See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
IIOT-OXYS, Inc. and Subsidiaries
See accompanying notes to unaudited condensed consolidated financial statements.
Notes to Unaudited Consolidated Financial
Statements
June 30, 2020
1. NATURE OF OPERATIONS
The Company was only recently formed and
is currently devoting substantially all its efforts in identifying, developing and marketing engineered products, software and
services for applications in the Industrial Internet which involves collecting and processing data collected from a wide variety
of industrial systems and machines.
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
The Company's financial statements are
prepared on the accrual method of accounting. The accounting and reporting policies of the Company conform with generally accepted
accounting principles (“GAAP”).
Interim Financial Statements
The accompanying unaudited condensed interim
financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United
States of America (“U.S. GAAP”) for interim financial information, and in accordance with the rules and regulations
of the United States Securities and Exchange Commission with respect to Form 10-Q and Article 8 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited
interim financial statements furnished reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion
of management, necessary for a fair statement of the results for the interim periods presented. Interim results are not necessarily
indicative of the results for the full year. These unaudited interim financial statements should be read in conjunction with the
audited financial statements of the Company for the year ended December 31, 2019.
Principles of Consolidation
The consolidated financial statements for
June 30, 2020 and 2019 include the accounts of IIOT-OXYS, Inc., OXYS Corporation, and HereLab, Inc. All significant intercompany
balances and transactions have been eliminated.
Revenue Recognition
The Company’s revenue is derived
primarily from providing services under contractual agreements. The Company recognizes revenue in accordance with ASC Topic No.
606, Revenue from Contracts with Customers (“ASC 606”) which was adopted on January 1, 2018, using the modified
retrospective method, which was elected to apply to all active contracts as of the adoption date. Application of the modified retrospective
method did not impact amounts previously reported by the Company, nor did it require a cumulative effect adjustment upon adoption,
as the Company's method of recognizing revenue under ASC 606 yielded similar results to the method utilized immediately prior to
adoption. Accordingly, there was no effect to each financial statement line item as a result of applying the new revenue standard.
According to ASC 606, the Company recognizes
revenue based on the following criteria:
|
·
|
Identification of a contract or contracts, with a customer.
|
|
·
|
Identification of the performance obligations in the contract.
|
|
·
|
Determination of contract price.
|
|
·
|
Allocation of transaction price to the performance obligation.
|
|
·
|
Recognition of revenue when, or as, performance obligation is satisfied.
|
The Company used a practical expedient
available under ASC 606-10-65-1(f)4 that permits it to consider the aggregate effect of all contract modifications that occurred
before the beginning of the earliest period presented when identifying satisfied and unsatisfied performance obligations, transaction
price, and allocating the transaction price to the satisfied and unsatisfied performance obligations.
The Company has elected to treat shipping
and handling activities as cost of sales. Additionally, the Company has elected to record revenue net of sales and other similar
taxes.
Use of Estimates
Management uses estimates and assumptions
in preparing these financial statements in accordance with generally accepted accounting principles. These estimates and assumptions
affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported revenues and expenses during the reporting period. Actual results could vary from the estimates that
were used.
Going Concern
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. As shown in the accompanying financial statements, the
Company was only recently formed, has incurred continuing operating losses, and has an accumulated deficit of $6,418,042 and $5,040,307
as of June 30, 2020 and December 31, 2019, respectively. These factors raise substantial doubt about the ability of the Company
to continue as a going concern.
Management believes that the Company will
be able to achieve a satisfactory level of liquidity to meet the Company’s obligations for the next 12 months by generating
cash through additional borrowings and/or issuances of equity securities, as needed. However, there can be no assurance that the
Company will be able to generate sufficient liquidity to maintain its operations. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
Concentration of Risk
Financial instruments that potentially
expose the Company to concentrations of risk consist primarily of cash and cash equivalents which are generally not collateralized.
The Company’s policy is to place its cash and cash equivalents with high quality financial institutions, in order to limit
the amount of credit exposure. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (FDIC), up
to $250,000. As of June 30, 2020, and December 31, 2019, the Company had no amounts in excess of the FDIC insurance limit.
Cash and Cash Equivalents
For purposes of the statement of cash flows,
the Company considers all unrestricted highly liquid investments with an original maturity of three months or less to be cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are carried at
original invoice amount less an estimate made for doubtful accounts. The Company determines the allowance for doubtful accounts
by identifying potential troubled accounts and by using historical experience and future expectations applied to an aging of accounts.
Trade accounts receivable are written off when deemed uncollectible. Recoveries of trade accounts receivable previously written
off are recorded as income when received. There was no allowance for doubtful accounts as of June 30, 2020 and December 31, 2019.
Fair Value of Financial Instruments
The fair value of the Company’s financial
instruments is determined in accordance with ASC 820, Fair Value Measurements and Disclosures.
Income Taxes
The Company accounts for income taxes in
accordance with FASB ASC 740, Income Taxes.
Long-Lived Assets
The Company regularly reviews the carrying
value and estimated lives of its long-lived assets to determine whether indicators of impairment may exist that warrant adjustments
to the carrying value or estimated useful lives. The determinants used for this evaluation include management’s estimate
of the asset’s ability to generate positive income from operations and positive cash flow in future periods as well as the
strategic significance of the assets to the Company’s business objectives.
Definite-lived intangible assets are amortized
on a straight-line basis over the estimated periods benefited and are reviewed when appropriate for possible impairment.
Convertible Debt
Convertible debt is accounted for under
FASB ASC 470-20, Debt – Debt with Conversion and Other Options.
Basic and Diluted Net Loss Per Common
Share
The Company computes basic and diluted
net loss attributable to common stockholders for the period under ASC 260-10, Earnings Per Share.
