Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 2017
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company:
Surna
Inc. (the “Company”) incorporated in Nevada on October 15, 2009. On March 26, 2014, the Company acquired Safari Resource
Group, Inc. (“Safari”), a Nevada corporation, whereby the Company became the sole surviving corporation after the
acquisition of Safari. In July 2014, the Company acquired 100% of the membership interests in Hydro Innovations, LLC, a Texas
limited liability company (“Hydro”), pursuant to which Hydro became a wholly-owned subsidiary of the Company. The
Company engineers and manufactures innovative technology and products that address the energy and resource intensive nature of
indoor cultivation. The Company is focused on supplying industrial solutions to commercial indoor cannabis cultivation facilities.
The Company’s engineering team is tasked with creating novel energy and resource efficient solutions, including the Company’s
proprietary liquid-cooled climate control platform. The Company’s engineers continuously seek to create technologies that
allow growers to meet the specific demands of a cannabis cultivation environment through temperature, humidity, light, and process
control. The Company’s objective is to provide intelligent solutions that improve the quality, control and overall crop
yield and efficiency of indoor cannabis cultivation. The Company is headquartered in Boulder, Colorado. The Company does not cultivate
or distribute cannabis.
Financial
Statement Presentation:
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with
generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, certain information and note
disclosures, normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted. GAAP requires
management to make estimates and assumptions that affect reported amounts and related disclosures. In the opinion of management,
all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating
results for the nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 2017. The balance sheet as of December 31, 2016 has been derived from the audited financial statements
at that date, but does not include all the information and footnotes required by GAAP for complete financial statements. For further
information, refer to the consolidated financial statements and notes thereto contained in the Annual Report on Form 10-K for the
year ended December 31, 2016. The notes to the unaudited condensed consolidated financial statements are presented on a going concern
basis unless otherwise noted.
Basis
of Presentation:
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
The Company has experienced recurring losses since its inception. The Company incurred a net loss of approximately $3,553,000
for the nine months ended September 30, 2017, and had an accumulated deficit of approximately $17,889,000 as of September
30, 2017. Since inception, the Company has financed its activities principally through debt and equity financing and customer
deposits. Management expects to incur additional losses and cash outflows in the foreseeable future in connection with its operating
activities.
The
Company’s consolidated financial statements have been presented on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
The
Company is subject to a number of risks similar to those of other similar stage companies, including dependence on key individuals;
successful development, marketing and branding of products; uncertainty of product development and generation of revenues; dependence
on outside sources of financing; risks associated with research and development; dependence on third-party suppliers and collaborators;
protection of intellectual property; and competition with larger, better-capitalized companies. Ultimately, the attainment of
profitable operations is dependent on future events, including obtaining adequate financing to fund its operations and generating
a level of revenues adequate to support the Company’s cost structure. In the first quarter of 2017, the Company extinguished
convertible promissory notes in the principal amount of $510,000 through the issuance of shares of its common stock (See Note
2) and raised $2,685,000 in a private placement of the Company’s common stock and attached warrants to accredited investors
(see Note 6). In the third quarter of 2017, the Company extinguished notes payable in the principal amount of $537,000 through
the issuance of shares of its common stock (See Note 3).
The
Company will likely need to raise debt and equity financing in the future in order to continue its operations and achieve its
growth targets, however, there can be no assurance that such financing will be available in sufficient amounts and on acceptable
terms, when and if needed, or at all. The precise amount and timing of the funding needs cannot be determined accurately at this
time, and will depend on a number of factors, including market demand for the Company’s products and services, the success
of product development efforts, the timing of receipts for customer deposits, the management of working capital, and the continuation
of normal payment terms and conditions for purchase of goods and services. The Company believes its cash balances and cash flow
from operations will not be sufficient to fund its operations and growth for the next twelve months. If the Company is unable
to substantially increase revenues, reduce expenditures, or otherwise generate cash flows from operations, then the Company will
likely need to raise additional funding to continue as a going concern from investors or through other avenues.
Basis
of Consolidation and Reclassifications:
The
condensed consolidated financial statements include the accounts of the Company and its controlled and wholly-owned subsidiary.
Intercompany transactions, profits, and balances are eliminated in consolidation.
Certain
reclassifications have been made to amounts in prior periods to conform to the current period presentation. All reclassifications
have been applied consistently to the periods presented. The reclassifications had no impact on net loss or total assets and liabilities.
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 the disclosure of contingent assets and liabilities at the date of the financial
statements and that affect the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates
on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results could differ from those estimates. In addition, any change in these estimates or their related
assumptions could have an adverse effect on the Company’s operating results. Key estimates include: valuation of derivative
liabilities, valuation of intangible assets, and valuation of deferred tax assets and liabilities.
Warrants
Issued in Connection with Financings:
The
Company generally accounts for warrants issued in connection with financings as a component of equity, unless there is a possibility
that the Company may have to settle the warrants in cash. For warrants issued with the deemed possibility of a cash settlement,
the Company records the fair value of the issued warrants as a liability at each reporting date and records changes in the estimated
fair value as a non-cash gain or loss in the condensed consolidated statements of operations. The fair values of have been determined
using the Black Scholes Merton Option Pricing valuation model, or the Black-Scholes Model. The Black-Scholes Model provides for
assumptions regarding volatility, call and put features and risk-free interest rates within the total period to maturity. These
values are subject to a significant degree of judgment on the part of the Company.
Fair
value measurements
The
Company evaluates assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate
level to classify them for each reporting period. There have been no transfers between fair value measurements levels during the
three months ended September 30, 2017. The carrying amounts for cash, accounts receivable and accounts payable, accrued expenses
and other current liabilities approximate fair value due to their short-term nature.
The
authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring
or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical
levels of inputs to measure fair value:
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●
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Level
1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
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●
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Level
2: Observable inputs that reflect quoted prices for identical assets or liabilities in markets that are not active; quoted
prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets
or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other
means.
