Notes
to the Condensed Consolidated Financial Statements
(unaudited)
Note
1 - Organization and Operations
Jerrick Media Holdings, Inc. (“we,”
“us,” the “Company,” or “Jerrick Media”) (formerly Great Plains Holdings, Inc. or “GTPH”)
was incorporated under the laws of the state of Nevada on December 30, 1999 under the name LILM, Inc. The Company changed its name
on December 3, 2013 to Great Plains Holdings, Inc. as part of its plan to diversify its business through the acquisition and operation
of commercial real estate, including, but not limited to, self-storage facilities, apartment buildings, 55+ senior manufactured
home communities, and other income producing properties. Historically, the Company has principally engaged in the manufacture and
marketing of the LiL Marc, a plastic boys’ toilet-training device, which we discontinued as of December 31, 2014.
On February 5, 2016 (the “Closing
Date”), GTPH, GPH Merger Sub, Inc., a Nevada corporation and wholly-owned subsidiary of GTPH (“Merger Sub”),
and Jerrick Ventures, Inc., a privately-held Nevada corporation headquartered in New Jersey (“Jerrick”), entered into
an Agreement and Plan of Merger (the “Agreement”) pursuant to which the Merger Sub was merged with and into Jerrick,
with Jerrick surviving as a wholly-owned subsidiary of GTPH (the “Merger”). GTPH acquired, through a reverse triangular
merger, all of the outstanding capital stock of Jerrick in exchange for issuing Jerrick’s shareholders (the “Jerrick
Shareholders”), pro-rata, a total of 28,500,000 shares of GTPH’s common stock. GTPH assumed 33,415 shares of Jerrick’s
Series A Convertible Preferred Stock (the “Jerrick Series A Preferred”) and 8,064 shares of Series B Convertible Preferred
Stock (the “Jerrick Series B Preferred”).
In connection with the Merger, on the Closing
Date, GTPH and Kent Campbell entered into a Spin-Off Agreement (the “Spin-Off Agreement”), pursuant to which Mr. Campbell
purchased from GTPH (i) all of GTPH’s interest in Ashland Holdings, LLC, a Florida limited liability company, and (ii) all
of GTPH’s interest in Lil Marc, Inc., a Utah corporation, in exchange for the cancellation of 781,818 shares of GTPH’s
Common Stock held by Mr. Campbell. In addition, Mr. Campbell assumed all debts, obligations and liabilities of GTPH, including
any existing prior to the Merger, pursuant to the terms and conditions of the Spin-Off Agreement.
Upon closing of the Merger on February
5, 2016, the Company changed its business plan to that of Jerrick Media.
Effective February 28, 2016, GTPH entered
into an Agreement and Plan of Merger (the “Statutory Merger Agreement”) with Jerrick, pursuant to which GTPH became
the parent company of Jerrick Ventures, LLC, a wholly-owned operating subsidiary of Jerrick (the “Statutory Merger”)
and GTPH changed its name to Jerrick Media Holdings, Inc. to better reflect its new business strategy.
Jerrick Media is a technology company focused
on the development of digital communities, marketing branded digital content, and e-commerce opportunities. Jerrick’s content
distribution platform, Vocal, delivers a robust long-form, digital publishing platform organized into highly engaged niche-communities
capable of hosting all forms of rich media content. Through Jerrick’s proprietary algorithm dynamics, Vocal enhances the
visibility of content and maximizes viewership, providing advertisers access to target markets that most closely match their interests.
Note
2 - Significant and Critical Accounting Policies and Practices
The
Company’s significant accounting policies are disclosed in Note 2 - Summary of Significant Accounting Policies in the 2016
Annual Report. Since the date of the 2016 Annual Report, there have been no material changes to the Company’s significant
accounting policies. The preparation of the condensed consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported
in the condensed consolidated financial statements and the accompanying notes to the condensed consolidated financial statements.
These estimates and assumptions include valuing equity securities and derivative financial instruments issued in financing transactions,
deferred taxes and related valuation allowances, and the fair values of long lived assets. Actual results could differ from the
estimates.
Basis
of Presentation
The
Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“US GAAP”) and the rules and regulations of the Securities and Exchange
Commission (“SEC”).
The
unaudited condensed consolidated financial information furnished herein reflects all adjustments, consisting solely of normal
recurring items, which in the opinion of management are necessary to fairly state the financial position of the Company and the
results of its operations for the periods presented. This report should be read in conjunction with the Company’s financial
statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2016 filed with the Securities
and Exchange Commission (the “
SEC
”) on March 31, 2017. The Company assumes that the users of the interim financial
information herein have read or have access to the audited financial statements for the preceding fiscal year and that the adequacy
of additional disclosure needed for a fair presentation may be determined in that context. Accordingly, footnote disclosure, which
would substantially duplicate the disclosure contained in the Company’s Form 10-K for the year ended December 31, 2016 has
been omitted. The results of operations for the interim periods presented are not necessarily indicative of results for the entire
year ending December 31, 2017 or any other period.
Use
of Estimates and Assumptions and Critical Accounting Estimates and Assumptions
The
preparation of financial statements in conformity with US 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 dates of the financial
statements and the reported amounts of revenues and expenses during the reporting periods.
Critical
accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and
judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact
of the estimate on financial condition or operating performance is material. The Company’s critical accounting estimates
and assumptions affecting the financial statements were:
(i)
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Assumption
as a going concern
: Management assumes that the Company will continue as a going concern, which contemplates continuity
of operations, realization of assets, and liquidation of liabilities in the normal course of business.
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(ii)
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Fair
value of long-lived assets:
Fair value is generally determined using the asset’s expected future discounted cash
flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly
determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets
are depreciated over the newly determined remaining estimated useful lives. The Company considers the following to be some
examples of important indicators that may trigger an impairment review: (i) significant under-performance or losses of
assets relative to expected historical or projected future operating results; (ii) significant changes in the manner
or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes
in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv) increased
competitive pressures; (v) a significant decline in the Company’s stock price for a sustained period of time; and
(vi) regulatory changes. The Company evaluates acquired assets for potential impairment indicators at least annually
and more frequently upon the occurrence of such events.
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(iii)
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Valuation
allowance for deferred tax assets
: Management assumes that the realization of the Company’s net deferred tax assets
resulting from its net operating loss (“NOL”) carry–forwards for Federal income tax purposes that may be
offset against future taxable income was not considered more likely than not and accordingly, the potential tax benefits of
the net loss carry-forwards are offset by a full valuation allowance. Management made this assumption based on (a) the Company
has incurred recurring losses, (b) general economic conditions, and (c) its ability to raise additional funds to support its
daily operations by way of a public or private offering, among other factors.
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(iv)
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Estimates
and assumptions used in valuation of equity instruments:
Management estimates expected term of share options and similar
instruments, expected volatility of the Company’s common shares and the method used to estimate it, expected annual
rate of quarterly dividends, and risk free rate(s) to value share options and similar instruments.
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These
significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached
to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management
bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the
financial statements taken as a whole 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.
Management
regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes
in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those
estimates are adjusted accordingly.
Actual
results could differ from those estimates.
Principles
of consolidation
The
Company consolidates all less-than-majority-owned subsidiaries, if any, in which the parent’s power to control exists.
As
of September 30, 2017, the Company’s consolidated subsidiaries and/or entities are as follows:
Name
of combined affiliate
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State
or other jurisdiction of
incorporation or organization
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Company interest
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Jerrick
Ventures LLC
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The
State of Delaware
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100
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%
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All
inter-company balances and transactions have been eliminated.
On May 12, 2017, the Company assigned the
right, title and interest to all of the membership interests of certain of it’s inactive business subsidiaries, with the
exception of Jerrick Ventures, LLC, to the Company’s Chief Executive Officer, Jeremy Frommer, in consideration for Mr. Frommer’s
assumption of all liabilities of such subsidiaries, if any, with such assignment and assumption effected entirely in the interest
of corporate efficiency. The Board reviewed the transaction and believes it to be fair in all respects, deeming it to advance the
Company’s business interests by allowing the Company to divest non-producing and non-operating subsidiaries at no cost to
the Company. All of the Company’s operations have been, and will continue to be, run through its operating subsidiary, Jerrick
Ventures LLC.
Fair
Value of Financial Instruments
The
Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial
instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to
measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in
U.S. GAAP, and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements
and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques
used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted)
in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of
fair value hierarchy defined by Paragraph 820-10-35-37 are described below:
Level
1
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Quoted
market prices available in active markets for identical assets or liabilities as of the reporting date.
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Level
2
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Pricing
inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date.
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Level
3
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Pricing
inputs that are generally observable inputs and not corroborated by market data.
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Financial
assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or
similar techniques and at least one significant model assumption or input is unobservable.
The
fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within
more than one level described above, the categorization is based on the lowest level input that is significant to the fair value
measurement of the instrument.
The
carrying amount of the Company’s financial assets and liabilities, such as cash, prepaid expenses, accounts payable and
accrued liabilities and accrued liquidating damages approximate their fair value because of the short maturity of those instruments.
Transactions
involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of
competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply
that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions
unless such representations can be substantiated.
Cash
Equivalents
The
Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
The
Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial
institution. The balance at times may exceed federally insured limits.
Inventories
Inventory
Valuation
The
Company values inventory, entirely consisting of finished goods, at the lower of cost or market. Cost is determined on the first-in
and first-out (“FIFO”) method.
Inventory
Obsolescence and Markdowns
The
Company evaluates its current level of inventory considering historical sales and other factors and, based on this evaluation,
classify inventory markdowns in the income statement as a component of cost of goods sold. These markdowns are estimates, which
could vary significantly from actual requirements if future economic conditions, customer demand or competition differ from expectations.
The
Company recorded a markdown of $0 and $0 as of September 30, 2017 and 2016, respectively, due to slow moving inventory.
There
was no lower of cost or market adjustments for the reporting period ended September 30, 2017 or 2016.
Fair Value of Non-Financial Assets or Liabilities Measured
on a Recurring Basis
The Company’s
non-financial assets include inventory. The Company identifies potentially excess and slow-moving inventory by evaluating turn
rates, inventory levels and other factors. Excess quantities are identified through evaluation of inventory aging, review of inventory
turns and historical sales experiences. The Company provides lower of cost or market reserves for such identified excess and slow-moving
inventories. The Company establishes a reserve for inventory shrinkage, if any, based on the historical results of physical inventory
cycle counts.
Property
and Equipment
Property
and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs
are charged to operations as incurred. Depreciation is computed by the straight-line method (after taking into account their respective
estimated residual values) over the estimated useful lives of the respective assets as follows:
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Estimated Useful
Life
(Years)
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Computer equipment and software
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3
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Furniture and fixture
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5
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Upon
sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and
any gain or loss is reflected in the consolidated statements of operations.