3. RECENT ACCOUNTING PRONOUNCEMENTS
ASU 2019-12
In December 2019, the FASB issued ASU No.
2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related
to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies
and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2021, and interim periods within fiscal years beginning after December
15, 2022, with early adoption permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial
statements.
Other accounting standards that have been
issued or proposed by FASB and do not require adoption until a future date are not expected to have a material impact on the consolidated
financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact
on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
4. COMMITMENTS AND CONTINGENCIES
In prior years, the Company entered into
consulting agreements with one director, three executive officers, and one engineer of the Company which include commitments to
issue shares of the Company’s common stock from the Company’s Stock Incentive Plans. Two agreements have been terminated
and shares have been issued in conjunction with the related separation agreements, but the vested shares related to the remaining
consulting agreements with the three executive officers have not yet been issued and, therefore, remain a liability. According
to the remaining three agreements, 1,269,000 shares vested in 2019, 1,600,000 shares vested during the six months ended June 30,
2020, 800,000 shares of common stock will vest during the remainder of 2020, and 3,600,000 shares of common stock will vest in
2021.
In the event that the agreement is terminated
by either party pursuant to the terms of the agreement, all unvested shares which have been earned shall vest on a pro-rata basis
as of the effective date of the termination of the agreement and all unearned, unvested shares shall be terminated.
The value of the shares was assigned at
fair market value on the effective date of the agreement and the pro-rata number of shares earned was calculated and amortized
at the end of each reporting period. The Company accrued $1,465,099 and $1,102,645 in shares payable in conjunction with these
agreements as of June 30, 2020 and December 31, 2019, respectively. A summary of these agreements is as follows.
On March 11, 2019, the Company’s
Board of Directors approved the Consulting Agreement dated effective June 4, 2018 with its CEO. The term of the agreement is for
three years beginning as of the effective date, unless terminated earlier pursuant to the agreement and is automatically renewable
for one-year terms upon the consent of the parties. The services to be provided by the CEO pursuant to the agreement are those
customary for the position in which the CEO is serving. As of the effective date, the Company shall issue to the CEO an aggregate
of 3,060,000 shares of the Company’s common stock which vest as follows:
1.
560,000 shares on the first-year anniversary of the effective date;
2.
1,000,000 shares on the second-year anniversary of the effective date; and
3.
1,500,000 shares on the third-year anniversary of the effective date.
The shares are issued under the 2019 Stock
Incentive Plan. Vesting of the shares is subject to acceleration of vesting upon the occurrence of certain events such as a Change
of Control (as defined in the agreement) or the listing of the Company’s common stock on a senior exchange. As of June 30,
2020, and December 31, 2019, 1,560,000 and 560,000 shares had vested, respectively, but were not yet issued.
As part of the Consulting Agreement dated
June 4, 2018 the CEO shall also receive a monthly fee of $15,000 which accrues unless converted into shares of common stock of
the Company at a conversion rate specified in the agreement. Until the Company closes a minimum $500,000 capital raise, the monthly
fee accrues and, upon the closing of such a capital raise, $5,000 of the monthly fee will be paid to the CEO in cash and the remainder
will continue to accrue. Upon the closing of a capital raise of at least $2,000,000, the entire monthly fee will be paid to the
CEO in cash and all accrued and unpaid monthly fees will be paid by the Company within one year of the closing of such a capital
raise.
On June 11, 2020, the Company entered into
a Debt Forgiveness Agreement with the CEO, pursuant to which the CEO forgave $185,000 of accrued and unpaid consulting fees owed
to him pursuant to his consulting agreement with the Company. On June 12, 2020, the Company entered into an amendment effective
January 1, 2020 to the Consulting Agreement with the CEO. The amendment stated that from January 1, 2020 until April 23, 2020,
the Consultant shall be paid an hourly wage of $12.75 per hour for services performed. From April 24, 2020 onward, the Consultant
shall be paid an hourly wage of $48.08 an hour for services performed. Fees may accrue at the discretion of management. At any
time, the Consultant shall have the right to convert any accrued and unpaid fees into shares of Common Stock of the Company. The
conversion price shall equal 90% multiplied by the market price (representing a discount rate of 10%). As of June 30, 2020, and
December 31, 2019 $121,149 and $117,001 is in salaries payable to related parties due and payable to the CEO, respectively
On March 11, 2019, the Company’s
Board of Directors approved the Consulting Agreement dated effective October 1, 2018 with its COO. The term of the agreement is
for three years beginning as of the effective date, unless terminated earlier pursuant to the agreement and is automatically renewable
for one-year terms upon the consent of the parties. The services to be provided by the COO pursuant to the agreement are those
customary for the position in which the COO is serving. As of the effective date, the Company shall issue to the COO an aggregate
of 2,409,000 shares of the Company’s common stock which vest as follows:
1.
409,000 shares on the first-year anniversary of the effective date;
2.
800,000 shares on the second-year anniversary of the effective date; and
3.
1,200,000 shares on the third-year anniversary of the effective date.
The shares are issued under the 2017 Stock
Incentive Plan. Vesting of the shares is subject to acceleration of vesting upon the occurrence of certain events such as a Change
of Control (as defined in the agreement) or the listing of the Company’s common stock on a senior exchange. As of June 30,
2020, and December 31, 2019, 409,000 shares had vested, but were not yet issued.
As part of the Consulting Agreement dated
October 1, 2018 the COO shall receive a monthly fee of $12,750 which accrues unless converted into shares of common stock of the
Company at a conversion rate specified in the agreement. Until the Company closes a minimum $500,000 capital raise, the monthly
fee accrues and, upon the closing of such a capital raise, $4,250 of the monthly fee will be paid to the COO in cash and the remainder
will continue to accrue. Upon the closing of a capital raise of at least $2,000,000, the entire monthly fee will be paid to the
COO in cash and all accrued and unpaid monthly fees will be paid by the Company within one year of the closing of such a capital
raise.
