ITEM
2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking
Statements
This
quarterly report contains “forward-looking statements”. All statements other than statements of historical fact are
“forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any
projections of earnings, revenue or other financial items; any statements of the plans, strategies and objections of management
for future operations; any statements concerning proposed new services, products or developments; any statements regarding future
economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing.
Forward-looking
statements may include the words “may,” “could,” “estimate,” “intend,” “continue,”
“believe,” “expect” or “anticipate” or other similar words. These forward-looking statements
present our estimates and assumptions only as of the date of this quarterly report. Accordingly, readers are cautioned not to
place undue reliance on forward-looking statements, which speak only as of the dates on which they are made. Except as required
by applicable law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information,
future events or otherwise, even if experience or future changes make it clear that any projected results or events expressed
or implied therein will not be realized. You are advised, however, to consult any further disclosures we make in future public
filings, statements and press releases.
Forward-looking
statements in this quarterly report include express or implied statements concerning our future revenues, expenditures, capital
and funding requirements; the adequacy of our current cash and working capital to fund present and planned operations and financing
needs; our proposed expansion of, and demand for, product offerings; the growth of our business and operations through acquisitions
or otherwise; and future economic and other conditions both generally and in our specific geographic and product markets. These
statements are based on currently available operating, financial and competitive information and are subject to various risks,
uncertainties and assumptions that could cause actual results to differ materially from those anticipated or implied in the forward-looking
statements due to a number of factors including, but not limited to, those set forth below in the section entitled “Risk
Factors” in this quarterly report, which you should carefully read. Given those risks, uncertainties and other factors,
many of which are beyond our control, you should not place undue reliance on these forward-looking statements. You should be prepared
to accept any and all of the risks associated with purchasing any securities of our company, including the possible loss of all
of your investment.
In
this quarterly report, unless otherwise specified, all references to “common shares” refer to the common shares in
our capital stock.
As
used in this quarterly report on Form 10-Q, the terms “we”, “us” “our” and “nFusz”
refer to nFusz, Inc., a Nevada corporation unless otherwise specified.
The
discussion and analysis of our financial condition and results of operations are based on our financial statements, which we have
prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these
condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial
statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate estimates
and judgments, including those described in greater detail below. We base our estimates on historical experience and on various
other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.
The
following discussion should be read together with the information contained in the unaudited condensed consolidated financial
statements and related notes included in Item 1 – Financial Statements, in this Form 10-Q.
Overview
The
Company has developed proprietary interactive video technology which serves as the basis for certain products and services that
it licenses under the brand name “Notifi”. Its NotifiCRM, NotifiADS, NotifiLINKS, and NotifiWEB products are cloud-based,
SaaS, CRM, sales lead generation, advertising, and social engagement software, accessible on mobile and desktop platforms, for
sales-based organizations, consumer brands, marketing and advertising agencies, and artists and social influencers seeking greater
levels of viewer engagement and higher sales conversion rates. The Company’s NotifiCRM platform is enterprise scalable and
incorporates unique, proprietary, push-to-screen, interactive audio/video messaging and interactive on-screen “virtual salesperson”
communications technology. The Company’s NotifiLIVE service is a proprietary broadcast video platform allowing viewers to
interact with broadcast video content by clicking on links embedded in people, objects, graphics or sponsors’ signage displayed
on the screen. Viewers can experience NotifiLIVE interactive content and capabilities on most devices available in the market
today without the need to download special software or proprietary video players.
The
Company was previously engaged in the manufacture, marketing, and operation of audition booths deployed in shopping malls and
other high-traffic venues in the United States and in the production of interactive television content. The audition booths were
portable recording studio kiosks, branded and marketed as “bBooth,” in which customers could audition for TV shows
such as American Idol. The kiosks were Internet connected and integrated into a social media, messaging, gaming, music streaming
and video sharing app called bBoothGO.
Critical
Accounting Policies
Our
Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United
States, which require that we make certain assumptions and estimates that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of net revenue and expenses during each reporting period. On
an ongoing basis, management evaluates its estimates, including those related to valuation of the fair value of financial instruments,
share based compensation arrangements and long-lived assets. These estimates are based on historical experience and on various
other factors that it believes to be reasonable under the circumstances. Actual results could differ from those estimates.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the reported periods. Significant estimates include the value
of share based payments. Amounts could materially change in the future.
