed at a rate of interest that is equal to 7.0%
per annum, and is payable in monthly installments of $50,555 commencing April 28, 2016 through August 28, 2016. Any amount of principal
or interest on this Convertible Note, which is not paid by the due dates, shall bear interest at the rate of 15% per annum from
the due date until paid. During the nine months ended September 30, 2016, the Company repaid Convertible Note principal of $162,166.
The Lender is entitled, at their option,
at any time after the eighth month anniversary of this Convertible Note, to convert all or any lesser portion of the
outstanding principal amount and accrued but unpaid interest into the Company’s common stock. The conversion price
shall equal $0.50 per share (the "Fixed Conversion Price") provided, however that from and after the occurrence of
any event of default, as defined, the conversion price shall be the lower of: (i) the Fixed Conversion Price or (ii) 50%
multiplied by the lowest sales price of the common stock in a public market during the ten consecutive Trading Day period
immediately preceding the Trading Day that the Company receives a notice of conversion. In connection with the issuance of
this Convertible Note, the Company determined that the terms of the Convertible Note include a down-round provision under
which the conversion price and exercise price could be affected by future equity offerings undertaken by the Company or
contain terms that are not fixed monetary amounts at inception. Accordingly, under the provisions of FASB ASC Topic No.
815-40, “Derivatives and Hedging – Contracts in an Entity’s Own Stock”, the embedded conversion
option contained in the convertible instruments were accounted for as derivative liabilities at the date of issuance and
shall be adjusted to fair value through earnings at each reporting date. The fair value of the embedded conversion option
derivatives was determined using the Black- Scholes Option Pricing Model. On the initial measurement date, the fair values of
the embedded conversion option derivative of $73,236 was recorded as a derivative liability and was allocated as a debt
discount to the Convertible Note of $73,236. At December 28, 2015, the Company valued the embedded conversion option
derivative liabilities resulting in no gain or loss from change in fair value of derivative liabilities. Additionally, in
connection with this Convertible Note, in December 2015, the Company paid Lender debt issuance costs of $10,000 and issued
50,000 shares of its common stock. These common shares were valued at $0.225 per share based on recent sales of the
Company’s stock and in December 2015, the Company recorded a debt discount of $10,725, which is the relative fair value
of such shares.
During the nine months ended September 30,
2016, the Company entered into agreements for the addendum of the Convertible Note which waived all rights to enforce any event
of default, which may have been triggered by the Company’s failure to file it reports with the SEC. In connection with these
agreements, the Company issued an aggregate of 200,000 shares of common stock that were valued on the date of grant at $0.40 per
share or $80,000 based on recent sales of the Company’s common stock and paid cash penalties of $10,000. The value of these
shares and the cash penalties paid have been included in interest expense on the accompanying consolidated statement of operations.
PETRONE WORLDWIDE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2016
NOTE 3 –
CONVERTIBLE NOTES (continued)
For the nine months ended September 30, 2016
and 2015, amortization of debt discounts related to this convertible note amounted to $120,813 and $0, which has been included
in interest expenses on the accompanying unaudited consolidated statements of operations, respectively.
At September 30, 2016, and December 31, 2015,
the fair value of the derivative liabilities was estimated using the Black-scholes option-pricing model with the following assumptions:
|
|
September 30,
2016
|
|
December 31,
2015
|
Dividend rate
|
|
|
0
|
|
|
|
0
|
|
Term (in years)
|
|
|
0.41 to 0.08 years
|
|
|
|
0.67 years
|
|
Volatility
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Risk-free interest rate
|
|
|
0.20% to 0.39%
|
|
|
|
0.66
|
%
|
At September 30, 2016 and December 31, 2015, convertible promissory
notes consisted of the following:
|
|
September 30,
2016
|
|
December 31,
2015
|
Principal amount
|
|
$
|
87,834
|
|
|
$
|
250,000
|
|
Less: unamortized debt discount
|
|
|
—
|
|
|
|
(120,813
|
)
|
Convertible notes payable, net
|
|
$
|
87,834
|
|
|
$
|
129,187
|
|
NOTE 4 –
LOANS PAYABLE
On September 23, 2016, the Company entered into a business loan
and security agreement with EBF Partners, LLC (the “EBF Loan”). Pursuant to the EBF Loan, the Company borrowed $20,000.
