Ex
a
ctus, Inc.
(formerly known as Spiral Energy Tech, Inc.)
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
ASSETS
|
|
|
Current Assets:
|
|
|
Cash
and cash equivalents
|
$
1,960
|
$
161,215
|
Prepaid
expenses
|
12,330
|
11,458
|
Total current assets
|
14,290
|
172,673
|
|
|
|
TOTAL ASSETS
|
$
14,290
|
$
172,673
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
Current Liabilities:
|
|
|
Accounts
payable
|
$
923,429
|
$
735,051
|
Accrued
expenses
|
46,875
|
582,236
|
Note
payable
|
51,400
|
48,000
|
Convertible
notes, net of unamortized debt discount
|
491,788
|
57,796
|
Derivative
liability
|
1,742,000
|
930,000
|
Settlement
payable
|
17,000
|
20,000
|
Interest
payable
|
66,300
|
15,232
|
Total Current Liabilities
|
3,338,792
|
2,388,315
|
|
|
|
Long Term Liabilities:
|
|
|
Convertible
notes payable
|
100,000
|
-
|
Total Long Term Liabilities
|
100,000
|
-
|
|
|
|
TOTAL LIABILITIES
|
3,438,792
|
2,388,315
|
|
|
|
Commitments and contingencies (see note 9)
|
|
|
|
|
|
Stockholders' Deficit:
|
|
|
Preferred
stock: 50,000,000 authorized; $0.0001 par value, 0
shares
|
|
|
issued
and outstanding
|
-
|
-
|
Preferred
stock Series A: 1,000,000 authorized; $0.0001 par value,
0
|
|
|
shares
issued and outstanding
|
-
|
-
|
Preferred
stock Series B-1: 32,000,000 authorized; $0.0001 par
value,
|
|
|
2,800,000
shares issued and outstanding
|
280
|
280
|
Preferred
stock Series B-2: 10,000,000 authorized; $0.0001 par
value,
|
|
|
8,684,000
shares issued and outstanding
|
868
|
868
|
Preferred
stock Series C: 1,733,334 authorized; $0.0001 par
value,
|
|
|
1,733,334
shares issued and outstanding
|
173
|
173
|
Preferred
stock Series D: 200 authorized; $0.0001 par value, 45 and
0
|
|
|
shares
issued and outstanding, respectively
|
1
|
-
|
Common
stock: 650,000,000 shares authorized; $0.0001 par
value,
|
|
|
6,233,524
and 4,383,983 shares issued and outstanding,
|
|
|
respectively
|
623
|
439
|
Additional
paid-in capital
|
7,111,445
|
3,983,171
|
Accumulated
deficit
|
(10,537,892
)
|
(6,200,573
)
|
Total Stockholders' Deficit
|
(3,424,502
)
|
(2,215,642
)
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$
14,290
|
$
172,673
|
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
Exa
c
tus, Inc.
(formerly known as Spiral Energy Tech, Inc.)
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
Revenues
|
$
-
|
$
-
|
|
|
|
Operating Expenses:
|
|
|
General
and administration
|
1,932,607
|
1,219,309
|
Professional
|
203,619
|
499,522
|
Research
and development
|
300,000
|
356,076
|
Impairment
loss
|
-
|
1,050,000
|
Total Operating Expenses
|
2,436,226
|
3,124,907
|
|
|
|
Net Loss from Operations
|
(2,436,226
)
|
(3,124,907
)
|
|
|
|
Other Expenses:
|
|
|
Derivative
loss
|
(828,694
)
|
(667,200
)
|
Loss
on stock settlement
|
(607,929
)
|
-
|
Interest
expense
|
(464,470
)
|
(68,568
)
|
Total Other Expenses
|
(1,901,093
)
|
(735,768
)
|
|
|
|
Net
loss before income taxes
|
(4,337,319
)
|
(3,860,675
)
|
Provision
for income taxes
|
-
|
-
|
|
|
|
Net Loss
|
$
(4,337,319
)
|
$
(3,860,675
)
|
|
|
|
Basic and Diluted Loss per Common Share
|
$
(0.91
)
|
$
(0.91
)
|
|
|
|
Weighted Average Number of Common Shares Outstanding
|
4,764,056
|
4,243,395
|
The accompanying notes are an integral part of these consolidated
financial statements.
(formerly known as Spiral Energy Tech, Inc.)
Consolidated Statements of Stockholders' Deficit
|
Preferred Stock- Series B-1
|
Preferred Stock- Series B-2
|
Preferred Stock- Series C
|
Preferred Stock- Series D
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
2,800,000
|
$
280
|
8,584,000
|
$
858
|
1,733,334
|
$
173
|
-
|
$
-
|
4,258,983
|
$
426
|
$
3,838,244
|
$
(2,339,898
)
|
$
1,500,083
|
Issuance
of Series B-2 preferred stock for cash
|
-
|
-
|
100,000
|
10
|
-
|
-
|
-
|
-
|
-
|
-
|
24,990
|
-
|
25,000
|
Cancellation
of common stock issued for
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
share-based
payment
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(62,500
)
|
(6
)
|
(44
)
|
-
|
(50
)
|
Common
stock issued for debt settlement
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
187,500
|
19
|
119,981
|
|
120,000
|
Net
Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(3,860,675
)
|
(3,860,675
)
|
Balance, December 31, 2017
|
2,800,000
|
280
|
8,684,000
|
868
|
1,733,334
|
173
|
-
|
-
|
4,383,983
|
439
|
3,983,171
|
(6,200,573
)
|
(2,215,642
)
|
Issuance
of Series D preferred stock for cash
|
-
|
-
|
-
|
-
|
-
|
-
|
45
|
1
|
-
|
-
|
549,999
|
-
|
550,000
|
Common
stock issued for debt settlement
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
214,834
|
21
|
343,714
|
-
|
343,735
|
Common
stock issued for services
|
|
|
|
|
|
|
|
|
250,000
|
25
|
17,975
|
|
18,000
|
Common
stock issued upon convesion of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
debt
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
685,644
|
69
|
400,411
|
-
|
400,480
|
Common
stock issued for services
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
125,000
|
12
|
7,988
|
-
|
8,000
|
Common
stock issued for settlement
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
574,063
|
57
|
86,742
|
-
|
86,799
|
Warrants
issued to Series B-2 holder
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
138,679
|
-
|
138,679
|
Related
party debt forgiveness
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,355,372
|
-
|
1,355,372
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
227,394
|
-
|
227,394
|
Net
Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(4,337,319
)
|
(4,337,319
)
|
Balance, December 31, 2018
|
2,800,000
|
$
280
|
8,684,000
|
$
868
|
1,733,334
|
$
173
|
45
|
$
1
|
6,233,524
|
$
623
|
$
7,111,445
|
$
(10,537,892
)
|
$
(3,424,502
)
|
The accompanying notes are an integral part of these consolidated
financial statements.
Exac
t
us, Inc.
(formerly known as Spiral Energy Tech, Inc.)
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
Cash Flows From Operating Activities:
|
|
|
Net
loss
|
$
(4,337,319
)
|
$
(3,860,675
)
|
Adjustments
to reconcile net loss to cash used in operations:
|
|
|
Derivative
expense
|
828,694
|
667,200
|
Officer
and director stock payment
|
500,000
|
-
|
Stock
option expense
|
227,394
|
-
|
Warrant
expense
|
138,679
|
|
Amortization
of discount and debt issuance costs for convertible
notes
|
405,173
|
52,795
|
Impairment
|
-
|
1,050,000
|
Stock
issued for services
|
26,000
|
|
Loss
on debt settlement in stock
|
607,929
|
78,315
|
Changes
in operating assets and liabilities:
|
|
|
(Increase)
decrease in operating assets:
|
|
|
Prepaid
expenses
|
(872
)
|
8,214
|
Increase
(decrease) in operating liabilities:
|
|
|
Accounts
payable
|
188,378
|
210,241
|
Accrued
expenses
|
905,946
|
523,757
|
Settlement
payable
|
(3,000
)
|
20,000
|
Interest
payable
|
47,243
|
15,232
|
Net Cash Used In Operating Activities
|
(465,755
)
|
(1,234,921
)
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
Net Cash From Investing Activities
|
-
|
-
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
Proceeds
from sale of Series B-2 Preferred Stock
|
-
|
25,000
|
Proceeds
from sale of Series D Preferred Stock
|
50,000
|
-
|
Proceeds
from issuance of notes payable
|
103,400
|
48,000
|
Payments
of principal on convertible notes
|
(25,000
)
|
-
|
Proceeds
from issuance of convertible notes
|
178,100
|
267,800
|
Net Cash Provided By Financing Activities
|
306,500
|
340,800
|
|
|
|
Net decrease in cash and cash equivalents
|
(159,255
)
|
(894,121
)
|
Cash and cash equivalents at beginning of year
|
161,215
|
1,055,336
|
|
|
|
Cash and cash equivalents at end of year
|
$
1,960
|
$
161,215
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
Cash
paid for interest
|
$
-
|
$
-
|
Cash
paid for taxes
|
$
-
|
$
-
|
|
|
|
Non-Cash transactions investing and financing
activity:
|
|
|
Forgiveness
of debt by officers and directors
|
$
1,355,372
|
$
-
|
Proceeds
from sale of Preferred Series D stock paid directly to settle
amounts
|
|
due
to officers and directors
|
$
500,000
|
$
-
|
Accounts
payable settled by common stock issued
|
$
85,934
|
$
41,685
|
Convertible
notes settled by common stock
|
$
46,295
|
$
-
|
Initial
benefical conversion feature and debt discount on convertible
notes
|
$
236,500
|
$
374,700
|
Initial
derivative liability on convertible notes
|
$
469,000
|
$
876,000
|
Fair
value of common stock issued on conversion of notes
|
$
400,480
|
$
-
|
Fair
value of common stock issued for settlement of accounts
payable
|
$
343,735
|
$
120,000
|
The
accompanying notes are an integral part of these consolidated
financial statements.