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|
●
|
Level
3: Unobservable inputs reflecting our own assumptions incorporated in valuation techniques used to determine fair value. These
assumptions are required to be consistent with market participant assumptions that are reasonably available.
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The
following table sets forth the Company’s assets and liabilities that were measured at fair value as of September 30, 2017
and December 31, 2016 by level within the fair value hierarchy:
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|
As of September 30, 2017
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|
|
|
|
|
As of December 31, 2016
|
|
|
|
Level I
|
|
|
Level
II
|
|
|
Level
III
|
|
|
Fair
Value
|
|
|
Level I
|
|
|
Level
II
|
|
|
Level
III
|
|
|
Fair
Value
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities - warrants
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
265,760
|
|
|
$
|
265,760
|
|
|
$
|
–
|
|
|
$
|
-
|
|
|
$
|
477,814
|
|
|
$
|
477,814
|
|
Total financial assets (liabilities)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
265,760
|
|
|
$
|
265,760
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
477,814
|
|
|
$
|
477,814
|
|
The
estimated fair value of the derivative liability associated with the Company’s warrants is calculated using the Black-Scholes
option pricing model.
Net
Income (Loss) Per Share
In
accordance with ASC Topic 280 – “Earnings Per Share”, the basic loss per common share is computed by dividing
net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted loss per common
share is computed similar to basic loss per common share except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares
were dilutive. As of September 30, 2017, there are approximately 19,143,050 shares of common stock issuable upon the exercise
of certain outstanding options and warrants and vesting of certain restricted stock units that have been excluded from
the computation of diluted net loss per share because the effect would have been anti-dilutive.
Recent
Accounting Pronouncements:
In
May 2017, the FASB issued Accounting Standards Update (ASU) No. 2017-09,
Compensation – Stock Compensation (Topic 718)
– Scope of Modification Accounting
, to clarify when to account for a change to the terms or conditions of a share-based
payment award as a modification. Under the new standard, modification is required only if the fair value, the vesting conditions,
or the classification of an award as equity or liability changes as a result of the change in terms or conditions. The amendments
are effective for all entities for annual periods beginning after December 15, 2017, including interim periods within those annual
periods, and will be applied prospectively. Early adoption is permitted. The Company is currently evaluating the effect that adopting
this new accounting guidance will have on its consolidated results of operations, cash flows and financial position.
In
January 2017, the FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”). ASU
2017-04 simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a
hypothetical purchase price allocation. ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years
beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for interim or annual
goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the effect that
adopting this new accounting guidance will have on its consolidated results of operations, cash flows and financial position.
In
May 2014, the FASB issued ASU 2014-09 (Topic 606),
Revenue from Contracts with Customers
. The new revenue recognition standard
supersedes all existing revenue recognition guidance. Under this ASU, an entity should recognize revenue when it transfers promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services. ASU 2014-09 and its related amendments are effective for reporting periods (including interim periods)
beginning after December 31, 2017. The standard may be applied retrospectively to each prior period presented or retrospectively
with the cumulative effect recognized as of the date of adoption (“modified retrospective method”). The Company currently
plans to adopt the standard under the modified retrospective method effective January 1, 2018, which will be reflected in its
financial statements as of and for the three months ended March 31, 2018. The Company is currently evaluating the effect that
adopting this new accounting guidance will have on its consolidated financial statements, and is working with a consultant to
assess the effects of the new standard on its internal processes, customer contracts, and future revenues.
NOTE
2 – CONVERTIBLE PROMISSORY NOTES
In
the first quarter of 2017, the Company entered into note conversion and warrant amendment agreements (each an “Agreement”
and together, the “Agreements”) to: (i) amend the convertible promissory notes – series 2 (“Original Notes”)
to reduce the conversion price of such holder’s Original Note and simultaneously cause the conversion of the outstanding
amount under such Original Note into shares of common stock of the Company (“Conversion Shares”); and (ii) reduce
the exercise price of the original warrant (“Original Warrants” and together with the amended notes and the amended
warrants, the “Amendments”). Each Agreement was privately negotiated so the terms vary. Pursuant to the Agreements,
the Original Notes were amended to reflect a reduced conversion price per share between $0.09 and $0.22. Additionally, pursuant
to the Agreements
,
the Original Warrants were amended to reflect a reduced exercise price per share between $0.30
and $0.35, except for one Original Warrant to reflect a reduced exercise price of $0.15 per share. The term of one Original Warrant
was also extended.
Pursuant to the Agreements,
in the first quarter of 2017, the Company (i) converted Original Notes with an aggregate outstanding principal amount of $510,000
and accrued interest of $134,553 in exchange for the issuance of 5,001,554 shares of the Company’s common stock,
and (ii) amended Original Warrants to reduce their exercise price. In the first quarter of 2017, the Company also made payments
of $314,150 to settle convertible promissory notes in the principal amount of $270,000 and accrued interest of $44,150. As of
June 30, 2017, the Company had no convertible notes outstanding.
The
Company has accounted for the Agreements as debt extinguishment where by the difference between the reacquisition price of the
debt and the net carrying amount of the extinguished debt was recognized as a loss during the first quarter of 2017. The following
details the calculation of the loss on extinguishment of the notes payable – series 2 in the first quarter of 2017:
Carrying amount of debt
|
|
|
|
|
Principal converted
|
|
$
|
510,000
|
|
Accrued interest converted
|
|
|
134,553
|
|
Unamortized debt discount
|
|
|
(5,398
|
)
|
Total carrying amount of debt
|
|
|
639,155
|
|
Reacquisition price of debt
|
|
|
|
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Fair value of shares of common stock issued
|
|
|
995,155
|
|
Warrant modification value
|
|
|
59,000
|
|
Total reacquisition price of debt
|
|
|
1,054,155
|
|
Loss on extinguishment of debt
|
|
$
|
(415,000
|
)
|
NOTE
3 – PROMISSORY NOTES
On
February 9, 2017, the Company entered into a securities purchase agreement with two accredited investors pursuant to which the
Company issued promissory notes in the aggregate original principal amount of $537,500. In addition, each investor received 125,000
shares, an aggregate of 250,000 shares, of the Company’s common stock. The notes were unsecured, had an interest rate of
6%, per annum and were originally due and payable, with all accrued interest, on November 9, 2017. The total proceeds were approximately
$500,000 with an original issue discount of approximately $37,500. The Company allocated the cash proceeds amount between the
debt and shares issued on a relative fair value basis. Based on relative fair value, the Company allocated approximately $461,000
and $39,000 to the promissory notes and the shares of common stock, respectively. The original issue discount of $37,500 and fair
value of the shares issued of $39,000 were amortized and expensed over the life of the loans. For the three and nine months ended
September 30, 2017, the amortization expense was approximately $11,000 and approximately $50,000, respectively. In the event of
a default under the terms of the promissory notes, the interest rate automatically increases to 18% per annum, until such time
as the default event is cured. The events of default included suspension from trading of the Company’s common stock, failure
to pay principal or interest when due, commencement of bankruptcy or insolvency proceedings or a change of control.
