NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE YEARS
ENDED DECEMBER 31, 2017 AND 2016
NOTE 1 –
ORGANIZATION
AND PRINCIPAL ACTIVITIES
Corporate History and Background
On December 1, 2016, substantially all
of the operating assets of Coordinates Collection, Inc. (“CCI” or “Coordinates Collection”) was acquired
by
Reign Sapphire
Corporation
(
“
RGNP
“
or the “Company”),
(see “
Acquisition of Assets Related to the Coordinates
Collection Business”). RGNP
is a Beverly Hills-based, direct-to-consumer, branded and
custom jewelry company.
As part of the Acquisition, we created a wholly owned subsidiary, Reign Brands, Inc. (“Reign
Brands”), which is a Delaware corporation, and shall act as the operating entity for the acquired CCI assets. The acquisition
method of accounting was used to record assets acquired and liabilities assumed by Successor. Such accounting generally results
in increased amortization and depreciation reported in future periods. Accordingly, the accompanying consolidated financial statements
of the Predecessor and Successor are not comparable in all material respects since those consolidated financial statements report
financial position, results of operations, and cash flows of these two separate entities. CCI’s fixed assets and identifiable
intangible assets acquired were recorded based upon their estimated fair values as of the closing date of the Acquisition.
The excess of purchase price over the value of the net assets acquired was recorded as goodwill.
The
accompanying consolidated financial statements ha
ve been presented on a comparative
basis
.
For periods after the acquisition of the
Coordinates Collection
(since
December 1, 2016), our financial results are referred to as “Successor” and its results of operations combines Reign
Corporation operations and the
Coordinates Collection operations.
For periods prior
to the acquisition of the
Coordinates Collection brand,
our financial results are
referred to as “Predecessor” and its operations includes only the
Coordinates Collection operations.
Where
tables are presented
, a
black line separates the Successor and Predecessor financial
information to highlight the lack of comparability between the periods.
Predecessor
CCI, previously known as FD9 Group, Inc.,
markets and distributes classic custom jewelry through
Le Bloc
and
custom jewelry,
inscribed with location coordinates commemorating life’s special moments through
Coordinates Collection
. CCI
was organized as a Delaware corporation in 2013 and is currently based in Los Angeles, California.
On December 21, 2015, the shareholders
of CCI approved
an
amendment to the Articles of Incorporation to change the name to
“Coordinates Collection Inc.”, increase the authorized number of shares of common stock from 1,000,000 to 15,000,000,
par value $0.0001, eliminate the authorized preferred stock, convert each outstanding share of common stock into 9.8 shares of
common stock, and convert each outstanding share of preferred stock into 1.16 shares of common stock. This transaction was accounted
for as a stock split. CCI has retroactively restated per share and the outstanding shares for weighted average shares used in the
basic and diluted earnings per share calculations for all periods presented, as a result of the reorganization.
Successor
RGNP
is a Beverly Hills-based, direct-to-consumer, branded and custom jewelry company with 4 niche
brands: Reign Sapphires
: ethically produced, direct mine-to-consumer sapphire jewelry
targeting millennials
, Coordinates Collection
:
custom jewelry, inscribed with location coordinates commemorating life’s special moments, and Le Bloc
:
classic customized jewelry and athleisure jewelry brand ION Collection by Jen Selter.
Reign Sapphire Corporation was established
on December 15, 2014 in the State of Delaware as a vertically integrated “source to consumer” model for sapphires and
sapphire jewelry. The Company acquired its Coordinates Collection and Le Bloc brands and the assets related to the production and
sale of it on December 1, 2016 (See Note 4).
The Company is focusing its marketing
initiatives on: (1) Direct-to-Consumer (“D2C”) ecommerce marketing to attract customers to the reignsappires.com
website, (2) Business-to-Business (“B2B”) marketing and sales efforts, to establish distribution partners such as
high-end fashion retailers.
The Company started as UWI Holdings Corporation
(previously known as Australian Sapphire Corporation) (“UWI”) and was established on May 31, 2013 in the Province of
New Brunswick, Canada. On December 31, 2014, UWI entered into an Agreement of Conveyance, Transfer and Assignment of Assets and
Assumption of Obligations with Reign Corporation, pursuant to which UWI transferred all of its net assets to Reign. The sole shareholder
of UWI along with his spouse retained 100% ownership of Reign and were issued 27,845,000 of Reign common shares in exchange for
the 16,000,250 outstanding shares of UWI. There was no significant tax consequence to this exchange. As a result, Reign is considered
to be the continuation of the predecessor UWI. All historical financial information prior to the reorganization is that of UWI.
Prior to the reorganization, the Company
was authorized to issue 50,000,000 shares of common stock and 5,000,000 shares of preferred stock. On May 8, 2015, the Company’s
Articles of incorporation were amended to increase the authorized common shares to 100,000,000 and preferred shares to 10,000,000.
On December 22, 2015, the Company’s Articles of Incorporation were amended to increase the authorized number common shares
to 150,000,000 with the authorized number of preferred shares remaining at 10,000,000.
On March 17, 2017, the shareholders of
the Company approved an amendment to the Company’s Certificate of Incorporation to designate 1 share of the Company’s
authorized 10,000,000 shares of Preferred Stock as Series A Preferred Stock (“Series A Preferred Stock”), which shall
vote with the Common Stock, and shall be entitled to fifty-one percent (51%) of the total votes of Common Stock on all such matters
voted on.
The Company has begun its planned principal
operations, and accordingly, the Company has prepared its consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America (“GAAP”).
NOTE 2 – BASIS OF PRESENTATION
The accompanying consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include
all adjustments necessary for the fair presentation of the Company’s financial position for the periods presented.
The Company currently operates in one business
segment. The Company is not organized by market and is managed and operated as one business. A single management team reports to
the chief operating decision maker, the Chief Executive Officer, who comprehensively manages the entire business. The Company does
not currently operate any separate lines of businesses or separate business entities.
Going Concern
The accompanying consolidated financial
statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the
realization of assets and satisfaction of liabilities in the normal course of business. The Company had an accumulated deficit
of approximately $10,381,000 and $6,130,000 at December 31, 2017 and 2016, respectively, had a working capital deficit of $3,404,000
and $2,128,000 at December 31, 2017 and 2016, respectively, had a net loss of approximately $4,251,000 for the year ended December
31, 2017 (Successor) and $832,000 for the one month ended December 31, 2016 (Successor) plus the eleven months ended November 30,
2016 (Predecessor), and net cash used in operating activities of approximately $400,000 and $131,000 for the year ended December
31, 2017 (Successor) and for the one month ended December 31, 2016 (Successor) plus the eleven months ended November 30, 2016 (Predecessor),
respectively, with limited revenue earned since inception, and a lack of operational history. These matters raise substantial doubt
about the Company’s ability to continue as a going concern.
While the Company is attempting to expand
operations and increase revenues, the Company’s cash position may not be significant enough to support the Company’s
daily operations. Management intends to raise additional funds by way of a public or private offering. Management believes that
the actions presently being taken to further implement its business plan and generate revenues provide the opportunity for the
Company to continue as a going concern. While management believes in the viability of its strategy to generate revenues and in
its ability to raise additional funds, there can be no assurances to that effect or on terms acceptable to the Company. The ability
of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan
and generate revenues. Our current burn rate to maintain the minimal level of operations for us to be in a position to execute
our business plan upon funding is anticipated to be no greater than $25,000 per month in cash and Joseph Segelman, our President
and CEO, has agreed to underwrite these costs until we are then able to begin execution of our business plan. In addition, until
we begin execution of our business plan, we will continue to defer and accrue salaries and thus will not require cash to make payments
under employment agreements.
The consolidated financial statements do
not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
This summary of significant accounting
policies of the Company is presented to assist in understanding the Company’s consolidated financial statements. The consolidated
financial statements and notes are representations of the Company’s management, which is responsible for their integrity
and objectivity. These accounting policies conform to GAAP and have been consistently applied in the preparation of the consolidated
financial statements.
Consolidation
The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary, Reign Brands, Inc. All significant intercompany accounts and transactions
are eliminated in consolidation.
Use of Estimates
The preparation of these consolidated financial
statements in accordance with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities
at the dates of the consolidated financial statements and the reported amounts of net sales and expenses during the reported periods.
Actual results may differ from those estimates and such differences may be material to the consolidated financial statements. The
more significant estimates and assumptions by management include among others: inventory valuation, derivative liabilities, warrant
liabilities, common stock and option valuation, valuation of acquired intangible assets. and the recoverability of intangibles.
The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.
Cash
The Company’s cash is held in bank
accounts in the United States and is insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. The Company has
not experienced any cash losses.
Income Taxes
Income taxes are accounted for under an
asset and liability approach. This process involves calculating the temporary and permanent differences between the carrying amounts
of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The temporary differences
result in deferred tax assets and liabilities, which would be recorded on the Balance Sheets in accordance with ASC 740, which
established financial accounting and reporting standards for the effect of income taxes. The likelihood that its deferred tax assets
will be recovered from future taxable income must be assessed and, to the extent that recovery is not likely, a valuation allowance
is established. Changes in the valuation allowance in a period are recorded through the income tax provision in the consolidated
Statements of Operations.
ASC 740-10-30 was adopted from the date
of its inception. ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an entity’s consolidated
financial statements and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax
positions taken or expected to be taken on a tax return. Under ASC 740-10, the impact of an uncertain income tax position on the
income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant
taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.
Additionally, ASC 740-10 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. As a result of the implementation of ASC 740-10, the Company does not have a liability for unrecognized
income tax benefits.
Advertising and Marketing Costs
Advertising and marketing costs are recorded
as general and administrative expenses when they are incurred. Advertising and marketing expenses were recorded of approximately
$533,000 for the year ended December 31, 2017 (Successor), and approximately $413,000 for the one month ended December 31, 2016
(Successor) plus the eleven months ended November 30, 2016 (Predecessor).
Comprehensive Income
Comprehensive income is reported in accordance
with FASB ASC Topic 220 “Comprehensive Income,” which established standards for reporting and displaying comprehensive
income and its components in a financial statement that is displayed with the same prominence as other financial statements.
Total comprehensive income is defined as
all changes in shareholders’ equity during a period, other than those resulting from investments by and distributions to
shareholders (i.e., issuance of equity securities and dividends). Generally, total comprehensive income (loss) equals net income
(loss) plus or minus adjustments for currency translation. There are no items other than net loss affecting comprehensive loss
for the year ended December 31, 2017 (Successor), and for the one month ended December 31, 2016 (Successor) plus the eleven months
ended November 30, 2016 (Predecessor).
Foreign Currency - Functional and Presentation
Currency
The functional currency represents the
currency of the primary economic environment in which the entity operates. Management has determined the functional currency of
the Company to be the USD, as sales prices and major costs of operating expenses are primarily influenced by fluctuations in the
USD, and with its Chief Executive Officer and director (“CEO”), and employees of the Company headquartered and operating
in the United States.
The results of transactions in foreign
currency are remeasured into the functional currency at the average rate of exchange during the reporting period. The Company had
no aggregate net foreign currency remeasurements included in general and administrative expenses in the accompanying consolidated
statements of operations for the year ended December 31, 2017 (Successor), and for the one month ended December 31, 2016 (Successor)
plus the eleven months ended November 30, 2016 (Predecessor).
Assets and liabilities denominated in foreign
currencies at the balance sheet date are translated into the Company’s reporting currency of USD at the exchange rates prevailing
at the balance sheet date. All translation adjustments resulting from the translation of the consolidated financial statements
into the reporting currency at USD are dealt with as a separate component within shareholders’ equity. There were no translation
adjustments for the year ended December 31, 2017 (Successor), and for the one month ended December 31, 2016 (Successor) plus the
eleven months ended November 30, 2016 (Predecessor).
Revenue Recognition
Revenues are recognized in accordance with
FASB ASC Topic 605, “Revenue Recognition”, and with the guidelines of the Securities and Exchange Commission (“SEC”)
Staff Accounting Bulletin (“SAB”) No. 104 “Revenue Recognition”.
Under SAB 104, four conditions must be
met before revenue can be recognized: (i) there is persuasive evidence that an arrangement exists, (ii) delivery has occurred or
service has been rendered, (iii) the price is fixed or determinable, and (iv) collection is reasonably assured.
Revenue is recognized from product sales
when the product is shipped to the customer, provided that collection of the resulting receivable is reasonably assured. Credit
is granted generally for terms of 7 to 90 days, based on credit evaluations. Discounts and refunds are recorded as a reduction
of revenue.
There is a no return policy. The return
policy is currently being evaluated to be more in line with industry standards.
Inventories
Reign Sapphire
Inventories are stated at the
lower of cost or market (net realizable value) on a lot basis each quarter. A lot is determined by the cut, clarity, size,
and weight of the sapphires. Inventory consists of sapphire jewels that meet rigorous grading criteria and are of cuts and
sizes most commonly used in the jewelry industry. As of December 31, 2017, the Company carried primarily loose sapphire
jewels and loose sapphire jewels held as samples. Samples are used to show potential customers what the jewelry would look
like. Promotional items given to customers that are not expected to be returned will be removed from inventory and expensed.
There have been no promotional items given to customers as of December 31, 2017. The Company performs its own in-house
assessment based on gem guide and the current market price for metals to value its inventory on an annual basis or if
circumstances dictate sooner to determine if the estimated fair value is greater or less than cost. In addition, the
inventory is reviewed each quarter by the Company against industry prices from gem-guide and if there is a potential
impairment, the Company would appraise the inventory. The estimated fair value is subject to significant change due to
changes in popularity of cut, perceived grade of the clarity of the sapphires, the number, type and size of inclusions, the
availability of other similar quality and size sapphires, and other factors. As a result, the internal assessed value of the
sapphires could be significantly lower from the current estimated fair value. Loose sapphire jewels do not degrade in quality
over time. The estimated fair value per management’s internal assessment is
greater than the cost, therefore, there is no indicator of impairment as of December 31, 2017.
