NOTES TO FINANCIAL STATEMENTS
1.
Summary of Significant Accounting Policies and Use of Estimates
Basis
of Presentation and Organization and Reorganization
Effective September 13, 2016, TimefireVR
Inc., a Nevada corporation (“Timefire,” “we,” “us,” “our” or the “Company”)
entered into an Agreement and Plan of Merger (“Merger Agreement” or the “Merger”) through which it acquired
Timefire LLC, a Phoenix-based virtual reality content developer and Arizona Limited Liability Company (“TLLC”). As
consideration for the Merger, the Company issued the equity holders of TLLC a total of 41,400,000 shares of its common stock, and
2,800,000 five-year warrants exercisable at $0.58 per share for 100% of the membership interests of TLLC. As a result, the former
members of TLLC owned approximately 99% of the then outstanding shares of common stock.
On January 3, 2018, the Company entered into
a Membership Interest Purchase Agreement (the “Agreement”) by and between the Company and Mitchell Saltz (“Saltz”).
Pursuant to the terms of the Agreement, Saltz acquired all the membership interests of the Company’s subsidiary, Timefire
LLC (“TLLC”).
In consideration for entering in the Agreement,
the Company received: (i) $100,000 in cash and (ii) a secured (by all the tangible and intangible property of TLLC) promissory
note in the principal amount of $120,000 bearing 6% annual interest maturing on September 28, 2018. Additionally, Saltz or TLLC
assumed certain of the Company’s liabilities including a sublease agreement entered into by the Company, loans made by Saltz
to the Company, a certain $100,000 senior convertible note of the Company dated March 3, 2017, a certain services agreement entered
into by the Company, certain past compensation owed to the Company’s former executive officers, and certain credit card debts
owed by the Company.
On January 3, 2018, the Company purchased $100,000
of ether, the cryptocurrency offered by the Ethereum network. This purchase was the Company’s first material cryptocurrency
purchase and signified the start of the Company’s entry into the cryptocurrency business. The Company records its cryptocurrency
holdings at fair value as of valuation date. The Company recorded net loss on fair value of its cryptocurrency holdings of $55,083
for the six months ended June 30, 2018.
Unaudited Interim Financial Statements
The interim financial statements of the Company
as of June 30, 2018 and 2017, and for the periods then ended, are prepared in accordance with the instructions to Form 10-Q. Accordingly,
the accompanying financial statements and notes thereto do not reflect all disclosures required under accounting principles generally
accepted in the United States of America (“U.S. GAAP”). However, in the opinion of management, the interim financial
statements include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the Company’s
financial position as of June 30, 2018 and the results of its operations and its cash flows for the periods ended June 30, 2018
and 2017. These results are not necessarily indicative of the results expected for the year ended December 31, 2018. The financial
statements should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2017,
filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 9, 2018. The balance sheet as of December
31, 2017 has been derived from the audited financial statements included in that filing.
Principles of Consolidation
For accounting purposes, the Merger
transaction was recorded as a reverse recapitalization, with TLLC as the accounting acquirer. Consequently, the historical pre-Merger
financial statements of TLLC were then those of the Company. The financial statements for periods December 31, 2017 and prior include
the accounts of the Company and TLLC. All significant intercompany transactions and balances have been eliminated. Equity investments
through which we exercise significant influence over but do not control the investee and are not the primary beneficiary of the
investee's activities are accounted for using the equity method where applicable.
Reclassifications
For the three and six months ended June
30, 2017, the Company’s Statement of Operations and Cash Flows have been reclassified to the current presentation to reflect
the discontinued operations resulting from the sale of TLLC. The reclassified financial statement items had no effect on net income
for the periods.
Discontinued
Operations
The Company has classified the operating
results related to the TLLC virtual reality business, which was sold on January 3, 2018, as discontinued operations in the financial
statements. As per SEC guidelines, the December 31, 2017 balance sheet has not been retrospectively adjusted to reflect discontinued
operations. Such adjustment will be reflected when the December 31, 2017 balance sheet is first presented with annual financial
statements that report discontinued operations.