On
August 8, 2017, the Company executed an amendment (the “Amendment”) with the holders of the promissory notes, each
in the original principal amount of $268,750. The Amendment provides for each of the holder’s notes to convert its principal
into 2,800,000 shares, or 5,600,000 shares in the aggregate, of the Company’s common stock, at a price per share of approximately
$0.096. The Company’s closing share price on August 7, 2017 was $0.135. In connection with this Amendment, the holders also
agreed to surrender to the Company the portion of the promissory notes representing the accrued interest as the consideration
for this Amendment, which approximates $16,900 in total. The transactions contemplated by the Amendment closed on August 22, 2017.
The
Company has accounted for the Amendment as debt extinguishment whereby the difference between the reacquisition price of the debt
and the net carrying amount of the extinguished debt was recognized as a loss during the third quarter of 2017. The following
details the calculation of the loss on extinguishment of the notes payable in the third quarter of 2017:
Carrying amount of debt
|
|
|
|
|
Principal converted
|
|
$
|
537,500
|
|
Accrued interest converted
|
|
|
15,904
|
|
Unamortized debt discount
|
|
|
(25,832
|
)
|
Total carrying amount of debt
|
|
|
527,572
|
|
Reacquisition price of debt
|
|
|
|
|
Fair value of shares of common stock issued
|
|
|
756,000
|
|
Loss on extinguishment of debt
|
|
$
|
(228,428
|
)
|
NOTE
4 – COMMITMENTS AND CONTINGENCIES
Litigation
From time to time, in the normal course of its operations, the Company is subject to litigation matters and
claims. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings
are difficult to predict and the Company’s view of these matters may change in the future as the litigation and events related
thereto unfold. The Company expenses legal fees as incurred. The Company records a liability for contingent losses when it is both
probable that a liability has been incurred and the amount of the loss can be reasonably estimated. An unfavorable outcome to any
legal matter, if material, could have an adverse effect on the Company’s operations or its financial position, liquidity
or results of operations.
Internal
Revenue Service Penalties
The Company has been penalized by the Internal Revenue Service for failure to file its Foreign Form 5471,
Information Return of U.S. Persons With Respect To Certain Foreign Corporations, for the years 2009 through 2014 on a timely basis.
The penalties approximate $115,000. The Company’s request that the penalties be abated was initially denied by the Internal
Revenue Service. The Company is appealing and believes the likelihood of abatement is high based on reasonable cause. However,
there can be no assurance of any abatement until the Internal Revenue Service acts upon the appeal.
Stock
Options of Former CEO
In
March 2017, a former CEO of the Company requested to exercise an option to purchase 3,000,000 shares of the Company’s common
stock at an exercise price of $.00024 per share. The stock option expired in March 2017.
The Company’s
Board of Directors (the “Board”) has not approved the request for the issuance of the common stock under the stock
option.
New
Building Lease
On June 27, 2017, the Company executed a lease, to be effective September 29, 2017, for its manufacturing
and office space. The term of the lease commenced September 29, 2017 and continues through August 31, 2022. The Company will occupy
its current space at a rate of $12,967 per month until January 1, 2018. On January 2, 2018, the space will be expanded and the
monthly rental rate will increase to $18,979 until August 31, 2018. Beginning September 1, 2018, the monthly rent will increase
by 3% each year through the end of the lease. Pursuant to the lease, the Company made a security deposit of $51,000 on July 31,
2017 and received a $100,000 allowance for leasehold improvements. No leasehold improvements have been made as of September 30,
2017.
The
following is a schedule by years of the minimum future lease payments on the building lease as of September 30, 2017.
Year ending December 31:
|
|
|
|
2017
|
|
$
|
38,901
|
|
2018
|
|
|
230,026
|
|
2019
|
|
|
236,926
|
|
2020
|
|
|
244,034
|
|
2021
|
|
|
251,355
|
|
Later years
|
|
|
170,888
|
|
Total future minimum lease payments
|
|
$
|
1,172,130
|
|
NOTE
5 – RELATED PARTY TRANSACTIONS
Keen
Consulting Agreement
On
May 10, 2017, the Board approved a three-year consulting agreement between the Company and Stephen Keen, a principal shareholder
of the Company and a former officer and director. Under the consulting agreement, Mr. Keen will provide certain consulting services
to the Company including research and development, new product design and innovations, existing product enhancements and improvements,
and other technology advancements with respect to the Company’s business and products in exchange for an annual consulting
fee of $30,000. The consulting agreement also includes certain activity restrictions which prohibit Mr. Keen from competing with
the Company. In connection with the execution of this consulting agreement, Mr. Keen resigned as a director of the Company on
May 10, 2017. Mr. Keen’s employment with the Company ceased as of April 28, 2017. Pursuant to the terms of this agreement,
the Company paid Mr. Keen $7,500 and $12,500 for the three and nine months ended September 30, 2017, respectively.
