NOTES
TO FINANCIAL STATEMENTS
December
31, 2017
1.
ORGANIZATION AND BASIS OF PRESENTATION
During
the periods covered by these financial statements, GTX Corp and subsidiaries (the “Company” or “GTX”)
were engaged in businesses that design, develop and sell various interrelated and complementary products and services in the Personal
Location Services marketplace. GTX owns 100% of the issued and outstanding capital stock of Global Trek Xploration, Inc. and LOCiMOBILE,
Inc.
Global
Trek Xploration, Inc. focuses on hardware, software, connectivity, design and development of Global Positioning System (“GPS”)
and Bluetooth Low Energy (“BLE”) monitoring and tracking solutions by providing real-time tracking of the whereabouts
of people and high valued assets. Utilizing a miniature quad band GPRS transceiver, antenna, circuitry, battery and inductive
charging pad our product(s) can be customized and integrated into numerous products whose location and movement can be monitored
in real time over the Internet through our 24x7 tracking portal or on a web enabled cellular telephone. Our core products and
services are supported by an IP portfolio of patents, patents pending, registered trademarks, copyrights, URLs and a library of
software source code. LOCiMOBILE, Inc., has been at the forefront of Smartphone application (“App”) development since
2008. With a suite of mobile applications that turn the iPhone, iPad, Android and other GPS enabled handsets into a tracking device
which can be tracked from handset to handset or through our tracking portal or on any connected device with internet access. LOCiMOBILE
has launched numerous Apps across multi mobile device operating systems and continues to launch consumer and enterprise apps.
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States. The accompanying consolidated financial statements reflect the accounts of GTX Corp and its wholly owned
subsidiaries. All significant inter-company balances and transactions have been eliminated.
Going
Concern
The
consolidated financial statements have been prepared on a going concern basis which assumes the Company will be able to realize
its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has incurred
net losses of $1,266,344 and $1,220,356 for the years ended December 31, 2017 and 2016, respectively, has incurred losses
since inception resulting in an accumulated deficit of $21,005,763 as of December 31, 2017, and has negative working capital
of $1,675,414 as of December 31, 2017. A significant part of our negative working capital position at December 31, 2017
consisted of $981,758 of amounts due to various accredited investors of the Company for convertible promissory notes. The
Company anticipates further losses in the development of its business.
The
ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining
the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come
due. The Company’s ability to raise additional capital through the future issuances of debt or equity is unknown. The ability
to obtain additional financing, the successful development of the Company’s contemplated plan of operations, or its ability
to achieve profitable operations are necessary for the Company to continue operations. The ability to successfully resolve these
factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements
of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue
Recognition
Revenues
consist primarily of the sale of our GPS tracking devices and the related monthly service fees, the sale of our GPS SmartSole
via various pilot programs, the monthly service fee from subscribers of the GPS Shoe, and our mobile tracking applications sold
via the Apple iTunes Store and the Google Marketplace.
The
Company recognizes revenue from product sales when the product is shipped to the customer and title has transferred. The Company
recognizes application revenue when the application is purchased by the customer. The Company assumes no remaining significant
obligations associated with the product sale other than that related to its warranty program discussed below. Revenue related
to monthly service fees both for the GPS SmartSole, GPS Shoes and GPS tracking devices, licensing agreements and annual subscriptions
are recognized over the respective terms of the agreements.
Revenue
from multiple-element arrangements is allocated to the elements based on the relative fair value of each element, which is generally
based on the relative sales price of each element when sold separately. Each element’s allocated revenue is recognized when
the revenue recognition criteria for that element have been met. If the Company cannot objectively determine the fair value of
any undelivered element included in a multiple-element arrangement, the Company defers revenue until all elements are delivered
and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.
Allowance
for Doubtful Accounts
We
extend credit based on our evaluation of the customer’s financial condition. We carry our accounts receivable at net realizable
value. We monitor our exposure to losses on receivables and maintain allowances for potential losses or adjustments. We determine
these allowances by (1) evaluating the aging of our receivables; and (2) reviewing high-risk customers financial condition. Past
due receivable balances are written off when our internal collection efforts have been unsuccessful in collecting the amount due.
Our allowance for doubtful accounts was $22,312 as of December 31, 2017 and $10,507 as of December 31, 2016.
Shipping
and Handling Costs
Shipping
and handling costs are included in cost of goods sold in the accompanying consolidated statements of operations.
