NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited condensed
consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements
and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present
fairly the financial position and results of operations of Blue Sphere Corporation (the “Company”). These condensed
consolidated financial statements and notes thereto are unaudited and should be read in conjunction with the Company’s audited
financial statements included in its Annual Report on Form 10-K for the year ended September 30, 2015, as filed with the U.S.
Securities and Exchange Commission. The results of operations for the six and three months ended June 30, 2016 are not
necessarily indicative of results that could be expected for the entire fiscal year.
NOTE 2 – GENERAL
Blue Sphere Corporation
(“the Company”), together with its wholly-owned subsidiaries, Eastern Sphere Ltd. (“Eastern”), Binosphere
LLC (“Binosphere”), Johnstonsphere LLC (“Johnstonsphere”), and Sustainable Energy Ltd. (“SEL”),
is focused on project integration in the clean energy production and waste to energy markets.
The Company was incorporated in
the state of Nevada on July 17, 2007 and was originally in the business of developing and promoting automotive internet sites.
On February 17, 2010, the Company conducted a reverse merger, name change and forward split of its common stock, and in March 2010
current management took over operations, at which point the Company changed its business focus to become a project integrator in
the clean energy production and waste to energy markets.
As of June 30, 2016, Johnstonsphere
had not commenced operations.
On May 12, 2015 the Company formed
Bluesphere Pavia (formerly called Bluesphere Italy S.r.l.). Italy S.r.l, a subsidiary of Eastern in order to acquire certain biogas
plants located in Italy (see note 3 below).
NOTE 3 – INVESTMENT IN BLUE SPHERE PAVIA
On August 18, 2015, the
Company and two of its wholly-owned subsidiaries, Eastern and Bluesphere Pavia, entered into a Long Term Mezzanine Loan Agreement
(the “Helios Loan Agreement”) with Helios Italy Bio-Gas 1 L.P. (“Helios”). Under the Helios Loan Agreement,
Helios will make up to $5,646,628 (€5,000,000) available to Bluesphere Pavia (the “Helios Loan”) to finance (a)
ninety percent (90%) of the total required investment of the first four SVPs acquired, (b) eighty percent (80%) of the total required
investment of up to three SVPs subsequently acquired, (c) certain broker fees incurred in connection with the acquisitions, and
(d) any taxes associated with registration of an equity pledge agreement (as described below). Each financing of an SVP acquisition
will be subject to specified conditions precedent and will constitute a separate loan under the Helios Loan Agreement. Helios
may, within 90 days of a closing, require repayment of ten percent (10%) of the relevant loan and broker fees. If no such repayment
is required, Helios may reduce the amount of its commitment to finance the acquisitions of the three additional SVPs to seventy
to eighty percent (70-80%) of the total required investment. Helios’s commitment to provide any loan under the Helios Loan
Agreement that is not utilized by June 30, 2016 will automatically cancel, unless extended in writing by Helios. Subject to specified
terms, representations and warranties, the Helios Loan Agreement provides that each loan thereunder will accrue interest at a
rate of 14.5% per annum, paid quarterly. Helios will also be entitled to an annual operation fee, paid quarterly. The final payment
for each loan will become due no later than the earlier of (a) thirteen and one half years from the date such loan was made available
to Bluesphere Pavia, and (b) the date that the Feed in Tariff license granted to the relevant SVP expires. Pursuant to the Helios
Loan Agreement and an equity pledge agreement, Eastern Sphere pledged all its shares in Bluesphere Pavia to secure all loan amounts
utilized under the Helios Loan Agreement.
On December 14, 2015 (“Closing
Date”), and pursuant to a Share Purchase Agreement, dated May 14, 2015 (the “Share Purchase Agreement”), by
and among the Company’s indirect wholly-owned subsidiary, Bluesphere Pavia, and Volteo Energie S.p.A., Agriholding S.r.l.,
and Overland S.r.l. (collectively, the “Sellers”), Bluesphere Pavia completed the acquisitions of one hundred percent
(100%) of the share capital of Agricerere S.r.l., Agrielektra S.r.l., Agrisorse S.r.l. and Gefa S.r.l. (each, an “SPV”
and collectively, the “SPVs”) from the Sellers. Each SPV owns and operates an anaerobic digestion biogas plant in
Italy for the production and sale of electricity to Gestore del Servizi Energetici GSE, S.p.A., a state-owned company, pursuant
to a power purchase agreement. Pursuant to the Italy Projects Agreement, the Company also issued a corporate guarantee to the
Sellers, whereby the Company will secure the obligations of Bluesphere Pavia under the Italy Projects Agreement.
