The accompanying notes are an integral part of these unaudited
condensed financial statements.
The accompanying notes are an integral part of these unaudited
condensed financial statements.
The accompanying notes are an integral part of these unaudited condensed
interim financial statements
NOTES TO UNAUDITED CONDENSED INTERIM
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2017 AND 2016
NOTE 1 – NATURE OF BUSINESS, BASIS
OF PRESENTATION AND GOING CONCERN
Nature of Operations and Going
Concern
HPIL Holding (referred
to in this report as “HPIL” or the “Company”) (formerly Trim Holding Group) was incorporated on February
17, 2004 in the state of Delaware under the name TNT Designs, Inc. A substantial part of the Company’s activities was involved
in developing a business plan to market and distribute fashion products. On June 16, 2009, the majority interest in the Company
was purchased in a private agreement by Mr. Louis Bertoli, an individual, with the objective to acquire and/or merge with other
businesses. On October 7, 2009, the Company merged with and into Trim Nevada, Inc., which became the surviving corporation. The
merger did not result in any change in the Company’s management, assets, liabilities, net worth or location of principal
executive offices. However, this merger changed the legal domicile of the Company from Delaware to Nevada where Trim Nevada, Inc.
was incorporated. Each outstanding share of TNT Designs, Inc. was automatically converted into one share of the common stock of
Trim Nevada, Inc. Pursuant to the merger, the Company changed its name from TNT Designs, Inc. to Trim Holding Group. On May 21,
2012, the Company changed its name to HPIL Holding. HPIL Holding intends that its main activity will be in the business of providing
consulting services and of investing in differing business sectors.
The concentration of
the Company has become the consulting services and the development of products related to the Brand License Agreement (see Note
5 for further discussion of the Brand License Agreement. As of March 31, 2017, the Company has yet to commence substantial operations. Expenses
incurred from February 17, 2004 (date of inception) through March 31, 2017, relate to the Company’s formation and general
administrative activities. In the course of its start-up activities, the Company has sustained operating losses and expects to
incur operating losses in 2017. The Company has generated a limited amount of revenue and has not achieved profitable operations
or positive cash flows from operations. These factors and uncertainties raise substantial doubt about the Company’s ability to
continue as a going concern. The unaudited condensed interim financial statements do not include any adjustments related to the
recoverability and classification of the recorded asset amounts or the amounts and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern. All adjustments consisting only of normal recurring items,
considered necessary for fair presentation have been included in these unaudited condensed interim financial statements.
The Company will continue
targeting sources of additional financing and opportunities to produce profitable revenue streams, whether through sole or joint
ventures, to provide for the continuation of its operations. The Company is also prepared to re-evaluate its expense load, if necessary,
to determine whether any efficiency can be achieved prior to the commencement of substantial operations related to the Brand License
Agreement (Note 5) or other potential operations identified by the Company. Additionally, the Company’s Chief Financial Officer,
who is also the Company’s Corporate Secretary and Treasurer and Director and stockholder, has indicated his ability to provide
financial support to the Company for the continuation of its operations, should it be necessary.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These unaudited condensed
interim financial statements are presented in accordance with accounting principles generally accepted in the United States (“GAAP”),
and are expressed in United States dollars.
Unaudited Condensed Interim Financial
Statements
These unaudited condensed
interim financial statements have been prepared on the same basis as the annual financial statement and should be read in conjunction
with those annual financial statements filed on Form 10-K for the year ended December 31, 2016. In the opinion of management, these
unaudited condensed interim financial statements reflect adjustments, necessary to present fairly the Company’s financial
position, results of operations and cash flows for the periods shown. The results of operations for such periods are not necessarily
indicative of the results for a full year or for any future period.
Derivative Financial Instruments
The Company reviews
the terms of convertible debt, equity instruments and other financing arrangements to determine whether there are embedded derivative
instruments, including embedded conversion options that are required to be bifurcated and accounted for separately as a derivative
financial instrument.
Derivative financial
instruments are initially measured at their fair value. For derivative financial instruments that are accounted for as liabilities,
the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in
the fair value reported as charges or credits to income. To the extent that the initial fair values of the freestanding and/or
bifurcated derivative instrument liabilities exceed the total proceeds received an immediate charge to income is recognized in
order to initially record the derivative instrument liabilities at their fair value.
The discount from
the face value of the convertible debt or equity instruments resulting from allocating some or all of the proceeds to the derivative
instruments, together with the stated rate of interest on the instrument, is amortized over the life of the instrument through
periodic charges to income, using the effective interest method.
