The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2018
Introductory Comment
Unless otherwise indicated, any reference to
“our company”, “we”, “us”, or “our” refers to Creative Medical Technology Holdings,
Inc., and as applicable to its wholly owned subsidiary, Creative Medical Technologies, Inc., a Nevada corporation (“
CMT
”).
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Organization
-
Creative Medical Technology Holdings, Inc., is considered to be a commercial stage company, following the commencement of sales
of stem cell separation equipment and disposable kits used in our Caverstem procedure to treat ED in the fourth quarter of 2017.
Our fiscal year end is December 31st. We have acquired the licensing rights for our Amniostem amniotic-based stem cell, purchased
the patent for our ED and lower back pain treatments, and filed patent applications for our neurological treatments.
Use of Estimates
– The
preparation of the financial statements in conformity 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 disclosure
of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Basis of Presentation
– The accompanying unaudited condensed consolidated financial statements have been prepared without audit. In the
opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows at June 30, 2018 and for the three and six months period then ended
have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America have been condensed or omitted. The operations
for the three and six months period ended June 30, 2018, are not necessarily indicative of the operating results for the full
year.
Going Concern
– The
accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America, which contemplate continuation of the Company as a going
concern. However, during the six month period ended June 30, 2018, the Company incurred a net loss of $14,018,984 had negative
cash flows from operating activities, had a working capital deficit of $10,766,185 and had minimal revenue-generating
activities. These factors raise substantial doubt about the ability of the Company to continue as a going concern. In this
regard, management is proposing to raise any necessary additional funds not provided by operations through loans or through
additional sales of equity securities. There is no assurance that the Company will be successful in raising this additional
capital or in achieving profitable operations. The unaudited condensed consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
Revenue
-
The
Company recognizes revenue as it is earned as defined by U.S. GAAP. We have adopted the new revenue recognition standard ASC 606 that
went into effect on January 1, 2018 and determined there was no material impact to the Company’s financial statements.
All revenues reported in 2018 and beyond will reflect those standards.
Fair Value of
Financial Instruments
- The Company’s financial instruments consist of cash and cash equivalents,
convertible notes, and payables. The carrying amount of cash and cash equivalents and payables approximates fair value because
of the short-term nature of these items.
When determining fair
value, whenever possible the Company uses observable market data, and relies on unobservable inputs only when observable market
data is not available. As of June 30, 2018 and December 31, 2017, the Company didn’t have any Level 1 or 2 financial instruments.
The table below reflects the results of our Level 3 fair value calculations:
|
|
Notes
|
|
|
Warrants
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability at December 31, 2017
|
|
$
|
1,060,315
|
|
|
$
|
248,875
|
|
|
$
|
1,309,190
|
|
Addition of new conversion option derivatives
|
|
|
2,198,749
|
|
|
|
313,608
|
|
|
|
2,512,357
|
|
Conversion of note derivatives
|
|
|
(3,017,685
|
)
|
|
|
(1,805,258
|
)
|
|
|
(4,822,943
|
)
|
Change in fair value
|
|
|
5,481,702
|
|
|
|
5,448,464
|
|
|
|
10,930,166
|
|
Derivative liability at June 30, 2018
|
|
$
|
5,723,081
|
|
|
$
|
4,205,689
|
|
|
$
|
9,928,770
|
|
Basic and Diluted Loss Per Share –
The Company follows Financial Accounting Standards Board (“FASB”) ASC 260 Earnings per Share to account for
earnings per share. Basic earnings per share (“EPS”) calculations are determined by dividing net loss by the weighted
average number of shares of common stock outstanding during the year. Diluted earnings per share calculations are determined by
dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding. During
periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation. During the three
and six month periods ended June 30, 2018, the Company had 500,000 options and 76,968,929 warrants to purchase common stock outstanding.
During the three and six month periods ended June 30, 2017, the Company had 500,000 options and 800,000 warrants to purchase common
stock outstanding. In addition, the Company has various convertible notes payable which at June 30, 2018 are convertible into
approximately 92,775,038 shares of common stock. The effects of the dilutive securities were anti-dilutive due to net loss during
the three month period ended June 30, 2018 and 2017.
Recent Accounting Pronouncements –
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),” which addresses the complexity of accounting for certain financial instruments
with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result
in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost
and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features
that require fair value measurement of the entire instrument or conversion option. For public business entities, the amendments
in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December
15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after December
15, 2019, and interim periods within fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact
of adopting this guidance on its consolidated financial statements.
The Company has reviewed all recently issued,
but not yet adopted, accounting standards in order to determine their effects, if any, on its results of operation, financial position
or cash flows. Based on that review, the Company believes that none of these pronouncements will have a significant effect on its
financial statements other than disclosed above.
NOTE 2 – LICENSING AGREEMENTS
ED Patent
– The Company
acquired a patent from CMH.
Amortization expense of $2,493 and $4,986 were recorded for the
three month and six month periods ended June 30, 2018, respectively.
As of June 30, 2018, the carrying value of the patent
was $75,890. The Company expects to amortize approximately $9,972 annually through 2026 related to the patent costs.
Male Infertility License Agreement -
The Company has acquired a royalty license from Los Angeles Biomedical Research Institute at Harbor-UCLA Medical Center (“
LABIOMED
”) granting the exclusive license to the products and services of a LABIOMED patent.
The Company is subject to a 6% royalty payment
to LABIOMED on net sales of any products under this license and 25% on any non-royalty sublicense income. Commencing in 2019, and
each subsequent year thereafter, the Company is required to pay to LABIOMED annual maintenance royalties of $20,000, unless during
the prior one-year period the Company paid $50,000 or more in actual royalty payments. Finally, the Company agreed to pay LABIOMED
certain milestone payments upon achieving the milestones set forth in the agreement. As of June 30, 2018, no amounts are currently
due to LABIOMED.