Product
Warranty
The
Company’s warranty policy provides repair or replacement of products (excluding GPS Shoe devices) returned for defects within
ninety days of purchase. Warranty liabilities are recorded at the time of sale for the estimated costs that may be incurred under
our standard warranty. As of December 31, 2017, products returned for repair or replacement have been immaterial. Accordingly,
a warranty liability has not been deemed necessary.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Fair
Value Estimates
Pursuant
to the Accounting Standards Codification (“ASC”) No. 820, “
Disclosures About Fair Value of Financial Instruments
”,
the Company records its financial assets and liabilities at fair value. ASC No. 820 provides a framework for measuring fair value,
clarifies the definition of fair value and expands disclosures regarding fair value measurements. Fair value is defined as the
price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between
market participants at the reporting date. ASC No. 820 establishes a three-tier hierarchy, which prioritizes the inputs used in
the valuation methodologies in measuring fair value:
|
Level
1 -
|
Inputs
are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
|
|
Level
2 -
|
Inputs
(other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through
correlation with market data at the measurement date and for the duration of the asset/liability’s anticipated life.
|
|
|
|
|
Level
3 -
|
Inputs
reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement
date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
|
The
carrying values for cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued liabilities
approximate their fair value due to their short maturities.
Reclassifications
For
comparability, certain prior period amounts have been reclassified, where appropriate, to conform to the financial statement presentation
used in 2017.
Cash
and Cash Equivalents
Cash
equivalents consist of highly liquid investments with insignificant rate risk and with original maturities of three months or
less at the date of purchase.
Inventory
Inventory
generally consists of raw materials and finished goods and is valued at the lower of cost (first-in, first-out) or net realizable
value. The Company evaluates its inventory for excess and obsolescence on a regular basis. In preparing the evaluation the Company
looks at the expected demand for the product, as well as changes in technology, in order to determine whether or not a reserve
is necessary to record the inventory at net realizable value. For the years ending December 31, 2017 and 2016 the Company did
not recognize any charges to expense associated with excess and obsolete inventory cost adjustments.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated
using the straight-line method over the estimated two year useful lives of the assets. When property and equipment are retired
or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain
or loss is included in operations. Expenditures for maintenance and repairs are expensed as incurred.
Website
Development
Under
ASC 350-50 –
Intangibles – Goodwill and Other – Website Development Costs
, costs and expenses incurred
during the planning and operating stages of the Company’s website development are expensed as incurred. The Company accounts
for the development of its website by expensing all costs associated with the planning of the website as incurred and capitalizing
the costs to develop the website. Depreciation is calculated using the straight-line method over the estimated two year useful
lives of the assets.
Software
Development Costs
Software
development costs include payments made to independent software developers under development arrangements primarily for the development
of our smart-phone mobile applications (“Apps”). Software development costs are capitalized once technological feasibility
of a product is established and it is determined that such costs should be recoverable against future revenues. For products where
proven technology exists, this may occur early in the development cycle. Technological feasibility is evaluated on a product-by-product
basis. Amounts related to software development that are not capitalized are charged immediately to product research and development
costs.
Commencing
upon the related product’s release, capitalized software development costs are amortized to cost of sales based upon the
higher of (i) the ratio of current revenue to total projected revenue or (ii) the straight-line method. The recoverability of
capitalized software development costs is evaluated based on the expected performance of the specific products for which the costs
relate. The following criteria are used to evaluate expected product performance: historical performance of comparable products
using comparable technology and orders for the product prior to its release.
Significant
management judgments and estimates are utilized in the assessment of when technological feasibility is established, as well as
in the ongoing assessment of the recoverability of capitalized costs. If revised forecasted or actual product sales are less than
and/or revised forecasted or actual costs are greater than the original forecasted amount utilized in the initial recoverability
analysis, the net realizable value may be lower than originally estimated in any given quarter, which could result in an impairment
charge.
Intangible
Assets
The
Company records identifiable intangible assets acquired from other enterprises or individuals at cost. Intangible assets consist
of a licensing agreement enabling the Company to sell its GPS-related vehicle tracking software and services.
Marketable
Securities
During
the second quarter of fiscal 2016, we received marketable equity securities, which we have classified as “available for
sale” securities. Our marketable securities are marked to market on a quarterly basis, with unrealized gains and losses
being excluded from earnings and reflected as a component of other comprehensive income.
The
inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those
securities.
Following
are the disclosures related to our financial assets pursuant to ASC No. 820:
|
|
December
31, 2017
|
|
|
Fair
Value
|
|
|
Input
Level
|
Available
for sale marketable securities:
|
|
|
|
|
|
|
Common
stock
|
|
$
|
3,230
|
|
|
Level
1
|
The
fair value of our available for sale securities is determined based on quoted market prices for identical securities on a quarterly
basis.
Derivative
Instruments
Our
debt or equity instruments may contain embedded derivative instruments, such as conversion options, which in certain circumstances
may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability.