CCI and Le Bloc
CCI and Le Bloc products are outsourced
to a third party for manufacture, made to order, and when completed are shipped to the customer. The inventory for CCI and Le Bloc
are considered immaterial as of December 31, 2017 and December 31, 2016.
Property and Equipment
Property and equipment are carried at cost
and are depreciated on a straight-line basis over the estimated useful lives of the assets, generally five years. The cost of repairs
and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed
of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income
in the year of disposition. Fixed assets are examined for the possibility of decreases in value when events or changes in circumstances
reflect the fact that their recorded value may not be recoverable.
Business Combinations
Amounts paid for acquisitions are allocated
to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. The fair value
of identifiable intangible assets is based on detailed valuations that use information and assumptions provided by management,
including expected future cash flows. We allocate any excess purchase price over the fair value of the net assets and liabilities
acquired to goodwill. Identifiable intangible assets with finite lives are amortized over their useful lives. Acquisition-related
costs, including advisory, legal, accounting, valuation and other costs, are expensed in the periods in which the costs are incurred.
The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
Intangible Assets and Goodwill
Goodwill is the cost of an acquisition less the fair value of
the net assets of the acquired business.
Intangible assets consist primarily of
tradenames, proprietary designs, developed technology – website, and developed technology – Ipad application. Our intangible
assets are being amortized on a straight-line basis over a period of three to ten years.
Impairment of Long-lived Assets and Goodwill
We evaluate goodwill for impairment annually
in the fourth quarter, and whenever events or changes in circumstances indicate it is more likely than not that the fair value
of a reporting unit containing goodwill is less than its carrying amount. The goodwill impairment test consists of a two-step
process, if necessary. The first step is to compare the fair value of a reporting unit to its carrying value, including goodwill.
We typically use discounted cash flow models to determine the fair value of a reporting unit. The assumptions used in these models
are consistent with those we believe hypothetical marketplace participants would use. If the fair value of the reporting unit is
less than its carrying value, the second step of the impairment test must be performed in order to determine the amount of impairment
loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of
that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds its implied fair value, an impairment charge
is recognized in an amount equal to that excess. There are no impairments as of December 31, 2017 and 2016.
We periodically evaluate whether the carrying
value of property, equipment and intangible assets has been impaired when circumstances indicate the carrying value of those assets
may not be recoverable. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected
to result from the use and eventual disposition of the asset. If the carrying value is not recoverable, the impairment loss
is measured as the excess of the asset’s carrying value over its fair value. There are no impairments as of December 31,
2017 and 2016.
Our impairment analyses require management
to apply judgment in estimating future cash flows as well as asset fair values, including forecasting useful lives of the assets,
assessing the probability of different outcomes, and selecting the discount rate that reflects the risk inherent in future cash
flows. If the carrying value is not recoverable, we assess the fair value of long-lived assets using commonly accepted techniques,
and may use more than one method, including, but not limited to, recent third party comparable sales and discounted cash flow models.
If actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new
information, we may be exposed to an impairment charge in the future.
Deferred revenue
Deferred revenue consists of customer orders
paid in advance of the delivery of the order. Deferred revenue is classified as short-term as the typical order ships within approximately
three weeks of placing the order. Deferred revenue is recognized as revenue when the product is shipped to the customer and all
other revenue recognition criteria have been met.
Fair Value of Financial Instruments
The provisions of accounting guidance,
FASB Topic ASC 825 requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized
and not recognized on the balance sheet, for which it is practicable to estimate fair value, and defines fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of December
31, 2017 and 2016, the fair value of cash, accounts receivable, accounts payable, accrued expenses, notes payable, and convertible
debt approximated carrying value due to the short maturity of the instruments, quoted market prices or interest rates which fluctuate
with market rates.
Fair Value Measurements
Fair value is defined as the exchange price
that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market
for the asset or liability, in an orderly transaction between market participants on the measurement date. Valuation techniques
used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value
hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:
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Level 1 – Quoted prices in active markets for identical assets
or liabilities.
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Level 2 – Inputs other than Level 1 that are observable, either
directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active;
or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets
or liabilities.
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Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the
measurement of the fair value of the assets or liabilities
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The carrying value of financial assets
and liabilities recorded at fair value is measured on a recurring or nonrecurring basis. Financial assets and liabilities measured
on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. There were no financial assets
or liabilities carried and measured on a nonrecurring basis during the reporting periods. Financial assets and liabilities measured
on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. The warrant and the
embedded derivative liabilities are recognized at fair value on a recurring basis at December 31, 2017 and are Level 3 measurements
(see Note 9). There have been no transfers between levels.
Debt
The Company issues debt that may have separate
warrants, conversion features, or no equity-linked attributes.
Debt with warrants
– When
the Company issues debt with warrants, the Company treats the warrants as a debt discount, record as a contra-liability against
the debt, and amortize the balance over the life of the underlying debt as amortization of debt discount expense in the consolidated
statements of operations. When the warrants require equity treatment under ASC 815, the offset to the contra-liability is
recorded as additional paid in capital in our consolidated balance sheet. When the Company issues debt with warrants that
require liability treatment under ASC 815, such as a clause requiring repricing, the warrants are considered to be a derivative
that is recorded as a liability at fair value. If the initial value of the warrant derivative liability is higher than the
fair value of the associated debt, the excess is recognized immediately as interest expense. The warrant derivative liability
is adjusted to its fair value at the end of each reporting period, with the change being recorded as expense or gain to Other (income)
expense in the consolidated Statements of Operations. If the debt is retired early, the associated debt discount is then
recognized immediately as amortization of debt discount expense in the consolidated statement of operations. The debt is
treated as conventional debt.
Convertible debt – derivative
treatment
– When the Company issues debt with a conversion feature, we must first assess whether the conversion feature
meets the requirements to be treated as a derivative, as follows: a) one or more underlyings, typically the price of our common
stock; b) one or more notional amounts or payment provisions or both, generally the number of shares upon conversion; c) no initial
net investment, which typically excludes the amount borrowed; and d) net settlement provisions, which in the case of convertible
debt generally means the stock received upon conversion can be readily sold for cash. An embedded equity-linked component that
meets the definition of a derivative does not have to be separated from the host instrument if the component qualifies for the
scope exception for certain contracts involving an issuer’s own equity. The scope exception applies if the contract is both
a) indexed to its own stock; and b) classified in shareholders’ equity in its statement of financial position.
If the conversion feature within convertible
debt meets the requirements to be treated as a derivative, we estimate the fair value of the convertible debt derivative using
Monte Carlo Method upon the date of issuance. If the fair value of the convertible debt derivative is higher than the face value
of the convertible debt, the excess is immediately recognized as interest expense. Otherwise, the fair value of the convertible
debt derivative is recorded as a liability with an offsetting amount recorded as a debt discount, which offsets the carrying amount
of the debt. The convertible debt derivative is revalued at the end of each reporting period and any change in fair value is recorded
as a gain or loss in the statement of operations. The debt discount is amortized through interest expense over the life of the
debt.
Convertible debt – beneficial
conversion feature
– If the conversion feature is not treated as a derivative, we assess whether it is a beneficial conversion
feature (“BCF”). A BCF exists if the conversion price of the convertible debt instrument is less than the stock price
on the commitment date. This typically occurs when the conversion price is less than the fair value of the stock on the date the
instrument was issued. The value of a BCF is equal to the intrinsic value of the feature, the difference between the conversion
price and the common stock into which it is convertible, and is recorded as additional paid in capital and as a debt discount in
the consolidated balance sheet. The Company amortizes the balance over the life of the underlying debt as amortization of debt
discount expense in the statement of operations. If the debt is retired early, the associated debt discount is then recognized
immediately as amortization of debt discount expense in the consolidated Statement of Operations.
If the conversion feature does not qualify
for either the derivative treatment or as a BCF, the convertible debt is treated as traditional debt.
Employee Stock Based Compensation
Stock based compensation issued to employees
and members of our board of directors is measured at the date of grant based on the estimated fair value of the award, net of estimated
forfeitures. The grant date fair value of a stock based award is recognized as an expense over the requisite service period of
the award on a straight-line basis.
For purposes of determining the variables
used in the calculation of stock based compensation issued to employees
,
the Company performs an analysis of current market
data and historical data to calculate an estimate of implied volatility, the expected term of the option and the expected forfeiture
rate. With the exception of the expected forfeiture rate, which is not an input, we use these estimates as variables in the Black-Scholes
option pricing model. Depending upon the number of stock options granted any fluctuations in these calculations could have a material
effect on the results presented in our consolidated statements of operations. In addition, any differences between estimated forfeitures
and actual forfeitures could also have a material impact on our consolidated financial statements.
Non-Employee Stock Based Compensation
Issuances of the Company’s common
stock or warrants for acquiring goods or services are measured at the fair value of the consideration received or the fair value
of the equity instruments issued, whichever is more reliably measurable. The measurement date for the fair value of the equity
instruments issued to consultants or vendors is determined at the earlier of (i) the date at which a commitment for performance
to earn the equity instruments is reached (a “performance commitment” which would include a penalty considered to be
of a magnitude that is a sufficiently large disincentive for nonperformance) or (ii) the date at which performance is complete.
Although situations may arise in which counter performance may be required over a period of time, the equity award granted to the
party performing the service is fully vested and non-forfeitable on the date of the agreement. As a result, in this situation in
which vesting periods do not exist as the instruments fully vested on the date of agreement, the Company determines such date to
be the measurement date and will record the estimated fair market value of the instruments granted as a prepaid expense and amortize
such amount to general and administrative expense in the accompanying statement of operations over the contract period. When it
is appropriate for the Company to recognize the cost of a transaction during financial reporting periods prior to the measurement
date, for purposes of recognition of costs during those periods, the equity instrument is measured at the then-current fair values
at each of those interim financial reporting dates.
Non-Cash Equity Transactions
Shares of equity instruments issued for
non-cash consideration are recorded at the fair value of the consideration received based on the market value of services to be
rendered, or at the value of the stock given, considered in reference to contemporaneous cash sale of stock.
Earnings per Share
Diluted earnings (loss) per share are computed
on the basis of the weighted average number of common shares (including common stock subject to redemption) plus dilutive potential
common shares outstanding for the reporting period. In periods where losses are reported, the weighted-average number of common
stock outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
The total number of potential additional
dilutive securities outstanding for the year ended December 31, 2017 (Successor), and for the one month ended December 31, 2016
(Successor) plus the eleven months ended November 30, 2016 (Predecessor), was none since the Company had net losses and any additional
potential common shares would have an anti-dilutive effect.
Related Parties
Related parties are any entities or individuals
that, through employment, ownership or other means, possess the ability to direct or cause the direction of the management and
policies of the Company.
Concentrations, Risks, and Uncertainties
Business Risk
Substantial business risks and uncertainties
are inherent to an entity, including the potential risk of business failure.
The Company is headquartered and operates
in the United States. To date, the Company has generated limited revenues from operations. As the Company generates significant
revenues from operations, business activities will also include Australia and Asia and geographic segment reporting will be provided.
There can be no assurance that the Company will be able to successfully continue to produce its products and failure to do so would
have a material adverse effect on the Company’s financial position, results of operations and cash flows. Also, the success
of the Company’s operations is subject to numerous contingencies, some of which are beyond management’s control. These
contingencies include general economic conditions, price of raw material, competition, governmental and political conditions, and
changes in regulations. Because the Company is dependent on foreign trade in Australia and Asia, the Company is subject to various
additional political, economic and other uncertainties. Among other risks, the Company’s operations will be subject to risk
of restrictions on transfer of funds, domestic and international customs, changing taxation policies, foreign exchange restrictions,
and political and governmental regulations.
The Company has business activities in
Australia and Asia, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility of
foreign exchange rates between USD and the Australian currency AUD. The results of operations denominated in foreign currency are
translated at the average rate of exchange during the reporting period. The Company had no aggregate net foreign currency transactions
included in the income statement for the year ended December 31, 2017 (Successor), and for the one month ended December 31, 2016
(Successor) plus the eleven months ended November 30, 2016 (Predecessor).
Interest rate risk
Financial assets and liabilities do not
have material interest rate risk.
Credit risk
The Company is exposed to credit risk from
its cash in banks and accounts receivable. The credit risk on cash in banks is limited because the counterparties are recognized
financial institutions.
There was one customer that accounted
for 12% of total revenue for the year ended December 31, 2017 (Successor), and no customers that accounted for 10% or more of
total revenue for the one month ended December 31, 2016 (Successor) plus the eleven months ended November 30, 2016
(Predecessor).
Foreign currency risk
The Company has transactions settled in
AUD and British Pound. Thus, the Company has foreign currency risk exposure.
Seasonality
The business is subject to substantial
seasonal fluctuations. Historically, a significant portion of net sales and net earnings have been realized during the
period from October through December.
Major Suppliers
The Company does not manufacture its own
products and currently depends primarily upon ASK Gold to manufacture its products. Pursuant to the acquisition of CCI (see Note
4), the Company issued ASK Gold 1,000,000 shares of the 7,000,000 shares issued in connection to the transaction.
In the event that the manufacturing provided
by ASK Gold were discontinued, it is believed that alternate suppliers could be identified which would be able to provide it with
sufficient levels of products at terms similar to those of ASK Gold.
Recent Accounting Pronouncements
FASB ASU 2017-11 “
Earnings Per
Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815)
” - In July
2017, the FASB issued 2017-11. The guidance eliminates the requirement to consider “down round” features when determining
whether certain equity-linked financial instruments or embedded features are indexed to an entity’s own stock. Our warrants
issued with our convertible notes are treated as derivative instruments, because they include a “down round” feature.
The ASU is effective for annual periods beginning after December 15, 2018, and for interim periods within those years, with early
adoption permitted. Early adoption of this guidance could have a significant impact on our financial statements, as it would effectively
eliminate the warrant derivative liability and the gain or loss from changes in the fair value of the warrant derivative liability.
We are currently assessing whether to early adopt this standard.