BLUE SPHERE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
NOTE 3 – INVESTMENT IN BLUE SPHERE PAVIA (continued)
Pursuant to the Share Purchase
Agreement, the Company to pay $5,646,628 (€5,200,000) (the “Purchase Price”), subject to certain post-closing
adjustments, to acquire the share capital of the SPVs. The Purchase Price for each SPV was determined based on a Base Line EBITDA
guaranteed by the Sellers and an Equity IRR Target calculated on the Purchase Price of no less than twenty-five percent (25%).
Fifty percent (50%) of the Purchase Price, adjusted for certain post-closing adjustments and closing costs, in the amount of $2,143,181
(€1,952,858) was paid at closing, and the balance is due to the Sellers on the third anniversary of the closing date. The
remaining fifty percent (50%) of the Purchase Price, prior to and after closing date, and any variation of EBITDA results in the
18 months following the closing date , will be promised by a note from each Seller, to be paid on the third anniversary of the
closing, along with interest on the unpaid balance due at an annual rate of two percent (2%). The portion of the Purchase Price
paid at closing was primarily financed by a loan of $3,149,081 (€2,900,000) pursuant to the Helios Loan Agreement whereas
the Company repaid $342,192 (€310,204) during the six months ended June 30, 2016.
In accordance with a Framework
EBITDA Guarantee Agreement, dated July 17, 2015 (the “EBITDA Agreement”), between the Company and Austep S.p.A. (“Austep”),
Austep will operate, maintain and supervise each biogas plant owned by the SPVs. In addition, Austep will guarantee a monthly
aggregate EBITDA of $204,147 (€188,000) from the four SPVs for the initial six months following the acquisition, and thereafter
Austep will guarantee an annual aggregate EBITDA of $4,082,946 (€3,760,000) from the four SPVs. Pursuant to the terms of
the agreements with Austep, the Company will receive the guaranteed levels of EBITDA and Austep will receive ninety (90%)
of the revenue in excess of these levels.
The Company applied the equity
method of accounting for those investments because the Framework EBITDA Guarantee Agreement between the Company and Austep S.p.A.
(“Austep”) whereas Austep operates, maintains and supervises each biogas plants prevents us from exercising a controlling
influence over operating policies of the plants. Under this method, our equity investment is reflected as an investment in non-consolidated
subsidiaries on our Condensed Balance Sheets and the net earnings or losses of the investments is reflected as equity in net earnings
of non-consolidated companies on our Consolidated Statements of Operations.
NOTE 4 – CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The accompanying unaudited condensed
consolidated financial statements as of June 30, 2016 and for the six and three months then ended have been prepared in accordance
with accounting principles generally accepted in the United States relating to the preparation of financial statements for interim
periods. Accordingly, they do not include all the information and footnotes required for annual financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six and three months ended June 30, 2016 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2016.
The September 30, 2015 Condensed
Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles
generally accepted in the United States of America. These financial statements should be read in conjunction with the audited financial
statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended September 30, 2015.
NOTE 5 – SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies
applied in the annual financial statements of the Company as of September 30, 2015, are applied consistently in these financial
statements except for the following:
|
a.
|
Business combinations and Goodwill
|
The Company accounts for its
business combinations using the purchase method of accounting. Under this method, the Company allocates the purchase price to
tangible and intangible assets acquired and liabilities assumed based on estimated fair values at the date of acquisition, with
the excess of the purchase price amount being allocated to goodwill. Acquisition-related and integration costs associated to the
business combination are expensed as incurred. Changes in estimates associated with future income tax assets after measurement
period are recognized as income tax expense with prospective application to all business combinations regardless of the date of
acquisition. Goodwill for each reporting unit is assessed for impairment at least annually, or when an event or circumstance occurs
that more likely than not reduces the fair value of a reporting unit below its carrying amount. An impairment charge is recorded
when the carrying amount of the reporting unit exceeds its fair value and is determined as the difference between the goodwill’s
carrying amount and its implied fair value.