Long-Lived
Assets
The
Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value
may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash
flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying
amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available,
or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. No impairment
of long-lived assets was required for the nine months ended September 30, 2017.
Stock-
Compensation
The
Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for
services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based
on the authoritative guidance provided by the Financial Accounting Standards Board whereas the value of the award is measured
on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and
vesting to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board whereas the
value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance
commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee
stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances
where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based
compensation charge is recorded in the period of the measurement date.
The
fair value of the Company’s common stock option grant is estimated using the Black-Scholes Option Pricing model, which uses
certain assumptions related to risk-free interest rates, expected volatility, expected life of the common stock options, and future
dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes Option Pricing model, and based
on actual experience. The assumptions used in the Black-Scholes Option Pricing model could materially affect compensation expense
recorded in future periods.
Recent
Accounting Policies
For
a summary of our recent accounting policies, refer to Note 2 of our unaudited condensed consolidated financial statements included
under Item 1 – Financial Statements in this Form 10-Q.
Results
of Operations for the Three Months Ended September 30, 2017 as Compared to the Three Months Ended September 30, 2016.
Revenues
We
did not have any revenue in 2017 or 2016.
Operating
Expenses
Research
and development expenses were $109,350 for the three months ended September 30, 2017, as compared to $67,350 for the three months
ended September 30, 2016. The increase was primarily due to an increase in fees for coders dedicated to software development enhancements
and modifications.
General
and administrative expenses for the three months ended September 30, 2017 and 2016 was $1,082,131 and $851,815, respectively.
The increase was primarily due to an increase in stock based compensation expense of approximately $186,529.
Other
expense, net, for the three months ended September 30, 2017 amounted to $689,408, which represented interest expense of $205,038
on outstanding notes payable and $81,959 as interest expense for amortization of debt discount. We also incurred a loss from debt
extinguishment in the amount of $424,331. The amount of other expense, net, was higher in 2017 as we did not have loss from debt
extinguishment, plus additional interest related to the redemption of Series A Preferred stock, offset by lower amortization of
debt discount.
Other
Income
Other
income for the three months ended September 30, 2017 and 2016 was $21,920 and $16,243, respectively. During 2017 and 2016, we
earned income from rental of our interactive booths.
Results
of Operations for the Nine Months Ended September 30, 2017 as Compared to the Nine Months Ended September 30, 2016.
Revenues
We
did not have any revenue in 2017 or 2016.
Operating
Expenses
Research
and development expenses were $291,190 for the nine months ended September 30, 2017, as compared to $189,166 for the nine
months ended September 30, 2016. The increase was primarily due to an increase in fees for coders dedicated to software development
enhancements and modifications during.
General
and administrative expenses for the nine months ended September 30, 2017 and 2016 was $3,052,161 and $2,408,753 respectively.
The increase was primarily due to an increase in stock based compensation expense of approximately $678,191.
Other
expense, net, for the nine months ended September 30, 2017 amounted to $1,528,044 which represented interest expense of
$375,862 on outstanding notes payable and $174,981 as interest expense for amortization of debt discount. We also
incurred a loss from debt extinguishment in the amount of $977,201. The amount of other expense, net, was higher in 2017
as we did not have loss from debt extinguishment, plus additional interest related to the redemption of Series A Preferred stock
offset by lower amortization of debt discount as most of the debt discounts.
Other
Income
Other
income for the three months ended September 30, 2017 and 2016 was $21,921 and $47,836, respectively. During 2017 and 2016,
we earned income from rental of our interactive booths.
Liquidity
and Capital Resources
The
following is a summary of our cash flows from operating, investing and financing activities for the nine months ended September
30, 2017 and 2016.
|
|
|
For the Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Cash used in operating activities
|
|
$
|
(1,174,534
|
)
|
|
$
|
(1,320,202
|
)
|
|
Cash used in investing activities
|
|
|
-
|
|
|
|
(2,494
|
)
|
|
Cash provided by financing activities
|
|
|
1,186,678
|
|
|
|
1,381,070
|
|
|
Increase in cash
|
|
$
|
12,144
|
|
|
$
|
58,374
|
|
For
the nine months ended September 30, 2017, our cash flows used in operating activities amounted to $1,174,534 compared to cash
used in 2016 of $1,320,202. The change is due to an increase in business activity which resulted in an additional consulting,
salary, and various operating expenses in 2017 compared to 2016. The net decrease is driven by an increase in accounts payable
and accrued expenses in 2017 versus 2016.
