The number of shares of Common Stock, $0.001
per share par value, outstanding on May 10, 2018 was 155,463,198 shares.
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
eWELLNESS
HEALTHCARE CORPORATION
CONDENSED
BALANCE SHEETS
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
125,098
|
|
|
$
|
6,882
|
|
Prepaid
expenses
|
|
|
178,147
|
|
|
|
179,827
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
303,245
|
|
|
|
186,709
|
|
|
|
|
|
|
|
|
|
|
Property & equipment,
net
|
|
|
9,237
|
|
|
|
5,021
|
|
Intangible
assets, net
|
|
|
13,216
|
|
|
|
13,954
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
325,698
|
|
|
$
|
205,684
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable
and accrued expenses
|
|
$
|
384,587
|
|
|
$
|
345,956
|
|
Accounts payable
- related party
|
|
|
442,691
|
|
|
|
351,511
|
|
Accrued expenses
- related party
|
|
|
215,388
|
|
|
|
210,828
|
|
Accrued compensation
|
|
|
1,107,005
|
|
|
|
1,071,369
|
|
Contingent liability
|
|
|
90,000
|
|
|
|
90,000
|
|
Convertible debt,
net of discount
|
|
|
667,143
|
|
|
|
444,680
|
|
Derivative liability
|
|
|
502,584
|
|
|
|
1,140,578
|
|
Short
term note and liabilities
|
|
|
180,051
|
|
|
|
180,051
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
3,589,449
|
|
|
|
3,834,973
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
3,589,449
|
|
|
|
3,834,973
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Preferred stock,
authorized, 20,000,000 shares, $.001 par value, 0 shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, authorized
400,000,000 shares, $.001 par value, 148,447,813 and 142,352,406 issued and outstanding, respectively
|
|
|
148,447
|
|
|
|
142,352
|
|
Additional paid in
capital
|
|
|
14,011,547
|
|
|
|
13,178,131
|
|
Accumulated
deficit
|
|
|
(17,423,745
|
)
|
|
|
(16,949,772
|
)
|
|
|
|
|
|
|
|
|
|
Total
Stockholders’ Deficit
|
|
|
(3,263,751
|
)
|
|
|
(3,629,289
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
|
$
|
325,698
|
|
|
$
|
205,684
|
|
The
accompanying notes are an integral part of these condensed financial statements
eWELLNESS
HEALTHCARE CORPORATION
CONDENSED
STATEMENTS OF OPERATIONS
(unaudited)
|
|
For
The
Three Months Ended
|
|
|
|
March
31, 2018
|
|
|
March
31, 2017
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
Executive
compensation
|
|
$
|
102,000
|
|
|
$
|
102,000
|
|
General
and administrative
|
|
|
196,690
|
|
|
|
183,337
|
|
Professional
fees
|
|
|
512,525
|
|
|
|
704,011
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
811,215
|
|
|
|
989,348
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
(811,215
|
)
|
|
|
(989,348
|
)
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Gain
on derivative liability
|
|
|
509,752
|
|
|
|
5,242,634
|
|
Foreign
exchange rate
|
|
|
7,399
|
|
|
|
12,712
|
|
Interest
expense
|
|
|
(179,909
|
)
|
|
|
(103,353
|
)
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) before Income Taxes
|
|
|
(473,973
|
)
|
|
|
4,162,645
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
-
|
|
|
|
(800
|
)
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
(473,973
|
)
|
|
$
|
4,161,845
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
$
|
(0.00
|
)
|
|
$
|
0.07
|
|
Diluted
earnings (loss) per share
|
|
$
|
(0.00
|
)
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
145,882,450
|
|
|
|
60,043,059
|
|
Diluted
average shares outstanding
|
|
|
145,882,450
|
|
|
|
89,107,951
|
|
The
accompanying notes are an integral part of these condensed financial statements
eWELLNESS HEALTHCARE CORPORATION
CONDENSED
STATEMENTS OF CASH FLOWS
(unaudited)
|
|
For
The Three Months Ended
|
|
|
|
March
31, 2018
|
|
|
March
31, 2017
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
(473,973
|
)
|
|
$
|
4,161,845
|
|
Adjustments to reconcile net (loss)
to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
1,459
|
|
|
|
1,207
|
|
Contributed services
|
|
|
55,500
|
|
|
|
55,500
|
|
Shares issued for
consulting services
|
|
|
138,600
|
|
|
|
25,750
|
|
Options expense
|
|
|
108,594
|
|
|
|
108,594
|
|
Amortization of debt
discount
|
|
|
155,033
|
|
|
|
82,443
|
|
Foreign currency
exchange
|
|
|
7,399
|
|
|
|
-
|
|
Gain on derivative
liability
|
|
|
(509,752
|
)
|
|
|
(5,242,634
|
)
|
Amortization of prepaids
|
|
|
126,992
|
|
|
|
462,439
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Prepaid expense
|
|
|
(21,312
|
)
|
|
|
(27,562
|
)
|
Accounts payable
and accrued expenses
|
|
|
36,242
|
|
|
|
55,991
|
|
Accounts payable
- related party
|
|
|
91,180
|
|
|
|
(90,761
|
)
|
Accrued expenses
- related party
|
|
|
4,560
|
|
|
|
73,713
|
|
Accrued
compensation
|
|
|
35,636
|
|
|
|
24,000
|
|
|
|
|
|
|
|
|
|
|
Net cash used
in operating activities
|
|
|
(243,842
|
)
|
|
|
(309,475
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
(4,937
|
)
|
|
|
(2,910
|
)
|
Net cash used
in investing activities
|
|
|
(4,937
|
)
|
|
|
(2,910
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance
of convertible debt
|
|
|
414,550
|
|
|
|
350,000
|
|
Original issue discount
and debt issuance costs
|
|
|
(46,550
|
)
|
|
|
(29,525
|
)
|
Payments
on debt
|
|
|
(1,005
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash provided
by financing activities
|
|
|
366,995
|
|
|
|
320,475
|
|
|
|
|
|
|
|
|
|
|
Net increase in
cash
|
|
|
118,216
|
|
|
|
8,090
|
|
|
|
|
|
|
|
|
|
|
Cash, beginning
of period
|
|
|
6,882
|
|
|
|
13,995
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period
|
|
$
|
125,098
|
|
|
$
|
22,085
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information:
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Taxes
|
|
$
|
-
|
|
|
$
|
800
|
|
Non cash items:
|
|
|
|
|
|
|
|
|
Derivative liability
and debt discount issued with new notes
|
|
$
|
219,526
|
|
|
$
|
-
|
|
Shares issued for
debt conversion
|
|
$
|
213,292
|
|
|
$
|
-
|
|
Shares issued for
prepaids
|
|
$
|
104,000
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these condensed financial statements
eWellness
Healthcare Corporation
Notes
to Condensed Financial Statements
March
31, 2018
(unaudited)
Note
1. The Company
The
Company and Nature of Business
eWellness Healthcare Corporation (the “eWellness”, “Company”, “we”, “us”,
“our”) was incorporated in the State of Nevada on April 7, 2011. The Company has generated no revenues to date.
eWellness
is the first physical therapy telehealth company to offer insurance reimbursable real-time distance monitored treatments. Our
business model is to license our PHZIO (“PHZIO”) platform to any physical therapy (“PT”) clinic in the
U.S. and or have large-scale employers use our PHZIO platform as a fully PT monitored corporate wellness program. The Company’s
PHZIO home physical therapy exercise platform has been designed to disrupt the $30 billion physical therapy and the $8 billion
corporate wellness industries. PHZIO re-defines the way physical therapy can be delivered. PHZIO is the first real-time remote
monitored 1-to-many physical therapy platform for home use. Due to the real-time patient monitoring feature, the PHZIO platform
is insurance reimbursable by payers such as: Anthem Blue Cross and Blue Shield.
eWellness
Healthcare Corporation
Notes
to Condensed Financial Statements
March
31, 2018
(unaudited)
Note
2. Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles
for interim financial statements. Accordingly, they omit or condense notes and certain other information normally included in
financial statements prepared in accordance with U.S. generally accepted accounting principles. The accounting policies followed
for quarterly financial reporting conform with the accounting policies disclosed in Note 2 to the Notes to Financial Statements
included in our Annual Report on Form 10-K for the year ended December 31, 2017. In the opinion of management, all adjustments
necessary for a fair presentation of the financial information for the interim periods reported have been made. All such adjustments
are of a normal recurring nature. The results of operations for the three months ended March 31, 2018 are not necessarily indicative
of the results that can be expected for the fiscal year ending December 31, 2018. The unaudited condensed financial statements
should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for
the year ended December 31, 2017.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of
the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ
materially from these good faith estimates and judgments.
