Notes to Consolidated Financial Statements
Years Ended December 31, 2018 and 2017
1. ORGANIZATION AND LINE OF BUSINESS
Organizational History
Digital Locations, Inc. (the “Company”) was incorporated in the State of Nevada on August 25, 2006 as Zingerang, Inc. On April 2, 2007, the Company changed its name to Carbon Sciences, Inc. and on September 14, 2017, the Company changed its name to Digital Locations, Inc.
As further discussed in Note 3, on November 30, 2018, the Company entered into an Agreement and Plan of Merger ( the “Merger”) pursuant to which EllisLab, Inc., an S Corporation owned 100% by Rick Ellis that builds software for web professionals and provides related support services, merged with and into EllisLab Corp., a newly-formed subsidiary of the Company.
Going Concern
The accompanying financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. As of December 31, 2018, our current liabilities exceeded our current assets by $12,801,600 and we had a total stockholders’ deficit of $12,673,490. In addition, prior to the Merger in November 2018, the Company did not generate any revenue, and has reported negative cash flows from operations since inception. The Company currently does not have the cash resources to meet its operating commitments for the next twelve months, expects to have ongoing requirements for capital investment to implement its business plan, These factors, among others, raise substantial doubt that the Company will be able to continue as a going concern for a reasonable period of time.
The ability of the Company to continue as a going concern is dependent upon, among other things, raising additional capital. The Company has obtained operating funds primarily from the issuance of convertible debt and management believes this funding will continue and will provide the additional cash needed to meet the Company’s obligations as they become due and will allow the development of the recently acquired EllisLab business. There can be no assurance, however, that the Company will be successful in accomplishing its objectives. Without such additional capital we may be required to cease operations. The accompanying financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements. Significant estimates made in preparing these financial statements include the estimate of useful lives of property and equipment and intangible assets, impairment of assets, the deferred tax valuation allowance, the fair value of stock options and derivative liabilities. Actual results could differ from those estimates.
Consolidation
The accompanying consolidated financial statements include the accounts of the Company and, effective December 1, 2018, the accounts of EllisLab Corp., its wholly owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the Statement of Cash Flows, the Company considers liquid investments with an original maturity of three months or less to be cash equivalents. The Company places its cash and cash equivalents with large commercial banks. The Federal Deposit Insurance Corporation (“FDIC”) insures these balances, up to $250,000. All of the Company’s cash balances at December 31, 2018 and December 31, 2017 were insured. At December 31, 2018 and 2017, there were no cash equivalents.
Prepaid Expenses
Insurance premiums paid in advance of the policy coverage period are recorded as prepaid expenses and expensed over the policy coverage period. Domain name registration costs are also recorded as prepaid expenses and amortized over their contract lives.
Property and Equipment
The Company’s property and equipment is stated at cost, and is depreciated using the straight-line method over the estimated useful life of the related asset as follows:
Computer equipment
|
3-5 years
|
Office furniture and equipment
|
7 years
|
Maintenance and repairs are charged to expense as incurred. Significant renewals and betterments will be capitalized. At the time of retirement or other disposition of equipment, the cost and accumulated depreciation will be removed from the accounts and the resulting gain or loss, if any, will be reflected in operations.
The Company assesses the recoverability of property and equipment by determining whether the depreciation and amortization of these assets over their remaining life can be recovered through projected undiscounted future cash flows. The amount of equipment impairment, if any, will be measured based on fair value and is charged to operations in the period in which such impairment is determined by management.
Intangible Assets
Intangible assets consist primarily of intellectual property, customer base, trade-names/marks and non-compete agreements acquired in the Merger, which are amortized on a straight-line basis over their estimated useful lives of 5 years. Intangible assets are reviewed for impairment annually, or more frequently whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable.
The excess of the cost over the fair value of net assets of acquired in the Merger is recorded as goodwill. Goodwill is not subject to amortization, but is reviewed for impairment annually, or more frequently whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. An impairment charge would be recorded to the extent the carrying value of goodwill exceeds its estimated fair value. The testing of goodwill under established guidelines for impairment requires significant use of judgment and assumptions. Changes in forecasted operations and other assumptions could materially affect the estimated fair values. Changes in business conditions could potentially require adjustments to these asset valuations. At December 31, 2018, the Company reviewed the goodwill recorded in the Merger and determined that an impairment expense of $4,934,429 was required.
Derivative Liabilities
We have identified the conversion features of our convertible notes payable and Series B preferred stock and certain stock options as derivatives. Where the number of warrants or common shares to be issued under these agreements is indeterminate, the Company has concluded that the equity environment is tainted, and all additional warrants and convertible debt and equity are included in the value of the derivatives. We estimate the fair value of the derivatives using the Black-Scholes pricing model and a multinomial lattice model based on projections of various potential future outcomes. We estimate the fair value of the derivative liabilities at the inception of the financial instruments, at the date of conversions to equity and at each reporting date, recording a derivative liability, debt discount, additional paid-in capital and a gain or loss on change in derivative liabilities as applicable. These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price volatility, variable conversion prices based on market prices as defined in the respective agreements and probabilities of certain outcomes based on management projections. These inputs are subject to significant changes from period to period and to management's judgment; therefore, the estimated fair value of the derivative liabilities will fluctuate from period to period, and the fluctuation may be material.
Fair Value of Financial Instruments
Disclosures about fair value of financial instruments require disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of December 31, 2018 and 2017, we believe the amounts reported for cash, accounts receivable, prepaid expenses, accounts payable, accrued interest, accrued expenses and other current liabilities, and convertible note payable approximate fair value because of their short maturities.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
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·
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Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
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|
|
|
|
·
|
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
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|
|
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·
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Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
|
We measure certain financial instruments at fair value on a recurring basis. Liabilities measured at fair value on a recurring basis are as follows at December 31, 2018 and 2017:
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|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
December 31, 2018:
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|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
10,363,105
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,363,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value
|
|
$
|
10,363,105
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,363,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
8,072,904
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,072,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value
|
|
$
|
8,072,904
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,072,904
|
|
During the years ended December 31, 2018 and 2017, the Company had the following activity in its derivative liabilities account:
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|
Convertible
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|
|
Series B
|
|
|
Stock
|
|
|
|
|
|
|
Notes Payable
|
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|
Preferred Stock
|
|
|
Options
|
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|
Total
|
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|
|
|
|
|
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|
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|
|
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Derivative liabilities at December 31, 2016
|
|
$
|
3,335,906
|
|
|
$
|
3,354,791
|
|
|
$
|
-
|
|
|
$
|
6,690,697
|
|
Addition to liability for new issuances
|
|
|
855,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
855,000
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|
Elimination of liability on conversion to common shares
|
|
|
(111,225
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(111,225
|
)
|
Change in fair value
|
|
|
1,162,081
|
|
|
|
(523,649
|
)
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|
|
-
|
|
|
|
638,432
|
|
Derivative liabilities at December 31, 2017
|
|
|
5,241,762
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|
|
|
2,831,142
|
|
|
|
-
|
|
|
|
8,072,904
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|
Addition to liability for new issuances
|
|
|
692,500
|
|
|
|
-
|
|
|
|
188,127
|
|
|
|
880,627
|
|
Elimination of liability on conversion to common shares
|
|
|
(8,209
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,209
|
)
|
Change in fair value
|
|
|
1,883,001
|
|
|
|
(491,244
|
)
|
|
|
26,026
|
|
|
|
1,417,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Derivative liabilities at December 31, 2018
|
|
$
|
7,809,054
|
|
|
$
|
2,339,898
|
|
|
$
|
214,153
|
|
|
$
|
10,363,105
|
|
Revenue Recognition
On January 1, 2018, we adopted Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification (ASC) Topic 605, “Revenue Recognition” (Topic 605). The Company had no operating revenues prior to the Merger. Effective December 1, 2018, the Company’s revenues are derived primarily from the sale of monthly and annual tech support subscriptions and partnership fees, and from software applications that customers purchase via the Company’s online store. Sales are processed using a real-time payment processing company. Revenue from product sales is recorded net of processing costs. Effective December 31, 2018, revenues are presented under Topic 606. The impact of adopting the new revenue standard was not material to our financial statements and there was no adjustment to beginning retained earnings on January 1, 2018.