Our
cash provided by financing activities for the nine months ended September 30, 2017 amounted to $1,186,678 which represented $470,000
of proceeds received from issuances of common stock, $555,000 of proceeds received from the issuance of convertible series A preferred
stock, $200,000 of proceeds from the issuance of convertible debt, and $100,000 of proceeds from the issuance of notes payable,
offset by $138,322 of redemption payments against series A preferred stock. Our cash provided by financing activities for the
nine months ended September 30, 2016 amounted to $1,381,000 which represented $1,464,850 of proceeds received from common stock
subscriptions, $82,446 of additional borrowings from our Chief Executive Officer offset by $166,226 of repurchases of the Company’s
common stock.
As
of September 30, 2017, we had cash of $28,906. We estimate our operating expenses for the next three months may continue to exceed
any revenues we generate, and we may need to raise capital through either debt or equity offerings to continue operations.
We
are in the early stages of our business. We are required to fund growth from financing activities, and we intend to rely on a
combination of equity and debt financings. Due to market conditions and the early stage of our operations, there is considerable
risk that our company will not be able to raise such financings at all, or on terms that are not overly dilutive to our existing
shareholders. We can offer no assurance that we will be able to raise such funds.
Going
Concern
We
have incurred operating losses since inception and have negative cash flows from operations. We had a stockholders’ deficit
of $4,454,322 as of September 30, 2017 and incurred a net loss of $4,849,474 and utilized $1,174,534 in cash during the period
ended. As a result, our continuation as a going concern is dependent on our ability to obtain additional financing until we can
generate sufficient cash flows from operations to meet our obligations. We intend to continue to seek additional debt or equity
financing to continue our operations.
Our
condensed consolidated financial statements have been prepared on a going concern basis, which implies we may not continue to
meet our obligations and continue our operations for the next fiscal year. The continuation of our Company as a going concern
is dependent upon our ability to obtain necessary debt or equity financing to continue operations until our Company begins generating
positive cash flow.
There
is no assurance that we will ever be profitable or that debt or equity financing will be available to us. The consolidated financial
statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets
or the amounts and classifications of liabilities that may result should we be unable to continue as a going concern.
NOTES
PAYABLE
The
Company has the following notes payable as of September 30, 2017 and December 31, 2016:
|
Note
|
|
Note Date
|
|
Maturity Date
|
|
Interest Rate
|
|
|
Original Borrowing
|
|
|
Balance at
September 30, 2017
|
|
|
Balance at
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Note payable (a)
|
|
March 21, 2015
|
|
March 20, 2018
|
|
|
12
|
%
|
|
$
|
125,000
|
|
|
$
|
125,000
|
|
|
$
|
125,000
|
|
|
Note payable (b)
|
|
December 15, 2016
|
|
September 15, 2017
|
|
|
5
|
%
|
|
$
|
101,300
|
|
|
|
-
|
|
|
|
101,300
|
|
|
Note payable (c)
|
|
September 26, 2016
|
|
September 15, 2017
|
|
|
5
|
%
|
|
$
|
110,000
|
|
|
|
110,000
|
|
|
|
-
|
|
|
Total notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
235,000
|
|
|
|
226,300
|
|
|
Debt discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51,442
|
)
|
|
|
(48,942
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable, net of debt discount
|
|
|
|
|
|
|
|
|
|
$
|
183,558
|
|
|
$
|
177,358
|
|
|
|
(a)
|
On
March 21, 2015, the Company entered into an agreement with DelMorgan Group LLC (“DelMorgan”), pursuant to which
DelMorgan agreed to act as the Company’s exclusive financial advisor. In connection with the agreement, the Company
paid DelMorgan $125,000, which was advanced by a third-party lender in exchange for an unsecured note payable issued by the
Company bearing interest at the rate of 12% per annum payable monthly beginning on April 20, 2015.
|
|
|
|
|
|
|
|
Effective
March 20, 2017, the Company entered into an extension agreement (the “Extension Agreement”) with DelMorgan to
extend the maturity date of the Note to March 20, 2018. All other terms of the Note remain unchanged.