On June 11, 2020, the Company entered into
a Debt Forgiveness Agreement with the COO, pursuant to which the COO forgave $103,250 of accrued and unpaid consulting fees owed
to her pursuant to her consulting agreement with the Company. On June 12, 2020, the Company entered into an amendment effective
January 1, 2020 to the Consulting Agreement with the COO. The amendment stated that from January 1, 2020 until April 23, 2020,
the Consultant shall be paid an hourly wage of $12.75 per hour for services performed. From April 24, 2020 onward, the Consultant
shall be paid an hourly wage of $48.08 an hour for services performed. Fees may accrue at the discretion of management. At any
time, the Consultant shall have the right to convert any accrued and unpaid fees into shares of Common Stock of the Company. The
conversion price shall equal 90% multiplied by the market price (representing a discount rate of 10%). As of June 30, 2020, and
December 31, 2019 $122,828 and $118,000 is in salaries payable to related parties due and payable to the COO, respectively.
On March 11, 2019, the Company’s
Board of Directors approved the Amended and Restated Consulting Agreement dated effective April 23, 2018 with its CTO. The term
of the agreement is for three years beginning as of the effective date, unless terminated earlier pursuant to the agreement and
is automatically renewable for one-year terms upon the consent of the parties. The services to be provided by the CTO pursuant
to the agreement are those customary for the position in which the CTO is serving. As of the effective date, the Company shall
issue to the CTO an aggregate of 1,800,000 shares of the Company’s common stock which vest as follows:
1.
300,000 shares on the first-year anniversary of the effective date;
2.
600,000 shares on the second-year anniversary of the effective date; and
3.
900,000 shares on the third-year anniversary of the effective date.
As of June 30, 2020, and December 31, 2019,
900,000 and 300,000 shares had vested, respectively, but were not yet issued.
As part of the Amended and Restated Consulting
Agreement dated effective April 23,2018 the CTO shall receive a monthly fee of $9,375 which accrues unless converted into shares
of common stock of the Company at a conversion rate specified in the agreement. Until the Company closes a minimum $500,000 capital
raise, the monthly fee accrues and, upon the closing of such a capital raise, $3,125 of the monthly fee will be paid to the CTO
in cash and the remainder will continue to accrue. Upon the closing of a capital raise of at least $2,000,000, the entire monthly
fee will be paid to the CTO in cash and all accrued and unpaid monthly fees will be paid by the Company within one year of the
closing of such a capital raise.
On June 11, 2020, the Company entered into
a Debt Forgiveness Agreement with the CTO pursuant to which the CTO forgave $82,475 of accrued and unpaid consulting fees owed
to him pursuant to his consulting agreement with the Company. On June 12, 2020, the Company entered into an amendment effective
January 1, 2020 to the Consulting Agreement with the CTO. The amendment stated that from January 1, 2020 until April 23, 2020,
the Consultant shall be paid an hourly wage of $12.75 per hour for services performed. From April 24, 2020 onward, the Consultant
shall be paid an hourly wage of $48.08 an hour for services performed. Fees may accrue at the discretion of management. At any
time, the Consultant shall have the right to convert any accrued and unpaid fees into shares of Common Stock of the Company. The
conversion price shall equal 90% multiplied by the market price (representing a discount rate of 10%). As of June 30, 2020, and
December 31, 2019 $112,113 and $108.226 is in salaries payable to related parties due and payable to the CTO, respectively.
5. STOCKHOLDERS' EQUITY
Common Stock
The Company has authorized 190,000,000
shares of $0.001 par value common stock and 10,000,000 shares of $0.001 par value preferred stock. As of June 30, 2020, and December
31, 2019, the Company had 135,065,629 and 43,313,547 shares of common stock, respectively, and no shares of preferred stock issued
and outstanding.
Holders of shares of common stock are entitled
to one vote for each share on all matters to be voted on by the stockholders. Holders of common stock do not have cumulative voting
rights. Holders of common stock are entitled to share ratably in dividends, if any, as may be declared from time to time by the
Board of Directors in its discretion from funds legally available, therefore. In the event of liquidation, dissolution, or winding
up of the Company, the holders of common stock are entitled to share pro rata in all assets remaining after payment in full of
all liabilities. All of the outstanding shares of common stock are fully paid and non-assessable. Holders of common stock have
no preemptive rights to purchase the Company’s common stock. There are no conversion or redemption rights or sinking fund
provisions with respect to the common stock.
On December 14, 2017 (the “Effective
Date”), the Board of Directors of the Company approved the 2017 Stock Inventive Plan (the “2017 Plan”).
Awards may be made under the 2017 Plan for up to 4,500,000 shares of common stock of the Company. All of the Company’s employees,
officers and directors, as well as consultants and advisors to the Company are eligible to be granted awards under the 2017 Plan.
No awards can be granted under the 2017 Plan after the expiration of 10 years from the Effective Date but awards previously granted
may extend beyond that date. Awards may consist of both incentive and non-statutory options, restricted stock units, stock appreciation
rights, and restricted stock awards.
On March 11, 2019 (the “Effective
Date”) the Board of Directors of the Company approved the 2019 Stock Incentive Plan (the “Plan”).
Awards may be made under the Plan for up to 5,000,000 shares of common stock of the Company. All of the Company’s employees,
officers and directors, as well as consultants and advisors to the Company are eligible to be granted awards under the Plan. No
awards can be granted under the Plan after the expiration of 10 years from the Effective Date but awards previously granted may
extend beyond that date. Awards may consist of both incentive and non-statutory options, restricted stock units, stock appreciation
rights, and restricted stock awards.