N
O
TE 1. BUSINESS
DESCRIPTION
Exactus, Inc. (the
“Company”) was incorporated on January 18, 2008, as
“Solid Solar Energy, Inc.” in the State of Nevada as a
for-profit Company.
On May 16, 2013, the
Company filed a certificate of amendment to change its name to
“Spiral Energy Tech., Inc.”. On February 29,
2016, the Company acquired all of the issued and outstanding
capital stock of Exactus BioSolutions, Inc. (“Exactus
BioSolutions”) pursuant to a Share Exchange Agreement, dated
February 29, 2016, with Exactus BioSolutions (the “Share
Exchange”). T
he Company
issued 30 million shares of newly-designated Series B-1 Preferred
Stock to the shareholders of Exactus BioSolutions in the Share
Exchange, representing approximately 87% of voting control of the
Company upon consummation of the Share Exchange. As a result of the
Share Exchange, Exactus BioSolutions became a wholly-owned
subsidiary of Exactus, Inc. Effective March 22, 2016, the Company
changed its corporate name to “Exactus, Inc.” via a
merger with its wholly-owned subsidiary, Exactus Acquisition
Corp.
Following the Share Exchange, the Company became a
life science company that plans to develop and commercialize
Point-of-Care (“POC”) diagnostics for measuring
proteolytic enzymes in the blood based on a proprietary detection
platform (the “New Business”). The Company’s
primary product, the FibriLyzer, will employ a disposable test
“biosensor” strip combined with a portable and easy to
use hand held detection unit that provides a result in less than 30
seconds. The initial markets the Company intend to
pursue for the FibriLyzer are
(i) the management of
hyperfibrinolytic states associated with surgery and trauma, (ii)
obstetrics, (iii) acute events such as myocardial infarction and
ischemic stroke, (iv) pulmonary embolism and deep vein thrombosis
and (v) chronic coronary disease management. The Company expects to
follow up the FibriLyzer with similar technology, the MatriLyzer,
to detect collagenase levels in the blood for the detection of the
recurrence of cancer.
The Company
intends to file to gain regulatory approval to sell its products in
the United States, Canada and Europe. Management intends
to primarily focus on the development and commercialization of the
FibriLyzer and related technology exclusively licensed by
Exactus.
In
December 2018, the Company expanded its focus to pursue
opportunities in Cannabidiol (“CBD”). This decision was
based in part on the passing of The Hemp Farming Act of 2018. The
Act was signed into law during December 2018 and removes hemp
(cannabis with less than 0.3% THC) from the Schedule I controlled
substances list. Following passage, CBD derived from industrial
hemp became legal in the US under federal law and in all 50 states,
opening the door to develop and sell hemp-based CBD products
nationwide. The Company’s goal is to rapidly establish one or
more principal sources of supply and to develop wholesale and
retail sales channels for CBD end-products to be sold to humans and
for animal health, such as nutraceuticals, supplements and pet and
farm products. The Company intends to follow regulatorily compliant
pathways by adopting practices established by the FDA for
CBD.
Prior
to the Company’s acquisition of Exactus BioSolutions pursuant
to the Share Exchange, its primary business focus was on developing
and commercializing drone technology (the “Former
Business”).
On
January 11, 2019, the Board of Directors of the Company approved a
reverse stock split of the Company’s Common Stock at a ratio
of 1-for-8 (the “Reverse Stock Split”) including shares
issuable upon conversion of the Company’s outstanding
convertible securities. All share and per share values of the
Company’s common stock for all periods presented in the
accompanying consolidated financial statements are retroactively
restated for the effect of the Reverse Stock Split in accordance
with Staff Accounting Bulletin 4C.
NOTE 2. GOING CONCERN
These consolidated financial statements are presented on the basis
that the Company will continue as a going concern. The going
concern concept contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. No
adjustment has been made to the carrying amount and classification
of the Company’s assets and the carrying amount of its
liabilities based on the going concern uncertainty. The Company has
considered ASU 2014-15 in consideration of reporting requirements
of the going concern financial statements.
As
of December 31, 2018, the Company had no products available for
sale. There can be no assurance that the Company’s technology
will be approved for sale or, if approved for sale, be commercially
successful. In addition, The Company operates in an environment of
rapidly changing technology and is dependent upon the continued
services of its current consultants and
subcontractors.
The
Company had a working capital deficit of approximately $3.3 million
as of December 31, 2018 and incurred a net loss of approximately
$4.3 million for the year then ended.
Management Plans
Over
the last several months the Company and its advisors have been
evaluating numerous opportunities and relationships to increase
shareholder value.
The
Company identified the rapidly growing hemp-based CBD market as a
valuable target for a new company focus. On January 8, 2019, the
Company entered into a Master Product Development and Supply
Agreement with Ceed2Med LLC (“C2M”). C2M owns and
operates cGMP facilities located in the State of Florida and
elsewhere and has the expertise, resources, skills and experience
suitable for CBD rich ingredients including isolates, distillates,
water soluble, and proprietary formulations. Under the Agreement,
the Company has been allotted a minimum of 50 and up to 300
kilograms per month, and up to 2,500 kilograms annually, of CBD
rich ingredients for resale. The Company expects to be able to
offer tinctures, edibles, capsules, topical solutions and animal
health products manufactured for the Company by C2M to satisfy
demand for branded and white-label products that the Company
intends to offer to sell in the future. The Company expects to
begin marketing during the first quarter of
2019.
The
Company expects to realize revenue through our efforts, if
successful, to sell wholesale and retail finished products to third
parties. However, as the Company is in a start-up phase, in a new
business venture, in a rapidly evolving industry, many of our costs
and challenges are new and unknown. In order to fund the
Company’s activities, the Company will need to raise
additional capital either through the issuance of equity and/or the
issuance of debt. In the first quarter of 2019, the Company
accepted subscriptions in a private placement offering of common
stock of approximately $3.0 million.
The
Company will need to obtain further funding through public or
private equity offerings, debt financing, collaboration
arrangements or other sources in order to continue. The issuance of
any additional shares of common stock, preferred stock or
convertible securities could be substantially dilutive to the
Company’s stockholders. In addition, adequate additional
funding may not be available on acceptable terms, or at all. If the
Company is unable to raise capital, it would be forced to delay,
reduce or eliminate research and development programs and may not
be able to continue as a going concern.
NOTE
3. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and
Consolidation
. The consolidated
financial statements and related disclosures have been prepared
pursuant to the rules and regulations of the SEC. The
financial statements have been prepared using the accrual basis of
accounting in accordance with Generally Accepted Accounting
Principles of the United States (“GAAP”). The
Consolidated financial statements include the accounts of the
Company and Exactus Biosolutions, Inc. All significant intercompany
transactions and balances have been eliminated in
consolidation.
Use of
Estimates.
The Company
prepares its financial statements in conformity with GAAP which
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates. Significant estimates for the years ended December
31, 2018 and 2017 include the fair value of derivative liabilities,
contingent liabilities, and stock-based
payments.
Cash and Cash
Equivalents
.
The Company consider
all highly liquid investments purchased with an original maturity
of three months or less to be cash equivalents. The carrying value
of those investments approximates their fair market value due to
their short maturity and liquidity. Cash and cash equivalents
include cash on hand and amounts on deposit with financial
institutions, which amounts may at times exceed federally insured
limits.
As of December 31,
2018, the Company had
no amounts on deposit
that exceeded federally insured limits.
Stock-Based
Compensation.
The Company
recognizes compensation expense for stock-based compensation in
accordance with Financial Accounting Standards Board Accounting
Standards Codification (“ASC”) Topic 718
“
Compensation
-
Stock
Compensation
” and ASC
Topic 505-50
“Equity-Based Payments
to Non-Employees”
. For
employee stock-based awards, the Company calculates the fair value
of the award on the date of grant using the Black-Scholes method
for stock options and the quoted price of its common stock for
unrestricted shares; the expense is recognized over the requisite
service period. For non-employee stock-based awards, the Company
calculate the fair value of the award on the date of grant in the
same manner as employee awards.
Share-based
expense related to the vesting of stock options and the grant of
shares for services totaled $235,394 for the year ended December
31, 2018. There was no share-based expense for the year ended
December 31, 2017.
Research and Development
Expenses.
The Company
follow ASC 730-10, “
Research and
Development
,” and
expenses research and development costs when
incurred. Accordingly, third-party research and
development costs, including designing, prototyping and testing of
product, are expensed when the contracted work has been performed
or milestone results have been achieved. Indirect costs are
allocated based on percentage usage related to the research and
development. Research and development costs of $300,000 and
$356,076 were incurred for the years ended December 31, 2018 and
2017, respectively.
Derivatives and Hedging-
Contracts in Entity’s Own Equity.
In accordance with the provisions of ASC 815
“
Derivatives and
Hedging
” the embedded
conversion features in the convertible notes (Note 5) are not
considered to be indexed to the Company’s stock. As a result,
these are required to be accounted for as derivative financial
liabilities and have been recognized as liabilities on the
accompanying consolidated balance sheets. The fair value of the
derivative financial liabilities are determined using a binomial
model with Monte Carlo simulation and is affected by changes in
inputs to that model including the Company’s stock price,
expected stock price volatility, the expected term, and the
risk-free interest rate. The derivative financial liabilities are
subject to re-measurement at each balance sheet date and any
changes in fair value is recognized as a component in other income
(expenses) (Note 6).
Fair Value
Measurements
. The Company
adopted the provisions of ASC Topic 820, “Fair Value
Measurements and Disclosures”, which defines fair value
as used in numerous accounting pronouncements, establishes a
framework for measuring fair value, and expands disclosure of fair
value measurements. The guidance prioritizes the inputs used in
measuring fair value and establishes a three-tier value hierarchy
that distinguishes among the following:
●
Level
1—Valuations based on unadjusted quoted prices in active
markets for identical assets or liabilities that the Company has
the ability to access.