|
|
|
|
|
|
|
(b)
|
On
December 15, 2016, the Company entered into an agreement with a buyer, whereby the Company agreed to issue and sell to the
Buyer, and the Buyer agreed to purchase from the Company, (i) a non-interest bearing Note in the original principal amount
of $250,000, (ii) Warrants, and (iii) shares of the Company’s common stock in an amount equal to 30% of the purchase
price of the respective tranche divided by the closing price of the Common Stock on the trading day immediately prior to the
date of funding of the respective tranche (collectively, the “Inducement Shares”). The “Maturity Date”
shall be six months from the date of each payment of Consideration. A one-time interest charge of five percent (5%) (“Interest
Rate”) is to be applied on the Issuance Date to the original principal amount. In addition, there is a 10% Original
Issue Discount that is to be prorated based on the consideration paid by the Buyer.
|
On
December 16, 2016, the Buyer purchased for $80,000 the first tranche of the Note and the respective securities to be issued and
the Company sold to it including (i) a three-year warrant to acquire 176,000 shares of the Company’s common stock with an
exercise price of $0.25 per share, and (ii) 240,000 shares of the Company’s common stock.
On
June 7, 2017, the Company converted the debt and issued the Buyer 462,000 shares of its Common Stock (the “Shares”)
with a fair value of $110,880 at the date of the agreement. In the event the Buyer does not realize sufficient proceeds through
sales of the Shares, in accordance with the terms set forth herein, to equal $92,400, after deduction of reasonable sale transaction-related
expenses, the Company agrees to issue additional shares to make up the deficiency or to pay such deficiency in cash, at the Company’s
option. The Parties agree that this “Make Whole” provision shall expire and be of no further force and effect on the
date the sum of net proceeds realized from the sale of the initial issuance of 462,000 shares is equal to or great than $92,400;
or any deficiency is paid in cash by the Company at its option; or June 7, 2018, whichever occurs first. The buyer agrees not
to sell more than 10 percent (10%) of the total weekly volume of FUSZ common shares traded in the United States domestic over-the-counter
stock market in any one week. The Buyer agrees, that upon request of the Company, to provide trading records to the Company reflecting
all sales of the Shares, within 1 (one) business days following such request.
As
a result of this agreement, the Company issued a total of 1,026,195 shares of common stock with a fair value of $181,845 to settle
the note payable.
|
|
(c)
|
Effective
September 26, 2017, we entered into the Purchase Agreement, dated September 15, 2017, with Kodiak Capital Group, LLC (“Kodiak”).
Under the Purchase Agreement, the Company may from time to time, in our discretion, sell shares of our common stock to Kodiak
for aggregate gross proceeds of up to $2,000,000. Unless terminated earlier, Kodiak’s purchase commitment will automatically
terminate on the earlier of the date on which Kodiak shall have purchased our shares pursuant to the Purchase Agreement for
an aggregate purchase price of $2,000,000, or September 15, 2019. We have no obligation to sell any shares under the Purchase
Agreement.
|
As
provided in the Purchase Agreement, we may require Kodiak to purchase shares of common stock from time to time by delivering a
put notice (“Put Notice”) to Kodiak specifying the total number of shares to be purchased (such number of shares multiplied
by the Purchase Price described below, equals the “Investment Amount”); provided there must be a minimum of ten trading
days between delivery of each Put Notice. We may determine the Investment Amount provided that such amount may not be less than
$25,000. Our ability to issue Put Notices to Kodiak and require Kodiak to purchase our common stock is not contingent on the trading
volume of our common stock. Kodiak will have no obligation to purchase shares under the applicable Purchase Agreement to the extent
that such purchase would cause Kodiak to own more than 9.99% of our then-issued and outstanding common stock (the “Beneficial
Ownership Limitation”).
For
each share of our common stock purchased under the Purchase Agreement, Kodiak will pay a Purchase Price equal to 80% of the Market
Price. The Market Price is defined as the volume weighted average price (the “VWAP”) on the principal trading platform
for the Common Stock, as reported by OTC Markets Group, Inc. (“OTC Markets”), for the five consecutive trading days
immediately preceding the closing request date (each, a “Closing Request Date”) associated with the applicable Put
Notice (the “Valuation Period”). Kodiak’s obligation to purchase shares is subject to customary closing conditions,
including without limitation a requirement that this registration statement remain effective registering the resale by Kodiak
of the shares to be issued under the Purchase Agreement (the “Registration Statement”).
