Notes
to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2018 and 2017
(Unaudited)
1.
|
DESCRIPTION
OF BUSINESS
|
Organization
Cutaia
Media Group, LLC (“CMG”) was a limited liability company formed on December 12, 2012 under the laws of the State of
Nevada. On May 19, 2014, bBooth, Inc. was incorporated under the laws of the State of Nevada. On May 19, 2014, CMG was merged
into bBooth, Inc. and bBooth, Inc. changed its name to bBooth (USA), Inc. The operations of CMG and bBooth (USA), Inc. became
known as, and are referred to in this Report as, “bBoothUSA”.
On
October 16, 2014, bBoothUSA completed a Share Exchange Agreement with Global System Designs, Inc. (“GSD”) which was
accounted for as a reverse merger transaction. In connection with the closing of the Share Exchange Agreement, GSD management
was replaced by bBoothUSA management, and GSD changed its name to bBooth, Inc.
Effective
April 21, 2017, we changed our corporate name from bBooth, Inc. to nFüsz, Inc. The name change was effected through a parent/subsidiary
short-form merger of nFüsz, Inc., our wholly-owned Nevada subsidiary, formed solely for the purpose of the name change, with
and into us. We were the surviving entity. To effectuate the merger, we filed Articles of Merger with the Secretary of State of
the State of Nevada on April 4, 2017 and a Certificate of Correction with the Secretary of State of the State of Nevada on April
17, 2017. The merger became effective on April 21, 2017. Our board of directors approved the merger, which resulted in the name
change on that date. In accordance with Section 92A.180 of the Nevada Revised Statutes, stockholder approval of the merger was
not required.
On
the effective date of the name change merger, our name was changed to “nFüsz, Inc.” and our Articles of Incorporation,
as amended (the “Articles”), were further amended to reflect our new legal name. With the exception of the name change,
there were no other changes to our Articles.
Nature
of Business
We
have developed proprietary interactive video technology which serves as the basis for certain products and services that we market
under the brand name “notifi”. Our notifiCRM, notifiADS, notifiLINKS, and notifiWEB products are cloud-based, software-as-a-service
(“SaaS”), customer relationship management (“CRM”), sales lead generation, advertising and social engagement
software, accessible on mobile and desktop platforms, that we license to individual consumers, sales-based organizations, consumer
brands, marketing and advertising agencies, as well as to artists and social influencers. Our notifiCRM platform is an enterprise
scalable, subscription-based customer relationship management program that incorporates proprietary, interactive audio/video messaging
and interactive on-screen “virtual salesperson” communications technology. Our notifiCRM is distinguished from other
CRM programs because it utilizes interactive video as the primary means of communication between our subscribers and their clients
or prospects. Such clients and prospects can respond to notifiCRM subscribers’ calls to action in real time by clicking
on links embedded in the video, all without leaving or stopping the video. Subscribers also have access to detailed analytics
that reflect when the videos were viewed, by whom, how many times, for how long, and what items were clicked-on in the video to
assist subscribers in determining the possible interest level of that particular client or prospect in the subject matter of the
video. Our notifiTV and notifiLIVE products are also part of our proprietary interactive video platform that allows viewers to
interact with pre-recorded as well as live broadcast video content by clicking on links embedded in on-screen people, objects,
graphics or sponsors’ signage. Viewers can experience our notifiTV and notifiLIVE interactive content and capabilities on
most devices available in the market today without the need to download special software or proprietary video players.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation
The
accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial
reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with
GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated
financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC. The condensed consolidated
balance sheet as of December 31, 2017 included herein was derived from the audited consolidated financial statements as of that
date.
In
the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary
to fairly present the Company’s financial position and results of operations for the interim periods reflected. Except as
noted, all adjustments contained herein are of a normal recurring nature. Results of operations for the fiscal periods presented
herein are not necessarily indicative of fiscal year-end results.