●
Level
2—Valuations based on quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or
similar assets or liabilities in markets that are not active and
models for which all significant inputs are observable, either
directly or indirectly.
●
Level
3—Valuations based on inputs that are unobservable and
significant to the overall fair value measurement.
Liabilities
are classified based on the lowest level of input that is
significant to the fair value measurements. The Company has not
transferred any liabilities between the classification levels. As
of December 31, 2018 and 2017, the Company has no assets that are
re-measured at fair value, and its liabilities re-measured at fair
value consist of derivative liabilities embedded in convertible
notes, which are measured using Level 3 inputs. See Note
6.
Related
Parties.
The Company
follows ASC 850,
” Related Party
Disclosures,”
for
the identification of related parties and disclosure of related
party transactions.
Income
Taxes.
The Company
accounts for income taxes under ASC 740 “
Income
Taxes
.” Under the asset
and liability method of ASC 740, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. Under FASB ASC 740, the effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period the enactment occurs. A
valuation allowance is provided for certain deferred tax assets if
it is more likely than not that the Company will not realize tax
assets through future operations.
Earnings per
Share
. The Company computes
basic and diluted earnings per share amounts in accordance with ASC
Topic 260, “
Earnings per
Share
.” Basic earnings
per share is computed by dividing net income (loss) available to
common shareholders by the weighted average number of common shares
outstanding during the reporting period. Diluted earnings per share
reflects the potential dilution that could occur if stock options
and other commitments to issue common stock were exercised or
equity awards vest resulting in the issuance of common stock that
could share in the earnings of the Company. For the years
ended December 31, 2018 and 2017, the following potentially
dilutive shares were excluded from the computation of diluted
earnings per shares because their impact was
anti-dilutive:
|
|
|
Stock
Options
|
959,375
|
-
|
Stock
Warrants
|
644,083
|
208,458
|
Preferred
Stock
|
2,602,167
|
1,652,167
|
Convertible
Debt
|
22,134,849
|
424,479
|
Total
|
26,340,474
|
2,285,104
|
Recently Adopted Accounting Pronouncements
In
August 2014, the FASB issued ASU 2014-15, "Presentation of
Financial Statements – Going Concern (Subtopic 205-40),
effective for the annual period ending after December 15, 2016, and
for annual periods and interim periods thereafter. Early
application is permitted. This standard provides guidance about
management’s responsibility to evaluate whether there is
substantial doubt about an entity’s ability to continue as a
going concern and to provide related footnote disclosures. The
guidance is effective for annual reporting periods ending after
December 15, 2016, and early adoption is permitted. The
Company adopted this guidance on January 1, 2017, with no
significant impact the Company’s consolidate financial
position, results of operations or cash flows.
In March 2016, the FASB issued ASU
2016-09,
Improvements to Employee
Share-Based Payment Accounting
,
which amends Accounting Standards Codification (“ASC”)
Topic 718, Compensation – Stock Compensation. ASU 2016-09
simplifies several aspects of the accounting for share-based
payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and
classification on the statement of cash flows. ASU 2016-09 is
effective for fiscal years beginning after December 15, 2016, and
interim periods within those fiscal years and early adoption is
permitted. The adoption of this guidance did not have a material
impact on the Company's consolidated financial
statements.
In August 2016, the FASB issued ASU
2016-15,
Cash Flow Statements,
Classification of Certain Cash Receipts and Cash
Payments
, which addresses eight
specific cash flow classification issues with the objective of
reducing diversity in practice. The amendments are effective for
public business entities for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years. Early
adoption is permitted. The adoption of this guidance did not have a
material impact on the Company's consolidated financial
statements.
In May 2014, the FASB issued ASU No.
2014-09,
Revenue from Contracts with
Customers (Topic 606)
. The ASU
creates a single source of revenue guidance for companies in all
industries. The new standard provides guidance for all revenue
arising from contracts with customers and affects all entities that
enter into contracts to provide goods or services to their
customers, unless the contracts are within the scope of other
accounting standards. It also provides a model for the measurement
and recognition of gains and losses on the sale of certain
nonfinancial assets. This guidance, as amended, must be adopted
using either a full retrospective approach for all periods
presented or a modified retrospective approach and will be
effective for fiscal years beginning after December 15, 2017 with
early adoption permitted. The Company adopted this ASU effective
January 1, 2018 using the modified retrospective method with no
impact on its consolidated financial
statements.
Recent Accounting Pronouncements Not Yet Adopted
In
February 2016, the FASB issued ASU No. 2016-02 (Topic 842). Topic
842 amends a number of aspects of lease accounting, including
requiring lessees to recognize leases with a term greater than one
year as a right-of-use asset and corresponding liability, measured
at the present value of the lease payments. In July 2018, the FASB
issued supplemental adoption guidance and clarification to Topic
842 within ASU 2018-10 “Codification Improvements to Topic
842, Leases” and ASU 2018-11 “Leases (Topic 842):
Targeted Improvements.” The new guidance aims to increase
transparency and comparability among organizations by requiring
lessees to recognize lease assets and lease liabilities on the
balance sheet and requiring disclosure of key information about
leasing arrangements. A modified retrospective application is
required with an option to not restate comparative periods in the
period of adoption. This guidance is effective for the Company on
January 1, 2019 with early adoption permitted. The Company is
currently evaluating the impact of the adoption of this standard on
its consolidated financial statements, which will consist primarily
of a balance sheet gross up of its operating leases to show equal
and offsetting right-of-use assets and lease liabilities. The
Company anticipates using the practical expedients that are
included in the guidance for existing operating leases which allows
a waiver of lease assessment of their respective classification
under the new standard. The Company will adopt the requirements of
the new standard as new arrangements are executed.
On
June 20, 2018, the FASB issued ASU 2018-07,1 which simplifies the
accounting for share-based payments granted to nonemployees for
goods and services. Under the ASU, most of the guidance on such
payments to nonemployees would be aligned with the requirements for
share-based payments granted to employees. Currently, share-based
payment arrangements to nonemployees are accounted for under ASC
718,3 while nonemployee share-based payments issued for goods and
services are accounted for under ASC 505-50. ASC 505-50. Before the
amendment, the major difference for the Company (but not limited
to) was the determination of measurement date which generally is
the date on which the measurement of equity classified share-based
payments becomes fixed. Equity classified share-based payments for
employees was fixed at the time of grant and nonemployee share
based payments. Equity-classified nonemployee share-based payment
awards are no longer measured at the earlier of the date which a
commitment for performance by the counterparty is reached or the
date at which the counterparty’s performance is complete.
They are now measured at the grant date of the award which is the
same as share-based payments for employees. The Company adopt the
requirements of the new rule in the first quarter of
2019.
In
January 2017, the FASB issued Accounting Standards Update 2017-04,
“Intangibles-Goodwill and Other: Simplifying the Test for
Goodwill Impairment” (ASU 2017-04). The standard simplifies
the subsequent measurement of goodwill by eliminating Step 2 from
the goodwill impairment test. Under the amendments of ASU 2017-04,
an entity should perform its goodwill impairment test by comparing
the fair value of a reporting unit with its carrying amount. An
entity will recognize an impairment charge for the amount by which
the carrying amount exceeds the reporting unit’s fair value,
but the loss cannot exceed the total amount of goodwill allocated
to the reporting unit. ASU 2017-04 is effective for the calendar
year ending December 31, 2020. The amendments require a prospective
approach to adoption and early adoption is permitted for interim or
annual goodwill impairment tests. The Company is currently
evaluating the impact of this standard.
In
June 2016, the FASB issued ASU 2017-13, Financial
Instruments-Credit Losses. The standard requires a financial asset
(including trade receivables) measured at amortized cost basis to
be presented at the net amount expected to be collected. Thus, the
income statement will reflect the measurement of credit losses for
newly-recognized financial assets as well as the expected increases
or decreases of expected credit losses that have taken place during
the period. This standard will be effective for the calendar year
ending December 31, 2020. The Company is currently in the process
of evaluating the impact of adoption of this ASU on its
consolidated financial statements.
In
July 2017, the FASB issued ASU No. 2017-11, which amends the FASB
Accounting Standards Codification. Part I of ASU No.
2017-11, Accounting for Certain Financial Instruments with
Down Round Features, changes the classification analysis of certain
equity-linked financial instruments (or embedded features) with
down round features. The guidance is effective for reporting
periods beginning after December 15, 2018 and interim periods
within those fiscal years. Early adoption is permitted The Company
is in the process of evaluating the impact of adopting the guidance
on its consolidated financial statements.
NOTE 4. NOTES PAYABLE
On
June 28, 2017, the Company issued to two of the Company’s
executive officers a promissory note in the principal amount up to
$100,000, which amount may be drawn upon by the Company as bridge
financing for general working capital purposes. The promissory note
accrues interest at a rate of 8.0% per annum and matures on the
earlier of (i) one (1) year from the date of the promissory note,
and (ii) the closing the sale of the Company’s securities in
a single transaction or a series of related transactions from which
at least $500,000 of gross proceeds are raised. As of December 31,
2018 and 2017, the Company has drawn $51,400 and $48,000,
respectively, on the promissory notes. During the years ended
December 31, 2018 and 2017, the Company recognized $3,981 and
$1,967, respectively, of interest expense. As of December 31, 2018
and 2017, the notes had accrued interest balances of $5,928 and
$1,967, respectively
NOTE 5. CONVERTIBLE NOTES
The
Company’s convertible notes consist of the following as of
December 31, 2018 and 2017:
|
|
|
Convertible note in
the amount of $110,000 dated,
August
14, 2017, accruing interest at an annual rate of 8%, matured on
August 14, 2018, and convertible into common stock of the Company
at a conversion price equal to the lesser of (i) $2.00 ($0.25
pre-split) and (ii) 60% of the average of the three lowest trading
prices of the Company’s common stock during the twenty-day
trading period prior to the conversion (the “Note”).