FASB ASU 2017-09 “
Scope of
Modification Accounting (Topic 718)
” - In May 2017, the FASB issued 2017-09. The guidance clarifies the accounting
for when the terms of a share-based award are modified. The ASU is effective for annual reporting periods beginning after
December 15, 2017, and for interim periods within those years, with early adoption permitted. This new guidance would only
impact our consolidated financial statements if, in the future, we modified the terms of any of our share-based awards.
FASB ASU 2017-04
“Simplifying
the Test for Goodwill Impairment (Topic 350)”
– In January 2017, the FASB issued 2017-04. The guidance removes
“Step Two” of the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment
will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount
of goodwill. The ASU is effective for annual reporting periods beginning after December 15, 2019, and for interim periods within
those years, with early adoption permitted. We do not expect this ASU to have a significant impact on our consolidated financial
statements and related disclosures.
FASB ASU 2017-01
“Clarifying the
Definition of a Business (Topic 805)”
– In January 2017, the FASB issued 2017-1. The new guidance that changes
the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business.
The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated
in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is
not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of
outputs by more closely aligning it with how outputs are described in ASC 606. The ASU is effective for annual reporting
periods beginning after December 15, 2017, and for interim periods within those years. Adoption of this ASU is not expected to
have a significant impact on our consolidated results of operations, cash flows and financial position.
FASB ASU 2016-15
“Statement of
Cash Flows (Topic 230)” –
In August 2016, the FASB issued 2016-15. Stakeholders indicated that there is a diversity
in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15
addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This ASU is
effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Early
adoption is permitted. Adoption of this ASU is not expected to have a significant impact on our statement of cash flows.
FASB ASU 2016-12
“Revenue from
Contracts with Customers (Topic 606)”
– In May 2016, the FASB issued 2016-12. The core principle of the guidance
is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2016-12
provides clarification on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts
and contract modifications. This ASU is effective for annual reporting periods beginning after December 15, 2017, with the
option to adopt as early as December 15, 2016. We are currently assessing the impact of adoption of this ASU on our consolidated
results of operations, cash flows and financial position.
FASB ASU 2016-11
“Revenue
Recognition (Topic 605) and Derivatives and Hedging (Topic 815)”
– In May 2016, the FASB issued 2016-11,
which clarifies guidance on assessing whether an entity is a principal or an agent in a revenue transaction. This
conclusion impacts whether an entity reports revenue on a gross or net basis. This ASU is effective for annual
reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. Adoption of this
ASU is not expected to have a significant impact on our consolidated financial statements.
FASB ASU 2016-10
“Revenue from
Contracts with Customers (Topic 606)”
– In April 2016, the FASB issued ASU 2016-10, clarify identifying performance
obligations and the licensing implementation guidance, while retaining the related principles for those areas. This ASU is
effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. Adoption of this
ASU is not expected to have a significant impact on our consolidated financial statements.
FASB ASU 2016-09
“Compensation
– Stock Compensation (Topic 718)”
– In March 2016, the FASB issued ASU 2016-09, which includes multiple provisions
intended to simplify various aspects of accounting for share-based payments. The new guidance will require entities to recognize
all income tax effects of awards in the income statement when the awards vest or are settled. It also will allow entities
to make a policy election to account for forfeitures as they occur. This ASU is effective for fiscal years beginning after
December 15, 2016, including interim periods within those fiscal years. We do not expect this standard will have a significant
impact on our consolidated financial statements and related disclosures.
FASB ASU 2016-02
“Leases (Topic
842)” –
In February 2016, the FASB issued ASU 2016-02, which will require lessees to recognize almost all leases
on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a
dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that
are largely similar to those applied in current lease accounting, but without explicit bright lines. Lessor accounting is
similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard.
This ASU is effective for fiscal years beginning after December 18, 2018, including interim periods within those fiscal years.
We are currently evaluating the potential impact this standard will have on our consolidated financial statements and related
disclosures.
FASB ASU 2015-17
“Income Taxes
(Topic 740)” –
In November 2015, the FASB issued ASU 2015-17, which simplifies the presentation of deferred tax
assets and liabilities on the balance sheet. Previous GAAP required an entity to separate deferred income tax liabilities
and assets into current and noncurrent amounts on the balance sheet. The amendment requires that deferred tax liabilities
and assets be classified as noncurrent in a classified balance sheet. This ASU is effective for annual periods beginning
after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. We are currently evaluating
the potential impact this standard will have on our consolidated financial statements and related disclosures.
NOTE 4 – ACQUISITION OF COORDINATES COLLECTION
On December 1, 2016, the Company acquired
substantially all of the operating assets of CCI (the “Acquisition”). CCI is engaged in the marketing and distribution
of Coordinates Collection and Le Bloc customized jewelry. Upon the closing of the Acquisition, we received substantially all of
the operating assets of CCI, consisting of fixed assets and intellectual property. As part of the Acquisition, the Company created
a wholly owned subsidiary, Reign Brands, and shall act as the operating entity for the acquired CCI assets.
The purchase price of the operating assets
of CCI was the issuance 7,000,000 shares of common stock (of which 1,000,000 shares were issued to ASK Gold, a major supplier)
(see Note 3) valued at $770,000 (based on our stock price on the date of issuance). In addition, there is a cash payment of $500,000
contingent upon a future offering and earn out payments for all sales of CCI and RGNP products sold via CCI sales channels for
the 2017, 2018, 2019 and 2020 calendar years. The estimated fair value of the contingent payments totaled $424,511 and was recognized
as a liability in the accompanying consolidated Balance sheet as of December 31, 2016. The Company accounted for the Acquisition
using the acquisition method of accounting.
Total Purchase Consideration:
|
|
|
|
Common stock issued
|
|
$
|
770,000
|
|
Estimated fair value of contingent payments
|
|
|
424,511
|
|
|
|
$
|
1,194,511
|
|
The following table summarizes the estimated
fair values of the tangible and intangible assets acquired as of the date of Acquisition:
Net assets acquired:
|
|
|
|
Equipment
|
|
$
|
32,564
|
|
Developed technology - website
|
|
|
117,500
|
|
Developed technology – Ipad application
|
|
|
117,500
|
|
Tradename
|
|
|
365,000
|
|
Proprietary design
|
|
|
80,000
|
|
Goodwill
|
|
|
481,947
|
|
|
|
$
|
1,194,511
|
|
Goodwill is the excess of the purchase
price over the fair value of the underlying net tangible and identifiable intangible assets. In accordance with applicable accounting
standards, goodwill is not amortized but instead is tested for impairment at least annually or more frequently if certain indicators
are present.
NOTE 5 – INVENTORY
Inventories consisted of the following
as of:
|
|
December 31,
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
474,983
|
|
$
|
478,096
|
|
Work-in-process
|
|
|
117,012
|
|
|
111,361
|
|
Samples
|
|
|
134,145
|
|
|
134,145
|
|
|
|
$
|
726,140
|
|
$
|
723,602
|
|
NOTE 6 –
Equipment
Equipment consisted of the following as
of:
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Estimated Life
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Office equipment
|
|
5 years
|
|
$
|
3,391
|
|
|
$
|
2,451
|
|
Computer equipment
|
|
3 years
|
|
|
39,311
|
|
|
|
39,311
|
|
Accumulated depreciation
|
|
|
|
|
(17,424
|
)
|
|
|
(3,712
|
)
|
|
|
|
|
$
|
25,278
|
|
|
$
|
38,050
|
|
Depreciation expense was $13,712
for the year ended December 31, 2017 (Successor), and $7,308 for the one month ended December 31, 2016 (Successor) plus the eleven
months ended November 30, 2016 (Predecessor), and is classified in general and administrative expenses in the consolidated Statements
of Operations.
NOTE 7 –
INTANGIBLE
ASSETS AND GOODWILL
Intangible assets, net consisted of
the following as of:
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Estimated Life
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
3.3 – 4.5 years
|
|
$
|
260,000
|
|
|
$
|
260,000
|
|
Website
|
|
3 years
|
|
|
113,253
|
|
|
|
35,125
|
|
Acquired tradename
|
|
10 years
|
|
|
365,000
|
|
|
|
365,000
|
|
Acquired proprietary design
|
|
5 years
|
|
|
80,000
|
|
|
|
80,000
|
|
Acquired developed technology - website
|
|
3 years
|
|
|
117,500
|
|
|
|
117,500
|
|
Acquired developed technology – Ipad application
|
|
3 years
|
|
|
117,500
|
|
|
|
117,500
|
|
Accumulated amortization
|
|
|
|
|
(249,947
|
)
|
|
|
(27,866
|
)
|
|
|
|
|
$
|
803,306
|
|
|
$
|
947,259
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Estimated Life
|
|
2017
|
|
|
2016
|
|
Goodwill
|
|
indefinite
|
|
|
481,947
|
|
|
|
481,947
|
|
Amortization expense was $222,081 for the
year ended December 31, 2017 (Successor), and $79,149 for the one month ended December 31, 2016 (Successor) plus the eleven months
ended November 30, 2016 (Predecessor) and is classified in general and administrative expenses in the accompanying consolidated
Statements of Operations.
Future amortization expense related to intangible assets are
approximately as follows:
|
|
|
|
|
|
|
|
|
Acquired
|
|
|
|
|
|
|
|
Trademarks
|
|
|
Website
|
|
|
Intangibles
|
|
|
Total
|
|
2018
|
|
|
$
|
65,186
|
|
|
$
|
37,751
|
|
|
$
|
130,833
|
|
|
$
|
233,770
|
|
2019
|
|
|
|
62,907
|
|
|
|
37,084
|
|
|
|
124,306
|
|
|
|
224,297
|
|
2020
|
|
|
|
37,818
|
|
|
|
11,690
|
|
|
|
52,500
|
|
|
|
102,008
|
|
2021
|
|
|
|
12,606
|
|
|
|
—
|
|
|
|
51,167
|
|
|
|
63,773
|
|
2022
|
|
|
|
—
|
|
|
|
—
|
|
|
|
36,500
|
|
|
|
36,500
|
|
Thereafter
|
|
|
|
—
|
|
|
|
—
|
|
|
|
142,958
|
|
|
|
142,958
|
|
|
|
|
$
|
178,517
|
|
|
$
|
86,525
|
|
|
$
|
538,264
|
|
|
$
|
803,306
|
|
NOTE 8 –
DUE
TO RELATED PARTY
During 2017, the Company received
no advances from our CEO/director and incurred business expenses of $1,234,249 (comprised of operating expenses of
$1,218,085, inventory purchases totaling $5,650, website development costs of $9,573, and purchased equipment of $940) and
had repayments of $941,443. We have a balance owed to the related party of $721,434 and $440,747 at December 31, 2017
and 2016, respectively. During 2017, the Company incurred $180,000 of deferred compensation related to the CEO/director’s
employment agreement and $80,000 of deferred compensation related to the Secretary’s employment agreement. As of
December 31, 2017 and 2016, accrued compensation – related party was $1,036,000 and $776,000, respectively.
CCI had no employment agreement
with its CEO and director during the eleven months ended November 30, 2016 but CCI still incurred compensation on behalf of
the CEO and director. CCI incurred compensation expense of $79,288 in the eleven months ended November 30, 2016
(Predecessor), with no amounts due at November 30, 2016 (Predecessor). During the eleven months ended November 30, 2016
(Predecessor), the CEO and director received employee benefits totaling $43,947. In addition, the CEO/director incurred
business expenses and had repayments for business expenses of $13,130 for the eleven months ended November 30, 2016
(Predecessor).
NOTE 9 –
CONVERTIBLE
NOTEs PAYABLE
The
following represents a summary of the convertible debt terms at December 31, 2017:
|
|
Amount
of
Note
|
|
Debt
Discount
|
|
Maturity
Date
|
|
Conversion
Price
|
|
Number
of
Warrants
|
|
Exercise
Price
|
|
Warrants
Exercisable
thru
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 2017 Note
|
|
$
|
287,502
|
|
$
|
(224,904
|
)
|
|
6/30/2018
|
|
$
|
0.08
|
|
|
10,781,250
|
|
$
|
0.15
|
|
|
11/10/2022
|
|
November 2016 Note
|
|
|
287,502
|
|
|
—
|
|
|
6/30/2018
|
|
$
|
0.08
|
|
|
3,593,776
|
|
$
|
0.15
|
|
|
11/10/2022
|
|
December 2015 Note
|
|
|
862,500
|
|
|
—
|
|
|
6/30/2018
|
|
$
|
0.08
|
|
|
3,593,776
|
|
$
|
0.15
|
|
|
11/10/2022
|
|
Total
|
|
$
|
1,437,504
|
|
$
|
(224,904
|
)
|
|
|
|
|
|
|
|
17,968,802
|
|
|
|
|
|
|
|
November 2017
On November 10, 2017, the Company entered
into a Securities Purchase Agreement (the “November 2017 Purchase Agreement”) with respect to the sale and issuance
to certain institutional investors Alpha Capital Anstalt and Brio Capital Master Fund Ltd. (collectively “November 2017 Purchasers”)
of up to (i) 833,354 shares of the Company’s Common Stock (the “November 2017 Incentive Shares”); (ii) $287,502
aggregate principal amount of Secured Convertible Notes (the “November 2017 Notes”) and (iii) Common Stock Purchase
Warrants to purchase up to an aggregate of 3,593,776, shares of the Company’s Common Stock (the “November 2017 Warrants”).
The November 2017 Incentive Shares, November 2017 Notes and November 2017 Warrants were issued on November 10, 2017 (the “November
2017 Original Issue Date”). November 2017 Purchasers received (i) November 2017 Incentive Shares at the rate of 2.8986 November
2017 Incentive Shares for each $1.00 of November 2017 Note principal issued to such November 2017 Purchaser; (ii) a November 2017
Note with a principal amount of $1.00 for each $0.86956 for each $1.00 paid by each purchaser for such purchaser’s November
2017 Note; and (iii) November 2017 Warrants to purchase up to a number of shares of Common Stock equal to 100% of such purchaser’s
November 2017 Note principal amount divided by $0.08 (“Purchaser Conversion Price”), the conversion price in effect
on the Initial Closing Date, with a per share exercise price equal to $0.15, as amended on November 16, 2017, subject to adjustment.