Multipotent Amniotic Fetal Stem Cells
License Agreement -
In August 2016, CMT entered into a License Agreement with a University. This license agreement grants
to CMT the exclusive right to all products derived from a patent for use of multipotent amniotic fetal stem cells composition of
matter throughout the world during the period ending on the expiration date of the longest-lived patent rights under the patent.
CMT paid the University an initial license fee within 30 days of entering into the agreement. CMT is also required to pay annual
license maintenance fees on each anniversary date of the agreement, which maintenance fees would be credited toward any earned
royalties for any given period. The License Agreement provides for payment of various milestone payments and earned royalties on
the net sales of licensed products by CMT or any sub licensee. CMT is also required to reimburse the University for any future
costs associated with maintaining the patent. CMT may terminate the license agreement for any reason upon 90 days’ written
notice and the University may terminate the agreement in the event CMT fails to meet its obligations set forth therein, unless
the breach is cured within 30 days of the notice from the University specifying the breach. CMT is also obligated to indemnify
the University against claims arising due to the exercise of the license by CMT or any sub licensee. As of June 30, 2018, no amounts
are currently due to the University.
The Company estimates that the patent expires
in February 2026 and has elected to amortize the patent through the period of expiration on a straight line basis. Amortization
expense of $293 and $586 were recorded for the three and six month periods ended June 30, 2018
2018,
respectively.
As of June 30, 2018, the carrying value of the patent was $8,187. The Company expects to amortize approximately
$1,172 annually through 2026 related to the patent costs.
Lower Back Patent
– The
Company, through a newly created subsidiary of CMT, StemSpine, LLC, acquired a patent from CMH, a related company, on May 17, 2017,
for $100,000, payable in cash or stock. The patent expires on May 19, 2027 and the Company has elected to amortize the patent over
a ten-year period on a straight line basis. Amortization expense of $2,500 and $5,000 were recorded for the three and six month
periods ended June 30, 2018, respectively. As of June 30, 2018, the carrying value of the patent was $90,000. The company expects
to amortize approximately $10,000 annually through 2027 related to the patent costs.
For a period of five years from the date of
the first sale of any product derived from the patent, StemSpine is required to make royalty payments of 5% from gross sales of
products. StemSpine has also agreed to pay royalties of 50% of sale price or ongoing payments from third parties for licenses granted
under the patent to third parties. In addition, StemSpine has agreed to make progress payments under the patent purchase agreement
determined by whether the technology represented by the patent is tested by use of autologous cells or allogenic cells. In the
case of pursuit of the technology using autologous cells, StemSpine has agreed to pay CMH $100,000 upon the signing of an agreement
with a university for the initiation of an IRB clinical trial and $200,000 upon completion of the clinical trial. In the event
StemSpine determines to pursue the technology using allogenic cells, StemSpine has agreed to pay CMH $100,000 upon the filing for
IND with the FDA; $200,000 upon the dosing of the first patient in Phase 1-2 clinical trial; and $400,000 upon the dosing of the
first patient in Phase 3 clinical trial. In each case StemSpine has the option to make these payments in cash or in shares of the
Company’s common stock at a discount to the market price of the stock at the time of the transaction. The parties to the
patent purchase agreement have agreed that in no event will the aggregate royalty payments under the agreement exceed $2,500,000.
NOTE 3 – RELATED PARTY TRANSACTIONS
The Company has incurred a monetary obligation
to a related corporation to reimburse the cost of services provided to the Company (management and consulting) through June 30,
2018. Each of the Company’s executive officers is employed by the parent company, CMH, and will continue to receive his or
her salary or compensation from CMH. The Company has an agreement with CMH which obligates the Company to reimburse CMH $35,000
per month for such services beginning January 2016. The compensation paid by CMH will include an allocation of services performed
for CMH and for the Company. The amounts are presented as a “management fee payable - related party” on the accompanying
unaudited condensed consolidated balance sheets. The liability is non-interest bearing, unsecured, and will be due upon the Company
successfully raising at least $1,000,000 through the sale of equity. As of June 30, 2018, amounts due to CMH under the arrangement
were $154,050.
On November 17, 2017, the Company entered into
a Management Reimbursement Agreement dated November 17, 2017, with Creative Medical Technologies, Inc. (“ CMT ”), the
wholly owned subsidiary of the Company, and with Creative Medical Health, Inc., the parent of the Company (“ CMH ”).
The Agreement memorializes the arrangement between the parties whereby the Company has, since January 1, 2016, reimbursed CMH $35,000
per month for the services of management and consultants employed by CMH and performing services for the Company and CMT. At the
option of CMH, the reimbursable amounts set forth in the Agreement may be paid from time to time in shares of common stock of the
Company at a price equal to a 30% discount to the lowest closing price during the 20 trading days prior to time the notice is given.
The Agreement may be terminated by either party upon 30 days’ prior written notice.
On January 12, 2018, the Company entered into
a Debt Settlement Agreement with Creative Medical Health, Inc., the parent of the Company, to exchange $150,000 in management fees
owed to Creative Medical Health, Inc. in exchange for 3,000,000 shares of Series A Preferred Stock. In turn, Creative Medical Health,
Inc. entered into a Debt Settlement Agreement with Timothy Warbington, our CEO, Chairman, and principal shareholder to transfer
the 3,000,000 shares of Series A Preferred Stock in exchange for $150,000 of unpaid compensation owed to Mr. Warbington.