The Company is required to repay the EBF Loan by making daily payments of $204 on each business day until the purchased amount
of $28,200 is paid in full. Each payment is deducted directly from the Company’s bank accounts. The EBF Loan has an effective
interest rate of approximately 116%, is secured by the Company’s assets and is personally guaranteed by the Company’s
chief executive officer. At September 30, 2016, amounts due under the EBF Loan amounted to $19,054.
On September 26, 2016, the Company entered into a business loan
and security agreement with On Deck Capital, Inc. (the “On Deck Loan”). Pursuant to the On Deck Loan, the Company borrowed
$35,000 and received net proceeds of $34,125 after paying a loan origination fee of $825. The Company is required to repay the
On Deck Loan by making 252 daily payments of $190 on each business day until the purchased amount of $47,951 is paid in full. Each
payment is deducted directly from the Company’s bank accounts. The On Deck Loan has an effective interest rate of approximately
66%, is secured by the Company’s assets and is personally guaranteed by the Company’s chief executive officer. At September
30, 2016, amounts due under the On Deck Loan amounted to $34,490.
PETRONE WORLDWIDE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2016
NOTE 5 –
RELATED PARTY TRANSACTIONS
From time to time, the Company receives advances
from the Company’s chief executive officer for working capital purposes. The advances are non-interest bearing and
are payable on demand. For the nine months ended September 30, 2016 and 2015, due to related party activity consisted of the following:
|
|
Nine Months ended
September 30,
2016
|
|
Nine Months ended
September 30,
2015
|
Balance due to related party at beginning of period
|
|
$
|
38,434
|
|
|
$
|
8,051
|
|
Working capital advances received
|
|
|
38,000
|
|
|
|
800
|
|
Repayments made and conversions
|
|
|
(42,380
|
)
|
|
|
(983
|
)
|
Balance due to related party at end of period
|
|
$
|
34,054
|
|
|
$
|
7,868
|
|
NOTE 6 -
STOCKHOLDERS’ EQUITY
Preferred stock
The preferred stock
may be issued in one or more series. The Company’s board of directors are authorized to issue the shares of preferred stock
in such series and to fix from time to time before issuance thereof the number of shares to be included in any such series and
the designation, powers, preferences and relative, participating, optional or other rights, and the qualifications, limitations
or restrictions thereof, of such series.
On February 19, 2016, the Board of Directors
of the Company authorized and approved to create a new class of voting preferred stock called “Series A Preferred Stock”,
consisting of 1,000,000 shares authorized, $.001 par value. The preferred stock is not convertible into any other class or series
of stock and has no liquidation preference value. The Series A Preferred Stock was issued to ensure perpetual control of at least
51% is provided to the holder of the Series A Preferred Stock. On all matters to come before the shareholders of the Company, the
holders of Series A Preferred shall have that number of votes per share (rounded to the nearest whole share) equal to the product
of (x) the number of shares of Series A Preferred held on the record date for the determination of the holders of the shares entitled
to vote (the “Record Date”), or, if no record date is established, at the date such vote is taken or any written consent
of shareholders is first solicited, and (y) 50.
In the event that the votes by the holders
of the Series A Preferred Stock do not total at least 51% of the votes of all classes of the Company’s authorized capital
stock entitled to vote, then regardless of the provisions of this paragraph, in any such case, the votes cast by a majority of
the holders of the Series A Preferred Stock shall be deemed to equal 51% of all votes cast at any meeting of stockholders, or any
issue put to the stockholders for voting and the Company may state that any such action approved by at least a majority of the
holders of the Series A Preferred Stock was had by majority vote of the holders of all classes of the Company’s capital stock.