BLUE SPHERE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
NOTE 5 – SIGNIFICANT
ACCOUNTING POLICIES (continued)
|
b.
|
Investment
in non-consolidated and affiliated companies
|
Investments in non-consolidated
and affiliated companies that are not controlled but over which the Company can exercise significant influence (generally, entities
in which the Company holds approximately between 20% to 100% of the voting rights of the investee) are presented using the equity
method of accounting. Profits on intercompany sales, not realized outside the Company, are eliminated. The Company discontinues
applying the equity method when its investment (including advances and loans) is reduced to zero and the Company has not guaranteed
obligations of the affiliate or otherwise committed to provide further financial support to the affiliate.
Investments in preferred
shares, which are not in substance common stock, are recorded on a cost basis according to ASC 323-10-15-13, “Investments
- Equity Method and Joint Ventures - In-substance Common Stock” and ASC 323-10-40-1, “Investment -Equity Method and
Joint Ventures - Investee Capital Transactions”.
A change in the Company’s
proportionate share of an investee’s equity, resulting from issuance of common or in-substance common shares by the investee
to third parties, is recorded as a gain or loss in the consolidated income statements in accordance with ASC 323-10-40-1.
Investments in non-marketable
equity securities of entities in which the Company does not have control or the ability to exercise significant influence over
their operation and financial policies, are recorded at cost (generally when the Company holds less than 20% of the voting rights).
Management evaluates investments
in affiliated companies, partnerships and other non-marketable equity securities for evidence of other-than-temporary declines
in value. Such evaluation is dependent on the specific facts and circumstances. Accordingly, in determining whether other-than-temporary
declines exist, management evaluates various indicators for other-than-temporary declines and evaluates financial information
(e.g. budgets, business plans, financial statements, etc.). During 2015 and 2014, no material impairment was recognized.
Intangible assets consist of non-monetary
and separately identifiable assets, which can be controlled and are expected to generate future economic benefits. Such assets
are recognized at acquisition and/or production cost, including directly attributable expenses to make the asset ready for use,
net of accumulated amortization charges and any impairment losses. The costs incurred internally to develop new services and platforms
are considered intangible assets generated internally and are recognized as assets only if the following requirements are met:
|
1.
|
the cost incurred for the development of the assets can be reliably measured;
|
|
2.
|
the entity has the intention, the availability of financial resources, the ability to complete
the assets and to use or sell them;
|
Capitalized development costs
include only expenses incurred that can be directly attributed to the process of developing new products and services.
BLUE SPHERE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
NOTE 5 – SIGNIFICANT
ACCOUNTING POLICIES (continued)
Intangible assets with a finite
useful life are amortized on a straight-line basis over their useful lives and are tested for impairment when circumstances indicate
that the carrying value may be impaired. The amortization period and the amortization method for intangible assets with a finite
useful lives are reviewed at least at each reporting date.
Changes in expected useful lives,
or in the way the future economic benefits will be generated by the assets, are either recognized through a change in the period
or in the amortization method and are accounted for as changes in accounting estimates. The amortization charges for intangible
assets with a finite useful life are classified in the statement of income, in the costs appropriate for the function of the related
intangible assets.
When events or changes in circumstances
indicate that the carrying amount of long-lived assets, such as capital assets and intangible assets, may not be recoverable, undiscounted
estimated cash flows are projected over their remaining term and compared to the carrying amount. To the extent that such projections
indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge is
recorded to reduce the carrying amount to the projected future discounted cash flows.
NOTE 6 – GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as a going
concern. As of June 30, 2016, the Company had approximately $533,000 in cash and cash equivalents, approximately $10,525,000 in
negative working capital, a stockholders’ deficit of approximately $8,320,000 and an accumulated deficit of approximately
$51,385,000. Management anticipates their business will require substantial additional investments that have not yet been secured.