Investments
- Cost Method, Equity Method and Joint Venture
In
accordance with sub-topic 323-10 of the FASB ASC (“Sub-topic 323-10”), the Company accounts for investments in common
stock of an investee for which the Company has significant influence in the operating or financial policies even though the Company
holds 50% or less of the common stock or in-substance common stock.
On
January 2, 2013, the Company purchased a minority interest in a business for proceeds of $83,333. The interest is accounted for
under the cost method. The Company tests the carrying value annually for impairment.
Related
Parties
The
Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure
of related party transactions.
Pursuant
to Section 850-10-20 FASB Accounting Standards, the related parties include (a) affiliates of the Company (“Affiliate”
means, with respect to any specified Person, any other Person that, directly or indirectly through one or more intermediaries,
controls, is controlled by or is under common control with such Person, as such terms are used in and construed under Rule 405
under the Securities Act); (b) entities for which investments in their equity securities would be required, absent the election
of the fair value option under the Fair Value Option Subsection of Section 825–10–15 FASB Accounting Standards, to
be accounted for by the equity method by the investing entity; (c) trusts for the benefit of employees, such as pension and profit-sharing
trusts that are managed by or under the trusteeship of management; (d) principal owners of the Company and members of their immediate
families; (e) management of the Company and members of their immediate families; (f) other parties with which the Company may
deal if one party controls or can significantly influence the management or operating policies of the other to an extent that
one of the transacting parties might be prevented from fully pursuing its own separate interests; and (g) other parties that can
significantly influence the management or operating policies of the transacting parties or that have an ownership interest in
one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties
might be prevented from fully pursuing its own separate interests.
Pursuant
to ASC Paragraphs 850-10-50-1 and 50-5 financial statements shall include disclosures of material related party transactions,
other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. The disclosures
shall include: (a) the nature of the relationship(s) involved; (b) a description of the transactions, including transactions to
which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such
other information deemed necessary to an understanding of the effects of the transactions on the financial statements; (c) the
dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change
in the method of establishing the terms from that used in the preceding period; and (d) amounts due from or to related parties
as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement. Transactions
involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of
competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply
that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions
unless such representations can be substantiated.
Derivative
Liability
The
Company evaluates its debt and equity issuances to determine if those contracts or embedded components of those contracts qualify
as derivatives to be separately accounted for in accordance with paragraph 815-10-05-4 and Section 815-40-25 of the FASB Accounting
Standards Codification. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market
each balance sheet date and recorded as either an asset or a liability. In the event that the fair value is recorded as a liability,
the change in fair value is recorded in the consolidated statement of operations as other income or expense. Upon conversion,
exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise
or cancellation and then the related fair value is reclassified to equity.
In
circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also
other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative
instruments are accounted for as a single, compound derivative instrument.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is
re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject
to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative
instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement
of the derivative instrument is expected within 12 months of the balance sheet date.
The
Company adopted Section 815-40-15 of the FASB Accounting Standards Codification (“Section 815-40-15”) to determine
whether an instrument (or an embedded feature) is indexed to the Company’s own stock. Section 815-40-15 provides that
an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed
to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions.
The
Company utilizes an option pricing model to compute the fair value of the derivative and to mark to market the fair value of the
derivative at each balance sheet date. The Company records the change in the fair value of the derivative as other income or expense
in the condensed consolidated statements of operations.
Revenue
Recognition
The
Company follows paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company will
recognize revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned
when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped
or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is
reasonably assured.
Stock-Based
Compensation
The
Company recognizes compensation expense for all equity–based payments granted to employees in accordance with ASC
718
“Compensation – Stock Compensation”.
Under fair value recognition provisions, the
Company recognizes equity–based compensation net of an estimated forfeiture rate and recognizes compensation cost only
for those shares expected to vest over the requisite service period of the award.
Restricted
stock awards are granted at the discretion of the Company. These awards are restricted as to the transfer of ownership and generally
vest over the requisite service periods, typically over a five year period (vesting on a straight–line basis). The fair
value of a stock award is equal to the fair market value of a share of Company stock on the grant date.
The
fair value of an option award is estimated on the date of grant using the Black–Scholes option valuation model. The Black–Scholes
option valuation model requires the development of assumptions that are inputs into the model. These assumptions are the value
of the underlying share, the expected stock volatility, the risk–free interest rate, the expected life of the option, the
dividend yield on the underlying stock and the expected forfeiture rate. Expected volatility is benchmarked against similar companies
in a similar industry over the expected option life and other appropriate factors. Risk–free interest rates are calculated
based on continuously compounded risk–free rates for the appropriate term. The dividend yield is assumed to be zero as the
Company has never paid or declared any cash dividends on its Common stock and does not intend to pay dividends on its Common stock
in the foreseeable future. The expected forfeiture rate is estimated based on management’s best estimate.
Determining
the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the
subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards
represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment.
As a result, if factors change and the Company uses different assumptions, our equity–based compensation could be materially
different in the future. In addition, the Company is required to estimate the expected forfeiture rate and recognize expense only
for those shares expected to vest. If the Company’s actual forfeiture rate is materially different from its estimate, the
equity–based compensation could be significantly different from what the Company has recorded in the current period.
The
Company accounts for share–based payments granted to non–employees in accordance with ASC 505-40, “Equity
Based Payments to Non–Employees”. The Company determines the fair value of the stock–based payment as either
the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If
the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions
as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments
is reached, or (2) the date at which the counterparty’s performance is complete. The fair value of the equity instruments
is re-measured each reporting period over the requisite service period.
Income
Taxes
Income
taxes are provided in accordance with ASC No. 740, “
Accounting for Income Taxes
”. A deferred tax asset or liability
is recorded for all temporary differences between financial and tax reporting and net operating loss carryforwards. Deferred tax
expense (benefit) results from the net change during the period of deferred tax assets and liabilities.
Deferred
tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes
in tax laws and rates on the date of enactment.
Management
makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous
estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in
these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual
taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
Loss
Per Share
Basic
net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number
of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average number
of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when
losses are reported, which is the case for the three months ended September 30, 2017 and 2016 presented in these condensed consolidated
financial statements, the weighted-average number of common shares outstanding excludes common stock equivalents because their
inclusion would be anti-dilutive.
The
Company had the following common stock equivalents at September 30, 2017 and 2016:
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September 30,
2017
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September 30,
2016
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Options
|
|
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17,749,990
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|
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2,050,000
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Warrants
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34,457,024
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14,735,000
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Convertible notes
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13,681,425
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|
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-
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Totals
|
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65,888,439
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16,785,000
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Reclassifications
Certain
prior year amounts in the condensed consolidated financial statements and the notes thereto have been reclassified where necessary
to conform to the current year presentation. These reclassifications did not affect the prior period total assets, total liabilities,
stockholders’ deficit, net loss or net cash used in operating activities.
Recently
Issued Accounting Pronouncements
In
August 2014, the FASB issued ASU 2014-15, “
Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern
.” ASU 2014-15 provides guidance on management’s
responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern
and to provide related footnote disclosures. For each reporting period, management will be required to evaluate whether there
are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one
year from the date the financial statements are issued. The amendments in ASU 2014-15 are effective for annual reporting periods
ending after December 15, 2016 and for annual and interim periods thereafter. The Company has adopted the methodologies prescribed
by ASU 2014-15, the adoption of ASU 2014-15 did not have a material effect on its financial position or results of operations.
Management
does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material
effect on the accompanying consolidated financial statements.
Note
3 – Going Concern
The
Company’s condensed consolidated financial statements have been prepared assuming that it will continue as a going concern,
which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As
reflected in the condensed consolidated financial statements, the Company had an accumulated deficit at September 30, 2017, a
net loss and net cash used in operating activities for the reporting period then ended. These factors raise substantial doubt
about the Company’s ability to continue as a going concern.
The
Company is attempting to further implement its business plan and generate sufficient revenues; however, its cash position may
not be sufficient to support its daily operations. While the Company believes in the viability of its strategy to further implement
its business plan and generate sufficient revenues and in its ability to raise additional funds by way of a public or private
offering of its debt or equity securities, there can be no assurance to that effect. The ability of the Company to continue as
a going concern is dependent upon its ability to further implement its business plan and generate sufficient revenues and its
ability to raise additional funds by way of a public or private offering.
The
condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to
continue as a going concern.
Note
4 – Property and Equipment
Property
and equipment stated at cost, less accumulated depreciation and amortization, consisted of the following:
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September 30,
2017
|
|
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December 31,
2016
|
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Computer Equipment
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|
$
|
219,653
|
|
|
$
|
219,653
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Furniture and Fixtures
|
|
|
61,803
|
|
|
|
61,803
|
|
|
|
|
281,456
|
|
|
|
281,456
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|
Less: Accumulated Depreciation
|
|
|
(237,838
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)
|
|
|
(209,627
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)
|
|
|
$
|
43,618
|
|
|
$
|
71,829
|
|
Depreciation
expense was $9,507 and $10,933 for the three months ended September 30, 2017 and 2016, respectively. Depreciation expense was
$28,211 and $31,717 for the nine months ended September 30, 2017 and 2016, respectively.
Note
5 – Line of Credit
Line
of credit as of September 30, 2017 and December 31, 2016 is as follows:
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Outstanding Balances as of
|
|
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September 30,
2017
|
|
December 31, 2016
|
March 19, 2009
|
|
|
119,246
|
|
|
|
203,988
|
|
October 4, 2016
|
|
|
0
|
|
|
|
31,153
|
|
|
|
$
|
119,246
|
|
|
$
|
235,141
|
|
On March 19, 2009 Astoria Surgical Supplies
North LLC signed a revolving note (the “Revolving Note”) at PNC Bank (the “Bank”). The outstanding balance
of this Note is limited to $200,000 and expired March 19, 2010. The outstanding balance accrues interest at a variable rate. The
interest rate is subject to change based on changes in an independent index which is the highest Prime Rate as published in the
“Money Rates” section of the Wall Street Journal. Interest is payable monthly and the rate as of December 31, 2016
and 2015 was 3.75% and 4.50%, respectively. The Company had been in payment default since March 19, 2010; however, on May 3, 2017,
the Company agreed to pay back the line of credit by December 1, 2017.
The balance outstanding on the Revolving
Note at September 30, 2017 and December 31, 2016 was $119,246 and $203,988, respectively.