Going
Concern
For
the three months ended March 31, 2018, the Company had no revenues. The Company has an accumulated loss of $17,423,745. In view
of these matters, there is substantial doubt about the Company’s ability to continue as a going concern. The Company’s
ability to continue operations is dependent upon the Company’s ability to raise additional capital and to ultimately achieve
sustainable revenues and profitable operations, of which there can be no guarantee. The Company intends to finance its future
development activities and its working capital needs largely from the sale of public equity securities with some additional funding
from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient
to fund working capital requirements. The financial statements of the Company do not include any adjustments relating to the recoverability
and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company
be unable to continue as a going concern.
Fair
Value of Financial Instruments
As
of March 31, 2018, the Company had the following assets and liabilities measured at fair value on a recurring basis.
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Derivative
Liability
|
|
$
|
502,584
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
502,584
|
|
Total
Liabilities measured at fair value
|
|
$
|
502,584
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
502,584
|
|
eWellness
Healthcare Corporation
Notes
to Condensed Financial Statements
September
30, 2017
(unaudited)
As
of December 31, 2017, the Company had the following assets and liabilities measured at fair value on a recurring basis.
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Derivative
Liability
|
|
$
|
1,140,578
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,140,578
|
|
Total
Liabilities measured at fair value
|
|
$
|
1,140,578
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,140,578
|
|
Note
3. Related Party Transactions
During the three months
ended March 31, 2018, a company for which the Company’s former Secretary-Treasurer and CFO is also serving as CFO,
invoiced the Company $5,800 for accounting services. The amount outstanding as of March 31, 2018 and December 31, 2017 was $1,880
and $700, respectively.
In
April 2015, the Company entered into an operating agreement with a physical therapy company (“EPT”)
which is owned by the Company’s President and Chief Executive Officer. Through the agreement, the Company agrees to
provide operating capital advances for EPT to offer the Company’s PHIZIO platform to physical therapy patients. For
accounting and tax purposes, the net profits or losses generated by EPT shall be allocated monthly. The Company will receive
75% of the net patient insurance reimbursements associated with the operation of the PHIZIO platform.
In November
2016, the Company signed an agreement with a programming company (“PC”) within which one of the Company’s
directors and Chief Technical Officer is the Chief Marketing Officer. The agreement is for additional features to be
programmed for the launch of the PHIZIO platform. The Company is to pay a monthly base fee of $100,000 for the development
and compensation for the Company’s CEO and CTO. Following payment of the initial $100,000, the Company is obligated to
only pay $50,000 monthly until the PC has successfully signed and collected the first monthly service fee for 100 physical
therapy clinics to use the PHIZIO platform. The agreement establishes that the Company is indebted to the PC for $225,000 for
past programming services. For this amount, the Company issued 25,280,899 common shares at a value of $0.0089 per share on
April 1, 2017. The PC will also have the right to appoint 40% of the directors. At the end of March 31, 2018, the Company had
a payable of $440,810 due to this company.
The
Company rents its Culver City, CA office space from a company owned by our CEO. The imputed rent expense of $500 per month is
recorded in the Statement of Operations and Additional Paid in Capital in the Balance Sheet.
Throughout
the period ended March 31, 2018, the officers and directors of the Company incurred business expenses on behalf of the Company.
The amounts payable to the officers as of March 31, 2018 and December 31, 2017 were $3,388 and $5,828, respectively. There were
no expenses due to the board members, but the Company has accrued directors’ fees of $212,000 and $205,000 at March 31,
2018 and December 31, 2017, respectively. Because the Company is not yet profitable the officers have agreed to defer compensation.
The Company had accrued executive compensation of $1,107,005 and $1,071,369 at March 31, 2018 and December 31, 2017 respectively.
eWellness
Healthcare Corporation
Notes
to Condensed Financial Statements
March
31, 2018
(unaudited)
Note
4. Non-Convertible Notes Payable
In February 2017,
the Company was served by a complaint filed by the holder of a note payable. The action was removed from Louisiana state
court to the United States Federal District Court in Baton Rouge, LA. The lawsuit alleges that the Company is indebted to the
note holder a promissory note stemming from four loans to the Company during the 20 months prior to February 2017 amounting
to $75,500 in total original principal bearing interest at 12% per annum, of which $45,202 has been repaid. Further, the note
holder claims that, because of alleged defaults and extensions of the notes, the Company is now indebted in the amount of
$253,877 inclusive of interest and penalties at an effective rate exceeding 70% per annum, far more than the maximum rate
allowable in California or Louisiana. The Company and its counsel have determined that: (i) the note holder is not a licensed
lender in the State of California, where the loan was made and the $75,500 was deposited and therefore was not permitted
under California law to make loans in the State; and (ii) the interest rate the note holder is seeking to collect is usurious
and therefore interest claimed in the lawsuit is neither collectible nor enforceable. In October 2017 the
complainant and his counsel motioned to dismiss the unlicensed lender assertion. In January 2018 the
U.S. District Court, Louisiana ruled that the unlicensed lender assertion was to proceed. The Company and counsel believe
that the suit is wholly without merit and the company will prevail.
At
March 31, 2018, the Company had indebtedness to this holder of the note payable of $180,051 plus $49,625 of accrued interest.
During the three months ended March 31, 2018 and 2017, the Company accrued interest expense totaling $7,991 and $7,991, respectively.
Note
5. Convertible Notes Payable
In
January 2018, the Company executed an 8% Fixed Convertible Promissory Note payable to an institutional investor
in the principal amount of $110,000. The note, which is due on October 12, 2018 has an original issue discount of $10,000.
The convertible notes convert into common stock of the Company at conversion price into which any principal amount and
interest (including any default interest) under the notes shall be convertible into shares of common stock shall be equal to
the lesser of: (i) $0.20 or (ii) 65% of the lowest per share trading price for the fifteen (15) trading days immediately
following the 180
th
calendar day after the Original Issue Date. During the three months ended March 31, 2018, the
Company recognized interest expense of $1,905.
In January
2018, the Company executed an 12% Fixed Convertible Promissory Note payable to an institutional investor in the principal
amount of $91,300. The note, which is due on October 30, 2018 has an original issue discount of $8,300. The convertible notes
convert into common stock of the Company at conversion price into which any principal amount and interest (including any
default interest) under the notes shall be convertible into shares of common stock shall be equal to the lesser of: (i) the
fixed conversion price of $0.20 or (ii) 75% of the VWAP for the trading price for the ten (10) trading days immediately
following the 180
th
calendar day after the Original Issue Date. During the three months ended March 31, 2018, the
Company recognized interest expense of $2,341.