During 2016, the Company entered into three
note payable agreements with CMH in which the proceeds were used in operations. The notes payable were dated February 2, 2016,
May 1, 2016 and May 18, 2016 and resulted in borrowings of $50,000, $50,000 and $25,000, respectively. Notes payable of $50,000
mature on April 30, 2018, $50,000 on July 31, 2018 and $25,000 on May 18, 2018. On May 4, 2017, CMT and CMH entered into a Note
Extension and Limited Waiver Agreement whereby the parties extended the maturity date of the 8% Promissory Note dated February
2, 2016, in the principal amount of $50,000, from April 30, 2017, to April 30, 2018, and CMH waived the nonpayment of the Note
by CMT on the original maturity date. On extension, CMT paid to CMH accrued interest related to the extended note of $4,050. On
July 31, 2017, CMT and CMH entered into a Note Extension and Limited Waiver Agreement whereby the parties extended the maturity
date of the 8% Promissory Note dated May 1, 2016, in the principal amount of $50,000, from July 31, 2017, to July 31, 2018, and
CMH waived the nonpayment of the Note by CMT on the original maturity date. On extension, CMT paid to CMH accrued interest related
to the extended note of $4,050. The notes incur interest at 8% per annum on the outstanding balance of the notes.
On April 11, 2018 CMH converted the total principal
and accrued interest all three notes into 9,855,307 shares of common stock.
See Note 2 for discussion of an additional
related party transaction with CMH.
NOTE 4 – DEBT
$400,000 Convertible Debenture
On May 2, 2017, the Company entered into a
convertible debenture agreement with a third party for an aggregate principal amount of up to $400,000, for which up to $360,000
in proceeds is to be received. On May 2, 2017, the Company received the first tranche of proceeds of $85,000 for which the Company
issued a convertible debenture in the face amount of $100,000. During the three and six month period ended June 30, 2018 the Company
amortized $54,085 to interest expense. As of June 30, 2018, a discount of $0 remained. During the three and six month periods ended
June 30, 2018, the lender converted $54,200 of principal into 23,485,183 shares of common stock. On March 23, 2018 the Company
paid the lender $1,000 to extinguish the remaining principal balance. As of June 30, 2018 the Company had fulfilled all the obligations
of the debenture.
$115,000 Convertible Note
On April 10, 2017, the Company
entered into a convertible note agreement with a third party for an aggregate principal amount of $115,000, for which
$103,250 in proceeds were received on May 5, 2017. Under the terms of the agreement, the convertible note incurs interest at
10% per annum and has a maturity date of January 10, 2018. The note holder has notified the company they do not consider the
note in default and their intent is to continue converting the remaining principal and accrued interest into common shares.
During the three and six month periods ended June 30, 2018, the Company amortized $0 and $4,600 to interest expense respectively. As of
June 30, 2018, a discount of $0 remained.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company accounted for the conversion
feature and the warrants as derivative liabilities, see Note 5. Derivative accounting applies as the conversion price is variable
and does not have a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid
prior to the note being converted significant pressure maybe put on the Company’s stock price and additional dilution of
current shareholders may take place. During the three and six month periods ended June 30, 2018, the lender converted $70,341 of
principal, interest and fees into 80,306,141 common shares $134,127 of principal, interest and fees into 145,929,641 common shares
respectively. As of June 30, 2018 the Company had fulfilled all the obligations of the note.
$55,000 Convertible Note
On April 24, 2017, the Company entered into
a convertible note agreement with a third party for an aggregate principal amount of $55,000, for which $47,500 in proceeds were
received on May 8, 2017. Under the terms of the agreement, the convertible note incurs interest at 10% per annum and has a maturity
date of April 24, 2018. During the three and six month periods ended June 30, 2018 the Company amortized $0 and $17,863 to interest
expense respectively. As of June 30, 2018, a discount of $0 remained.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company accounted for the conversion
feature and the warrants as derivative liabilities, see Note 5. Derivative accounting applies as the conversion price is variable
and does not have a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not
repaid prior to the note being converted significant pressure maybe put on the Company’s stock price and additional dilution
of current shareholders may take place. The warrants were considered derivative liabilities as there are various reset provisions
to the exercise price based upon additional issuances of common stock and equivalents. As of June 30, 2018 the Company had fulfilled
all the obligations of the note.
$50,000 Secured Convertible Note
On June 26, 2017, the Company entered into
a convertible note agreement with a third party for an aggregate principal amount of $50,000, for which $50,000 in proceeds were
received on June 26, 2017. Under the terms of the agreement, the convertible note incurs interest at 12% per annum and matured
on December 26, 2017. The convertible note has since been retired through a debt exchange agreement with a third party dated March
8, 2018, see "$60,000 Convertible Note - Global" below.
$50,000 Convertible Note
On July 19, 2017, the Company entered into
a convertible note agreement with a third party for an aggregate principal amount of $50,000, for which $43,000 in proceeds were
received on July 25, 2017. Under the terms of the agreement, the convertible note incurs interest at 5% per annum and has a maturity
date of July 19, 2018. During the three and six months ended June 30, 2018 the Company amortized $15,068 and $27,397 respectively
to interest expense. As of June 30, 2018, a discount of $0 remained.
During the three and six month periods ended
June 30, 2018, the lender converted $31,720 of principal, interest and fees into 35,756,381 common shares $54,697 of principal,
interest and fees into 56,453,381 common shares respectively. As of June 30, 2018 there were 333,470,447 common shares reserved
with our transfer agent. As of June 30, 2018 the Company had fulfilled all the obligations of the note.
$30,000 Convertible Note
On January 9, 2018, the Company entered into
a convertible note agreement with a third party for an aggregate principal amount of $30,000, for which 12,500,000 outstanding
warrants from the convertible note dated April 24, 2017 were extinguished. The difference between the convertible note, the conversion
feature and the value of the warrants was recorded as a derivative loss. No proceeds were received in conjunction with this note.