The classification
of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at
the end of each reporting period. If reclassification is required, the fair value of the derivative instrument, as of the determination
date, is reclassified. Any previous charges or credits to income for changes in the fair value of the derivative instrument are
not reversed. Derivative instrument liabilities are classified in the balance sheets as current or non-current based on whether
or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.
Impairment of Long-Lived Assets
The Company follows
the ASC 360, which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate
that the assets’ carrying amount may not be recoverable. In performing the review for recoverability, if future discounted
cash flows (excluding interest charges) from the use of ultimate disposition of the assets are less than their carrying values,
an impairment loss represented by the difference between its fair value and carrying value, is recognized.
Research and Development
The Company is engaged
in research and development in respect to the Company’s Brand License Agreement with World Traditional Fudokan Shotokan Karate-Do
Federation, a worldwide karate federation based in Switzerland (“WTFSKF”). Research and development costs are charged
as an operating expense as incurred.
Intangible Assets
The Company entered
into a brand license agreement (the “Brand License Agreement”) with WTFSKF. Pursuant to the Brand License Agreement,
WTFSKF has granted to the Company an exclusive, worldwide, transferrable license (the “License”) to use certain logos,
names, and marks of WTFSKF (the “Marks”) and manufacture and sell certain products (clothing, accessories and sporting
goods) bearing the Marks (see Note 5 for further discussion of the Brand License Agreement). The Company will amortize the License
over the contractual life of the asset of 25 years. No amortization has been recognized as of March 31, 2017 and 2016, as the Brand
License Agreement does not become effective until 2018.
Net Loss Per Share
Basic loss per share
is computed by dividing net loss and comprehensive loss available to common shareholders by the weighted average number of shares
of common stock outstanding for the year. Diluted loss per share is computed by dividing net loss by the weighted average number
of shares of common stock outstanding for the year and the number of shares of common stock issuable upon assumed exercise of preferred
stock provided the result is not anti-dilutive.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts
with Customers. This new standard provides guidance for the recognition, measurement and disclosure of revenue resulting from contracts
with customers and will supersede virtually all of the current revenue recognition guidance under GAAP. The standard is effective
for the first interim period within annual reporting periods beginning after December 15, 2017. Early adoption is permitted for
annual periods beginning after December 15, 2016. The Company is currently evaluating the impact of the new standard on its financial
statements.
In August 2014, the FASB issued ASU No.
2014-15, Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to
Continue as a Going Concern. This new standard provided guidance for the presentation of the disclosure of uncertainties about
an Entity’s Ability to Continue as a Going Concern. This standard is effective for annual periods beginning after December
15, 2016. The Company’sadoption of this standard did not have a significant impact on the unaudited interim financial statements.
In November 2015, the FASB
released ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). ASU
2015-17 simplifies the presentation of deferred income taxes by deferred tax assets and liabilities be classified as noncurrent
on the balance sheet. ASU 2015-17 is effective for public companies for annual reporting periods beginning after December 15, 2017,
and interim periods within those fiscal years. The guidance may be adopted prospectively or retrospectively and early adoption
is permitted. Adoption of this guidance is not expected to have any effect on the Company’s unaudited condensed interim financial
statements. The Company is currently evaluating the impact of the new standard on its financial statements.
In March 2016, the FASB
issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation –
Stock Compensation. The ASU simplifies several aspects of the accounting for employee share-based payment transaction. This standard
is effective for annual reporting periods beginning after December 15, 2016, and interim periods within that that reporting period.
The Company’s adoption of this standard did not have a significant impact on the unaudited interim financial statements.
In March 2016, the FASB
issued ASU No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross
vs. Net). ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB
issued ASU No. 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing. ASU 2016-10
clarified the implementation guidance on identifying performance obligations. These ASUs apple to all companies that enter into
contracts with customers to transfer goods or services. There ASUs are effective for public entities for interim and annual reporting
periods beginning after December 15, 2017. Early adoption is permitted, but not before interim and annual periods beginning after
December 16, 2016. Entities have the choice to apply these ASUs either retrospectively to each reporting period presented or by
recognizing the cumulative effect or applying these standards at the date of initial application and not adjusting comparative
information. The Company is currently evaluating the impact of the new standard on its unaudited condensed interim financial statements.
In April 2016, the FASB
issued ASU No. 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligation and Licensing, to clarify the
identification of performance obligation as well as the licensing implementation guidance.
In May 2016, the FASB
issued ASU No. 2016-12, Revenue from Contracts with Customers: Narrow Scope Improvements and Practical Expedients, which clarifies
certain core recognition principles including collectability, sales tax presentation, and contract modification, as well as identifies
disclosures no longer required if the full retrospective transition method is adopted.
In
August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments”.