In February
2018, the Company executed an 12% Fixed Convertible Promissory Note payable to an institutional investor in the principal
amount of $63,800. The note, which is due on November 30, 2018 has an original issue discount of $5,800. The convertible
notes convert into common stock of the Company at conversion price into which any principal amount and interest (including
any default interest) under the notes shall be convertible into shares of common stock shall be equal to the lesser of: (i)
the fixed conversion price of $0.20 or (ii) 75% of the VWAP for the trading price for the ten (10) trading days immediately
following the 180
th
calendar day after the Original Issue Date. During the three months ended March 31, 2018, the
Company recognized interest expense of $944.
eWellness
Healthcare Corporation
Notes
to Condensed Financial Statements
March
31, 2018
(unaudited)
In March
2018, the Company executed an 8% Fixed Convertible Promissory Note payable to an institutional investor in the principal
amount of $77,000. The note, which is due on December 5, 2018 has an original issue discount of $7,000. The convertible notes
convert into common stock of the Company at conversion price into which any principal amount and interest (including any
default interest) under the notes shall be convertible into shares of common stock shall be equal to the lesser of: (i) the
fixed conversion price of $0.20 or (ii) 75% of the average of the three daily VWAPs for the trading price for the twenty (20)
trading days before the 181
st
calendar date of the note or the ten (10) trading days if after the 181
st
calendar day of the note. During the three months ended March 31, 2018, the Company recognized interest expense of $439.
In March
2018, the Company executed an 12% Fixed Convertible Promissory Note payable to an institutional investor in the principal
amount of $72,450. The note, which is due on December 30, 2018 has an original issue discount of $9,450. The convertible
notes convert into common stock of the Company at conversion price into which any principal amount and interest (including
any default interest) under the notes shall be convertible into shares of common stock shall be equal to the lesser of: (i)
the fixed conversion price of $0.20 or (ii) 75% of the VWAP for the trading price for the ten (10) trading days immediately
following the 180
th
calendar day after the Original Issue Date. During the three months ended March 31, 2018, the
Company recognized interest expense of $286.
Note
6. Equity Transactions
Common
Stock
In January
2018, the Board of Directors approved the extension of an Advisory Agreement dated February 15, 2015 for one year. The
Company issued 800,000 shares of common stock as compensation with a value of $104,000. This value is being amortized over
the life of the contract.
During the three months
ended March 31, 2018, the Company issued a total of 3,945,407 shares of common stock per debt conversion of convertible notes
dated April, July and September 2017. The total of the debt conversion was $213,292 which includes $5,010 of accrued interest.
During
the three months ended March 31, 2018, the Company issued 1,350,000 shares of common stock for marketing and consulting services
valued at $138,600.
In January
2018, the Board of Directors agreed to form an eWellness Healthcare Corporation 2018 Equity Incentive Plan
(“Plan”). The Plan shall be for 20,000,000 shares of common stock that will be placed in a 10b5-1 Sales Plan that
will be registered under an S-8 Registration Statement. Under the sales plan, each recipient will open an account with Garden
State Securities (“GSS”) for management of all sales of shares issued under the Plan. Quarterly limitations are
placed on the number of shares that can be sold. The Company initially allocated 17,400,000 shares to officers, directors and
consultants. As of March 31, 2018, no shares have been issued.
Stock
Options
The
following is a summary of the status of all Company’s stock options as of March 31, 2018 and changes during the three months
ended on that date:
eWellness
Healthcare Corporation
Notes
to Condensed Financial Statements
March
31, 2018
(unaudited)
|
|
Number
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
of
Stock
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Exercise
Price
|
|
|
Life
(yrs)
|
|
|
Value
|
|
Outstanding
at December 31, 2017
|
|
|
20,000,000
|
|
|
$
|
0.26
|
|
|
|
1.9
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2018
|
|
|
20,000,000
|
|
|
|
0.26
|
|
|
|
1.8
|
|
|
$
|
-
|
|
Options
exercisable at March 31, 2018
|
|
|
14,208,333
|
|
|
$
|
0.30
|
|
|
|
1.8
|
|
|
$
|
-
|
|
The
Company recognized stock option expense of $108,594 and $108,594 for the three months ended March 31, 2018 and 2017.
Warrants
In March 2018,
the Board of Directors, at the request and with the approval of the investors, determined that it was in the best interests
of the Company and the Investors, based upon market price and relatively limited liquidity of the shares of common stock that
the Company revised the expiration date and exercise price for 417,429 unexercised warrants granted on April 9, 2015. The
original expiration date of April 9, 2018 is extended to April 9, 2019. The original exercise price of $.35 is reduced to
$.05.
In
February 2017, the Company authorized the issuance of 68,750 warrants that were issued as part of a convertible note. At March
31, 2018 the fair value of the warrants is $4,529.
In
April 2017, the Company authorized the issuance of 1,232,000 warrants that were issued as part of a convertible note. At March
31, 2018 the fair value of the warrants is $81,417.
The
following is a summary of the status of the Company’s warrants as of March 31, 2018 and changes during the three months
ended on that date:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Number
of
|
|
|
Average
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Life
(yrs.)
|
|
|
Value
|
|
Outstanding at December 31,
2017
|
|
|
8,753,179
|
|
|
$
|
0.21
|
|
|
|
2.4
|
|
|
$
|
0.038
|
|
Granted
|
|
|
417,429
|
|
|
$
|
0.05
|
|
|
|
1.0
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
417,429
|
|
|
$
|
0.35
|
|
|
|
1.0
|
|
|
|
-
|
|
Outstanding at
March 31, 2018
|
|
|
8,753,179
|
|
|
$
|
0.21
|
|
|
|
2.4
|
|
|
$
|
0.038
|
|
Warrants exercisable
at March 31, 2018
|
|
|
8,753,179
|
|
|
$
|
0.21
|
|
|
|
2.4
|
|
|
$
|
0.038
|
|
For
purpose of determining the fair market value of the warrants and options issued during the three months ended March 31, 2018,
we used the Black Scholes option valuation model. These valuations were done throughout the period at the date of issuance and
not necessarily as of the reporting date. The assumptions used in the Black Scholes valuation of the date of issuance are as follows:
eWellness
Healthcare Corporation
Notes
to Condensed Financial Statements
March
31, 2018
(unaudited)
Stock
price on the valuation date
|
|
$
|
.0673
|
|
Exercise price
of warrants
|
|
$
|
.004
and .25
|
|
Dividend
yield
|
|
|
0.00
|
%
|
Years
to maturity
|
|
|
3-4
|
|
Risk
free rate
|
|
|
2.33%
- 2.475
|
%
|
Expected
volatility
|
|
|
257.35%-257.75
|
%
|
Note
7. Commitments, Contingencies
The
Company may be subject to lawsuits, administrative proceedings, regulatory reviews or investigations associated with its business
and other matters arising in the normal conduct of its business. The following is a description of an uncertainty that is considered
other than ordinary, routine and incidental to the business.
The
closing of the Initial Exchange Agreement with Private Co. was conditioned upon certain, limited customary representations and
warranties, as well as, among other things, our compliance with Rule 419 (“Rule 419”) of Regulation C under the Securities
Act of 1933, as amended (the “Securities Act”) and the consent of our shareholders as required under Rule 419. Accordingly,
we conducted a “Blank Check” offering subject to Rule 419 (the “Rule 419 Offering”) and filed a Registration
Statement on Form S-1 to register the shares of such offering; the Registration Statement was declared effective on September
14, 2012. We used 10% of the subscription proceeds as permitted under Rule 419 and the amount remaining in the escrow trust as
of the date of the closing of the Share Exchange was $90,000 (the “Trust Account Balance”).