Sterling
Pharms Equipment Agreement
On
May 10, 2017, the Board approved a three-year equipment, demonstration and product testing agreement between the Company and Sterling
Pharms, LLC (“Sterling”), an entity controlled by Mr. Keen, which operates a Colorado-regulated cannabis cultivation
facility currently under construction. Under this agreement, the Company has agreed to provide to Sterling certain lighting, environmental
control, and air sanitation equipment for use at the Sterling facility in exchange for a quarterly fee of $16,500. Also, under
this agreement, Sterling has agreed to allow the Company and its existing and prospective customers to have access to the Sterling
facility for demonstration tours in a working environment, which the Company believes will assist it in the sale of its products.
Sterling has also agreed to monitor, test and evaluate the Company’s products installed at the Sterling facility and to
collect data and provide feedback to the Company on the energy and operational efficiency and efficacy of the installed products,
which the Company intends to use to improve, enhance and develop new or additional product features, innovations and technologies.
In consideration for access to the Sterling facility to conduct demonstration tours and for the product testing and data to be
provided by Sterling, the Company will pay Sterling a quarterly fee of $12,000.
As
of September 30, 2017, Sterling Pharms had accepted substantially all the equipment under the agreement, but is in the process
of completing the installation of the equipment. Pursuant to the terms of this agreement, the respective payments will begin upon
the delivery and installation of the equipment.
In
September 2017, the Company received a deposit from Sterling of $78,310 to purchase equipment unrelated to the lease. The Company
purchased on behalf of Sterling additional equipment of $23,520 which is included in Other Receivables.
Independent
Director Compensation Plan
On
August 8, 2017, the Board approved a compensation plan for the Company’s independent directors effective for the election
or appointment of independent directors on or after May 31, 2017. Under this compensation plan, the Company will pay the independent
directors an annual fee of $60,000, payable quarterly in advance on the first business day of each quarter, covering any regular
or special meetings of the Board or any committee thereof attended in person, any telephonic meeting of the Board or any committee
thereof in which the director participated, any non-meeting consultations with the Company’s management, and any other services
provided by them as a director (other than services as the Chairman of the Board and lead independent director and the Chairman
of the Company’s Audit Committee). The annual fee is paid 50% in cash and 50% in shares of the Company’s common stock,
with the number of shares to be determined based on the closing price of the common stock on the date of issuance.
The
Company pays the Chairman of the Board and lead independent director an additional annual fee of $15,000, payable quarterly in
advance. The Company pays the Audit Committee Chairman an annual fee of $15,000, payable quarterly in advance, for his services
as the Audit Committee Chairman. There is no additional compensation paid to members of the Audit Committee.
At
the time of initial election or appointment, each director also receives an equity retention award in the form of non-qualified
stock options to purchase shares of common stock, shares of common stock, or a combination thereof.
Employment
Agreement with Current Chief Executive Officer
On September 6, 2017, the Board approved an employment agreement between the Company and its current Chief
Executive Officer (“the CEO”), which included the grant of certain restricted stock units.
The
initial term of the employment agreement commenced on August 17, 2017, the date of the CEO’s appointment, and will continue
until December 31, 2019. However, the Company and the CEO may terminate the employment agreement, at any time, with or without
cause, by providing the other party with 30-days’ prior written notice. In the event the CEO’s employment is terminated
by the Company during the initial term without cause, the CEO will be entitled to receive his base salary for an additional 30
days. Following the initial term, the Company and the CEO may extend the employment agreement for additional one-year terms by
mutual written agreement.
The
CEO will receive an annualized base salary of $180,000. Beginning December 31, 2017 and for each six-month period through December
31, 2019, the CEO will also be eligible to receive a special bonus of 1,000,000 shares of the Company’s common stock, provided
the Board has determined, in its sole discretion, that the CEO’s performance has been average or better for such special
bonus period.
The
Board also granted the CEO a total of 3,000,000 restricted stock units, which vest based on the CEO’s continued service
and subject to the following performance thresholds: (i) 1,500,000 restricted stock units will vest on March 31, 2019 if the Company
achieves 2018 revenue of $18,000,000, and (iii) 1,500,000 restricted stock units will vest on March 31, 2020 if the Company achieves
2019 revenue of $25,000,000.
In
consideration of the grant of the restricted stock units and the eligibility for the special bonus, the CEO agreed to terminate
and cancel the non-qualified stock options to purchase 900,000 shares of the Company’s common stock, which were granted
to him as an equity retention award in connection with his appointment to the Board on August 8, 2017.
In
the event of a change of control involving the Company, (i) any restricted stock units not already vested will become vested (other
than those restricted stock units that were previously forfeited due to failure to meet the performance threshold), and (ii) any
remaining special bonuses related to any bonus period ending after the date of the change of control will become due and payable,
provided the CEO continues to provide services to the Company on the date immediately preceding the date of the change of control.
On
August 8, 2017, the CEO was awarded 600,000 shares of the Company’s common stock in consideration of services rendered to
the Company prior to his appointment as a director. These shares were fully vested at the time of the award.
Resignation
of Former Chief Executive Officer
On
August 17, 2017, the Company’s then current Chief Executive Officer (the “Previous CEO”) notified the Board
of his resignation, including his resignation as a director, effective August 17, 2017.
On
August 17, 2017, the Company and the Previous CEO entered into an employment agreement pursuant to which the Previous CEO will
continue his employment as the Company’s Vice President Business Development – West Coast, a non-executive officer
position. The Previous CEO will focus his efforts and use his industry knowledge to assist the Company in developing the significant
market opportunities resulting from the recent legalization of cannabis for recreational use in the State of California. The initial
term of the employment agreement commences on August 17, 2017 and continues until March 31, 2018. The employment agreement may
be extended beyond the initial term upon the mutual agreement of the Company and the Previous CEO.
On
August 17, 2017, the Board also granted the Previous CEO a total of 9,000,000 restricted stock units, which vest in twelve (12)
equal installments (750,000 restricted stock units per installment) commencing on the first business day of January 2018 and continuing
on the first business day of each of the next eleven (11) calendar months, provided that the Previous CEO is employed by the Company
on such vesting date or, if the initial term under the employment agreement has expired, the Previous CEO has not materially breached
any non-competition, non-solicitation and other post-termination of employment obligations.