Under Topic 606, revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
We determine revenue recognition through the following steps:
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·
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identification of the contract, or contracts, with a customer;
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·
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identification of the performance obligations in the contract;
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|
·
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determination of the transaction price;
|
|
·
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allocation of the transaction price to the performance obligations in the contract; and
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|
·
|
recognition of revenue when, or as, we satisfy a performance obligation.
|
Amounts collected from customers for support subscriptions and partnership fees with a contract life of one month or greater are recorded as deferred revenue and recognized over the life of the contract.
Concentrations of Credit Risk and Major Customers
The Company’s customers are the end-consumers that purchase its products from the Company’s online store. Therefore, the Company does not have any individual customers that represent any more than a fraction of its revenue.
Income (Loss) per Share Calculations
Basic net income or loss per common share is computed by dividing net income or loss by the weighted average number of common shares outstanding. Diluted net income or loss per common share is computed by dividing net income or loss by the sum of the weighted average number of common shares outstanding and the dilutive potential common share equivalents then outstanding. Potential dilutive common share equivalents consist of shares issuable upon the exercise of outstanding stock options and warrants to acquire common stock using the treasury stock method and the average market price per share during the period and shares issuable upon exercise of convertible notes payable and convertible preferred stock.
Since we had no dilutive effect of stock options, warrants, convertible notes payable and convertible preferred stock for the years ended December 31, 2018 and 2017, our basic weighted average number of common shares outstanding is the same as our diluted weighted average number of common shares outstanding. For the year ended December 31, 2018, the Company has excluded 1,451,561,693 common shares for exercisable options, approximately 1,451,562,000 shares issuable upon conversion of convertible notes payable, approximately 367,000,000 common shares upon conversion of convertible Series B preferred stock and approximately 720,000,000 common shares upon conversion of convertible Series C preferred stock. For the year ended December 31, 2017, the Company has excluded 1,408,750 common shares for exercisable options, 6,000 common shares for exercisable warrants, approximately 502,772,000 shares issuable upon conversion of convertible notes payable and approximately 367,000,000 common shares upon conversion of convertible Series B preferred stock.
Income Taxes
We account for income taxes using the asset and liability method. Under the asset and liability method, 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 bases. 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Research and Development
Research and development costs are expensed as incurred. Total research and development costs were $0 and $65,009 for the years ended December 31, 2018 and 2017, respectively.
Advertising Costs
We expense the cost of advertising and promotional materials when incurred. We incurred no material advertising costs for the years ended December 31, 2018 and 2017.
Stock-Based Compensation
Stock-based compensation is measured at the grant date based on the value of the award granted using either the Black-Scholes option pricing model or a multinomial lattice model based on projections of various potential future outcomes and recognized over the period in which the award vests. For stock awards no longer expected to vest, any previously recognized stock compensation expense is reversed in the period of termination. The stock-based compensation expense is included in general and administrative expenses.
Comprehensive Loss
Comprehensive loss is the same as net loss for all years presented.
Reclassifications
Certain amounts in the prior years have been reclassified to conform to the current year presentation.
Recently Issued Accounting Pronouncements
Although there are several new accounting pronouncements issued or proposed by the FASB, which the Company has adopted or will adopt, as applicable, the Company does not believe any of these accounting pronouncements has had or will have a material impact on its financial position or results of operations.
NOTE 3 –
MERGER
On November 30, 2018, the Company entered into an Agreement and Plan of Merger with the EllisLab, Inc., Rick Ellis (“Ellis”), and EllisLab Corp., a newly formed Nevada corporation and wholly owned subsidiary of the Company, pursuant to which EllisLab, Inc. merged with and into EllisLab Corp. (the “Merger”). Pursuant to the terms of the Merger, Ellis received 36,000 shares of the Company’s newly designated Series C Convertible Preferred, with a stated value of $100 per share, in exchange for the cancellation of all common shares of EllisLab, Inc. owned by Ellis, which shares represented 100% of the issued and outstanding capital stock of EllisLab, Inc. The separate legal existence of EllisLab, Inc. ceased, and EllisLab Corp. became the surviving company.
Pursuant to the Merger, Ellis has agreed to a covenant not to compete for a period of 2 years following the effective date of the Merger (the “Non-Competition Period”). Ellis further agreed that during the Non-Competition Period, he will not directly or indirectly solicit or agree to service for his benefit or the benefit of any third-party, any of the Company’s, Digital Locations, or EllisLab Corp. customers.
Pursuant to the Merger, during the period beginning on the effective date and ending on the 24 month anniversary thereof, Ellis will not directly or indirectly, (i) offer, sell, offer to sell, contract to sell, hedge, pledge, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or sell, or otherwise transfer or dispose of, any portion of the Series C preferred shares, or any shares of the Company’s common stock underlying the preferred, beneficially owned, within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934.
Each of the parties to the Plan of Merger has made customary representations and warranties in the Plan of Merger.
On November 30, 2018, in connection with and pursuant to the Merger, the Company entered into a Nonstatutory Stock Option Agreement (the “Option Agreement”) with Derek Jones (“Jones”), whereby the Company issued to Jones an option to purchase 100,000,000 shares of the Common stock of the Company, at an exercise price of $0.005, in exchange for his surrender of an option to purchase 10% of the shares of outstanding common stock of EllisLab, Inc. The option is vested but may not be exercised for 2 years from the date of the Merger. The option contains a blocker that prevents Jones from exercising the Option if such exercise would result in beneficial ownership of more than 4.99% of the outstanding shares of the Company’s stock, without at least 61 days of prior notice. Under the Option, Jones is also subject to the Rule 144 restrictions of an affiliate.