Discontinued operations consist of specifically
identified expenses as follows:
TIMEFIREVR INC.
|
STATEMENTS OF OPERATIONS
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
June 30,
|
|
June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
488
|
|
|
$
|
—
|
|
|
$
|
488
|
|
Cost of sales
|
|
|
—
|
|
|
|
146
|
|
|
|
—
|
|
|
|
146
|
|
Gross profit
|
|
|
—
|
|
|
|
342
|
|
|
|
—
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
—
|
|
|
|
344,001
|
|
|
|
—
|
|
|
|
792,892
|
|
Occupancy
|
|
|
—
|
|
|
|
20,135
|
|
|
|
—
|
|
|
|
43,342
|
|
Depreciation and amortization
|
|
|
—
|
|
|
|
3,151
|
|
|
|
—
|
|
|
|
6,303
|
|
Officer compensation
|
|
|
—
|
|
|
|
108,864
|
|
|
|
—
|
|
|
|
321,720
|
|
Professional fees
|
|
|
—
|
|
|
|
1,062
|
|
|
|
—
|
|
|
|
1,562
|
|
Other operating expenses
|
|
|
—
|
|
|
|
2,829
|
|
|
|
—
|
|
|
|
23,000
|
|
Total operating expenses
|
|
|
—
|
|
|
|
480,042
|
|
|
|
—
|
|
|
|
1,188,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
—
|
|
|
|
(479,700
|
)
|
|
|
—
|
|
|
|
(1,188,477
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal of Timefire, LLC
|
|
|
—
|
|
|
|
—
|
|
|
|
670,428
|
|
|
|
—
|
|
Interest income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
Interest expense
|
|
|
—
|
|
|
|
(12,130
|
)
|
|
|
(180
|
)
|
|
|
(15,578
|
)
|
Total other income (expense)
|
|
|
—
|
|
|
|
(12,130
|
)
|
|
|
670,248
|
|
|
|
(15,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
$
|
—
|
|
|
$
|
(491,830
|
)
|
|
$
|
670,248
|
|
|
$
|
(1,204,053
|
)
|
Accounting Estimates
The preparation of financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual results could materially differ from those estimates. Significant estimates
of the Company include accounting for depreciation and amortization, derivative liabilities, accruals and contingencies, the fair
value of the Company’s common stock and the estimated fair value of warrants.
Revenue Recognition
On January 1, 2018,
the Company adopted Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers”
(“ASC 606”). The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange
for those goods or services. ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible
more judgment and estimates may be required within the revenue recognition process than required under U.S. GAAP including identifying
performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and
allocating the transaction price to each separate performance obligation.
The Company is paid in cryptocurrency for its
mining operations. The revenue generated is valued by the cryptocurrency fair value on the date earned.
Cash and Cash Equivalents
The Company considers all highly liquid instruments,
with original maturity of three months or less when purchased, to be cash equivalents. We place our cash and cash equivalents with
major financial institutions. Such amounts are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”). From
time to time, balances may exceed FDIC coverage limits.
Property and Equipment
Property and equipment is recorded at cost
reduced by accumulated depreciation. Depreciation is provided for on the straight-line method, over the estimated useful lives
of the assets. Maintenance and repairs that neither materially add to the value of the property nor appreciably prolong its life
are charged to expense as incurred. Betterments or renewals are capitalized when incurred. Gains and losses on the disposition
of property and equipment are recorded in the period incurred.
The estimated useful lives of property and
equipment are:
|
·
|
Office furniture and equipment 3-5 years
|
Impairment of Long-Lived
Assets and Intangible Assets
The Company follows Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) No. 360-10,
"Property, Plant, and Equipment,"
which established a
"primary asset"
approach to determine the cash flow estimation period for a group of assets
and liabilities that represents the unit of accounting for a long-lived asset and amortizable intangible asset to be held and used.
Long-lived assets and amortizable intangible assets to be held and used are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset
and amortizable intangible asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from
the use and eventual disposition of the asset. Long-lived assets and amortizable intangible assets to be disposed of are reported
at the lower of carrying amount or fair value less cost to sell.
Business Segments
ASC 280,
"Segment Reporting"
requires use of the
"management approach"
model for segment reporting. The management approach model is based
on the way a company's management organizes segments within the company for making operating decisions and assessing performance.
The Company determined it has one operating segment as of June 30, 2018.
Research and Development Costs
Research and development costs, including design, development and
testing of software, are expensed as incurred.
Income Taxes
The Company accounts for income taxes under
FASB ASC 740,
Income Taxes
. Deferred income tax assets and liabilities are determined based upon differences between
financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Stock-Based Compensation
In accordance with ASC No. 718, Compensation
– Stock Compensation (“ASC 718”), the Company measures the compensation costs of stock-based compensation arrangements
based on the grant date fair value of granted instruments and recognizes the costs in the financial statements over the period
during which such awards vest. Stock-based compensation arrangements include stock options and restricted stock awards.
Equity instruments (“Instruments”)
issued to non-employees are recorded on the basis of the fair value of the Instruments, as required by ASC 718. ASC No. 505, Equity
Based Payments to Non-Employees (“ASC 505”), defines the measurement date and recognition period for such Instruments.