Principles
of Consolidation
The
consolidated financial statements include the accounts of nFüsz, Inc., (formerly bBooth, Inc.) and Songstagram, Inc. (“Songstagram”)
our wholly owned subsidiary. All intercompany transactions and balances have been eliminated in consolidation.
Going
Concern
We
have incurred operating losses since inception and have negative cash flows from operations. We had a stockholders’ deficit
of $2,789,332 as of March 31, 2018, and incurred a net loss of $8,494,418 and utilized $991,923 of cash during the period then
ended. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of
the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement
its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to
continue as a going concern. In addition, the Company’s independent registered public accounting firm, in its report on
the Company’s December 31, 2017 consolidated financial statements, has raised substantial doubt about the Company’s
ability to continue as a going concern.
Our
continuation as a going concern is dependent on our ability to obtain additional financing until we can generate sufficient cash
flows from operations to meet our obligations. We intend to continue to seek additional debt or equity financing to continue our
operations. There is no assurance that we will ever be profitable or that debt or equity financing will be available to us. The
consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classifications of liabilities that may result should we be unable to continue
as a going concern.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and
expenses during the reported periods. Significant estimates include assumptions made in valuing derivative liabilities, valuation
of debt and equity instruments, share-based compensation arrangements and realization of deferred tax assets. Amounts could materially
change in the future.
Revenue
Recognition
We
generate substantially all of our revenue from subscription services, which are comprised of subscription fees from customer accounts.
Subscription service arrangements are generally non-cancelable and do not provide for refunds to customers in the event of cancellations
or any other right of return. We record revenue net of sales or excise taxes.
In
May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), (ASC 606). The underlying principle
of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected.
ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which
includes (1) identifying the contract(s) or agreement(s) with a customer, (2) identifying our performance obligations in the contract
or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations,
and (5) recognizing revenue as each performance obligation is satisfied.
Under
ASC 606, revenue is recognized when performance obligations under the terms of a contract are satisfied, which occurs for the
Company upon shipment or delivery of products or services to our customers based on written sales terms, which is also when control
is transferred. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring the products
or services to a customer.
The
Company adopted the guidance of ASC 606 on January 1, 2018. The implementation of ASC 606 had no impact on the prior period financial
statements and no cumulative effect adjustment was recognized.
Derivative
Financial Instruments
The
Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported
in the consolidated statements of operations. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities
are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument
could be required within 12 months of the balance sheet date.
The
Company uses Level 2 inputs for its valuation methodology for the derivative liabilities as their fair values were determined
by using a probability weighted average Black-Scholes-Merton pricing model based on various assumptions. The Company’s derivative
liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded
in results of operations as adjustments to fair value of derivatives.
Share
Based Payments
The
Company issues stock options, common stock, and equity interests as share-based compensation to employees and non-employees. The
Company accounts for its share-based compensation to employees in accordance with FASB ASC 718 “Compensation – Stock
Compensation.” Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award,
and is recognized as expense over the requisite service period.
The
Company accounts for share-based compensation issued to non-employees and consultants in accordance with the provisions of FASB
ASC 505-50
“
Equity - Based Payments to Non-Employees
.”
Measurement of share-based payment transactions
with non-employees is based on the fair value of whichever is more reliably measurable: (
a
) the goods or services received;
or (
b
) the equity instruments issued. The final fair value of the share-based payment transaction is determined at the
performance completion date. For interim periods, the fair value is estimated, and the percentage of completion is applied to
that estimate to determine the cumulative expense recorded.
The
Company values stock compensation based on the market price on the measurement date. As described above, for employees this is
the date of grant, and for non-employees, this is the date of performance completion. The Company values stock options and warrants
using the Black-Scholes option pricing model.
Net
Loss Per Share
Basic
net loss per share is computed by using the weighted-average number of common shares outstanding during the period. Diluted
net loss per share is computed giving effect to all dilutive potential common shares that were outstanding during the period.