The acquisition of EllisLab, Inc. in the Merger has been accounted for as a purchase, and the accounts of EllisLab Corp. are consolidated with those of the Company as of December 1, 2018. The Company engaged an independent valuation firm to estimate the value of the consideration paid by the Company in the Merger, consisting of the issuance of 36,000 shares of the Company’s $0.001 par value Series C Preferred Stock to Ellis, valued at $4,345,866, and 100,000,000 stock options to purchase common shares of the Company to Jones, valued at $599,998. Based on the report of the independent valuation firm, the total value of the consideration paid of $4,945,864 has been allocated as follows:
Cash
|
|
$
|
35,822
|
|
Accounts receivable
|
|
|
22,235
|
|
Property and equipment, net
|
|
|
4,271
|
|
Accounts payable
|
|
|
(74,680
|
)
|
Accrued expenses
|
|
|
(14,176
|
)
|
Deferred revenue
|
|
|
(27,037
|
)
|
Loans payable
|
|
|
(60,000
|
)
|
Net liabilities
|
|
|
(113,565
|
)
|
Intangible assets:
|
|
|
|
|
Intellectual property
|
|
|
37,000
|
|
Customer base
|
|
|
79,000
|
|
Trade-name/marks
|
|
|
8,000
|
|
Non-compete agreements
|
|
|
1,000
|
|
Goodwill
|
|
|
4,934,429
|
|
|
|
|
|
|
Total
|
|
$
|
4,945,864
|
|
At December 31, 2018, the Company reviewed the goodwill recorded in the Merger and determined that an impairment expense of $4,934,429 was required.
Unaudited pro forma summary results of operations for the years ended December 31, 2018 and 2017 as though the Merger had taken place on January 1, 2017 are as follows:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
624,381
|
|
|
$
|
701,981
|
|
Net loss
|
|
|
(3,308,857
|
)
|
|
|
(7,231,785
|
)
|
Net loss per share
|
|
|
(0.08
|
)
|
|
|
(0.20
|
)
|
NOTE 4 –
PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
$
|
49,605
|
|
|
$
|
12,303
|
|
Office furniture and equipment
|
|
|
8,751
|
|
|
|
1,459
|
|
Total
|
|
|
58,356
|
|
|
|
13,762
|
|
Less accumulated depreciation
|
|
|
(53,163
|
)
|
|
|
(11,298
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
5,193
|
|
|
$
|
2,464
|
|
Depreciation expense was $1,542 and $675 for the years ended December 31, 2018 and 2017, respectively.
NOTE 5 –
INTANGIBLE ASSETS
Intangible assets were acquired in the Merger and consisted of the following at December 31, 2018:
Intellectual property
|
|
$
|
37,000
|
|
Customer base
|
|
|
79,000
|
|
Trade-name/marks
|
|
|
8,000
|
|
Non-compete agreements
|
|
|
1,000
|
|
Total
|
|
|
125,000
|
|
Less accumulated amortization
|
|
|
(2,083
|
)
|
|
|
|
|
|
Net
|
|
$
|
122,917
|
|
Amortization expense was $2,083 and $0 for the years ended December 31, 2018 and 2017, respectively.
Future amortization of intangible assets as of December 31, 2018 is as follows:
Years ending December 31:
|
|
|
|
2019
|
|
$
|
25,000
|
|
2020
|
|
|
25,000
|
|
2021
|
|
|
25,000
|
|
2022
|
|
|
25,000
|
|
2023
|
|
|
22,917
|
|
|
|
|
|
|
Total
|
|
$
|
122,917
|
|
6. CONVERTIBLE NOTES PAYABLE
Convertible Promissory Notes - Related Parties of $58,600
On December 31, 2012, we entered into 5% convertible promissory notes with two employees in exchange for services rendered in the aggregate amount of $58,600. The notes are convertible into shares of our common stock at a conversion price equal to the lesser of $2.00 per share or the closing price per share of common stock recorded on the trading day immediately preceding the date of conversion. We recorded a total debt discount of $57,050 related to the conversion feature of the notes, which has been fully amortized to interest expense, along with a derivative liability at inception. One of the notes with a principal balance of $25,980 at December 31, 2018 matured on December 31, 2014 and is currently in default. The maturity date of a second note with a principal balance of $32,620 at December 31, 2018 has been extended to December 31, 2019.
Convertible Promissory Note – Accounts Payable of $29,500
On March 14, 2013, we entered into a 5% convertible promissory note in the principal amount of $29,500, which is convertible into shares of our common stock at a conversion price equal to the lesser of $1.50 per share or the closing price per share of common stock recorded on the trading day immediately preceding the date of conversion. The note, with a principal balance of $29,500 at December 31, 2018, matured two years from its effective date, or March 14, 2015, and is currently in default.
Convertible Promissory Note – Services of $25,000
On June 4, 2013, we entered into a 5% convertible promissory note with a former member of our Board of Directors in exchange for services rendered in the amount of $25,000. The note was convertible into shares of common stock of the Company at a conversion price equal to the lesser of $0.35 per share or the closing price per share of common stock recorded on the trading day immediately preceding the date of conversion. We entered into an agreement to repay this note with 12 equal monthly payments of principal and interest of $2,352 beginning in June 2016. The note was paid in full as of December 31, 2017.
Convertible Promissory Note – $5,000 Exchanged Note
On September 6, 2013, we exchanged a $5,000 promissory note for a 10% convertible promissory note in the aggregate principal amount of $5,000. The note was convertible into shares of our common stock at a price equal to a conversion price of the lesser of $0.042 per share or fifty percent (50%) of the lowest trade price recorded after the effective date. We recorded a debt discount of $2,536, which has been fully amortized to interest expense, along with a derivative liability at inception. In February 2017, we issued the lender 1,496,499 shares of our common stock in consideration for the conversion of principal of $5,000 and accrued interest of $1,734.
March 2016 Convertible Promissory Note – $1,000,000
On March 4, 2016, we entered into a 10% convertible promissory note in the aggregate principal amount of up to $1,000,000 (the "March 2016 $1,000,000 CPN"). The lender may advance the Company consideration for the note in such amounts as the lender may choose in its sole discretion. The note is convertible into shares of our common stock at a price per share equal to the lesser of: $0.03; 50% of the lowest trade price of our common stock subsequent to the effective date of the note; or the lowest effective price per share granted to any person or entity (exclusive of our officers and directors) to acquire common stock subsequent to the effective date of the note. The note initially matured, with respect to each advance, one year from the effective date of each advance. Subsequently, the lender extended the maturity date, with the note payable upon demand, but in no event later than 60 months from March 4, 2016.
On March 4, 2016, we received proceeds of $25,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $25,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2017 and 2016, amortization of debt discount was recorded to interest expense in the amount of $4,315 and $20,685, respectively, and the debt discount was fully amortized to interest expense. In September and December 2017, we issued the lender a total of 1,632,272 shares of our common stock in consideration for the conversion of principal of $25,000 and accrued interest of $3,956, extinguishing the note in full.
On March 14, 2016, we received proceeds of $27,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $27,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2017 and 2016, amortization of debt discount was recorded to interest expense in the amount of $5,400 and $21,600, respectively, and the debt discount was fully amortized to interest expense. In December 2017, we issued the lender 469,041 shares of our common stock in consideration for the conversion of principal of $5,000 and accrued interest of $863, resulting in a principal balance of $22,000 at December 31, 2017. In November and December 2018, we issued the lender a total of 1,973,604 shares of our common stock in consideration for the conversion of principal of $2,330 and accrued interest of $630, resulting in a principal balance of $19,670 at December 31, 2018.