Under the terms of the agreement, the convertible note incurs interest at 8% per annum and has a maturity date of January 9, 2019.
The convertible note is convertible upon issuance and convertible into shares of the Company’s stock at a conversion price
equal to 60% of the lowest traded price of the Company’s common stock during the previous 20 trading days preceding the conversion
date. The Company is required at all times to reserve shares of the Company’s common stock equal to three times the number
of common shares the convertible note is convertible into.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company accounted for the conversion
feature as a derivative liability, see Note 5. Derivative accounting applies as the conversion price is variable and does not have
a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid prior to the
note being converted significant pressure maybe put on the Company’s stock price and additional dilution of current shareholders
may take place. As of June 30, 2018, there were 0 shares reserved with our transfer agent with a potential of up to 1,629,600 being
reserved if and when the lender issues a request to our transfer agent.
In the event of default, the holder has the
right to require the Company to pay an amount equal to 120% multiplied by the then outstanding entire balance of the note, including
principal and accrued unpaid interest. In addition, the default interest rate would increase to 24%.
The Company has the option to redeem the convertible
notes at any time within 180 days from the date of issuance at 120% of the principal and interest; and after 180 days the right
of prepayment expires.
During the three and six month periods ended
June 30, 2018, the lender converted $ 27,744 of principal, interest and fees into 4,533,351 common shares.
$44,000 Convertible Note
On January 17, 2018, the Company entered into
a convertible note agreement with a third party for an aggregate principal amount of $44,000, for which $19,000 in proceeds were
received on January 23, 2018 and $19,000 in proceeds were received on February 26, 2018. Under the terms of the agreement, the
convertible note incurs interest at 10% per annum and has a maturity date of January 17, 2019. The convertible note is convertible
upon issuance and convertible into shares of the Company’s stock at a conversion price equal to 60% of the lowest traded
price of the Company’s common stock during the previous 20 trading days preceding the conversion date. The Company is required
at all times to reserve shares of the Company’s common stock equal to three times the number of common shares the convertible
note is convertible into. The Company is amortizing the on issuance discount of $4,000, legal fees of $2,000 and the remaining
discount of $34,324 due to the recording of a derivative liability as discussed in Note 5. The Company is amortizing the total
discount of $40,324 to interest expense using the straight-line method over the term of the loan. During the three and six month
periods ended June 30, 2018 the Company amortized $32,259 and $40,324 to interest expense respectively. As of June 30, 2018, a
discount of $0 remained.
The conversion price is subject to
adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and
any issuances of securities below the conversion price of the convertible note. On the date of issuance, the Company
accounted for the conversion feature as a derivative liability, see Note 5. Derivative accounting applies as the conversion
price is variable and does not have a floor as to the number of common shares in which could be converted. Thus, if the
convertible note is not repaid prior to the note being converted significant pressure maybe put on the Company’s stock
price and additional dilution of current shareholders may take place. As of June 30, 2018, there were 125,259,293 shares
reserved with our transfer agent with a potential of 0 being reserved if and when the lender issues a request to our transfer
agent.
In the event of default, the holder has the
right to require the Company to pay an amount equal to 120% multiplied by the then outstanding entire balance of the note, including
principal and accrued unpaid interest. In addition, the default interest rate would increase to 24%.
There is no option for the Company to redeem
the convertible note prior to maturity.
During the three and six month periods ended
June 30, 2018, the lender converted $44,000 of principal, interest and fees into 27,518,485 common shares. As of June 30, 2018
the Company had fulfilled all the obligations of the note.
$12,500 Convertible Note
On January 22, 2018, the Company entered into
a convertible note agreement with a third party for an aggregate principal amount of $12,500, in exchange for the release of reserved
shares to the Company. Under the terms of the agreement, the convertible note incurs interest at 8% per annum and has a maturity
date of January 22, 2019. The convertible note is convertible upon issuance and convertible into shares of the Company’s
stock at a conversion price equal to 60% of the lowest traded price of the Company’s common stock during the previous 20
trading days preceding the conversion date.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company accounted for the conversion
feature as a derivative liability, see Note 5. Derivative accounting applies as the conversion price is variable and does not have
a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid prior to the
note being converted significant pressure maybe put on the Company’s stock price and additional dilution of current shareholders
may take place.
In the event of default, the holder has the
right to require the Company to pay an amount equal to 120% multiplied by the then outstanding entire balance of the note, including
principal and accrued unpaid interest. In addition, the default interest rate would increase to 24%.
The Company has the option to redeem the convertible
note within 180 days from the date of issuance at 120% of the principal and interest. After 180 days the right of prepayment expires.
During the three and six month periods ended
June 30, 2018, the lender converted $12,925 of principal, interest and fees into 2,111,873 common shares. As of June 30, 2018 the
Company had fulfilled all the obligations of the note.