On October 4, 2016, the Company signed a revenue
based factoring agreement (the “Factoring Agreement”) with Imperial Advance, LLC. The company received proceeds of
$40,000 and agreed to pay $52,400 of future receivables. The note issued in connection with the Factoring Agreement is secured
by an officer of the Company. On August 21, 2017, the Company and Imperial Advance, LLC entered into a Settlement Agreement pursuant
to which the Company agreed to pay Imperial Advance, LLC $9,368 by August 23, 2017. The company recorded a gain on settlement of
debt of $2,079.
The balance outstanding on the revenue based
factoring agreement at September 30, 2017 and December 31, 2016 was $0 and $31,153, respectively.
Note
6 –Note Payable
Notes
payable as of September 30, 2017 and December 31, 2016 is as follows:
|
|
Outstanding Principal as of
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
Interest Rate
|
|
|
Maturity Date
|
|
Quantity
|
|
|
Exercise
Price
|
|
October 25, 2016
|
|
|
-
|
|
|
|
25,000
|
|
|
|
9
|
%
|
|
July 1, 2017
|
|
|
50,000
|
|
|
$
|
0.30
|
|
February 22, 2017
|
|
|
400,000
|
|
|
|
-
|
|
|
|
12
|
%
|
|
September 1, 2017
|
|
|
6,161,615
|
|
|
$
|
0.20
|
|
August 18, 2017
|
|
|
50,000
|
|
|
|
-
|
|
|
|
15
|
%
|
|
October 2, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
|
450,000
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Debt Discount
|
|
|
-
|
|
|
|
(9,421
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Debt Issuance Costs
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
450,000
|
|
|
$
|
15,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From February 24, 2017 through March 17, 2017,
the Company conducted multiple closings of a private placement offering (the “February 2017 Offering”) of the
Company’s securities by entering into subscription agreements (the “Subscription Agreements”) with accredited
investors (the “Accredited Investors”) for aggregate gross proceeds of $916,858 for which the Accredited Investors
received $975,511 in principal value of secured promissory notes with an original issue discount of six percent (6%) (the “February
2017 Offering Notes”) and warrants to purchase the Company’s common stock (the “February 2017 Offering Warrants”).
The February 2017 Offering Notes are convertible
into shares of the Company’s common stock at the time of Company’s next round of financing (the “Subsequent
Offering”) at a price equal to eighty-five percent (85%) of the price per share offered in the Subsequent Offering (the
“Conversion Price”). The February 2017 Offering Warrants have a five-year term. Investors received the February
2017 Offering Warrants in the following amounts: (i) Investors purchasing $150,000 or more of the Offering received a February
2017 Offering Warrant equal to one hundred thirty percent (130%) of the dollar amount invested in the Offering; (ii) investors
purchasing at least $100,000 but less than $150,000 of the February 2017 Offering received a February 2017 Offering Warrant equal
to one hundred percent (100%) of the dollar amount invested in the Offering; and (iii) investors purchasing less than $100,000
of the Offering received to a February 2017 Offering Warrant equal to seventy percent (70%) of the dollar amount invested in the
Offering. The Warrants entitle the holder to purchase shares of the Company’s common stock at $0.20 per share (the “Exercise
Price”)
.
The Conversion Price and the Exercise Price
are subject to adjustments for issuances of (i) the Company’s common stock, (ii) any equity linked instruments or (iii) securities
convertible into the Company’s common stock, at a purchase price of less than the prevailing Conversion Price or Exercise
Price. Such adjustments shall result in the Conversion Price or Exercise Price being reduced to such lower purchase price, as described
in the February 2017 Offering Notes and the February 2017 Offering Warrants.
Pursuant to the Subscription Agreements,
the February 2017 Offering Notes matured on September 1, 2017 (the February 2017 Offering Maturity Date). Prior to the February
2017 Offering Maturity Date, investors representing $575,511 in principal value converted their February 2017 Offering Notes into
two year, 15% secured convertible promissory notes offered by the Company (the “August 2017 Convertible Note Offering”).
The remaining investors representing an aggregate $400,000 in principal of the February 2017 Offering Notes agreed to forbear their
right to declare an event of default until December 15, 2017 during which time they retain the right to convert their principal
and any accrued but unpaid interest into the August 2017 Convertible Note Offering. In consideration of the forbearance for which
the investors will receive a warrant to purchase up to fifteen percent (15%) of the shares of common stock underlying the warrant
acquired with the purchase of the February 2017 Offering Notes at a purchase price of $0.20 per share, and the interest on their
note would be increased to eighteen percent (18%) from September 1, 2017 through December 15, 2017 or the conversion date, whichever
is sooner.
On July 21, 2017, the Company entered
into a loan agreement (the “July 2017 Loan Agreement”) with an individual (the “July 2017 Lender”), the
Company issued the July 2017 Lender a promissory note of $100,000 (the “July 2017 Note”). Pursuant to the July 2017
Loan Agreement, the July 2017 Note bears interest at a rate of 10% per annum. As additional consideration for entering in the
July 2017 Loan Agreement, the Company issued the July 2017 Lender a five-year warrant to purchase 100,000 shares of the Company’s
common stock with an exercise price of $0.20 per share. The maturity date of the July 2017 Note was April 21, 2017 (the “July
2017 Maturity Date”) at which time all outstanding principal, accrued and unpaid interest and other amounts due under the
July 2017 Note were due. . On September 28, 2017, the July 2017 Note and accrued but unpaid interest was converted into the Company’s
August 2017 Convertible Note Offering.
On August 18, 2017, the Company entered
into a loan agreement (the “August 2017 Loan Agreement”) with an individual (the “August 2017 Lender”),
the Company issued the August 2017 Lender a promissory note of $50,000 (the “August 2017 Note”). Pursuant to the August
2017 Loan Agreement, the August 2017 Note bears interest at a rate of 15% per annum. The maturity date of the August 2017 Note
was October 2, 2017 at which time all outstanding principal, accrued and unpaid interest and other amounts due under the August
2017 Note were due. During September 2017, the August 2017 Note and accrued but unpaid interest was converted into the Company’s
August Convertible Note Offering.
Private Placement Offering:
From
February 24, 2017 through March 17, 2017, the Company conducted multiple closings of a private placement offering (the “February
2017 Offering”) of the Company’s securities by entering into subscription agreements (the “Subscription Agreements”)
with accredited investors (the “Accredited Investors”) for aggregate gross proceeds of $916,858 for which the Accredited
Investors received $975,511 in principal value of secured promissory notes with an original issue discount of six percent (6%)
(the “February 2017 Offering Notes”) and warrants to purchase the Company’s common stock (the “February
2017 Offering Warrants”). Pursuant to the Subscription Agreements, the February 2017 Offering Notes matured on September
1, 2017.
The February 2017 Offering Notes are convertible
into shares of the Company’s common stock at the time of Company’s next round of financing (the “Subsequent Offering”)
at a price equal to eighty-five percent (85%) of the price per share offered in the Subsequent Offering (the “Conversion
Price”). The February 2017 Offering Warrants have a five-year term. Investors received the February 2017 Offering Warrants
in the following amounts: (i) Investors purchasing $150,000 or more of the Offering received a February 2017 Offering Warrant equal
to one hundred thirty percent (130%) of the dollar amount invested in the Offering; (ii) investors purchasing at least $100,000
but less than $150,000 of the February 2017 Offering received a February 2017 Offering Warrant equal to one hundred percent (100%)
of the dollar amount invested in the Offering; and (iii) investors purchasing less than $100,000 of the Offering received to a
February 2017 Offering Warrant equal to seventy percent (70%) of the dollar amount invested in the Offering. The Warrants entitle
the holder to purchase shares of the Company’s common stock at $0.20 per share (the “Exercise Price”).
The Conversion Price and the Exercise Price
are subject to adjustments for issuances of (i) the Company’s common stock, (ii) any equity linked instruments or (iii) securities
convertible into the Company’s common stock, at a purchase price of less than the prevailing Conversion Price or Exercise
Price. Such adjustments shall result in the Conversion Price or Exercise Price being reduced to such lower purchase price, as described
in the February 2017 Offering Notes and the February 2017 Offering Warrants.
Note
7 – Convertible Note Payable
Convertible
notes payable as of September 30, 2017 and December 31, 2016 is as follows:
|
|
Outstanding Principal as of
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
Interest
Rate
|
|
|
Conversion
Price
|
|
Maturity Date
|
|
Quantity
|
|
|
Exercise
Price
|
|
November - December, 2016
|
|
|
200,000
|
|
|
|
400,000
|
|
|
|
10
|
%
|
|
0.30
|
|
November 1, 2017
|
|
|
400,000
|
|
|
|
0.30
|
|
December 27, 2016
|
|
|
-
|
|
|
|
100,000
|
|
|
|
10
|
%
|
|
0.30
|
|
December 27, 2017
|
|
|
100,000
|
|
|
|
0.30
|
|
June, 2017
|
|
|
121,500
|
|
|
|
-
|
|
|
|
12
|
%
|
|
Not Applicable
|
|
September 1, 2017
|
|
|
114,700
|
|
|
|
0.20
|
|
July, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
8.5
|
%
|
|
0.20(*)
|
|
April 11, 2018
|
|
|
350,000
|
|
|
|
0.20
|
|
August – September 2017
|
|
|
1,618,611
|
|
|
|
-
|
|
|
|
15
|
%
|
|
0.20(*)
|
|
August – September 2019
|
|
|
8,093,052
|
|
|
|
0.20
|
|
|
|
|
1,940,111
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Debt Discount
|
|
|
(177,971
|
)
|
|
|
(184,398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Debt Issuance Costs
|
|
|
(34,997
|
)
|
|
|
(46,779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,727,143
|
|
|
|
268,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Current Debt
|
|
|
(375,482
|
)
|
|
|
(268,823
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Debt
|
|
$
|
1,351,661
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
As subject to adjustment as further outlined in the notes
During the months of November and December
2016, the Company issued convertible notes to third party lenders totaling $400,000. These notes accrue interest at 10% per annum
and mature with interest and principal both due on November 1, 2017 through December 29, 2017. The notes and accrued interest
are convertible at a conversion price as defined therein. In addition, in connection with the notes the Company issued five-year
warrants to purchase an aggregate of 400,000 shares of Company common stock at a purchase price of $0.30 per share. Subsequent
to September 30, 2017, the investors converted $200,000 of principal and $16,384 of interest into the August 2017 Convertible
Note Offering.
On December 27, 2016, the Company issued a
convertible note to a third party lender totaling $100,000 (the “December 2016 Note”). The December 2016 Note accrues
interest at 10% per annum and matures with interest and principal both due on December 27, 2017. In addition, the Company issued
a warrant to purchase 100,000 shares of Company common stock. The warrant entitles the holder to purchase the Company’s common
stock at a purchase price of $0.40 per share for a period of five years from the issue date. The December 2016 Note and accrued
interest is convertible at a conversion price of $0.30 per share, subject to adjustment. On August 31, 2017 the investor converted
$100,000 of principal and $6,767 of interest into the August Offering.