The Company received net proceeds of $87,000 from the issuance of
the Note , after deducting an original issue discount and debt
issuance costs. On December 18, 2017, the Company further amended
the Note to (i) increase the aggregate principal amount of the Note
to $115,000 and (ii) extend the date by which the Company is
required to cause the Registration Statement to become effective to
January 4, 2018. On January 4, 2018, the Company further amended
the Note to (i) increase the aggregate principal amount of the Note
to $125,000 and (ii) extend the date by which the Company is
required to cause the Registration Statement to become effective to
February 1, 2018. In March 2018, the Company paid $25,000 towards
principal of the Note. On May 7, 2018, the Company further amended
the Note to (i) increase the aggregate principal amount of the Note
to $121,481 and (ii) extend the date by which the Company is
required to cause the Registration Statement to become effective to
May 31, 2018. On June 11, 2018, the holder of the Note
converted $10,000 of the principal of the Note into 22,727
post-split shares (181,818 pre-split shares) of common stock. On
July 13, 2018, the holder of the note converted $10,500 of the
principal of the Note to 116,667 post-split shares (933,334
pre-split shares) of common stock. On August 30, 2018, the holder
of the Note converted $10,500 of the principal of the Note to
218,750 post-split shares (1,750,000 pre-split shares) of common
stock. On November 13, 2018, the Company further amended the Note
to (i) increase the aggregate principal amount of the Note by
$10,000 and (ii) extend the date by which the Company is required
to cause the Registration Statement to become effective to December
13, 2018. The Company determined that the conversion feature
embedded in the Note required bifurcation and presentation as a
liability. During the year ended December 31, 2017, the Company
recorded an initial derivative liability of $240,000, resulting in
initial derivative expense of $153,000, and an initial debt
discount of $87,000 to be amortized into interest expense through
the maturity of the Note. During the years ended December 31, 2018
and 2017, the Company recognized $68,589 and $41,411, respectively,
of amortization expense. As of December 31, 2018 and 2017, the
notes had principal balances of $101,481 and $115,000,
respectively, and is carried at $101,481 an $46,411, respectively,
net of remaining discounts of $0 and $68,589,
respectively.
|
$
101,481
|
$
46,411
|
|
|
|
Convertible note in
the amount
of $27,500 dated
,
September 27, 2017, accruing interest
at an annual rate of 8%, matured on September 27, 2018, and
convertible into common stock of the Company at a conversion price
equal to the lesser of (i) $2.00 ($0.25 pre-split) and (ii) 60% of
the average of the three lowest trading prices of the
Company’s common stock during the twenty-day trading period
prior to the conversion (the “Note”). The Company
received net proceeds of $21,750 from the issuance of the Note,
after deducting an original issue discount and debt issuance costs.
On May 7, 2018, the Company further amended the Note to increase
the aggregate principal amount of the Note to $4,125. On
November 13, 2018, the Company amended the Note to (i) increase the
aggregate principal amount of the Note by $5,000 and (ii) extend
the date by which the Company is required to cause the Registration
Statement to become effective to December 13, 2018. The Company
determined that the conversion feature embedded in the Note
required bifurcation and presentation as a liability. During the
year ended December 31, 2017, the Company recorded an initial
derivative liability of $46,000, resulting in initial derivative
expense of $24,450, and an initial debt discount of $21,750 to be
amortized into interest expense through the maturity of the Note.
During the years ended December 31, 2018 and 2017, the Company
recognized $20,177 and $7,323, respectively, of amortization
expense. As of December 31, 2018 and 2017, the notes had principal
balances of $36,625 and $27,500, respectively, and is carried at
$36,625 an $7,323, respectively, net of remaining discounts of $0
and $20,177, respectively.
|
36,625
|
7,323
|
Convertible note in
the amount
of $65,000 dated
,
December 21, 2017, accruing interest
at an annual rate of 12%, matured on December 21, 2018, and
convertible into common stock of the Company at a conversion price
equal to the lesser of (i)
closing sale price of the common
stock on the principal market on the trading day immediately
preceding the closing date and (ii) 60%
of the average of the three lowest trading prices
of the Company’s common stock during the twenty-day trading
period prior to the conversion (the “Note”). The
Company received net proceeds of $62,400 from the issuance of the
Note, after deducting an original issue discount and debt issuance
costs. On March 28, 2018, the Company amended the Note to (i)
increase the aggregate principal amount of the Note to $71,500 and
(ii) adjust the conversion price to the lesser of (i)
closing sale price of the common stock on the principal market on
the trading day immediately preceding the closing date
and (ii) 51% of the average of the three lowest
trading prices of the Company’s common stock during the
twenty-five day trading period prior to the conversion. On November
11, 2018, the holder of the note converted $5,325 of the principal
of the Note to 187,500 post-split shares (1,500,000 pre-split
shares) of common stock. On December 18, 2018, the holder of the
Note converted $4,850 of the principal of the Note to 100,000
post-split shares (800,000 pre-split shares) of common stock. The
Company determined that the conversion feature embedded in the Note
required bifurcation and presentation as a liability. During the
year ended December 31, 2017, the Company recorded an initial
derivative liability of $163,000, resulting in initial derivative
expense of $106,200, and an initial debt discount of $56,800 to be
amortized into interest expense through the maturity of the Note.
During the years ended December 31, 2018 and 2017, the Company
recognized $63,219 and $1,781, respectively, of amortization
expense. As of December 31, 2018 and 2017, the note had principal
balances of $89,588 and $65,000, respectively, and is carried at
$89,588 and $1,781 respectively, net of remaining discounts of $0
and $63,219, respectively.
|
89,588
|
1,781
|
|
|
|
Convertible note in
the amount
of $125,000 dated
,
December 26, 2017, accruing interest
at an annual rate of 12%, matured on September 26, 2018, and
convertible into common stock of the Company at a conversion price
equal to the lesser of (i) the lowest trading price of the
Company's common stock during the twenty-five-day trading period
prior to the issue date of the Note and (ii) 50% of the average of
the three lowest trading prices of the Company’s common stock
during the twenty-five day trading period prior to the conversion
(the “Note”). The Company received net proceeds of
$112,250 from the issuance of the Note, after deducting an original
issue discount and debt issuance costs. On July 11, 2018, the
holder of the note elected to convert interest of $3,120 into
15,000 post-split (120,000 pre-split shares) of common stock. On
November 28, 2018, the holder of the Note converted $2,000 of the
interest of the Note to 25,000 post-split shares (200,000 pre-split
shares) of common stock. The Company determined that the conversion
feature embedded in the Note required bifurcation and presentation
as a liability. During the year ended December 31, 2017, the
Company recorded an initial derivative liability of $427,000,
resulting in initial derivative expense of $324,750, and an initial
debt discount of $102,250 to be amortized into interest expense
through the maturity of the Note. During the years ended December
31, 2018 and 2017, the Company recognized $122,719 and $2,281,
respectively, of amortization expense. As of December 31, 2018 and
2017, the Note had a principal balance of $125,000 for both
periods, and is carried at $125,000 and $2,281 respectively, net of
remaining discounts of $0 and $122,719,
respectively.
|
125,000
|
2,281
|
|
|
|
Convertible note in
the amount
of $58,500 dated
,
March 16, 2018, accruing interest at
an annual rate of 9%, matures on December 16, 2018, and convertible
into common stock of the Company at a conversion price equal to the
lesser of (i) $2.00 ($0.25 pre-split) and (ii) 51% of the average
of the three lowest trading prices of the Company’s common
stock during the twenty-five day trading period prior to the
conversion (the “Note”). The Company received net
proceeds of $41,050 from the issuance of the Note, after deducting
an original issue discount and debt issuance costs. The Company
determined that the conversion feature embedded in the Note
required bifurcation and presentation as a liability. During the
year ended December 31, 2018, the Company recorded an initial
derivative liability of $94,000, resulting in initial derivative
expense of $46,000, and an initial debt discount of $48,000 to be
amortized into interest expense through the maturity of the Note.
During the year ended December 31, 2018, the Company recognized
$65,450 of amortization expense and as of December 31, 2018, the
note is carried at its face value of $58,500.
|
58,500
|
-
|
Convertible note in
the amount
of $60,000 dated
,
June 29, 2018, accruing interest at an
annual rate of 12%, maturing on June 29, 2019, and convertible into
common stock of the Company at a conversion price equal to 50% of
the average of the three lowest trading prices of the
Company’s common stock during the twenty-day trading period
prior to the conversion (the “Note”). The Company
received net proceeds of $51,900 from the issuance of the Note,
after deducting an original issue discount and debt issuance costs.
In December 2018, the Company agreed to increase the principal
balance of note by $30,000 in relation to the assignment of the
Note by the holder to another third party. The Company determined
that the conversion feature embedded in the Note required
bifurcation and presentation as a liability. During the year ended
December 31, 2018, the Company recorded an initial derivative
liability of $120,000, resulting in initial derivative expense of
$63,000, and an initial debt discount of $57,000 to be amortized
into interest expense through the maturity of the Note. During the
year ended December 31, 2018, the Company recognized $30,981 of
amortization expense and as of December 31, 2018, the Note had a
principal balance of $90,000, and is carried at $55,881, net of
un-amortized discounts of $34,119.
|
55,881
|
-
|
|
|
|
Convertible note in
the aggregate amount
of $30,000
dated
,
July 3, 2018, accruing
interest and an annual rate of 12%, maturing on July 3, 2019, and
convertible into common stock of the Company at a conversion price
equal to 50% of the average of the three lowest trading prices of
the Company’s common stock during the twenty-day trading
period prior to the conversion (the “Notes”). The
Company received net proceeds of $28,000 from the issuance of the
Note , after deducting an original issue discount and debt issuance
costs. The Company determined that the conversion feature embedded
in the Note required bifurcation and presentation as a liability.