Dilutive potential common shares consist of incremental common shares issuable upon exercise of stock options. No dilutive
potential common shares were included in the computation of diluted net loss per share because their impact was
anti-dilutive. As of March 31, 2018, the Company had a total of 22,447,225 options and 30,107,413 warrants outstanding, and
the potential issuance of approximately 11.2 million shares of common stock upon conversion of notes payable. These shares
were excluded from the computation of net loss per share because they are anti-dilutive. As of March 31, 2017, the Company
had total of 17,530,953 options and 18,455,264 warrants which were excluded from the computation of net loss per share
because they are anti-dilutive.
Recent
Accounting Pronouncements
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires
a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease
payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about
leasing arrangements. ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that
the cost of the lease is allocated over the lease term, generally on a straight-line basis. ASU 2016-02 requires classification
of all cash payments within operating activities in the statement of cash flows. Disclosures are required to provide the amount,
timing and uncertainty of cash flows arising from leases. A modified retrospective transition approach is required for lessees
for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented
in the financial statements, with certain practical expedients available. ASU 2016-02 is effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Company has
not yet evaluated the impact of the adoption of ASU 2016-02 on the Company’s financial statement presentation or disclosures.
In
July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic
480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features; (Part
II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and
Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception” (“ASU 2017-11”). ASU 2017-11
allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature)
is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with
down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value
of a down round feature only when it is triggered, and the strike price has been adjusted downward. For equity-classified freestanding
financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income
available to common stockholders in computing basic earnings per share. For convertible instruments with embedded conversion features
containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be
amortized to earnings. ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within
those fiscal years. Early adoption is permitted. The guidance in ASU 2017-11 can be applied using a full or modified retrospective
approach. The Company is currently evaluating the impact of the adoption of ASU 2017-11 on the Company’s financial statement
presentation or disclosures.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact
on the Company’s present or future consolidated financial statements.
3.
|
PROPERTY
AND EQUIPMENT
|
Property
and equipment consisted of the following as of March 31, 2018 and December 31, 2017.
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
(Unaudited)
|
|
|
|
|
Furniture and fixtures
|
|
$
|
56,890
|
|
|
$
|
56,890
|
|
Office equipment
|
|
|
50,669
|
|
|
|
50,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,559
|
|
|
|
107,559
|
|
Less: accumulated depreciation
|
|
|
(82,310
|
)
|
|
|
(77,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,249
|
|
|
$
|
30,554
|
|
Depreciation
expense amounted to $5,305 for three months ended March 31, 2018 and 2017, respectively.
|
On
March 21, 2015, the Company entered into an agreement with DelMorgan Group LLC (“DelMorgan”), pursuant to which
DelMorgan agreed to act as the Company’s exclusive financial advisor. In connection with the agreement, the Company
paid DelMorgan $125,000, which was advanced by a third-party lender in exchange for an unsecured note payable issued by the
Company bearing interest at the rate of 12% per annum payable monthly beginning on April 20, 2015.
|
|
|
|
Effective
March 20, 2017, for no additional consideration the Company entered into an extension
agreement with the third-party lender to extend the maturity date of the Note to March
21, 2018. All other terms of the Note remain unchanged. As of December 31, 2017, the
balance due under the note was $125,000.
On
January 29, 2018, the Company settled the debt of $125,000 in exchange for 1,250,000 shares of its Common Stock. There
was no gain or loss recognized as the fair value of the common shares issued approximates the note payable settled.
|
5.