On March 17, 2016, we received proceeds of $33,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $33,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $11,392 and the debt discount was fully amortized to interest expense.
On April 11, 2016, we received proceeds of $90,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $90,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $24,904 and the debt discount was fully amortized to interest expense.
On May 20, 2016, we received proceeds of $60,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $23,014 and the debt discount was fully amortized to interest expense.
On June 22, 2016, we received proceeds of $50,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $50,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $23,699 and the debt discount was fully amortized to interest expense.
On July 6, 2016, we received proceeds of $87,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $87,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $44,573 and the debt discount was fully amortized to interest expense.
On August 8, 2016, we received proceeds of $60,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $36,164 and the debt discount was fully amortized to interest expense.
On September 13, 2016, we received proceeds of $55,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $55,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $38,575 and the debt discount was fully amortized to interest expense.
On October 17, 2016, we received proceeds of $55,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $55,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $43,699 and the debt discount was fully amortized to interest expense.
On November 8, 2016, we received proceeds of $55,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $55,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $47,014 and the debt discount was fully amortized to interest expense.
On December 6, 2016, we received proceeds of $60,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $56,233 and the debt discount was fully amortized to interest expense.
On January 10, 2017, we received proceeds of $60,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2018 and 2017, amortization of debt discount was recorded to interest expense in the amount of $1,644 and $58,356, respectively, and the debt discount was fully amortized to interest expense.
On February 13, 2017, we received proceeds of $60,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2018 and 2017, amortization of debt discount was recorded to interest expense in the amount of $7.233 and $52,767, respectively, and the debt discount was fully amortized to interest expense.
On March 9, 2017, we received proceeds of $60,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2018 and 2017, amortization of debt discount was recorded to interest expense in the amount of $11,178 and $48,822, respectively, and the debt discount was fully amortized to interest expense.
On April 12, 2017, we received proceeds of $95,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $95,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2018 and 2017, amortization of debt discount was recorded to interest expense in the amount of $26,548 and $68,452, respectively, and the debt discount was fully amortized to interest expense.
On May 8, 2017, we received proceeds of $60,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2018 and 2017, amortization of debt discount was recorded to interest expense in the amount of $21,041 and $38,959, respectively, and the debt discount was fully amortized to interest expense.
June 2017 Convertible Promissory Note – $500,000
On June 2, 2017, we entered into a 10% convertible promissory note in the aggregate principal amount of up to $500,000 (the "June 2017 $500,000 CPN"). The lender may advance the Company consideration for the note in such amounts as the lender may choose in its sole discretion. The note is convertible into shares of our common stock at a price per share equal to the lesser of: $0.03; 50% of the lowest trade price of our common stock subsequent to the effective date of the note; or the lowest effective price per share granted to any person or entity (exclusive of our officers and directors) to acquire common stock subsequent to the effective date of the note. The note initially matured, with respect to each advance, one year from the effective date of each advance. Subsequently, the lender extended the maturity date, with the note payable upon demand, but in no event later than 60 months from June 2, 2017.
On June 2, 2017, we received proceeds of $60,000 pursuant to the June 2017 $500,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2018 and 2017, amortization of debt discount was recorded to interest expense in the amount of $25,151 and $34,849, respectively, and the debt discount was fully amortized to interest expense.
On July 10, 2017, we received proceeds of $80,000 pursuant to the June 2017 $500,000 CPN. We recorded a debt discount of $80,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2018 and 2017, amortization of debt discount was recorded to interest expense in the amount of $41,863 and $38,137, respectively, and the debt discount was fully amortized to interest expense.
On August 11, 2017, we received proceeds of $80,000 pursuant to the June 2017 $500,000 CPN. We recorded a debt discount of $80,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2018 and 2017, amortization of debt discount was recorded to interest expense in the amount of $48,877 and $31,123, respectively, and the debt discount was fully amortized to interest expense.
On September 12, 2017, we received proceeds of $85,000 pursuant to the June 2017 $500,000 CPN. We recorded a debt discount of $85,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2018 and 2017, amortization of debt discount was recorded to interest expense in the amount of $59,384 and $25,616, respectively, and the debt discount was fully amortized to interest expense.
On October 13, 2017, we received proceeds of $80,000 pursuant to the June 2017 $500,000 CPN. We recorded a debt discount of $80,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2018 and 2017, amortization of debt discount was recorded to interest expense in the amount of $61,603 and $18,397, respectively, and the debt discount was fully amortized to interest expense.
On November 8, 2017, we received proceeds of $75,000 pursuant to the June 2017 $500,000 CPN. We recorded a debt discount of $75,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2018 and 2017, amortization of debt discount was recorded to interest expense in the amount of $62,658 and $12,342, respectively, and the debt discount was fully amortized to interest expense.
December 2017 Convertible Promissory Note – $500,000
On December 14, 2017, we entered into a 10% convertible promissory note in the aggregate principal amount of up to $500,000 (the "December 2017 $500,000 CPN"). The lender may advance the Company consideration for the note in such amounts as the lender may choose in its sole discretion. The note is convertible into shares of our common stock at a price per share equal to the lesser of: $0.03; 50% of the lowest trade price of our common stock subsequent to the effective date of the note; or the lowest effective price per share granted to any person or entity (exclusive of our officers and directors) to acquire common stock subsequent to the effective date of the note. The note initially matured, with respect to each advance, one year from the effective date of each advance. Subsequently, the lender extended the maturity date, with the note payable upon demand, but in no event later than 60 months from December 14, 2017.
On December 14, 2017, we received proceeds of $60,000 pursuant to the December 2017 $500,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2018 and 2017, amortization of debt discount was recorded to interest expense in the amount of $56,041 and $3,959, respectively, resulting in a remaining discount of $56,041 at December 31, 2017.
On January 11, 2018, we received proceeds of $70,000 pursuant to the December 2017 $500,000 CPN. We recorded a debt discount of $70,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $67,890, resulting in a remaining debt discount of $2,110 as of December 31, 2018.
On February 7, 2018, we received proceeds of $60,000 pursuant to the December 2017 $500,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $53,753, resulting in a remaining debt discount of $6,247 as of December 31, 2018.
On March 8, 2018, we received proceeds of $55,000 pursuant to the December 2017 $500,000 CPN. We recorded a debt discount of $55,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $44,904, resulting in a remaining debt discount of $10,096 as of December 31, 2018.
On March 14, 2018, we received proceeds of $6,500 pursuant to the December 2017 $500,000 CPN. We recorded a debt discount of $6,500 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $5,200, resulting in a remaining debt discount of $1,300 as of December 31, 2018.
On April 9, 2018, we received proceeds of $77,000 pursuant to the December 2017 $500,000 CPN. We recorded a debt discount of $77,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $56,115, resulting in a remaining debt discount of $20,885 as of December 31, 2018.
On May 7, 2018, we received proceeds of $60,000 pursuant to the December 2017 $500,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $39,123, resulting in a remaining debt discount of $20,877 as of December 31, 2018.
On June 7, 2018, we received proceeds of $52,000 pursuant to the December 2017 $500,000 CPN. We recorded a debt discount of $52,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $29,490, resulting in a remaining debt discount of $22,510 as of December 31, 2018.