NOTE
6 – SHAREHOLDERS’ EQUITY
Private
Placement
In
March 2017, the Company entered into a Securities Purchase Agreement (the “Agreement”) with certain accredited investors
(the “Investors”). The Company issued an aggregate of 16,781,250 investment units (the “Units”), for aggregate
gross proceeds of $2,685,000. Each Unit consisted of one share of the Company’s common stock and one warrant for the purchase
of one share of the Company’s common stock; however, one investor declined receipt of the warrant to purchase 468,750 shares
of the Company’s common stock.
Pursuant
to each of the warrants, the holder thereof may, subject to the terms of the warrant, at any time on or after six months after
the date of the warrant and on or prior to the close of business on the date that is the third anniversary of the date of the
warrant, purchase up to the number of shares of the Company’s common stock as set forth in the respective warrant. The exercise
price per share of the common stock under each warrant is $0.26, subject to adjustment as provided in the warrant. Each warrant
is callable at the Company’s option commencing six months from the date of the warrant, provided the Company’s common
stock trades at a volume weighted average price (“VWAP”) of $0.42 or greater (subject to adjustment) for five consecutive
trading days (the “Call Condition”). Commencing at any time after the date on which the Call Condition is satisfied,
the Company has the right, upon 30 days’ notice to the holder given not later than 30 trading days after the date on which
the Call Condition is satisfied, to redeem the number of warrant shares specified in the applicable Call Condition at a price
of $0.01 per warrant share, subject to the terms of the warrant.
Equity
Issued as Compensation for Services
Warrants
Issued to Former Director
On
May 31, 2017, in connection with the resignation of a former director, the Company agreed to issue the former director three individual
warrants to purchase: (i) 900,000 shares (“Warrant 1”), (ii) 460,525 shares (“Warrant 2”), and (iii) 460,525
shares (“Warrant 3”) (collectively, the “Warrants”) of the Company’s common stock for a period of
five years. Warrant 1 was granted on June 20, 2017, is fully vested, and can be exercised beginning December 21, 2017 at an exercise
price of $0.114 per share with the option for a cashless exercise. Warrants 2 and 3 were granted on June 20, 2017, are fully vested,
and can be exercised beginning December 21, 2017 at an exercise price of $0.0005 per share with the option for a cashless exercise.
The Company recorded approximately $207,000 of compensation expense for the fair value the Warrants on the grant date. The fair
value of the Warrants at the date of grant was determined using the Black-Scholes Option Pricing Model. The assumptions used in
the Black-Scholes Option Pricing Model were term of the Warrants of 5 years, volatility rate of 119.96%, quarterly dividends 0%,
and a risk-free interest rate of 1.77%.
Warrants
Issued to Investment Bank
On
June 18, 2017, for services rendered in connection with the conversion of the Original Notes, the Company issued to an investment
bank or its designees a warrant (“Banker Warrant”) to purchase, at an exercise price $0.35 per share, 500,000 shares
of the Company’s common stock for a period of three years. The Banker Warrants were fully vested on the date of issuance
and may be exercised beginning December 20, 2017. The Company recorded approximately $55,000 of expense for the fair value the
Banker Warrant on the date of issuance. The fair value of the Banker Warrants at date of issuance was determined using the Black-Scholes
Option Pricing Model. The assumptions used in the Black-Scholes Option Pricing Model were term of the Banker Warrant of 3 years,
volatility rate of 120.02%, rate of quarterly dividends 0% and a risk-free interest rate of 1.52%.
Common
Shares Issued to Employee
During
the first quarter of 2017, the Company issued to an employee 40,000 shares of common stock which were valued at approximately
$9,000 on the date of issuance.
Common
Shares Issued to Director
On
March 14, 2017, the Company issued to its Chairman of the Board (the “Chairman”) 700,000 shares of common stock as
an equity retention award. These shares were valued, using the closing price for the Company’s common stock, as of the date
of ratification for total value of $122,000, which was expensed as compensation.
2014
Stock Ownership Plan
As
of December 31, 2016, the Company had non-qualified stock options to purchase 6,177,600 shares of the Company’s common stock,
with an exercise price of $0.00024, outstanding under the 2014 Stock Ownership Plan of Safari Resource Group, Inc. (the “2014
Stock Plan”). Upon the adoption of the Company’s 2017 Equity Incentive Plan (the “2017 Equity Plan”),
there will be no further awards under the 2014 Stock Plan.
In
March 2017, in a private transaction, certain principal shareholders of the Company, assigned to the Previous CEO, non-qualified
stock options to purchase 3,088,800 shares of the Company’s common stock outstanding under the 2014 Stock Plan. The principal
shareholders informed the Company that they agreed to assign these options as an incentive (i) for the Previous CEO to complete
the negotiations with the Company’s convertible noteholders to convert their notes into shares of the Company’s common
stock, and (ii) for the Previous CEO to complete a private placement of the Company’s common stock. The Previous CEO thereupon
delivered a purported notice of exercise of the options to the Company just prior to the expiration of the options. The Company
erroneously reported in its Form 10-K for the year ended December 31, 2016 that the common stock underlying these options had
been issued during the three months ended March 31, 2017. Prior to the Company’s acceptance of the notice of exercise and
issuances of these shares in response thereto, in May 2017, the Previous CEO and the principal shareholders entered into a rescission
agreement to nullify the March 2017 assignment transaction. Pursuant to their terms, the options have expired.
In
March 2017, a former CEO of the Company, holding non-qualified options to 3,088,800 shares of the Company’s common stock
outstanding under the 2014 Stock Plan, requested to exercise options with respect to 3,000,000 shares at an exercise price of
$.00024 per share.
The Board has not approved the request for the issuance of the common stock underlying
these exercised options. All of these options expired in March 2017.
As
of September 30, 2017, there are no options outstanding under the 2014 Stock Plan.