Our
derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative
liability recorded as charges or credits to income, in the period in which the changes occur. For bifurcated conversion options
that are accounted for as derivative instrument liabilities, we determine the fair value of these instruments using the Black-Scholes
option pricing model. This model requires assumptions related to the remaining term of the instrument and risk-free rates of return,
our current Common Stock price and expected dividend yield, and the expected volatility of our Common Stock price over the life
of the option.
Net
Loss Per Common Share
Basic
net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during
the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of shares of common stock
and potentially outstanding shares of common stock during each period. There were no dilutive shares outstanding as of December
31, 2017 and 2016. Common stock equivalents, totaling 386,364,706 and 117,371,085 at December 31, 2017 and 2016, respectively,
were not included in the computation of diluted earnings per share in 2017 and 2016 on the consolidated statements of operations
due to the fact that the Company reported a net loss in 2017 and 2016 and to do so would be anti-dilutive for that period.
Income
Taxes
The
Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized
by applying the statutory tax rates in effect in the years in which the differences between the financial reporting and tax filing
bases of existing assets and liabilities are expected to reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
Stock-based
Compensation
Stock-based
compensation expense is recorded for stock and stock options awarded in return for services rendered. The expense is measured
at the grant-date fair value of the award and recognized as compensation expense on a straight-line basis, which is generally
commensurate with the vesting period. The Company estimates forfeitures that it expects will occur and records expense based upon
the number of awards expected to vest.
Comprehensive
Loss
FASB
ASC 220 establishes rules for reporting and displaying comprehensive loss and its components. Comprehensive loss is the sum of
net loss as reported in the consolidated statements of operations and comprehensive loss transactions as reported in the consolidated
statement of stockholders’ deficit. Comprehensive loss transactions that currently apply to the Company result from unrealized
losses on available for sale investments.
Recently
Issued Accounting Pronouncements
In
May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue
recognition guidance under U.S. GAAP. The core principle of ASU No. 2014-09 is to recognize revenues when promised goods or services
are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those
goods or services. ASU No. 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment
and estimates may be required under existing U.S. GAAP. The standard is effective for annual periods beginning after December
15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting
the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii)
a retrospective approach with the cumulative effect of initially adopting ASU No. 2014-09 recognized at the date of adoption (which
includes additional footnote disclosures). In July 2015, the FASB issued ASU No. 2015-14 which delayed the effective date of ASU
No. 2014-09 by one year (effective for annual periods beginning after December 15, 2017). The Company adopted ASU 2014-09 in the
first quarter of fiscal 2018 using the modified retrospective method. The adoption of this standard did not have
a material impact on our revenue recognition policies, other than enhanced disclosures related to the disaggregation of revenues
from contracts with customers, our performance obligations and any significant judgments.
In
August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern.
The new standard provides guidance around
management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as
a going concern and to provide related footnote disclosure. The new standard is effective for the fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. Adoption of this standard did
not have a material impact on our financial statements.
There
were other updates recently issued, most of which represented technical clarifications and corrections to the accounting literature
or application to specific industries and are not expected to have a material impact on the Company’s financial position,
results of operations or cash flows.
3.
JOINT VENTURE AND INVESTMENT IN EQUITY SECURITIES
On
June 16, 2016, the Company entered into a Definitive Agreement with Inventergy Innovations, LLC (“Inventergy”), a
subsidiary of Inventergy Global, Inc. (NASDAQ: INVT). The Company partnered with Inventergy to monetize three (3) GTX Patents.
Upon signing the Agreement, the Patents were assigned to an Inventergy subsidiary, and Inventergy assigned a 45% interest in the
entity to GTX. Inventergy is also obligated to make a sequence of quarterly payments to GTX in 2017, which payments represent
non-refundable advances against future royalty and other payments. The Company recognized $75,000 of royalty payments in 2017.
Pursuant to a non-exclusive license back to GTX, GTX will still retain all use rights of the 3 patents.
In
addition to the Definitive Agreement, the Company entered into a Consulting Agreement with Inventergy for a period of eighteen
months. The Company was issued 42,500 shares of restricted common stock of INVT valued at $62,479 on the date of grant, of which
1/6
th
of the stock vests at the close of each calendar quarter and Inventergy agreed to make five monthly payments
to GTX totaling $250,000 through December 2016 as compensation. As of December 31, 2017, we owned 42,500 shares of restricted
common stock of INVT at a closing price of $0.076, for a value of $3,230.
The
Company uses the equity method to account for its 45% investment in the Inventergy subsidiary. Under the equity method, the Company
recognizes its share of the earnings and losses of the subsidiary as they accrue instead of when they are realized. As of December
31, 2017, the Company’s investment in the subsidiary was $0.
4.