The aggregate cash subscription amount received by the Company from the purchasers for the issuance of the November 2017 Incentive
Shares, November 2017 Notes and November 2017 Warrants was approximately $250,002 (the “Subscription Amount”) which
was issued at a $37,500 original issue discount from the face value of the Note.
The November 2017 Notes mature on June
30, 2018, as amended on November 16, 2017, and provide for interest to accrue at an interest rate equal to the lesser of 15% per
annum or the maximum rate permitted under applicable law after the occurrence of any event of default as provided in the November
2017 Notes. At any time after the November 2017 Original Issue Date, the holders, at their option, may convert the outstanding
principal balance and accrued interest into shares of our Common Stock. The initial conversion price for the principal and interest
in connection with voluntary conversions by a holder of a Note is $0.08 per share, subject to adjustment as provided therein. Each
November 2017 Note, for example, is subject to adjustment upon certain events such as stock splits and has full ratchet anti-dilution
protections for issuance of securities by us at a price that is lower than the conversion price. Each November 2017 Note also contains
certain negative covenants, including prohibitions on incurrence of indebtedness, liens, charter amendments, dividends, redemption.
None of the holders of the November 2017 Note have the right to convert any portion of their November 2017 Note if it (together
with its affiliates) would beneficially own in excess of 9.99% of the number of shares of Common Stock outstanding immediately
after giving effect to the exercise. The November 2017 Notes include customary events of default, including, among other things,
payment defaults, covenant breaches, certain representations and warranties, certain events of bankruptcy, liquidation and suspension
of the Company’s Common Stock from trading. If such an event of default occurs, the holders of the November 2017 Notes
may be entitled to take various actions, which may include the acceleration of amounts due under the November 2017 Notes and accrual
of interest as described above. The November 2017 Notes are collectively collateralized by substantially all of the Company’s
assets and guarantees of payment of the November 2017 Notes have also been delivered by Joseph Segelman, the Chief Executive Officer
and President of the Company, and Australian Sapphire Corporation (“ASC”), a shareholder of the Company which is wholly-owned
by Joseph Segelman, guaranteed payment of all amounts owed under the November 2017 Notes, subject to the terms of such guaranty
agreements.
The November 2017 Purchase Agreement
is
being entered into in accordance with the halachically accepted exemptions on the paying of interest payments in business transactions
known as “heter iska”.
The Company
is still accounting for the interest
in accordance with GAAP.
Optional Redemption
The November 2017 Notes provide that commencing
six (6) months after the November 2017 Original Issue Date, the Company will have the option of prepaying the outstanding principal
amount of the November 2017 Notes (an “November 2017 Optional Redemption”), in whole or in part, by paying to the holders
a sum of money in cash equal to one hundred percent (100%) of the principal amount to be redeemed, together with accrued but unpaid
interest thereon, if any, and any and all other sums due, accrued or payable to the holder arising under the November 2017 Note
through the November 2017 Redemption Payment Date and 2.8986 shares of the Company’s Common Stock for each $1.00 of November
2017 Note principal amount being redeemed. A Notice of Redemption, if given, may be given on the first Trading Day following twenty
(20) consecutive Trading Days during which all of the “Equity Conditions”, as defined, have been in effect. No derivative
liability has been recorded as of December 31, 2017, as redemption was contingent.
Purchaser Conversion
The November 2017 Purchaser has the right
at any time after the November 2017 Original Issue Date until the outstanding balance of the Note has been paid in full, to convert
all or any part of the outstanding balance into shares (“November 2017 Purchaser Conversion Shares”) of the Company’s
common stock, of the portion of the outstanding balance being converted (the “November 2017 Conversion Amount”) divided
by the November 2017 Purchaser Conversion Price of $0.08, subject to potential future adjustments described below. If the total
outstanding balance of the November 2017 Note were convertible as of December 31, 2017, the November 2017 Note would have been
convertible into 3,593,776 shares of our common stock.
The Company evaluated the note under the
requirements of ASC 480 “Distinguishing Liabilities From Equity” and concluded that the Note does not fall within the
scope of ASC 480. The Company next evaluated the November 2017 Note under the requirements of ASC 815 “Derivatives and Hedging”.
Due to the existence of the anti-dilution provision which reduces the November 2017 Purchaser Conversion Price in the event of
subsequent dilutive issuances by the Company below the November 2017 Purchaser Conversion Price as described above, the November
2017 Purchaser Conversion feature does not meet the definition of “indexed to” our stock, and the scope exception to
ASC 815’s derivative accounting provisions does not apply. The Company also evaluated the embedded derivative criteria in
ASC 815, and concluded that the Purchaser Conversion feature meets all of the embedded derivative criteria in ASC 815, and therefore,
the November 2017 Purchaser Conversion feature meets the definition of an embedded derivative that should be separated from the
note and accounted for as a derivative liability.
The embedded derivative was recorded as
a derivative liability on the consolidated Balance Sheet at its fair value of $165,000 at the date of issuance. At each subsequent
reporting date, the fair value of the embedded derivative liability will be remeasured and changes in the fair value will be recorded
in the consolidated Statements of Operations. At December 31, 2017, the embedded derivative was re-measured at fair value that
was determined to be $63,000. During the year ended December 31, 2017, the Company recorded a gain of $97,000 on embedded derivative
re-valuation.
On November 16, 2017, the
November 2017 Notes were modified in accordance with ASC 470-50-40 and ASC 815 and the Company re-measured the embedded
derivative at fair value, which was determined to be $155,000 and recorded a modification of derivative liability charge of
$5,000.
The fair value of the embedded derivative
liability is measured in accordance with ASC 820 “Fair Value Measurement”, using “Monte Carlo Method” modeling
incorporating the following inputs:
|
|
December 31, 2017
|
|
|
November 10, 2017
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
55.0
|
%
|
Risk-free interest rate
|
|
|
1.53
|
%
|
|
|
1.54
|
%
|
Expected term of options (years)
|
|
|
0.5
|
|
|
|
1.5
|
|
Stock price
|
|
$
|
0.12
|
|
|
$
|
0.20
|
|
Conversion price
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
November 2017 Purchaser Warrants
The November 2017 Purchaser Warrants allow
the November 2017 Purchaser to purchase up to a number of shares of common stock equal to 100% of such purchaser’s Note principal
amount divided by $0.08, with a per share exercise price equal to $0.15, subject to adjustment.
The term of the Purchaser Warrants is at
any time on or after the six (6) month anniversary of the November 2017 Original Issue Date and on or prior to the five (5) year
anniversary of the November 2017 Initial Trading Date of our common stock on a Trading Market.
The exercise price of the November 2017
Purchaser Warrants is $0.15 per share of our common stock, as may be adjusted from time to time pursuant to the antidilution provisions
of the November 2017 Purchaser Warrants.
The November 2017 Purchaser Warrants are
exercisable by the November 2017 Purchaser in whole or in part, as either a cash exercise or as a “cashless” exercise.
The
Company evaluated the November 2017 Warrants under ASC 480 “Distinguishing Liabilities From Equity” and ASC 815
“Derivatives and Hedging”. Due to the existence of the antidilution provision, which reduces the November 2017
Exercise Price and November 2017 Conversion Price in the event of subsequent November 2017 Dilutive Issuances, the November
2017 Purchaser Warrants are not indexed to our common stock, and the Company has determined that the November 2017 Purchaser
Warrants meet the definition of a derivative under ASC 815. Accordingly, the November 2017 Purchaser Warrants were recorded
as derivative liabilities in the consolidated Balance Sheet at their fair value of $290,612 at the date of issuance. At each
subsequent reporting date, the fair value of the Purchaser Warrants will be remeasured and changes in the fair value will be
reported in the consolidated Statements of Operations. On November 16, 2017, the November 2017 Warrants were modified in
accordance with ASC 470-50-40 and ASC 815 which eliminated the antidilution provision of the exercise price, fixed the
exercise price at $0.15 per share, and fixed the number of shares the warrants can be exercised into; thereby eliminating the
requirement for derivative accounting and liability classification. As a result, immediately prior to the modification, the Company
recognized a loss of $181,896 to change in fair value of warrant liabilities under Other (income) expense in the accompanying
consolidated Statements of Operations comprised of:
|
|
Change
in Fair Value of
Warrant Liability
|
|
|
|
November
2017 Note
|
|
$
|
(19,938
|
)
|
November 2016 Note
|
|
|
74,514
|
|
December
2015 Note
|
|
|
127,320
|
|
Total
|
|
$
|
181,896
|
|
Subsequent
to the modification, the Company recognized a loss of $238,935 to modification of warrant and derivatives in the
accompanying consolidated Statements of Operations comprised of:
|
|
|
Modification
of
|
|
|
|
|
|
|
|
Warrant
Liability
|
|
|
Derivative
Liability
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November
2017 Note
|
|
|
$
|
13,819
|
|
|
$
|
(5,000
|
)
|
|
$
|
8,819
|
|
November
2016 Note
|
|
|
|
28,993
|
|
|
|
15,301
|
|
|
|
44,294
|
|
December
2015 Note
|
|
|
|
182,173
|
|
|
|
3,649
|
|
|
|
185,822
|
|
Total
|
|
|
$
|
224,985
|
|
|
$
|
13,950
|
|
|
$
|
238,935
|
|
In
addition, the warrant re-valuation was reclassified to additional paid-in-capital resulting in a warrant liability of $0 as of
November 16, 2017. The reclassification to additional paid-in-capital is comprised of:
|
|
|
Reclassification
of Warrant liability to Equity
|
|
|
|
|
|
|
|
November
2017 Note
|
|
|
$
|
284,493
|
|
November
2016 Note
|
|
|
|
284,493
|
|
December
2015 Note
|
|
|
|
853,473
|
|
Total
|
|
|
$
|
1,422,459
|
|
The fair value of the November 2017 Purchaser
Warrants is measured in accordance with ASC 820 “Fair Value Measurement”, using “Monte Carlo simulation”
modeling, incorporating the following inputs:
|
|
December 31, 2017
|
|
|
November 10, 2017
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
55.0
|
%
|
Risk-free interest rate
|
|
|
2.07
|
%
|
|
|
2.06
|
%
|
Expected term of options (years)
|
|
|
0.5
|
|
|
|
1.5
|
|
Stock price
|
|
$
|
0.12
|
|
|
$
|
0.20
|
|
Exercise price
|
|
$
|
0.15
|
|
|
$
|
0.08
|
|
November 2017 Purchaser Common Stock
The November 2017 Purchasers were issued
a total of 833,354 shares of the Company’s common stock, valued at $163,171 (based on the stock price on the date of issuance).
Debt Discount
The Company issued the November 2017 Notes
with warrants and conversion features that require liability treatment under ASC 815. As such, the proceeds of the notes were allocated,
based on fair values, as follows: original issue discount of $37,497, $163,171 to the common shares issued; $290,612 to the warrants
granted; and $165,000 to the embedded derivative, resulting in a debt discount to such notes of $287,502 with the remaining amount
of approximately $369,000 expensed at inception of the note. The debt discount is accreted over the term of the convertible notes
to interest expense in the accompanying consolidated Statements of Operations.
The Company recorded debt discount accretion
of $62,598 to interest expense in the consolidated Statements of Operations during the year ended December 31, 2017 and has an
unamortized debt discount of $224,904 as of December 31, 2017.
November 2016
As of December 31, 2016, the Company previously
entered into a Securities Purchase Agreement (the “November 2016 Purchase Agreement”) with respect to the sale and
issuance to certain institutional investors Alpha Capital Anstalt and Brio Capital Master Fund Ltd. (collectively “November
2016 Purchasers”) of up to (i) 833,354 shares of the Company’s Common Stock (the “November 2016 Incentive Shares”);
(ii) $287,502 aggregate principal amount of Secured Convertible Notes (the “November 2016 Notes”) and (iii) Common
Stock Purchase Warrants to purchase up to an aggregate of 3,593,775, as amended, shares of the Company’s Common Stock (the
“November 2016 Warrants”). The November 2016 Incentive Shares, November 2016 Notes and November 2016 Warrants were
issued on November 10, 2016 (the “November 2016 Original Issue Date”). November 2016 Purchasers received (i) November
2016 Incentive Shares at the rate of 2.8986 November 2016 Incentive Shares for each $1.00 of November 2016 Note principal issued
to such November 2016 Purchaser; (ii) a November 2016 Note with a principal amount of $1.00 for each $0.86956 for each $1.00 paid
by each purchaser for such purchaser’s November 2016 Note; and (iii) November 2016 Warrants to purchase up to a number of
shares of Common Stock equal to 100% of such purchaser’s November 2016 Note principal amount divided by $0.12 (“Purchaser
Conversion Price”), the conversion price in effect on the Initial Closing Date, as amended on May 30, 2017 to $0.08, with
a per share exercise price equal to $0.30, subject to adjustment. The aggregate cash subscription amount received by the Company
from the purchasers for the issuance of the November 2016 Incentive Shares, November 2016 Notes and November 2016 Warrants was
approximately $244,945 (the “Subscription Amount”) which was issued at a $42,557 original issue discount from the face
value of the Note.