Effective
September 26, 2017, as a commitment fee under the Purchase Agreement for which we received no proceeds, we issued to Kodiak an
unsecured Promissory Note (the “Commitment Note”), dated September 15, 2017, for the principal amount of $100,000
with interest at the rate of 5% per annum, payable nine months from the issue date. The Purchase Agreement provides that in the
event this Registration Statement is not effective by December 31, 2017, through no fault of ours, the Commitment Note shall be
deemed cancelled, null and void, and of no further force and effect. In exchange for proceeds of $100,000, we issued to Kodiak
an additional unsecured Promissory Note (the “First Note”), dated September 15, 2017 and effective September 26, 2017,
in the principal amount of $110,000 with interest at the rate of 5% per annum, payable six months from the issue date. Upon the
filing of this Registration Statement, and in exchange for additional proceeds of $100,000, we issued to Kodiak an additional
note (the “Second Note”) for the principal amount of $110,000 with interest at the rate of 5% per annum, payable six
months from the issue date. (the Commitment Note, the First Note, and the Second Note hereinafter referred to collectively as
the “Notes”) The principal amount and accrued interest under the Notes are not convertible except in the event of
default. In the event of default, the conversion price for the Notes shall be the lesser of $0.25 per share or 70% of the lowest
trading price during the ten-trading-day period prior to the conversion date. Conversion of the Notes is subject to the Beneficial
Ownership Limitation.
Effective
September 26, 2017, and as an additional commitment fee under the Purchase Agreement, we issued to Kodiak two Common Stock Purchase
Warrants, the first of which entitles Kodiak to purchase up to 1,000,000 shares of our Common Stock at an exercise price of $0.15
per share (the “First Warrant”), and the second of which entitles Kodiak to purchase up to 1,000,000 shares of our
Common Stock at an exercise price of $0.20 per share (the “Second Warrant”), to be issued only upon, and subject to,
the filing of the registration statement. The Purchase Agreement also provides for the issuance of a third Common Stock Purchase
Warrant as an additional commitment fee, entitling Kodiak to purchase up to 4,000,000 shares of our common stock at an exercise
price of $0.25 per share (the “Third Warrant”), to be issued only upon, and subject to, the occurrence of the first
Closing Date.
As
of September 30, 2017, only the First Note and First Warrant were effective. The aggregate fair value of the original issue discount
and the Warrants issued was $52,605 and was recorded as a valuation discount. The balance of the valuation discount at September
30, 2017 was $51,442.
NOTES
PAYABLE – RELATED PARTIES
The
Company has the following related parties notes payable:
|
Note
|
|
Issuance
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Original
Borrowing
|
|
|
Balance
at
September 30, 2017
|
|
|
Balance
at
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Note
1
|
|
Year
2015
|
|
August
8, 2018
|
|
|
12.0
|
%
|
|
$
|
1,203,242
|
|
|
$
|
1,198,883
|
|
|
$
|
1,198,883
|
|
|
Note
2
|
|
December
1, 2015
|
|
August
8, 2018
|
|
|
12.0
|
%
|
|
|
189,000
|
|
|
|
189,000
|
|
|
|
189,000
|
|
|
Note
3
|
|
December
1, 2015
|
|
April
1, 2017
|
|
|
12.0
|
%
|
|
|
111,901
|
|
|
|
111,901
|
|
|
|
111,901
|
|
|
Note
4
|
|
August
4, 2016
|
|
December
4, 2018
|
|
|
12.0
|
%
|
|
|
343,326
|
|
|
|
343,326
|
|
|
|
343,326
|
|
|
Note
5
|
|
August
4, 2016
|
|
December
4, 2018
|
|
|
12.0
|
%
|
|
|
121,875
|
|
|
|
121,875
|
|
|
|
121,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
notes payable – related parties, net
|
|
|
|
|
|
|
|
|
|
$
|
1,964,985
|
|
|
$
|
1,964,985
|
|
|
|
●
|
On
various dates during the year ended December 31, 2015, Rory J. Cutaia, the Company’s majority shareholder and Chief
Executive Officer, loaned the Company total principal amounts of $1,203,242. The loans were unsecured and all due on demand,
bearing interest at 12% per annum. On December 1, 2015, the Company entered into a Secured Convertible Note agreement with
Mr. Cutaia whereby all outstanding principal and accrued interest owed to Mr. Cutaia from previous loans amounting to an aggregate
total of $1,248,883 and due on demand, was consolidated under a note payable agreement, bearing interest at 12% per annum,
and converted from due on demand to due in full on April 1, 2017. In consideration for Mr. Cutaia’s agreement to consolidate
the loans and extend the maturity date, the Company granted Mr. Cutaia a senior security interest in substantially all current
and future assets of the Company. Per the terms of the agreement, at Mr. Cutaia’s discretion, he may convert up to $374,665
of outstanding principal, plus accrued interest thereon, into shares of common stock at a conversion rate of $0.07 per share.