In general, the measurement date is (a) when a performance commitment, as defined, is reached or (b) when the earlier of (i) the
non-employee performance is complete and (ii) the Instruments are vested. The measured fair value related to the Instruments is
recognized over a period based on the facts and circumstances of each particular grant as defined in ASC 505.
Net Income (Loss) Per
Share
Basic earnings per share does not include
dilution and is computed by dividing loss available to common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an
entity. Dilutive securities are not included in the weighted average number of shares when inclusion would be anti-dilutive. As
of June 30, 2018 and 2017, there were total shares of 192,232,724 and 23,215,628, respectively, issuable upon conversion of preferred
stock, exercise of warrants and options.
Fair Value Measurements
ASC 820 Fair Value Measurements defines fair
value, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosure about fair value measurements.
The following provides an analysis of financial
instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to
which fair value is observable:
Level 1- fair value measurements are those
derived from quoted prices (unadjusted in active markets for identical assets or liabilities);
Level 2- fair value measurements are those
derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
(i.e. as prices) or indirectly (i.e. derived from prices); and
Level 3- fair value measurements are those
derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable
inputs).
These financial instruments are measured using
management’s best estimate of fair value, where the inputs into the determination of fair value require significant management
judgment to estimation. Valuations based on unobservable inputs are highly subjective and require significant judgments. Changes
in such judgments could have a material impact on fair value estimates. In addition, since estimates are as of a specific point
in time, they are susceptible to material near-term changes. Changes in economic conditions may also dramatically affect the estimated
fair values.
Financial instruments classified as Level 1
- quoted prices in active markets include cash.
Fair value estimates discussed herein are based
upon certain market assumptions and pertinent information available to management as of June 30, 2018. The respective carrying
value of certain financial instruments approximated their fair values due to the short-term nature of these instruments. These
financial instruments include cash, accounts payable and accrued expenses.
Derivative Liabilities
The
Company issued common stock purchase warrants in September 2016 in conjunction with the Merger Agreement. Additional
warrants were issued in March and August 2017 as part of private placement offerings. Warrants were also issued in March 2018 as
part of a private placement offering (see Note 5) and per an advisory agreement (see Note 7). In accordance with ASC No. 480,
Distinguishing
Liabilities from Equity
(“ASC 480”), the fair value of these warrants is classified as a liability on the
Company’s Balance Sheets because, according to the warrants' terms, a fundamental transaction could give rise to an
obligation of the Company to pay cash to certain warrant holders. Corresponding changes in the fair value of the warrants
are recognized as a gain or loss on the Company’s Statements of Operations in each subsequent period.
The
fair value of the warrants at June 30, 2018 and December 31, 2017 was $231,176 and 198,994, respectively. The difference has been
recorded as a change in change in fair value of derivatives.
2.
Going Concern
The Company has incurred losses since inception
and requires additional funds for future operating activities. The Company has not reached a level of revenue sufficient to fund
its operating activities. These factors create an uncertainty as to how the Company will fund its operations and maintain sufficient
cash flow to operate as a going concern. The combination of these factors, among others, raise substantial doubt about the Company’s
ability to continue as a going concern. Management’s plans in response to these factors include the issuances of debt in
exchange for cash such as that which is described in Note 5, Convertible Notes Payable.
The Company’s ability to meet its cash
requirements in the next year is dependent upon obtaining additional financing. If this is not achieved, the Company will be unable
to obtain sufficient cash flow to fund its operations and obligations, and as a result there is substantial doubt the Company will
be able to continue as a going concern. The accompanying financial statements have been prepared on a going concern basis, and
accordingly, do not include any adjustments relating to the recoverability and classification of recorded asset amounts; nor do
they include adjustments to the amounts and classification of liabilities that might be necessary should the Company be unable
to continue operations or be required to sell its assets.
3.
Gain on Disposal of Timefire LLC
As discussed in Note 1, on January 3, 2018,
the Company entered into the Agreement. Pursuant to the terms of the Agreement, Mr. Saltz acquired all the membership interests
of TLLC.
In consideration for entering into the Agreement,
the Company received: (i) $100,000 in cash and (ii) a secured promissory note in the principal amount of $120,000 bearing 6% annual
interest that matures on September 28, 2018. Additionally, Mr. Saltz and TLLC each assumed certain of the Company’s liabilities
including a sublease agreement entered into by the Company, loans made by Mr. Saltz to the Company, a certain $100,000 senior convertible
note from the March 2017 Notes, as defined below, a certain services agreement entered into by the Company, certain past compensation
owed to the Company’s former executive officers, and certain credit card debts owed by the Company. Total gross proceeds
from the sale were $220,000, including the cash payment and secured promissory note, plus $510,599 in liabilities relieved, less
$60,171 of assets sold to TLLC resulted in a gain on disposal of $670,428.