On February 19, 2016, the Company issued 1,000,000
shares of Series A Preferred Stock to its chief executive officer. In connection with the issuance of Series A preferred shares,
the Company recorded a nominal amount of stock-based compensation of $1,000 since the shares had no economic value, on the date
of the issuance of such shares, the Company’s chief executive officer was the majority owner of the Company’s common
shares, and the value of such voting rights were not readily and objectively measurable.
Common stock issued for services
On March 16, 2016, pursuant to a consulting
agreement, the Company issued 16,667 shares of common stock to a consultant for investor relations services rendered. These shares
were valued on the date of grant at $0.90 per share or $15,000 based on the fair value of services performed. In March 2016, in
connection with the issuance of these shares, the Company recorded stock-based consulting expense of $15,000.
On September 13, 2016, pursuant to a
one-year consulting agreement, the Company issued 60,000 shares of common stock to a consultant for business development
services rendered and to be rendered. These shares were valued on the date of grant at $0.40 per share or $24,000 based on
recent sales of the Company’s common stock. In connection with this agreement, the Company recorded stock-based
consulting fees, of $1,043 and a prepaid expense of $22,957 that will be amortized over the remaining one-year service
period.,
Additionally, for the nine months ended September
30, 2016 and 2015, amortization of other prepaid stock-based consulting fees amounted to $123,405 and $105,179, respectively.
Common shares issued in connection with
debt addendum
On April 20, 2016, June 6, 2016 and August
26, 2016, the Company entered into agreements for the addendum of the Convertible Note (see Note 3) which waived all rights to
enforce any event of default, which may have been triggered by the Company’s failure to file it reports with the SEC. In
connection with these agreements, the Company issued of 30,000, 40,000 and 130,000 shares of common stock, respectively, for an
aggregate of 200,000 shares of common stock. These shares were valued on the date of grant at $0.40 per share or $80,000 based
on recent sales of the Company’s common stock.
Common stock issued for cash
On February 3, 2016, the Company sold 1,200,000
shares of its common stock at $0.40 per common share for cash of $200,000 and a subscription receivable of $280,000. The subscription
receivable of $280,000 was collected in April 2016.
PETRONE WORLDWIDE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2016
NOTE 7 –
COMMITMENTS
International distribution agreement
On February 28, 2014, the Company entered into
an International Distribution Agreement (the “International Distribution Agreement”) with its major supplier. Through
September 30, 2016, the Company has complied with its minimum purchase commitments. Future minimum purchase amounts under the International
Distribution Agreement at December 31, 2015 are as follows:
Years ending December 31,
|
|
Amount
|
|
2016
|
|
|
$
|
1,000,000
|
|
|
2017
|
|
|
|
1,500,000
|
|
|
2018
|
|
|
|
2,500,000
|
|
|
Total minimum purchase amounts
|
|
|
$
|
5,000,000
|
|
NOTE 8 –
CONCENTRATIONS
Concentrations of credit risk
Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of and cash deposits. The Company places its cash in banks at levels
that, at times, may exceed federally insured limits. There were no balances in excess of FDIC insured levels as of September 30,
2016 and December 31, 2015. The Company has not experienced any losses in such accounts through September 30, 2016.
Geographic concentrations of sales
For the nine
months ended September 30, 2016 and 2015, substantially all of the Company’s revenues was to customers located outside the
United States. No other geographical area accounted for more than 10% of total sales during the nine months ended September 30,
2016 and 2015.
Customer concentrations
For the nine months ended September 30, 2016, two customers accounted
for approximately 38.7% of total sales (19.0% and 19.7%, respectively). These two customers consist of one customer from the Company’s
product segment and its only customer in the logistics services segment, respectively. For the nine months ended September 30,
2015, five customers accounted for approximately 87.4% of total sales (22.5%, 14.1%, 22.7%, 13.5% and 14.6%, respectively). A
reduction in sales from or loss of such customers would have a material adverse effect on the Company’s consolidated results
of operations and financial condition.