|
NOTES
PAYABLE – RELATED PARTIES
|
The
Company has the following related parties notes payable as of March 31, 2018 and December 31, 2017:
Note
|
|
Issuance Date
|
|
Maturity Date
|
|
Interest Rate
|
|
|
Original Borrowing
|
|
|
Balance at
March 31,
2018
|
|
|
Balance at
December 31,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Note 1 (A)
|
|
December 1, 2015
|
|
August 1, 2018
|
|
|
12.0
|
%
|
|
$
|
1,203,242
|
|
|
$
|
1,198,883
|
|
|
$
|
1,198,883
|
|
Note 2
|
|
December 1, 2015
|
|
August 1, 2018
|
|
|
12.0
|
%
|
|
|
189,000
|
|
|
|
189,000
|
|
|
|
189,000
|
|
Note 3 (B)
|
|
December 1, 2015
|
|
April 1, 2017
|
|
|
12.0
|
%
|
|
|
111,901
|
|
|
|
111,901
|
|
|
|
111,901
|
|
Note 4 (C)
|
|
August 4, 2016
|
|
December 4, 2018
|
|
|
12.0
|
%
|
|
|
343,326
|
|
|
|
343,326
|
|
|
|
343,326
|
|
Note 5
|
|
August 4, 2016
|
|
December 4, 2018
|
|
|
12.0
|
%
|
|
|
121,875
|
|
|
|
121,875
|
|
|
|
121,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable – related parties, net
|
|
|
|
|
|
|
|
|
|
$
|
1,964,985
|
|
|
$
|
1,964,985
|
|
(A)
|
Per
the terms of the agreement, at Mr. Cutaia’s discretion (majority stockholder and Chief Executive Officer (CEO)), he
may convert up to $374,665 of outstanding principal, plus accrued interest thereon, into shares of common stock at a conversion
rate of $0.07 per share.
|
|
|
(B)
|
As
of March 31, 2018, and the date of this report, the note is past due. The Company is currently in negotiations with the note
holder to settle the note payable.
|
|
|
(C)
|
A
total of 30% of the note principal can be converted to shares of common stock at a conversion price $0.07 per share.
|
Total
interest expense for notes payable to related parties for the three months ended March 31, 2018 and 2017 was $58,142, respectively.
6.
|
CONVERTIBLE
NOTES PAYABLE
|
The
Company has the following convertible notes payable as of March 31, 2018 and December 31, 2017:
Note
|
|
Note Date
|
|
Maturity Date
|
|
Interest Rate
|
|
|
Original Borrowing
|
|
|
Balance at
March 31,
2018
|
|
|
Balance at
December 31,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Note payable
|
|
April 3, 2016
|
|
April 4, 2018
|
|
|
12
|
%
|
|
$
|
600,000
|
|
|
$
|
-
|
|
|
$
|
680,268
|
|
Note payable
|
|
June and August 2017
|
|
February and March 2018
|
|
|
5
|
%
|
|
$
|
220,500
|
|
|
|
-
|
|
|
|
220,500
|
|
Note payable
|
|
Various
|
|
Various
|
|
|
5
|
%
|
|
$
|
320,000
|
|
|
|
-
|
|
|
|
320,000
|
|
Note payable
|
|
December 8, 2017
|
|
December 8, 2018
|
|
|
8
|
%
|
|
$
|
370,000
|
|
|
|
-
|
|
|
|
370,000
|
|
Note payable
|
|
December 13, 2017
|
|
September 20, 2018
|
|
|
8
|
%
|
|
$
|
105,000
|
|
|
|
-
|
|
|
|
105,000
|
|
Total notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
1,695,768
|
|
Debt discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
(675,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable, net of debt discount
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
680,268
|
|
During
2016 through 2017, the Company issued convertible notes payable to unrelated, third party creditors/investors totaling $1,695,768.
The notes bear an average interest rate of 8% per annum, secured by the Company’s assets, matures starting February 2018
through January 2019 and convertible to shares of common stock based upon a discounted market price. As of December 31, 2017,
outstanding balance of the notes payable amounted $1,695,768 and unamortized debt discount of $675,453.