Shares earned and issued related to the
consulting agreements discussed in Note 4 are issued under the 2017 Stock Incentive Plan and the 2019 Stock Incentive Plan. Vesting
of the shares is subject to acceleration of vesting upon the occurrence of certain events such as a Change of Control (as defined
in the agreement) or the listing of the Company’s common stock on a senior exchange.
A summary of the status of the Company’s
non-vested shares as June 30, 2019 and 2020 and changes during the year then ended, is presented below:
|
|
Non-vested Shares of Common Stock
|
|
|
Weighted Average Fair Value
|
|
Balance at December 31, 2018
|
|
|
7,469,000
|
|
|
$
|
0.30
|
|
Awarded
|
|
|
–
|
|
|
|
–
|
|
Vested
|
|
|
(910,000
|
)
|
|
|
0.30
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
Balance at June 30, 2019
|
|
|
6,559,000
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
|
6,000,000
|
|
|
$
|
0.30
|
|
Awarded
|
|
|
–
|
|
|
|
–
|
|
Vested
|
|
|
(1,600,000
|
)
|
|
|
0.30
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
Balance at June 30, 2020
|
|
|
4,400,000
|
|
|
$
|
0.30
|
|
As of June 30, 2020, and December 31, 2019,
there was $715,601 and $1,078,055, respectively, of total unrecognized compensation costs related to the non-vested share-based
compensation arrangements awarded to consultants. That cost is expected to be recognized over a weighted-average period of 0.9
years and 1.4 years, respectively, as of June 30, 2020 and December 31, 2019. The total fair value of shares recognized during
the six months ended June 30, 2020 and 2019 was $362,454 and $370,380, respectively.
On March 6, 2020, six months from receipt
of the first tranche of $35,000 under the Convertible Promissory Note issued on August 29, 2019, the Company failed to pay the
accrued and unpaid interest, which is considered an “Event of Default” under the note. As a result, the conversion
price became a “Variable Conversion Price.” Also, as a result of the occurrence of the “Event of Default,”
all amounts owing under the note became immediately due and payable and the Company became obligated to pay to the holder 175%
of the then outstanding balance of the note and all unpaid principal and unpaid interest accrued interest at 15%. During the three
months ended June 30, 2020 the holder of the note had converted $16,312 of principal, $1,636 of interest, plus fees of $7,000 into
27,200,000 shares amounting to $24,948. During the six months ended June 30,2020, the holder of the note had converted $34,980
of principal, $1,636 of interest, plus fees of $16,000 into 50,950,000 shares of Common Stock amounting to $52,636. Furthermore,
during the three and six months ended June 30, 2020 the holder of the note converted $35,000 worth of warrants and $726 worth of
fees into 41,666,667 shares of common stock.
Total share-based compensation for the
three months ended June 30, 2020 and 2019 was $209,788 and $47,917, respectively. Total share-based compensation for the six months
ended June 30, 2020 and 2019 was $478,295 and $256,430, respectively.
Warrants
A summary of the status of the Company’s
warrants as of June 30, 2020 and 2019 and changes during the three months then ended, is presented below:
|
|
Shares Under Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life
|
|
Outstanding at December 31, 2018
|
|
|
384,615
|
|
|
$
|
0.75
|
|
|
|
|
|
Issued
|
|
|
286,667
|
|
|
$
|
0.36
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
Expired/Forfeited
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
Outstanding at June 30, 2019
|
|
|
671,282
|
|
|
$
|
0.43
|
|
|
|
5.3 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
1,627,532
|
|
|
$
|
0.21
|
|
|
|
4.5 years
|
|
Issued
|
|
|
42,907,532
|
|
|
$
|
0.01
|
|
|
|
|
|
Exercised
|
|
|
(41,666,667
|
)
|
|
$
|
0.00
|
|
|
|
|
|
Expired/Forfeited
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
Outstanding at June 30, 2020
|
|
|
2,868,397
|
|
|
$
|
0.00
|
|
|
|
4.0 years
|
|
6. EARNINGS PER SHARE
The following table sets forth the computation
of basic and diluted net loss per share of common stock for the three and six months ended June 30, 2020 and 2019:
|
|
Three months ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Net loss attributable to common stockholders (basic)
|
|
$
|
(384,668
|
)
|
|
$
|
(547,003
|
)
|
|
|
|
|
|
|
|
|
|
Shares used to compute net loss per common share, basic and diluted
|
|
|
71,927,594
|
|
|
|
42,035,306
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common stockholders, basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
|
Six months ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Net loss attributable to common stockholders (basic)
|
|
$
|
(1,174,138
|
)
|
|
$
|
(1,327,041
|
)
|
|
|
|
|
|
|
|
|
|
Shares used to compute net loss per common share, basic and diluted
|
|
|
78,478,730
|
|
|
|
41,614,374
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common stockholders, basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
Basic net loss per share is calculated
by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share
is computed by dividing net loss by the weighted-average number of common shares and common share equivalents outstanding for the
period. Common stock equivalents are only included when their effect is dilutive. The Company’s potentially dilutive securities
which include stock options, convertible debt, convertible preferred stock and common stock warrants have been excluded from the
computation of diluted net loss per share as they would be anti-dilutive. For all periods presented, there is no difference in
the number of shares used to compute basic and diluted shares outstanding due to the Company’s net loss position.