Management is continuing in the process of fund raising in the private equity markets as the Company will need to finance future
activities. The Company’s ability to continue as a going concern is dependent upon raising capital from financing transactions
and revenue from operations. These unaudited financial statements do not include any adjustments that may be necessary should the
Company be unable to continue as a going concern. The Company’s continuation as a going concern is dependent on its ability
to obtain additional financing as may be required and ultimately to attain profitability.
NOTE 7 – NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
No new accounting standards have
been adopted since the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015 was filed.
BLUE SPHERE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
NOTE 8 – COMMON SHARES
On January 26, 2016, the Company
issued 1,000,000 shares of common stock pursuant to a subscription agreement dated June 12, 2015.
On February 1, 2016 the Company issued 540,000 shares of common stock to a consultant in respect of his consulting
services for the Company. The Company has estimated the fair value of such shares, and recorded an expense of $108,327.
In February 2016, the Company
conducted an offering (the “February Offering”) consisting of (a) up to USD $1,925,000 of the Company’s shares
of common stock, par value $0.001 per share (“Common Stock”), priced at the closing price for shares of Common Stock,
as reported on the OTCQB Venture Marketplace, on the trading day prior to the closing of the February Offering, and (b) 5-year
warrants to purchase shares of Common Stock in an amount equal to 50% of the number of shares of Common Stock so purchased by the
subscriber (the “February Warrants”, together with the shares of Common Stock subscribed for, the “February Securities”).
The February Securities have been offered pursuant to subscription agreements with each investor (the “February Subscription
Agreement”). In addition to other customary provisions, each February Subscription Agreement provides that the Company will
use its reasonable commercial efforts to register all shares of Common Stock sold in the February Offering, including all shares
of Common Stock underlying the February Warrants, within 60 days of the closing of the February Offering. The February Warrants
are exercisable for 5 years from the date of issuance at $0.10 per share, include an option by which the holder may exercise the
February Warrant by means of a cashless exercise, and include customary weighted-average price adjustment and anti-dilution terms.
On February 15, 2016, the Company completed the only closing of the February Offering, representing aggregate gross proceeds to
the Company of $1,925,000. In connection with the closing, the Company and subscribers entered into (a) February Subscription Agreements
for, in the aggregate, 35,000,000 shares of Common Stock at $0.055 per share, and (b) February Warrants to purchase, in the aggregate,
up to 17,500,000 shares of Common Stock at an exercise price of $0.10 per share. The warrants were accounted for as derivative
liabilities. The Company has estimated the fair value of such warrants at a value of $933,358 at the date of issuance and using
the Black-Scholes option pricing model using the following assumptions:
|
|
%
|
|
Dividend yield
|
|
|
0
|
|
Risk-free interest rate
|
|
|
1.20
|
%
|
Expected term (years)
|
|
|
5
|
|
Volatility
|
|
|
203
|
%
|
The Company engaged Maxim Group
LLC (“Maxim”) to assist in the February Offering. Pursuant to the terms of an engagement letter between Maxim and the
Company, Maxim received commissions equal to 7% of the gross proceeds raised by Maxim in the February Offering, warrants to purchase,
in the aggregate, up to 2,800,000 shares of Common Stock at an exercise price of $0.0605 per share and to purchase, in the aggregate,
up to 1,400,000 shares of Common Stock at an exercise price of $0.11 per share. The Company has estimated the fair value of such
warrants at a value of $224,413 at the date of issuance and using the Black-Scholes option pricing model using the following assumptions:
|
|
%
|
|
Dividend yield
|
|
|
0
|
|
Risk-free interest rate
|
|
|
1.20
|
%
|
Expected term (years)
|
|
|
5
|
|
Volatility
|
|
|
203
|
%
|
On March 15, 2016, the Company
issued 85,000 shares of Common Stock to a consultant in respect of his consulting services for the Company. The Company has estimated
the fair value of such shares, and recorded an expense of $5,685.
On April 13, 2016, the Company issued 1,000,000 shares of Common Stock of the Company to a consultant in consideration
for corporate finance, investor communications and financial and investor public relations services. The Company has estimated
the fair value of such shares, and recorded an expense of $72,733.
On June 13, 2016 and per the
consulting agreement the Company issued an additional 1,000,000 shares of Common Stock as a service bonus since the agreement
was not terminated prior to June 9, 2016. The Company has estimated the fair value of such shares, and recorded an expense of
$89,000.