|
|
|
|
On
May 4, 2017, the Company entered into an extension agreement (the “Extension Agreement”) with Rory J. Cutaia to
extend the maturity date of the $1,198,883 Secured Note due on April 1, 2017 to August 1, 2018.
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●
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On
December 1, 2015, the Company entered into an Unsecured Convertible Note with Mr. Cutaia in the amount of $189,000, bearing
interest at 12% per annum, representing a portion of Mr. Cutaia’s accrued salary for 2015. The note extends the payment
terms from on-demand to due in full on April 1, 2017. The outstanding principal and accrued interest may be converted at Mr.
Cutaia’s discretion into shares of common stock at a conversion rate of $0.07.
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On
May 4, 2017, the Company entered into an extension agreement (the “Extension Agreement”) with Rory J. Cutaia to
extend the maturity date of the $189,000 Unsecured Note due on April 1, 2017 to August 1, 2018. All other terms of the Note
remain unchanged.
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●
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On
December 1, 2015, the Company entered into an Unsecured Note agreement with a consulting firm owned by Michael Psomas, a former
member of the Company’s Board of Directors, in the amount of $111,901 representing unpaid fees earned for consulting
services previously rendered but unpaid as of November 30, 2015. The outstanding amounts bear interest at 12% per annum, and
are due in full on April 1, 2017, and is currently past due.
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●
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On
April 4, 2016, the Company issued a secured convertible note to the Chief Executive Officer
(“CEO”) and a director of the Company, in the amount of $343,326, which represents
additional sums of $93,326 that the CEO advanced to the Company during the period from
December 2015 through March 2016, and the conversion of $250,000 other pre-existing notes.
This note bears interest at the rate of 12% per annum, compounded annually and matures
on August 4, 2017. The note is also convertible up to 30% of the principal balance into
shares of the Company’s common stock at $0.07 per share. In addition, the Company
also issued 2,452,325 share purchase warrants, exercisable at $0.07 per share until April
4, 2019, which warrants represent 50% of the amount of such note.
On
August 4, 2017, the Company entered into an extension agreement (the “Extension Agreement”) with Rory J. Cutaia
to extend the maturity date of the $343,326 Unsecured Note due on August 4, 2017 to December 4, 2018.
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●
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On
April 4, 2016, the Company issued an unsecured convertible note payable to the CEO in
the amount of $121,875, which represents the amount of the accrued but unpaid salary
owed to the CEO for the period from December 2015 through March 2016. The note bears
interest at the rate of 12% per annum, compounded annually and matures on August 4, 2017.
The note is also convertible into shares of the Company’s common stock at $0.07
per share, which approximated the trading price or the Company’s common stock on
the date of the agreement.
On
August 4, 2017, the Company entered into an extension agreement (the “Extension Agreement”) with Rory J. Cutaia
to extend the maturity date of the $121,875 Unsecured Note due on August 4, 2017 to December 4, 2018. All other terms
of the Note remain unchanged.
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CONVERTIBLE
NOTE PAYABLE
The
Company has the following notes payable as of September 30, 2017 and December 31, 2016:
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Note
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Note
Date
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Maturity
Date
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Interest
Rate
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|
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Original
Borrowing
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|
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Balance
at
September 30, 2017
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Balance
at
December 31, 2016
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(Unaudited)
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Note
payable (a)
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Various
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August
4, 2017
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|
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12
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%
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$
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600,000
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$
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680,268
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$
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680,268
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Note
payable (b)
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June
19, 2017
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February
19, 2018
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|
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5
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%
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$
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110,250
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|
|
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110,250
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|
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-
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Note
payable (c)
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August
21, 2017
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March
21, 2018
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|
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5
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%
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$
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110,250
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|
|
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110,250
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|
|
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-
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Total
notes payable
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900,768
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680,268
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|
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Debt
discount
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|
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(114,302
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)
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|
|
-
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
notes payable, net of debt discount
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|
|
|
|
|
|
|
|
|
$
|
786,466
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|
|
$
|
680,268
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|
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(a)
|
The
Company entered into a series of unsecured loan agreement with Oceanside Strategies, Inc. (“Oceanside”) a third
party-lender, in the aggregate principal amount of $600,000 through December 31, 2015. The loans bear interest at rates ranging
from 5% to 12% per annum and were due on demand.