The following outstanding common stock
equivalents have been excluded from diluted net loss per common share for the three and six months ended June 30, 2020 and 2019
because their inclusion would be anti-dilutive:
|
|
As of June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Warrants to purchase common stock
|
|
|
2,868,397
|
|
|
|
671,282
|
|
Potentially issuable shares related to convertible notes payable
|
|
|
42,402,856
|
|
|
|
3,084,615
|
|
Potentially issuable vested shares to directors and officers
|
|
|
2,869,000
|
|
|
|
910,000
|
|
Potentially issuable unvested shares to officers
|
|
|
4,400,000
|
|
|
|
6,559,000
|
|
Total anti-dilutive common stock equivalents
|
|
|
52,540,253
|
|
|
|
11,224,897
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7. CONVERTIBLE NOTE PAYABLE
On January 18, 2018, the Board of Directors
of the Company approved a non-public offering of up to $1,000,000 aggregate principal amount of its 12% Senior Secured Convertible
Notes. The notes are convertible, in whole or in part, into shares of the Company’s common stock, at any time at a rate of
$0.65 per share with fractions rounded up to the nearest whole share, unless paid in cash at the Company’s election. The
notes bear interest at a rate of 12% per annum and interest payments will be made on a quarterly basis. The notes mature January
15, 2020.
The notes are governed by a Securities
Purchase Agreement and are secured by all the assets of the Company pursuant to a Security and Pledge Agreement. In addition to
the issuance of the notes in the offering, the Company’s Board of Directors approved, as part of the offering, the issuance
of warrants to purchase one share of the Company’s common stock for 50% of the number of shares of common stock issuable
upon conversion of each note. Each warrant is immediately exercisable at $0.75 per share, contains certain anti-dilution down-round
features and expires on January 15, 2023. If the Company ever defaults on the loan the warrants to be issued will increase from
50% of the number of shares of common stock issuable upon conversion to 100%.
On January 22, 2018, the Company entered
into a SPA and Security and Pledge Agreement with its first investor in the offering and issued a note to the investor in the principal
amount of $500,000. Subscription funds were received by the Company from the investor on February 7, 2018. In addition to the note,
the Company issued to the investor 384,615 warrants. The warrants are considered equity instruments based on the Company’s
adoption of ASU 2017-11.
The proceeds received upon issuing the
note and warrants were allocated to each instrument on a relative fair value basis. The initial fair value of the warrants was
$838,404 determined using the Black-Scholes valuation model with the following assumptions: expected term of 2.5 years; risk free
interest rate of 2.1%; and volatility of 142%. The effective conversion rate resulted in a Beneficial Conversion Feature greater
than the proceeds received. Thus, the discount was limited to the proceeds received of $500,000 and was amortized to interest expense
using the effective interest method over the term of the note.
On March 7, 2019, the Board of Directors
of the Company approved Amendment No. 1 to the 12% Senior Secured Convertible Promissory Note and the Warrant Agreement, each issued
January 22, 2018, respectively, to the note holder. The amendments (i) extend the maturity date of the note to March 1, 2021 and
extend the term of the warrants to March 6, 2024, (ii) lower the conversion price of the note and the exercise price of the warrants
to $0.20 and $0.30, respectively, and (iii) add an adjustment to the conversion and exercise price of the note and warrants, respectively,
in the event the Company does not achieve certain milestones during calendar 2019. The fair value of the warrants is $25,162 determined
using the Black-Scholes valuation model with the following assumptions: expected term of 2.5 years; risk free interest rate of
2.6%; and volatility of 127%. The effective conversion rate resulted in a discount of $23,956 and is amortized to interest expense
using the effective interest method over the term of the note. The Company recognized a loss on extinguishment of debt of $221,232
related to the decrease in conversion price.
On January 1, 2020, the Company failed
to achieve certain milestones during calendar 2019 and, as such, the conversion/exercise prices of the note and warrants were adjusted
to $0.10 and $0.15, respectively. This resulted in an adjustment to retained earnings of $201 based on the change in fair value.
Effective January 15, 2020, the Company
went into technical default of the note agreement as a result of not making the December 31, 2019 interest payment within the required
period. As a result, the principal was increased by 20%, or $100,000, and the Company was required to issue an additional 384,615
warrants at the then effective exercise price of $0.15 per share. The fair value of the warrants was $44,297, determined using
the Black-Scholes valuation model with the following assumptions: expected term of 4.14 years; risk free interest rate of 1.6%;
and volatility of 243%. Due to the default, this value was immediately expensed.
During the quarter ended March 31, 2020,
the exercise price of the warrants was further adjusted to $0.00084 as a result of the down-round features being triggered. This
resulted in an adjustment to retained earnings of $71 based on the change in fair value.
As of June 30, 2020, the Company has accrued
interest related to this note of $30,666. For the three and six months ended June 30, 2020, the Company also amortized to interest
expense $2,999 and $5,997 of the discount, respectively.
The unpaid principal balance of the note
is $600,000 as of June 30, 2020, which includes the default penalty noted above, and the remaining unamortized discount is $11,039.
On January 22, 2019, the Company entered
into a Securities Purchase Agreement and Security and Pledge Agreement with a single investor and issued a Secured Convertible
Promissory Note to the investor in the principal amount of $55,000. In addition to the note, the Company issued to the investor
36,667 warrants. Each warrant is immediately exercisable at $0.75 per share, contains certain anti-dilution down-round features
and expires on January 22, 2024. If the Company ever defaults on the loan, the warrants to be issued will increase from 50% of
the number of shares of common stock issuable upon conversion to 100%. The warrants are considered equity instruments based on
the Company’s adoption of ASU 2017-11.
The proceeds received upon issuing the
note and warrants were allocated to each instrument on a relative fair value basis. The initial fair value of the warrants was
$3,217 determined using the Black-Scholes valuation model with the following assumptions: expected term of 2.5 years; risk free
interest rate of 2.6%; and volatility of 128%. The effective conversion rate resulted in a discount of $3,039 and is amortized
to interest expense using the effective interest method over the term of the note.