Assets sold:
|
|
|
Cash
|
|
|
(505
|
)
|
Property & equipment, net
|
|
|
(26,128
|
)
|
Accounts receivable
|
|
|
(38
|
)
|
Deposit
|
|
|
(33,500
|
)
|
|
|
|
(60,171
|
)
|
|
|
|
|
|
Liabilities relieved:
|
|
|
|
|
Accounts payable & accrued expenses
|
|
|
204,809
|
|
Demand obligation payable - related party
|
|
|
116,883
|
|
Convertible notes payable
|
|
|
100,000
|
|
Accrued interest
|
|
|
31,507
|
|
Short-term advance - related party
|
|
|
57,400
|
|
|
|
|
510,599
|
|
|
|
|
|
|
Additional consideration:
|
|
|
|
|
Note receivable
|
|
|
120,000
|
|
Cash
|
|
|
100,000
|
|
|
|
|
220,000
|
|
|
|
|
|
|
Gain on disposal of Timefire, LLC
|
|
|
670,428
|
|
The gain on disposal is included in the income
from discontinued operations on the profit and loss statement for the six months ended June 30, 2018.
4. Cryptocurrencies
On January 3, 2018, the Company purchased $100,000
of ether (106.95 units), the cryptocurrency offered by the Ethereum network. The fair value of such ether units on June 30, 2018
was $46,627 and the Company took a charge to operations of $53,364 in the six months ended June 30, 2018. That amount is included
in gain/loss on the fair value of cryptocurrencies in the accompanying statement of operations.
In April 2018, the Company began its mining
operations. The Company is paid in cryptocurrency for these operations. It started out mining Bitcoin and later, in June 2018,
expanded into the mining of ether. The revenue generated is valued by the cryptocurrency fair value on the date earned. Such amounts
aggregated $8,917 for the six months ended June 30, 2018. The fair value of the earned cryptocurrency is adjusted at quarter end,
resulting in a charge to operations.
5. Convertible Notes Payable
On March 6, 2017, the Company closed
on a private placement offering with institutional investors and one of the Company’s former directors pursuant to which
the Company issued and sold the investors senior convertible notes (the “March 2017 Notes”) in the aggregate principal
amount of $750,000, with an original issue discount of 5%, for gross proceeds to the Company of $712,500 prior to payment of $20,000
in reimbursement of legal fees of the lead investor. The March 2017 Notes had an original maturity date of September 3, 2017 with
an initial interest rate of 8%, and a default interest rate of 18% which became effective as of the maturity date. On the maturity
date, the Company was obligated to repay an amount equal to 120% of outstanding principal and accrued interest. On the maturity
date (and subsequently, if the holders had elected to extend the maturity date), the investors had the right to convert the Notes
into the common stock of the Company at $0.30 per share, subject to adjustment (the “Conversion Price”). As additional
consideration, the Company issued the investors a total of 2,500,000 five-year warrants to purchase the Company’s common
stock, which are exercisable on or after the maturity date at $0.35 per share. The Company failed to pay the March 2017 Notes on
the maturity date, which date the investors did not elect to extend.
On August 18, 2017, the Company closed
on an offering of convertible notes and warrants on terms substantially identical to the March 6, 2017 financing. The purchasers
are the same investors as in the March 2017 Notes except for the former director who did not participate in this financing. The
Company received $60,000 in net proceeds from the issuance of $63,158 of convertible notes (the “August 2017 Notes”).
Additionally, the Company issued the investors a total of 210,526 five-year warrants exercisable at $.35 per share. The Company
failed to pay the August 2017 Notes when due on September 3, 2017.
The March 2017 Notes and August 2017
Notes and accompanying warrants were converted on January 3, 2018 into Series E Preferred stock. See Note 8.
On October 27, 2017, the Company closed
on an offering of convertible notes with two institutional investors in the principal amount of $70,000 (the “October 2017
Notes”). The October 2017 Notes matured on November 29, 2017 and bear interest at 8% per annum. On the maturity date, the
Company was obligated to repay an amount equal to 120% of the outstanding principal and accrued interest. The investors may elect
to convert the October 2017 Notes into common stock of the Company at $.03 per share. The Company failed to pay these October 2017
Notes when due.
On December 21, 2017, the Company closed
on an offering with three institutional investors pursuant to which the Company issued and sold convertible notes in the aggregate
principal amount of $703,947 (the “December 2017 Notes”). The December 2017 Notes had an original issue discount of
5%, for proceeds to the Company in the amount of $668,750. The notes matured on January 20, 2018, bear interest at 8%, and require
the repayment of 120% of principal and accrued interest at maturity. The investors may elect to convert the December 2017 Notes
into common stock of the Company at $.03 per share.