This ASU provides eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of
cash flows. ASU 2016-15 is effective for the fiscal year commencing after December 15, 2017. The Company is still assessing the
impact that the adoption of ASU 2016-15 will have on the statement of cash flows
.
None of the other recently
issued accounting pronouncements are expected to significantly affect the Company.
NOTE 3 – CAPITAL STOCK
The Company filed an
amendment with the Secretary of State of Nevada on April 19, 2016, amending its Articles of Incorporation, Article IV - Capital
Stock. The effect of the amendment was to cancel all 100,000,000 shares of the Company’s authorized preferred stock (“Preferred
Stock”), consisting of 25,000,000 shares of Preferred Stock, par value $8.75 per share; and 75,000,000 shares of Preferred
Stock, par value $7 per share. The amendment was effective as of April 18, 2016, at which time there were no shares of Preferred
Stock issued and outstanding. Following the amendment, the Company has 400,000,000 shares of stock authorized for issuance (reduced
from 500,000,000 shares authorized prior to the effect of the amendment), consisting solely of shares of the Company’s common
stock, par value $0.0001 per share.
The Company entered
into an Equity Purchase Agreement (the “Original Equity Purchase Agreement”) with Kodiak Capital Group, LLC (“KCG”)
on August 12, 2016. The Company and KCG executed an Amended and Restated Equity Purchase Agreement dated December 27, 2016 (the
“Amended Equity Purchase Agreement”; together with the Original Equity Purchase Agreement, the “Equity Purchase
Agreement”), which completely restates and makes minor revisions to the Original Equity Purchase Agreement, such as correcting
the stated capitalization of the Company and extending the period of the Original Equity Purchase Agreement. The Company and KCG
also entered into a Registration Rights Agreement dated August 12, 2016 (the “Registration Agreement”, and together
with the Equity Purchase Agreement, the “Agreements”). Pursuant to the Equity Purchase Agreement, the Company, at its
sole and exclusive option, may issue and sell to KCG, from time to time as provided therein, and KCG would purchase from the Company
shares of the Company’s common stock (“Shares”) equal to a value of up to $5,000,000. Pursuant to the Registration
Agreement, the Company has agreed to provide certain registration rights under the Equity Act of 1933, as amended, and applicable
state laws with respect to all Shares issued in connection with the Equity Purchase Agreement. Subject to the terms and conditions
of the Equity Purchase Agreement, the Company, at its sole and exclusive option, may issue and sell to KCG, and KCG shall purchase
from the Company, the Shares upon the Company’s delivery of written notices to KCG. In exchange of KCG signing the Securities
Purchase Agreements, the Company issued to KCG a Convertible Promissory Note (Note 6) in the principal amount of $215,000 as payment
of a commitment fee to induce KCG to enter into the Agreements.
The aggregate maximum amount of all purchases
that KCG shall be obligated to make under the Equity Purchase Agreement shall not exceed $5,000,000. Once a written notice is received
by KCG, it shall not be terminated, withdrawn or otherwise revoked by the Company. The purchase price per share for each purchase
of Shares to be paid by KCG shall be 70% of the lowest trading price (or if there are no recorded trades, the lowest closing price)
during the Valuation Period (as defined and calculated pursuant to the Equity Purchase Agreement). KCG is not obligated to purchase
any Shares unless and until the Company has registered the Shares pursuant to a registration statement on Form S-1 (or on such
other form as is available to the Company).
On November 9, 2016, the Company entered
into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with GPL Ventures, LLC (“GPL”).
The Company and GPL also entered into a Registration Rights Agreement dated November 9, 2016 (the “Registration Agreement”,
and together with the Securities Purchase Agreement, the “Agreements”). Pursuant to the Securities Purchase Agreement,
the Company, at its sole and exclusive option, may issue and sell to GPL, from time to time as provided therein, and GPL would
purchase from the Company shares of the Company’s common stock (“Shares”) equal to a value of up to $5,600,000.
Pursuant to the Registration Agreement, the Company has agreed to provide certain registration rights under the Securities Act
of 1933, as amended, and applicable state laws with respect to all Shares issued in connection with the Securities Purchase Agreement.
Subject to the terms and conditions of the Securities Purchase Agreement, the Company, at its sole and exclusive option, may issue
and sell to GPL, and GPL shall purchase from the Company, the Shares upon the Company’s delivery of written notices to GPL.