On July 10, 2018, we received proceeds of $35,000 pursuant to the December 2017 $500,000 CPN. We recorded a debt discount of $35,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $16,685, resulting in a remaining debt discount of $18,315 as of December 31, 2018.
On August 16, 2018, we received proceeds of $24,500 pursuant to the December 2017 $500,000 CPN. We recorded a debt discount of $24,500 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $9,196, resulting in a remaining debt discount of $15,304 as of December 31, 2018.
August 2018 Convertible Promissory Note – $500,000
On August 17, 2018, we issued a 10% convertible promissory note in the aggregate principal amount of up to $500,000 (the "August 2018 $500,000 CPN"). The lender may advance the Company consideration for the note in such amounts as the lender may choose in its sole discretion. The note is convertible into shares of our common stock at a price per share equal to the lesser of: $0.01; 50% of the lowest trade price of our common stock subsequent to the effective date of the note; or the lowest effective price per share granted to any person or entity (exclusive of our officers and directors) to acquire common stock subsequent to the effective date of the note. The note matures, with respect to each advance, one year from the effective date of each advance.
On August 17, 2018, we received proceeds of $10,500 pursuant to the August 2018 $500,000 CPN. We recorded a debt discount of $10,500 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $3,912, resulting in a remaining debt discount of $6,588 as of December 31, 2018.
On September 13, 2018, we received proceeds of $30,000 pursuant to the August 2018 $500,000 CPN. We recorded a debt discount of $30,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $8,959, resulting in a remaining debt discount of $21,041 as of December 31, 2018.
On October 8, 2018, we received proceeds of $25,000 pursuant to the August 2018 $500,000 CPN. We recorded a debt discount of $25,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $5,753, resulting in a remaining debt discount of $19,247 as of December 31, 2018.
On October 26, 2018, we received proceeds of $12,000 pursuant to the August 2018 $500,000 CPN. We recorded a debt discount of $12,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $2,170, resulting in a remaining debt discount of $9,830 as of December 31, 2018.
On November 5, 2018, we received proceeds of $25,000 pursuant to the August 2018 $500,000 CPN. We recorded a debt discount of $25,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $3,836, resulting in a remaining debt discount of $21,164 as of December 31, 2018.
On November 28, 2018, we received proceeds of $30,000 pursuant to the August 2018 $500,000 CPN. We recorded a debt discount of $30,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $2,712, resulting in a remaining debt discount of $27,288 as of December 31, 2018.
On November 30, 2018, we received proceeds of $10,000 pursuant to the August 2018 $500,000 CPN. We recorded a debt discount of $10,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $849, resulting in a remaining debt discount of $9,151 as of December 31, 2018.
On December 24, 2018, we received proceeds of $50,000 pursuant to the August 2018 $500,000 CPN. We recorded a debt discount of $50,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $959, resulting in a remaining debt discount of $49,041 as of December 31, 2018.
November 2018 Convertible Promissory Note – $33,000
Effective November 23, 2018, the Company entered into a 10% convertible note with an institutional investor in the principal amount of $33,000. The note matures November 23, 2019. The Company received proceeds of $30,000 after payment of $3,000 of the fees and expenses of the lender and its counsel. The lender, at its option after 180 days from the issuance of the note, may convert the unpaid principal balance of, and accrued interest on, the note into shares of the Company’s common stock at a 39% discount from the lowest trading price during the 15 days prior to conversion. The Company may prepay the note during the 180 days from the issuance of the note at redemption premiums ranging from 20% to 45%. After the expiration of 180 days after issuance, the Company has no right of prepayment. We recorded a debt discount of $33,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $3,436, resulting in a remaining debt discount of $29,564 as of December 31, 2018.
December 2018 Convertible Promissory Note – $33,000
Effective December 5, 2018, the Company entered into a 10% convertible note with an institutional investor in the principal amount of $33,000. The note matures December 5, 2019. The Company received proceeds of $30,000 after payment of $3,000 of the fees and expenses of the lender and its counsel. The lender, at its option after 180 days from the issuance of the note, may convert the unpaid principal balance of, and accrued interest on, the note into shares of the Company’s common stock at a 39% discount from the lowest trading price during the 15 days prior to conversion. The Company may prepay the note during the 180 days from the issuance of the note at redemption premiums ranging from 20% to 45%. After the expiration of 180 days after issuance, the Company has no right of prepayment. We recorded a debt discount of $33,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2018, amortization of debt discount was recorded to interest expense in the amount of $2,351, resulting in a remaining debt discount of $30,649 as of December 31, 2018.
Total accrued interest payable on notes payable was $342,752 and 155,070 as of December 31, 2018 and 2017, respectively.
For the year ended December 31, 2018, there was no gain or loss on settlement of debt. The total gain on settlement of debt, including conversions to common stock, was $11,643 for the year ended December 31, 2017.
7. CAPITAL STOCK
At December 31, 2018, the Company’s authorized stock consisted of 2,000,000,000 shares of common stock, with a par value of $0.001 per share. The Company is also authorized to issue 20,000,000 shares of preferred stock, with a par value of $0.001 per share. The rights, preferences and privileges of the holders of the preferred stock will be determined by the Board of Directors prior to issuance of such shares.
Series A Preferred Stock
On August 31, 2017, the Company filed a Withdrawal of Certificate of Designation for its original Series A Preferred Stock with the Secretary of State of Nevada. On September 4, 2017, the Board of Directors of the Company authorized (a) the execution and recording with the Nevada Secretary of State of a new Certificate of Designation (the “Series A Certificate”) for its new Series A Preferred Stock, authorizing up to 1,000 shares, and (b) the issuance of 1,000 shares of Series A Preferred Stock to the Company’s President and Director, William E. Beifuss, Jr., which shares were issued and outstanding at December 31, 2017.
The shares of Series A Preferred Stock have a par value of $0.001 per share. The shares of Series A Preferred Stock do not have a dividend right or rate, or liquidation preference, and are not convertible into shares of common stock.
The shares of the Series A Preferred Stock were automatically redeemed by the Company at their par value in January 2018, 120 days after the effective date of the Series A Certificate
Series B Preferred Stock
On March 2, 2016, the Company filed a Certificate of Designation for its Series B Preferred Stock (the “Series B Certificate”) with the Secretary of State of Nevada designating 30,000 shares of its authorized preferred stock as Series B Preferred Stock. The shares of Series B Preferred Stock have a par value of $0.001 per share.
The total face value of this entire series is three million dollars ($3,000,000). Each share of Series B Preferred Stock has a stated face value of One Hundred Dollars ($100) (“Share Value”) and is convertible into shares of fully paid and non-assessable shares of common stock (“Common Stock”) of the Company.
As of December 31, 2018 and 2017, the Company had 16,155 shares of Series B Preferred Stock outstanding, with a face value of $1,615,500. These shares were issued in March 2016 for the redemption and cancellation of $1,615,362 of convertible promissory notes and $264,530 of accrued interest payable.