Vendor concentrations
For the nine months ended September 30, 2016 and 2015, the Company
purchased all of its products from one supplier. The loss of this supplier may have a material adverse effect on the Company’s
consolidated results of operations and financial condition.
NOTE 9 –
RESTATEMENT OF 2015 PERIODS
The Company’s unaudited consolidated financial statements
have been restated for the three and nine months ended September 30, 2015 to properly reflect certain transactions for revenues,
costs of revenues and operating expenses in the proper period.
PETRONE WORLDWIDE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2016
NOTE 9 –
RESTATEMENT OF 2015 PERIODS
(continued)
The effect of correcting these errors in the Company’s unaudited
consolidated financial statements for the three and nine months ended September 30, 2015 are shown in the table as follows:
Consolidated Statement of operations
|
|
For the Nine Months Ended
September 30, 2015 (Unaudited)
|
|
|
As previously reported
|
|
Adjustments to Restate
|
|
As Restated
|
Revenues
|
|
$
|
1,437,117
|
|
|
$
|
(63,570
|
)
|
|
$
|
1,373,547
|
|
Cost of revenues
|
|
|
1,224,575
|
|
|
|
41,263
|
|
|
|
1,265,838
|
|
Gross profit
|
|
|
212,542
|
|
|
|
(104,833
|
)
|
|
|
107,709
|
|
Operating expenses
|
|
|
360,308
|
|
|
|
(48,551
|
)
|
|
|
311,757
|
|
Loss from operations
|
|
|
(147,766
|
)
|
|
|
(56,282
|
)
|
|
|
(204,048
|
)
|
Other expenses
|
|
|
—
|
|
|
|
(105
|
)
|
|
|
(105
|
)
|
Net loss
|
|
$
|
(147,766
|
)
|
|
$
|
(56,387
|
)
|
|
$
|
(204,153
|
)
|
Net loss per common share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
Consolidated Statement of operations
|
|
For the Three Months Ended
September 30, 2015 (Unaudited)
|
|
|
As previously reported
|
|
Adjustments to Restate
|
|
As Restated
|
Revenues
|
|
$
|
95,227
|
|
|
$
|
(70,770
|
)
|
|
$
|
24,457
|
|
Cost of revenues
|
|
|
39,235
|
|
|
|
(16,301
|
)
|
|
|
22,934
|
|
Gross profit
|
|
|
55,992
|
|
|
|
(54,469
|
)
|
|
|
1,523
|
|
Operating expenses
|
|
|
142,597
|
|
|
|
(26,204
|
)
|
|
|
116,393
|
|
Loss from operations
|
|
|
(86,605
|
)
|
|
|
(28,265
|
)
|
|
|
(114,870
|
)
|
Other expenses
|
|
|
—
|
|
|
|
(58
|
)
|
|
|
(58
|
)
|
Net loss
|
|
$
|
(86,605
|
)
|
|
$
|
(28,323
|
)
|
|
$
|
(114,928
|
)
|
Net loss per common share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
NOTE 10 –
SEGMENT REPORTING
The Company’s principal operating
segments coincide with the types of products or services to be sold. The Company’s two reportable segments for the
three and nine months ended September 30, 2016 were (i) the Product Segment and (ii) the Logistics Services Segment. For the
three and nine months ended September 30, 2015, the Company only operated in the Product Segment. The Company’s chief
operating decision-maker has been identified as the Chairman and CEO, who reviews operating results to make decisions about
allocating resources and assessing performance for the entire Company. Segment information is presented based upon the
Company’s management organization structure as of September 30, 2016 and the distinctive nature of each segment. Future
changes to this internal financial structure may result in changes to the reportable segments disclosed. There are no
inter-segment revenue transactions and, therefore, revenues are only to external customers.