Rule
419 required that the Share Exchange occur on or before March 18, 2014, but due to normal negotiations regarding the transactions
and the parties’ efforts to satisfy all the closing conditions, the Share Exchange did not close on such date. Accordingly,
after numerous discussions with management of both parties, they entered into an Amended and Restated Share Exchange Agreement
(the “Share Exchange Agreement”) to reflect a revised business combination structure, pursuant to which we would:
(i) file a registration statement on Form 8-A (“Form 8A”) to register our common stock pursuant to Section 12(g) of
the Exchange Act, which we did on May 1, 2014 and (ii) seek to convert the participants of the Rule 419 Offering into participants
of a similarly termed private offering (the “Converted Offering”), to be conducted pursuant to Regulation D, as promulgated
under the Securities Act.
Fifty-two
persons participated in the Rule 419 Offering and each of them gave the Company his/her/its consent to use his/her/its escrowed
funds to purchase shares of the Company’s restricted common stock in the Converted Offering (the “Consent”)
rather than have their funds returned. To avoid further administrative work for the investors, we believe that we took reasonable
steps to inform investors of the situation and provided them with an appropriate opportunity to maintain their investment in the
Company, if they so choose, or have their funds physically returned. Management believed the steps it took constituted a constructive
return of the funds and therefore met the requirements of Rule 419.
However,
pursuant to Rule 419(e)(2)(iv), “funds held in the escrow or trust account shall be returned by first class mail or equally
prompt means to the purchaser within five business days [if the related acquisition transaction does not occur by a date that
is 18 months after the effective date of the related registration statement].” As set forth above, rather than physically
return the funds, we sought consent from the investors of the Rule 419 Offering to direct their escrowed funds to the Company
to instead purchase shares in the Converted Offering. The consent document (which was essentially a form of rescission) was given
to the investors along with a private placement memorandum describing the Converted Offering and stated that any investor who
elected not to participate in the Converted Offering would get 90% of their funds physically returned. Pursuant to Rule 419(b)(2)(vi),
a blank check company is entitled to use 10% of the proceed/escrowed funds; therefore, if a return of funds is required, only
90% of the proceed/escrowed funds need be returned. The Company received $100,000 proceeds and used $10,000 as per Rule 419(b)(2)(vi);
therefore, only $90,000 was subject to possible return.
eWellness
Healthcare Corporation
Notes
to Condensed Financial Statements
March
31, 2018
(unaudited)
As
disclosed therein, we filed the amendments to the initial Form 8-K in response to comments from the SEC regarding the Form 8-K
and many of those comments pertain to an alleged violation of Rule 419. The Company continued to provide the SEC with information
and analysis as to why it believes it did not violate Rule 419 but was unable to satisfy the SEC’s concerns. Comments and
communications indicate that Rule 419 requires a physical return of funds if a 419 offering cannot be completed because a business
combination was not consummated within the required time frame; constructive return is not permitted.
Because
of these communications and past comments, we are disclosing that we did not comply with the requirements of Rule 419, which required
us to physically return the funds previously submitted to escrow pursuant to the Rule 419 Offering. Because of our failure to
comply with Rule 419, the SEC may bring an enforcement action or commence litigation against us for failure to strictly comply
with Rule 419. If any claims or actions were to be brought against us relating to our lack of compliance with Rule 419, we could
be subject to penalties (including criminal penalties), required to pay fines, make damages payments or settlement payments. In
addition, any claims or actions could force us to expend significant financial resources to defend ourselves, could divert the
attention of our management from our core business and could harm our reputation.
Ultimately,
the SEC determined to terminate its review of the Initial Form 8-K and related amendments, rather than provide us with additional
opportunities to address their concerns and therefore, we did not clear their comments. It is not possible at this time to predict
whether or when the SEC may initiate any proceedings, when this issue may be resolved or what, if any, penalties or other remedies
may be imposed, and whether any such penalties or remedies would have a material adverse effect on our consolidated financial
position, results of operations, or cash flows. Litigation and enforcement actions are inherently unpredictable, the outcome of
any potential lawsuit or action is subject to significant uncertainties and, therefore, determining currently the likelihood of
a loss, any SEC enforcement action and/or the measurement of the amount of any loss is complex. Consequently, we are unable to
estimate the range of reasonably possible loss. Our assessment is based on an estimate and assumption that has been deemed reasonable
by management, but the assessment process relies heavily on an estimate and assumption that may prove to be incomplete or inaccurate,
and unanticipated events and circumstances may occur that might cause us to change that estimate and assumption. Considering the
uncertainty of this issue and while Management evaluates the best and most appropriate way to resolve same, management determined
to create a reserve on the Company’s Balance Sheet for the $90,000 that was subject to the Consent.
From
time to time the Company may become a party to litigation matters involving claims against the Company. Except as may be outlined
above, the Company believes that there are no current matters that would have a material effect on the Company’s financial
position or results of operations.
eWellness
Healthcare Corporation
Notes
to Condensed Financial Statements
March
31, 2018
(unaudited)
Note
8. Derivative Valuation
The
Company evaluated the convertible debentures and associated warrants in accordance with ASC Topic 815, “Derivatives and
Hedging,” and determined that the conversion feature of the convertible promissory notes was not afforded the exemption
for conventional convertible instruments due to their variable conversion rates. The notes have no explicit limit on the number
of shares issuable, so they did not meet the conditions set forth in current accounting standards for equity classification. In
addition, the warrants have a Most Favored Nations clause resulting in the exercise price of the warrants also not being fixed.
Therefore, these have been characterized as derivative instruments. We elected to recognize the notes under ASU paragraph 815-15-25-4,
whereby there would be a separation into a host contract and derivative instrument. We elected to initially and subsequently measure
the notes and warrants in their entirety at fair value, with changes in fair value recognized in earnings.
The
debt discount is amortized over the life of the note and recognized as interest expense. For the three months ended March
31, 2018 and 2017, the Company amortized the debt discount of $155,033 and $82,443, respectively. The derivative liability is
adjusted periodically according to stock price fluctuations and other inputs and was $502,584 and $1,140,578 at March 31,
2018 and December 31, 2017, respectively.
During
the three months ended March 31, 2018, the Company had the following activity in the derivative liability account:
|
|
Total
|
|
Derivative
liability at December 31, 2017
|
|
$
|
1,140,578
|
|
Addition
of new conversion option derivatives
|
|
|
91,284
|
|
Extinguishment
due to note conversions
|
|
|
(219,526
|
)
|
Changes
in fair value
|
|
|
(509,752
|
)
|
Derivative
liability at March 31, 2018
|
|
$
|
502,584
|
|
For
purposes of determining the fair market value of the derivative liability, the Company used Black Scholes option valuation model.
The significant assumptions used in the Black Scholes valuation of the derivative are as follows:
Stock
price at valuation date
|
|
$
|
.06-.135
|
|
Exercise price
of warrants
|
|
$
|
.004 - .25
|
|
Conversion
rate of convertible debt
|
|
$
|
.0495 – 0.2000
|
|
Risk
free interest rate
|
|
|
1.27%-2.62
|
%
|
Stock
volatility factor
|
|
|
61%-257.75
|
%
|
Years
to Maturity
|
|
|
.01
– 4.0
|
|
Expected
dividend yield
|
|
|
None
|
|
Note
9. Subsequent Events
During
the month of April and to the date of the filing of this report, the Company has issued 400,000 shares of common stock for consulting
services for a value of $34,475.
During
the month of April and to the date of the filing of this report, the Company has issued 6,615,385 shares of common stock for conversion
of convertible debt totaling $215,000.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING
STATEMENTS
This
Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” in Item 2 of Part I of this report include forward-looking statements. These forward-looking statements are
based on our management’s current expectations and beliefs and involve numerous risks and uncertainties that could cause
actual results to differ materially from expectations. In some cases, you can identify forward-looking statements by terminology
such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “potential,” “proposed,” “intended,” or “continue”
or the negative of these terms or other comparable terminology. You should read statements that contain these words carefully,
because they discuss our expectations about our future operating results or our future financial condition or state other “forward-looking”
information. Many factors could cause our actual results to differ materially from those projected in these forward-looking statements,
including but not limited to: variability of our future revenues and financial performance; risks associated with product development
and technological changes; the acceptance of our products in the marketplace by potential future customers; general economic conditions.