The November 2016 Notes mature on June
30, 2018, as amended on November 16, 2017, and provide for interest to accrue at an interest rate equal to the lesser of 15% per
annum or the maximum rate permitted under applicable law after the occurrence of any event of default as provided in the November
2016 Notes. At any time after the November 2016 Original Issue Date, the holders, at their option, may convert the outstanding
principal balance and accrued interest into shares of our Common Stock. The initial conversion price for the principal and interest
in connection with voluntary conversions by a holder of a Note was $0.12 per share, as amended on May 30, 2017 to $0.08, subject
to adjustment as provided therein. Each November 2016 Note, for example, is subject to adjustment upon certain events such as stock
splits and has full ratchet anti-dilution protections for issuance of securities by us at a price that is lower than the conversion
price. Each November 2016 Note also contains certain negative covenants, including prohibitions on incurrence of indebtedness,
liens, charter amendments, dividends, redemption. None of the holders of the November 2016 Note have the right to convert any portion
of their November 2016 Note if it (together with its affiliates) would beneficially own in excess of 9.99% of the number of shares
of Common Stock outstanding immediately after giving effect to the exercise. The November 2016 Notes include customary events of
default, including, among other things, payment defaults, covenant breaches, certain representations and warranties, certain events
of bankruptcy, liquidation and suspension of the Company’s Common Stock from trading. If such an event of default occurs,
the holders of the November 2016 Notes may be entitled to take various actions, which may include the acceleration of amounts due
under the November 2016 Notes and accrual of interest as described above. The November 2016 Notes are collectively collateralized
by substantially all of the Company’s assets and guarantees of payment of the November 2016 Notes have also been delivered
by Joseph Segelman, the Chief Executive Officer and President of the Company, and Australian Sapphire Corporation (“ASC”),
a shareholder of the Company which is wholly-owned by Joseph Segelman, guaranteed payment of all amounts owed under the November
2016 Notes, subject to the terms of such guaranty agreements.
The November 2016 Purchase Agreement
is
being entered into in accordance with the halachically accepted exemptions on the paying of interest payments in business transactions
known as “heter iska”.
The Company
is still accounting for the interest
in accordance with GAAP.
As a result of the failure to timely file
our 2016 Form 10-K for the year ended December 31, 2016 and our Form 10-Q for the three month period ended March 31, 2017, the
November 2016 and December 2015 Notes were in default. On May 30, 2017, the Company entered into a Second Consent, Waiver and Modification
Agreement (the “Agreement”) with certain purchasers of convertible promissory notes (the “Notes”) pursuant
to securities purchase agreements dated December 23, 2015 and November 10, 2016, which were amended pursuant to a Consent, Waiver
and Modification Agreement dated October 13, 2016. The waivers contained in the Agreement were related to a waiver of the right
to participate in additional offerings by the Company, allowing shares of the Company’s common stock to be issued pursuant
to a private offering at a price of not less than $0.08 per share as well as warrants exercisable for a period of five years at
$0.15 per share, as amended on November 16, 2017, adjusting the conversion price of the Notes issued to the purchasers to $0.08
per share, extending the maturity date of the December 23, 2015 convertible promissory notes to December 31, 2018 and waiving default
provisions listed in the Notes related to the Company’s failure to timely file its Form 10-K for the year ended December
31, 2016 and the Form 10-Q for the three month period ended March 31, 2017. Based on ASC 470-50-40,
Extinguishments of Debt
,
the Company recognized $691,371 as an extinguishment of debt under Other (income) expense in the accompanying consolidated Statements
of Operations for the year ended December 31, 2017 (Successor). The extinguishment of debt is comprised of changes in the fair
value of warrant and derivative liabilities due to the amendment of the notes that were measured immediately prior to and subsequent
to the amendment that resulted in extinguishment loss of $176,022 for the December 2015 Purchaser Warrants, $75,648 for the November
2016 Purchaser Warrants, $183,250 for the December 2015 Purchaser Conversion Shares, and $41,842 for the November
2016 Purchaser
Conversion Shares, as well as $178,409 for the unamortized debt discount associated with the November 2016 Notes and $36,200 for
the unamortized debt discount associated with the December 2015 Notes.
Optional Redemption
The November 2016 Notes provide that commencing
six (6) months after the November 2016 Original Issue Date, the Company will have the option of prepaying the outstanding principal
amount of the November 2016 Notes (an “November 2016 Optional Redemption”), in whole or in part, by paying to the holders
a sum of money in cash equal to one hundred percent (100%) of the principal amount to be redeemed, together with accrued but unpaid
interest thereon, if any, and any and all other sums due, accrued or payable to the holder arising under the November 2016 Note
through the November 2016 Redemption Payment Date and 2.8986 shares of the Company’s Common Stock for each $1.00 of November
2016 Note principal amount being redeemed. A Notice of Redemption, if given, may be given on the first Trading Day following twenty
(20) consecutive Trading Days during which all of the “Equity Conditions”, as defined, have been in effect.
The Company evaluated the Optional Redemption
in ASC 815, and concluded that the Optional Redemption meets the criteria in ASC 815, and therefore, is accounted for as a liability.
As of December 31, 2017, the Optional Redemption
was recorded as a derivative liability on the consolidated Balance Sheet using “Monte Carlo Method” modeling and at
each subsequent reporting date, the fair value of the Optional Redemption liability will be re-measured and changes in the fair
value will be recorded in the consolidated Statements of Operations. The Optional Redemption liability fair value was originally
valued at $35,015 and was re-measured at fair value to be $38,960 at December 31, 2017. During the year ended December 31, 2017, the Company recorded a loss of $34,643 on Optional Redemption valuation and no derivative
liability has been recorded at December 31, 2016, as redemption was contingent.
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Expected
dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price
volatility
|
|
|
47.5
|
%
|
|
|
55.0
|
%
|
Risk-free interest
rate
|
|
|
1.53
|
%
|
|
|
1.47
|
%
|
Expected term of options
(years)
|
|
|
0.5
|
|
|
|
1.5-5
|
|
Stock price
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
Conversion price
|
|
$
|
0.08
|
|
|
$
|
0.12
|
|
Purchaser Conversion
The November 2016 Purchaser has the right
at any time after the November 2016 Original Issue Date until the outstanding balance of the Note has been paid in full, to convert
all or any part of the outstanding balance into shares (“November 2016 Purchaser Conversion Shares”) of the Company’s
common stock, of the portion of the outstanding balance being converted (the “November 2016 Conversion Amount”) divided
by the November 2016 Purchaser Conversion Price of $0.08, as amended on May 30, 2017, subject to potential future adjustments described
below. If the total outstanding balance of the November 2016 Note were convertible as of December 31, 2017, the November 2016 Note
would have been convertible into 3,593,775 shares of our common stock.
The Company evaluated the note under the
requirements of ASC 480 “Distinguishing Liabilities From Equity” and concluded that the Note does not fall within the
scope of ASC 480. The Company next evaluated the November 2016 Note under the requirements of ASC 815 “Derivatives and Hedging”.
Due to the existence of the anti-dilution provision which reduces the November 2016 Purchaser Conversion Price in the event of
subsequent dilutive issuances by the Company below the November 2016 Purchaser Conversion Price as described above, the November
2016 Purchaser Conversion feature does not meet the definition of “indexed to” our stock, and the scope exception to
ASC 815’s derivative accounting provisions does not apply. The Company also evaluated the embedded derivative criteria in
ASC 815, and concluded that the Purchaser Conversion feature meets all of the embedded derivative criteria in ASC 815, and therefore,
the November 2016 Purchaser Conversion feature meets the definition of an embedded derivative that should be separated from the
note and accounted for as a derivative liability.
The embedded derivative was recorded as
a derivative liability on the consolidated Balance Sheet at its fair value of $32,016 at the date of issuance. At each subsequent
reporting date, the fair value of the embedded derivative liability will be remeasured and changes in the fair value will be recorded
in the consolidated Statements of Operations. At December 31, 2017, the embedded derivative was re-measured at fair value that
was determined to be $63,000. During the year ended December 31, 2017 and the one month ended December 31, 2016, the Company recorded
a gain of $14,088 and a gain of $8,021, respectively, on embedded derivative re-valuation, respectively.
The fair value of the embedded derivative
liability is measured in accordance with ASC 820 “Fair Value Measurement”, using “Monte Carlo Method” modeling
incorporating the following inputs:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
55.0
|
%
|
Risk-free interest rate
|
|
|
1.53
|
%
|
|
|
1.47
|
%
|
Expected term of options (years)
|
|
|
0.5
|
|
|
|
1.5-5
|
|
Stock price
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
Conversion price
|
|
$
|
0.08
|
|
|
$
|
0.12
|
|
November 2016 Purchaser Warrants
The November 2016 Purchaser Warrants allow
the November 2016 Purchaser to purchase up to a number of shares of common stock equal to 100% of such purchaser’s Note principal
amount divided by $0.08, as amended on May 30, 2017, with a per share exercise price equal to $0.15, as amended on November 16,
2017, subject to adjustment.
The term of the Purchaser Warrants is at
any time on or after the six (6) month anniversary of the November 2016 Original Issue Date and on or prior to the five (5) year
anniversary of the November 2016 Initial Trading Date of our common stock on a Trading Market.
The exercise price of the November 2016
Purchaser Warrants is $0.15, as amended on November 16, 2017, per share of our common stock, as may be adjusted from time to time
pursuant to the antidilution provisions of the November 2016 Purchaser Warrants.
The November 2016 Purchaser Warrants are
exercisable by the November 2016 Purchaser in whole or in part, as either a cash exercise or as a “cashless” exercise.
The
Company evaluated the November 2016 Warrants under ASC 480 “Distinguishing Liabilities From Equity” and ASC 815
“Derivatives and Hedging”. Due to the existence of the antidilution provision, which reduces the November 2016
Exercise Price and November 2016 Conversion Price in the event of subsequent November 2016 Dilutive Issuances, the November
2016 Purchaser Warrants are not indexed to our common stock, and the Company has determined that the November 2016 Purchaser
Warrants meet the definition of a derivative under ASC 815. Accordingly, the November 2016 Purchaser Warrants were recorded
as derivative liabilities in the consolidated Balance Sheet at their fair value of $108,597 at the date of issuance. At each
subsequent reporting date, the fair value of the Purchaser Warrants will be remeasured and changes in the fair value will be
reported in the consolidated Statements of Operations. On November 16, 2017, the November 2016 Warrants were modified in
accordance with ASC 470-50-40 and ASC 815 which eliminated the antidilution provision of the exercise price, fixed the
exercise price at $0.15 per share, and fixed the number of shares the warrants can be exercised into; thereby eliminating the
requirement for derivative accounting and liability classification. As a result,
immediately prior to the modification, the Company recognized a loss of $181,896 to change in fair value of warrant
liabilities under Other (income) expense in the accompanying consolidated Statements of Operations comprised of:
|
|
Change
in Fair Value of
Warrant Liability
|
|
|
|
November
2017 Note
|
|
$
|
(19,938
|
)
|
November 2016 Note
|
|
|
74,514
|
|
December
2015 Note
|
|
|
127,320
|
|
Total
|
|
$
|
181,896
|
|
Subsequent
to the modification, the Company recognized a loss of $238,935 to modification of warrant and derivatives in the
accompanying consolidated Statements of Operations comprised of:
|
|
|
Modification
of
|
|
|
|
|
|
|
|
Warrant
Liability
|
|
|
Derivative
Liability
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November
2017 Note
|
|
|
$
|
13,819
|
|
|
$
|
(5,000
|
)
|
|
$
|
8,819
|
|
November
2016 Note
|
|
|
|
28,993
|
|
|
|
15,301
|
|
|
|
44,294
|
|
December
2015 Note
|
|
|
|
182,173
|
|
|
|
3,649
|
|
|
|
185,822
|
|
Total
|
|
|
$
|
224,985
|
|
|
$
|
13,950
|
|
|
$
|
238,935
|
|
In
addition, the warrant re-valuation was reclassified to additional paid-in-capital resulting in a warrant liability of $0 as of
November 16, 2017. The reclassification to additional paid-in-capital is comprised of:
|
|
|
Reclassification
of Warrant liability to Equity
|
|
|
|
|
|
|
|
November
2017 Note
|
|
|
$
|
284,493
|
|
November
2016 Note
|
|
|
|
284,493
|
|
December
2015 Note
|
|
|
|
853,473
|
|
Total
|
|
|
$
|
1,422,459
|
|
The fair value of the November 2016 Purchaser
Warrants is measured in accordance with ASC 820 “Fair Value Measurement”, using “Monte Carlo simulation”
modeling, incorporating the following inputs:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
55.0
|
%
|
Risk-free interest rate
|
|
|
2.07
|
%
|
|
|
1.93
|
%
|
Expected term of options (years)
|
|
|
0.5
|
|
|
|
1.5-5
|
|
Stock price
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
Exercise price
|
|
$
|
0.15
|
|
|
$
|
0.30
|
|
November 2016 Purchaser Common Stock
The November 2016 Purchasers were issued
a total of 833,354 shares of the Company’s common stock, valued at $100,002 (based on the stock price on the date of issuance).
As of December 31, 2016, the total proceeds
of $244,945 previously received by the Company for the November 2016 Note, November 2016 Purchaser Common Stock, and November 2016
Purchaser Warrants, was allocated first to the November 2016 Purchaser Common Stock, November 2016 Purchaser Warrants, and embedded
derivative liabilities at their initial fair values determined at the issuance date. Since the difference between the full fair
value of November 2016 Purchaser Common Stock, November 2016 Purchaser Warrants, and embedded derivative liabilities of $240,615
was less than the proceeds of $244,945, no additional amounts were recorded.
Debt Discount
The Company issued the November 2016 Notes
with warrants and conversion features that require liability treatment under ASC 815. As such, the proceeds of the notes were allocated,
based on fair values, as follows: $100,002 to the common shares issued; $108,567 to the warrants granted; $42,557 to the original
issue discount; and $32,016 to the embedded derivative, resulting in a debt discount to such notes of $283,172. The debt discount
is accreted over the term of the convertible notes to interest expense in the accompanying consolidated Statements of Operations.
The Company recorded debt discount accretion
of $78,313 and $16,078 to interest expense in the consolidated Statements of Operations during the year ended December 31, 2017
and the one month ended December 31, 2016, respectively, and has an unamortized debt discount of $0 as of December 31, 2017.