During the quarter ended March 31, 2020,
the exercise price of the warrants was adjusted to $0.00084 as a result of the down-round features being triggered. This resulted
in an adjustment to retained earnings of $7 based on the change in fair value.
The unpaid principal balance of the note
and accrued interest is $55,000 and $3,955, respectively, as of June 30, 2020, and the remaining unamortized discount is $0. For
the three and six months ended June 30, 2020, the Company amortized to interest expense $194 from the amortization of the discount.
This note and accrued interest is due to a related party. On June 12, 2020, this note was amended to extend the maturity date to
January 22, 2021, and all events of default were waived.
On March 7, 2019, the Board of Directors
of the Company approved a non-public offering of up to $500,000 aggregate principal amount of its 12% Senior Secured Convertible
Notes. The notes are convertible, in whole or in part, into shares of the Company’s common stock, at any time at a rate of
$0.20 per share with fractions rounded up to the nearest whole share, unless paid in cash at the Company’s election. The
notes bear interest at a rate of 12% per annum and interest payments will be made on a quarterly basis. The notes mature March
1, 2021. The conversion price of the notes is also subject to adjustments if the Company does not achieve certain milestones during
the calendar year 2019.
The notes are governed by a Securities
Purchase Agreement and are secured by all the assets of the Company pursuant to a Security and Pledge Agreement. Funding is subject
to the occurrence of certain milestones, as stated in the SPA. In addition to the issuance of the notes in the offering, the Company’s
Board of Directors approved, as part of the offering, the issuance of warrants to purchase one share of the Company’s common
stock for 50% of the number of shares of common stock issuable upon conversion of each note. Each warrant is immediately exercisable
at $0.30 per share and expires five years from the issuance date. The exercise price of the warrants is also subject to adjustments
if the Company does not achieve certain milestones during the calendar year 2019.
On March 6, 2019, the Company entered into
SPAs and Security and Pledge Agreements with its first two investors in the offering and issued notes to the investors in the aggregate
principal amount of $100,000. Subscription funds were received by the Company from the investors on March 6, 2019. In addition
to the notes, the Company issued to the investors an aggregate of 250,000 warrants. Each warrant is immediately exercisable at
$0.30 per share, contains certain anti-dilution down-round features and expires on March 6, 2024. If the Company ever defaults
on the loan the warrants to be issued will increase from 50% of the number of shares of common stock issuable upon conversion to
100%. The warrants are considered equity instruments based on the Company’s adoption of ASU 2017-11.
The proceeds received upon issuing the
notes and warrants were allocated to each instrument on a relative fair value basis. The initial fair value of the warrants was
$12,646 determined using the Black-Scholes valuation model with the following assumptions: expected term of 2.5 years; risk free
interest rate of 2.5%; and volatility of 127%. The effective conversion rate resulted in a discount of $11,226 and is amortized
to interest expense using the effective interest method over the term of the notes.
On January 1, 2020, the Company failed
to achieve certain milestones during calendar 2019 and, as such, the conversion/exercise prices of the note and warrants were adjusted
to $0.10 and $0.15, respectively. This resulted in an adjustment to retained earnings of $131 based on the change in fair value.
Effective January 15, 2020, the Company
went into technical default of the note agreement as a result of not making the December 31, 2019 interest payment within the required
period. As a result, the principal was increased by 20%, or $20,000, in aggregate, and the Company was required to issue an additional
250,000 warrants at the then effective exercise price of $0.15 per share. The fair value of the warrants was $28,793, determined
using the Black-Scholes valuation model with the following assumptions: expected term of 4.14 years; risk free interest rate of
1.6%; and volatility of 243%. Due to the default, this value was immediately expensed.
During the quarter ended March 31, 2020,
the exercise price of the warrants was further adjusted to $0.00084 as a result of the down-round features being triggered. This
resulted in an adjustment to retained earnings of $46 based on the change in fair value.
As of June 30, 2020, the unpaid principal
balance of the notes is $120,000, which includes the default penalty noted above, accrued interest is $6,133 and the balance of
the unamortized discount is $0. For the three and six months ended June 30, 2020, the Company also amortized to interest expense
$2,037 from the amortization of the discount.
On August 2, 2019, the Company entered
into a Securities Purchase Agreement with an investor for the purchase of a 12% Secured Convertible Note in the principal amount
of up to $125,000. The note is convertible, in whole or in part, into shares of the Company’s common stock, at any time at
a rate of $0.08 per share with fractions rounded up to the nearest whole share, unless paid in cash at the Company’s election.
The note bears interest at a rate of 12% per annum and interest payments will be made on a quarterly basis. The note matures August
2, 2021. $75,000, $25,000, and $25,000 subscription funds were received by the Company from the investor on August 2, 2019, September
6, 2019, and October 16, 2019, respectively. In addition to the note, the Company issued to the investor an aggregate of 781,250
warrants. The warrants are considered equity instruments based on the Company’s adoption of ASU 2017-11.
The proceeds received upon issuing the
note and warrants were allocated to each instrument on a relative fair value basis. The initial fair value of the warrants was
$71,035 determined using the Black-Scholes valuation model with the following assumptions: expected term of 2.5 years; risk free
interest rate of 1.6%; and volatility of 132%. The effective conversion rate resulted in a discount of $104,941 and is amortized
to interest expense using the effective interest method over the term of the note.