You should be aware that the occurrence of any of the events described in this Quarterly Report could substantially harm our business,
results of operations and financial condition, and that upon the occurrence of any of these events, the trading price of our securities
could decline. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot
guarantee future results, growth rates, levels of activity, performance or achievements. We are under no duty to update any of
the forward-looking statements after the date of this Quarterly Report to conform these statements to actual results.
The
following discussion and analysis of financial condition and results of operations relates to the operations and financial condition
reported in the financial statements of eWellness Healthcare Corporation for the three months ended March 31, 2018 and 2017 and
should be read in conjunction with such financial statements and related notes included in this report and the Company’s
Annual Report on Form 10-K for the year ended December 31, 2017.
THE
COMPANY
Overview
eWellness
is the first physical therapy telehealth company to offer insurance reimbursable real-time distance monitored treatments. eWellness
plans to generate revenue from Third Party Healthcare Administrators (“TPA”) employees, PTs and corporate wellness
licensees on a contractually recurring PHZIO session fee basis. Our PHZIO platform is anticipated to transform the access, cost
and quality dynamics of physical therapy (“PT”) delivery for the market participants. eWellness further believes any
patient, employer, health plan or healthcare professional interested in a better approach to PT is a potential PHZIO platform
user.
Our
PHZIO platform completely disrupts the current in-clinic business model of the $30 billion PT industry. Innovators in other industries
have solved access, cost and quality inefficiencies through the implementation of technology platforms and business models that
deliver products and services on-demand and create new economies by connecting and empowering both consumers and businesses. We
have taken the same approach to solving the pervasive access, cost and quality challenges facing the current access to PT clinics.
eWellness’ underlying technology platform is complex, deeply integrated and purpose-built over the past four years for the
evolving PT marketplace. eWellness’ PHZIO platform is highly scalable and can support substantial growth of third party
licensees. eWellness’ PHZIO platform provides for broad interconnectivity between PT practitioners and their patients, uniquely
positioning the Company as a focal point in the rapidly evolving PT industry to introduce innovative, technology-based solutions,
such as remote patient monitoring, post-discharge treatment plan adherence and in-home care.
The
Company’s PHZIO home PT exercise platform has been designed to disrupt the $30 billion PT and the $8 billion corporate wellness
industries. PHZIO re-defines the way PT can be delivered. PHZIO is the first real-time remote monitored one-to-many PT platform
for home use. Due to the real-time patient monitoring feature, the PHZIO platform is insurance reimbursable by payers such as
Anthem Blue Cross and Blue Shield.
Los
Angeles Sales & Marketing Office:
The Company opened its first sales and marketing office in Playa Vista, California in
May 2017 to accelerate the adoption of PHZIO and the other new digital telehealth tools to patients, physicians and PT’s
in California. The company will also be hiring sales and marketing professionals to manage the new silos of business.
eWellness
will initially rollout these new telehealth solutions within California, New York and Virginia, with plans to expand nationally
over the next 6 months. With these new telehealth tools, eWellness will engage with the “At-Home” Physical Therapy
treatment market. This market involves physical therapy practitioners treating patients in their home instead of a clinic. The
“At-Home” market model when combined with PHZIO offers patients and practitioners a means to receive and deliver PT
services without having to leave work during normal business hours. Patients will be able to receive physical therapy services
at almost any hour of the day. A model that is not currently employed within traditional clinical settings.
Plan
of Operations
Our
business model is to license our PHZIO (“PHZIO”) platform to any physical therapy (“PT”) clinic in the
U.S. and or have large-scale employers use our PHZIO platform as a fully PT monitored corporate wellness program.
The
Company’s 5-Year Agreement with Endeavor Plus.
In October 2017 eWellness executed a 5-year Comprehensive
Physical Therapy Services Agreement with Endeavor Plus Services, Inc. (“EPS”), a fast-growing healthcare plan administrator.
EPS projects having approximately 100,000 healthcare members in 2018. This level of sales will allow the Company to gain cash
flow positive operations during the second half of 2018. Additionally, if EPS can continue their projected growth rate over the
next 12-18 months an additional 500,000 new members would be added. Endeavor Plus, Inc. (“EPI”), the parent company
of EPS, has taken the lead in a movement to assist small group employers to leave fully insured health plans and use partially
self-funded ERISA qualified health insurance plans that are new and innovative and embrace a new era of Consumer-Driven Health
Care Planning (CDHC). EPI’s mission is to bring about innovative changes using existing law and regulations to change the
traditional health insurance models to drive down healthcare costs while offering significantly better benefits to both small
and midsize group employers and their employees. This is accomplished further by having these employers and their employees to
participate in the Endeavor Plus Plan, a CDHC program with technology-driven health care programs that are affordable, manageable
and responsive to the demand for higher quality care with cost transparency, integrated health information and better provider
access and communication and better outcomes.
EPS/PHZIO
Marketing Plans.
eWellness and EPS intend to
immediately commence system, sales and marketing integration, to position eWellness to begin onboarding and treating EPS
members in the second quarter of 2018. EPS is a third-party administrator (TPA), which is an organization that
processes insurance claims or certain aspects of employee benefit plans for small and medium sized companies. EPS is
projecting to grow rapidly in the small group health insurance market which has annual premiums of over $384 billion.
Approximately 84% of this market is traditional full insurance. EPS is expected to grow rapidly by offering these small
employers the ability to self- insure through excellent plan design and reinsurance. The Company is excited to be chosen as
their PT gatekeeper as well as wellness program supplier. Our comprehensive PT & wellness programs and consulting
services are anticipated to provide EPS with new products that will: (1) build new sales channels that increase their current
health insurance business, and (2) create new revenue sources through the introduction of such products.
The
Company Partnership with LifeWallet (“LW”)
In February 2018 the Company signed a Partnership Agreement
to co-market the Company’s PHZIO platform with LW (https://www.lifewallet.com) which provides employers, communities and
healthcare professionals with a simple, consumer centric, integrated platform to assess the health of their population and monitor
their progress towards better health. LifeWallet™ is transforming the delivery of care and revolutionizing the health care
to wellness process with a consumer centric health platform and modern digital assistants that promote better outcomes. LW’s
employees are dedicated to making the best products on earth. LWt™ is creating a one of a kind technology region in the
south and has brought in developers from leading technology companies including Apple.
Concierge
PT Medical Service.
The Company will be provisioning to EPS and/or LW insureds a new and highly unique patient treatment protocol
that includes “white glove” concierge in-home or in-office PT assessments and digital care treatments to enhance the
medical treatment and help improve patient treatment outcomes. The Company will become the exclusive provider of “white
glove” concierge in-home or in-office PT assessments, digital physical therapy and a wellness program to the individuals
covered by EPS and or LW. The Company has been selected to be the gatekeeper for all EPS and or LW PT treatments. As the PT treatment
gatekeeper, the Company will conduct an online consultation with each patient to assess the complexity involved with the patient
presentation. From the online consultation, an in-home or in-office evaluation of the patient may be prescribed. Through this
initial evaluation, a plan of care will be designed for each patient that in most cases is anticipated to include digital therapy
sessions.
PreHabPT.