The holders of outstanding shares of the Series B Preferred Stock (the "Holders") are entitled to receive dividends pari passu with the holders of Common Stock, except upon a liquidation, dissolution and winding up of the Company, in which case the Series B Preferred Stock has a preference. Such dividends will be paid equally to all outstanding shares of Series B Preferred Stock and Common Stock, on an as-if-converted basis with respect to the Series B Preferred Stock. The Holders may elect to use the most favorable conversion price for the purpose of determining the as-if-converted number of shares.
In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the Holder of each outstanding share of the Series B Preferred Stock shall be entitled to receive, out of the assets of the Company available for distribution to its shareholders upon such liquidation, whether such assets are capital or surplus of any nature, an amount equal to one hundred dollars ($100) for each such share of the Series B Preferred Stock (as adjusted for any combinations, consolidations, stock distributions, stock splits or stock dividends with respect to such shares), plus all dividends, if any, declared and unpaid thereon as of the date of such distribution, before any payment is made or any assets distributed to the holders of the Common Stock. After such payment, the remaining assets of the Company will be distributed to the holders of Common Stock.
If the assets to be distributed to the Holders of the Series B Preferred Stock are insufficient to permit the receipt by such Holders of the full preferential amounts, then all of such assets will be distributed among such Holders ratably in accordance with the number of such shares then held by each such Holder.
The sale of all or substantially all of the Company's assets, any consolidation or merger of the Company with or into any other entity or person, or any other corporate reorganization, in which the stockholders of the Company immediately prior to such consolidation, merger or reorganization, own less than fifty percent (50%) of the Company's voting power immediately after such consolidation, merger or reorganization, or any transaction or series of related transactions to which the Company is a party in which in excess of fifty percent (50%) of the Company's voting power is transferred, excluding any consolidation or merger effected exclusively to change the domicile of the Company, is deemed to be a liquidation, dissolution or winding up.
The Series B Preferred Stock is convertible into Common Stock.
The Holder has the right, at any time, at its election, to convert all or part of the Share Value into shares of Common Stock. The conversion price is the lesser of (1) Fifty Percent (50%) of the lowest trade price of Common Stock recorded on any trade day after December 12, 2012 or (2) the lowest effective price per share granted to any person or entity, including the Holder but excluding officers and directors of the Company, to acquire Common Stock, or adjusted, whether by operation of purchase price adjustment, settlement agreements, exchange agreements, reset provision, floating conversion or otherwise, any outstanding warrant, option or other right to acquire Common Stock or outstanding Common Stock equivalents (the "Conversion Price").
The conversion formula is as follows: The number of shares receivable upon conversion equals the Share Value divided by the Conversion Price. A conversion notice (the "Conversion Notice") may be delivered to Company by any method of Holder's choice (including but not limited to email, facsimile, mail, overnight courier, or personal delivery), and all conversions will be cashless and not require further payment from the Holder. If no objection is delivered from the Company to the Holder, with respect to any variable or calculation reflected in the Conversion Notice, within 24 hours of delivery of the Conversion Notice, the Company will thereafter be deemed to have irrevocably confirmed and ratified such notice of conversion and waived any objection. The Company will deliver the shares of Common Stock from any conversion to the Holder (in any name directed by the Holder) within three (3) business days of Conversion Notice delivery. If the Company is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer ("FAST") program, then upon request of the Holder and provided that the shares to be issued are eligible for transfer under Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"), or are effectively registered under the Securities Act, the Company will cause its transfer agent to electronically issue the Common Stock issuable upon conversion to the Holder through the DTC Direct Registration System ("DRS"). If the Company is not participating in the DTC FAST program, then the Company agrees in good faith to apply and cause the approval for participation in the DTC FAST program.
The Conversion Price is subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Company relating to the Company's securities or the securities of any subsidiary of the Company, combinations, recapitalization, reclassifications, extraordinary distributions and similar events. No fractional shares of the Common Stock shall be issuable upon the conversion of shares of the Series B Preferred Stock and the Company shall pay the cash equivalent of any fractional share upon such conversion.
If the Company fails to deliver shares in accordance with the required time frame, then for each conversion, a penalty of $1,500 per day will be assessed for each day after the third business day (inclusive of the day of the conversion) until share delivery is made. Such penalty may be converted into Common Stock at the Conversion Price or payable in cash, at the sole option of the Holder (under the Holder's and the Company's expectations that any penalty amounts shall tack back to the original date of the issuance of Series B Preferred Stock, consistent with applicable securities laws).
In no event will the Holder be entitled to convert any Series B Preferred Stock, such that upon conversion the sum of (1) the number of shares of Common Stock beneficially owned by the Holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of this Series B Preferred Stock or the unexercised or unconverted portion of any other security of the Company subject to a limitation on conversion or exercise analogous to these limitations), and (2) the number of shares of Common Stock issuable upon the conversion of Series B Preferred Stock, would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock. The limitations on conversion may be waived by the Holder upon, at the election of the Holder, not less than 61 days prior notice to the Company, and the provisions of the conversion limitation shall continue to apply until such 61st day (or such later date, as determined by the Holder, as may be specified in such notice of waiver).
Except as required by law, the Holders of Series B Preferred Stock are not entitled to vote, as a separate class or otherwise, on any matter presented to the stockholders of the Company for their action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu of meeting). Each Holder of outstanding shares of Series B Preferred Stock will be entitled, on the same basis as holders of Common Stock, to receive notice of such action or meeting.
So long as any shares of the Series B Preferred Stock remain outstanding, the Company will not, without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series B Preferred Stock voting together as one class: (a) alter or change the rights, preferences or privileges of the shares of the Series B Preferred Stock so as to affect materially and adversely such shares; or (b) create any new class of shares having preference over the Series B Preferred Stock.
The Holder has the right, at its sole discretion, to elect a fixed conversion price for the Series B Preferred Stock. The Fixed Conversion Price may not be lower than the Conversion Price. The Company will not, by amendment of its Certificate of Incorporation, bylaws or through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Series B Certificate, and will at all times carry out all the provisions of the Series B Certificate.
On March 2, 2016, the Company filed a Certificate of Designation for its Series B Preferred Stock (the “Series B Certificate”) with the Secretary of State of Nevada designating 30,000 shares of its authorized preferred stock as Series B Preferred Stock. The shares of Series B Preferred Stock have a par value of $0.001 per share.
Series C Preferred Stock
In November 2018, the Company filed a Certificate of Designation for its Series B Preferred Stock (the “Series B Certificate”) with the Secretary of State of Nevada designating 36,000 shares of its authorized preferred stock as Series C Preferred Stock. The shares of Series B Preferred Stock have a par value of $0.001 per share. The total face value of this entire series is three million dollars ($3,600,000). Each share of Series C Preferred Stock has a stated face value of One Hundred Dollars ($100) (“Share Value”) and is convertible into shares of fully paid and non-assessable shares of common stock (“Common Stock”) of the Company.
As discussed in Note 3, the Company issued 36,000 shares of Series C Preferred Stock to the owner of the common stock of EllisLab, Inc. in the Merger, which shares were outstanding at December 31, 2018.