RELATED PARTY TRANSACTIONS
In
order to preserve cash for other working capital needs, various officers, members of management and Board Members agreed to accrue
portions of their wages since 2011. As of December 31, 2017, and 2016, the Company owed $0 and $0, respectively, for such accrued
wages.
On
December 31, 2017, management elected to transfer accrued salaries into long-term convertible promissory notes, due on March 31,
2019, totaling $201,050. The notes will bear a 10% annual interest rate. Management shall have the right, but not the obligation
to convert up to 50% of the amount advanced and accrued interest into shares, warrants or options of common or preferred stock
of the Company at $0.01 per share.
5.
INVENTORY
Inventories
consist of the following:
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Raw
materials
|
|
$
|
33,928
|
|
|
$
|
31,041
|
|
Finished
goods
|
|
|
23,907
|
|
|
|
79,907
|
|
Total
Inventories
|
|
$
|
57,835
|
|
|
$
|
110,948
|
|
6.
PROPERTY AND EQUIPMENT
Property
and equipment, net, consists of the following:
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Software
|
|
$
|
25,890
|
|
|
$
|
19,900
|
|
Website
development
|
|
|
91,622
|
|
|
|
91,622
|
|
Software
development
|
|
|
282,251
|
|
|
|
246,122
|
|
Less:
accumulated depreciation
|
|
|
(283,529
|
)
|
|
|
(222,343
|
)
|
|
|
|
|
|
|
|
|
|
Total
property and equipment, net
|
|
$
|
116,234
|
|
|
$
|
135,301
|
|
Depreciation
expense for the years ended December 31, 2017 and 2016 was $62,446 and $40,935, respectively, and is included in general
and administrative expenses.
7.
CONCENTRATIONS
We
currently rely on one manufacturer to supply us with our GPS SmartSole and one manufacturer to supply us with the GPS device included
in the GPS SmartSole. The loss of either of these manufacturers could severely impede our ability to manufacture the GPS SmartSole.
During
the year ended December 31, 2017, the Company’s customer base and revenue streams were comprised of approximately 53% B2B
(Wholesale Distributors and Enterprise Institutions), 24% B2C (consumers and government agencies who bought on the behalf of consumers,
through our online ecommerce platform and through Amazon, Google and iTunes), 13% IP (our monetization campaign from consulting,
licensing and asserting our patents) and 10% Military and Law Enforcement.
As
of December 31, 2017, the Company had three customers representing approximately 33%, 29%, and 16% of sales and three customers
representing approximately 8%, 23%, and 11% of total accounts receivable, respectively. The Company had two customers representing
approximately 23% and 42%, respectively, of sales and one customer representing approximately 32% of total accounts receivable
for the year ended December 31, 2016.
During
the year ended December 31, 2016, the Company’s customer base was comprised of approximately 42% Wholesale Distributors
and Enterprise Institutions and 21% Consumer, 1% Military and Law Enforcement, 36% IP (our monetization campaign from consulting,
licensing and asserting).
8.
DEBT
The
following table summarizes the components of our short-term borrowings:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Q4 2014 Convertible Notes
|
|
$
|
126,000
|
|
|
$
|
126,000
|
|
Q1 2015 Convertible Notes
|
|
|
60,000
|
|
|
|
60,000
|
|
Q2 2015 Convertible Notes
|
|
|
200,000
|
|
|
|
200,000
|
|
Q3 2015 Convertible Notes
|
|
|
45,000
|
|
|
|
45,000
|
|
Q4 2015 Convertible Notes
|
|
|
-
|
|
|
|
-
|
|
Q1 2016 Convertible Notes
|
|
|
60,000
|
|
|
|
60,000
|
|
Q2 2016 Convertible Notes
|
|
|
-
|
|
|
|
225,431
|
|
Q3 2016 Convertible Notes
|
|
|
507,671
|
|
|
|
507,671
|
|
Q4 2016 Convertible Notes
|
|
|
110,326
|
|
|
|
162,826
|
|
Q1 2017 Convertible Notes
|
|
|
15,000
|
|
|
|
-
|
|
Q2 2017 Convertible Notes
|
|
|
187,500
|
|
|
|
-
|
|
Q3 2017 Convertible Notes
|
|
|
112,000
|
|
|
|
-
|
|
Q4 2017 Convertible
Notes
|
|
|
370,425
|
|
|
|
-
|
|
Total short-term convertible notes
|
|
|
1,793,922
|
|
|
|
1,386,928
|
|
Less:
Debt discount
|
|
|
(142,117
|
)
|
|
|
(90,119
|
)
|
Convertible notes,
net of debt discount
|
|
$
|
1,651,805
|
|
|
$
|
1,296,809
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
981,758
|
|
|
$
|
867,812
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings
|
|
$
|
670,047
|
|
|
$
|
428,997
|
|
|
|
|
|
|
|
|
|
|
Short-term derivative
liabilities
|
|
$
|
261,172
|
|
|
$
|
78,112
|
|
Short-term
convertible notes
Convertible
Notes
On
January 4, 2017, we issued a total of 10,000,000 shares of common stock to an investor for converting $24,500 in debt from a Convertible
Note that was issued in the second quarter of 2016.