2017
Equity Incentive Plan
On
August 1, 2017, the Board adopted and approved the 2017 Equity Plan in order to attract, motivate, retain, and reward high-quality
executives and other employees, officers, directors, consultants, and other persons who provide services to the Company by enabling
such persons to acquire an equity interest in the Company. Under the 2017 Equity Plan, the Board (or the compensation committee
of the Board, if one is established) may award stock options, stock appreciation rights (“SARs”), restricted stock
awards (“RSAs”), restricted stock unit awards (“RSUs”), shares granted as a bonus or in lieu of another
award, and other stock-based performance awards. The 2017 Equity Plan allocates 50,000,000 shares of the Company’s common
stock (“Plan Shares”) for issuance of equity awards under the 2017 Equity Plan. As of September 30, 2017, the Company
has granted, under the 2017 Equity Plan, awards in the form restricted shares for services rendered by independent directors and
consultants, non-qualified stock options and RSUs.
Equity-based
compensation costs are classified in the Company’s consolidated financial statements in the same manner as if such compensation
was paid in cash. The following is a summary of equity-based compensation costs under the 2017 Equity Plan included in the Company’s
consolidated statements of operations for the three and nine months ended September 30, 2017:
|
|
Three months
|
|
|
Nine months
|
|
Equity-based compensation expense included in:
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
38,104
|
|
|
$
|
38,104
|
|
Advertising and marketing expenses
|
|
|
7,259
|
|
|
|
7,259
|
|
Product development costs
|
|
|
2,640
|
|
|
|
2,640
|
|
Selling, general and administrative expenses
|
|
|
578,151
|
|
|
|
877,856
|
|
Total equity-based compensation expense included in consolidated statement of operations
|
|
$
|
626,154
|
|
|
$
|
925,859
|
|
Equity-based
compensation expense is reduced for forfeitures as the forfeitures occur since the Company does not have historical data or other
factors to appropriately estimate the expected employee terminations and to evaluate whether particular groups of employees have
significantly different forfeiture expectations.
The
total unrecognized compensation expense for unvested equity-based compensation awards at September 30, 2017, was $1,304,660, which
will be recognized over approximately 2.25 years. This unrecognized compensation expense does not include the potential future
compensation expense related to equity awards which are subject to vesting based on certain revenue and bookings thresholds for
2017, 2018 and 2019 being satisfied (the “Performance-based Awards”). As of September 30, 2017 and the grant date,
the Company has determined that the likelihood of performance levels being obtained is remote.
Restricted
Stock Awards
On
August 8, 2017, the CEO was awarded 600,000 shares of restricted stock under the 2017 Equity Plan in consideration of services
rendered to the Company prior to his appointment as a director. These restricted shares were fully vested at the time of the award
and the value attributable to these shares, which were issued in August 2017, was $84,000 as calculated using the fair value of
the Company’s common stock on August 7, 2017. See Note 5 – Related Party Transactions – Employment Agreement
with Current Chief Executive Officer.
On
August 8, 2017, the Company awarded 111,113 restricted shares under the 2017 Equity Plan to independent directors in lieu of the
payment of cash fees earned during the second quarter of 2017. These restricted shares were fully vested at the time of the award.
The value attributable to these shares, which were issued in August 2017, was $15,000 as calculated using the fair value of the
Company’s common stock on August 7, 2017. As of September 30, 2017, the independent directors are owed cash fees of $15,000
which will be paid in the form of fully vested restricted shares in November 2017.
On
August 8, 2017, the Company awarded 260,778 restricted shares under the 2017 Equity Plan to a consultant who provided corporate
and financial services to the Company. These restricted shares were awarded in lieu of cash fees earned for the April, May, June
and July 2017 and were fully vested at the time of the award. The value attributable to these shares, which were issued in August
2017, was $35,000 as calculated using the fair value of the Company’s common stock on August 7, 2017. As of September 30,
2017, the consultant is owed cash fees of $15,000 which will be paid in the form of fully vested restricted shares in November
2017.
On
September 6, 2017, the Company awarded 1,200,000 restricted shares under the 2017 Equity Plan to an employee as compensation.
These restricted shares were fully vested at the time of the award. The value attributable to these shares, which were issued
in October 2017, was $134,280 as calculated using the fair value of the Company’s common stock on September 6, 2017. These
shares are reflected as shares to be issued in the Company’s Statement of Changes in Shareholders’ Equity (Deficit).
Non-Qualified
Stock Options
On
August 8, 2017, the Board granted to certain independent directors non-qualified stock options, under the 2017 Equity Plan, to
purchase a total of 1,800,000 shares of the Company’s common stock at an exercise price of $0.135 per share for a period
of ten years. These options vest 50% on date of grant and the remaining 50% on March 1, 2018, provided they are still serving
as a director on such date. On August 17, 2017, one of these independent directors was appointed the CEO and, in consideration
of the grant of the restricted stock units and the eligibility for the special bonus, the CEO agreed to terminate and cancel the
non-qualified stock options to purchase 900,000 shares of the Company’s common stock previously granted to him.
During
the third quarter of 2017, the Board granted to certain employees non-qualified stock options, under the 2017 Equity Plan, to
purchase a total of 12,355,000 shares of the Company’s common stock at an exercise price equal to the closing market price
of the Company’s common stock on the day before the grant. The terms of the options are summarized as follows:
|
(a)
|
Non-qualified
stock options to purchase 1,805,000 shares at an exercise price of $0.135 per share granted to certain employees on August
8, 2017, which vest based on the employee’s continued service over 2.75 years, as follows: (i) 661,672 options will
vest if the employee remains employed at various dates during 2017, (ii) 571,665 options will vest if the employee remains
employed at various dates during 2018, and (iii) 571,663 options will vest if the employee remains employed at various dates
during 2019, and have a term of 10 years. As of September 30, 2017, non-qualified stock options to purchase 60,000 shares
have expired.
|
|
|
|
|
(b)
|
Non-qualified
stock options to purchase 1,300,000 shares at an exercise price of $0.121 per share granted to a former employee on August
17, 2017, which were fully vested on the grant date and have a term of three years.