On March 6, 2018, the holders of the
October 2017 Notes and December 2017 Notes agreed to extend the due date of these notes to April 15, 2019 as discussed below.
On
March 6, 2018,
the Company closed on a private placement offering with institutional investors pursuant to which the Company
issued and sold Senior Secured Convertible Notes (the “2018 Notes”) to the Investors in the aggregate principal amount
of $1,052,632 with an original issue discount of 5% and received gross proceeds of $1,000,000. The 2018 Notes mature on April 15,
2019 and bear interest at 8% per annum. The 2018 Notes are secured by a first lien on all of the assets of the Company. On the
maturity date, the Company must repay an amount equal to 120% of the outstanding principal and accrued interest. Beginning on the
six-month anniversary of the issuance of the 2018 Notes, the investors may elect to convert the 2018 Notes into common stock of
the Company at $0.03 per share, subject to adjustment. In addition, the 2018 Notes are redeemable by the Company up to 90 days
following issuance at an amount equal to 110% of outstanding principal and accrued interest, and thereafter at an amount equal
to 120% of outstanding principal and accrued interest, subject in either case to upward adjustment to the extent the closing price
of the Company’s common stock on the OTCQB exceeds the Conversion Price. As additional consideration, the Company issued
the investors a total of 35,087,720 five-year warrants to purchase the Company’s common stock, which are exercisable on or
after the six-month anniversary of the issuance at $0.06 per share. In addition, the Investors agreed to extend the due date of
the October 2017 Notes and December 2017 Notes.
The aggregate principal amount of the
above described notes is $1,826,579, which is shown in the accompanying balance sheet as of June 30, 2018, net of $37,427 debt
discount, as convertible notes payable-net. Accrued interest amounted to $292,575 as of that date and interest expense aggregated
$266,381 for the six months ended June 30, 2018.
6. Related Party Transactions
On March 6, 2017, the Company issued
one of the March 2017 Notes to a former director as an investor for $100,000. The Company’s obligation under the March 2017
Notes was cancelled on January 3, 2018 as described below.
On June 2, 2017, the Company entered into an
agreement with an entity managed by a former director of the Company to provide services to the entity. A retainer deposit of $57,400
was received, and services were to be initiated within sixty days. The Company’s obligation under this agreement was cancelled
on January 3, 2018 as described below.
During the year ended December 31, 2017,
the Company received advances totaling $116,883 from a related party, an original TLLC investor. These advances are not evidenced
by a promissory note, and are non-interest bearing. The Company’s obligation to repay this amount was cancelled on January
3, 2018 as described below.
On January 3, 2018, the Company effected
the sale of TLLC to a group of persons including TLLC’s former owners and two of the Company’s former executive officers
and directors.
7. Commitments and Contingencies
Employment Agreements
Effective September 13, 2016, the Company
entered into an employment agreement with its former President, John Wise. The agreement was for a two year period at the rate
of $150,000 per annum. The Company was in default on this agreement, and the payroll for this officer accrued from July 8, 2017
until his resignation in October 2017.
Effective September 13, 2016, the Company
entered into an employment agreement with its former Chief Strategy Officer, who was later named Chief Executive Officer, Jeffrey
Rassas. The Company was in default on this agreement, and the payroll for this officer accrued from May 16, 2017 until his resignation
in October 2017.
Aggregate accrued payroll for these
two former officers was approximately $106,000 as of December 31, 2017. These obligations were cancelled on January 3, 2018 as
part of the sale of TLLC.
Effective January 3, 2018, the Company
entered into an oral employment agreement (the “Read Agreement”) with the Company’s current Chief Executive Officer
(the “CEO”), Jonathan Read. Under the terms of the Read Agreement the Company is paying Mr. Read an annual salary of
$240,000 subject to his continued employment with the Company. Additionally, the Company paid Mr. Read compensation for his services
as the Company’s CEO from October 20, 2017, to December 31, 2017, calculated as a pro-rata portion of an annual salary of
$150,000. Additionally, on January 3, 2018 (the “Grant Date”) the Company’s Board of Directors (the “Board”)
granted Mr. Read 15,000,000 stock options of which 5,000,000 vested on the Grant Date, 5,000,000 will vest one-year from the Grant
Date, and 5,000,000 will vest two years from the Grant Date subject to continued employment with the Company.
Effective January 3, 2018, the Company
agreed to compensate Gary Smith for his service as a non-employee director by paying him $2,500 per calendar quarter effective
as of July 10, 2017.