$53,000 Convertible Note
On February 15, 2018, the Company entered into
a convertible note agreement with a third party for an aggregate principal amount of $53,000, for which $50,000 in proceeds were
received on February 22, 2018 . Under the terms of the agreement, the convertible note incurs interest at 12% per annum and has
a maturity date of February 15, 2019. The convertible note is convertible upon issuance and convertible into shares of the Company’s
stock at a conversion price equal to 61% of the average of the two lowest traded prices of the Company’s common stock during
the previous 15 trading days preceding the conversion date. The Company is required at all times to reserve shares of the Company’s
common stock equal to three times the number of common shares the convertible note is convertible into. The Company is amortizing
the on issuance discount of $3,000 and the remaining discount of $50,000 due to the recording of a derivative liability as discussed
in Note 5. The Company is amortizing the total discount of $53,000 to interest expense using the straight-line method over the
term of the loan. During the three and six months ended June 30, 2018 the Company amortized $46,611 and $53,000 to interest expense
respectively. As of June 30, 2018, a discount of $0 remained.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company accounted for the conversion
feature as a derivative liability, see Note 5. Derivative accounting applies as the conversion price is variable and does not have
a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid prior to the
note being converted significant pressure maybe put on the Company’s stock price and additional dilution of current shareholders
may take place. As of June 30, 2018, there were 0 shares reserved with our transfer agent with a potential of up to 256,031,833
being reserved if and when the lender issues a request to our transfer agent.
In the event of default, the holder has the
right to require the Company to pay an amount equal to 120% multiplied by the then outstanding entire balance of the note, including
principal and accrued unpaid interest. In addition, the default interest rate would increase to 22%.
The Company has the option to redeem the convertible
notes within 90 days from the date of issuance at 115% of the principal and interest; between 91 and to 180 days from the date
of issuance at 120% of the principal and interest; and after 180 days the right of prepayment expires.
On April 26, 2018 the Company retired the note
with a payment of $82,084 to the note holder. A derivative liability gain of $279,795 was recorded to reflect the retirement of
the derivative liability.
$27,500 Convertible Note
On March 9, 2018, the Company entered into
a convertible note agreement with a third party for an aggregate principal amount of $27,500, for which proceeds of $23,500 were
received on March 9, 2018. Under the terms of the agreement, the convertible note incurs interest at 10% per annum and has a maturity
date of March 9, 2019. The convertible note is convertible upon issuance and convertible into shares of the Company’s stock
at a conversion price equal to 60% of the lowest traded price of the Company’s common stock during the previous 20 trading
days preceding the conversion date. The Company is amortizing the discount of $27,500 due to on issuance discount of $4,000 and
the recording of a derivative liability as discussed in Note 5. The Company is amortizing the discount of $27,500 to interest expense
using the straight-line method over the term of the loan. During the three and six months ended June 30, 2018 the Company amortized
$25,842 and $27,500 to interest expense respectively. As of June 30, 2018, a discount of $0 remained.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company accounted for the conversion
feature as a derivative liability, see Note 5. Derivative accounting applies as the conversion price is variable and does not have
a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid prior to the
note being converted significant pressure maybe put on the Company’s stock price and additional dilution of current shareholders
may take place.
In the event of default, the holder has the
right to require the Company to pay an amount equal to 150% multiplied by the then outstanding entire balance of the note, including
principal and accrued unpaid interest. In addition, the default interest rate would increase to 24%.
The Company has the option to redeem the convertible
notes within 30 days from the date of issuance at 115% of the principal and interest; between 31 and to 60 days from the date of
issuance at 120% of the principal and interest; between 61 and to 90 days from the date of issuance at 125% of the principal and
interest; between 91 and to 120 days from the date of issuance at 130% of the principal and interest; between 121 and to 150 days
from the date of issuance at 135% of the principal and interest; between 151 and 180 days from issuance at 140% of principal and
interest; and after 180 days the right of prepayment expires.
During the three and six month periods ended
June 30, 2018, the lender converted $28,344 of principal, interest and fees into 4,631,346 common shares. As of June 30, 2018 the
Company had fulfilled all the obligations of the note.
$60,000 Convertible Note
March 9, 2018, the Company entered into a convertible
note agreement with a third party for an aggregate principal amount of $60,000, in exchange for the extinguishment of the outstanding
principal due on the convertible note dated June 26, 2017, see disclosure above for "
$50,000 Secured Convertible Note -
WBRE".
No proceeds were received in conjunction with the exchange of this convertible note. Under the terms of the agreement,
the convertible note incurs interest at 10% per annum and has a maturity date of March 9, 2019. The convertible note is convertible
upon issuance and convertible into shares of the Company’s stock at a conversion price equal to 60% of the lowest traded
price of the Company’s common stock during the previous 20 trading days preceding the conversion date. At no additional cost,
we issued to the note holder 30,000,000 five-year warrants to purchase common stock at $0.01, subject to adjustment if we issue
securities at less than the exercise price. The warrants are exercisable on a cashless basis.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company accounted for the conversion
feature as a derivative liability, see Note 5. Derivative accounting applies as the conversion price is variable and does not have
a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid prior to the
note being converted significant pressure maybe put on the Company’s stock price and additional dilution of current shareholders
may take place.
In the event of default, the holder has the
right to require the Company to pay an amount equal to 150% multiplied by the then outstanding entire balance of the note, including
principal and accrued unpaid interest. In addition, the default interest rate would increase to 24%.
The Company has the option to redeem the convertible
notes within 180 days from the date of issuance at 120% of the principal and interest; and after 180 days the right of prepayment
expires.
At the date of the agreement, the Company determined
that the transactions qualified for extinguishment accounting whereby the transaction was accounted for at fair market value with
the excess value between the fair value of the old note and new note was accounted for as an extinguishment loss of $154,284.
During the three and six month periods ended
June 30, 2018, the lender converted $60,147 of principal, interest and fees into 45,665,203 common shares. As of June 30, 2018
the Company had fulfilled all the obligations of the note.