Effective January 30, 2020, the Company
went into technical default of the note agreement as a result of not making the December 31, 2019 interest payment within the required
period. As a result, the Company was required to issue an additional 781,250 warrants at the then effective exercise price of $0.12
per share. The fair value of the warrants was $90,342, determined using the Black-Scholes valuation model with the following assumptions:
expected term of 4.76 years; risk free interest rate of 1.6%; and volatility of 233%. Due to the default, this value was immediately
expensed.
During the quarter ended March 31, 2020,
the exercise price of the warrants was adjusted to $0.00084 as a result of the down-round features being triggered. This resulted
in an adjustment to retained earnings of $70 based on the change in fair value.
As of June 30, 2020, the unpaid principal
balance of the notes is $125,000, the accrued interest is $11,129 and the balance of the unamortized discount is $60,210. For the
three and six months ended June 30, 2020, the Company amortized to interest expense $13,220 and $26,436 from the amortization of
the discount, respectively. This note is payable to a related party.
On August 29, 2019, the Company entered
into a Securities Purchase Agreement with an investor for the purchase of a Convertible Promissory Note in the principal amount
of up to $105,000. The Note is not convertible within 180 days of receipt of funds for the first closing and is then convertible,
in whole or in part, into shares of the Company’s Common Stock at a rate of $0.20 per share. Upon an “Event of Default,”
as defined in the note, the conversion price becomes the “Variable Conversion Price” which is defined in the note as
“60% multiplied by the Marked Price.” “Market Price” is defined in the note as “the lowest one (1)
Trading Price (as defined in the note) for the common stock during the twenty-five (25) Trading Day period ending on the last complete
Trading Day prior to the Conversion Date.” The note bears interest at a rate of 10% per annum with principal and accrued
and unpaid interest payable six months from the receipt of funds for each tranche under the note. Subscription funds of $30,000
were received by the Company from the investor on September 6, 2019 for which the Company paid a purchase price of $35,000. In
addition to the notes, the Company issued to the investor an aggregate of 175,000 warrants. The warrants are considered equity
instruments based on the Company’s adoption of ASU 2017-11.
The proceeds received upon issuing the
notes and warrants were allocated to each instrument on a relative fair value basis. The initial fair value of the warrants was
$15,868 determined using the Black-Scholes valuation model with the following assumptions: expected term of 2.5 years; risk free
interest rate of 1.4%; and volatility of 132%. The effective conversion rate resulted in a discount of $10,378 and is amortized
to interest expense using the effective interest method over the term of the notes.
During the quarter ended March 31, 2020,
the exercise price of the warrants was adjusted to $0.00084 and the number of warrants was increased to 41,666,667 as a result
of the down-round features being triggered. This resulted in an adjustment to retained earnings of $203,002 based on the change
in fair value.
During the quarter ended March 31, 2020,
the note went into default upon passing its maturity date. As a result, a default penalty of $26,250 was recorded and added to
the principal balance. In addition, the conversion price became the “Variable Conversion Price” as defined above. This
note became convertible into a variable number of shares of common stock for which there is no floor to the number of shares that
might be required to be issued. Based on the requirements of ASC 815, Derivatives and Hedging, the conversion feature represents
an embedded derivative that is required to be bifurcated and accounted for as a separate derivative liability. The derivative liability
is originally recorded at its estimated fair value and is required to be revalued at each conversion event and reporting period.
Changes in the derivative liability fair value are reported in operating results each reporting period.
The Company valued the conversion feature
on the date of default resulting in initial liability of $159,888, which was immediately expensed due to the default. At each conversion
date, the Company recalculated the value of the derivative liability associated with the convertible note recording a gain (loss)
in connection with the change in fair market value. In addition, the pro-rata portion of the derivative liability as compared to
the portion of the convertible note converted was reclassed to additional paid-in capital. During the three and six months ended
June 30, 2020, the Company recorded a loss of $63,908 related to the change of fair value of the derivative liability. During the
three and six months ended June 30, 2020, the company recorded $158,007 and $235,393 to additional paid-in capital, respectively.
Upon issuance and at each conversion and
reporting period date, the Company valued the conversion feature using the Black-Scholes option pricing model with the following
assumptions: conversion prices ranging from $0.0008 to $0.0028, the closing stock price of the Company's common stock on the date
of valuation ranging from $0.0022 to $0.021, an expected dividend yield of 0%, expected volatility ranging from 563% to 574%, risk-free
interest rates ranging from 0.11% to 0.39%, and an expected term of 0.25 years.
As of June 30, 2020, the unpaid principal
balance of the notes including the default penalty is $26,250 and accrued interest is $0. For the three and six months ended June
30, 2020, $5,577 of the note discount has been amortized to interest expense leaving an unamortized balance of $0.
On May 20, 2020, the second closing of
the Convertible Promissory Note occurred pursuant to which the Company paid a purchase price of $35,000 and received gross proceeds
of $29,300. In addition to the issuance of the note, the Company issued to the holder warrants to purchase one share of the Company’s
Common Stock for 100% of the number of shares of Common Stock issuable upon conversion of the funds received in the second closing.
Each warrant is immediately exercisable at $0.20 per share, unless adjusted, and expires on May 20, 2025.
As of June 30, 2020, the unpaid principal
balance of the note is $35,000 and accrued interest is $393. For the three and six months ended June 30, 2020, $7,249 of the note
discount has been amortized to interest expense leaving an unamortized balance of $25,284.
8. PPP LOAN
The
Company applied for and received funding from the Payroll Protection Program (the “PPP Loan”) in the amount
of $36,700. under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The PPP Loan matures
on April 23, 2022 and bears interest at a rate of 1.0% per annum. Monthly amortized principal and interest payments are deferred
for six months after the date of disbursement (subject
to further deferral pursuant to the terms of the Paycheck Protection Flexibility Act of 2020). The Promissory Note contains events
of default and other provisions customary for a loan of this type. The Paycheck Protection Program provides that the use of PPP
Loan amount shall be limited to certain qualifying expenses and may be partially or wholly forgiven in accordance with the requirements
set forth in the CARES Act.