Lease Agreements
On September 23, 2016, the Company entered
into an office lease agreement commencing October 1, 2016. This lease expires December 31, 2018. As part of the sale
of TLLC, the Company was released of this lease obligation as well as the rights to the security deposit. The Company has been
renting an office space on a month-to-month basis, and incurred rent expense of approximately $5,400 during the six months ended
June 30, 2018.
Other Agreements
On January 20, 2017, the Company entered
into an agreement with a firm to provide their artificial intelligence conversational voice platform for integration into the Company’s
product. Per the agreement, the Company issued 50,000 shares of common stock and was scheduled to make monthly payments towards
a $127,500 integration fee. As of December 31, 2017, the Company had expensed $46,000, with $35,000 remaining in accounts payable.
On January 3, 2018, the Company sold TLLC, and this payable, and any future obligations under this agreement, were relieved as
part of this transaction.
On November 7, 2016, the Company entered
into an agreement with a firm to provide general advisory and business development advisory services for a fee of $75,000. The
Company remitted $75,000, but the contract was ultimately cancelled and the services were postponed. The amount was recorded as
a deposit on contract. Later, on March 27, 2017, the Company entered into an agreement with the same firm to provide these services
on an expanded scale for a fee of $150,000. Per the agreement, the firm applied our previously remitted funds and we paid the remaining
$75,000 balance. In addition to the cash compensation, the firm was also compensated via a one-time equity retainer of 25,000 shares
of common stock.
On April 4, 2017, the Company entered
into an agreement with a firm to provide management and general business consulting services. The term of the agreement is 24 months,
and the firm will be compensated via the issuance of 1,000,000 shares of common stock at a price of $.21 per share. The shares
will be expensed ratably over the term of the agreement.
On January 18, 2018, the Company entered into
an agreement for corporate communications services. The agreement is for an initial period of six months with a monthly fee of
$5,000. Should the Company raise $2,000,000 or more, the monthly fee increases to $7,500 per month. The Company will also issue
1,000,000 shares of common stock per this agreement. These shares have not yet been issued as of the date of this report.
On March 16, 2018, the Company entered into
an Advisor Agreement (the “Advisor Agreement) with a third party (the “Advisor”), and David Drake (“Drake”),
a consultant to the cryptocurrency industry. Under the terms of the Advisor Agreement, Drake was appointed to the Company’s
Advisory Board and Drake and the Advisor agreed to assist the Company in the implementation and execution of its cryptocurrency
business model, including initiation of its mining business and recommending to the Company potential acquisitions and joint ventures
in this sector. Drake is required to devote at least three business days per month to assisting the Company. The Company agreed
to issue the Advisor 6,666,666 shares of common stock valued at $0.03 per share, which shares shall vest quarterly over a 12-month
period subject to the Advisor Agreement not having been terminated as of each applicable vesting date. The Company also issued
the Advisor 6,666,666 3-year warrants, with the same vesting period, exercisable at $0.05 per share. The Company agreed to pay
the Advisor a royalty from revenues received from its mining of cryptocurrency with the royalties decreasing over a five-year period.
Finally, the Company agreed to reimburse the Advisor $5,000 a month for the services of an engineer to operate the Company’s
cryptocurrency mining business.
On May 15, 2018, the Company entered
into a Master Service Agreement with ColoGuard Enterprise Solutions (“ColoGuard”) which becomes effective August 1,
2018. ColoGuard will provide colocation and other services related to our cryptocurrency mining activities. The initial term of
the agreement is two years, with automatic 12-month renewals unless thirty days written notice is provided. The monthly obligation
under the agreement with the current specifications is $30,212. On June 27, 2018, the Company made a $459,648 deposit towards mining
equipment (totaling $646,000) to ColoGuard. This equipment is scheduled to be placed into operation during the quarter ended September
30, 2018.
8. Shareholders’ Deficit
Common Stock
There is currently only one class of common
stock. Each share of common stock is entitled to one vote. The authorized number of shares of common stock of the Company at June
30, 2018 was 500,000,000 shares with a par value per share of $0.001. Authorized shares that have been issued and fully paid amounted
to 228,460,470 as of June 30, 2018.
Preferred Stock
The Company is authorized to issue 10,000,000
shares of preferred stock with a par value of $0.01 per share, with rights, preferences and limitations as may be decided from
time-to-time by the Board of Directors.
Series E
Effective January 3, 2018, the Board of Directors
authorized the issuance of up to 305,000 shares of Series E Convertible Preferred Stock ("Series E"). Each share of Series
E has a stated value of $1,000 and is convertible into shares of our common stock at a conversion price of $1.00 per share. The
Series E does not have any price protection from future issuances of securities by the Company at a price below the conversion
price then in effect.