$115,000 Convertible Note
On March 13, 2018, the Company entered into
a convertible note agreement with a third party for an aggregate principal amount of $115,000, for which $97,250 in proceeds were
received on March 19, 2018 . Under the terms of the agreement, the convertible note incurs interest at 10% per annum and has a
maturity date of December 13, 2018. The convertible note is convertible upon issuance and convertible into shares of the Company’s
stock at a conversion price equal to 60% of the average of the two lowest traded prices of the Company’s common stock during
the previous 25 trading days preceding the conversion date. The Company is required at all times to reserve shares of the Company’s
common stock equal to six times the number of common shares the convertible note is convertible into. The Company is amortizing
the original issuance discount of $15,000 legal fees of $2,750 and the remaining discount of $97,250 due to the recording of a
derivative liability as discussed in Note 5. The Company is amortizing the total discount of $115,000 to interest expense using
the straight-line method over the term of the loan. During the three and six months ended June 30, 2018 the Company amortized $38,055
and $45,582 to interest expense respectively. As of June 30, 2018, a discount of $69,418 remained.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company accounted for the conversion
feature as a derivative liability, see Note 5. Derivative accounting applies as the conversion price is variable and does not have
a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid prior to the
note being converted significant pressure maybe put on the Company’s stock price and additional dilution of current shareholders
may take place. As of June 30, 2018, there were 500,000,000 shares reserved with our transfer agent with a potential of 114,429,224
being reserved if and when the lender issues a request to our transfer agent.
In the event of default, the holder has the
right to require the Company to pay an amount equal to 125% multiplied by the then outstanding entire balance of the note, including
principal and accrued unpaid interest. In addition, the default interest rate would increase to 24%.
The Company has the option to redeem the convertible
notes within 90 days from the date of issuance at 125% of the principal and interest; between 91 and to 180 days from the date
of issuance at 140% of the principal and interest; and after 180 days the right of prepayment expires.
$48,000 Convertible Note
On March 15, 2018, the Company entered into
a convertible note agreement with a third party for an aggregate principal amount of $48,000, for which $45,600 in proceeds were
received on March 20, 2018 . Under the terms of the agreement, the convertible note incurs interest at 10% per annum and has a
maturity date of March 15, 2019. The convertible note is convertible upon issuance and convertible into shares of the Company’s
stock at a conversion price equal to 63% of the average of the two lowest traded prices of the Company’s common stock during
the previous 12 trading days preceding the conversion date. The Company is required at all times to reserve shares of the Company’s
common stock equal to six times the number of common shares the convertible note is convertible into. The Company is amortizing
legal fees of $2,400 and the remaining discount of $45,600 due to the recording of a derivative liability as discussed in Note
5. The Company is amortizing the total discount of $48,000 to interest expense using the straight-line method over the term of
the loan. During the three and months ended June 30, 2018 the Company amortized $45,896 and $48,000 to interest expense respectively.
As of June 30, 2018, a discount of $0 remained.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company accounted for the conversion
feature as a derivative liability, see Note 5. Derivative accounting applies as the conversion price is variable and does not have
a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid prior to the
note being converted significant pressure maybe put on the Company’s stock price and additional dilution of current shareholders
may take place. As of June 30, 2018, there were 0 shares reserved with our transfer agent with a potential of 0 being reserved
if and when the lender issues a request to our transfer agent.
In the event of default, the holder has the
right to require the Company to pay an amount equal to 120% multiplied by the then outstanding entire balance of the note, including
principal and accrued unpaid interest. In addition, the default interest rate would increase to 24%.
The Company has the option to redeem the convertible
notes within 60 days from the date of issuance at 110% of the principal and interest; between 61 and to 120 days from the date
of issuance at 124% of the principal and interest; between 121 days and to 180 days from the date of issuance at 138%; and after
180 days the right of prepayment expires.
On April 25, 2018 the Company retired the note
with a payment of $60,000 to the note holder. A derivative liability gain of $209,076 was recorded to reflect the retirement of
the derivative liability.
$110,000 Convertible Note
On April 3, 2018, the Company entered into
a convertible note agreement with a third party for an aggregate principal amount of $110,000, for which $95,000 in proceeds were
received on April 3, 2018 . Under the terms of the agreement, the convertible note incurs interest at 10% per annum and has a maturity
date of March 29, 2019. The convertible note is convertible upon issuance and convertible into shares of the Company’s stock
at a conversion price equal to 60% of the lowest traded price of the Company’s common stock during the previous 20 trading
days preceding the conversion date. The Company is required at all times to reserve shares of the Company’s common stock
equal to five times the number of common shares the convertible note is convertible into. The Company is amortizing legal fees
of $2,652 and the remaining discount of $107,348 due to the recording of a derivative liability as discussed in Note 5. The Company
is amortizing the total discount of $110,000 to interest expense using the straight-line method over the term of the loan. During
the three and months ended June 30, 2018 the Company amortized $26,521 to interest expense. As of June 30, 2018, a discount of
$83,479 remained. At no additional cost, we issued to the note holder 11,000,000 five-year warrants to purchase common stock at
$0.01, subject to adjustment if we issue securities at less than the exercise price. The warrants are exercisable on a cashless
basis.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company accounted for the conversion
feature as a derivative liability, see Note 5. Derivative accounting applies as the conversion price is variable and does not
have a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid prior
to the note being converted significant pressure maybe put on the Company’s stock price and additional dilution of current
shareholders may take place. As of June 30, 2018, there were 118,000,000 shares reserved with our transfer agent with a potential
of 92,000,000 being reserved if and when the lender issues a request to our transfer agent.
In the event of default, the holder has the
right to require the Company to pay an amount equal to 150% multiplied by the then outstanding entire balance of the note, including
principal and accrued unpaid interest. In addition, the default interest rate would increase to 18%.
The Company has the option to redeem the convertible
notes within 180 days from the date of issuance at 140% of the principal and interest. After 180 days the right of prepayment expires.