Segment operating profits or loss is determined
based upon internal performance measures used by the chief operating decision-maker. The Company derives the segment results from
its internal management reporting system. The accounting policies the Company uses to derive reportable segment results are the
same as those used for external reporting purposes. Management measures the performance of each reportable segment based upon several
metrics, including net revenues, gross profit and operating income (loss). Management uses these results to evaluate the performance
of, and to assign resources to, each of the reportable segments. The Company manages certain operating expenses separately at the
corporate level and does not allocate such expenses to the segments. Segment income (loss) from operations excludes interest income/expense
and other income or expenses and income taxes according to how a particular reportable segment’s management is measured.
Management does not consider impairment charges, and unallocated costs in measuring the performance of the reportable segments.
PETRONE WORLDWIDE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2016
NOTE 10 –
SEGMENT REPORTING (continued)
Segment information available with respect
to these reportable business segments for the three and nine months ended September 30, 2016 and 2015 was as follows:
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
2016
|
|
2015
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product segment
|
|
$
|
35,422
|
|
|
$
|
24,457
|
$
|
206,851
|
$
|
1,373,547
|
|
|
Logistics services segment
|
|
|
50,708
|
|
|
|
-
|
|
50,708
|
|
-
|
|
|
Total segment and consolidated revenues
|
|
|
86,130
|
|
|
|
24,457
|
|
257,559
|
|
1,373,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product segment
|
|
|
7,205
|
|
|
|
1,523
|
|
44,738
|
|
107,709
|
|
|
Logistics services segment
|
|
|
16,878
|
|
|
|
-
|
|
16,878
|
|
-
|
|
|
Total segment and consolidated gross profit
|
|
|
24,083
|
|
|
|
1,523
|
|
61,616
|
|
107,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product segment
|
|
$
|
(70,696
|
)
|
|
$
|
(103,897)
|
$
|
(390,335
|
) $
|
(163,366)
|
|
|
Logistics services segment
|
|
|
16,878
|
|
|
|
-
|
|
16,878
|
|
-
|
|
|
Total segment income (loss)
|
|
|
(53,818
|
)
|
|
|
(103,897)
|
|
(373,457
|
)
|
(163,366)
|
|
|
Unallocated costs
|
|
|
(47,821
|
)
|
|
|
(10,973)
|
|
(146,625
|
)
|
(40,682)
|
|
|
Total consolidated loss from operations
|
|
$
|
(101,639
|
)
|
|
$
|
(114,870)
|
$
|
(520,082
|
) $
|
(204,048)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Total assets:
|
|
|
|
|
|
|
|
|
Product segment
|
|
$
|
184,081
|
|
|
$
|
350,372
|
|
Logistics services segment
|
|
|
50,708
|
|
|
|
—
|
|
Total segment and consolidated assets
|
|
$
|
247,984
|
|
|
$
|
350,372
|
|
NOTE 11 -
SUBSEQUENT EVENTS
Equity Purchase Agreement and Registration Rights Agreement
On October 24, 2016 (the “Closing Date”), the
Company entered into an equity purchase agreement (the “Purchase Agreement”) with Peak One Opportunity Fund, L.P.
(“Buyer”), whereby, upon the terms and subject to the conditions thereof, the Buyer is committed to purchase
shares of the Company’s common stock (the “Purchase Shares”) at an aggregate price of up to $5,000,000 (the
“Total Commitment Amount”) over the course of its 24-month term. From time to time over the 24-month term of the
Purchase Agreement, commencing on the date on which a registration statement registering the Purchase Shares (the
“Registration Statement”) becomes effective, the Company may, in its sole discretion, provide the Buyer with a
put notice (each a “Put Notice”) to purchase a specified number of the Purchase Shares (each a “Put Amount
Requested”) subject to the limitations discussed below and contained in the Purchase Agreement. Upon delivery of a Put
Notice, the Company must deliver the Put Amount Requested as Deposit Withdrawal at Custodian (“DWAC”) shares to
Buyer within two trading days.