The holders of outstanding shares of the Series C Preferred Stock (the “Holders”) shall be entitled to receive dividends pari passu (on a pro rata basis) with the holders of Series B Preferred Stock and Common Stock, except upon a liquidation, dissolution and winding up of the Company. Such dividends shall be paid equally to all outstanding shares of Series C Preferred Stock, Series B Preferred Stock and Common Stock, on an as-if-converted basis with respect to the Series C Preferred Stock and Series B Preferred Stock.
In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the Holder of each outstanding share of the Series C Preferred Stock shall be entitled to receive, on a pro rata basis with the outstanding Series B Preferred Stock, out of the assets of the Company available for distribution to its shareholders upon such liquidation, whether such assets are capital or surplus of any nature, an amount equal to one hundred dollars ($100.00) for each such share of the Series C Preferred Stock (as adjusted for any combinations. consolidations, stock distributions, stock splits or stock dividends with respect to such shares), plus all dividends, if any, declared and unpaid thereon as of the date of such distribution, before any payment shall be made or any assets distributed to the holders of the Common Stock, and, after such payment, the remaining assets of the Company shall be distributed to the holders of Common Stock.
Each share of Series C Preferred Stock is convertible into twenty thousand (20,000) shares of the Company’s fully paid and nonassessable shares of Common Stock, as adjusted. The Series C Preferred Stock shall contain the respective rights, privileges and designations as are set forth in the Certificate of Designations, Preferences, Rights and Limitations of Series C Preferred Stock appended hereto as Exhibit 4.1. The Series C contains a blocker that prevents the Holder from converting the Series C Preferred if such exercise would result in beneficial ownership of re than 4.99% of the outstanding shares of the Company’s stock, without at least 61 days of prior notice. Under the Series C Preferred Stock, the Holder is also subject to the Rule 144 restrictions of an affiliate.
Except as required by law or as specifically provided in the Certificate of Designation, the Holders of Series C Preferred Stock shall not be entitled to vote, as a separate class or otherwise, on any matter presented to the stockholders of the Company for their action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu of meeting); provided, however, that each Holder of outstanding shares of Series C Preferred Stock shall be entitled, on the same basis as holders of Common Stock, to receive notice of such action or meeting.
The foregoing description of the Certificate of Designation of Series C Preferred Stock does not purport to be complete and is qualified in its entirety by reference to the full text of the Certificate of Designation of Series C Preferred Stock, which is attached as Exhibit 4.1 to this Current Report on Form 8-K and is incorporated herein by reference.
Common Stock
On April 20, 2016, the Company amended its articles of incorporation to reduce the number of authorized shares of common stock from 1,000,000,000 to 100,000,000 and to affect a one-for-ten reverse stock split of its authorized, issued and outstanding shares of common stock. The Company has given retroactive affect for the reverse stock split in all periods presented in the accompanying financial statements.
On April 29, 2016, our Board of Directors and the holder of a majority of the total issued and outstanding voting stock of the Company authorized and approved an amendment to the Company's articles of incorporation to increase the number of authorized shares of common stock from 100,000,000 to 2,000,000,000.
As of December 31, 2018 and 2017, the Company had 40,750,040 and 38,776,436 shares of common stock issued and outstanding, respectively.
During the year ended December 31, 2018, the Company the Company issued a total of 1,973,604 shares of common stock at fair value in consideration for the conversion of $2,330 of convertible promissory notes and accrued interest payable of $631. In connection with the debt conversion, the Company reduced derivative liabilities by $8,209. There was no gain or loss on settlement of debt due to the conversions occurring within the terms of the convertible note.
During the year ended December 31, 2017, The Company issued a total of 3,597,812 shares of common stock for the conversion of $35,000 of convertible notes payable and accrued interest payable of $6,552. In connection with the debt conversion, the Company reduced derivative liabilities by $111,225 and recorded a gain on settlement of debt of $11,643.
8. STOCK OPTIONS AND WARRANTS
As of December 31, 2018, the Board of Directors of the Company had granted non-qualified stock options and warrants exercisable for a total of 141,406,250 shares of common stock to its employees, officers, and consultants.
As further discussed in Note 3, on November 30, 2018 in connection with the Merger, the Company issued a ten-year option to purchase 100,000,000 shares of common stock of the Company, at an exercise price of $0.005. The option vested upon grant but may not be exercised for 2 years from the date of the Merger. Stock-based compensation of $599,998, measured at the grant date using a multinomial lattice model, was included in the purchase price recorded in the Merger and recorded to additional paid-in capital.
On November 30, 2018, the Company also issued ten-year warrants to two consultants to purchase a total of 40,000,000 shares of common stock of the Company, at an exercise price of $0.005. The warrants vested upon grant but may not be exercised for 2 years from the date of issuance. Stock-based compensation of $188,127, measured at the grant date using a multinomial lattice model, was included in general and administrative expenses and recorded to derivative liabilities due to the existence of a tainted equity environment.
We recognized stock-based compensation expense of $188,124 and $0 for the years ended December 31, 2018 and 2017, respectively. As of December 31, 2018, we had no unrecognized stock-based compensation expense.
The significant assumptions used in the valuation of the stock options and warrants are as follows:
Stock price on the valuation date
|
|
$0.006 - $0.013
|
|
Risk free interest rates
|
|
2.59 - 2.84
|
%
|
Expected volatility
|
|
228.9 – 236.6
|
%
|
A summary of the Company’s stock options and warrants as of December 31, 2018, and changes during the two years then ended is as follows:
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contract Term
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
1,416,000
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(1,250
|
)
|
|
$
|
29.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
1,414,750
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
Granted
|
|
|
140,000,000
|
|
|
$
|
0.005
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(8,500
|
)
|
|
$
|
13.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
141,406,250
|
|
|
$
|
0.006
|
|
|
|
9.84
|
|
|
$
|
1,120,000
|
|
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the closing price of our common stock of $0.013 as of December 31, 2018, which would have been received by the holders of in-the-money options and warrants had the holders exercised their options and warrants as of that date.
As of December 31, 2017, the Company had 6,000 common stock purchase warrants outstanding with an exercise price of $5.00 per share. The warrants expired during 2018.
9. DERIVATIVE LIABILITIES
The fair value of the Company’s derivative liabilities is estimated at the issuance date and is revalued at each subsequent reporting date. We estimate the fair value of derivative liabilities associated with our convertible notes payable, Series B preferred stock and warrants using a multinomial lattice model based on projections of various potential future outcomes. Where the number of warrants or common shares to be issued under these agreements is indeterminate, the Company has concluded that the equity environment is tainted, and all additional warrants and convertible debt and equity are included in the value of the derivatives.
The significant assumptions used in the valuation of the derivative liabilities at December 31, 2018 are as follows:
Conversion to stock
|
|
Monthly
|
|
Stock price on the valuation date
|
|
$
|
0.0230
|
|
Conversion price
|
|
$
|
0.0045
|
|
Risk free interest rates
|
|
2.58% - 2.49
|
%
|
Years to maturity
|
|
|
15.0
|
|
Expected volatility
|
|
123%–358
|
%
|
The value of our derivative liabilities was estimated as follows at December 31:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Convertible notes payable
|
|
$
|
7,809,054
|
|
|
$
|
5,241,762
|
|
Series B preferred stock
|
|
|
2,339,898
|
|
|
|
2,831,142
|
|
Warrants
|
|
|
214,153
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,363,105
|
|
|
$
|
8,072,904
|
|
The calculation input assumptions are subject to significant changes from period to period and to management’s judgment; therefore, the estimated fair value of the derivative liability will fluctuate from period to period, and the fluctuation may be material.