Any individuals covered by EPS and/or LW, who are seeking non-emergency orthopedic surgery shall first receive a concierge
online consultation, in-home or in-office PT therapy evaluation and will be prescribed a four to eight-week prehabpt.com exercise
program prior to any surgery. Another in-home or in-office PT evaluation will be made following surgery and a treatment plan will
be initiated. PreHabPT is up to an eight-week physician to patient pre-surgical (Prehab) digital therapeutic exercise treatment
system for patients that anticipate having total join replacement (knee, hip and or shoulder) or back surgeries.
PurePT.
PurePT is a patient and independent PT digital treatment platform for connecting new patients to PT’s that are seeking
to be treated with our PHZIO treatment system. Patient program assessments can be made in the privacy of a patient’s home
or office. PurePT connects new patients to PT’s, particularly in states that have direct access rules where patient’s
insurance will reimburse for treatment without requiring a physician’s prescription. PurePT puts the patient first.
PHZIO
Comprehensive Wellness Program
Any EPS and/or LW insureds may, after an in-home or in-office PT assessment, enroll in a 6-month
comprehensive wellness program. The top line wellness goals of our PHZIO wellness exercise program is to graduate at least 60%
of inducted patients through our 6-month program. Patients should expect to experience an average of a 20% reduction in BMI, a
two-inch reduction in waist size, weight loss of at least 10 pounds, significant overall improvement in balance, coordination,
flexibility, strength and lumbopelvic stability. Patients also should score better on Functional Outcomes Scales (Oswestry and
LEFS) which indicates improved functional activity levels due to reduced low back, knee and hip pain.
The
Company’s PHZIO home physical therapy exercise platform has been designed to disrupt the $30 billion physical therapy and
the $8 billion corporate wellness industries. PHZIO re-defines the way physical therapy can be delivered. PHZIO is the first real-time
remote monitored 1-to-many physical therapy platform for home use. Due to the real-time patient monitoring feature, the PHZIO
platform is insurance reimbursable by payers such as: Anthem Blue Cross, AETNA and Blue Shield.
The
PHZIO Solution: A New Physical Therapy Delivery System
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SaaS
technology platform solution for providers bundling rehabilitation services and employer wellness programs;
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First
real-time remote monitored 1-to-many physical therapy treatment platform for home use;
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Ability
for physical therapists to observe multiple patients simultaneously in real-time;
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Solves
what has been a structural problem and limitation in post-acute care practice growth.
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PT
practices can experience 20% higher adherence & compliance rates versus industry standards; and
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Tracking
to 30% increase in net income for a PT practice.
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Our
initial PHZIO platform enables employees or patients to engage with live or on-demand video based physical therapy telemedicine
treatments from their home or office. Following a physician’s exam and prescription for physical therapy to treat back,
knee or hip pain, a patient can be examined by a physical therapist and if found appropriate inducted in the Company’s PHZIO
program that includes a progressive 6-month telemedicine exercise program (including monthly in-clinic checkups). All PHZIO treatments
are monitored by a licensed therapist that sees everything the patient is doing while providing their professional guidance and
feedback in real-time. This ensures treatment compliance by the patient, maintains the safety and integrity of the prescribed
exercises, tracks patient metrics and captures pre-and post-treatment evaluation data. PHZIO unlocks a host of potential for revolutionizing
patient treatment models and directly links back to the established brick and mortar physical therapy clinic. This unique model
enables any physical therapy practice to be able to execute more patient care while utilizing their same resources and creates
more value than was ever before possible.
Our
PHZIO platform, including: design, testing, exercise intervention, follow-up, and exercise demonstration, has been developed by
accomplished Los Angeles based physical therapist Darwin Fogt. Mr. Fogt has extensive experience and education working with diverse
populations from professional athletes to morbidly obese. He understands the most beneficial exercise prescription to achieve
optimal results and has had enormous success in motivating all patient types to stay consistent in working toward their goals.
Additionally, his methods have proven effective and safe as he demonstrates exercises with attention to proper form to avoid injury.
Mr. Fogt has established himself as a national leader in his field and has successfully implemented progressive solutions to delivering
physical therapy: he has consulted with and been published by numerous national publications including Runner’s World, Men’s
Health, Men’s Journal, and various Physical Therapy specific magazines; his 13 plus years of experience include rehabilitating
the general population, as well as professional athletes, Olympic gold medalists, and celebrities. He has bridged the gap between
physical therapy and fitness by opening Evolution Fitness, which uses licensed physical therapists to teach high intensity circuit
training fitness classes. He also founded one of the first exclusive prenatal and postnatal physical therapy clinic in the country.
Mr. Fogt is a leader in advancing the profession to incorporate research-based methods and focus on, not only rehabilitation but
also wellness, functional fitness, performance, and prevention. He can recognize that the national healthcare structure (federal
and private insurance) is moving toward a model of prevention and that the physical therapy profession will take a larger role
in providing wellness services to patients.
Innovators
in other industries have solved access, cost and quality inefficiencies through the implementation of technology platforms and
business models that deliver products and services on-demand and create new economies by connecting and empowering both consumers
and businesses. We have taken the same approach to solving the pervasive access, cost and quality challenges facing the current
access to physical therapy clinics.
Our
underlying technology platform is complex, deeply integrated and purpose-built over the three years for the evolving physical
therapy marketplace. Our PHZIO platform is highly scalable and can support substantial growth of third party licensees. Our PHZIO
platform provides for broad interconnectivity between PT practitioners and their patients and, we believe, uniquely positions
us as a focal point in the rapidly evolving PT industry to introduce innovative, technology-based solutions, such as remote patient
monitoring, post-discharge treatment plan adherence and in-home care.
We
plan to generate revenue from third-party PT and corporate wellness licensees on a contractually recurring per PHZIO session fee
basis. Our PHZIO platform is anticipated to transform the access, cost and quality dynamics of physical therapy delivery for all
the market participants. We further believe any patient, employer, health plan or healthcare professional interested in a better
approach to physical therapy is a potential PHZIO platform user.
Before
even launching, we have received a high indication of interest in our service. We think the demand is warranted but recognize
that in the preliminary stages of our services, we may experience bottlenecks in our ability to meet the demand for same. Under
this type of environment, it is critical to maintain awareness of the Company’s operational budget goals and how they are
being met in our attempts to address demand. Regardless of our growth pace, it is critical to shareholder value that we are mindful
of our operational spending.
Investment
Agreement with Tangiers Global, LLC
In February
2017, the Company entered into an Investment Agreement with Tangiers. Pursuant to the terms of the Investment Agreement,
Tangiers committed to purchase up to $5,000,000 of the Company’s common stock over a period of up to 36 months. From
time to time during the 36-month period commencing from the effectiveness of the registration statement, we may deliver a put
notice to Tangiers which states the dollar amount that we intend to sell to Tangiers on a date specified in the put notice.
The maximum investment amount per notice must be no more than 200% of the average daily trading dollar volume of our Common
stock for the ten (10) consecutive trading days immediately prior to date of the applicable put notice and such amount must
not exceed an accumulative amount of $250,000. The minimum put amount is $5,000. The purchase price per share to be paid by
Tangiers will be the 80% of the of lowest trading prices of the Common stock during the 5 trading days including and
immediately following the date on which put notice is delivered to Tangiers.
In
connection with the Investment Agreement with Tangiers, we also entered into a registration rights agreement with Tangiers.
Advisory
Agreement with Fintech Global Consultants
In
March
2018, the Company signed an Advisory Agreement with Fintech Global Consultants [“FGC”
http://f-g-c.com
]
to assist the Company in completing blockchain adaptation across the $30 billion physical therapy and $8 billion wellness
markets with new advanced health tech tools. We believe that out implementation of the new blockchain technology for the
Company’s PHZIO digital treatment platform and our other new health tech tools may have a beneficial impact on patient
care beginning in the third quarter of 2018. The Company has hired a leading international blockchain advisory firm to
further our state of the art PHZIO digital telehealth platform. We believe that by being blockchain enabled, our patients
will have more convenient access to wellness services, seamless storage and access to HIPPA compliant medical records and
simplified insurance reimbursement. In addition, FGC will assist the Company in its planned Initial Coin Offering of up to a
$10 million non-dilutive funding that we believe will help in the implementation and acceleration of PHZIO’s expansion
on a national basis during the next twelve months.