During
the period ended March 31, 2018, the Company issued similar convertible notes payable totaling $150,000 in exchange for cash of
$130,000. The Company determined that since the conversion floor had no limit to the conversion price, that the Company could
no longer determine if it had enough authorized shares to fulfil the conversion obligation. As such, pursuant to current accounting
guidelines, the Company determined that the conversion feature of the notes created a derivative with a fair value of $252,778
at the date of issuance. The Company accounted for the fair value of the derivative up to the face amount of the note of $150,000
as a valuation discount amortized over the life of the note, and the excess of $102,778 being recorded as financing cost (see
Note 8 for discussion of derivative liability). In addition, the Company also recorded the notes’ original issue discount
of $20,000 as financing costs.
As
part of the offering, the Company also granted a five-year warrant to acquire 1,000,000 shares of the Company’s common stock
with an exercise price of $0.14 per share. A total of 500,000 warrants that were granted included full ratchet reset provision
in case a future offering at a price below $0.14 per share and a fundamental transaction provision that could give rise to an
obligation to pay cash to the warrant holder and a reset. As such, pursuant to current accounting guidelines, the Company determined
that the warrant exercise price and fundamental transaction clause created a derivative with a fair value of $48,961 at the date
of issuance. The Company accounted for the fair value of the derivative as financing cost. See Note 8 for discussion of derivative
liability.
During
the period ended March 31, 2018 the Company paid $845,000 to settle certain outstanding convertible notes and converted outstanding
convertible notes payable and accrued interest of $2,139,005 thru the issuance of 6,133,006 shares of common stock. As the fair
value of the common shares issued of $1,679,276 exceeded the recorded amount of the convertible notes and accrued interest settled,
the Company recorded a loss on debt extinguishment $1,090,056 on the settlement. The Company amortized the remaining debt discount
of $675,453 to interest expense during the period.
As
of March 31, 2018, all convertible notes payable had been settled or paid.
Total
interest expense for convertible notes payable for the three months ended March 31, 2018 and 2017 was $144,541 and $20,128, respectively.
Under
authoritative guidance used by the FASB on determining whether an instrument (or embedded feature) is indexed to an entity’s
own stock, instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The Company has
issued certain convertible notes whose conversion price contains reset provisions based on a future offering price and/or whose
conversion price is based on a future market price. However, since the number of shares to be issued is not explicitly limited,
the Company is unable to conclude that enough authorized and unissued shares are available to share settle the conversion option.
In addition, the Company also granted certain warrants which included a fundamental transaction provision that could give rise
to an obligation to pay cash to the warrant holder.
As
a result, the conversion option and warrants are classified as a liability and bifurcated from the debt host and accounted for
as a derivative liability in accordance with ASC 815 and will be re-measured at the end of every reporting period with the change
in value reported in the statement of operations.
The
derivative liabilities were valued using a probability weighted average Black-Scholes-Merton pricing model with the following
average assumptions:
|
|
March 31, 2018
|
|
|
Upon Issuance
|
|
|
December 31, 2017
|
|
Stock Price
|
|
$
|
1.45
|
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
Exercise Price
|
|
$
|
0.13
|
|
|
$
|
0.08
|
|
|
$
|
0.06
|
|
Expected Life
|
|
|
4.75
|
|
|
|
2.33
|
|
|
|
1.26
|
|
Volatility
|
|
|
228
|
%
|
|
|
193
|
%
|
|
|
189
|
%
|
Dividend Yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk Free Interest Rate
|
|
|
1.93
|
%
|
|
|
1.18
|
%
|
|
|
1.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
$
|
1,735,354
|
|
|
$
|
301,739
|
|
|
$
|
1,250,581
|
|
The
expected life of the conversion feature of the notes and warrants was based on the remaining contractual term of the notes and
warrants. The Company uses the historical volatility of its common stock to estimate the future volatility for its common stock.
The expected dividend yield was based on the fact that the Company has not paid dividends in the past and does not expect to pay
dividends in the future. The risk-free interest rate was based on rates established by the Federal Reserve Bank.