December 2015
As of December 31, 2016, the Company previously
entered into a Securities Purchase Agreement (the “Purchase Agreement”) with respect to the sale and issuance to certain
institutional investors Alpha Capital Anstalt and Brio Capital Master Fund Ltd. (collectively “Purchasers”) of up to
(i) 2,500,000 shares of the Company’s Common Stock (the “December 2015 Incentive Shares”); (ii) $862,500 aggregate
principal amount of Secured Convertible Notes (the “December 2015 Notes”) and (iii) December 2015 Common Stock Purchase
Warrants to purchase up to an aggregate of 10,781,250, as amended, shares of the Company’s Common Stock (the “December
2015 Warrants”). The December 2015 Incentive Shares, December 2015 Notes and December 2015 Warrants were issued on December
23, 2015 (the “Original Issue Date”). December 2015 Purchasers received (i) December 2015 Incentive Shares at the rate
of 2.8986 December 2015 Incentive Shares for each $1.00 of December 2015 Note principal issued to such December 2015 Purchaser;
(ii) a December 2015 Note with a principal amount of $1.00 for each $0.86956 for each $1.00 paid by each purchaser for such purchaser’s
December 2015 Note; and (iii) December 2015 Warrants to purchase up to a number of shares of Common Stock equal to 100% of such
purchaser’s December 2015 Note principal amount divided by $0.12 (“December 2015 Purchaser Conversion Price”),
the conversion price in effect on the Initial Closing Date, as amended on May 30, 2017 to $0.08, with a per share exercise price
equal to $0.15, as amended on November 16, 2017, subject to adjustment. The aggregate cash subscription amount received by the
Company from the purchasers for the issuance of the December 2015 Incentive Shares, December 2015 Notes and December 2015 Warrants
was approximately $724,500 (the “December 2015 Subscription Amount”) which was issued at a $138,000 original issue
discount from the face value of the December 2015 Note.
The December 2015 Notes mature on December
31, 2018, as amended on November 16, 2017, and provide for interest to accrue at an interest rate equal to the lesser of 15% per
annum or the maximum rate permitted under applicable law after the occurrence of any event of default as provided in the December
2015 Notes. At any time after the December 2015 Original Issue Date, the holders, at their option, may convert the outstanding
principal balance and accrued interest into shares of the Company’s Common Stock. The initial conversion price for the principal
and interest in connection with voluntary conversions by a holder of a December 2015 Note was $0.12 per share, as amended on May
30, 2017 to $0.08, subject to adjustment as provided therein. Each December 2015 Note, for example, is subject to adjustment upon
certain events such as stock splits and has full ratchet anti-dilution protections for issuance of securities by us at a price
that is lower than the conversion price. Each December 2015 Note also contains certain negative covenants, including prohibitions
on incurrence of indebtedness, liens, charter amendments, dividends, redemption. None of the holders of the December 2015 Note
have the right to convert any portion of their December 2015 Note if it (together with its affiliates) would beneficially own in
excess of 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to the exercise. The December
2015 Notes include customary events of default, including, among other things, payment defaults, covenant breaches, certain representations
and warranties, certain events of bankruptcy, liquidation and suspension of the Company’s Common Stock from trading. If
such an event of default occurs, the holders of the December 2015 Notes may be entitled to take various actions, which may include
the acceleration of amounts due under the December 2015 Notes and accrual of interest as described above. The December 2015 Notes
are collectively collateralized by substantially all of our assets and guarantees of payment of the December 2015 Notes have also
been delivered by Joseph Segelman, the Chief Executive Officer and President of the Company, and Australian Sapphire Corporation
(“ASC”), a shareholder of the Company which is wholly-owned by Joseph Segelman, guaranteed payment of all amounts owed
under the December 2015 Notes, subject to the terms of such guaranty agreements.
In addition, until one year after the initial
trading date of a Registration Statement which registers all then outstanding or issuable underlying shares, the December 2015
Purchasers shall have the right to participate in an amount of subsequent financing equal to 100% of the December 2015 Purchase
Agreement. As of December 31, 2016, this requirement was waived pursuant to the terms of the Consent, Waiver and Modification Agreement
with certain Purchasers of Purchase Agreement dated December 23, 2015.
The Purchase Agreement
is
being entered into in accordance with the halachically accepted exemptions on the paying of interest payments in business transactions
known as “heter iska”.
The Company
is still accounting for the interest
in accordance with GAAP.
As a result of the failure to timely
file our 2016 Form 10-K for the year ended December 31, 2016 and our Form 10-Q for the three month period ended March 31,
2017, the November 2016 and December 2015 Notes were in default. On May 30, 2017, the Company entered into a Second Consent,
Waiver and Modification Agreement with certain purchasers of convertible promissory notes (the “Notes”) pursuant
to securities purchase agreements dated December 23, 2015 and November 10, 2016, which were amended pursuant to a Consent,
Waiver and Modification Agreement dated October 13, 2016. The waivers contained in the Agreement were related to a waiver of
the right to participate in additional offerings by the Company, allowing shares of the Company’s common stock to be
issued pursuant to a private offering at a price of not less than $0.08 per share as well as warrants exercisable for a
period of five years at $0.15 per share, as amended on November 16, 2017, adjusting the conversion price of the Notes issued
to the purchasers to $0.08 per share, extending the maturity date of the December 23, 2015 convertible promissory notes to
December 31, 2018, as amended on November 16, 2017, and waiving default provisions listed in the Notes related to the
Company’s failure to timely file its Form 10-K for the year ended December 31, 2016 and the Form 10-Q for the three
month period ended March 31, 2017. Based on ASC 470-50-40,
Extinguishments of Debt
, the Company recognized $691,371 as
an extinguishment of debt under Other (income) expense in the accompanying consolidated Statements of Operations for the year
ended December 31, 2017 (Successor). The extinguishment of debt is comprised of changes in the fair value of warrant and
derivative liabilities due to the amendment of the notes that were measured immediately prior to and subsequent to the
amendment that resulted in extinguishment loss of $176,022 for the December 2015 Purchaser Warrants, $75,648 for the
November 2016 Purchaser Warrants, $183,250 for the December 2015 Purchaser Conversion Shares, and $41,842 for the November 2016 Purchaser Conversion Shares, as well as $178,409 for the unamortized debt discount associated with the November 2016
Notes and $36,200 for the unamortized debt discount associated with the December 2015 Notes.
December 2015 Optional Redemption
The December 2015 Notes provide that commencing
six (6) months after the December 2015 Original Issue Date, the Company will have the option of prepaying the outstanding principal
amount of the December 2015 Notes (an “December 2015 Optional Redemption”), in whole or in part, by paying to the holders
a sum of money in cash equal to one hundred percent (100%) of the principal amount to be redeemed, together with accrued but unpaid
interest thereon, if any, and any and all other sums due, accrued or payable to the holder arising under the December 2015 Note
through the December 2015 Redemption Payment Date and 2.8986 shares of the Company’s Common Stock for each $1.00 of December
2015 Note principal amount being redeemed. A Notice of Redemption, if given, may be given on the first Trading Day following twenty
(20) consecutive Trading Days during which all of the “Equity Conditions”, as defined, have been in effect.
The Company evaluated the Optional Redemption
in ASC 815, and concluded that the Optional Redemption meets the criteria in ASC 815, and therefore, is accounted for as a liability.
As of December 31, 2016, the Optional Redemption
was recorded as a derivative liability on the consolidated Balance Sheet using “Monte Carlo Method” modeling and at
each subsequent reporting date, the fair value of the Optional Redemption liability will be re-measured and changes in the fair
value will be recorded in the consolidated Statements of Operations. The Optional Redemption liability fair value was originally
valued at $199,150 and was re-measured at fair value to be $116,880 at December 31, 2017. During the year ended December 31, 2017
and the one month ended December 31, 2016, the Company recorded a loss of $19,909 and a gain of $33,100 on Optional Redemption
valuation, respectively, in the change in fair value of derivative liabilities in the accompanying consolidated Statements of Operations.
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
50.0
|
%
|
Risk-free interest rate
|
|
|
1.53
|
%
|
|
|
0.62
|
%
|
Expected term of options (years)
|
|
|
0.5
|
|
|
|
0.5
|
|
Stock price
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
Conversion price
|
|
$
|
0.08
|
|
|
$
|
0.12
|
|
December 2015 Purchaser Conversion
The December 2015 Purchaser has the right
at any time after the December 2015 Original Issue Date until the outstanding balance of the December 2015 Note has been paid in
full, to convert all or any part of the outstanding balance into shares (“December 2015 Purchaser Conversion Shares”)
of the Company’s common stock, of the portion of the outstanding balance being converted (the “December 2015 Conversion
Amount”) divided by the December 2015 Purchaser Conversion Price of $0.08, as amended on May 30, 2017, subject to potential
future adjustments described below. If the total outstanding balance of the Note were convertible as of December 31, 2017, the
December 2015 Note would have been convertible into 10,781,250 shares of our common stock.
The Company evaluated the note under the
requirements of ASC 480 “Distinguishing Liabilities From Equity” and concluded that the December 2015 Note does not
fall within the scope of ASC 480. The Company next evaluated the December 2015 Note under the requirements of ASC 815 “Derivatives
and Hedging”. Due to the existence of the anti-dilution provision which reduces the December 2015 Purchaser Conversion Price
in the event of subsequent dilutive issuances by the Company below the December 2015 Purchaser Conversion Price as described above,
the December 2015 Purchaser Conversion feature does not meet the definition of “indexed to” the Company’s stock,
and the scope exception to ASC 815’s derivative accounting provisions does not apply. The Company also evaluated the embedded
derivative criteria in ASC 815, and concluded that the December 2015 Purchaser Conversion feature meets all of the embedded derivative
criteria in ASC 815, and therefore, the December 2015 Purchaser Conversion feature meets the definition of an embedded derivative
that should be separated from the note and accounted for as a derivative liability.
The embedded derivative was recorded as
a derivative liability on the consolidated Balance Sheet using “Monte Carlo Method” modeling and at each subsequent
reporting date, the fair value of the embedded derivative liability will be remeasured and changes in the fair value will be recorded
in the consolidated Statements of Operations. The original fair value of the derivative was $88,983 and at December 31, 2017, the
embedded derivative was re-measured at fair value that was determined to be $188,999. During the year ended December 31, 2017 and
the one month ended December 31, 2016, the Company recorded a gain of $30,320 and a gain of $27,210 on embedded derivative re-valuation,
respectively.
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
50.0
|
%
|
Risk-free interest rate
|
|
|
1.53
|
%
|
|
|
0.62
|
%
|
Expected term of options (years)
|
|
|
0.5
|
|
|
|
0.5
|
|
Stock price
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
Conversion price
|
|
$
|
0.08
|
|
|
$
|
0.12
|
|
December 2015 Purchaser Warrants
The December 2015 Purchaser Warrants allow
the December 2015 Purchaser to purchase up to a number of shares of Common Stock equal to 100% of such purchaser’s Note principal
amount divided by $0.08, as amended on May 30, 2017, with a per share exercise price equal to $0.15, as amended on November 16,
2017, subject to adjustment.
The term of the December 2015 Purchaser
Warrants is at any time on or after the six (6) month anniversary of the December 2015 Original Issue Date and on or prior to the
five (5) year anniversary of the December 2015 Initial Trading Date of the Company’s common stock on a Trading Market.
The exercise price of the December 2015
Purchaser Warrants is $0.15, as amended on November 16, 2017, per share of the Company’s common stock, as may be adjusted
from time to time pursuant to the antidilution provisions of the December 2015 Purchaser Warrants.
The December 2015 Purchaser Warrants are
exercisable by the Purchaser in whole or in part, as either a cash exercise or as a “cashless” exercise.
The Company evaluated the Warrants under
ASC 480 “Distinguishing Liabilities From Equity” and ASC 815 “Derivatives and Hedging”. Due to the existence
of the antidilution provision, which reduces the Exercise Price and Conversion Price in the event of subsequent Dilutive Issuances,
the December 2015 Purchaser Warrants are not indexed to the Company’s common stock, and the Company determined that the December
2015 Purchaser Warrants meet the definition of a derivative under ASC 815.
At
each subsequent reporting date, the fair value of the Purchaser Warrants will be remeasured and changes in the fair value
will be reported in the consolidated Statements of Operations. The original fair value of the warrants were $439,107. On
November 16, 2017, the December 2015 Purchaser Warrants were modified in accordance with ASC 470-50-40 and ASC 815 which
eliminated the antidilution provision of the exercise price, fixed the exercise price at $0.15 per share, and fixed the
number of shares the warrants can be exercised into; thereby eliminating the
requirement for derivative accounting and liability classification. As a result, immediately prior to the modification, the Company
recognized a loss of $181,896 to change in fair value of warrant liabilities under Other (income) expense in the accompanying
consolidated Statements of Operations comprised of:
|
|
Change
in Fair Value of
Warrant Liability
|
|
|
|
November
2017 Note
|
|
$
|
(19,938
|
)
|
November 2016 Note
|
|
|
74,514
|
|
December
2015 Note
|
|
|
127,320
|
|
Total
|
|
$
|
181,896
|
|
Subsequent
to the modification, the Company recognized a loss of $238,935 to modification of warrant and derivatives in the
accompanying consolidated Statements of Operations comprised of:
|
|
|
Modification
of
|
|
|
|
|
|
|
|
Warrant
Liability
|
|
|
Derivative
Liability
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November
2017 Note
|
|
|
$
|
13,819
|
|
|
$
|
(5,000
|
)
|
|
$
|
8,819
|
|
November
2016 Note
|
|
|
|
28,993
|
|
|
|
15,301
|
|
|
|
44,294
|
|
December
2015 Note
|
|
|
|
182,173
|
|
|
|
3,649
|
|
|
|
185,822
|
|
Total
|
|
|
$
|
224,985
|
|
|
$
|
13,950
|
|
|
$
|
238,935
|
|
In
addition, the warrant re-valuation was reclassified to additional paid-in-capital resulting in a warrant liability of $0 as of
November 16, 2017. The reclassification to additional paid-in-capital is comprised of:
|
|
|
Reclassification
of Warrant liability to Equity
|
|
|
|
|
|
|
|
November
2017 Note
|
|
|
$
|
284,493
|
|
November
2016 Note
|
|
|
|
284,493
|
|
December
2015 Note
|
|
|
|
853,473
|
|
Total
|
|
|
$
|
1,422,459
|
|
The fair value of the December 2015 Purchaser
Warrants is measured in accordance with ASC 820 “Fair Value Measurement”, using “Monte Carlo simulation”
modeling, incorporating the following inputs:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
50.0
|
%
|
Risk-free interest rate
|
|
|
2.20
|
%
|
|
|
1.70
|
%
|
Expected term of options (years)
|
|
|
0.5
|
|
|
|
0.5
|
|
Stock price
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
Exercise price
|
|
$
|
0.15
|
|
|
$
|
0.30
|
|
December 2015 Purchaser Common Stock
The December 2015 Purchasers were issued
a total of 2,500,000 shares of the Company’s common stock, valued at $625,000 (based on the estimated fair value of the stock
on the date of grant).