On
January 13, 2017, we issued a total of 11,970,339 shares of common stock to an investor for converting $29,327 in debt from a
Convertible Note that was issued in the second quarter of 2016.
On
January 31, 2017, we received the second tranche of $97,500 (“Q1 2017”) from 2 investors from their November 21, 2016
Security Purchase Agreements. The investors may convert their notes into common shares in the Company at a price equal to the
lower of 51% of the lowest trading price in the prior 20 days, or at $0.005 per share. The notes do not bear interest. The Company
may prepay the notes at any time with a premium of 10% of the amount to be paid off, in the first 90 days, and 20% any time thereafter.
The notes matured on July 31, 2017 and are in default. The notes were issued pursuant to Section 4(a)(2) of the Securities Act
of 1933. On August 1, 2017, an investor converted $15,000 in debt into 9,803,922 shares of common stock.
On
February 9, 2017, we paid down a Q2 2016 Convertible Note for $10,000.
On
February 17, 2017, we issued 16,339,869 shares of common stock to an investor for converting $25,000 in debt from a Convertible
Note that was issued in the fourth quarter of 2016.
On
February 22, 2017, we issued 16,442,455 shares of common stock to an investor for converting $24,170 in debt from a Convertible
Note that was issued in the second quarter of 2016.
On
March 3, 2017, we issued 5,820,000 shares of common stock to an investor for converting $25,000 in principal and $4,100 in accrued
interest from a Convertible Note that was issued in the second quarter of 2016.
On
March 24, 2017, we issued 3,267,974 shares of common stock to an investor for converting $10,000 in debt from a Convertible Note
that was issued in the fourth quarter of 2016.
On
April 6, 2017, the Company entered into two Note and Share Purchase Agreements with two accredited investors. As a result, we
issued two convertible notes with a total principal balance of $75,000. The Purchasers may convert their notes into common shares
in the Company at a price equal to the lower of 60% of the average of the lowest volume-weighted average price in the prior 30
days, or at $0.005 per share. The notes do not bear interest. The Company may prepay the notes at any time with a premium of 10%
of the amount to be paid off, in the first 90 days, and 20% any time thereafter. The notes matured on October 6, 2017. The notes
were issued pursuant to Section 4(a)(2) of the Securities Act of 1933.
On
April 25, 2017, we issued 13,950,618 in common stock to an investor for converting $110,000 in principal and $3,000 in interest
of their debt from a Convertible Note that was issued in the second quarter of 2016.
On
May 16, 2017, the Company entered into two Note and Share Purchase Agreements with two accredited investors. As a result, we issued
two convertible notes with a total principal balance of $75,000. The Purchasers may convert their notes into common shares in
the Company at a price equal to 60% of the average of the lowest volume-weighted average price in the prior 30 days. The notes
do not bear interest. The Company may prepay the notes at any time with a premium of 10% of the amount to be paid off, in the
first 90 days, and 20% any time thereafter. The notes mature on November 16, 2017. The notes were issued pursuant to Section 4(a)(2)
of the Securities Act of 1933.
On
June 1, 2017, we issued 7,300,793 shares of common stock to an investor for converting $17,500 in debt from a Convertible Note
that was issued in the fourth quarter of 2016.
On
June 20, 2017, the Company entered into two Note and Share Purchase Agreements with two accredited investors. As a result, we
issued two convertible notes with a total principal balance of $75,000. The Purchasers may convert their notes into common shares
in the Company at a price equal to 60% of the average of the lowest volume-weighted average price in the prior 30 days. The notes
do not bear interest. The Company may prepay the notes at any time with a premium of 10% of the amount to be paid off, in the
first 90 days, and 20% any time thereafter. The notes mature on December 20, 2017. The notes were issued pursuant to Section 4(a)(2)
of the Securities Act of 1933.
On
July 31, 2017, the Company entered into Securities Purchase Agreements to fund inventory and R&D with two accredited investors.
As a result, the investors will purchase, severally and not jointly, an aggregate of up to $224,000 in Subscription Amount corresponding
to an aggregate of up to $224,000 in Principal Amount of Notes. The purchase will occur in four tranches (each a “Tranche,”
and collectively the “Tranches”), with the first Tranche of $56,000 being funded to the Company upon execution of
this Agreement (the “First Closing”). The second Tranche will be for $56,000 and will be funded to the Company 30
calendar days after the First Closing. The third Tranche will be for $56,000 and will be funded to the Company 60 calendar days
after the First Closing. The fourth Tranche will be for $56,000 and will be funded to the Company 90 calendar days after the First
Closing.