During the year ended December 31, 2018, the Company recorded an
initial derivative liability of $68,000, resulting in initial
derivative expense of $40,000, and an initial debt discount of
$28,000 to be amortized into interest expense through the maturity
of the Note. During the year ended December 31, 2018, the Company
recognized $16,620 of amortization expense. As of December 31,
2018, the Note had a principal balance of $30,000 and the note is
carried at $14,120, net of un-amortized discount of
$15,880.
|
14,120
|
-
|
|
|
|
Convertible notes
in the aggregate amount
of $70,500
dated
,
October 23, 2018
($35,250) and October 26, 2018 ($35,250), accruing interest at an
annual rate of 12%, maturing in one year, and convertible into
common stock of the Company at a conversion price equal to the
lesser of i) the closing sale price of the Company's common stock
on closing date and ii) 60% of the lowest trading price of the
Company’s common stock during the twenty-day trading period
prior to the conversion (the “Note”). The Company
received net proceeds of $57,000 from the issuance of the Note,
after deducting an original issue discount and debt issuance costs.
The Company determined that the conversion features embedded in the
Notes required bifurcation and presentation as liabilities. During
the year ended December 31, 2018, the Company recorded initial
derivative liabilities of $187,000, resulting in initial derivative
expense of $127,000, and initial debt discounts of $60,000 to be
amortized into interest expense through the maturity of the Note.
During the year ended December 31, 2018, the Company recognized
$15,535 of amortization expense and as of December 31, 2018, the
Note had a principal balance of $70,500 and the notes are carried
at $10,593, net of un amortized discounts of
$59,907.
|
10,593
|
-
|
|
|
|
Convertible
Notes in the aggregate amount of $100,000, issued on March 22,
2018. The Notes bear interest at a rate of 5% per annum and will
mature on February 1, 2023. If a qualified financing from which at
least $5 million of gross proceeds are raised occurs prior to the
maturity date, then the outstanding principal balance of the notes,
together with all accrued and unpaid interest thereon, shall be
automatically converted into a number of shares of the
Company’s common stock at $0.40 ($0.05 pre-split) per Share.
The Notes offers registration rights wherein the Company agrees
that within 45 days of a Qualified Offering, prior to the Maturity
Date, the Company shall file a registration statement with the SEC
registering for resale the shares of Company’s common stock
into which the Notes are convertible. The balance of notes as of
December 31, 2018 totaled $100,000.
|
100,000
|
-
|
|
|
|
Net Carrying Amount
of Convertible Debt
|
$
591,788
|
$
57,796
|
Less: Current
Portion
|
491,788
|
57,796
|
Convertible Notes,
Long Term
|
$
100,000
|
$
0
|
The
following is a summary of the carrying amounts of convertible notes
as of December 31, 2018 and 2017:
|
|
|
Principal
Amount
|
$
701,694
|
$
332,500
|
Less unamortized
debt discount and debt issuance costs
|
(109,906
)
|
(274,704
)
|
Total convertible
debt less unamortized debt discount and debt issuance
costs
|
$
591,788
|
$
57,796
|
During
the years ended December 31, 2018 and 2017, the Company recognized
$55,877 and $4,495, respectively, of interest expense for these
convertible notes. As of December 31, 2018 and 2017, the notes had
accrued interest balances of $60,372 and $4,495,
respectively
NOTE
6. DERIVATIVE LIABILITIES
The Company determined
that the conversion options embedded in the Notes discussed in Note
5 require liability presentation at fair value. Each of these
instruments provide the holder with the right to convert into
common stock at a fixed discount market, with certain notes subject
to a cap on the conversion price. These clauses cause uncertainty
as to the number of shares issuable upon conversion of convertible
debt and accordingly require liability presentation on the balance
sheet in accordance with US GAAP.
The fair value of the
described embedded derivative on all debt was valued at $1,742,000
and $930,000 at December 31, 2018 and 2017,
respectively
.
For the years ended December 31, 2018 and 2017, the Company
measured the fair value of the embedded derivatives using a
binomial model and Monte Carlo simulations, and the following
assumptions:
|
|
|
Expected
Volatility
|
|
|
Expected
Term
|
|
|
Risk Free
Rate
|
|
|
Dividend
Rate
|
0.00%
|
0.00%
|
The
Company recorded change in fair value of the derivative liability
on debt to market resulting in non-cash, non-operating loss of
$433,855 and $54,000 for the year ended December 31, 2018 and 2017,
respectively.
During
the year ended December 31, 2018 and 2017 the Company reclassed the
derivative liability of $90,855 and $0, respectively, to additional
paid in capital on conversion of convertible note.
The
following table provides a summary of derivative activity for years
ended December 31, 2018 and 2017:
Balance, December
31, 2016
|
$
-
|
Initial
fair value at note issuances
|
876,000
|
Change
in fair value
|
54,000
|
Balance, December
31, 2017
|
930,000
|
Initial
fair value at note issuances
|
469,000
|
On
conversions and repayments
|
(90,855
)
|
Change
in fair value
|
433,855
|
Balance, December
31, 2018
|
$
1,742,000
|
Net loss for the
year included in earnings relating to the liabilities held at
December 31, 2018
|
$
433,855
|
Non-cash interest
expenses related to derivative liability
|
$
394,839
|
NOTE 7. STOCKHOLDERS’ DEFICT
On
January 11, 2019, the Board of Directors of the Company approved a
reverse stock split of the Company’s Common Stock at a ratio
of 1-for-8 including shares issuable upon conversion of the
Company’s outstanding convertible securities. All share and
per share values of the Company’s common stock for all
periods presented in the accompanying consolidated financial
statements are retroactively restated for the effect of the Reverse
Stock Split in accordance with Staff Accounting Bulletin
4C.
Preferred Stock
The Company’s authorized preferred stock consists of
50,000,000 shares with a par value of
$0.0001.
Series
A
-
On February 17, 2016, the Board of
Directors voted to designate a class of preferred stock entitled
Series A Preferred Stock, consisting of up to five million
(5,000,000) shares, par value
$0.0001.
On December 21, 2018, we filed a Certificate of Cancellation of our
previously filed Certificate of Designation of Preferences, Rights
and Limitations of Series A Preferred Stock in order to designate
1,000,000 shares as a new Series of Preferred Stock for issuance to
former Holders of our Notes under the Exchange Agreements, and
filed a new Certificate of Designation of Preferences, Rights and
Limitations of Series A Convertible Preferred Stock.
Pursuant
to the Series A Preferred Certificate of Designation, the Company
issued shares of Series A Preferred. Each share of Series A
Preferred has a stated value of $1.00 per share. In the
event of a liquidation, dissolution or winding up of the Company,
each share of Series A Preferred Stock will be entitled to a
payment as set forth in the Certificate of Designation. The Series
A Preferred is convertible into such number of shares of the
Company’s common stock, par value $0.0001 per share equal to
the Stated Value of $8.00 ($1.00 pre-split), divided by $0.20
($0.025 per share pre-split), subject to adjustment in the event of
stock split, stock dividends, and recapitalization or
otherwise. Pursuant to the Exchange Agreements each
holder of Notes shall be issued Series A Preferred in the amount of
the purchase price paid for such Notes by the buyer under the
Exchange Agreement, including any penalty, interest and premium
payments. Each share of Series A Preferred entitles the holder to
vote on all matters voted on by holders of Common Stock as a single
class. With respect to any such vote, each share of Series A
Preferred entitles the holder to cast such number of votes equal to
the number of shares of Common Stock such share of Series A
Preferred is convertible into at such time, but not in excess of
the conversion limitations set forth in the Series A Preferred
Certificate of Designation. The Series A Preferred will be entitled
to dividends to the extent declared by the Company.
There
are no shares of Series A preferred stock outstanding as of
December 31, 2018 and 2017.
Series
B-1
- On February 29, 2016, the
Company’s Board of Directors voted to designate a class of
preferred stock entitled Series B-1 Convertible Preferred Stock
(“Series B-1 Preferred Stock”), consisting of up to
thirty-two million (32,000,000) shares, par value
$0.0001. With respect to rights on liquidation, winding
up and dissolution, the Series B-1 Preferred Stock ranks pari
passu to the class of common stock. Shares of Series B-1
Preferred Stock have no dividend rights except as may be declared
by the Board in its sole and absolute discretion, out of funds
legally available for that purpose. Shares of Series B-1 Preferred
Stock are convertible, at the option of the holder, into shares of
common stock at a conversion rate of 0.125 post-split shares (1
pre-split shares) for 1 share basis. Holders of Series B-1
Preferred Stock have the right to vote as-if-converted to common
stock on all matters submitted to a vote of holders of the
Company’s common stock. On February 29, 2016, the Company
issued 30,000,000 shares of Series B-1 Preferred Stock, of which
2,800,000 remain outstanding as of December 31, 2018 and
2017.
Series
B-2
- Also on February 17,
2016, the Company’s Board of Directors voted to designate a
class of preferred stock entitled Series B-2 Convertible Preferred
Stock (“Series B-2 Preferred Stock”), consisting of up
to six million (6,000,000) shares, par value $0.0001, with a stated
value of $0.25 per share. With respect to rights on
liquidation, winding up and dissolution, holders of Series B-2
Preferred Stock will be paid in cash in full, before any
distribution is made to any holder of common or other classes of
capital stock, an amount of $0.25 per share. Shares of Series B-2
Preferred Stock have no dividend rights except as may be declared
by the Board in its sole and absolute discretion, out of funds
legally available for that purpose. Shares of Series B-2 Preferred
Stock are convertible, at the option of the holder, into shares of
common stock at a conversion rate of 0.125 post-split shares (1
pre-split shares) for 1 share basis. Holders of Series
B-2 Preferred Stock have the right to vote as-if-converted to
common stock on all matters submitted to a vote of the holders of
the Company’s common stock.
For so long as any
shares of Series B-2 Preferred Stock are issued and
outstanding, the Corporation shall not issue any notes, bonds,
debentures, shares of preferred stock, or any other securities that
are convertible to common stock unless such conversion rights are
at a fixed ratio or a fixed monetary price (Note 9).
On February 29, 2016, the Company
issued 2,084,000 shares of Series B-2 Preferred
Stock.