BLUE SPHERE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
NOTE 8 – COMMON SHARES (continued)
On April 13, 2016, we issued an aggregate of 875,000 shares of our Common Stock to a consultant, pursuant
to consulting agreements dated September 1, 2015 and March 1, 2016, in consideration for investor relations and communications
services. The Company has estimated the fair value of such shares, and recorded an expense of $42,467.
On May 18, 2016, a 1.5-year warrant
to purchase shares of Common Stock, dated May 4, 2015, was exercised into 700,000 shares of common stock at an exercise price of
$0.058 per share, for total consideration of $40,235.
On June 2, 2016, we issued
13,930,742 shares of our Common Stock in consideration of $145,525 pursuant to all but one of the July 2015 Offering Subscription
Agreements, with the issuance of the remaining 7,658,129 shares of our Common Stock currently in process.
On June 13, 2016, the Company
issued 7,103,467 shares of Common Stock to several officers, directors, employees and/or consultants of the Company.
All shares were issued pursuant to the Company’s Global Share and Options Incentive Enhancement Plan (2014) (the “2014
Incentive Plan”) and the Company’s Global Share Incentive Plan (2010). The Company has estimated and recorded the
fair value of such shares as an expense of $632,208 which was recorded through the vesting periods.
On June 26, 2016, the Company
issued 500,000 shares of Common Stock in order to complete its obligations under the Share Purchase Agreement from 2014.
NOTE 9 – WARRANTS, DEBENTURES AND NOTES
Senior
Debentures Offering
Beginning in November 2015, the
Company conducted an offering (the “Debenture Offering”) of up to $3,000,000 of the Company’s Senior Debentures
(the “Debentures”) and warrants (the “Debenture Offering Warrants”, together with the “Debentures”,
the “Debenture Offering Securities”) to purchase up to 8,000,000 shares of Common Stock in proportion to each Subscriber’s
subscription amount relative to the total offering amount, with 50% of the Debenture Offering Warrants exercisable at a price per
share of $0.05 and the other 50% of the Debenture Offering Warrants exercisable at price per share of $0.075.
The Debentures bear interest at
11%, paid quarterly, and mature in two years. The Debentures are secured by a pledge agreement between the Company and each investor,
whereby the Company pledged as collateral up to 49% of its shares of common stock in Eastern Sphere, Ltd., our wholly-owned subsidiary
(the “Pledge Agreement”). The Pledge Agreement further provides that the Company’s obligations under the Debentures
rank senior to all other indebtedness of Blue Sphere Corporation, but are subordinate to all indebtedness and liabilities of its
subsidiaries and project-level operating entities. The Debenture Offering Warrants are exercisable for 5 years from the date of
issuance, with 50% exercisable at $0.05 per share and 50% exercisable at $0.075 per share
The November 2015 Warrants were
accounted for as derivative liabilities. The Company has estimated the fair value of such warrants at a value of $208,597 at the
date of issuance using the Black-Scholes option pricing model using the following assumptions:
|
|
%
|
|
Dividend yield
|
|
0
|
|
Risk-free interest rate
|
|
1.74
|
%
|
Expected term (years)
|
|
5
|
|
Volatility
|
|
202
|
%
|
BLUE SPHERE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
NOTE 9 – WARRANTS, DEBENTURES
AND NOTES (continued)
The Debenture Offering Securities
were offered pursuant to subscription agreements with each investor (the “Debenture Offering Subscription Agreement”).
Pursuant to the Debenture Offering Subscription Agreements, the investors in the Debenture Offering shall have the right to collectively
designate one observer or member to the Company’s Board of Directors.
On December 23, 2015, the Company
completed the closing of the Debenture Offering and entered into Debenture Offering Subscription Agreements with investors representing
aggregate gross proceeds to the Company of $3,000,000.