On
August 1, 2017 and on August 2, 2017, the Company received its first tranche of $28,000 from each of the accredited investors.
As a result, we issued two convertible notes with a total principal balance of $28,000 each. The Purchasers may convert their
notes into common shares in the Company at a price equal to 60% of the lowest trading price in the prior 30 days. The notes do
not bear interest. The Company may prepay the notes at any time with a premium of 10% of the amount to be paid off, in the first
90 days, and 20% any time thereafter. The notes mature 180 days from issuance, or on February 1st and 2
nd
of 2018.
The notes were issued pursuant to Section 4(a)(2) of the Securities Act of 1933.
On
August 1, 2017, we issued 9,803,922 shares of common stock to an investor for converting $15,000 in debt that was issued in the
first quarter of 2017.
On
August 15, 2017, we issued 9,803,922 shares of common stock to an investor for converting $15,000 in debt from a Convertible Note
that was issued in the first quarter of 2017.
On
September 9, 2017, we issued 16,418,050 shares of common stock to an investor for converting $17,500 in debt from a Convertible
Note that was issued in the first quarter of 2017.
On
September 13, 2017, we issued 32,679,739 shares of common stock to an investor for converting $35,000 in debt from a Convertible
Note that was issued in the first quarter of 2017. On October 10, 2017 and on October 17, 2017, the Company received its second
tranche of $28,000 from each of the accredited investors, respectively, as related to the July 31, 2017 Securities Purchase Agreement.
As a result, we issued two convertible notes with a total principal balance of $28,000 each under the same terms as described
above.
On
November 15, 2017, we issued a $7,785 convertible note as part of a one-year advisory agreement. The note is due November
15, 2018 and can be paid in either cash or common stock.
On
November 16, 2017, we issued 20,833,33 shares of common stock to an investor for converting $37,500 in debt from a Convertible
Note that was issued in the second quarter of 2017.
On
December 15, 2017, the Company entered into a Convertible Promissory Agreement with an accredited investor. As a result, we issued
a convertible note with a total principal balance of $37,500. The Purchaser may convert their notes after six months into common
shares in the Company at a price equal to $0.002 The notes bear interest of 12%, no OID, no discount to market or prepayment penalty.
The notes mature on June 15, 2018. The notes were issued pursuant to Section 4(a)(2) of the Securities Act of 1933.
Derivative
liabilities
The
conversion features embedded in the convertible notes were evaluated to determine if such conversion feature should be bifurcated
from its host instrument and accounted for as a freestanding derivative. In the convertible notes with variable conversion terms,
the conversion feature was accounted for as a derivative liability. The derivatives associated with the term convertible notes
were recognized as a discount to the debt instrument and the discount is amortized over the expected life of the notes with any
excess of the derivative value over the note payable value recognized as additional interest expense at the issuance date. Amortization
of the debt discount totaled $423,682 and $885,597 during the years ended December 31, 2017 and 2016, respectively.
The
derivative liability was calculated using the Black Scholes method over the expected terms of the convertible debentures, with
a risk free rate of 2% and volatility of 165.68% as of December 31, 2017. Included in Derivative Income in the accompanying consolidated
statements of operations is income arising from the change in fair value of the derivatives of $309,142 and $703,518 during
the years ended December 31, 2017 and 2016, respectively.
9.
INCOME TAXES
The
provision for refundable Federal income tax consists of the following as of December 31:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Federal income tax benefit
calculated at statutory rate of 34%
|
|
$
|
431,000
|
|
|
$
|
425,000
|
|
Less: Stock based compensation expense
|
|
|
(37,000
|
)
|
|
|
(116,000
|
)
|
Effect of rate
change from 34% to 21%
|
|
|
(1,895,000
|
)
|
|
|
-
|
|
Change in valuation
allowance
|
|
|
1,501,000
|
|
|
|
(309,000
|
)
|
Net income tax
provision
|
|
$
|
-
|
|
|
$
|
-
|
|
The
cumulative tax effect at the expected rate of 34% of significant items comprising our net deferred tax amount is as follows at
December 31:
|
|
2017
|
|
|
2016
|
|
Deferred tax asset attributable to:
|
|
|
|
|
|
|
|
|
Net operating losses carried
forward
|
|
$
|
3,061,000
|
|
|
$
|
4,562,000
|
|
Less: Valuation
allowance
|
|
|
(3,061,000
|
)
|
|
|
(4,562,000
|
)
|
Net deferred tax
asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company established a full valuation allowance. The Company continually reviews the adequacy of the valuation allowance and recognizes
a benefit from income taxes only when reassessment indicates that it is more likely than not that the benefits will be realized.