During the month of June 2017, the Company
issued convertible notes to third party lenders totaling $121,500. The notes accrue interest at 12% per annum and mature with
interest and principal both due on September 1, 2017. The notes and accrued interest may be converted into a subsequent offering
at a 15% discount to the offering price are convertible at a conversion price as defined therein. In addition, the Company issued
warrants to purchase 102,550 shares of Company common stock. The warrants entitle the holders to purchase the Company’s
common stock at a purchase price of $0.20 per share for a period of five years from the issue date. Subsequent to September 30,
2017, the company repaid $40,000 of the outstanding principal balance of the note. The Company is currently in default on $85,000
in principal due on the notes.
The July 2017 Convertible Offering
During the month of July 2017, the Company
entered into Securities Purchase Agreements and conducted closings of a private placement offering (the “July 2017 Convertible
Note Offering”) of the Company’s securities for aggregate gross proceeds of $450,000. In aggregate, the Company entered
into Securities Purchase Agreements with three accredited investors for (i) the issuance and sale of 8.5% Convertible Redeemable
Debentures, containing a ten percent (10%) original issuance discount, due April 18, 2018 (the “Debentures”) and
(ii) the issuance and sale of five-year Common Stock Purchase Warrants to purchase up to 778,750 shares of the Company’s
common stock, par value $0.001 per share. The Warrants were immediately exercisable upon issuance at an exercise price of $0.20
per share, subject to adjustment, and expire five years from the date of issuance. The accredited investors also received a total
of 245,000 shares of the Company’s common stock as inducement for participating in the July 2017 Convertible Note Offering
(the “Consideration Shares”).
During September 8, 2017 through September
13, 2017, the Company redeemed the 8.5% Convertible Redeemable Debentures by paying the three accredited investors an aggregate
$606,812 representing 117.5% of the principal along with interest. Pursuant to such redemption, the Debentures are no longer in
full force and effect.
The Company also repurchased 25,000 consideration shares of one of the accredited investors for $3,520, cancelling
the accredited investor’s Consideration Shares.
Due
to the fact that these convertible notes have an option to convert at a variable amount, they are subject to derivative liability
treatment. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The conversion
feature has been measured at fair value using a Black Scholes model at the issuance date and the period end. The conversion feature
of The July 2017 Convertible Offering issued during the nine months ended September 30, 2017, gave rise to a derivative liability
of $321,231 which was recorded as a debt discount. The debt discount is charged to accretion of debt discount and issuance cost
ratably over the term of the convertible note.
The
Company recorded an $52,743 debt discount relating to 778,750 warrants issued to investors based on the relative fair value of
each equity instrument on the dates of issuance. The debt discount is being accreted over the life of the note to accretion of
debt discount and issuance cost.
The August 2017 Convertible Note Offering
During the three months ended September 30,
2017, the Company conducted multiple closings of a private placement offering to accredited investors (the “August 2017
Convertible Note Offering”) of units of the Company’s securities by entering into subscription agreements with “accredited
investors” (the “Investors”) for aggregate gross proceeds of $500,000. In addition, $992,177 of the Company’s
short term debt along with accrued but unpaid interest of $24,876 was converted into the August 2017 Convertible Note Offering .
The conversions resulted in the issuance of 4,377,826 warrants with a fair value of $250,036, a derivative liability from the
conversion feature of $247,754 and an original issue discount of $101,561. These were recorded as a loss on extinguishment of
debt.
The August 2017 Convertible Note Offering
consisted of a maximum of $6,000,000 of units of the Company’s securities (each, a “Unit” and collectively, the
“Units”), with each Unit consisting of (a) a 15% Convertible Secured Promissory Note (each a “Note” and
together the “Notes”), convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion
Shares”) at a conversion price of $0.20 per share (the “Conversion Price”), and (b) a five-year warrant (each
a “Warrant and together the “Warrants”) to purchase common stock equal to one hundred percent (100%) of the shares
into which the Notes can be converted into (“Warrant Shares”) at an exercise price of $0.20 per share (“Exercise
Price”). The Notes mature on the second (2nd) anniversary of their issuance dates.
The Conversion Price of the Note and the Exercise
Price of the Warrants are subject to adjustment for issuances of the Company’s common stock or any equity linked instruments
or securities convertible into the Company’s common stock at a purchase price of less than the prevailing Conversion Price
or Exercise Price. Such adjustment shall result in the Conversion Price and Exercise Price being reduced to such lower purchase
price, subject to carve-outs as described therein.
Due to the fact that these convertible notes
have an option to convert at a variable amount, they are subject to derivative liability treatment. The Company has applied ASC
815, due to the potential for settlement in a variable quantity of shares. The conversion feature has been measured at fair value
using a Black Scholes model at the issuance date and the period end. The conversion feature of The August Offering issued during
the nine months ended September 30, 2017, gave rise to a derivative liability of $106,916 which was recorded as a debt discount.
The debt discount is charged to accretion of debt discount and issuance cost ratably over the term of the convertible note.
The Company recorded a $138,180 debt discount
relating to 2,500,000 warrants issued to investors based on the relative fair value of each equity instrument on the dates of issuance.
The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost.
In connection with the Offering, the Company
paid a placement agent a cash fee of $49,420 to carry out the Offering on a “best-efforts” basis, which was recorded
as issuance cost and is being accreted over the life of the note to accretion of debt discount and issuance cost.
Subsequent to September 30, 2017, the Company
completed the August 2017 Convertible Note Offering. The aggregate principal of the Notes was $4,062,009, representing $2,104,938
in gross proceeds and $2,219,913 in the conversion of unpaid principal and interest of existing short term debt.
For
services in its capacity as Placement Agent, the Company paid the Placement Agent a cash fee of one hundred and fifteen
thousand nine hundred and ninety-four dollars ($115,994) and warrants to purchase up to 579,969 shares of Common Stock at an exercise
price of $0.20 per share.
Note
8 – Related Party Loan
Convertible
notes
Convertible
notes payable – related party as of September 30, 2017 and December 31, 2016 is as follows:
|
|
Outstanding Principal as of
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
September 30, 2017
|
|
|
December 31,
2016
|
|
|
Interest Rate
|
|
|
Maturity Date
|
|
Quantity
|
|
|
Exercise
Price
|
|
April 25, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
%
|
|
September 1, 2017
|
|
|
17,500
|
|
|
|
0.20
|
|
April 25, 2017
|
|
|
25,000
|
|
|
|
-
|
|
|
|
12
|
%
|
|
September 1, 2017
|
|
|
17,500
|
|
|
|
0.20
|
|
August – September 2017
|
|
|
917,893
|
|
|
|
-
|
|
|
|
15
|
%
|
|
August – September 2019
|
|
|
4,589,466
|
|
|
|
0.20
|
|
|
|
|
942,893
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Debt Discount
|
|
|
(278,436
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
664,457
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Current Debt
|
|
|
(25,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Debt
|
|
$
|
639,457
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On April 25, 2017, the Company issued convertible
notes to Arthur Rosen, a lender, totaling $25,000 (the “April Rosen Notes”). The April Rosen Notes accrue interest
at 12% per annum and mature with interest and principal both due on September 1, 2017. In addition, in connection with the April
Rosen Notes, the Company issued a five-year warrant to purchase 17,500 shares of Company common stock at a purchase price of $0.20
per share. On September 7, 2017, the April Rosen Notes and accrued interest was converted into the August 2017 Convertible Note
Offering.
On April 25, 2017, the Company issued a convertible
note to Chris Gordon, a lender totaling $25,000 (the “April Gordon Notes”). The April Gordon Notes accrue interest
at 12% per annum and matures with interest and principal both due on September 1, 2017. In addition, the Company issued a five-year
warrant to purchase 17,500 shares of Company common stock at a purchase price of $0.20 per share. Subsequent to September 30,
2017. the April Gordon Notes and accrued interest were converted into the August 2017 Convertible Note Offering.
The
August 2017 Convertible Note Offering – Related Party
During the three months ended September 30,
2017, the Company conducted multiple closings of a private placement offering to accredited investors (the “The August 2017
Convertible Offering”) of units of the Company’s securities by entering into subscription agreements with “accredited
investors” (the “Investors”) for aggregate gross proceeds of $500,000. In addition, $992,177 of the Company’s
short term debt along with accrued but unpaid interest of $24,876 was converted into the August 2017 Convertible Offering. The
conversions resulted in the issuance of 2,064,466 warrants with a fair value of $121,800, a derivative liability from the conversion
feature of $127,595 and the increase of principal of $60,000. These were recorded as a loss on extinguishment of debt.
The Company offered, through a placement
agent, $6,000,000 of units of its securities (each, a “Unit” and collectively, the “Units”), with each
Unit consisting of (a) a 15% Convertible Secured Promissory Note (each a “Note” and together the “Notes”),
convertible into shares of the Company’s common stock, par value $.001 per share (“Conversion Shares”) at a conversion
price of $0.20 per share (the “Conversion Price”), and (b) a five-year warrant ( each a “Warrant and together
the “Warrants”) to purchase common stock equal to one hundred percent (100%) of the shares into which the Notes can
be converted into (“Warrant Shares”) at an exercise price of $0.20 per share (“Exercise Price”). The Notes
mature on the second (2nd) anniversary of their issuance dates.
The Conversion Price of the Note and the Exercise
Price of the Warrants are subject to adjustment for issuances of the Company’s common stock or any equity linked instruments
or securities convertible into the Company’s common stock at a purchase price of less than the prevailing Conversion Price
or Exercise Price. Such adjustment shall result in the Conversion Price and Exercise Price being reduced to such lower purchase
price, subject to carve-outs as described therein.
Due to the fact that these convertible notes
have an option to convert at a variable amount, they are subject to derivative liability treatment. The Company has applied ASC
815, due to the potential for settlement in a variable quantity of shares. The conversion feature has been measured at fair value
using a Black Scholes model at the issuance date and the period end. The conversion feature of The August 2017 Convertible Offering
issued during the nine months ended September 30, 2017, gave rise to a derivative liability of $127,594 which was recorded as a
debt discount. The debt discount is charged to accretion of debt discount and issuance cost ratably over the term of the convertible
note.
The Company recorded a $161,552 debt discount
relating to 2,525,000 warrants issued to investors based on the relative fair value of each equity instrument on the dates of issuance.
The debt discount is being accreted over the life of the note to accretion of debt discount and issuance cost.