As
of December 31, 2017, the Company had recorded a derivative liability of $1,250,581. During the period ended March 31, 2018, the
Company recorded an additional derivative liability totaling $301,739 as a result of the issuance of convertible notes and warrants.
During the period ending March 31, 2018, the Company extinguished a derivative liability of $1,718,816 upon the conversion and
payment of outstanding convertible notes payable, which was recorded as a gain on extinguishment, and $723,072 from exercise of
warrants that was accounted for as a charge to additional paid in capital. During the period ended March 31, 2018 the Company
recorded a change in fair value of $2,624,887 up to the dates of the extinguishment which has been reflected as a cost in the
accompanying statement of operations. At March 31, 2018, the fair value of the derivative liability amounted to $1,735,354.
The
Company’s common stock activity for the three months ended March 31, 2018 is as follows:
Common
Stock
Shares
Issued for Services
– During the period ended March 31, 2018, the Company issued 4,748,514 common shares to employees
and vendors for services rendered with a fair value of $3,269,747 and are expensed based on fair market value of the stock price
at the date of grant. Included in these issuances were 4,500,000 shares of common stock with a fair value of $1,539,000 granted
to officers and a director of the Company for services rendered.
Shares
Issued from Stock Subscription
. For the period ended March 31, 2018, the Company issued 16,409,067 common shares to investors
for net cash proceeds of $2,278,500.
Shares
Issued from Conversion of Note Payable
- During the period ended March 31, 2018, the Company issued 7,383,006 shares of
common stock upon conversion of notes payable and accrued interest of $1,187,243 (see Note 4 and 6).
Shares
Issued Upon Exercise of Put Option
- In January and February 2018, the Company issued Put Notices to Kodiak and issued
3,048,105 shares of common stock in exchange for cash of $1,000,000. In addition, the Company also issued Kodiak the prorated
warrants to purchase 2,000,000 shares of common stock at $0.25 per share.
Shares
Issued for Accrued Salary
- On March 28, 2018 the Company converted the CEO’s accrued salary of $582,333 into 407,226
shares of common stock with a fair value of $582,333 at the date of conversion.
Shares
Issued from Exercise of Warrants
- During the period months ended March 31, 2018, a total of 1,281,000 warrants were exercised
in a cash and cashless exercised in exchange for 1,011,856 common shares. The Company received cash of $22,000 upon exercise of
the warrants.
Stock
Options
Effective
October 16, 2014, the Company adopted the 2014 Stock Option Plan (the “Plan”) under the administration of the board
of directors to retain the services of valued key employees and consultants of the Company.
At
its discretion, the Company grants share option awards to certain employees and non-employees, as defined by ASC 718, Compensation—Stock
Compensation, under the 204 Stock Option Plan (the “Plan”) and accounts for its share-based compensation in accordance
with ASC 718.
A
summary of option activity for the three months ended March 31, 2018 is presented below.
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2017
|
|
|
21,840,953
|
|
|
$
|
0.33
|
|
|
|
1.21
|
|
|
|
|
|
Granted
|
|
|
906,272
|
|
|
|
0.26
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(300,000
|
)
|
|
|
1.30
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2018
|
|
|
22,447,225
|
|
|
$
|
0.25
|
|
|
|
1.83
|
|
|
$
|
26,926,862
|
|
Vested and deemed vested at March 31, 2018
|
|
|
12,229,135
|
|
|
$
|
0.30
|
|
|
|
|
|
|
$
|
14,435,999
|
|
Exercisable at March 31, 2018
|
|
|
9,692,428
|
|
|
$
|
0.35
|
|
|
|
|
|
|
$
|
10,693,296
|
|
During
the three months ended March 31, 2018, the Company granted stock options to employees and consultants to purchase a total 906,272
shares of common stock for services rendered. The options have an average exercise price of $0.26 per share, expire in five years
and vest on grant date or over a period of three years from grant date. Total fair value of these options at grant date was $164,165
using the Black-Scholes Option Pricing model with the following average assumptions: life of 5 years; risk free interest rate
of 2.56%; volatility of 184% and dividend yield of 0%.