The aggregate maximum amount of all purchases that GPL shall be obligated to make under the Securities Purchase Agreement shall
not exceed $5,600,000. Once a written notice is received by GPL, it shall not be terminated, withdrawn or otherwise revoked by
the Company. GPL is not obligated to purchase any Shares unless and until the Company has registered the Shares pursuant to a registration
statement on Form S-1 (or on such other form as is available to the Company), which is required to be effective within 11 months
of the execution of the Agreements. Pursuant to the Securities Purchase Agreement, each purchase of Shares must be in an amount
equal to at least $100,000 and is capped at the lesser of (i) $175,000 or (ii) 200% of the average daily trading volume as calculated
pursuant to the Securities Purchase Agreement. The purchase price per share for each purchase of Shares to be paid by GPL shall
be 80% of the lowest trading price (or if there are no recorded trades, the lowest closing price) during the Valuation Period (as
defined and calculated pursuant to the Securities Purchase Agreement). In exchange of GPL signing the Securities Purchase Agreements,
the Company issued to GPL a Convertible Promissory Note (Note 6) in the principal amount of $250,000 as payment of a commitment
fee to induce GPL to enter into the Agreements.
On March 27, 2017, Kodiak
Capital Group, LLC, (“KCG”) has claimed an event of default under a convertible promissory note in the principal amount
of $215,000 issued by the company pursuant to the Company’s failure to deliver shares of the Company’s common stock
pursuant to a conversion notice served on the company. KCG has also alleged various defaults with reference to a convertible promissory
note in the principal amount of $60,000. As a result of these various alleged defaults KCG has sent the Company a claim in the
sum of $2,608,572 as of March 27, 2017. KCG claims that the claim amount continues to increase in accordance to the terms of the
notes. The Company is disputing the payment of the $215,000 note with Kodiak and is considering initiating an action against KCG
for obtaining the note by fraudulent means and may claim damages as well. Management believes that this claim has no merit. There
is no litigation currently pending. The Company issued 3,661,150 shares of treasury common stock of the Company (the “Shares”)
related to the conversion of $40,800 convertible notes held by KCG during the period ended March 31, 2017.
NOTE 4 – RELATED PARTY TRANSACTIONS AND BALANCES
The Company has advances
payable to its current majority shareholder totaling $25,000 as of March 31, 2016, and $34,932 as of December 31, 2016. During
the three months ended March 31, 2017, $9,932 were reimbursed to the Company’s current majority shareholder. These advances
were made to be used for working capital. These advances are unsecured, non-interest bearing and due on demand.
The Company has advances
payable to its current Chief Financial Officer, who is also the Company’s Corporate Secretary, Treasurer, Director and stockholder,
totaling $Nil as of March 31, 2017, and $3,500 as of December 31, 2016. These advances were made to be used for working capital.
During the three months ended March 31, 2017, $3,500 were reimbursed to the Company’s current Chief Financial Officer. These
advances are unsecured, non-interest bearing and due on demand.
During the three months
ended March 31, 2017, the Company has receivables from its current Chief Financial Officer, who is also the Company’s Corporate
Secretary, Treasurer, Director and stockholder, totaling $31,064, and $Nil as of December 31, 2016, which are included in accounts
receivable in the unaudited condensed interim balance sheets. These receivables are non-interest bearing and due on demand.
The Company used Bay
City Transfer Agency & Registrar Inc. (“BCTAR”) to facilitate its stock transfers, corporate services and Edgar
filings until November 9, 2016. Mr. Amersey is listed with the Securities and Exchange Commission as a control person of BCTAR.
For the three months ended March 31, 2017, and 2016, the Company incurred expenses of $Nil and $1,231, respectively, in relation
to these services, which are included in general and administrative expense. The Company has receivables from BCTAR, totaling $14,000
as of March 31, 2017, and $Nil as of December 31, 2016 included in accounts receivable in the unaudited condensed interim balance
sheets. These receivables are non-interest bearing and due on demand.