As of September 30, 2017, the total outstanding
balance of the convertible notes - related party was $942,893, net of debt discount of $278,436.
Notes
payable
Notes
payable – related party as of September 30, 2017 and December 31, 2016 is as follows:
|
|
Outstanding Principal as of
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
Interest
Rate
|
|
|
Maturity Date
|
|
Quantity
|
|
|
Exercise
Price
|
|
May 26, 2016
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
13
|
%
|
|
November 26, 2017
|
|
|
1,000,000
|
|
|
|
0.40
|
|
September 12, 2016
|
|
|
-
|
|
|
|
100,000
|
|
|
|
12
|
%
|
|
November 22, 2017
|
|
|
17,500
|
|
|
|
0.20
|
|
September 20, 2016
|
|
|
-
|
|
|
|
10,000
|
|
|
|
10
|
%
|
|
March 20, 2017
|
|
|
235,000
|
|
|
|
0.40
|
|
October 13, 2016
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
12
|
%
|
|
November 22, 2017
|
|
|
50,000
|
|
|
|
0.40
|
|
October 24, 2016
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
9
|
%
|
|
January 1, 2018
|
|
|
30,000
|
|
|
|
0.30
|
|
October 31, 2016
|
|
|
-
|
|
|
|
10,000
|
|
|
|
10
|
%
|
|
November 10, 2016
|
|
|
10,000
|
|
|
|
0.30
|
|
November 22, 2016
|
|
|
225,000
|
|
|
|
225,000
|
|
|
|
10
|
%
|
|
November 22, 2017
|
|
|
750,000
|
|
|
|
0.30
|
|
December 21, 2016
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
10
|
%
|
|
November 22, 2017
|
|
|
166,666
|
|
|
|
0.30
|
|
January 25, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
%
|
|
January 1, 2018
|
|
|
50,000
|
|
|
|
0.30
|
|
March 2, 2017
|
|
|
10,000
|
|
|
|
-
|
|
|
|
10
|
%
|
|
January 21, 2018
|
|
|
10,000
|
|
|
|
0.30
|
|
April 12, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
%
|
|
January 21, 2018
|
|
|
17,500
|
|
|
|
0.20
|
|
April 12, 2017
|
|
|
10,000
|
|
|
|
-
|
|
|
|
10
|
%
|
|
September 1, 2017
|
|
|
17,500
|
|
|
|
0.20
|
|
May 4, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
%
|
|
September 1, 2017
|
|
|
10,500
|
|
|
|
0.30
|
|
May 11, 2017
|
|
|
20,000
|
|
|
|
-
|
|
|
|
10
|
%
|
|
September 30, 2017
|
|
|
20,000
|
|
|
|
0.20
|
|
June 26, 2017
|
|
|
30,000
|
|
|
|
-
|
|
|
|
10
|
%
|
|
January 21, 2018
|
|
|
22,500
|
|
|
|
0.20
|
|
July 6, 2017
|
|
|
25,000
|
|
|
|
-
|
|
|
|
10
|
%
|
|
July 21, 2017
|
|
|
18,750
|
|
|
|
0.20
|
|
July 6, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
%
|
|
July 21, 2017
|
|
|
18,750
|
|
|
|
0.20
|
|
August 24, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
%
|
|
November 1, 2017
|
|
|
-
|
|
|
|
-
|
|
September 8, 2017
|
|
|
224,000
|
|
|
|
-
|
|
|
|
|
|
|
September 24, 2017
|
|
|
1,650,000
|
|
|
|
0.20
|
|
|
|
|
1,659,000
|
|
|
|
1,460,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Debt Discount
|
|
|
(-)
|
|
|
|
(94,675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,659,000
|
|
|
$
|
1,365,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Subsequent to September 30, 2017, notes were converted into August 2017 Convertible Note Offering
with maturity dates between September - October 2019.
|
On May 26, 2016, the Company entered into
a loan agreement (the “May 2016 Rosen Loan Agreement”) with Arthur Rosen, an individual (“Rosen”), pursuant
to which on May 26, 2016 (the “Closing Date”), Rosen provided the Company a secured term loan of $1,000,000 (the “May
2016 Rosen Loan”). In connection with the May 2016 Rosen Loan Agreement, on May 26, 2016, the Company and Rosen entered
into a security agreement (the “Rosen Security Agreement”), pursuant to which the Company granted to Rosen a senior
security interest in substantially all of the Company’s assets as security for repayment of the May 2016 Rosen Loan. Pursuant
to the May 2016 Rosen Loan Agreement, the May 2016 Rosen Loan bears interest at a rate of 12.5% per annum, compounded annually
and payable on the maturity date of May 26, 2017 (the “May 2016 Rosen Maturity Date”) at which time all outstanding
principal, accrued and unpaid interest and other amounts due under the May 2016 Rosen Loan are due. The Company entered into an
amendment to the May 2016 Rosen Loan extending the May 2016 Rosen Maturity Date to November 26, 2017. As additional consideration
for entering in the May 2016 Rosen Loan Agreement, the Company issued Rosen a five-year warrant to purchase 1,000,000 shares of
the Company’s common stock at a purchase price of $0.40 per share (the “May 2016 Rosen Warrant”). The May 2016
Rosen Warrant contains anti-dilution provisions as further described therein. On September 7, 2017 (the “Conversion
Date”), Rosen converted all accrued but unpaid interest on the May 26 Rosen Loan from May 26, 2016 through September 6,
2017 in the amount of $150,127.97 (the “May 26 Rosen Loan Interest”) into the Company’s August Convertible Note
Offering, after which May 26 Rosen Loan Interest was deemed paid in full through the Conversion Date.
On September 12, 2016, the Company entered
into a loan agreement (the “September 2016 Rosen Loan Agreement”) with Rosen, pursuant to which on September 12, 2016
(the “Closing Date”), the Company issued Rosen a promissory note of $100,000 (the “September 2016 Rosen Note”).
Pursuant to the September 2016 Rosen Loan Agreement, the September 2016 Rosen Note bears interest at a rate of 12% per annum.
As additional consideration for entering in the September 2016 Rosen Loan Agreement, the Company issued Rosen a five-year warrant
to purchase 150,000 shares of the Company’s common stock at a purchase price of $0.40 per share. On September 7, 2017 the
principal and interest of this note were converted into the August 2017 Convertible Note Offering.
On October 13, 2016, the Company entered
into a loan agreement (the “October 2016 Gordon Loan Agreement”) with Chris Gordon, an individual (the “Gordon”),
pursuant to which on October 13, 2016 (the “Closing Date”), the Company issued a promissory note of $50,000 to Gordon
(the “October 2016 Gordon Note”). Pursuant to the October 2016 Gordon Loan Agreement, the October 2016 Gordon Note
bears interest at a rate of 12% per annum. As additional consideration for entering in the October 2016 Gordon Loan Agreement,
the Company issued Gordon a five-year warrant to purchase 50,000 shares of the Company’s common stock at a purchase price
of $0.40 per share. Subsequent to September 30, 2017, the principal and interest of the October 2016 Gordon Note were converted
into the August 2017 Convertible Note Offering.
On October 24, 2016, the Company entered into
a loan agreement (the “October 2016 Schiller Loan Agreement”) with Leonard Schiller, a Board Member (the “Schiller”),
pursuant to which on October 24, 2016 (the “Closing Date”), the Company issued Schiller a promissory note of $15,000
(the “October 2016 Schiller Note”). Pursuant to the October 2016 Schiller Loan Agreement, the October 2016 Schiller
Note bears interest at a rate of 9% per annum. As additional consideration for entering in the October 2016 Schiller Loan Agreement,
the Company issued Schiller a 5-year warrant to purchase 30,000 shares of the Company’s common stock at a purchase price
of $0.30 per share. Subsequent to September 30, 2017, the principal and interest of the October 2016 Gordon Note were converted
into the August 2017 Convertible Note Offering
On October 31, 2016, the Company entered into
a loan agreement (the “October 2016 Rosen Loan Agreement”) with Rosen, pursuant to which on October 31, 2016 (the
“Closing Date”), Company issued Rosen a promissory note of $10,000 (the “October 2016 Rosen Note”). Pursuant
to the October 2016 Rosen Loan Agreement, the October 2016 Rosen Note bears interest at a rate of 10% per annum. As additional
consideration for entering in the October 2016 Rosen Loan Agreement, the Company issued Rosen a five-year warrant to purchase
10,000 shares of the Company’s common stock at a purchase price of $0.30 per share. On September 7, 2017 the principal and
interest of this note were converted into the August 2017 Convertible Note Offering.
On December 21, 2016, the Company entered
into a loan agreement (the “December 2016 Gordon Loan Agreement”) with Gordon, pursuant to which on December 21, 2016
(the “Closing Date”), the Company issued Gordon a promissory note of $275,000 (the “December 2016 Gordon Note”).
Pursuant to the December 2016 Gordon Loan Agreement, the December 2016 Gordon Note bears interest at a rate of 10% per annum.
As additional consideration for entering in the December 2016 Gordon Loan Agreement, the Company issued Gordon a five-year warrant
to purchase 166,666 shares of the Company’s common stock at a purchase price of $0.40 per share. Subsequent to September
30, 2017 the principal and interest of this note were converted into the August 2017 Convertible Note Offering.
On January 25, 2017, the Company entered into
a loan agreement (the “January 2017 Rosen Loan Agreement”) with Rosen pursuant to which on January 25, 2017 (the “Closing
Date”), the Company issued Rosen a promissory note of $50,000 (the “January 2017 Rosen Note”). The January 2017
Rosen Note is secured by an officer of the Company. Pursuant to the January 2017 Rosen Loan Agreement, the January 2017 Rosen
Note bears interest at a rate of 10% per annum. As additional consideration for entering in the January 2017 Rosen Loan Agreement,
the Company issued Rosen a five-year warrant to purchase 50,000 shares of the Company’s common stock at a purchase price
of $0.30 per share. On September 7, 2017 the principal and interest of this note were converted into the August 2017 Convertible
Note Offering.
On January 26, 2017, the Company entered
into a loan agreement (the “January 2017 Gordon Loan Agreement”) with Gordon pursuant to which on January 26, 2017
(the “Closing Date”), the Company issued Gordon a promissory note of $50,000 (the “January 2017 Gordon Note”).
The January 2017 Gordon Note is secured by an officer of the Company. Pursuant to the January 2017 Gordon Loan Agreement, the January
2017 Gordon Note bears interest at a rate of 10% per annum. As additional consideration for entering in the January 2017 Gordon
Loan Agreement, the Company issued Gordon a five-year warrant to purchase 50,000 shares of the Company’s common stock at
a purchase price of $0.30 per share. Subsequent to September 30, 2017 the principal and interest of this note were converted into
the August 2017 Convertible Note Offering.