At
December 31, 2017, the Company had an unused net operating loss carryover approximating $14,589,000 that is available to
offset future taxable income, which expires beginning in 2028.
10.
EQUITY
Common
Stock
The
Company issued the following shares of common stock for the years ended December 31:
|
|
2017
|
|
|
2016
|
|
|
|
Value of Shares
|
|
|
# of shares
|
|
|
Value of Shares
|
|
|
# of shares
|
|
Shares issued for services rendered
|
|
$
|
94,250
|
|
|
|
16,250,000
|
|
|
$
|
296,550
|
|
|
|
34,050,000
|
|
Shares issued for accrued salaries and expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
104,294
|
|
|
|
10,421,592
|
|
Shares issued for conversion of debt
|
|
|
392,620
|
|
|
|
174,631,014
|
|
|
|
422,879
|
|
|
|
108,464,758
|
|
Shares issued for financing
|
|
|
20,325
|
|
|
|
3,000,000
|
|
|
|
16,000
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restricted shares issued
|
|
$
|
507,195
|
|
|
|
193,881,014
|
|
|
$
|
839,723
|
|
|
|
154,936,350
|
|
Shares
issued for services rendered were to various members of management, employees and consultants and are generally expensed as Stock-Based
Compensation in the accompanying consolidated statement of operations. Also included are shares of common stock issued to our
2017 investors in conjunction with their note and share purchase agreements. Shares issued for accrued salaries and expenses were
granted to members of management, Board Members, consultants and employees as payment for portions of amounts owed to them for
services rendered in previous periods. Shares issued for conversion of debt relate to conversions of both short and long term
debt as discussed in Note 8. Shares issued for financing in 2017 relate to shares granted to investors for their participation
in the 2017 financings.
Common
Stock Warrants
Since
inception, the Company has issued numerous warrants to purchase shares of the Company’s common stock to shareholders, consultants
and employees as compensation for services rendered.
A
summary of the Company’s warrant activity and related information is provided below:
|
|
Exercise
Price $
|
|
|
Number
of Warrants
|
|
Outstanding
and exercisable at December 31, 2015
|
|
|
0.15
- 0.02
|
|
|
|
11,150,000
|
|
Warrants
exercised
|
|
|
-
|
|
|
|
-
|
|
Warrants
granted
|
|
|
0.0125
- 0.03
|
|
|
|
18,750,000
|
|
Warrants
expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding
and exercisable at December 31, 2016
|
|
|
0.0125
- 0.03
|
|
|
|
29,900,000
|
|
Warrants
exercised
|
|
|
-
|
|
|
|
-
|
|
Warrants
granted
|
|
|
0.15
- 0.02
|
|
|
|
10,000,000
|
|
Warrants
expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding
and exercisable at December 31, 2017
|
|
|
0.0125
- 0.03
|
|
|
|
39,900,000
|
|
Stock
Warrants as of December 31, 2017
|
|
Exercise
|
|
|
Warrants
|
|
|
Remaining
|
|
|
Warrants
|
|
Price
|
|
|
Outstanding
|
|
|
Life
(Years)
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.02
|
|
|
|
14,900,000
|
|
|
|
0.97
|
|
|
|
14,900,000
|
|
$
|
0.015
|
|
|
|
21,350,000
|
|
|
|
1.14
|
|
|
|
21,350,000
|
|
$
|
0.0125
|
|
|
|
500,000
|
|
|
|
1.30
|
|
|
|
500,000
|
|
$
|
0.03
|
|
|
|
3,150,000
|
|
|
|
1.51
|
|
|
|
3,150,000
|
|
Common
Stock Options
Under
the Company’s 2008 Plan, we are authorized to grant stock options intended to qualify as Incentive Stock Options, “ISO”,
under Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified options, restricted and unrestricted stock awards
and stock appreciation rights to purchase up to 7,000,000 shares of common stock to our employees, officers, directors and consultants,
with the exception that ISOs may only be granted to employees of the Company and its subsidiaries, as defined in the 2008 Plan.
The
Company recognizes option expense ratably over the vesting periods. As of December 31, 2012, all options granted were fully vested.
Accordingly, no option expense has been recognized during the years ended December 31, 2017 and 2016.
No
options were granted during 2017 and 2016.
The
Plan provides for the issuance of a maximum of 7,000,000 shares of which, after adjusting for estimated pre-vesting forfeitures
and expired options, approximately 2,235,000 were available for issuance as of December 31, 2017.