Results
of Operations for the three months ended March 31, 2018 and 2017
REVENUE:
We had no revenues from operations during the three months ended March 31, 2018 and 2017. We expect to generate revenues during
the third quarter of 2018.
OPERATING
EXPENSES
: Total operating expenses decreased to $811,214 for the three months ended March 31, 2018 from $989,348 for the three
months ended March31, 2017. The decrease resulted from a reduction in consultant expense.
NET
LOSS:
The Company incurred a net loss of $473,973 for the three months ended March 31, 2018, compared with a net income of
$4,161,845 for the three months ended March 31, 2017. The significant decrease from income to loss was the result of the revaluation
of the derivative liabilities for the convertible debt and warrants totaling $4,732,882 offset by decreases in consulting expense
as noted above.
Liquidity
and Capital Resources
As
of March 31, 2018, we had negative working capital of $3,286,204 compared to negative working capital of $3,648,264 as of December
31, 2017. The decrease resulted from a decrease in the derivative liability offset by increases in accounts payable and convertible
debt. Cash used in operations was $243,842 and $309,475 for the three months ended March 31, 2018 and 2017, respectively. The
decrease in cash used in operations was because of relative changes in the assets and liabilities. Cash used in investing activities
was $4,937 and $2,910 for the three months ended March 31, 2018 and 2017, respectively. Cash flows provided by financing activities
were $366,995 and $320,475 for the three months ended March 31, 2018 and March 31, 2017, respectively. The increase in cash flows
from financing activities was the issuance of convertible debt for cash. The cash balance as of March 31, 2018 was $125,098.
We
believe that anticipated cash flows from operations will be insufficient to satisfy our ongoing capital requirements. We are seeking
financing in the form of equity capital to provide the necessary working capital. Our ability to meet our obligations and continue
to operate as a going concern is highly dependent on our ability to obtain additional financing. We cannot predict whether this
additional financing will be in the form of equity or debt or be in another form. We may not be able to obtain the necessary additional
capital on a timely basis, on acceptable terms, or at all. In any of these events, we may be unable to implement our current plans
which circumstances would have a material adverse effect on our business, prospects, financial conditions and results of operations.
Contingencies
The
Company may be subject to lawsuits, administrative proceedings, regulatory reviews or investigations associated with its business
and other matters arising in the normal conduct of its business. The following is a description of an uncertainty that is considered
other than ordinary, routine and incidental to the business.
The
closing of the Initial Exchange Agreement with Private Co. was conditioned upon certain, limited customary representations and
warranties, as well as, among other things, our compliance with Rule 419 (“Rule 419”) of Regulation C under the Securities
Act of 1933, as amended (the “Securities Act”) and the consent of our shareholders as required under Rule 419. Accordingly,
we conducted a “Blank Check” offering subject to Rule 419 (the “Rule 419 Offering”) and filed a Registration
Statement on Form S-1 to register the shares of such offering; the Registration Statement was declared effective on September
14, 2012. We used 10% of the subscription proceeds as permitted under Rule 419 and the amount remaining in the escrow trust as
of the date of the closing of the Share Exchange was $90,000 (the “Trust Account Balance”).
Rule
419 required that the Share Exchange occur on or before March 18, 2014, but due to normal negotiations regarding the transactions
and the parties’ efforts to satisfy all the closing conditions, the Share Exchange did not close on such date. Accordingly,
after numerous discussions with management of both parties, they entered into an Amended and Restated Share Exchange Agreement
(the “Share Exchange Agreement”) to reflect a revised business combination structure, pursuant to which we would:
(i) file a registration statement on Form 8-A (“Form 8A”) to register our common stock pursuant to Section 12(g) of
the Exchange Act, which we did on May 1, 2014 and (ii) seek to convert the participants of the Rule 419 Offering into participants
of a similarly termed private offering (the “Converted Offering”), to be conducted pursuant to Regulation D, as promulgated
under the Securities Act.
Fifty-two
persons participated in the Rule 419 Offering and each of them gave the Company his/her/its consent to use his/her/its escrowed
funds to purchase shares of the Company’s restricted common stock in the Converted Offering (the “Consent”)
rather than have their funds returned. To avoid further administrative work for the investors, we believe that we took reasonable
steps to inform investors of the situation and provided them with an appropriate opportunity to maintain their investment in the
Company, if they so choose, or have their funds physically returned. Management believed the steps it took constituted a constructive
return of the funds and therefore met the requirements of Rule 419.
However,
pursuant to Rule 419(e)(2)(iv), “funds held in the escrow or trust account shall be returned by first class mail or equally
prompt means to the purchaser within five business days [if the related acquisition transaction does not occur by a date that
is 18 months after the effective date of the related registration statement].” As set forth above, rather than physically
return the funds, we sought consent from the investors of the Rule 419 Offering to direct their escrowed funds to the Company
to instead purchase shares in the Converted Offering. The consent document was given to the investors along with a private placement
memorandum describing the Converted Offering and stated that any investor who elected not to participate in the Converted Offering
would get 90% of their funds physically returned. Pursuant to Rule 419(b)(2)(vi), a blank check company is entitled to use 10%
of the proceed/escrowed funds; therefore, if a return of funds is required, only 90% of the proceed/escrowed funds need be returned.
The Company received $100,000 proceeds and used $10,000 as per Rule 419(b)(2)(vi); therefore, only $90,000 was subject to possible
return.
As
disclosed in the prior amendments to the Initial Form 8-K, we have filed the prior amendments in response to comments from the
SEC regarding the Form 8-K and many of those comments pertain to the Company’s potential violation of Rule 419. Although
the Company has continued to provide the SEC with information and analysis as to why it believes it did not violate Rule 419,
based upon latest communications with the persons reviewing the Form 8-K, they do not agree with the assessments the Company presented
to them. Comments and communications indicate that Rule 419 requires a physical return of funds if a 419 offering cannot be completed
because a business combination was not consummated within the required time frame; constructive return is not permitted.
Because
of these communications and past comments, we are disclosing that we did not comply with the requirements of Rule 419, which required
us to physically return the funds previously submitted to escrow pursuant to the Rule 419 Offering. Because of our failure to
comply with Rule 419, the SEC may bring an enforcement action or commence litigation against us for failure to strictly comply
with Rule 419. If any claims or actions were to be brought against us relating to our lack of compliance with Rule 419, we could
be subject to penalties (including criminal penalties), required to pay fines, make damages payments or settlement payments. In
addition, any claims or actions could force us to expend significant financial resources to defend ourselves, could divert the
attention of our management from our core business and could harm our reputation.
Ultimately,
the SEC determined to terminate its review of the Initial Form 8-K and related amendments, rather than provide us with additional
opportunities to address their concerns and therefore, we did not clear their comments. It is not possible now to predict whether
or when the SEC may initiate any proceedings, when this issue may be resolved or what, if any, penalties or other remedies may
be imposed, and whether any such penalties or remedies would have a material adverse effect on our consolidated financial position,
results of operations, or cash flows. Litigation and enforcement actions are inherently unpredictable, the outcome of any potential
lawsuit or action is subject to significant uncertainties and, therefore, determining now the likelihood of a loss, any SEC enforcement
action and/or the measurement of the amount of any loss is complex. Consequently, we are unable to estimate the range of reasonably
possible loss. Our assessment is based on an estimate and assumption that has been deemed reasonable by management, but the assessment
process relies heavily on an estimate and assumption that may prove to be incomplete or inaccurate, and unanticipated events and
circumstances may occur that might cause us to change that estimate and assumption. Considering the uncertainty of this issue
and while Management evaluates the best and most appropriate way to resolve same, management determined to create a reserve on
the Company’s Balance Sheet for the $90,000 that was subject to the Consent.