On February 7, 2017, the Company entered
into a loan agreement (the “February 2017 Schiller Loan Agreement”) with Schiller, a member of the Board, pursuant
to which on October 24, 2016 (the “Closing Date”), the Company issued Schiller a promissory note of $10,000 (the “February
2017 Schiller Note”). The February 2017 Schiller Note is secured by an officer of the Company. Pursuant to the February 2017
Schiller Loan Agreement, the February 2017 Schiller Note bears interest at a rate of 10% per annum. As additional consideration
for entering in the February 2017 Schiller Note Loan Agreement, the Company issued Schiller a five-year warrant to purchase 10,000
shares of the Company’s common stock at a purchase price of $0.30 per share. Subsequent to September 30, 2017 the principal
and interest of this note were converted into the August 2017 Convertible Note Offering.
On April 12, 2017, the Company entered
into a loan agreement (the “April 2017 Schiller Loan Agreement”) with Schiller, a member of the Board, whereby the
Company issued Schiller a promissory note of $10,000 (the “April 2017 Schiller Note”). The April 2017 Schiller Note
is secured by an officer of the Company. Pursuant to the April 2017 Schiller Loan Agreement, the April 2017 Schiller Note bears
interest at a rate of 10% per annum. As additional consideration for entering in the April 2017 Schiller Loan Agreement, the Company
issued Schiller a five-year warrant to purchase 10,000 shares of the Company’s common stock at a purchase price of $0.30
per share. Subsequent to September 30, 2017 the principal and interest of this note were converted into the August 2017 Convertible
Note Offering.
On April 12, 2017, the Company entered into
a loan agreement (the “April 2017 Rosen Loan Agreement”) with Rosen, whereby the Company issued Rosen a promissory
note of $10,000 (the “April 2017 Rosen Note”). The April 2017 Rosen Note is secured by an officer of the Company.
Pursuant to the April 2017 Rosen Loan Agreement, the April 2017 Rosen Note bears interest at a rate of 10% per annum. As additional
consideration for entering in the April 2017 Rosen Loan Agreement, the Company issued Rosen a five-year warrant to purchase 10,000
shares of the Company’s common stock at a purchase price of $0.30 per share. . On September 7, 2017 the principal and interest
of this note were converted into the August 2017 Convertible Note Offering.
On May 4, 2017, the Company entered into a loan agreement (the “May 2017 Rosen Loan Agreement”)
with Rosen, whereby the Company issued Rosen a promissory note of $15,000 (the “May 2017 Rosen Note”). The May 2017
Rosen Note is secured by an officer of the Company. Pursuant to the May 2017 Rosen Note Loan Agreement, the May 2017 Rosen Note
bears interest at a rate of 12% per annum. As additional consideration for entering in the May 2017 Rosen Note Loan Agreement,
the Company issued Rosen a five-year warrant to purchase 10,500 shares of the Company’s common stock at a purchase price
of $0.30 per share. On September 7, 2017 the principal and interest of this note were converted into the August 2017 Convertible
Note Offering.
On May 11, 2017, the Company entered into
a loan agreement (the “May 2017 Schiller Loan Agreement”) with Schiller, a member of the Board, whereby the Company
issued Schiller a promissory note of $20,000 (the “May 2017 Schiller Note”). Pursuant to the May 2017 Schiller Loan
Agreement, the May 2017 Schiller Note bears interest at a rate of 10% per annum. As additional consideration for entering in the
May 2017 Schiller Note Loan Agreement, the Company issued Schiller a five-year warrant to purchase 20,000 shares of the Company’s
common stock at a purchase price of $0.20 per share. Subsequent to September 30, 2017 the principal and interest of this note
were converted into the August 2017 Convertible Note Offering.
On June 26, 2017, the Company entered into
a loan agreement (the “June 2017 Schiller Loan Agreement”) Schiller, a member of the Board, whereby the Company issued
Schiller a promissory note of $30,000 (the “June 2017 Schiller Note”). Pursuant to the June 2017 Schiller Loan Agreement,
the June 2017 Schiller Note bears interest at a rate of 10% per annum. As additional consideration for entering in the June 2017
Schiller Loan Agreement, the Company issued Schiller a five-year warrant to purchase 22,500 shares of the Company’s common
stock at a purchase price of $0.20 per share. Subsequent to September 30, 2017 the principal and interest of this note were converted
into the August 2017 Convertible Note Offering
On July 6, 2017, the Company entered into
a loan agreement (the “July 2017 Rosen Loan Agreement”) with Rosen, whereby the Company issued Rosen a promissory
note of $25,000 (the “July 2017 Rosen Note”). The July 2017 Rosen Note is secured by an officer of the Company. Pursuant
to the July 2017 Rosen Note Loan Agreement, the July 2017 Rosen Note bears interest at a rate of 10% per annum. As additional
consideration for entering in the July 2017 Rosen Note Loan Agreement, the Company issued Rosen a five-year warrant to purchase
18,750 shares of the Company’s common stock at a purchase price of $0.20 per share. On September 7,2017 the principal and
interest of this note was converted into the August 2017 Convertible Note Offering.
On July 6, 2017, the Company entered into
a loan agreement (the “July 2017 Gordon Loan Agreement”) with Gordon, whereby the Company issued Gordon a promissory
note of $25,000 (the “July 2017 Gordon Note”). The July 2017 Gordon Note is secured by an officer of the Company.
Pursuant to the July 2017 Gordon Note Loan Agreement, the July 2017 Gordon Note bears interest at a rate of 10% per annum. As
additional consideration for entering in the July 2017 Gordon Note Loan Agreement, the Company issued Gordon a five-year warrant
to purchase 18,750 shares of the Company’s common stock at a purchase price of $0.20 per share. Subsequent to September
30, 2017 the principal and interest of this note were converted into the August 2017 Convertible Note Offering.
On August 24, 2017, the Company entered into
a loan agreement (the “August 2017 Rosen Loan Agreement”) with Rosen, whereby the Company issued Rosen a promissory
note of $20,000 (the “August 2017 Rosen Note”). The August 2017 Rosen Note is secured by an officer of the Company.
Pursuant to the August 2017 Rosen Note Loan Agreement, the August 2017 Rosen Note bears interest at a rate of 12% per annum. On
September 7, 2017 the principal and interest of this note were converted into the August 2017 Convertible Note Offering.
On September 8, 2017, the Company entered into a loan agreement (the “September 2017 Rosen Loan Agreement”)
with Rosen, whereby the Company issued Rosen a promissory note of $224,000 (the “September 2017 Rosen Note”). The
September 2017 Rosen Note is secured by an officer of the Company. As additional consideration for entering in the September 2017
Rosen Note Loan Agreement, the Company issued Rosen a five-year warrant to purchase 1,650,000 shares of the Company’s common
stock at a purchase price of $0.20 per share. On September 7, 2017 the principal and interest of this note were converted into
the August 2017 Convertible Note Offering.
As
of September 30, 2017, the total outstanding balance of related party notes payable was $1,659,000, net of debt discount of $0.
As of December 31, 2016, the total outstanding balance of related party notes payable was $1,350,325, net of debt discount of
$94,675.
Line
of credit
On
May 9, 2017, the Company entered into a Revolving Line of Credit (the “LOC”) with Grawin, LLC, an LLC controlled
by Arthur Rosen, a related party. The LOC is was established for a period of twelve months in which the Company can borrow principal
up to $130,000. The LOC bears interest at a rate of 18%.
On
May 09, 2017, in connection with the LOC the Company issued a promissory note in the principal aggregate amount of $56,000 in
favor Grawin, LLC.
On
May 16, 2017, in connection with the LOC the Company issued a promissory note in the principal aggregate amount of $30,000 in
favor Grawin, LLC.
On
May 22, 2017, in connection with the LOC the Company issued a promissory note in the principal aggregate amount of $6,000 in favor
Grawin, LLC.
On
May 25, 2017, in connection with the LOC the Company issued a promissory note in the principal aggregate amount of $35,000 in
favor Grawin, LLC.
On
June 16, 2017, in connection with the LOC the Company issued a promissory note in the principal aggregate amount of $3,000 in
favor Grawin, LLC.
As
of September 30, 2017, the total outstanding balance of line of credit - related party was $130,000.
Note
9 – Capital Leases Payable
Capital
lease obligation consisted of the following:
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
|
(i)
|
Capital lease obligation to a financing company for a term of five (5) years, collateralized by equipment, with interest at 10.0% per annum, with principal and interest due and payable in monthly installments of $383.10
|
|
$
|
4,732
|
|
|
$
|
4,732
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
(4,732
|
)
|
|
|
(3,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligation, net of current maturities
|
|
|
-
|
|
|
|
1,208
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL CAPITAL LEASE OBLIGATION
|
|
$
|
4,732
|
|
|
$
|
4,732
|
|
The
capital leases mature as follows:
2017:
|
|
$
|
3,524
|
|
|
$
|
3,524
|
|
2018:
|
|
|
1,208
|
|
|
$
|
1,208
|
|
Note
10 – Derivative Liabilities
The
Company has identified derivative instruments arising from embedded conversion features in the Company’s convertible notes
payable and warrants at September 30, 2017. The Company had no financial assets measured at fair value on a recurring basis as
of September 30, 2017.
The
following summarizes the Black-Scholes assumptions used to estimate the fair value of the derivative liability and warrant liability
at the date of issuance and for the convertible notes converted during the three months ended September 30, 2017.
|
|
Low
|
|
|
High
|
|
Annual dividend rate
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life
|
|
|
0.34
|
|
|
|
5.00
|
|
Risk-free interest rate
|
|
|
1.14
|
%
|
|
|
1.93
|
%
|
Expected volatility
|
|
|
65.38
|
%
|
|
|
92.96
|
%
|
Risk-free
interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Note with a similar term on the date of the grant.
Dividend
yield: The Company uses a 0% expected dividend yield as the Company has not paid dividends to date and does not anticipate declaring
dividends in the near future.
Volatility:
The Company calculates the expected volatility of the stock price based on the corresponding volatility of the Company’s
peer group stock price for a period consistent with the warrants’ expected term.
Remaining
term: The Company’s remaining term is based on the remaining contractual maturity of the warrants.