NOTE 5 – BRAND LICENSE
The Company, entered
into a Brand License Agreement (the “Brand License Agreement”), dated December 29, 2014, with the World Traditional
Fudokan Karate Do Federation (the “WTFSKF”). Under the Agreement: The “Licensed Brand and Trademarks” shall
mean the brand, marks, logos, names, service marks, trademarks, trade names, unexpired patents, utility models, and applications
identified below in this note, and any other United States and foreign patents, utility models, and applications hereafter developed
by the Licensor. The “Licensed Product(s)” shall mean the Licensor’s clothing, accessories and sporting goods,
including basic sporting equipment and additional sporting merchandise, which are products covered, in whole or in part, by the
Licensed Brand and Trademarks identified below in this note, and all modified, improved and derivative versions thereof manufactured
by the Licensee after the Effective Date, and which are added to Exhibit B by agreement of the Parties. Pursuant to the Brand License
Agreement, WTFSKF has granted to the Company the License to use the Marks of WTFSKF and manufacture and sell the Products bearing
the Marks. Pursuant to the Brand License Agreement, in consideration for the License, beginning in 2018, the Company will pay to
WTFSKF an ongoing License Fee. Additionally, the Company issued to WTFSKF 752,000 shares of treasury common stock (the “Shares”)
of the Company in accordance with the Brand License Agreement. WTFSKF has agreed to provide to the Company annual projected sales
forecasts based on its membership and their expected needs for Products (the “Projected Sales”). The Brand License
Agreement requires the License Consideration to be subject to renegotiation by the parties in the event that Projected Sales exceed
actual sales of the Products by more than an agreed upon deviation percentage. Additionally, pursuant to the Brand License Agreement,
the Company may require WTFSKF to either return the Shares or pay to the Company the market value of the Shares at the time of
the execution of the Brand License Agreement (approximately $6,805,600), if the Company terminates the Brand License Agreement
as a result of such deviations within the first 52 months after the execution of the Brand License Agreement. The initial term
of the Brand License Agreement lasts until December 31, 2042, at which time the Brand License Agreement will automatically renew
for successive 25 year terms unless and until either party provides notice of non-renewal or terminates the Brand License Agreement.
Impairment of Brand License Agreement
The Brand License of
$6,805,600 was measured based on the fair value of the stock issued (on December 29, 2014, 752,000 common shares of HPIL Holding
issued at $9.05 per share). Currently, based on the market value of the common shares, 752,000 shares would be equal to the value
of $7,520 (752,000 common shares of HPIL Holding at $0.01 per share). In terms of measuring the Brand License on the value of
the stock issued, the Company would have to write the value down to $7,520. Based on a qualitative assessment, the Company is
uncertain of how its relationship with the WTFSKF will proceed in the future and thus based on this uncertainty, the Company deems
it prudent to value the asset at the current market value of the stock held by the WTFSKF. The Company has simply recognized the
potential of it losing the Brand License due to factors beyond its control and based on this risk has reassessed the value of
the Brand License to be the recoverable amount of the potential return of shares during the year ended December 31, 2016. Based
on the Company assessment of the value of the Brand License, the Company has determined the fair value of the Brand License to
be $7,520 (752,000 common shares of HPIL Holding at $0.01 per share). No amortization has been recognized as of December 31, 2016,
as the Brand License Agreement is not effective until 2018. As a result, an impairment loss of $NIL (December 31, 2016- $6,798,080)
is included in the unaudied condensed interim statements of loss and comprehensive loss. In the event of the Company losing the
Brand License, the Company would seek to reacquire this stock and is thereby assessing the value of the Brand License at the value
of the stock as determined by the market. The impairment loss does not necessarily impact on the future expected cash flow associated
with the Brand License or with the Company’s intent or ability to renew or extend the Brand License Agreement. It simply
recognizes the risk that the Company believes is extant.
Addendum to Brand License Agreement
to Acquire Broadcast Rights
On May 19, 2017, the
Company entered into an addendum to the Brand License Agreement (the “Addendum”) with the WTFSKF whereby the Company
acquired the television, radio and internet rights to the WTFSKF World Karate Championship and the International Karate Gasshuku.
The term of the agreement is for the life of the Brand License Agreement. The Addendum further enhances the ability of the Company
to develop the market under the Brand License Agreement and the Addendum. However, the Company has chosen to follow a prudent and
vigilant course of action in writing down the value of the Brand License. The Company has considered and taken note of Section
350-30-35, the Subsequent Measurement Section that provides guidance on an entity’s subsequent measurement and subsequent
recognition of an item. Situations that may result in subsequent changes to the carrying amount include impairment, credit losses,
fair value adjustments, depreciation and amortization, and so forth. The Company has also taken note of Section 350-30-50, the
Disclosure Section that provides guidance regarding the disclosure in the notes to the financial statements. In some cases, disclosure
may relate to disclosure on the face of the financial statements.
The Licensed Products
The Basic Licensed Products for Licensor’s
affiliates (i.e. athletes, masters and leaders) shall mean: Kimono Karate, Complete Suit, Protection Woman/Man, Official Complete
Suit, Hakama Complete Judge Suit, Embroidered Badge, Karate Belts Kyu / Dan, Official Complete Suit (all together “Basic
Equipment”).
The Additional Licensed Products for Licensor’s
affiliates (i.e. athletes, masters and leaders) and available for fans and amateurs, and for general costumers shall mean: Sport
Suit, Running Top, Running Shorts, T-Shirts, Sport Shoes, Sport bag, Sport Cap, Cap, Gloves, Scarf, Socks, Karate Slippers, other
products need to be approved by the Parties (all together “Additional Sporting Merchandise”).