Capital
Expenditure Plan
During the three months ended March 31, 2018, we raised $414,550, less $46,550 for debt issuance costs, in
equity and debt capital and we may require up to an additional $1.6 million in capital during the next 12 months to fully implement
our business plan and fund our operations. Our plan is to utilize the equity capital that we raise, together with anticipated cash
flow from operations, to fund a very significant investment in sales and marketing, concentration principally on advertising and
incentivizing existing customers for the introduction of new customers, among other strategies. However, there can be no assurance
that: (i) we will continue to be successful in raising equity capital in sufficient amounts and/or at terms and conditions satisfactory
to the Company; or (ii) we will generate sufficient revenues from operations, to fulfill our plan of operations. Our revenues are
expected to come from our PHZIO platform services. As a result, we will continue to incur operating losses unless and until we
are able to generate sufficient cash flow to meet our operating expenses and fund our planned sales and market efforts. There can
be no assurance that the market will adopt our portal or that we will generate sufficient cash flow to fund our enhanced sales
and marketing plan. In the event that we are not able to successfully: (i) raise equity capital and/or debt financing; or (ii)
market and significantly increase the number of portal users and revenues from such users, our financial condition and results
of operations will be materially and adversely affected and we will either have to delay or curtail our plan for funding our sales
and marketing efforts.”
Off-Balance
Sheet Arrangements
As
of March 31, 2018 and December 31, 2017, respectively, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii)
of Regulation S-K promulgated under the Securities Act of 1934.
Contractual
Obligations and Commitments
In
February 2017, the Company was served by a complaint filed by a holder of a note payable. The action was removed from
Louisiana state court to the United States Federal District Court in Baton Rouge, LA. The lawsuit alleges that the Company is
indebted to Schoemann under a promissory note stemming from four loans to the Company during the 20 months prior to
February 2017 amounting to $75,500 in total original principal bearing interest at 12% per annum, of which $45,202 has
been repaid. Further the note holder claims that, because of alleged defaults and extensions of the notes,
the Company is now indebted in the amount of $253,677 inclusive of interest and penalties at an effective rate exceeding
70% per annum, far in excess of the maximum rate allowable in California or Louisiana. The Company and its counsel
have determined that: (i) note holder is not a licensed lender in the State of California, where the loan was made and
the $75,500 was deposited and therefore was not permitted under California law to make loans in the State; (ii) the interest
rate the note holder is seeking to collect is usurious and therefore interest claimed in the lawsuit is neither
collectible nor enforceable. In October 2017 the complainant and his counsel motioned to dismiss the
unlicensed lender assertion.
In January
2018 the U.S. District Court, Louisiana ruled in favor of the Company that the unlicensed lender assertion made by the
Company and counsel was to proceed in a matter brought before the court by note holder Rodney Schoeman on January 24, 2017.
The Company and counsel believe that the Schoemann suit is wholly without merit and the Company will prevail.
In
January 2018, the Company executed an 8% Fixed Convertible Promissory Note payable to an institutional investor in
the principal amount of $110,000. The note, which is due on October 12, 2018 has an original issue discount of $10,000. The
convertible notes convert into common stock of the Company at conversion price into which any principal amount and interest
(including any default interest) under the notes shall be convertible into shares of common stock shall be equal to the
lesser of: (i) $0.20 or (ii) 65% of the lowest per share trading price for the fifteen (15) trading days immediately
following the 180
th
calendar day after the Original Issue Date. During the three months ended March 31, 2018, the
Company recognized interest expense of $1,905.
In January
2018, the Company executed an 12% Fixed Convertible Promissory Note payable to an institutional investor in the principal
amount of $91,300. The note, which is due on October 30, 2018 has an original issue discount of $8,300. The convertible notes
convert into common stock of the Company at conversion price into which any principal amount and interest (including any
default interest) under the notes shall be convertible into shares of common stock shall be equal to the lesser of: (i) the
fixed conversion price of $0.20 or (ii) 75% of the VWAP for the trading price for the ten (10) trading days immediately
following the 180
th
calendar day after the Original Issue Date. During the three months ended March 31, 2018, the
Company recognized interest expense of $2,341.
In February
2018, the Company executed an 12% Fixed Convertible Promissory Note payable to an institutional investor in the principal
amount of $63,800. The note, which is due on November 30, 2018 has an original issue discount of $5,800. The convertible
notes convert into common stock of the Company at conversion price into which any principal amount and interest (including
any default interest) under the notes shall be convertible into shares of common stock shall be equal to the lesser of: (i)
the fixed conversion price of $0.20 or (ii) 75% of the VWAP for the trading price for the ten (10) trading days immediately
following the 180
th
calendar day after the Original Issue Date. During the three months ended March 31, 2018, the
Company recognized interest expense of $944.
In March
2018, the Company executed an 8% Fixed Convertible Promissory Note payable to an institutional investor in the principal
amount of $77,000. The note, which is due on December 5, 2018 has an original issue discount of $7,000. The convertible notes
convert into common stock of the Company at conversion price into which any principal amount and interest (including any
default interest) under the notes shall be convertible into shares of common stock shall be equal to the lesser of: (i) the
fixed conversion price of $.0.06 or (ii) 75% of the average of the three daily VWAPs for the trading price for the twenty
(20) trading days before the 181
st
calendar date of the note or the ten (10) trading days if after the 181st
calendar day of the note. During the three months ended March 31, 2018, the Company recognized interest expense of $439.
In March
2018, the Company executed an 12% Fixed Convertible Promissory Note payable to an institutional investor in the principal
amount of $72,450. The note, which is due on December 30, 2018 has an original issue discount of $9,450. The convertible
notes convert into common stock of the Company at conversion price into which any principal amount and interest (including
any default interest) under the notes shall be convertible into shares of common stock shall be equal to the lesser of: (i)
the fixed conversion price of $0.20 or (ii) 75% of the VWAP for the trading price for the ten (10) trading days immediately
following the 180
th
calendar day after the Original Issue Date. During the three months ended March 31, 2018, the
Company recognized interest expense of $286.
From
time to time the Company may become a party to litigation matters involving claims against the Company. Except as may be outlined
above, the Company believes that there are no current matters that would have a material effect on the Company’s financial
position or results of operations.
Critical
Accounting Policies
Please
refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual
Report on Form 10-K for the year ended December 31, 2017, for disclosures regarding the Company’s critical accounting policies
and estimates, as well as any updates further disclosed in our interim financial statements as described in this Form 10-Q.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As
a “smaller reporting company”, we are not required to provide the information under Item 3.
ITEM
4. CONTROLS AND PROCEDURES.
Evaluation
of disclosure controls and procedures.
Our
management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of
our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act as of the end of the period covered
by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, our management recognized
that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving
the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there
are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls
and procedures relative to their costs. The design of any disclosure controls and procedures also is based in part upon certain
assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions.
Based
on that evaluation, our chief executive officer and chief financial officer concluded that, as of March 31, 2018, our disclosure
controls and procedures were not effective to provide reasonable assurance that information we are required to disclose in reports
that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules, regulations and forms, and (ii) that such information is accumulated and communicated
to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions
regarding required disclosure.
Changes
in Internal Control Over Financial Reporting
There
were no changes in the Company’s internal controls over financial reporting that occurred during the period covered by this
report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.