Debt Discount
The Company issued the December 2015 Notes
with warrants that require liability treatment under ASC 815. As such, the proceeds of the notes were allocated, based on fair
values, as follows: original issue discount of $138,000, $625,000 to the common shares issued, $439,107 to the warrants granted,
and $88,983 to the embedded derivative, resulting in a debt discount to such notes of $862,500 with the remaining amount of approximately
$429,000 expensed at inception of the note. The debt discount is accreted to interest expense over the term of the note.
The Company recorded debt discount accretion
of $237,660 and $48,791 to interest expense in the consolidated Statements of Operations during the year ended December 31, 2017
and the one month ended December 31, 2016, respectively, and has no unamortized debt discount remaining as of December 31, 2017.
Changes in the derivative and warrant liabilities were as follows:
Derivative liabilities:
|
|
|
|
December 31, 2016
|
|
$
|
153,663
|
|
November 2017 convertible note payable
|
|
|
165,000
|
|
Decrease in fair value
|
|
|
(121,871
|
)
|
Change due to extinguishment of debt
|
|
|
225,082
|
|
Change due to modification of debt
|
|
|
13,950
|
|
Valuation of November 2016 Optional Redemption shares
|
|
|
35,015
|
|
December 31, 2017
|
|
$
|
470,839
|
|
Warrant liabilities:
|
|
|
|
December 31, 2016
|
|
$
|
473,296
|
|
November 2017 convertible note payable
|
|
|
290,612
|
|
Reclassifications of warrants to equity
|
|
|
(1,422,459
|
)
|
Increase in fair value
|
|
|
181,896
|
|
Change due to extinguishment of debt
|
|
|
251,670
|
|
Change due to modification of debt
|
|
|
224,985
|
|
December 31, 2017
|
|
$
|
—
|
|
NOTE 10 – SHORT TERM
NOTES PAYABLE
On
June 30, 2017, the Company entered into a Loan Agreement, a Secured Promissory Note (“Note”) and a personal
guarantee with respect to the funding by certain institutional investors
Alpha Capital Anstalt and Brio Capital Master
Fund Ltd.
of up to $1,125,000 in debt. The Company, until December 31, 2018, has the
ability to request quarterly advances of up to the lesser of (i) $250,000 or (ii) one sixth (1/6) of the revenue reported in
the Form 10-Q or 10-K for the previous calendar quarter or previous fiscal year, whichever is most recent, provided that such
revenue generated a profit of at least 10 percent (10%). The investors may advance the funds in their absolute discretion. In
June 2017, the Company was advanced $125,005. The Note shall become due and payable 18 months from each advance date. The
Company must make payments to the investors in an amount of $350, including interest at 10% per annum, every business day
from the date of the first advance, which shall be increased proportionately upon each advance. The Note is secured with the
assets of the Company pursuant to a security agreement dated December 23, 2015. In addition, the Company’s CEO has
personally guaranteed the Note. As additional consideration for the loan, the investors received 1,500,000 shares of
restricted common stock, in aggregate, valued at $105,000
(based on our stock price on the date of grant) along with
$2,500 in cash for reimbursement of expenses incurred and recorded as debt issuance costs with a balance at June 30, 2017 of
$107,500
. The note payable balance net of debt discount of $70,000 at December 31,
2017 was $18,880 with an availability of $1,000,000 on the Note.
In January 2018, the Company was
advanced an additional $60,010 under the Note with no additional shares issued. In March 2018, the Company was advanced an
additional $60,000 under the Note with 600,000 additional shares to be issued.
The Agreement
and
Note are being entered into in accordance with the halachically accepted exemptions on the paying of interest payments in business
transactions known as “heter iska”.
The Company
is still accounting for
the interest in accordance with GAAP.
The Company borrows funds from third
parties from time to time for working capital purposes with an upfront fee of approximately $400, paying no interest, and
with no length of repayment. For the year ended December 31, 2017, the Company had borrowings of $24,500 and repayments of
$24,329 for a balance due of $171 at December 31, 2017. Repayments are based on 30% of amounts processed through PayPal until
the balance is paid.
NOTE 11 –
stock
transactionS
Preferred Stock
On March 17, 2017, the Company held an
annual meeting of its shareholders. At the annual meeting, the majority shareholders of the Company approved an amendment to the
articles of incorporation, authorizing one share of Series A Preferred stock, which would be issued to Joseph Segelman. The share
of Series A Preferred stock shall vote together as a single class with the holders of the Company’s common stock, and the
holders of any other class or series of shares entitled to vote with the common stock, with the holder of the Series A Preferred
stock being entitled to fifty-one percent (51%) of the total votes on all such matters regardless of the actual number of shares
of Series A Preferred stock then outstanding, and the holders of the common stock and any other shares entitled to vote shall be
entitled to their proportional share of the remaining forty-nine percent (49%) of the total votes based on their respective voting
power. The share of Series A Preferred stock shall not be entitled to receive any distributions in the event of any liquidation,
dissolution or winding up of the Company, either voluntary or involuntary. The share of Series A Preferred stock shall not be eligible
to receive dividends. The class of Series A Preferred stock shall be automatically cancelled ten (10) years after the initial issue
date of such Series A Preferred stock.
On May 19, 2017, the Company received the
file stamped certificate of amendment from the state of Delaware, which lists an effective date of March 20, 2017. On May 23, 2017,
the Company issued the share of Series A Preferred stock to Joseph Segelman,
valued at $270,000
(based on the estimated fair value of the stock and control premium on the date of grant), which will allow Mr. Segelman
to maintain fifty-one percent (51%) voting control of the Company regardless of how many shares of common stock are issued and
outstanding. Therefore, the Company considers the Series A Preferred stock to be issued on May 23, 2017.
Common Stock
On
June 30, 2017, the Company entered into an Agreement and Note by certain institutional investors
Alpha Capital Anstalt and
Brio Capital Master Fund Ltd.
of up to $1,125,000 in debt. As additional consideration for
the loan, the investors received 1,500,000 shares of restricted common stock, in aggregate, valued at $105,000
(based on
our stock price on the date of grant) (see Note 9)
.
During the year ended December 31,
2017, the Company issued 6,861,768 restricted common shares for services rendered of $755,884 (based on our stock price on
the measurement date).
During the year ended December 31, 2017,
the Company issued a total of 175,200 restricted common shares to its employees, valued at $16,920 (based on our stock price on
the date of grant) as compensation pursuant to the Company’s 2015 Equity Incentive Plan.
During the year ended December 31, 2017,
the Company issued 200,000 restricted common shares to an Advisor, valued at $20,000 (based on the estimated fair value of the
stock on the measurement date) for outside advisory and consulting services pursuant to the Company’s 2015 Equity Incentive
Plan (see Note 11).
On July 14, 2017, the Company
entered into a contract with a third party for consulting services. The consulting agreement provides for the consultant to
receive 487,500 shares for entering into the agreement that were valued at $34,125 (based on our stock price on the date of
grant) and 162,500 restricted common shares each month beginning month four through month twelve. During the year ended
December 31, 2017, the consultant vested in 406,250 shares, valued at $79,625 (based on our stock price on the date of each
grant). As of December 31, 2017, the Company had not issued the shares and has recorded a common stock payable of $79,625.
The contract was terminated at December 31, 2017.
On January 22, 2017, the Company issued
150,000 restricted common shares for payment of accounts payable of $14,985.
On December 1, 2016, we acquired substantially
all of the operating assets of CCI. As part of the purchase price of the operating assets of CCI, we issued 7,000,000 shares of
common stock (of which 1,000,000 shares were issued to ASK Gold, a major supplier) valued at $770,000 (based on our stock price
on the date of issuance).
As of December 31, 2016, the Company issued
a total of 400,000 restricted common shares to its Advisors, valued at $100,000 (based on the estimated fair value of the stock
on the date of grant) for outside advisory and consulting services pursuant to the Company’s 2015 Equity Incentive Plan (see
Note 11).
As of December 31, 2016, the Company previously
issued common shares pursuant to the terms of the Consent, Waiver and Modification Agreement (the “Agreement”) with
certain Purchasers of Purchase Agreement dated December 23, 2015. The waivers contained in the Agreement were related to an increase
in the shares issuable under the Company’s 2015 Stock Option Plan, a waiver of the right to participate in additional offerings
by the Company, and allowing up to 20,000,000 shares of the Company’s common stock to be issued pursuant to a private or
public offering at a price of not less than $0.30 per share. As consideration for the terms contained in the Agreement, as well
as for a fee of $0.0001 per share, the Company issued an aggregate of 1,000,000 shares to the Purchasers. The aggregate fair market
value of these shares was approximately $200,000 as the fair market value of the stock was $0.20 per share. We used recent sales
of stock to determine the fair market value of these transactions.
NOTE 12 –
STOCK
BASED COMPENSATION
2015 Equity
Incentive Plan
As of December
31, 2017, the board of directors and shareholders of the Company previously authorized the adoption and implementation of the Company’s
2015 Equity Incentive Plan (the “2015 Plan”). The principal purpose of the 2015 Plan is to attract, retain and motivate
employees, officers, directors, consultants, agents, advisors and independent contractors of the Company and its related companies
by providing them the opportunity to acquire a proprietary interest in the Company and to link their interests and efforts to the
long-term interests of the Company’s shareholders. Under the 2015 Plan, an aggregate of 20,000,000 shares of the Company’s
common stock have initially been reserved for issuance pursuant to a variety of stock-based compensation awards, including stock
options, stock appreciation rights, stock awards, restricted stock, restricted stock units and other stock and cash-based awards.
The exercise price for each option may not be less than fair market value of the common stock on the date of grant, and shall vest
as determined by the Company’s board of directors but shall not exceed a ten-year period.
As of December
31, 2017, the Company issued a total of 600,000 restricted common shares to members of its advisory committee (“Advisors”),
valued at $120,000 (based on the estimated fair value of the stock on the date of grant) for outside advisory and consulting services
pursuant to the Company’s 2015 Equity Incentive Plan. One-twelfth (1/12) of the shares will be earned each month. The Company
will revalue the shares at each vesting period and recognize expense for the portion of the shares earned. The Company recognized
compensation expense of $41,667 and $6,250 under general and administrative expenses in the accompanying consolidated Statements
of Operations for the year ended December 31, 2017 (Successor) and the one month ended December 31, 2016 (Successor), respectively,
with $13,750 remaining to be amortized. As of December 31, 2017, the Advisors had vested in 508,333 shares with 91,667 shares remaining
to be issued.
As of December
31, 2017, the Company previously granted to its CEO, options to purchase 10,000,000 shares of our common stock under the 2015 Plan,
valued at $2,500,000 (based on the Black Scholes valuation model on the date of grant). The Black-Scholes option-pricing model
used the following weighted average assumptions as of December 31, 2016: (i) no dividend yield for each year, (ii) volatility of
35.6 percent, (iii) risk-free interest rate of 1.87 percent, (iv) stock price of $0.25, (v) exercise price of $0.005, and (vi)
expected life of 6.0 years. The options will vest 50% on the first anniversary of the grant date (“First Year Vest”)
and the remaining 50% of the shares shall vest in twelve (12) equal installments on the first day of each calendar month following
the first anniversary of the Grant Date beginning on June 1, 2016 and ending on June 1, 2017 (“Second Year Vest”),
provided that CEO is continuously employed by the Company from the grant date through such applicable vesting date. Notwithstanding
the foregoing, 100% of the shares of the Company’s common stock subject to the Option shall fully vest if the Company shall
successfully sell all of the shares of its common stock included in the primary offering of such common stock by the Company pursuant
to the registration statement on Form S-1 to be filed with the Securities and Exchange Commission within ninety (90) days of the
Grant Date. The First Year Vest options will amortize to expense over a 12 month period beginning May 2015 through April 2016 and
the Second Year Vest options will amortize to expense over a 24 month period beginning May 2015 through April 2017. The Company
recognized expense of $45,391 and $24,302 for the year ended December 31, 2017 (Successor) and the one month ended December 31,
2016 (Successor), respectively, within stock based compensation – related party in the accompanying consolidated Statement
of Operations with no amounts remaining to be recognized.
The following represents a summary of the
Options outstanding at
December 31, 2017
and changes during the period then ended:
|
|
|
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Intrinsic Value *
|
|
Outstanding at December 1, 2016
|
|
|
10,000,000
|
|
|
$
|
0.005
|
|
|
$
|
1,100,000
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired/Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at December 31, 2016
|
|
|
10,000,000
|
|
|
$
|
0.005
|
|
|
$
|
1,100,000
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired/Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at December 31, 2017
|
|
|
10,000,000
|
|
|
$
|
0.005
|
|
|
$
|
1,200,000
|
|
Exercisable at December 31, 2017
|
|
|
10,000,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Expected to be vested
|
|
|
10,000,000
|
|
|
$
|
0.005
|
|
|
$
|
—
|
|
* Based on the Company’s stock price on December
1, 2016, December 31, 2017 and 2016, respectively
NOTE 13 –
Related
Party Transactions
Other than as set forth below, and as
disclosed in Notes 8, 10, 11, 12, and 16, there have not been any transaction entered into or been a participant in which a
related person had or will have a direct or indirect material interest.