NOTE 6 – CONVERTIBLE PROMISSORY
NOTES
On November 9, 2016,
the Company issued to GPL a Convertible Promissory Note (the “Note”) in the principal amount of $250,000 as payment
of a commitment fee to induce GPL to enter into the Agreements. The Note accrues interest at the rate of 5% per annum and is due
in full on or before July 30, 2017. The Note also prohibits prepayment of the principal. GPL has the right to convert all or any
portion of the note balance at any time at a conversion price per share of 75% of the lowest Trading Price during the Valuation
Period (as defined and calculated pursuant to the Note), which is adjustable in accordance with the Note terms in the event certain
capital reorganization, merger, or liquidity events of the Company as further described in the Note.
On December 9, 2016,
the Company issued to GPL a Convertible Promissory Note (the “Note”) in the principal amount of $5,000 in exchange
for $5,000 in cash (the “5K Note”). The 5K Note accrues interest at the rate of 5% per annum and is due in full on
or before June 9, 2017. The Note also prohibits prepayment of the principal. GPL has the right to convert all or any portion of
the note balance at any time at a conversion price per share of 75% of the lowest Trading Price during the Valuation Period (as
defined and calculated pursuant to the Note), which is adjustable in accordance with the 5K Note terms in the event certain capital
reorganization, merger, or liquidity events of the Company as further described in the 5K Note.
On June 28, 2016, upon
the signing of the Term Sheet (“Term Sheet”) related to the Equity Purchase Agreement, the Company issued to KCG a
Convertible Promissory Note (the “Note”) in the principal amount of $215,000 as payment of a commitment fee to induce
KCG to enter into the Agreements. The Note is due in full on or before January 28, 2017. The Company may prepay this Note in whole
or in part at any time following at least 15 and no more than 60 days’ advance written notice to the Holder, provided that
the Holder shall retain all rights of conversion until the date of repayment, notwithstanding the pendency of any prepayment notice.
KCG has the right to convert all or any portion of the note balance at any time at a conversion price per share of 50% of the Current
Market Price (as defined and calculated pursuant to the Note), which is adjustable in accordance with the Note terms in the event
certain capital reorganization, merger, or liquidity events of the Company as further described in the Note. Upon an Event of Default
(as defined in the Note), the principal amount increases to $250,000 and the conversion price shall decrease to 25% of the Current
Market Price (as defined and calculated pursuant to the Note).
On December 27, 2016,
the Company and KCG entered an Amendment and Waiver (the “Amendment and Waiver”), pursuant to which KCG waived certain
defaults of the Company under the Note and amended the Note to delete a default provision requiring the Company to file a registration
statement by a certain date, amend a default provision to reflect the Company’s listing on the OTCPink market, and extend
the maturity date to July 28, 2017. The Original Equity Purchase Agreement, Amended Equity Purchase Agreement, Registration Agreement,
Term Sheet, Note, and Amendment and Waiver contain other provisions customary to transactions of this nature.
On December 27, 2016,
the Company and KCG entered into a Securities Purchase Agreement to which the Company sold to KCG a convertible promissory note
in the amount of $60,000 for a purchase price of $50,000. The Company issued to KCG a 15% Convertible Note (the “December
Note”) in the principal amount of $60,000. The December Note accrues interest at the rate of 15% per year and is due in full
on or before December 27, 2017. The Company may prepay this Note in whole at any time prior to 6 months from the issue date on
at least 5 Trading Days (as defined in the December Note) but not more than 10 Trading Days notice, provided that the Holder shall
retain all rights of conversion until the date of repayment, notwithstanding the pendency of any prepayment notice. KCG has the
right to convert all or any portion of the note balance at any time at a conversion price per share of forty percent (40%) lowest
sale price for the Company’s Common Stock during the thirty (30) consecutive Trading Days immediately preceding the Conversion
Date (as defined and calculated pursuant to the Note), which is adjustable in accordance with the Note terms in the event certain
capital reorganization, merger, or liquidity events of the Company as further described in the Note.
On February 17, 2017,
the Company and Power Up Lending Group, Ltd. (“Power Up”) entered into a Securities Purchase Agreement (the “Power
Up Securities Purchase Agreement”), pursuant to which the Company sold to Power Up a convertible promissory note in the amount
of $33,000. Pursuant to the Power Up Securities Purchase Agreement, the Company issued to Power Up a 12% Convertible Note (the
“Power Up Note”) in the principal amount of $33,000. The Power Up Note accrues interest at the rate of 12% per year
and is due in full on or before September 12, 2017. The Company may prepay this Note in whole at any time prior to 6 months from
the issue date on at least 3 Trading Days’ notice, subject to a variable prepayment penalty. Power Up has the right to convert
all or any portion of the note balance at any time at a conversion price per share of sixty-one percent (61%) of the average of
the three (3) lowest sale price for the Company’s Common Stock during the fifteen (15) consecutive Trading Days immediately
preceding the Conversion Date (as defined and calculated pursuant to the Power Up Note), which is adjustable in accordance with
the Note terms in the event certain capital reorganization, merger, or liquidity events of the Company as further described in
the Note.