|
|
|
|
|
(c)
|
Non-qualified
stock options to purchase 1,200,000 shares at an exercise price of $0.135 per share granted to certain employees on August
8, 2017, which vest based on the employee’s continued service and subject to the following performance thresholds: (i)
400,000 options will vest if the Company achieves $8,000,000 and $10,000,000 of revenue and new bookings, respectively, for
the year end December 31, 2017, (ii) 400,000 options will vest if the Company achieves 2018 revenue of $18,000,000, and (iii)
400,000 options will vest if the Company achieves 2019 revenue of $25,000,000.
|
|
|
|
|
(d)
|
Non-qualified
stock options to purchase 4,050,000 shares at an exercise price of $0.121 per share granted to certain employees on August
17, 2017, which vest based on the employee’s continued service and subject to the following performance thresholds:
(i) 800,000 options will vest if the Company achieves $8,000,000 and $10,000,000 of revenue and new bookings, respectively,
for the year end December 31, 2017, (ii) 1,300,000 options will vest if the Company achieves 2018 revenue of $18,000,000,
and (iii) 1,950,000 options will vest if the Company achieves 2019 revenue of $25,000,000.
|
|
|
|
|
(e)
|
Non-qualified
stock options to purchase 4,000,000 shares at an exercise price of $0.112 per share granted to an employee on September 9,
2017, which vest based on the employee’s continued service and subject to the following performance thresholds: (i)
750,000 options will vest if the Company achieves $8,000,000 and $10,000,000 of revenue and new bookings, respectively, for
the year end December 31, 2017, (ii) 1,250,000 options will vest if the Company achieves 2018 revenue of $18,000,000, and
(iii) 2,000,000 options will vest if the Company achieves 2019 revenue of $25,000,000.
|
The
Company uses the
Black-Scholes
Option Pricing Model to determine the fair value of options
granted. Option-pricing models require the input of highly subjective assumptions, particularly for the expected stock price volatility
and the expected term of options. Changes in the subjective input assumptions can materially affect the fair value estimate. The
expected stock price volatility assumptions are based on the historical volatility of the Company’s common stock over periods
that are similar to the expected terms of grants and other relevant factors. The Company derives the expected term based on historical
experience and other relevant factors concerning expected employee behavior with regard to option exercise. The risk-free interest
rate is based on U.S. Treasury yields for a maturity approximating the expected term calculated at the date of grant. The Company
has never paid any cash dividends on its common stock and the Company has no intention to pay a dividend at this time; therefore,
the Company assumes that no dividends will be paid over the expected terms of option awards.
The Company determines the assumptions used in the valuation of option awards as of the date of grant. Differences
in the expected stock price volatility, expected term or risk-free interest rate may necessitate distinct valuation assumptions
at those grant dates. As such, the Company may use different assumptions for options granted throughout the year. The valuation
assumptions used to determine the fair value of each option award on the date of grant were: expected stock price volatility 117.13%
- 120.6%; expected term in years 5.0 - 7.5 and risk free interest rate 1.71% - 2.07%
A
summary of the non-qualified stock options granted to employees under the
2017
Equity Plan
as of September 30, 2017, and changes during the nine months then ended, are presented
in the table below:
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Term
|
|
|
Aggregate Intrinsic Value ($000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
12,355,000
|
|
|
|
0.121
|
|
|
|
9.9
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(60,000
|
)
|
|
|
0.135
|
|
|
|
9.9
|
|
|
|
-
|
|
Outstanding as of September 30, 2017
|
|
|
12,295,000
|
|
|
|
0.121
|
|
|
|
9.9
|
|
|
|
-
|
|
Expected to vest as of September 30, 2017
|
|
|
3,045,000
|
|
|
|
0.129
|
|
|
|
9.9
|
|
|
|
-
|
|
As
of September 30, 2017, of the options to purchase 12,295,000 shares outstanding, options to purchase 9,250,000 shares are performance-based
and the Company has determined that the likelihood of performance levels being obtained is remote as of the date of grant and
September 30, 2017. Based on the low level of obtaining the performance level, the fair value of these performance-based options
was negligible as of the grant date and September 30, 2017.
A
summary of the non-qualified stock options granted to the directors under the
2017
Equity Plan
as of September 30, 2017, and changes during the nine months then ended, are presented
in the table below:
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Term
|
|
|
Aggregate Intrinsic Value ($000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
1,800,000
|
|
|
|
0.135
|
|
|
|
9.9
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Cancelled
|
|
|
(900,000
|
)
|
|
|
0.135
|
|
|
|
9.9
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding and expected to vest as of September 30, 2017
|
|
|
900,000
|
|
|
|
0.135
|
|
|
|
9.9
|
|
|
|
-
|
|
The
total fair value of vested options issued to employees and directors and recorded as compensation expense was $303,000
and $371,000 for the three and nine months ended September 30, 2017, respectively. Compensation expense for the nine
months ended September 30, 2017 includes $68,000 for cancelled options.
Restricted
Stock Units
On August 8, 2017, the Company awarded 700,000
restricted stock units to the Chairman based on the retention agreement between the Company and the Chairman entered into in March
2017 prior to his appointment. These restricted stock units will vest on March 1, 2018, provided he remains a director on such
date, and will be settled by the issuance of one share of common stock for each vested restricted stock unit.
On
June 12, 2017, the Company entered into a consulting agreement for a sales and business development services. The consulting term
ended on September 1, 2017. The consultant was compensated with an award of 200,000 restricted stock units, which vested on the
following dates: 66,667 units on July 7, 2017, 66,667 units on August 4, 2017 and 66,666 units on September 1, 2017. Each vested
restricted stock unit will be settled by the issuance of one share of common stock. The Company will account for these restricted
stock units using the graded vesting method with the total value of the restricted stock units calculated on the date the shares
of common stock are issued to the consultant. For accounting purposes, the restricted stock units will be revalued at each reporting
date with the final value being the date the shares of common stock are issued to the consultant. The Company recorded an expense
of $17,000 and $21,000 for the three and nine months ended September 30, 2017, respectively. The Company issued 200,000 shares
of common stock to settle the vested restricted stock units on October 3, 2017 which are reflected as shares to be issued in the
Company’s Statement of Changes in Shareholders’ Equity (Deficit).