The actual amount of proceeds the Company receives pursuant to each
Put Notice (each, the “Put Amount”) is to be determined by multiplying the Put Amount Requested by the applicable purchase
price. The purchase price for each of the Purchase Shares equals 90% of the “Market Price,” which is defined as the
lesser of the (i) lowest closing bid price of our common stock for any trading day during the ten (10) trading days immediately
preceding the date of the respective Put Notice, or (ii) lowest closing bid price of the common stock for any trading day during
the seven trading days immediately following the clearing date associated with the applicable Put Notice (the “Valuation
Period”). Within three trading days following the end of the Valuation Period, the Buyer will deliver the Put Amount to the
Company via wire transfer.
PETRONE WORLDWIDE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2016
NOTE 11 -
SUBSEQUENT EVENTS (continued)
Equity Purchase Agreement and Registration Rights Agreement (continued)
The Put Amount Requested pursuant to any single Put Notice must
have an aggregate value of at least $15,000, and cannot exceed the lesser of (i) 200% of the average daily trading value of the
common stock in the ten trading days immediately preceding the Put Notice or (ii) such number of shares of common stock that has
an aggregate value of $100,000.
In order to deliver a Put Notice, certain conditions set forth in
the Purchase Agreement must be met, as provided therein. In addition, the Company is prohibited from delivering a Put Notice if:
(i) the sale of Purchase Shares pursuant to such Put Notice would cause the Company to issue and sell to Buyer, or Buyer to acquire
or purchase, a number of shares of the Company’s common stock that, when aggregated with all shares of common
stock purchased by Buyer pursuant to all prior Put Notices issued under the Purchase Agreement, would exceed the Total Commitment
Amount; or (ii) the sale of the Commitment Shares pursuant to the Put Notice would cause the Company to issue and sell to Buyer,
or Buyer to acquire or purchase, an aggregate number of shares of common stock that would result in Buyer beneficially owning more
than 4.99% of the issued and outstanding shares of the Company’s common stock.
Unless earlier terminated, the Purchase Agreement will terminate
automatically on the earlier to occur of: (i) 24 months after the initial effectiveness of the Registration Statement, (ii) the
date on which the Buyer has purchased or acquired all of the Purchase Shares, or (iii) the date on which certain bankruptcy proceedings
are initiated with respect to the Company. In connection with the execution of the Purchase Agreement, the Company agreed to issue
650,000 shares of its common stock (the “Commitment Shares”) to Buyer or Buyer’s designee as a commitment fee.
On the Closing Date, and in connection with the Purchase Agreement,
the Company also entered into a registration rights agreement (the “Registration Rights Agreement”) with Buyer whereby
the Company is obligated to file the Registration Statement to register the resale of the Commitment Shares and Purchase Shares.
Pursuant to the Registration Rights Agreement, the Company must (i) file the Registration Statement within thirty calendar days
from the Closing Date, (ii) use reasonable efforts to cause the Registration Statement to be declared effective under the Securities
Act of 1933, as amended (the “Securities Act”), as promptly as possible after the filing thereof, but in any event
no later than the 90th calendar day following the Closing Date, and (iii) use its reasonable efforts to keep such Registration
Statement continuously effective under the Securities Act until all of the Commitment Shares and Purchase Shares have been sold
thereunder or pursuant to Rule 144.
Securities Purchase Agreement and Debenture
On October 24, 2016 (the “Issuance Date”), the
Company entered into a securities purchase agreement (the “SPA”) with Buyer, whereby Buyer agreed to invest up to
$346,500 (the “Purchase Price”) in the Company in exchange for the convertible debentures, upon the terms and
subject to the conditions thereof. Pursuant to the SPA, the Company issued a convertible debenture to Buyer on October 26,
2016, in the original principal amount of $85,000, which bears interest at 0% per annum (the “First Debenture”).