On June 28, 2016, November
9, 2016, December 9, 2016, December 27, 2016, and February 17, 2017, the Company recorded a discount on the Notes. This discount
is amortized using the effective interest rate method at an interest rate of 58.70%, 100.04%, 132.66%, 48.38%, and 96.16% for the
June 28, 2016, November 9, 2016, December 9, 2016, December 27, 2016, and February 17, 2017 Notes, respectively, over the term
of the Notes.
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Period ended
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|
March 31,
2017
|
|
Face value of June 28, 2016, promissory note payable
|
|
$
|
215,000
|
|
Face value of November 9, 2016, promissory note payable
|
|
|
250,000
|
|
Face value of December 9, 2016, promissory note payable
|
|
|
5,000
|
|
Face value of December 27, 2016, promissory note payable
|
|
|
60,000
|
|
Total face value of promissory notes payable
|
|
|
530,000
|
|
Discount on promissory notes payable
|
|
|
(436,938
|
)
|
Accretion of discount on promissory notes payable
|
|
|
109,234
|
|
Balance December 31, 2016
|
|
$
|
202,296
|
|
Face value of February 17, 2017, promissory note payable
|
|
|
33,000
|
|
Discount on promissory notes payable
|
|
|
(22,581
|
)
|
Accretion of discount on promissory notes payable
|
|
|
132,448
|
|
Face value of June 28, 2016, promissory note payable converted into common stock
|
|
|
(40,800
|
)
|
Balance March 31, 2017
|
|
$
|
304,363
|
|
During the three months ended March 31,
2017, accretion of discount of the Notes amounted to $132,448 (March 31, 2016 - $Nil).
During the three months ended March 31,
2017, interest expense on the Notes amounted to $5,905 (March 31, 2016 - $Nil).
NOTE 7 – CONVERSION OPTION DERIVATIVE
LIABILITY
The Company accounted for the conversion
option of the Notes in accordance with ASC Topic 815 (“Derivatives and Hedging”), under which the conversion option
meets the definition of a derivative instrument.
This conversion option
derivative liability was measured at fair value on the dates of issue and at March 31, 2017 and December 31, 2016, using a binomial
lattice model, with changes in the fair value charged or credited, as applicable, to the unaudited condensed interim statements
of operations and comprehensive loss.
The inputs into the binomial lattice model
for each issuance and at March 31, 2017 and December 31, 2016, are as follows:
|
|
June 28,
|
|
|
November 9,
|
|
|
December 9,
|
|
|
December 27,
|
|
|
December 31,
|
|
|
February 17,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
2017
|
|
|
2017
|
|
Closing share price
|
|
$
|
2.50
|
|
|
$
|
1.60
|
|
|
$
|
1.60
|
|
|
$
|
1.60
|
|
|
$
|
1.60
|
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
Conversion price
|
|
$
|
1.25
|
|
|
$
|
1.20
|
|
|
$
|
0.80
|
|
|
$
|
0.64
|
|
|
|
$0.64- $1.20
|
|
|
$
|
0.01
|
|
|
|
$
0.00 - $0.01
|
|
Risk free rate
|
|
|
0.45
|
%
|
|
|
0.72
|
%
|
|
|
0.85
|
%
|
|
|
0.89
|
%
|
|
|
0.85
|
%
|
|
|
1.27
|
%
|
|
|
1.27
|
%
|
Expected volatility
|
|
|
118
|
%
|
|
|
118
|
%
|
|
|
118
|
%
|
|
|
118
|
%
|
|
|
118
|
%
|
|
|
118
|
%
|
|
|
118
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life
|
|
|
0.59 year
|
|
|
|
0.72 year
|
|
|
|
0.50 year
|
|
|
|
1 year
|
|
|
|
0.08 - 0.99 year
|
|
|
|
0.75 year
|
|
|
|
0.19 – 0.74 year
|
|
The fair value of the
conversion option derivative liability, as determined using the binomial lattice model, was $2,271,221 at March 31, 2017 ($507,668
– December 31, 2016). The change in the fair value of the conversion option derivative liability of $1,786,155 was primarily
due to a decrease in the price of the Company’s common stock, and was recorded as a loss in the unaudited condensed interim
statement of operations and comprehensive loss for the period ended March 31, 2017.