On August 1, 2016, the Company closed
a private offering of Series B-2 Preferred Stock. The
Company sold a total of 500,000 shares of Series B-2 Preferred
Stock to accredited investors at an offering price of $0.25 per
share, for an aggregate subscription price of
$125,000. No underwriting discounts or commissions have
been paid in connection with the sale of the Series B-2 Preferred
Stock
.
Effective
October 13, 2016, the Company amended the Certificate of
Designation for its Series B-2 Preferred Stock to increase the
number of shares of the Series B-2 Preferred Stock from 6,000,000
to 10,000,000 shares. There were no other changes to the terms of
the Company’s Series B-2 Preferred Stock.
On
October 27, 2016, the Company closed a private offering of Series
B-2 Preferred Stock. The Company sold a total of
6,000,000 shares of Series B-2 Preferred Stock to accredited
investors at an offering price of $0.25 per share, for an aggregate
subscription price of $1,500,000. No underwriting
discounts or commissions have been or will be paid in connection
with the sale of the Series B-2 Preferred Stock.
On
January 26, 2017, the Company closed a private offering of Series
B-2 Preferred Stock. The Company sold a total of 100,000
shares of Series B-2 Preferred Stock to accredited investors at an
offering price of $0.25 per share, for an aggregate subscription
price of $25,000. No underwriting discounts or
commissions have been or will be paid in connection with the sale
of the Series B-2 Preferred Stock.
As
of December 31, 2018 and 2017, 8,684,000 shares of Series B-2
Preferred Stock are issued and outstanding.
Series
C
- On June 30, 2016, the
Company’s Board of Directors approved a Certificate of
Designation authorizing 1,733,334 shares of new Series C Preferred
Stock, par value $0.0001. The Series C Preferred Stock
ranks equally with the Company’s common stock with respect to
liquidation rights and is convertible to common stock at a
conversion rate of 0.125 post-split shares (1 pre-split shares) for
1 share basis. The conversion rights of holders of the
Series C Preferred Stock are limited such that no holder may
convert any shares of preferred stock to the extent that such
holder, immediately following the conversion, would own in excess
of 4.99% of the Company’s issued and outstanding shares of
common stock. This limitation may be increased to 9.99%
upon 61 days written notice by a holder of the Series C Preferred
Stock to the Company. As of December 31, 2018 and 2017,
1,733,334 shares of Series C Preferred Stock are issued and
outstanding.
Series
D
- On March 1, 2018, the
Company’s Board of Directors voted to designate a class of
preferred stock entitled Series D Convertible Preferred Stock
consisting of up to 200 shares, par value $0.0001 to offer for sale
to certain accredited investors, including affiliates of the
Company, with a maximum offering amount of $2,200,000. Pursuant to
the terms of the Series D Subscription Agreement, immediately
following the consummation of an offering of the Company’s
Common Stock for which the gross proceeds of the offering exceed
$5,000,000, each share of Series D automatically converts into
25,000 post-split shares (200,000 pre-split shares) of Common
Stock. Upon the liquidation, dissolution or winding up of the
Company, each holder of Series D Convertible Preferred Stock shall
be entitled to receive, for each share of Series D Convertible
Preferred Stock held, $10,000 per share payable pari passu with the
Company’s Series B-2 Convertible Preferred
Stock. Shares of Series D Preferred Stock have no
dividend rights except as may be declared by the Board in its sole
and absolute discretion, out of funds legally available for that
purpose. Holders of Series D Preferred Stock have the right to vote
as-if-converted to common stock on all matters submitted to a vote
of holders of the Company’s common stock. At no time may
shares of Series D Convertible Preferred Stock be converted if such
conversion would cause the holder to hold in excess of 4.99% of our
issued and outstanding common stock, subject to an increase in such
limitation up to 9.99% of the issued and outstanding common stock
on 61 days’ written notice to the
Company.
On
March 28, 2018, the Company issued 45 shares of Series D Preferred
Stock. The Company received $550,000 in connection with the
Offering including $50,000 in cash for 5 shares of Series D
Preferred Stock and $500,000 in debt re-payment to officers and
directors for 2016 and 2017 bonuses for 40 shares of Series D
Preferred Stock. As of December 31, 2018, 45 shares of Series D
Preferred Stock are issued and outstanding
Common Stock
The Company’s authorized common stock consists of 650,000,000
shares with a par value of $0.0001.
2017
- Cancellation of common stock issued for share-based
payment
- P
ursuant to a services
agreement with IRTH Communications, LLC (“IRTH”) in
which IRTH agreed to perform certain investor relations, financial
communications, and strategic consulting services, the Company
issued $100,000 of the Company’s common stock, or 17,730
post-split shares (141,844 pre-split shares), to IRTH on November
18, 2016 in partial consideration for those services. On December
13, 2016, the Company issued an additional 62,500 post-split shares
(500,000 pre-split shares) of common stock to IRTH pursuant to an
addendum to the services agreement and in consideration of certain
additional services, including telemarketing and investor outreach
services, to be provided by IRTH.
On February 22, 2017, the Company and IRTH
agreed that IRTH would not provide the additional services
pursuant to
an addendum to a services agreement
and the 62,500 post-split shares (500,000
pre-split shares) of common stock issued on December 13, 2016 were
returned to the Company and retired.
2017 - Common stock issued for the settlement of accounts
payable
- On October 19, 2017,
the Company issued 187,500 post-split shares (1,500,000 pre-split
shares) of its common stock, with a fair value of $120,000 to IRTH
to settle $41,685 of outstanding advertising and promotion expenses
and accounted for a debt settlement loss of
$78,315.
2018 - Common stock issued for the settlement of accounts
payable
- During the year ended
December 31, 2018, the Company issued 214,834 post-split shares
(1,718,675 pre-split shares) of its common stock with a fair value
of $343,735 to settle $85,934 of accounts payable and balance
$257,801 recorded as loss on stock settlement.
2018 - Common stock issued for the service
- During the year ended
December 31, 2018, the Company issued 250,000 post-split shares
(2,000,000 pre-split shares) of its common stock with a fair value
of $18,000 recorded as expenses.
2018 - Common stock upon conversion of convertible debt
- During
the year ended December 31, 2018, the Company issued 685,644
post-split shares (5,485,152 pre-split shares) of common stock upon
the conversion of convertible notes and interest of $46,295. The
fair value of shares on conversion was $400,480 having a derivative
value on date of conversion of $90,855 and balance $263,330 was
recorded as loss on stock settlement.
2018 - Common stock issued for services
- During the year ended
December 31, 2018, the Company issued 125,000 post-split shares
(1,000,000 pre-split shares) of common stock, with a fair value of
$8,000 for services rendered.
2018 - Common stock issued for settlement of Preferred B-2
- During
the year ended December 31, 2018, the Company issued 574,063
post-split shares (4,592,500 pre-split shares) of common stock,
with a fair value of $86,798
in settlement with two
holders of our Series B-2 Preferred Stock in exchange for their
agreement to convert their shares of Series B-2 Preferred Stock
into Common Stock, an additional further investment or agreement to
purchase and thereafter restructure certain outstanding notes of
the Company by cancelling such notes in exchange for shares of
newly-designated Series A Preferred Stock of the Company, and
release of any and all claims in connection with their prior
investments.
Common Stock Warrants
On
June 30, 2016, the Company issued warrants to purchase 208,333
post-split (1,666,667 pre-split) common stock shares for a price of
$4.80 post-split ($0.60 pre-split) per share exercisable for three
years to PoC Capital. These warrants have a grant date fair value
of $0.042 post-split ($0.0052 pre-split) per warrant, determined
using the Black-Scholes method based on the following assumptions:
(1) risk free interest rate of 0.71%; (2) dividend yield of 0%; (3)
volatility factor of the expected market price of our common stock
of 27.2%; and (4) an expected life of the warrants of 3 years. The
Company recorded a prepaid expense on these warrants of $8,667 in
June 30, 2016 which was impaired during the year ended December 31,
2017 due to cash constraints to manufacture materials needed for
trial.
On October 15, 2018,
the Company issued 435,750 post-split (3,486,000 pre-split)
warrants with an exercise price of $0.32 post-split ($0.04
pre-split) per share and exercisable for two years to a Series B-2
Holder.
These warrants have a
grant date fair value of $0.32 post-split ($0.0398 pre-split) per
warrant, determined using the Black-Scholes method based on the
following assumptions: (1) risk free interest rate of 2.54%; (2)
dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 396.30%; and (4) an expected life of
the warrants of 2 years. The Company recorded an expense on these
warrants of $138,679.
There
were 644,083 post-split (5,152,667 pre-split) and 208,333
post-split (1,666,667 pre-split) warrants outstanding at December
31, 2018 and December 31, 2017, respectively
|
|
|
|
|
Expiration
|
|
|
|
|
|
|
208,333
|
$
4.80
|
June
30, 2019
|
435,750
|
$
0.32
|
October
15, 2020
|
644,083
|
|
|
Stock Option Plan
In
September 2018, the Company’s stockholders approved the 2018
Equity Incentive Plan (the “2018 Plan”). The 2018 Plan
provides for the issuance of incentive awards in the form of
non-qualified and incentive stock options, stock appreciation
rights, restricted stock awards, and restricted stock unit awards.
The awards may be granted by the Company’s Board of Directors
to its employees, directors and officers and to consultants,
agents, advisors and independent contractors who provide services
to the Company or to a subsidiary of the Company. The exercise
price for stock options must not be less than the fair market value
of the underlying shares on the date of grant. The incentive awards
shall either be fully vested and exercisable from the date of grant
or shall vest and become exercisable in such installments as the
Board or Compensation Committee may specify. Stock options expire
no later than ten years from the date of grant. The aggregate
number of shares of Common Stock which may be issued pursuant to
the Plan is 9,500,000. Unless sooner terminated, the Plan
shall terminate in 10 years.