The
following are the changes in the derivative liabilities during the three months ended September 30, 2017.
|
|
Three Months Ended
September 30, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liabilities as January 1, 2017
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Addition
|
|
|
-
|
|
|
|
-
|
|
|
|
3,157,682
|
|
Conversion
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Reclassification of derivative liability to equity
|
|
|
|
|
|
|
|
|
|
|
(356,288
|
)
|
Loss on changes in fair value
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,257,716
|
)
|
Derivative liabilities as September 30, 2017
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,543,678
|
|
Note
11 - Stockholders’ Deficit
Shares
Authorized
Upon
incorporation, the total number of shares of all classes of stock which the Company is authorized to issue is Three Hundred Twenty
Million (320,000,000) shares of which Three Hundred Million (300,000,000) shares shall be Common Stock, par value $0.001 per share
and Twenty Million (20,000,000) shall be Preferred Stock, par value $0.001 per share. The designations, rights, and preferences
of such preferred stock are to be determined by the Board of Directors.
Preferred
Stock
Series
A Cumulative Convertible Preferred Stock
On
February 13, 2015, 100,000 shares of preferred stock were designated as Series A Cumulative Convertible Preferred Stock (“Series
A”). Each share of Series A shall have a stated value equal to $100.00 (as adjusted for any stock dividends, combinations
or splits with respect to such shares) (the “Series A Stated Value”).
During
the year ended December 31, 2015, the Company sold 24,400 shares of Series A for proceeds of $2,450,000. In addition, $800,000
in convertible notes and $91,400 in accrued interest were converted into 8,914 shares of the Company’s Series A.
During
the nine months ended September 30, 2017, the Company converted 1,733 shares of Series A for 1,146,307 shares of common stock.
The
holders of the Series A shall be entitled to receive preferential dividends at the rate of 6% per share per annum on the Series
A Stated Value, but before any dividend or other distribution will be paid or declared and set apart for payment on any shares
of any Junior Stock, as defined. Such dividends shall compound annually and be fully cumulative, and shall accumulate from the
date of original issuance of the Series A and shall be payable quarterly, in arrears, commencing on the first day of the calendar
quarter following the date on which the Series A is issued. Upon the occurrence of an Event of Default (as defined below) and
while such Event of Default is outstanding, such dividend rate shall be increased to 15% per annum on the Series A Stated
Value. At the Company’s option, such dividend payments may be made in (i) cash (ii) additional shares of Series A valued
at the Series A Stated Value thereof, in an amount equal to 150% of the cash dividend otherwise payable or (iii) a combination
of cash and additional shares of Series A, provided there is not an existing current Event of Default on the date on
which a dividend payment is payable, in which event the Holder entitled to receive such dividend may elect to receive such dividends
in cash or additional shares of Series A Preferred.
The
dividends on the Series A shall be cumulative whether or not declared so that, if at any time full cumulative dividends at the
rate aforesaid on all shares of the Series A then outstanding from the date from and after which dividends thereon are cumulative
to the end of the annual dividend period next preceding such time shall not have been paid or declared and set apart for payment,
or if the full dividend on all such outstanding Series A for the then current dividend period shall not have been paid or declared
and set apart for payment, the amount of the deficiency shall be paid or declared and set apart for payment before any sum shall
be set apart for or applied by the Corporation or a subsidiary of the Corporation to the purchase, redemption or other acquisition
of the Series A or any shares of any other class of stock ranking on a parity with the Series A and before any dividend or other
distribution shall be paid or declared and set apart for payment on any Junior Stock and before any sum shall be set aside for
or applied to the purchase, redemption or other acquisition of any Junior Stock.
Holder
of Series A shall have the right at any time after the issuance, to convert such shares, accrued but unpaid declared dividends
on the Series A and any other sum owed by the Corporation arising from the Series A into fully paid and non-assessable shares
of Common Stock (the “Conversion Shares”) of the Corporation determined in accordance with the applicable conversion
price (the “Conversion Price”).
The
number of Conversion Shares issuable upon conversion shall equal (i) the sum of (A) the Series A Stated Value being converted
and/or (B) at the Holder’s election, accrued and unpaid dividends or any other component of the Conversion Amount, divided
by (ii) the Conversion Price. The Conversion Price of the Series A shall be $0.25, subject to adjustment.
The
Corporation and the Holder may not convert that amount of the Conversion Amount on a Conversion Date in amounts that would result
in the Holder having a beneficial ownership of Common Stock which would be in excess of the sum of (i) the number of shares of
Common Stock beneficially owned by the Holder and its Affiliates on such Conversion Date, and (ii) the number of Conversion Shares
issuable upon the conversion of the Conversion Amount with respect to which the determination of this proviso is being made on
such Conversion Date, which would result in the aggregate beneficial ownership by the Holder and its Affiliates of more than 4.99%
of the outstanding shares of Common Stock of the Corporation. For the purposes of the proviso to the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section 13(d) of the 1934 Act and Regulation 13d-3 thereunder. Subject
to the foregoing, the Holder shall not be limited to successive exercises which would result in the aggregate issuance of more
than 4.99%. The Holder may allocate which of the equity of the Corporation deemed beneficially owned by the Holder shall be included
in the 4.99% amount described above and which shall be allocated to the excess above 4.99%. The Holder may waive the conversion
limitation described in this Section in whole or in part, upon and effective after sixty-one (61) days’ prior written notice
to the Corporation.
The
holders of our Series A do vote together with the holders of our Common Stock on an as converted basis on each matter submitted
to a vote of holders of Common Stock. The number of votes that may be cast by a holder of Series A shall be equal to the number
of shares of Common Stock issuable upon conversion of such Holder’s Series A on the record date for determining those stockholders
entitled to vote on the matter. In addition, the affirmative vote of the holders of a majority of our outstanding Series A is
required to for the following actions:
(a)
amending the Corporation’s certificate of incorporation or by-laws if such amendment would adversely affect the Series A
(b)
purchasing any of the Corporation’s securities other than required redemptions of Series A and repurchase under restricted
stock and option agreements authorizing the Corporation’s employees;
(c)
effecting a Liquidation Event;
(d)
declaring or paying any dividends other than in respect of the Series A; and
(e)
issuing any additional securities having rights senior to or on parity with the Series A.
During
the three months ended September 30, 2017, the Company accrued $0 for liquidating damages on the Series A and $0 on the warrants
associated with the Series A.
Series
B Cumulative Convertible Preferred Stock
On
December 21, 2015, 20,000 shares of preferred stock were designated as Series B Cumulative Convertible Preferred Stock (“Series
B”). Each share of Series B shall have a stated value equal to $100.00 (as adjusted for any stock dividends, combinations
or splits with respect to such shares) (the “Series B Stated Value”).
During
the year ended December 31, 2015, the Company sold 7,000 shares of Series B for proceeds of $700,000.
The
holders of outstanding shares of Series B shall be entitled to receive preferential dividends at the rate of 6% per share per
annum on the Series B Stated Value, but before any dividend or other distribution will be paid or declared and set apart for payment
on any shares of any Junior Stock as defined. Such dividends shall compound annually and be fully cumulative, and shall accumulate
from the date of original issuance of the Series B, and shall be payable quarterly, in arrears, commencing on the first day of
the calendar quarter following the date on which the Series B is issued. Upon the occurrence of an Event of Default as defined
below and while such Event of Default is outstanding, such dividend rate shall be increased to 15% per annum on the Series B Stated
Value. At the Corporation’s option, such dividend payments may be made in (i) cash (ii) additional shares of Series B valued
at the Series B Stated Value thereof, in an amount equal to 100% of the cash dividend otherwise payable or (iii) a combination
of cash and additional shares of Series B, provided there is not an existing current Event of Default on the date on
which a dividend payment is payable, in which event the Holder entitled to receive such dividend may elect to receive such dividends
in cash or additional shares of Series B Preferred.
The
dividends on the Series B shall be cumulative whether or not declared so that, if at any time full cumulative dividends at the
rate aforesaid on all shares of the Series B then outstanding from the date from and after which dividends thereon are cumulative
to the end of the annual dividend period next preceding such time shall not have been paid or declared and set apart for payment,
or if the full dividend on all such outstanding Series B for the then current dividend period shall not have been paid or declared
and set apart for payment, the amount of the deficiency shall be paid or declared and set apart for payment before any sum shall
be set apart for or applied by the Corporation or a subsidiary of the Corporation to the purchase, redemption or other acquisition
of the Series B or any shares of any other class of stock ranking on a parity with the Series B and before any dividend or other
distribution shall be paid or declared and set apart for payment on any Junior Stock and before any sum shall be set aside for
or applied to the purchase, redemption or other acquisition of any Junior Stock.
Holders
of shares of Series B shall have the right at any time commencing after the issuance to convert such shares, accrued but unpaid
declared dividends on the Series B into fully paid and non-assessable shares of Common Stock (the “Conversion Shares”)
of the Corporation determined in accordance with the applicable conversion price (the “Conversion Price”). All
declared or accrued but unpaid dividends may be converted at the election of the Holder together with or independent of the conversion
of the Series B Stated Value of the Series B.
The
number of Conversion Shares issuable upon conversion of the Conversion Amount shall equal (i) the sum of (A) the Series B Stated
Value being converted and/or (B) at the Holder’s election, accrued and unpaid dividends or any other component of the Conversion
Amount, divided by (ii) the Conversion Price. The Conversion Price of the Series B shall be $0.30, subject to adjustment.
The
Corporation and the Holder may not convert that amount of the Conversion Amount on a Conversion Date in amounts that would result
in the Holder having a beneficial ownership of Common Stock which would be in excess of the sum of (i) the number of shares of
Common Stock beneficially owned by the Holder and its Affiliates on such Conversion Date, and (ii) the number of Conversion Shares
issuable upon the conversion of the Conversion Amount with respect to which the determination of this proviso is being made on
such Conversion Date, which would result in the aggregate beneficial ownership by the Holder and its Affiliates of more than 4.99%
of the outstanding shares of Common Stock of the Corporation. For the purposes of the proviso to the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section 13(d) of the 1934 Act and Regulation 13d-3 thereunder. Subject
to the foregoing, the Holder shall not be limited to successive exercises which would result in the aggregate issuance of more
than 4.99%. The Holder may allocate which of the equity of the Corporation deemed beneficially owned by the Holder shall be included
in the 4.99% amount described above and which shall be allocated to the excess above 4.99%. The Holder may waive the conversion
limitation described in this Section in whole or in part, upon and effective after sixty one (61) days’ prior written notice
to the Corporation.
The
holders of our Series B do vote together with the holders of our Common Stock on an as converted basis on each matter submitted
to a vote of holders of Common Stock. The number of votes that may be cast by a holder of Series B shall be equal to the number
of shares of Common Stock issuable upon conversion of such Holder’s Series B on the record date for determining those stockholders
entitled to vote on the matter. In addition, the affirmative vote of the holders of a majority of our outstanding Series B is
required to for the following actions:
(a)
amending the Corporation’s certificate of incorporation or by-laws if such amendment would adversely affect the Series B
(b)
purchasing any of the Corporation’s securities other than required redemptions of Series B and repurchase under restricted
stock and option agreements authorizing the Corporation’s employees;
(c)
effecting a Liquidation Event;
(d)
declaring or paying any dividends other than in respect of the Company’s Series A or Series B; and
(e)
issuing any additional securities having rights senior to the Series B.