Pursuant to
an Exchange Agreement entered into effective January 3, 2018, we issued 303,714 shares of the Series E in exchange for the cancellation
of the following securities:
-
133,333.69 shares of Series A Convertible Preferred
Stock (extinguishing such series) - 133,334 Series E shares;
-
14,923.30 shares of Series A-1 Convertible Preferred
Stock (extinguishing such series) – 44,770 Series E shares;
-
501.54 shares of Series C Convertible Preferred
Stock (extinguishing such series) – 50,154 Series E shares;
-
$650,000 of Senior Convertible Notes issued March
3, 2017 – 63,368 Series E shares;
-
$63,158 of Senior Convertible Notes issued August
21, 2017 – 7,125 Series E shares; and
-
Warrants to purchase 4,963,402 shares of our common
stock – 4,963 Series E shares.
During the six
months ended June 30, 2018, holders of 174,524 shares of Series E converted them into 174,524,000 shares of our common stock
.
At June 30, 2018, there are 129,190 shares of Series E outstanding, which are convertible into an aggregate of 129,190,000 shares
of our common stock.
Series C
In 2014, the Board approved the issuance of
Series C Preferred Stock (“Series C”). Each share of Series C shall be convertible at the option of the holder
at any time, into 10,000 shares of common stock. During the year ended December 31, 2017, holders of 113 shares of Series C converted
them into 1,130,000 shares of our common stock. At December 31, 2017, there are 501.54 shares of Series C outstanding. Effective
January 3, 2018, all Series C shares were cancelled in exchange for 50,154 Series E shares.
Series A-1
Effective August 24, 2016, the Board approved
the issuance of Series A-1 Preferred Stock (“Series A-1”). Each share of Series A-1 shall be convertible at the
option of the holder at any time, into 100 shares of common stock. During the year ended December 31, 2017, holders of 5447.39
shares of Series A-1 converted them into 544,739 shares of common stock. At December 31, 2017, there are 14,923 shares of Series
A-1 outstanding. Effective January 3, 2018, all Series A-1 shares were cancelled in exchange for 44,770 Series E shares.
Series A
Effective September 13, 2016, the Company closed
on the SPA and the Board approved the issuance of a newly designated Series A Convertible Preferred Stock (“Series A”).
At December 31, 2017, there were 133,334 shares of Series A outstanding. Effective January 3, 2018, all Series A shares were cancelled
in exchange for 133,334 Series E shares.
The Series A contained certain provisions that
were outside the Company's control and which the Company believed caused the Series A to be classified as mezzanine equity.
Warrants
The balance of warrants outstanding for purchase of the Company’s
common stock as of June 30, 2018 is as follows:
|
|
Common Shares Issuable Upon Exercise of Warrants
|
|
Exercise Price of Warrants
|
|
Date Issued
|
|
Expiration Date
|
Balance of warrants at December 31, 2017
|
|
|
8,096,736
|
|
|
|
|
|
|
|
|
|
Cancelled in exchange for Series E (1)
|
|
|
(4,963,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued per offering (2)
|
|
|
35,087,720
|
|
|
$
|
.06
|
|
|
3/6/2018
|
|
9/6/2023
|
Issued for services (3)
|
|
|
6,666,666
|
|
|
$
|
.05
|
|
|
3/16/2018
|
|
3/16/2021
|
Balance of warrants at June 30, 2018
|
|
|
44,887,720
|
|
|
|
|
|
|
|
|
|
(1) As discussed above, on January 3, 2018,
4,963,402 warrants to purchase shares of common stock were cancelled in exchange for 4,963 Series E shares.
(2) On March 6, 2018, pursuant to the 2018
Notes (see Note 5), the Company issued warrants at $.06 to purchase 35,087,720 shares of common stock. The warrants may not be
exercised for six months after their effective date of March 6, 2018. The warrants have an expiration date of five years after
the initial six months have passed. As of June 30, 2018, the Company has recorded $185,263 as a derivative liability for these
warrants.
(3) On March 16, 2018, per the terms of the
Advisor Agreement (see Note 7), the Company issued warrants at $.05 to purchase 6,666,666 shares of common stock. The warrants
have an expiration date of March 16, 2021. As of June 30, 2018, the Company has recorded $33,600 as a derivative liability for
these warrants.
2016 Equity Incentive Plan
Effective September 13, 2016, the Company adopted
the 2016 Equity Incentive Plan (the "2016 Plan") to provide an incentive to our employees, consultants, officers and
directors who are responsible for or contribute to our long-range success. A total of 3,300,000 shares of our common stock were
originally reserved for the implementation of the 2016 Plan, either through the issuance of incentive stock options, non-qualified
stock options, stock appreciation rights, restricted awards, or restricted stock units. Whenever practical, the 2016 Plan is to
be administered by a committee of not less than two members of the Board of Directors appointed by the full Board, and the 2016
Plan has a term of ten years, unless sooner terminated by the Board. On January 3, 2018, the Board amended the Company’s
2016 Equity Incentive Plan by increasing the authorized number of shares available under the plan by 30,000,000. As of June 30,
2018, 15,145,000 shares of common stock remain available for issuance under the 2016 Plan.