$110,000 Convertible Note
On April 11, 2018, the Company entered into
a convertible note agreement with a third party for an aggregate principal amount of $110,000, for which $100,000 in proceeds were
received. Under the terms of the agreement, the convertible note incurs interest at 10% per annum and has a maturity 12 months
from the effective date of payment. The convertible note is convertible upon issuance and convertible into shares of the Company’s
stock at a conversion price equal to 60% of the lowest trading price of the Company’s common stock during the previous 20
trading days preceding the conversion date. The Company is required at all times to reserve shares of the Company’s common
stock equal to three times the number of common shares the convertible note is convertible into. The Company is amortizing an on-issuance
discount of $10,000 and the remaining discount of $100,000 due to the recording of a derivative liability as discussed in Note
5. The Company is amortizing the total discount of $110,000 to interest expense using the straight-line method over the term of
the loan. During the three and months ended June 30, 2018 the Company amortized $24,110 to interest expense. As of June 30, 2018,
a discount of $85,890 remained. At no additional cost, we issued to the note holder 11,000,000 five-year warrants to purchase common
stock at $0.01, subject to adjustment if we issue securities at less than the exercise price. The warrants are exercisable
on a cashless basis.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company anticipates that it will
account for conversion feature as a derivative liability. Derivative accounting applies as the conversion price is variable and
does not have a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid
prior to the note being converted significant pressure maybe put on the Company’s stock price and additional dilution of
current shareholders may take place. As of June 30, 2018, there were 18,333,333 shares reserved with our transfer agent with a
potential of 55,103,411 being reserved if and when the lender issues a request to our transfer agent.
In the event of default, the holder has the
right to require the Company to pay an amount equal to 150% multiplied by the then outstanding entire balance of the note, including
principal and accrued unpaid interest. In addition, the default interest rate would increase to 18%.
The Company has the option to redeem the convertible
notes within 180 days from the date of issuance at 140% of the principal and interest. After 180 days the right of prepayment expires.
$110,000 Convertible Note
On April 13, 2018, the Company entered into
a convertible note agreement with a third party for an aggregate principal amount of $110,000, for which $99,000 in proceeds were
received. Under the terms of the agreement, the convertible note incurs interest at 10% per annum and has a maturity date of March
29, 2019. The convertible note is convertible upon issuance and convertible into shares of the Company’s stock at a conversion
price equal to 60% of the lowest trading price of the Company’s common stock during the previous 20 trading days preceding
the conversion date. The Company is required at all times to reserve shares of the Company’s common stock equal to three
times the number of common shares the convertible note is convertible into. The Company is amortizing an on-issuance discount of
$10,000, legal fees of $1,000 and the remaining discount of $99,000 due to the recording of a derivative liability as discussed
in Note 5. The Company is amortizing the total discount of $110,000 to interest expense using the straight-line method over the
term of the loan. During the three and months ended June 30, 2018 the Company amortized $24,110 to interest expense. As of June
30, 2018, a discount of $85,890 remained.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company anticipates that it will
account for conversion feature as a derivative liability. Derivative accounting applies as the conversion price is variable and
does not have a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid
prior to the note being converted significant pressure maybe put on the Company’s stock price and additional dilution of
current shareholders may take place. As of June 30, 2018, there were 13,000,000 shares reserved with our transfer agent with a
potential of 55,103,411 being reserved if and when the lender issues a request to our transfer agent.
In the event of default, the holder has the
right to require the Company to pay an amount equal to 150% multiplied by the then outstanding entire balance of the note, including
principal and accrued unpaid interest. In addition, the default interest rate would increase to 22%.
The Company has the option to redeem the convertible
notes within 30 days from the date of issuance at 115% of the principal and interest; between 31 and to 60 days from the date of
issuance at 120% of the principal and interest; between 61 and to 90 days from the date of issuance at 125% of the principal and
interest; between 91 and to 120 days from the date of issuance at 130% of the principal and interest; between 121 and to 150 days
from the date of issuance at 135% of the principal and interest; between 151 and to 180 days from the date of issuance at 140%
of the principal and interest; and after 180 days the right of prepayment expires.
$108,000 Convertible Note
On May 14, 2018, the Company entered into a
convertible note agreement with a third party for an aggregate principal amount of $108,000, for which $94,960 in proceeds were
received. Under the terms of the agreement, the convertible note incurs interest at 8% per annum and has a maturity date of May
14, 2019. The convertible note is convertible upon issuance and convertible into shares of the Company’s stock at a conversion
price equal to 60% of the lowest trading price of the Company’s common stock during the previous 20 trading days preceding
the conversion date. The Company is required at all times to reserve shares of the Company’s common stock equal to three
times the number of common shares the convertible note is convertible into. The Company is amortizing an on-issuance discount of
$8,000, legal fees of $5,040 and the remaining discount of $94,960 due to the recording of a derivative liability as discussed
in Note 5. The Company is amortizing the total discount of $108,000 to interest expense using the straight-line method over the
term of the loan. During the three and six months ended June 30, 2018 the Company amortized $13,907 to interest expense. As of
June 30, 2018, a discount of $94,093 remained.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company anticipates that it will
account for conversion feature as a derivative liability. Derivative accounting applies as the conversion price is variable and
does not have a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid
prior to the note being converted significant pressure maybe put on the Company’s stock price and additional dilution of
current shareholders may take place. As of June 30, 2018, there were 35,000,000 shares reserved with our transfer agent with a
potential of 53,486,543 being reserved if and when the lender issues a request to our transfer agent.
In the event of default, the holder has the
right to require the Company to pay an amount equal to 150% multiplied by the then outstanding entire balance of the note, including
principal and accrued unpaid interest. In addition, the default interest rate would increase to 24%.
There is no option to pre-pay this note.