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On
April 3, 2016, the Company issued an unsecured convertible note payable to Oceanside in the amount of $680,268 (this amount
includes $600,000 principal amount and $80,268 accrued and unpaid interest). This note superseded and replaced all previous
notes and current liabilities due to Oceanside for sums Oceanside loaned to the Company in 2014 and 2015. This note bears
interest at the rate of 12% per annum, compounded annually. In consideration for Oceanside’s agreement to convert the
prior notes from current demand notes and extend the maturity date to December 4, 2016, the Company granted Oceanside the
right to convert up to 30% of the amount of such note into shares of the Company’s common stock at $0.07 per share and
issued 2,429,530 share purchase warrants, exercisable at $0.07 per share until April 4, 2019.
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Effective
December 30, 2016, the Company entered into an extension agreement (the “Extension
Agreement”) with Oceanside to extend the maturity date of the Note to August 4,
2017. All other terms of the Note remain unchanged. In consideration for Oceanside’s
agreement to extend the maturity date to August 4, 2017, the Company issued Oceanside
2,429,530 share purchase warrants, exercisable at $0.08 per share until December 29,
2019.
Effective
August 4, 2017, the Company entered into an extension agreement (the “Extension Agreement”) with Oceanside
to extend the maturity date of the Note to August 4, 2018. All other terms of the Note remain unchanged. In consideration
for Oceanside’s agreement to extend the maturity date to August 4, 2018, the Company issued Oceanside 1,318,800
share purchase warrants, exercisable at $0.15 per share until August 3, 2022.
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|
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(b)
|
On
June 19, 2017, the Company issued an unsecured convertible note to Lucas Holdings in the amount of $105,000 in exchange for
50,000 shares of common stock and a three-year warrant to acquire 330,000 shares of the Company’s common stock with
an exercise price of $.30 per share. The “Maturity Date” is February 18, 2018. A one-time interest charge of five
percent (5%) (“Interest Rate”) is to be applied on the Issuance Date to the original principal amount. In addition,
there is a 5% Original Issue Discount.
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(c)
|
On
August 28, 2017, the Company issued an unsecured convertible note to Lucas Holdings in the amount of $105,000. The “Maturity
Date” is March 28, 2018. A one-time interest charge of five percent (5%) (“Interest Rate”) is to be applied
on the Issuance Date to the original principal amount. In addition, there is a 5% Original Issue Discount.
|
CONVERTIBLE
SERIES A PREFERRED STOCK
Effective
February 14, 2017, the Company entered into a Securities Purchase Agreement, (the “Purchase Agreement”), by and between
an otherwise unaffiliated, accredited investor (the “Purchaser”) and the Company in connection with our issuance and
sale to the Purchaser of shares of Series A Preferred Stock under the terms and conditions as set forth in the Purchase Agreement
(the “Sale”).
In
connection with the Sale, our Board of Directors (our “Board”) authorized and approved a series of preferred stock
to be known as “Series A Convertible Preferred Stock”, for which 1,050,000 shares, $0.0001 par value per share, were
authorized and a Certificate of Designations, Preferences and Rights of the Series A Convertible Preferred Stock, (the “Certificate”),
was filed with the Office of the Secretary of State of the State of Nevada (the “State”) to effectuate the authorization.
Pursuant to the Purchase Agreement, the purchase of shares of our Series A Preferred Stock may occur in several tranches (each,
a “Tranche”; and, collectively, the “Tranches”). The first Tranche of $300,000 ($315,000 in stated value,
represented by 315,000 shares of our Series A Preferred Stock) closed simultaneously with the execution of the Purchase Agreement
on February 14, 2017 (the “First Closing”), and each additional Tranche shall close at such times and on such financial
terms as may be agreed to by the Purchaser and us. The net proceeds to us after offering costs was $255,000.