During
the nine months ended September 30, 2017, the Company accrued $0 for liquidating damages on the Series B and $0 on the warrants
associated with the Series B.
During
the nine months ended September 30, 2017, the Company issued 0 shares of Series B upon conversion of interest totaling $0.
Series
D Convertible Preferred Stock
On
January 29, 2016, 2,100,000 shares of preferred stock were designated as Series D Convertible Preferred Stock (“Series D”).
Each share of Series A shall have a stated value equal to $100.00 (as adjusted for any stock dividends, combinations or splits
with respect to such shares) (the “Series D Stated Value”).
Holders
of shares of Series D shall have the right at any time commencing after the issuance to convert such shares into fully paid and
non-assessable shares of Common Stock (the “Conversion Shares”) of the Corporation determined in accordance with the
applicable conversion price (the “Conversion Price”).
The number of Conversion Shares issuable
upon conversion of the Conversion Amount shall equal (i) the sum of (A) the Series D Stated Value being converted and/or (B) at
the Holder’s election, accrued and unpaid dividends or any other component of the Conversion Amount, divided by (ii) the
Conversion Price. The Conversion Price of the Series D is $0.25, subject to adjustment.
The Company and the Holder may not convert
that amount of the Conversion Amount on a Conversion Date in amounts that would result in the Holder having a beneficial ownership
of Common Stock which would be in excess of the sum of (i) the number of shares of Common Stock beneficially owned by the Holder
and its Affiliates on such Conversion Date, and (ii) the number of Conversion Shares issuable upon the conversion of the Conversion
Amount with respect to which the determination of this proviso is being made on such Conversion Date, which would result in the
aggregate beneficial ownership by the Holder and its Affiliates of more than 4.99% of the outstanding shares of Common Stock of
the Corporation. For the purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined
in accordance with Section 13(d) of the 1934 Act and Regulation 13d-3 thereunder. Subject to the foregoing, the Holder shall not
be limited to successive exercises which would result in the aggregate issuance of more than 4.99%. The Holder may allocate which
of the equity of the Corporation deemed beneficially owned by the Holder shall be included in the 4.99% amount described above
and which shall be allocated to the excess above 4.99%. The Holder may waive the conversion limitation described in this Section
in whole or in part, upon and effective after sixty one (61) days’ prior written notice to the Corporation.
The
holders of Series D Preferred shall not be entitled to a vote on matters submitted to a vote of the stockholders of the Company.
Also, as long as any shares of Series D Preferred are outstanding, the Company shall not, without the affirmative vote of all
of the Holders of the then outstanding shares of the Series D Preferred,
(a) alter
or change adversely the powers, preferences or rights given to the Series D Preferred or alter or amend this Certificate of Designation,
(b) amend
its articles of incorporation or other charter documents in any manner that adversely affects any rights of the Holders,
(c)
increase the number of authorized shares of Series D Preferred, or
(d)
enter into any agreement with respect to any of the foregoing.
On
August 31, 2016, a holder of Series D converted 1,099 shares of Series A into 1,098,933 shares of the Company’s common stock.
During
the nine months ended September 30, 2017, the Company converted 914 shares of Series D for 266,325 shares of common stock.
Common
Stock
On January 30, 2017, the Company issued
2,946,740 shares of its restricted common stock to settle outstanding vendor liabilities of $353,732. In connection with this transaction
the company also recorded a loss on settlement of vendor liabilities of $110,674.
On February 1, 2017, the Company issued
800,000 shares of its restricted common stock to its placement agent. Such shares were issued pursuant to a Placement Agent Agreement
with the Company and services rendered in connection with a private placement of the Company’s securities.
On February 13, 2017, the Company issued
133,333 shares of its restricted common stock to its placement agent. Such shares were issued pursuant to a Placement Agent Agreement
with the Company and services rendered in connection with a private placement of the Company’s securities.
Stock
Options
The
Company applied fair value accounting for all share based payments awards. The fair value of each option granted is estimated
on the date of grant using the Black-Scholes option-pricing model.
The
assumptions used for options granted during the three months ended September 30, 2017 and December 31, 2016 are as follows:
|
|
September 30,
2017
|
|
December 31,
2016
|
Exercise price
|
|
0.20-0.75
|
|
0.25-0.40
|
Expected dividends
|
|
0%
|
|
0%
|
Expected volatility
|
|
63.72% - 92.14%
|
|
73.44%-90.05%
|
Risk free interest rate
|
|
1.74% - 2.10%
|
|
1%-1.39%
|
Expected life of option
|
|
5 years
|
|
4.68-5 years
|
The
following is a summary of the Company’s stock option activity:
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in
years)
|
|
Balance – December 31, 2016
|
|
|
2,250,000
|
|
|
$
|
0.34
|
|
|
|
4.38
|
|
Granted
|
|
|
15,499,990
|
|
|
$
|
0.43
|
|
|
|
4.89
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled/Modified
|
|
|
(100,000
|
)
|
|
$
|
0.40
|
|
|
|
-
|
|
Balance – September 30, 2017 – outstanding
|
|
|
17,649,990
|
|
|
$
|
0.42
|
|
|
|
4.77
|
|
Balance – September 30, 2017 – exercisable
|
|
|
8,983,322
|
|
|
$
|
0.27
|
|
|
|
4.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options held by related party – September 30, 2017
|
|
|
17,549,990
|
|
|
$
|
0.42
|
|
|
|
4.77
|
|
Exercisable options held by related party – September 30, 2017
|
|
|
8,983,322
|
|
|
$
|
0.27
|
|
|
|
4.65
|
|
At
September 30, 2017, the aggregate intrinsic value of options outstanding and exercisable was $220 and $220, respectively.
Stock-based
compensation for stock options has been recorded in the condensed consolidated statements of operations and totaled $560,794 and
$0, for the three months ended September 30, 2017 and 2016, respectively.
The
following is a summary of the Company’s stock options granted during the nine months ended September 30, 2017:
Options
|
|
|
Value
|
|
|
Purpose for Grant
|
|
15,499,990
|
|
|
$
|
681,246
|
|
|
Service Rendered
|
Warrants
The
Company applied fair value accounting for all share based payments awards. The fair value of each warrant granted is estimated
on the date of grant using the Black-Scholes option-pricing model.
The
assumptions used for warrants granted during the three months ended September 30, 2017 are as follows:
|
|
September 30,
2017
|
|
December 31,
2016
|
|
Exercise
price
|
|
$
|
0.20-0.30
|
|
$
|
0.40
|
|
Expected
dividends
|
|
|
0
%
|
|
|
0%
|
|
Expected
volatility
|
|
|
62.63%-92.96%
|
|
|
73.44-91.54%
|
|
Risk
free interest rate
|
|
|
1.64%-2.03%
|
|
|
1.13%-1.39%
|
|
Expected
life of warrant
|
|
|
5
years
|
|
|
5
years
|
|
Warrant
Activities
The
following is a summary of the Company’s warrant activity:
|
|
Warrants
|
|
|
Weighted Average
Exercise
Price
|
|
|
|
|
|
|
|
|
Outstanding – December 31, 2016
|
|
|
15,541,666
|
|
|
$
|
0.36
|
|
Granted
|
|
|
18,915,358
|
|
|
$
|
0.20
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding – September 30, 2017
|
|
|
34,457,024
|
|
|
$
|
0.27
|
|
Exercisable – September 30, 2017
|
|
|
34,457,024
|
|
|
$
|
0.27
|
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
Exercise price
|
|
|
Number Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in years)
|
|
|
Weighted
Average
Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise Price
|
|
$
|
0.20 – 0.40
|
|
|
|
34,457,024
|
|
|
|
3.97
|
|
|
|
0.27
|
|
|
|
34,457,024
|
|
|
|
0.27
|
|
During the nine months ended September 30,
2017, a total of 5,811,360 warrants were issued with promissory notes (See Note 6 above). In addition, the placement agent was
granted a total of 487,756 warrants to purchase common stock. The warrants have a grant date fair value of $1,104,731 using a Black-Scholes
option-pricing model and the above assumptions.
During the nine months ended September 30,
2017, a total of 7,759,126 warrants were issued with convertible notes (See Note 7 above). In addition, the placement agent was
granted a total of 12,150 warrants to purchase common stock. The warrants have a grant date fair value of $455,173 using a Black-Scholes
option-pricing model and the above assumptions.
During the nine months ended September 30,
2017, a total of 255,500 warrants were issued with notes payable – related party (See Note 8 above). The warrants have a
grant date fair value of $23,437 using a Black-Scholes option-pricing model and the above assumptions.
During
the nine months ended September 30, 2017, a total of 4,589,466 warrants were issued with convertible notes payable – related
party (See Note 8 above). The warrants have a grant date fair value of $283,352 using a Black-Scholes option-pricing model and
the above assumptions.
Note 12 - Subsequent Events
Subsequent to September 30, 2017, the Company
sold Units under The August 2017 Convertible Note Offering for gross proceeds of $1,954,918. In addition, $659,112 of the Company’s
short term debt along with accrued but unpaid interest of $24,876 was converted. As additional consideration for entering in the
private placement offering, the investors were granted a total of 13,070,148 warrants to purchase common stock. As part of the
transaction, the Company incurred placement agent fees of $66,574. In addition, the placement agent was granted a total of 579,969
warrants to purchase common stock at an exercise price of $0.2.
On October 24, 2017, the Company entered into
a Settlement Agreement (the “Settlement Agreement”) by and among the Company and Alpha Capital Anstalt (“Alpha
Capital”) to resolve a dispute related to Alpha Capital’s claims brought against the Company on September 13, 2017
in United States District Court, Southern District of New York, for the alleged failure to honor a conversion notice submitted
by Alpha Capital whereby Alpha Capital believed it was to be issued a certain amount of the Company’s Common Stock for its
conversion of the Company’s Series A Cumulative Convertible Preferred Stock (the “Dispute”). Pursuant to the
Settlement Agreement, the Company agreed to pay Alpha Capital $150,000. In November 2017, the Company fulfilled is settlement obligation
by paying Alpha Capital a total of $150,000. Upon receipt of the payments, Alpha Capital no longer has any rights under the Series
A Cumulative Convertible Preferred Stock. The payments to Alpha Capital represents the settlement of the Dispute and all of the
claims related to such have been dismissed.