During
the third quarter of 2017, the Company also issued 12,700,000 restricted stock units to employees as follows:
|
(a)
|
On
August 17, 2017, the Company granted 700,000 restricted stock units to certain employees which vest at various times during
the first quarter of 2018, provided the employee remains employed as of the vesting date.
|
|
|
|
|
(b)
|
On
August 17, 2017, the Company granted to the Previous CEO 9,000,000 restricted stock units, which vest in 12 equal installments
(750,000 restricted stock units per installment) commencing on the first business day of January 2018 and continuing on the
first business day of each of the next 11 calendar months, provided that the Previous CEO is employed by the Company on such
vesting date or, if the initial term under the employment agreement has expired, the Previous CEO has not materially breached
any non-competition, non-solicitation and other post-termination of his employment obligations.
|
|
|
|
|
(c)
|
On
September 6, 2017, the Company granted 3,000,000 restricted stock units to the CEO, which vest based on the CEO’s continued
service and subject to the following performance thresholds: (i) 1,500,000 restricted stock units will vest if the Company
achieves 2018 revenue of $18,000,000, and (ii) 1,500,000 restricted stock units will vest if the Company achieves 2019 revenue
of $25,000,000.
|
All
of the foregoing restricted stock unit awards will be settled by the issuance of one share of common stock for each vested restricted
stock unit.
A
summary of the restricted stock units awarded to employees, directors and consultants under the 2017 Equity Plan as September
30, 2017 and changes during the period then ended, are presented in the table below:
|
|
Number of Units
|
|
|
Weighted Average Grant-Date Fair Value
|
|
|
|
|
|
|
|
|
|
|
Unvested as of December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
13,600,000
|
|
|
|
0.122
|
|
Vested
|
|
|
(1,828,000
|
)
|
|
|
0.132
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Unvested as of September 30, 2017
|
|
|
11,772,000
|
|
|
|
0.121
|
|
Expected to vest as of September 30, 2017
|
|
|
8,772,000
|
|
|
$
|
0.123
|
|
As of September 30, 2017, of the unvested 11,772,000 restricted stock units, 3,000,000 restricted stock units
are performance-based and the Company has determined that the likelihood of performance levels being obtained is remote as of the
date of grant and September 30, 2017. Based on the low level of obtaining the performance level, the fair value of these performance-based
restricted stock units was negligible as of the grant date and September 30, 2017.
.
The
total fair value of the vested restricted stock units issued to employees, directors and consultants and recorded as compensation
expense was $214,000 and $239,000 for the three and nine months ended September 30, 2017, respectively.
NOTE
7 – SUBSEQUENT EVENTS
Unless
disclosed elsewhere within the Notes to Unaudited Condensed Consolidated Financial Statements, the following significant subsequent
events occurring after September 30, 2017 are discussed below.
Equity
In
October 2017, the Company issued 1,400,000 shares of the Company’s common stock, which were classified as shares to be issued
as of September 30, 2017, consisting of 1,200,000 restricted shares issued as compensation to an employee and 200,000 restricted
units issued to a consultant as compensation which were settled by the issuance of 200,000 shares.
On
October 10, 2017, the Board granted non-qualified stock options, under the 2017 Equity Plan, to certain employees to purchase
175,000 shares at an exercise price of $0.105 per share, which vest over the next 2.75 years.
On October 10, 2017, the Board awarded an employee 200,000 restricted stock units, under the 2017 Equity Plan,
which vest in the second quarter of 2018.
On November 7, 2017, the Board awarded an employee 200,000 restricted stock units, under the 2017 Equity Plan,
which vest in the second quarter of 2018.
On
November 7, 2017, the Board awarded a total of 104,896 restricted shares, which were immediately vested, to the independent directors
in lieu of cash fees of $15,000 earned during the third quarter of 2017.
On
November 7, 2017, the Board awarded a total of 143,707 restricted shares, which were immediately vested, to a consultant in lieu
of cash fees of $20,500 earned in August, September and October of 2017.
Employment
Agreement with Principal Shareholder
On
October 10, 2017, the Board approved an employment agreement between the Company and a principal shareholder, the Company’s
Vice President, Secretary and Senior Technical Advisor. The employment agreement superseded and replaced an employment agreement
between the Company and such principal shareholder dated July 25, 2014, which expired by its terms on July 25, 2017. The initial
term of the employment agreement commenced on October 1, 2017 and continues until December 31, 2019. However, the Company and
such principal shareholder may terminate the employment agreement, at any time, with or without cause, by providing the other
party with 30-days’ prior written notice. In the event such principal shareholder’s employment is terminated by the
Company during the initial term without cause, such principal shareholder will be entitled to receive her base salary for an additional
30 days. Following the initial term, the Company and such principal shareholder may extend the employment agreement for additional
one-year terms by mutual written agreement. Such principal shareholder will receive an annualized base salary of $150,000. During
the initial term, such principal shareholder will be eligible to participate in the Company’s sales incentive program for
sales personnel, as in effect and as amended from time to time by the Company (the “Sales Program”). In connection
with the Sales Program, such principal shareholder will be entitled to a sales incentive equal to one-quarter of one percent (0.25%)
of the revenue collected and earned from the Company’s sales, payable quarterly in arrears. Subject to the approval of the
independent members of the Board, such principal shareholder may be eligible to participate in the 2017 Equity Plan. The independent
members of the Board have not approved such principal shareholder’s participation in the 2017 Equity Plan, and such principal
shareholder has not been granted, nor does such principal shareholder hold, any equity awards under thereunder.
Designation
of Principal Financial and Accounting Officer
On
October 16, 2017, Dean S. Skupen notified the Board of his resignation as the Company’s Director of External Reporting and
designated Principal Financial and Accounting Officer. The Company’s Chief Financial Officer will serve as the Company’s
new designated Principal Financial and Accounting Officer.