Effective September 13, 2016, pursuant
to his employment agreement, the Company entered into a Restricted Stock Unit (“RSU”) Agreement with Mr. Read which
granted him 500,000 RSUs pursuant to the 2016 Plan. The RSUs were to vest in three approximately equal increments with the first
tranche being fully vested on the grant date and the remaining tranches vesting on the first-year and second-year anniversaries
of the grant date. The fair value of the award was calculated based on the price of the common stock on the grant date and was
to be expensed over the vesting period. Effective January 31, 2017, Mr. Read’s former employment agreement was terminated
and the RSUs became fully vested. The Company recorded $0 and $128,695 in expense related to this grant during the six months ended
June 30, 2018 and 2017, respectively.
On January 20, 2017, the Company granted
options to purchase 1,655,000 shares of its common stock at $.50 to employees including a total of 800,000 options to its then
Chief Executive Officer and Chief Financial Officer per the 2016 Plan. The shares will vest based on months of service as of the
grant date. Employees that had worked for twelve months or more as of the grant date had one-third of their options vested as of
grant date. All other employees received pro-rata vesting for the portion of a year that they had worked. The remaining options
will equally vest on the 1
st
and 2
nd
anniversary of the grant date. The Company recorded $145,550 and $338,333
in expense related to this grant during the six months ended June 30, 2018 and 2017, respectively.
On January 3, 2018, as part of an oral employment
agreement with the Company’s Chief Executive Officer, the Company granted Mr. Read 15,000,000 stock options of which 5,000,000
vested on the grant date, 5,000,000 will vest one-year from the grant date, and 5,000,000 will vest two years from the grant date
subject to continued employment with the Company. The Company recorded $219,150 in expense related to this grant during the six
months ended June 30, 2018.
On January 22, 2018, the Company granted board
member Gary Smith 1,000,000 stock options under the 2016 Plan, exercisable at $.03 per share, vesting quarterly over one year beginning
in three months subject to continued service as a director on each applicable vesting date. The Company recorded $12,200 in expense
related to this grant during the six months ended June 30, 2018.
9. Fair Value Measurements
Our financial instruments consist of
cash, accounts payable, accrued liabilities, and warrant liability. We do not believe that we are exposed to significant interest,
currency, or credit risks arising from these financial instruments. The fair values of the warrants approximates their carrying
values using Level 3 inputs. Gains and losses recognized on changes in fair value of the warrants are reported in other income
(expense). Our warrant valuation was measured at fair value by applying the Black-Scholes option valuation model, which utilizes
Level 3 inputs.
The assumptions used in the Black-Scholes
option re-valuation for the September 2016 warrants at June 30, 2018 are as follows:
Dividend yield – 0%
|
Expected life – 3.25 years
|
Risk-free interest rate - 2.63%
|
Volatility – 216.150%.
|
The assumptions used for the March 2017
warrants at June 30, 2018 are as follows:
Dividend yield – 0%
|
Expected life – 4.25 years
|
Risk-free interest rate - 2.73%
|
Volatility – 223.895%.
|
The assumptions used for the March 6, 2018
warrants at June 30, 2018 are as follows:
Dividend yield – 0%
|
Expected life – 5.25 years
|
Risk-free interest rate - 2.73%
|
Volatility – 214.446%.
|
The assumptions used for the March 16, 2018
warrants at June 30, 2018 are as follows:
Dividend yield – 0%
|
Expected life – 2.75 years
|
Risk-free interest rate - 2.63%
|
Volatility – 259.419%.
|
The following summarizes the Company's financial
liabilities that are measured at fair value on a recurring basis at June 30, 2018.
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
231,176
|
|
|
$
|
231,176
|
|
10. Subsequent Events
On July 17, 2018, the Company issued 7,000,000
shares of common stock for the conversion of 7,000 shares of Series E.
Effective August 7, 2018, (the “Effective
Date”) the Company borrowed $76,000 from an institutional investor (the “Investor”) and issued the Investor a
5% Original Issue Discount Promissory Note (the “Note”) in the total principal amount of $80,000. The Note matures
on the sixth month anniversary of the Effective Date and bears interest at 12% per annum. The Note automatically becomes due and
payable upon the Company closing a financing through which the Company receives proceeds of at least $125,000.