10. RESEARCH AGREEMENTS
Research and development expenses totaled $65,009 in the year ended December 31, 2017 and related to our third sponsored research agreement with University of California – Santa Barbara (“UCSB”). We have completed our development and research efforts around graphene through our sponsored research agreements with UCSB. As a result, we reported no research and development expenses in the year ended December 31, 2018.
11. INCOME TAXES
A reconciliation of the income tax provision (benefit) that would result from applying a 2018 combined U.S. federal and state rate of 29% to loss before income taxes with the provision (benefit) for income taxes presented in the financial statements is as follows:
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Income tax benefit at statutory rate
|
|
$
|
(2,369,000
|
)
|
|
$
|
(1,027,000
|
)
|
State income taxes, net of federal benefit
|
|
|
(200
|
)
|
|
|
(300
|
)
|
Nondeductible expenses
|
|
|
2,123,100
|
|
|
|
2,004,820
|
|
Other
|
|
|
5,000
|
|
|
|
(600
|
)
|
Valuation allowance
|
|
|
241,100
|
|
|
|
(976,920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred tax assets (liabilities) are comprised of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
3,104,700
|
|
|
$
|
2,863,700
|
|
Research and development credit carryforward
|
|
|
125,300
|
|
|
|
125,200
|
|
Accrued compensated absences
|
|
|
700
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(3,230,700
|
)
|
|
|
(2,989,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”). The Tax Act establishes new tax laws that affect 2018 and future years, including a reduction in the U.S. federal corporate income tax rate to 21%, effective January 1, 2018. For certain deferred tax assets and deferred tax liabilities, we have recorded a provisional decrease of $1,382,720, with a corresponding net adjustment to valuation allowance of $1,382,720 as of December 31, 2017.
The ultimate realization of our deferred tax assets is dependent, in part, upon the tax laws in effect, our future earnings, and other events. As of December 31, 2018, we recorded a valuation allowance of $3,230,700 against net current deferred tax. In recording the valuation allowance, we were unable to conclude that it is more likely than not that our deferred tax assets will be realized.
As of December 31, 2018, we had a net operating loss carryforward available to offset future taxable income of approximately $10,706,000, which begins to expire at dates that have not been determined. If substantial changes in the Company’s ownership should occur, there would be an annual limitation of the amount of the net operating loss carryforward that could be utilized.
We perform a review of our material tax positions in accordance with recognition and measurement standards established by authoritative accounting literature, which requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. Based upon our review and evaluation, during the years ended December 31, 2018 and 2017, we concluded the Company had no unrecognized tax benefit that would affect its effective tax rate if recognized.
We file income tax returns in the U.S. federal jurisdiction and in the state of California. With few exceptions, we are no longer subject to U.S. federal, state or local income tax examinations by tax authorities for years before 2011.
We classify any interest and penalties arising from the underpayment of income taxes in our statements of operations and comprehensive loss in other income (expense). As of December 31, 2018 and 2017, we had no accrued interest or penalties related to uncertain tax positions.
12. RELATED PARTY TRANSACTIONS
Pursuant to a written consulting agreement, dated May 31, 2013 and amended effective November 1, 2016, William E. Beifuss, Jr., our current President, Acting Chief Executive Officer and Acting Chief Financial Officer, received $120,000 in fees for each of the years ended December 31, 2018 and 2017.
Effective December 1, 2018, Rick Ellis, Chief Executive Officer of EllisLab Corp., receives a monthly salary of $10,000.
As discussed in Note 3, the Company issued 36,000 shares of Series C Preferred Stock to Rick Ellis, which shares were outstanding at December 31, 2018.
See Note 7 for a discussion regarding the issuance in August 2017 of 1,000 shares of Series A Preferred Stock to the Company's interim chief executive officer and director, William E. Beifuss, Jr., for services rendered. The shares were automatically redeemed 120 days after the effective date of the related Series A Certificate.
See Note 5 for discussion of convertible notes payable with related parties.
On June 4, 2013, we entered into a convertible note with a former member of our Board of Directors in exchange for services valued at $25,000. The note was to mature on June 4, 2016. We entered into an agreement to repay this note in 12 equal monthly payments of principal and interest of $2,352, beginning in June 2016. The note was paid in full as of December 31, 2017.
13. COMMITMENTS AND CONTINGENCIES
Operating Leases
On September 5, 2017, we entered into an operating sublease for office space. The base rent for the new sublease is $1,000 per month for a period of one year and month-to-month thereafter. Rent expense for all operating leases for the years ended December 31, 2018 and 2017 was $12,000 and $47,068, respectively.
Consulting Agreement
We have a written consulting agreement, dated May 31, 2013 and amended effective November 1, 2016, with William E. Beifuss, Jr., our former Chief Executive Officer, and current President and Acting Chief Financial Officer, for the payment of monthly compensation of $10,000 per month. The agreement may be cancelled by either party with 30 days’ notice.
14. SUBSEQUENT EVENTS
Management has evaluated subsequent events according to the requirements of ASC TOPIC 855, and has reported the following:
Convertible Note Conversion
On March 4, 2019, a lender converted $2,285 principal and $679 accrued interest payable into 1,976,160 common shares of the Company.
Subsequent Borrowings
We received advances under the August 2018 $500,000 CPN of $25,000 in each of January, February and March 2019 and $15,000 in March 2019.
Effective January 25, 2019, the Company entered into a 10% convertible note with an institutional investor in the principal amount of $38,000. The note matures January 25, 2020. The Company received proceeds of $35,000 after payment of $3,000 of the fees and expenses of the lender and its counsel. The lender, at its option after 180 days from the issuance of the note, may convert the unpaid principal balance of, and accrued interest on, the note into shares of the Company’s common stock at a 39% discount from the lowest trading price during the 15 days prior to conversion. The Company may prepay the note during the 180 days from the issuance of the note at redemption premiums ranging from 20% to 45%. After the expiration of 180 days after issuance, the Company has no right of prepayment.
Effective March 25, 2019, the Company entered into a 10% convertible note with an institutional investor in the principal amount of $35,000. The note matures March 25, 2020. The Company received proceeds of $32,000 after payment of $3,000 of the fees and expenses of the lender and its counsel. The lender, at its option after 180 days from the issuance of the note, may convert the unpaid principal balance of, and accrued interest on, the note into shares of the Company’s common stock at a 39% discount from the lowest trading price during the 15 days prior to conversion. The Company may prepay the note during the 180 days from the issuance of the note at redemption premiums ranging from 20% to 45%. After the expiration of 180 days after issuance, the Company has no right of prepayment.
Extension of Maturity Dates of Convertible Promissory Note
Subsequent to December 31, 2018, the maturity date of a note payable issued for services with a principal balance of $32,620 at December 31, 2018 was extended from December 31, 2018 to December 31, 2019.