The
total stock compensation expense recognized relating to vesting of these stock options for the three months ended March 31, 2018
amounted to $1,341,207. As of March 31, 2018, total unrecognized stock-based compensation expense was $3,549,739 which is expected
to be recognized as an operating expense through February 2021.
The
fair value of share option award is estimated using the Black-Scholes method based on the following weighted-average assumptions:
|
|
3 Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Risk-free interest rate
|
|
|
2.25% - 2.66
|
%
|
|
|
1.93
|
%
|
Average expected term (years)
|
|
|
5 years
|
|
|
|
5 years
|
|
Expected volatility
|
|
|
184.45
|
%
|
|
|
160
|
%
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of measurement corresponding with the
expected term of the share option award; the expected term represents the weighted-average period of time that share option awards
granted are expected to be outstanding giving consideration to vesting schedules and historical participant exercise behavior;
the expected volatility is based upon historical volatility of the Company’s common stock; and the expected dividend yield
is based upon the Company’s current dividend rate and future expectations.
Warrants
The
Company has the following warrants outstanding as of March 31, 2018 all of which are exercisable:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Life (Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
28,436,413
|
|
|
$
|
0.13
|
|
|
|
2.79
|
|
|
$
|
-
|
|
Granted
|
|
|
3,000,000
|
|
|
|
0.21
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(48,000
|
)
|
|
|
0.10
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(1,281,000
|
)
|
|
|
0.17
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at March 31, 2018
|
|
|
30,107,413
|
|
|
$
|
0.14
|
|
|
|
3.15
|
|
|
$
|
39,553,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested March 31, 2018
|
|
|
30,107,413
|
|
|
|
|
|
|
|
|
|
|
$
|
39,553,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2018
|
|
|
30,107,413
|
|
|
|
|
|
|
|
|
|
|
$
|
39,553,468
|
|
For
the three months ended March 31, 2018, the Company issued warrants to note holders to purchase a total of 1,000,000 shares of
common stock. The warrants are exercisable at an average price of $0.14 per share and will expire in January 2023. A total of
500,00 warrants issued were accounted as derivative liability (see Note 6).
On
February 21, 2018, the Company issued 2,000,000 warrants as part of the exercise of our put option with Kodiak. The exercise price
of the 2,000,000 warrants is $0.25 per share and expire on February 20, 2023.
During
the three months ended March 31, 2018, a total of 1,281,000 warrants were exercised and converted into 1,011,856 common shares
at a weighted average exercise price of $0.17. The Company received $22,000 upon exercise of the warrants.
9.
|
COMMITMENTS
AND CONTINGENCIES
|
Litigation
We
know of no material proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder
is a party adverse to our Company or any of our subsidiaries or has a material interest adverse to our Company or any of our subsidiaries.
Subsequent
to March 31, 2018, the Company issued 1,050,000 common shares for net proceeds of $700,000. In addition, 41,667 shares of common
stock that were subject to vesting schedules and previously accounted for were issued.
On April 16, 2018, the Company
and Kodiak Capital Group, LLC “Kodiak” agreed that all notes payable between the parties shall be deemed
satisfied and cancelled. Further, all registered shares held by Kodiak shall be subject to the following amended more restrictive
leak-out provision: the number of shares Kodiak may sell in any given week is hereby limited to not more than the greater
of (a) 400,000 shares per week or (b) five percent of the prior week’s reported trading volume, proportionately adjusted
for weeks with fewer than five trading days.
On
April 19, 2018, 487,620 options were exercised and converted into 487,620 common shares at $.07. The Company received $34,133
upon exercise of the options.
On
April 27, 2018, a total of 2,000,000 warrants were exercised in a cashless exercise in exchange for 1,884,869 common shares.