As
of December 31, 2017, after adjusting for estimated pre-vested forfeitures, there was $0 of unrecognized compensation cost related
to unvested stock options. The Company intends to issue new shares to satisfy share option exercises.
Stock
option activity under the Plan for the period from December 31, 2015 to December 31, 2017 is summarized as follows:
|
|
Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life (in years)
|
|
|
Grant
Date Fair Value
|
|
Outstanding
at December 31, 2015
|
|
|
452,493
|
|
|
|
0.08
|
|
|
|
0.09
|
|
|
|
14,942
|
|
Options
granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options
exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options
cancelled/forfeited/expired
|
|
|
(
452,493
|
)
|
|
|
(0.08
|
)
|
|
|
-
|
|
|
|
(14,942
|
)
|
Outstanding
at December 31, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options
granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options
exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options
cancelled/forfeited/ expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at December 31, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
11.
COMMITMENTS & CONTINGENCIES
Bonuses
The
Company has an employment agreement with its CEO which, among other provisions, provide for the payment of a bonus, as determined
by the Board of Directors, in amounts ranging from 15% to 50% of the executive’s yearly compensation, to be paid in cash
or stock at the Company’s sole discretion, if the Company has an increase in year over year revenues and the Executive performs
his duties (i) within the time frame budgeted for such duties and (ii) at or below the cost budgeted for such duties.
Contingencies
From
time to time, we may be involved in routine legal proceedings, as well as demands, claims and threatened litigation that arise
in the normal course of our business. The ultimate amount of liability, if any, for any claims of any type (either alone or in
the aggregate) may materially and adversely affect our financial condition, results of operations and liquidity. In addition,
the ultimate outcome of any litigation is uncertain. Any outcome, whether favorable or unfavorable, may materially and adversely
affect us due to legal costs and expenses, diversion of management attention and other factors. We expense legal costs in the
period incurred. We cannot assure you that additional contingencies of a legal nature or contingencies having legal aspects will
not be asserted against us in the future, and these matters could relate to prior, current or future transactions or events.
12.
SUBSEQUENT EVENTS
On
January 1, 2018 the company issued 1,500,000 of warrants exercisable at $0.01 to various staff as bonuses for worked performed
in 2017.
On
January 8, 2018, the Company entered into a Convertible Promissory Agreement with an accredited investor. As a result, we issued
a convertible note with a total principal balance of $37,500. The Purchaser may convert their notes after six months into common
shares in the Company at a price equal to $0.002. The notes bear interest of 12%, no OID, no discount to market or prepayment
penalty. The notes mature on July 8, 2018. The notes were issued pursuant to Section 4(a)(2) of the Securities Act of 1933.
On
January 11, 2018, we issued 29,298,875 shares of common stock to an investor for converting $37,500 in debt from a Convertible
Note that was issued in the second quarter of 2017.
On
January 11, 2018, we issued 14,705,882 shares of common stock to an investor for converting $15,000 in debt from a Convertible
Note that was issued in the first quarter of 2017.
On
February 16, 2018, the Company entered into a Convertible Promissory Agreement with an accredited investor. As a result,
we issued a convertible note with a total principal balance of $75,000. The Purchaser may convert their notes after six months
into common shares in the Company at a price equal to $0.002. The notes bear interest of 12%, no OID, no discount to market or
prepayment penalty. The notes mature on July 16, 2018. The notes were issued pursuant to Section 4(a)(2) of the Securities Act
of 1933.
On
March 8, 2018, we issued 18,421,053 shares of common stock to an investor for converting $28,000 in debt from a Convertible Note
that was issued in the third quarter of 2017.
On
March 9, 2018, the Company entered into a Convertible Promissory Agreement with an accredited investor. As a result, we
issued a convertible note with a total principal balance of $100,000. The Purchaser may convert their notes after six months into
common shares in the Company at a price equal to $0.002. The notes bear interest of 12%, no OID, no discount to market or prepayment
penalty. The notes mature on August 9, 2018. The notes were issued pursuant to Section 4(a)(2) of the Securities Act of 1933.
On
March 22, 2017, the Company entered into a Convertible Promissory Agreement with an accredited investor. As a result, we issued
a convertible note with a total principal balance of $50,000. The Purchaser may convert their notes after six months into common
shares in the Company at a price equal to $0.002. The notes bear interest of 12%, no OID, no discount to market or prepayment
penalty. The notes mature on August 9, 2018. The notes were issued pursuant to Section 4(a)(2) of the Securities Act of 1933.
On
March 27, 2018, we paid off, in cash, two Convertible Promissory Notes totaling $56,000 that were issued in the fourth quarter
of 2017, and in return for paying off the notes in cash, the noteholder agreed to a lock up agreement not to convert their last
two remaining notes until May 30, 2018.