9. RELATED PARTIES
As of June 30, 2020, and December 31, 2019
the amount due to stockholders was $1,000. The balance is payable to two stockholders related to opening bank balances.
In January 2018, the Company entered into
a lease agreement with a stockholder of the Company and paid monthly installments of $2,000 which terminated on December 31, 2018.
The Company renewed the lease agreement in January 2019 for monthly installments of $2,000 which terminated on June 30, 2019, the
Company now rents month to month for $250 per month. For the three months ended June 30, 2020 and 2019, rent expense earned by
the stockholder amounted to $750 and $6,000. For the six months ended June 30, 2020 and 2019, rent expense earned by the stockholder
amounted to $1,500 and $12,000. $16,500 and $15,000 of rent expense is in accounts payable as of June 30, 2020 and December 31,
2019, respectively.
For the three and six months ended June
30, 2020 professional expense paid to directors and officers of the Company amounted to $14,237. For the three and six months ended
June 30, 2020 professional expense paid to directors and officers of the Company amounted to $10,250.
9. SUBSEQUENT EVENTS
The Company has evaluated subsequent events
from the balance sheet date through the date the financial statements were issued and determined that there were the following
items to disclose:
The Company is closely monitoring the impact
of the 2019 novel coronavirus, or COVID-19, on all aspects of its business. COVID-19 was declared a global pandemic by the World
Health Organization on March 11, 2020 and the President of the United States declared the COVID-19 outbreak a national emergency.
The Company has implemented contingency plans, with office-based employees working remotely where possible. While the COVID-19
pandemic has not had a material adverse impact on the Company’s operations to date, the future impacts of the pandemic and
any resulting economic impact are largely unknown and rapidly evolving. It is possible that the COVID-19 pandemic, the measures
taken by the governments of countries affected and the resulting economic impact may materially and adversely affect the Company’s
results of operations, cash flows and financial position as well as its customers.
On July 29, 2020, the Company entered into
a Settlement and Mutual Release Agreement with a lender pursuant to which the Company paid $100,000 to the lender in exchange for
the full extinguishment of the remaining principal amount and all accrued and unpaid interest (approximately $70,000) and penalties
associated with the Convertible Promissory Note dated August 29, 2019 issued to the lender. All remaining unexercised warrants
to purchase the Company’s Common Stock issued to the lender were also extinguished pursuant to the Settlement Agreement.
Upon receipt of the Settlement Amount by the lender, the lender agreed to release all reserved shares of the Company’s Common
Stock. The Settlement Agreement also provides for a full mutual release of the parties.
On July 29, 2020, the Company entered an
Equity Financing Agreement and Registration Rights Agreement with GHS Investments LLC (“GHS”), pursuant to which
GHS agreed to purchase up to $5,000,000 in shares of the Company’s Common Stock, from time to time over the course of 36
months after effectiveness of a registration statement on Form S-1 of the underlying shares of Common Stock.
In connection with entering into the Equity
Financing Agreement, on July 29, 2020, the Company issued to GHS a Convertible Promissory Note in the principal amount of $100,000.
The $100k Note matures on April 29, 2021 upon which time all accrued and unpaid interest will be due and payable. Interest accrues
on the $100k Note at 10% per annum based on a 360-day year. The $100k Note is convertible at any time, upon the election of GHS,
into shares of the Company’s Common Stock at $0.01 per share. The $100k Note is subject to various “Events of Default,”
which are disclosed in the $100k Note. Upon the occurrence of an uncured “Event of Default,” the $100k Note will become
immediately due and payable and will be subject to penalties and adjustments to the conversion price (the lesser of: (a) $0.01
or (b) 70% multiplied by the Market Price (as defined in the $100k Note) (representing a discount rate of 30%). Upon the issuance
of the $100k Note, the Company has agreed to reserve one times the amount of shares of Common Stock into which the $100k Note is
convertible and, 101 days from the issuance of the $100k Note, the Company will reserve two-and-a-half times the amount of shares
of Common Stock into which the $100k Note is convertible. Within three Trading Days (as defined in the $100k Note) of the sale
by GHS of all of the Common Stock issued upon the conversion of the $100k Note, the Company is required to issue to GHS an amount
of shares of Common Stock priced at the lowest traded price for the relevant Trading Day, which represents the difference between
$130,000 and the net proceeds to GHS from the sale of aggregate Common Stock issued upon the conversion of the $100k Note.
In connection with entering into the Equity
Financing Agreement, on July 29, 2020, the Company issued to GHS a Convertible Promissory Note in the principal amount of $75,000.
The $75k Note matures on April 29, 2021 upon which time all accrued and unpaid interest will be due and payable. Interest accrues
on the $75k Note at 10% per annum based on a 360-day year. The $75k Note is convertible at any time, upon the election of GHS,
into shares of the Company’s Common Stock at $0.0099 per share. The $75k Note is subject to various “Events of Default,”
which are disclosed in the $75k Note. Upon the occurrence of an uncured “Event of Default,” the $75k Note will become
immediately due and payable and will be subject to penalties and adjustments to the conversion price (the lesser of: (a) $0.01
or (b) 70% multiplied by the Market Price (as defined in the $75k Note) (representing a discount rate of 30%). Upon the issuance
of the $75k Note, the Company has agreed to reserve one times the amount of shares of Common Stock into which the $75k Note is
convertible and, 101 days from the issuance of the $75k Note, the Company will reserve two-and-a-half times the amount of shares
of Common Stock into which the $75k Note is convertible.