The Buyer paid the portion of the Purchase Price associated with the First Debenture, consisting of $76,500 (minus the
applicable fees under the SPA), to the Company in cash on October 26, 2016. Each convertible debenture issued pursuant to the
SPA, coupled with the accrued and unpaid interest relating to each convertible debenture, is due and payable three years from
the issuance date of the respective convertible debenture. Any amount of principal or interest that is due under each
convertible debenture, which is not paid by the respective maturity date, will bear interest at the rate of 18% per annum
until it is satisfied in full. Additionally, the Buyer has the right at any time to convert amounts owed under each
convertible debenture into shares of the Company’s common stock at the closing price of the Common Stock on September
8, 2015. Each debenture shall contain representations, warranties, events of default, beneficial ownership limitations, and
other provisions that are customary of similar instruments.
The Buyer is entitled to, at any time or from time to time, convert
each convertible debenture issued under the SPA into shares of the Company’s common stock, at a conversion price per share
(the “Conversion Price”) equal to either: (i) if no event of default has occurred under the respective convertible
debenture and the date of conversion is prior to the date that is one hundred eighty days after the issuance date of the respective
convertible debenture, $0.25, or (ii) if an event of default has occurred under the respective convertible debenture or the date
of conversion is on or after the date that is one hundred eighty days after the issuance date of the respective convertible debenture,
the lesser of (a) $0.25 or (b) 65% of the lowest closing bid price of the common stock for the twenty trading days immediately
preceding the date of the date of conversion (provided, further, that if either the Company is not DWAC operational at the time
of conversion or the common stock is traded on the OTC Pink at the time of conversion, then 65% shall automatically adjust to 60%),
subject in each case to equitable adjustments resulting from any stock splits, stock dividends, recapitalizations or similar events.
PETRONE WORLDWIDE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2016
NOTE 11 -
SUBSEQUENT EVENTS (continued)
Securities Purchase Agreement and Debenture (continued)
We may redeem each convertible debenture issued under the SPA, upon
not more than two days written notice, for an amount (the “Redemption Price”) equal to: (i) if the Redemption Date
(as defined below) is ninety days or less from the date of issuance of the respective convertible debenture, 105% of the sum of
the Principal Amount so redeemed plus accrued interest, if any; (ii) if the Redemption Date is greater than or equal to ninety
one days from the date of issuance of the respective convertible debenture and less than or equal to one hundred twenty days from
the date of issuance of the respective convertible debenture, 110% of the sum of the Principal Amount so redeemed plus accrued
interest, if any; (iii) if the Redemption Date is greater than or equal to one hundred twenty one days from the date of issuance
of the respective convertible debenture and less than or equal to one hundred fifty days from the date of issuance of the respective
convertible debenture, 120% of the sum of the Principal Amount so redeemed plus accrued interest, if any; (iv) if the Redemption
Date is greater than or equal to one hundred fifty one days from the date of issuance of the respective convertible debenture and
less than or equal to one hundred eighty days from the date of issuance of the respective convertible debenture, 130% of the sum
of the Principal Amount so redeemed plus accrued interest, if any; and (v) if either (1) the respective convertible debenture is
in default but the Buyer consents to the redemption notwithstanding such default or (2) the Redemption Date is greater than or
equal to one hundred eighty one days from the date of issuance of the respective convertible debenture, 140% of the sum of the
Principal Amount so redeemed plus accrued interest, if any. The date upon which the respective convertible debenture is redeemed
and paid shall be referred to as the “Redemption Date” (and, in the case of multiple redemptions of less than the entire
outstanding Principal Amount, each such date shall be a Redemption Date with respect to the corresponding redemption).
In connection with the issuance of this First
Debenture, the Company determined that the terms of the First Debenture contain terms that are not fixed monetary amounts at inception.
Accordingly, under the provisions of FASB ASC Topic No. 815-40, “Derivatives and Hedging – Contracts in an Entity’s
Own Stock”, the embedded conversion option contained in the convertible instruments will be accounted for as derivative liabilities
at the date of issuance and shall be adjusted to fair value through earnings at each reporting date.
Other
On October 31, 2016, we repaid all remaining
principal and interest of the Convertible Note with Firstfire Global Opportunities Fund LLC.