On September
4, 2018, the Company granted a total of 209,375 post-split
(1,675,000 pre-split) five-year non-qualified stock options to the
Company’s officers exercisable at $0.712 post-split ($0.089
pre-split) per share, of which 138,844 post-split (1,118,750
pre-split) vested immediately, 11,179 post-split (93,750 pre-split)
vest monthly in equal increments over a 16-month period beginning
on September 1, 2018, and 57,812 post-split (462,500 pre-split)
vest monthly in equal increments over a 28-month period beginning
on September 1, 2018. As part of new employment agreements with
three of the Company’s officers, 18,750 post-split (150,000
pre-split) of their remaining unvested options on December 1, 2018
vested immediately.
On
October 22, 2018, the Company granted 250,000 post-split (2,000,000
pre-split) ten-year non-qualified stock options to a consultant
exercisable at $0.32 post-split ($0.04 pre-split) per share, all of
which vested immediately.
On
December 28, 2018, the Company granted 500,000 post-split
(4,000,000 pre-split) ten-year non-qualified stock options to a
consultant exercisable at $0.32 post-split) ($0.04 pre-split) per
share, all of which vested immediately.
The
Company estimates the fair value of stock options using the
Black-Scholes valuation model. Compensation expense related to
stock options granted is measured at the grant date based on the
estimated fair value of the award and is recognized on a
straight-line basis over the requisite service period. The
assumptions used in the Black-Scholes model for the options granted
during the year ended December 31, 2018 are presented
below:
Risk-free interest
rate
|
2.72 – 3.2
%
|
Expected
volatility
|
343.72 –
412.31
%
|
Expected term (in
years)
|
5-10
|
Expected dividend
yield
|
0
%
|
The
risk-free interest rate is based on the U.S. Treasury yield for a
period consistent with the expected term of the option in effect at
the time of the grant. Expected volatility is based on the
historical volatility of the Company’s common stock. The
expected term assumption for stock options granted is the
contractual term of the option award. The Company has never
declared or paid dividends on its common stock and has no plans to
do so in the foreseeable future. Forfeitures are recognized as a
reduction of stock-based compensation expense as they
occur.
The
Company recognized $227,394 of compensation expense relate to the
vesting of stock options for the year ended December 31, 2018.
These amounts are included in general and administrative expenses
on the accompanying statement of operations.
Stock option activity for the year ended December
31, 2018 is presented below
and reflects the effect of the 1
for 8 Reverse Stock Split in January 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
December 31, 2017
|
-
|
$
-
|
-
|
$
-
|
Granted
|
959,375
|
0.41
|
9.00
|
-
|
Exercised
|
-
|
-
|
-
|
-
|
Expired/cancelled
|
-
|
-
|
-
|
-
|
Outstanding at
December 31, 2018
|
959,375
|
$
0.41
|
8.79
|
$
-
|
Vested at December
31, 2018
|
917,708
|
$
0.39
|
8.98
|
$
-
|
The aggregate intrinsic value of options at
December 31
, 2018 is based on the
Company’s closing stock price on that date of $0.16
post-split ($0.02 pre-split) per share. As of
December
31
, 2018, there was $29,663 of total
unrecognized compensation expense related to unvested stock
options, which the Company expects to recognize over the weighted
average remaining period of 2 years.
As of December 31, 2018, the Company had reserved
shares of its common stock for future issuance
and reflects
the effect of the 1 for 8 Reverse Stock Split in January 2019
as follows:
|
|
Stock options
outstanding
|
959,375
|
Available for
future grants under the 2018 Plan
|
228,125
|
Warrants
outstanding
|
644,083
|
Total shares
reserved
|
1,861,583
|
NOTE 8. INCOME TAXES
The
Company accounts for income taxes in accordance with ASC 740 which
prescribes a recognition threshold and measurement process for
financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. ASC 740 also
provides guidance on de-recognition, classification, interest and
penalties, accounting in interim period, disclosure and transition.
There were no unrecognized tax benefits as of December 31, 2018 and
2017.
The
following table summarizes the significant differences between the
U.S. Federal statutory tax rate and the Company’s effective
tax rate for financial statement purposes for the years ended
December 31, 2018 and 2017:
|
|
|
US Federal
Statutory Tax Rate
|
21.00
%
|
21.00
%
|
State
taxes
|
4.35
%
|
4.35
%
|
Change in valuation
allowance
|
(25.35
%)
|
(25.34
%)
|
|
0.00
%
|
0.00
%
|
The tax
effects of temporary differences that give rise to deferred tax
assets and liabilities as of December 31, 2018 and 2017 are
summarized as follows:
|
|
|
Deferred Tax
Assets:
|
|
|
Net
Operating Loss
|
$
2,668,829
|
$
1,285,000
|
Valuation
Allowance
|
(2,668,829
)
|
(1,285,000
)
|
Net Deferred Tax
Asset
|
$
—
|
$
—
|
As of
December 31, 2018, the Company has available federal net operating
loss carry forward of $10.5 million, the most significant of which
expire from 2020 until 2037.
The
Company assess the recoverability of its net operating loss carry
forwards and other deferred tax assets and records a valuation
allowance to the extent recoverability does not satisfy the
“more likely than not” recognition criteria. The
Company continues to maintain the valuation allowance until
sufficient positive evidence exists to support full or partial
reversal. As of December 31, 2018, the Company had a valuation
allowance totaling $2.7 million against its deferred tax assets,
net of deferred tax liabilities, due to insufficient positive
evidence, primarily consisting of losses within the taxing
jurisdictions that have tax attributes and deferred tax
assets.
Since
the Company has recently added to the scope of its activities
efforts to produce, market and sell products made from industrial
hemp containing cannabidiol (CBD).The Company and its Management
has not determined as of the statement date how IRC Section 280E
will affect the deduction of Company related expenditures related
to such business, but Management has provided a Full Valuation
Reserve to the Company’s Deferred Tax Assets.
For
U.S. purposes, the Company has not completed its evaluation of net
operating loss carryforwards utilization limitations under Internal
Revenue Code, as amended (the “Code”), Section 382/383,
change of ownership rules. If the Company has had a change in
ownership, the net operating loss carryforwards would be limited as
to the amount that could be utilized each year and could be
eliminated, based on the Code.
The Tax
Cuts and Jobs Act of 2017 was signed into law on December 22, 2017.
The law includes significant changes to the US Corporate income tax
system, including a Federal corporate rate reduction from 35% to
21%, limitations on the deductibility of interest expense and
executive compensation and the transition of US international
taxation from a worldwide tax system to a territorial tax system.
As the Company is not currently a taxpayer due to ongoing operating
losses, the impact on the financial statements is not material. We
have reflected the lower rates in the calculation above in the
December 31, 2018 information.
NOTE 9. COMMITMENTS AND CONTINGENCIES
In
the ordinary course of business, the Company enter into agreements
with third parties that include indemnification provisions which,
in its judgment, are normal and customary for companies in the
Company’s industry sector. These agreements are typically
with business partners, clinical sites, and suppliers. Pursuant to
these agreements, the Company generally agree to indemnify, hold
harmless, and reimburse indemnified parties for losses suffered or
incurred by the indemnified parties with respect to the
Company’s product candidates, use of such product candidates,
or other actions taken or omitted by us. The maximum potential
amount of future payments the Company could be required to make
under these indemnification provisions is unlimited. The Company
has not incurred material costs to defend lawsuits or settle claims
related to these indemnification provisions. As a result, the
estimated fair value of liabilities relating to these provisions is
minimal. Accordingly, the Company has no liabilities recorded for
these provisions as of December 31, 2018, and 2017.
Through the Share Exchange, the Company acquired
an exclusive license agreement (the “Licensing
Agreement”) between Exactus BioSolutions and Digital
Diagnostics Inc. (“Digital Diagnostics”) that the
Company recognized as an intangible
asset. Pursuant to the Licensing Agreement,
Digital Diagnostics granted to Exactus BioSolutions an exclusive
license to develop, produce and commercialize certain diagnostic
products, including the FibriLyzer and MatriLyzer, that utilize
certain intellectual property rights owned or licensed by Digital
Diagnostics. The Licensing Agreement provides for Exactus
BioSolutions and Digital Diagnostics to collaborate through the
various steps of the product and device development process,
including the development, regulatory approval and
commercialization stages. Exactus BioSolutions is required to pay
Digital Diagnostics, in cash and/or stock, an initial signing
payment, milestone fees triggered by the first regulatory clearance
or approval of each of the FibriLyzer and the MatriLyzer, and
various sales thresholds, and royalty payments based on the net
sales of the products, calculated on a product-by-product basis. In
2016, the Company paid $50,000 to Digital Diagnostics as part of
the initial signing payment under the Licensing Agreement and
$21,659 in legal expenses. As of December 31, 2016, the Company
accrued an additional $171,033 in licensing fees due to closing a
financing transaction in the fourth quarter of 2016, of which
$75,000 was paid during the first quarter of 2017. The Company
accrued the remaining $30,000 due for the initial signing fee
during the third quarter of 2017. The Company has also accrued
interest, per the Licensing Agreement, of $9,802 for the remaining
balance due as of December 31, 2017. As of December 31, 2017,
$134,802 remained due to Digital Diagnostics.
In the
first quarter of 2018, the Company paid the entire balance due to
Digital Diagnostics.
No milestones
have been met and no milestone fees have been paid or accrued
through December 31, 2018.
The
License Agreement is effective until such time as neither Digital
Diagnostics nor Exactus Biosolutions has any obligation to the
other under the Licensing Agreement in any country with respect to
any product. The Licensing Agreement may be terminated by the
Company effective upon at least six (6) months written notice if
regulatory approval has been obtained in the U.S. or in the
European Union, or upon at least three (3) months written notice if
regulatory approval has not been obtained in the U.S. or in the
European Union. Either party may terminate the Licensing Agreement
in the event the other party materially breaches the Licensing
Agreement, or becomes insolvent. On July 16, 2018, the Company
received Notice from Digital Diagnostics, Inc. of the
Licensor’s intent to terminate the Licensing Agreement. The
Company disputes the validity of the Notice and maintains that the
Agreement is in full force and effect until January 19, 2019 (the
“Expiration Date”) and that the Company’s
maintains the right to use the license and intellectual property
granted to the Company under the Agreement until the Expiration
Date. The Company has retained counsel to represent the Company
with regard to the enforceability of the Agreement and related
matters arising from the Notice and is in compliance with the
Dispute Resolution and arbitration provisions of the Agreement. On
January 23, 2019, Digital Diagnostics, Inc., made a demand for
compensation against the Company in connection with an alleged
breach of a License Agreement. No lawsuit has been filed; however,
in the event a lawsuit is filed, the Company intends to vigorously
contest the matter.