The Company engaged Maxim Group
LLC to assist in the Debenture Offering. Pursuant to the terms of an engagement letter between Maxim and the Company, Maxim received
commissions equal to 7% of the gross proceeds raised by Maxim in the Debenture Offering and warrants to purchase, in the aggregate,
up to 4,480,000 shares of Common Stock at an exercise price of $0.06875 per share. The Company has estimated the fair value of
such warrants at a value of $116,599 at the date of issuance using the Black-Scholes option pricing model using the following assumptions:
|
|
%
|
|
Dividend yield
|
|
0
|
|
Risk-free interest rate
|
|
1.74
|
%
|
Expected term (years)
|
|
5
|
|
Volatility
|
|
202
|
%
|
On February 3, 2016, the Company
issued 3-year warrants to purchase up to 1,500,000 shares of Company’s common stock at an exercise price of $0.06 per share,
in full satisfaction of certain obligations of the Company.
The Company has estimated
the fair value of such warrants at a value of $87,331 at the date of issuance using the Black-Scholes option pricing model using
the following assumptions:
|
|
%
|
|
Dividend yield
|
|
|
0
|
|
Risk-free interest rate
|
|
|
1.2
|
%
|
Expected term (years)
|
|
|
3
|
|
Volatility
|
|
|
203
|
%
|
Changes in the fair value
of the warrants are recorded as interest expenses
BLUE SPHERE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
NOTE 10 – SUBSEQUENT EVENTS
In June and July 2016, we conducted
an offering (the “June Offering”) consisting of (a) up to USD $3,000,000 of our shares of Common Stock, priced at the
closing price for shares of Common Stock, as reported on the OTCQB Venture Marketplace on the trading day prior to each respective
closing of the June Offering, and (b) five-year warrants (the “June Warrants”, together with the shares of Common Stock
subscribed for, the “June Securities”) to purchase shares of Common Stock in an amount equal to one hundred percent
(100%) of the number of shares of Common Stock so purchased by the subscriber, with an exercise price equal to the per share price
of the Common Stock or $0.011 per share, whichever is greater. The June Offering consisted of one or more closings, with the last
closing to occur on or before July 26, 2016, or as extended by the Company in is sole discretion. The June Securities were offered
pursuant to subscription agreements with each subscriber (the “June Subscription Agreement”). In addition to other
customary provisions, each June Subscription Agreement provides that the Company will use its reasonable commercial efforts to
register all shares of Common Stock sold in the June Offering, including all shares of Common Stock underlying the June Warrants,
within twenty (20) days of the final closing of the June Offering. Each June Subscription Agreement also provides that if, during
the period beginning on the date of the first closing of the June Offering and ending on the six month anniversary thereof, the
Company completes (a) a subsequent closing of the June Offering or (b) a public or private offering and sale of USD $1,000,000
or more of Common Stock or warrants to purchase Common Stock, where such subsequent closing or offering, as applicable, provides
for material deal terms and conditions more favorable than are contained in such June Subscription Agreement, then the June Subscription
Agreement will be deemed modified to provide the applicable subscriber with the more favorable deal terms and conditions, and the
Company will take all reasonable steps necessary to amend the June Securities and/or issue new securities to the applicable subscriber
reflecting such more favorable material deal terms and conditions (the “June MFN Rights”). The June Warrants are exercisable
for five years from the date of issuance, include an option by which the holder may exercise the June Warrant by means of a cashless
exercise, and include customary weighted-average price adjustment and anti-dilution terms.
On July 26, 2016, the Company
completed closings of the June Offering, both such closings representing aggregate gross proceeds to the Company of USD $1,370,000.
In connection with both closings, the Company and subscribers entered into (a) June Subscription Agreements for 18,266,668 shares
of Common Stock at $0.075 per share, and (b) June Warrants to purchase up to 18,266,668 shares of Common Stock at an exercise price
of $0.11 per share. The subscriber in the July 7, 2016 closing received an adjustment to its June Securities pursuant to its June
MFN Rights. The June Offering ended on July 26, 2016.
The Company engaged Maxim Group
LLC to assist in the June Offering. Pursuant to the terms of an engagement letter between Maxim and the Company, in connection
with both closings, Maxim received commissions equal to 4.44% of the gross proceeds raised, warrants to purchase up to 928,000
shares of Common Stock at an exercise price of $0.0825 per share, and warrants to purchase up to 928,000 shares of Common Stock
at an exercise price of $0.121 per share.