The
Series A PS has the following rights and privileges:
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|
●
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Senior
rights in terms preference as to dividends, distributions and payments upon the liquidation, dissolution and winding up of
the Company;
|
|
|
●
|
Accrues
dividends at a rate of 5% per annum;
|
|
|
●
|
Mandatorily
redeemable at an installment basis starting August 13, 2017 in the amount of $63,000 plus accrued interest. The Company has
the option to redeem the Series A shares in cash or in shares of common stock based upon the Company’s 5 day Volume
Weighted Average Price (“VWAP”).
|
Pursuant
to the terms of the Purchase Agreement, the shares of our Series A Preferred Stock issued in the First Closing are to be redeemed
by us in five (5) equal weekly payments (each, a “Redemption Payment”), commencing in approximately 180 days from
the First Closing. All but one of the Redemption Payments may be made by us in cash or in shares of our common stock, at our option.
The Holder shall have the option to demand payment of one Installment Redemption Payment in shares of Common Stock Redemption
Payments made using shares of our common stock will be valued based upon a VWAP formula, tied to the then-current quoted price
of shares of our common stock, described with greater particularity in the Purchase Agreement.
The
Company considered the guidance of ASC 480-10, Distinguishing Liabilities From Equity to determine the appropriate treatment of
the Series A shares. Pursuant to ASC 480-10, the Company determined that the Series A shares is an obligation to be settled, at
the option of the Company, in cash or in variable number of shares with a fixed monetary value that should be recorded as a liability
under ASC 480-10. As a result, the Company determined the fair value of the Series A to be $300,000 upon issuance with the difference
of $15,000 from the face amount, and incurred legal fees of $45,000, to be accounted as a debt discount which will be amortized
over the term of the redemption period of the Series A shares. As a result of this transaction, the Company recorded a liability
of $315,000 and a debt discount of $60,000, upon issuance.
On
July 7, 2017, the Company issued 52,500 shares of Series A Preferred stock for cash proceeds of $50,000 (the “Second Closing”).
As a result of this transaction the Company will record liability of $52,500 and a debt discount of $2,500 upon issuance.
On
July 28, 2017, the Company has agreed to issue 262,500 shares of Series A Preferred stock for cash proceeds of $250,000. $125,000
was paid to the Company on July 28, 2017 (the “Third Closing”), and the remaining $125,000 was paid on September 1,
2017 (the “Fourth Closing”). As a result of this transaction, the Company will record liability of $262,500 and debt
discount of $12,500 upon issuance.
On
July 28, 2017, the Company amended the Certificate of Designations to include the mandatory redemption dates. On January 8
th
the Company will redeem the $52,500 of Preferred Shares and any accrued but unpaid dividends. Beginning the earlier of the
effectiveness of a Registration Statement or January 28, 2018, the Company will begin redeeming the 131,250 preferred shares issued
on July 28, 2017. The Company shall redeem $26,250 of Preferred Shares an any accrued but unpaid dividends thereon on the first
business day of each week for five consecutive weeks.
On
September 1, 2017, the Company amended the Certificate of Designations. Solely in respect to the 189,000 Preferred Shares that
were issued on February 13, 2017 and outstanding as of August 28, 2017, the Company shall redeem $31,500 of the outstanding amount
of such Preferred Shares an any accrued but unpaid dividends thereon on the first business day of each week for six consecutive
weeks. Solely in respect to the 52,500 Preferred Shares that were issued on July 7, 2007 and outstanding as of the date of the
second amendment, beginning the earlier of the effectiveness of a Registration Statement and January 8, 2018, the Company shall
redeem $26,500 of the outstanding amount of such Preferred Shares an any accrued but unpaid dividends thereon on the first business
day of each week for two consecutive weeks. Beginning the earlier of the effectiveness of a Registration Statement and February
28, 2018, the Company will begin redeeming the 131,250 preferred shares issued on September 1, 2017. The Company shall redeem
$26,250 of Preferred Shares an any accrued but unpaid dividends thereon on the first business day of each week for five consecutive
weeks.
During
the period ending September 30, 2017, 283,500 of Series A Preferred Stock plus the redemption premium and interest were redeemed
through the issuance of 2,368,824 shares of common stock and a payment of $138,500. The fair value of the 2,368,824 shares was
$263,876, the $118,698 over the $283,500 of Preferred Stock redeemed was recorded as interest expense as of September 30, 2017.