On
June 30, 2016, in order to conduct a clinical trial for the
FibriLyzer and other studies, the Company entered into a Master
Services Agreement (the “MSA”) with Integrium LLC
(“Integrium”) and PoC Capital, LLC (“PoC
Capital”). Under the MSA, Integrium has agreed to perform
clinical research services in support of the development of POC
diagnostics devices. Integrium is to conduct one or more
studies in compliance with FDA regulations and pursuant to the
Company’s specific service orders. PoC Capital
has agreed to fund up to the first $1,000,000 in study costs and
fees due to Integrium, with all fees in costs in excess of that
amount being the Company’s sole responsibility, in exchange
for 200,000 post-split (1,600,000 pre-split) shares of the
Company’s common stock, 1,733,334 shares of newly designated
Series C Preferred Stock, and 208,333 post-split (1,666,667
pre-split) warrants to purchase the Company’s common stock at
a price of $4.80 post-split ($0.60 pre-split) per share exercisable
for three years. For the year ended December 31, 2016 the Company
had accounted $1,000,000 as prepaid expenses on the balance sheet
which was impaired during the year ended December 31, 2017 due to
cash constraints to manufacture materials needed for
trial.
On
January 20, 2017, Robert F. Parker (the “petitioner”)
filed a petition in the Supreme Court of the State of New York,
County of New York (the “Court”), naming, among others,
the Company and Ezra Green, a former shareholder, director and
officer of the Company, as respondents. The petition was received
by the Company on February 7, 2017.
The
parties reached an agreement on settlement which requires
co-defendant Ezra Green to make an initial payment with subsequent,
additional payments over time. The Company has agreed, in exchange
for the dismissal of all claims with prejudice, to pay up to
$20,000, at $1,000 per month beginning in January 2018 at the
earliest, if co-defendant Ezra Green defaults on his subsequent
payment obligations under the terms of the settlement agreement.
During the year ended December 31, 2018, the Company has paid
$3,000 towards the settlement with a remaining balance due of
$17,000.
On
December 14, 2018, the Company received a termination and demand
notice from KD Innovation, Ltd, an entity 100% owned by a former
Board member, in connection with a consulting agreement KDI entered
into with the Company on or about January 20, 2016. No lawsuit has
been filed; however, in the event a lawsuit is filed, the Company
intends to vigorously contest the matter.
NOTE 10. RELATED PARTY CONSIDERATIONS
Some
of the officers and directors of the Company are involved in other
business activities and may, in the future, become involved in
other business opportunities that become available. They may face a
conflict in selecting between the Company and other business
interests. The Company has not formulated a policy for the
resolution of such conflicts.
On November 20, 2017, Dr. Dimitrov provided a
notice dated November 21, 2017 to the Company stating that he was
resigning from the Board, effective immediately. Dr. Dimitrov
indicated that his resignation from the Board was based on the
deteriorating relationship between the Company and Digital
Diagnostics over the non-payment of fees owed by the Company
pursuant to the licensing agreement between the Company and Digital
Diagnostics. Dr. Dimitrov currently serves as the President of
Digital Diagnostics, and the Company has licensed the right to
develop, produce and commercialize certain diagnostic products,
including the FibriLyzer and MatriLyzer, utilizing certain
intellectual property rights owned or licensed by Digital
Diagnostics. Dr. Dimitrov believes that, in light of these
concerns, his role as both a Director of the Company and the
President of Digital Diagnostics creates a conflict of interest and
has decided to focus his time and energy on doing what is best for
the shareholders of Digital Diagnostics. For the year ended
December 31, 2017, the Company accrued $30,000 in licensing fees
expenses to Digital Diagnostics. As of December 31, 2017, $126,032
was included in accounts payable.
The Company has also accrued interest at 3% over
the prime rate, per the Licensing Agreement, of $9,802 for the
remaining balance due as of December 31, 2017
.
The Company paid $126,032 and $75,000 during the
years ended December 31, 2018 and 2017.
For the years ended December 31, 2018 and 2017,
$300,000 was recognized in Research and Development expenses for
consulting provided by Dr. Dimitrov. As of December 31, 2018 and
2017, $575,000 and $275,000 was included in accounts payable,
respectively. During the year ended December 31, 2018 and 2017, $0
and $125,000, respectively was paid.
Effective
December 1, 2018, the Company entered into new employment
agreements with our Chief Executive Officer, our Executive Vice
President, and our Chief Financial Officer. Under these agreements,
the executives agreed to terminate predecessor employment
agreements and agreed to release the Company from any and all
obligations under the predecessor agreement for any amounts that
could have been due or owing, including, without limitation,
compensation, bonuses and other payments. On February 21, 2019, the
Company executed a termination agreement and mutual release with
the Chief Business Officer. The agreement contains mutual releases
between the parties. As a result of these agreements, the Company
recognized $1,355,372 in debt forgiveness which was recorded under
additional paid in capital.
On
June 28, 2017, the Company issued to two of the Company’s
executive officers a promissory note in the principal amount up to
$100,000, which amount may be drawn upon by the Company as bridge
financing for general working capital purposes. The promissory note
accrues interest at a rate of 8.0% per annum and matures on the
earlier of (i) one (1) year from the date of the promissory note,
and (ii) the closing the sale of the Company’s securities in
a single transaction or a series of related transactions from which
at least $500,000 of gross proceeds are raised. See Note
4.
NOTE 11. SUBSEQUENT EVENTS
In
accordance with authoritative guidance, the Company has evaluated
any events or transactions occurring after December 31, 2018, the
balance sheet date, through the date of filing of this report and
note that there have been no such events or transactions that would
require recognition or disclosure in the consolidated financial
statements as of and for the year ended December 31, 2018, except
as disclosed below.
On
January 8, 2019 we began pursuing a new business segment and
entered into a Master Product Development and Supply Agreement (the
“Master Agreement”) with Ceed2Med, LLC
(“C2M”), a Florida limited liability company. We
determined to pursue opportunities in hemp based CBD following
passage of the 2018 Farm Bill which was signed into law on December
20, 2018.
On
January 23, 2019, Digital Diagnostics made a demand for
compensation against the Company in connection with an alleged
breach of a License Agreement entered into with the Company on
January 19, 2016 (see Note 9). No lawsuit has been filed; however,
in the event a lawsuit is filed, the Company intends to vigorously
contest the matter.
On
March 11, 2019, we acquired a 50.1% limited liability membership
interest in Exactus One World, LLC (“EOW”), an Oregon
limited liability company, in order to produce industrial hemp for
our own use. EOW leases approximately 200 acres of farm land in
Cave Junction, Oregon for growing and processing industrial
hemp.
EOW
will farm and process industrial hemp to be manufactured into
cannabidiol (CBD) and related products. EOW is a newly-formed
limited liability company that will be responsible for the
Company’s initial efforts to pursue agricultural development,
including farm soil preparation, planting, harvesting,
transportation and drying. In March 2019 we placed an order
for seeds (genetics) for the 2019 grow season. The Company will be
responsible for funding and the minority owners will be responsible
for management, servicing and operating the farm properties. The
EOW introduction and negotiation of the definitive agreements were
provided by C2M who will also be responsible for overseeing all
farming activities and manufacturing. We are currently negotiating
the terms for provision of services by C2M to the Company,
including access to C2M management and personnel, skills and
expertise, access to investments such as EOW and future business
opportunities, and operations and oversight over our farming,
manufacturing and processing operations and compensation
therefore.
Following
the events described above, the Company entered into the business
production and selling of products made from industrial hemp.
Industrial hemp is defined as plants containing less than 0.03%
tetra-hydrocannabinol, the lawful limit of the psychoactive
compound present to be considered industrial hemp. The Company will
own and develop hemp products under its own brand “Hemp
Healthy” and produce products for private label customers.
The Company is presently offering tinctures, edibles, capsules,
topical solutions and animal health products manufactured for us by
C2M during the second quarter of 2019. On March 6, 2019 we placed a
$1 million order for products from C2M.
On
March 20, 2019 we entered into agreements to acquire Tierra
Healthcare Concepts, LLC (“Tierra”), a Florida limited
liability company, and CannacareMD, LLC (“Cannacare”),
a Florida limited liability company. Through existing networks of
physicians and websites Tierra and Cannacare intend to assist
doctors to educate consumers about CBD, and to offer our own
“Hemp Healthy” brand hemp products through online
stores (
www.buyhempcbd.com
).
Following
December 31, 2018, in order to pursue our new business segment, the
Company undertook a number of steps to recapitalize and reorganize
our management structure. These actions included the
following:
1.
Five
new members joined our board of directors. Three of the directors
are considered to be independent directors. The Company established
an Audit, Compensation, Nominating and Governance Committee for the
first time, consisting entirely of independent directors. Each
committee adopted a committee charter meeting the board, committee
and charter requirements for listing on NASDAQ.
2.
The
Company offered and sold approximately $3.0 million of Common Stock
in private placements.
3.
The
Company converted all of our outstanding convertible notes and
issued 829,450 shares of Series A Convertible Preferred
Stock.
4.
The
Company adopted and implemented a 1:8 reverse split of our capital
stock which became effective March 11, 2019.
5.
James
Erickson and Timothy Ryan, directors, resigned. Each of these
former directors waived all outstanding financial and other
obligations of the Company (other than certain rights such as the
right to indemnification).