Conversion option derivative liability, beginning balance
|
|
$
|
-
|
|
Origination of conversion option derivative liability on June 28, 2016
|
|
|
215,000
|
|
Origination of conversion option derivative liability on November 9, 2016
|
|
|
158,854
|
|
Origination of conversion option derivative liability on December 9, 2016
|
|
|
5,000
|
|
Origination of conversion option derivative liability on December 27, 2016
|
|
|
60,000
|
|
Loss on change in fair value of conversion option derivative liability, December 31, 2016
|
|
|
68,814
|
|
Balance, December 31, 2016
|
|
$
|
507,668
|
|
Origination of conversion option derivative liability on February 17, 2017
|
|
|
22,581
|
|
Value of conversion option derivative liability on June 28, 2016 convertible promissory note converted into common stock
|
|
|
(45,183
|
)
|
Loss on change in fair value of conversion option derivative liability, March 31, 2017
|
|
|
1,786,155
|
|
Balance, March 31, 2017
|
|
$
|
2,271,221
|
|
NOTE 8 – SUBSEQUENT EVENTS
On April 11, 2017, the
Company and GPL Ventures, LLC (“GPL”) entered into a Securities Purchase Agreement (the “GPL Securities Purchase
Agreement”), pursuant to which the Company sold to GPL a convertible promissory note in the amount of $10,000 for a purchase
price of $10,000. Pursuant to the GPL Securities Purchase Agreement, the Company issued to GPL a 12% Convertible Note (the “GPL
Note”) in the principal amount of $10,000. The GPL Note accrues interest at the rate of 12% per year and is due in full on
or before October 11, 2017. The Company may prepay this Note in whole at any time prior to 30 days from the issue date on at least
3 Trading Days’ notice, upon payment of 125% of the outstanding balance of the GPL Note. GPL has the right to convert all
or any portion of the note balance at any time at a conversion price per share of fifty percent (50%) lowest sale price for the
Company’s Common Stock during the twenty (20) consecutive Trading Days immediately following the clearing of the converted
shares (as defined and calculated in the GPL Note), which is adjustable in accordance with the Note terms in the event certain
capital reorganization, merger, or liquidity events of the Company as further described in the Note.
On May 10, 2017, the
Company and Auctus Funds, LLC (“Auctus”) entered into a Securities Purchase Agreement (the “Auctus Securities
Purchase Agreement”), pursuant to which the Company sold to Auctus a convertible promissory note in the amount of $72,000
for a purchase price of $72,000. Pursuant to the Auctus Securities Purchase Agreement, the Company issued to Auctus a 12% Convertible
Note (the “Auctus Note”) in the principal amount of $72,000. The Auctus Note accrues interest at the rate of 12% per
year and is due in full on or before February 10, 2018. The Company may prepay this Note in whole at any time prior to 60 days
from the issue date on at least 5 Trading Days’ notice, upon payment of (i) 125% of the outstanding balance of the Auctus
Note within 30 days of the issue date, or (ii) 130% of the outstanding balance of the Auctus Note if between 30 and 60 days after
the issue date. The Company shall have no prepayment right after 60 days. Auctus has the right to convert all or any portion of
the note balance at any time at a conversion price per share of thirty percent (30%) lowest sale price for the Company’s
Common Stock during the twenty-five (25) consecutive Trading Days immediately preceding the Conversion Date (as defined and calculated
pursuant to the Auctus Note), which is adjustable in accordance with the Note terms in the event certain capital reorganization,
merger, or liquidity events of the Company as further described in the Note.
On May 19, 2017, the
Company entered into an addendum to the Brand License Agreement (the “Addendum”) with the WTFSKF whereby the Company
acquired the television, radio and internet rights to the WTFSKF World Karate Championship and the International Karate Gasshuku.
The term of the agreement is for the life of the Brand License Agreement. The Addendum further enhances the ability of the Company
to develop the market under the Brand License Agreement and the Addendum. However, the Company has chosen to follow a prudent and
vigilant course of action in writing down the value of the Brand License. The Company has considered and taken note of Section
350-30-35, the Subsequent Measurement Section that provides guidance on an entity’s subsequent measurement and subsequent
recognition of an item. Situations that may result in subsequent changes to the carrying amount include impairment, credit losses,
fair value adjustments, depreciation and amortization, and so forth. The Company has also taken note of Section 350-30-50, the
Disclosure Section that provides guidance regarding the disclosure in the notes to the financial statements. In some cases, disclosure
may relate to disclosure on the face of the financial statements. The Brand License Agreement, including the Addendum, has been
impaired on the books of the Company as discussed in Note 5 above.