$108,000 Note
On June 27, 2018, the Company entered into
a note agreement with a third party for an aggregate principal amount of $108,000, for which $100,000 in proceeds were received.
Under the terms of the agreement, the note incurs interest at 8% per annum and has a maturity date of June 27, 2019. The Company
is amortizing the on-issuance discount of $8,000 to interest expense using the straight-line method over the term of the loan.
During the three and six months ended June 30, 2018 the Company amortized $66 to interest expense. As of June 30, 2018, a discount
of $7,934 remained.
In the event of default, the holder has the
right to require the Company to pay an amount equal to 120% multiplied by the then outstanding entire balance of the note, including
principal and accrued unpaid interest. In addition, the default interest rate would increase to 24%.
As of June 30, 2018, future loan maturities
are as follows:
For the year ended December 31,
|
|
|
|
|
|
|
|
2018
|
|
|
118,434
|
|
2019
|
|
|
554,658
|
|
Total
|
|
$
|
673,092
|
|
NOTE 5 – DERIVATIVE LIABILITIES
Derivative Liabilities
In connection with
convertible notes payable, the Company records derivative liabilities for the conversion feature. In addition, the Company has
warrants for which the exercise prices reset upon future events. These warrants are also considered to be derivative liabilities.
The derivative liabilities are valued on the date the convertible note payable become convertible and revalued at each reporting
period. The warrants are valued on the date of issuance and revalued at each reporting period. During the six months ended June
30, 2018, the Company recorded initial derivative liabilities of $3,271,870 based upon the following Black-Scholes option pricing
model average assumptions: an exercise price of $0.00126 to $0.025 our stock price on the date of grant of $0.0029 to $0.0185,
expected dividend yield of 0%, expected volatility of 86% to 195%, risk free interest rate of 2.03% to 2.63% and expected terms
ranging from 1.0 to 5.0 years. Upon initial valuation, the derivative liability exceeded the face value certain of the convertible
note payables by approximately $502,000, which was recorded as a day one loss on derivative liability.
On June 30, 2018,
the derivative liabilities were revalued at $9,928,770 resulting in a loss of $4,424,949 related to the change in fair market value
of the derivative liabilities. The derivative liabilities were revalued using the Black-Scholes option pricing model with the following
average assumptions: an exercise price of $0.0008 to $0.025, our stock price on the date of valuation ($0.055), expected dividend
yield of 0%, expected volatility of 88% to 195%, risk-free interest rate of 2.63%, and an expected terms ranging from 0.5 to 4.9
years.
In connection with
convertible notes converted, as disclosed in Note 5, the Company reclassed derivative liabilities with a fair of $3,153,736 to
additional paid-in capital. The Company revalued the derivative liabilities at each conversion date recording the pro-rata portion
of the derivative liability as compared to the portion of the convertible note converted to the pre-conversion carrying value to
additional paid-in capital
Future Potential
Dilution
Most of the Company’s
convertible notes payable contain adjustable conversion terms with significant discounts to market. As of June 30, 2018 the Company’s
convertible notes payable are potentially convertible into an aggregate of approximately 93 million shares of common stock. In
addition, due to the variable conversion prices on some of the Company’s convertible notes, the number of common shares issuable
is dependent upon the traded price of the Company’s common stock.
NOTE 6 – WARRANTS
From March 2017 through May 2018, the Company
issued 78,526,087 warrants to multiple parties associated with the issuance of convertible notes. The issued warrants expire 5
years from the date of issuance and have anti-dilution and re-pricing features.
The fair value of each warrant is estimated
using the Black-Scholes valuation model. Assumptions used in calculating the fair value at June 30, 2018 were as follows:
|
|
Weighted
Average
Inputs Used
|
|
|
|
|
|
Annual dividend yield
|
|
$
|
-
|
|
Expected life (years)
|
|
|
4.1 to 4.9
|
|
Risk-free interest rate
|
|
|
2.63
|
%
|
Expected volatility
|
|
|
195
|
%
|
Common stock price
|
|
$
|
0.055
|
|
Since the expected life of the options was
greater than the Company’s historical stock information available, the Public Company determined the expected volatility
based on price fluctuations of comparable public companies.
The issuances, exercises and pricing re-sets during the six
months ended June 30, 2018 are as follows:
Outstanding at December 31, 2017
|
|
|
23,426,087
|
|
Issuances
|
|
|
66,176,923
|
|
Exercises
|
|
|
(156,560,322
|
)
|
Anti-Dilution/Modification
|
|
|
159,727,241
|
|
Forfeitures/cancellations
|
|
|
(15,200,000
|
)
|
Outstanding at June 30, 2018
|
|
|
77,569,929
|
|
Weighted Average Price at June 30, 2018
|
|
$
|
0.0038
|
|
NOTE 7 – SUBSEQUENT EVENTS
In accordance with ASC 855, management
reviewed all material events through August 14, 2018, for these financial statements and there are no material subsequent events
to report, except as follows:
Conversion Notice
In August of 2018 we issued 34,737,400
shares of common stock for the conversion of $40,269 in convertible notes.
On August 7, 2018 we converted three back-end notes dated January 18, 2018 into 5,280,000 restricted shares
in consideration of $114,000 in proceeds.
On August 8, 2018 we amended a convertible
promissory note dated March 13, 2018. In consideration of a pre-payment of $106,342, the note obligation was fulfilled and the
holder consented to the release of all reserved shares.
On August 8, 2018, the Company entered
into a promissory note agreement with a third party for an aggregate principal amount of $107,000, for which $106,500 in proceeds
were received. Under the terms of the agreement, the convertible note incurs interest at 8% per annum and has a maturity date of
August 22, 2018.