Sublease
The Company’s customer service and
distribution facility is subleased at $7,834 per month through CCI for a period of eighteen months. On March 1, 2017, the Company
gave ninety day written notice to terminate the sublease with no costs to terminate the lease. Beginning June 1, 2017, the Company
leases its customer service and distribution facility on a month-to-month basis for $4,000 per month from a third party.
Employment Agreements (Successor)
The Company previously had a consulting
agreement with its CEO under which he was compensated $120,000 per annum. Beginning June 20, 2013, this contract was to continue
unless and until terminated at any time by either the Company or CEO giving two month notice in writing. Such consulting agreement
was terminated by mutual agreement as of May 1, 2015 and superseded by the employment agreement effective May 1, 2015. The initial
term of employment agreement expires on December 31, 2018, unless earlier terminated by either party. The agreement provides for
automatic one-year renewals, unless either party gives notice of their intention not to extend at least 90 days prior to the expiration
of any term. Under this employment agreement, the CEO receives a minimum annual base salary of $180,000, is eligible to receive
an annual performance bonus each year, if performance goals established by the Company’s board of directors are met, and
is entitled to participate in customary benefit plans. There have been no performance goals established. If the Company terminates
the CEO’s employment without cause, he will be entitled to the following: (i) payment of (x) accrued compensation and unpaid
base salary through the date of such termination, (y) any amounts previously deferred by CEO and (z) the payment or reimbursement
for expenses incurred prior to the date of such termination; (ii) an amount equal to 200% of the base salary and (iii) continued
participation, at the Company’s expense, in the Company’s health and welfare programs for a period of two years after
the date of termination. The Company incurred compensation expense of $180,000 and $180,000 for the years ended December 31, 2017
and 2016, respectively. Deferred compensation totaling $709,000 as of December 31, 2017, is included in Accrued Compensation in
the accompanying consolidated Balance Sheet. Deferred compensation includes $495,000 related to the employment agreement and $214,000
related to the consulting agreement. In addition, we incurred employee benefits on behalf of the CEO totaling approximately $16,738
and $1,867 for the year ended December 31, 2017 (Successor) and the one month ended December 31, 2016 (Successor), respectively.
Employee benefits include health and dental coverage, use of a car, car insurance, and a gym membership.
The Company previously
had a consulting agreement with its secretary and director (“Secretary”) under which she was compensated $60,000 per
annum. Beginning June 20, 2013, this contract was to continue unless and until terminated at any time by either the Company or
Secretary giving two month notice in writing. Such consulting agreement was terminated by mutual agreement as of May 1, 2015 and
superseded by the employment agreement effective May 1, 2015. The initial term of employment agreement expires on December 31,
2018, unless earlier terminated by either party. The agreement provides for automatic one-year renewals, unless either party gives
notice of their intention not to extend at least 90 days prior to the expiration of any term. Under this employment agreement,
the Secretary receives a minimum annual base salary of $80,000. If the Company terminates the Secretary’s employment without
cause, she will be entitled to the following: (i) payment of (x) accrued compensation and unpaid base salary through the date of
such termination, (y) any amounts previously deferred by Secretary and (z) the payment or reimbursement for expenses incurred prior
to the date of such termination; (ii) an amount equal to 50% of the base salary and (iii) continued participation, at the Company’s
expense, in the Company’s health and welfare programs for a period of two years after the date of termination. The Company
incurred compensation expense of $80,000 and $80,000 for the years ended December 31, 2017 and 2016, respectively. Deferred compensation
totaling $327,000 as of December 31, 2017, is included in Accrued Compensation in the accompanying consolidated Balance Sheet.
Deferred compensation includes $213,333 related to the employment agreement and $113,667 related to the consulting agreement. In
addition, we incurred employee benefits on behalf of the Secretary totaling approximately $7,179 and $598 for the year ended December
31, 2017 (Successor) and the one month ended December 31, 2016 (Successor), respectively. Employee benefits include use of a car
and car insurance.
Consulting Agreement
On December 1, 2016, the
Company entered into a consulting agreement with Owen deVries, CCI’s CEO and director. The agreement calls for Mr.
deVries to develop strategic partnerships and international business on the Company’s behalf for initial monthly
payments of $11,000. The agreement was amended in April 2017 to reduce the monthly payment to $4,000. The agreement was
terminated in December 2017 giving 90 day written notice.
Loan and Advances
During 2017, the Company received no
advances from our CEO/director and incurred business expenses of $1,234,249 (comprised of operating expenses of $1,218,085,
inventory purchases totaling $5,650, website development costs of $9,573, and purchased equipment of $940) and had repayments
of $941,443. We have a balance owed to the related party of $721,434 and $440,747 at December 31, 2017 and 2016, respectively. During
2017, the Company incurred $180,000 of deferred compensation related to the CEO/director’s employment agreement and
$80,000 of deferred compensation related to the Secretary’s employment agreement. As of December 31, 2017 and 2016,
accrued compensation – related party was $1,036,000 and $776,000 respectively.
NOTE 14 – INCOME TAXES
At December 31, 2017, net operating loss
carry forwards for Federal and state income tax purposes totaling approximately $5,525,000 available to reduce future income which,
if not utilized, will begin to expire in the year 2032. There is no income tax affect due to the recognition of a full valuation
allowance on the expected tax benefits of future loss carry forwards based on uncertainty surrounding realization of such assets.
A reconciliation of the statutory income
tax rates and the effective tax rate is as follows:
|
|
For the Year Ended
|
|
|
For the One Month
|
|
|
|
For the Eleven Months
|
|
|
|
December 31,
|
|
|
Ended December 31,
|
|
|
|
Ended November 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
2016
|
|
|
|
Successor
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Statutory U.S. federal rate
|
|
|
21.0
|
%
|
|
|
34.0
|
%
|
|
|
|
34.0
|
%
|
State income tax, net of federal benefit
|
|
|
7.0
|
%
|
|
|
5.9
|
%
|
|
|
|
5.9
|
%
|
Permanent differences
|
|
|
(1.8
|
)%
|
|
|
(12.5
|
)%
|
|
|
|
(3.7
|
)%
|
Valuation allowance
|
|
|
(26.2
|
)%
|
|
|
(27.4
|
)%
|
|
|
|
(36.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
0.0
|
%
|
The tax effects of the temporary differences
and carry forwards that give rise to deferred tax assets consist of the following:
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
Successor
|
|
Predecessor
|
|
Predecessor
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
1,548,763
|
|
|
$
|
913,278
|
|
|
$
|
925,907
|
|
Stock based compensation
|
|
|
1,117,072
|
|
|
|
—
|
|
|
|
—
|
|
Valuation allowance
|
|
|
(2,665,835
|
)
|
|
|
(913,278
|
)
|
|
|
(925,907
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Major tax jurisdictions are the United
States and California. All of the tax years will remain open three and four years for examination by the Federal and state tax
authorities, respectively, from the date of utilization of the net operating loss. There are no tax audits pending.
NOTE 15 – EARNINGS PER SHARE
FASB ASC Topic 260,
Earnings Per Share
,
requires a reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share (EPS) computations.
Basic earnings (loss) per share are computed
by dividing net earnings available to common shareholders by the weighted-average number of common shares outstanding during the
period. Diluted earnings (loss) per share is computed similar to basic earnings per share except that the denominator is increased
to include the number of additional common shares that would have been outstanding if the potential common shares had been issued
and if the additional common shares were dilutive. In periods where losses are reported, the weighted-average number of common
stock outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
Basic and diluted earnings (loss) per share
are the same since net losses for all periods presented and including the additional potential common shares would have an anti-dilutive
effect.
The following table sets forth the computation of basic and
diluted net income per share:
|
|
For the Year Ended
|
|
|
For the One Month
|
|
|
For the Eleven Months
|
|
|
|
December 31,
|
|
|
Ended December 31,
|
|
|
Ended November 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
|
|
Successor
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
Net loss attributable to the common stockholders
|
|
$
|
(4,251,264
|
)
|
|
$
|
(199,142
|
)
|
|
$
|
(632,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average outstanding shares of common stock
|
|
|
47,093,401
|
|
|
|
43,163,881
|
|
|
|
10,032,000
|
|
Dilutive effect of options and warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Diluted weighted average common stock and common stock equivalents
|
|
|
47,093,401
|
|
|
|
43,163,881
|
|
|
|
10,032,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.09
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.06
|
)
|
NOTE 16 – COMMITMENTS AND CONTINGENCIES
Contingent Payments
On December 1, 2016, we acquired substantially
all of the operating assets of CCI. As part of the purchase price of the operating assets of CCI, there is a cash payment of $500,000
contingent upon a future offering and earn out payments for all sales of CCI and RGNP products sold via CCI sales channels for
the 2017, 2018, 2019 and 2020 calendar years. The estimated fair value of the contingent payments totaled $424,511 and was recognized
as a liability in the accompanying consolidated balance sheets as of December 31, 2016 (Successor). During the year ended December
31, 2017 (Successor), ASK Gold and CCI each earned $41,534 of earn out payments for a total of $83,068. In addition, the Company
paid $95,020 in reimbursement expenses (“Reimbursement Expenses”) that were the responsibility of CCI and will be applied
against current and future earn out payments to CCI. The Company applied $41,534 of earn out payments owed to CCI against the Reimbursement
Expenses for a net balance of $53,486 owed by CCI to the Company as of December 31, 2017 that is recorded in estimated fair value
of contingent payments, net in the accompanying consolidated balance sheets. As of December 31, 2017 (Successor), estimated fair
value of contingent payments, net was $287,957.
Consulting Agreement
On October 10, 2017, the Company
entered into a marketing agreement with a third party. The agreement expires October 9, 2018 (“Initial Term”),
has a base compensation of $100,000, payable $12,500 quarterly, and provides for royalties at ten percent (10%) of the Net
Revenues from the ION collection, as defined. If during the Initial Term, the Company’s net revenue from the sales of
the ION collection exceed the $100,000 base compensation, then the agreement shall automatically be extended for two years.
In conjunction with the agreement, the Company issued 1,000,000 restricted common shares to the consultant, valued at
$180,000 (based on our stock price on the date of grant), and recorded as marketing expenses in Operating expenses in
the Consolidated Statements of Operations. In addition, 500,000 restricted common shares shall be issued at the end of the
Initial Term, and should the agreement be extended, the Company shall an additional 1,350,000 restricted common shares. In
addition, the Company agreed to donate five percent (5%) of the Net Revenues from the ION collection to mutually agreeable
disaster relief funds.
Operating Leases
The Company has month-to month leases for
its headquarters and its sales and marketing office. The total rent is approximately $3,200 per month.
The Company’s customer service and
distribution facility is located at 1933 S. Broadway. Los Angeles, California. This facility is subleased at $7,834 per month through
CCI for a period of eighteen months. On March 1, 2017, the Company gave ninety day written notice to terminate the sublease with
no costs to terminate the lease. Beginning June 1, 2017, the Company leases its customer service and distribution facility on a
month-to-month basis for $4,000 per month from a third party.
Rent expense was approximately $99,679
and $95,603 for the year ended December 31, 2017 (Successor), and for the one month ended December 31, 2016 (Successor) plus the
eleven months ended November 30, 2016 (Predecessor), respectively.
Legal
From time to time, various lawsuits and
legal proceedings may arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an
adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of
any legal proceedings or claims that it believes will have a material adverse effect on its business, financial condition or operating
results.
Guarantees
The Company’s Convertible Notes
payable are collateralized by substantially all of the Company’s assets and are personally guaranteed by
the Company’s CEO and Australian Sapphire Corporation, a shareholder of the Company which is wholly-owned by the
Company’s CEO.
NOTE 17 – SUBSEQUENT EVENTS (SUCCESSOR)
Securities Purchase Agreement
In
January and February 2018, the Company entered into Securities Purchase Agreements (the “Purchase Agreement”) with
respect to the sale and issuance to Crossover Capital Fund II, LLC (“Crossover”) totaling (i) 833,332 shares of the
Company’s Common Stock (the “Commitment Shares”); (ii) 3,000,000 redeemable shares (the “Redeemable
Shares”), (iii) $294,000 aggregate principal amount of a convertible promissory note (the “Convertible
Note”) and (iv) Common Stock Purchase Warrants to purchase up to an aggregate of 1,960,000 shares of the Company’s
common stock (the “Warrants”) for aggregate consideration of $255,000 cash.
The
January and February 2018 Convertible Notes mature on October 3, 2018 and November 16, 2018, respectively, and provide
for interest to accrue at an interest rate equal to 18% per annum or the maximum rate permitted under applicable law after
the occurrence of any event of default as provided in the Note. At any time after 180 days from the Issue Date, the holder,
at its option, may convert the outstanding principal balance and accrued interest into shares of common stock of the
Company. The initial conversion price for the principal and interest in connection with voluntary conversions by a holder of
a Note is $0.08 per share, subject to adjustment as provided therein. There is also a one-time interest charge of 10% due at maturity.
If
the Note is prepaid on or prior to the maturity date, all of the Redeemable Shares shall be returned to the treasury shares of
the Company, without any payment by the Company for the Redeemable Shares. Further, if the Company prepays a portion of the Note,
but not the entire Note, on or before the maturity date, a pro rata portion of the Redeemable Shares shall be returned to the Company’s
treasury in proportion to the prepayment amount as it relates to the entire Note balance.
The
exercise price for the Warrants is $0.15, subject to adjustment, are exercisable for five years after the date of the Warrant and
are exercisable
in whole or in part, as either a cash exercise or as a “cashless” exercise.
In January 2018, the Company
was advanced an additional $60,010 under the Note with no additional shares issued. In March 2018, the Company was advanced
an additional $60,000 under the Note with 600,000 additional shares to be issued.
There were no other events subsequent to
December 31, 2017, and up to the date of this filing that would require disclosure.