NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017 (UNAUDITED)
NOTE
1 –
ORGANIZATION AND PRINCIPAL ACTIVITIES
Corporate
History and Background
On
December 1, 2016, substantially all of the operating assets of Coordinates Collection, Inc. (“CCI” or “Coordinates
Collection”) was acquired by
Reign Sapphire
Corporation
(
“
RGNP
“
or the “Company”)
(see “
Acquisition of Assets Related to the Coordinates
Collection Business”). RGNP
is a Beverly Hills-based, direct-to-consumer, branded
and custom jewelry company.
As part of the Acquisition, we created a wholly owned subsidiary, Reign Brands, Inc. (“Reign
Brands”), which is a Delaware corporation, and shall act as the operating entity for the acquired CCI assets. The acquisition
method of accounting was used to record assets acquired and liabilities assumed by the Company. Such accounting generally results
in increased amortization and depreciation reported in future periods. Accordingly, the accompanying consolidated financial statements
of CCI and the Company are not comparable in all material respects since those consolidated financial statements report financial
position, results of operations, and cash flows of these two separate entities. CCI’s fixed assets and identifiable intangible
assets acquired were recorded based upon their estimated fair values as of the closing date of the Acquisition. The excess of
purchase price over the value of the net assets acquired was recorded as goodwill.
The
accompanying condensed consolidated financial
statements ha
ve been presented on a comparative basis
.
RGNP
is a Beverly Hills-based, direct-to-consumer, branded and custom jewelry company with 4 niche brands: Reign Sapphires: ethically
produced, source-to-consumer sapphire jewelry targeting millennials, Coordinates Collection: custom jewelry, inscribed with location
coordinates commemorating life’s special moments, Le Bloc: classic customized jewelry, and athleisure jewelry brand ION
Collection.
Reign
Sapphire Corporation was established on December 15, 2014 in the State of Delaware as a vertically integrated “source to
retail” model for sapphires – rough sapphires to finished jewelry; a color gemstone brand; and a jewelry brand featuring
Australian sapphires. The Company acquired its Coordinates Collection and Le Bloc brands and the assets related to the production
and sale of it on December 1, 2016.
The
Company is focusing its marketing initiatives on: (1) Direct-to-Consumer (“D2C”) ecommerce marketing to attract customers
to the reignsappires.com website, (2) Business-to-Business (“B2B”) marketing and sales efforts, to establish distribution
partners such as high-end fashion retailers.
The
Company started as UWI Holdings Corporation (previously known as Australian Sapphire Corporation) (“UWI”) and was
established on May 31, 2013 in the Province of New Brunswick, Canada. On December 31, 2014, UWI entered into an Agreement of Conveyance,
Transfer and Assignment of Assets and Assumption of Obligations with Reign Corporation, pursuant to which UWI transferred all
of its net assets to Reign. The sole shareholder of UWI along with his spouse retained 100% ownership of Reign and were issued
27,845,000 of Reign common shares in exchange for the 16,000,250 outstanding shares of UWI. There was no significant tax consequence
to this exchange. As a result, Reign is considered to be the continuation of the predecessor UWI. All historical financial information
prior to the reorganization is that of UWI.
Prior
to the reorganization, the Company was authorized to issue 50,000,000 shares of common stock and 5,000,000 shares of preferred
stock. On May 8, 2015, the Company’s Articles of incorporation were amended to increase the authorized common shares to
100,000,000 and preferred shares to 10,000,000. On December 22, 2015, the Company’s Articles of Incorporation were amended
to increase the authorized number common shares to 150,000,000 with the authorized number of preferred shares remaining at 10,000,000.
On
March 17, 2017, the shareholders of the Company approved an amendment to the Company’s Certificate of Incorporation to designate
1 share of the Company’s authorized 10,000,000 shares of Preferred Stock as Series A Preferred Stock (“Series A Preferred
Stock”), which shall vote with the Common Stock, and shall be entitled to fifty-one percent (51%) of the total votes of
Common Stock on all such matters voted on. On May 23, 2017, the Company issued the share of Series A Preferred Stock to Joseph
Segelman.
The
Company has begun its planned principal operations, and accordingly, the Company has prepared its condensed consolidated financial
statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
NOTE
2 – BASIS OF PRESENTATION
The
included (a) condensed consolidated balance sheet as of December 31, 2017, which has been derived from audited financial statements,
and (b) the unaudited condensed financial statements as of September 30, 2018 and 2017, have been prepared in accordance with
accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission
(“SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in the
Company’s December 31, 2017 and 2016 audited financial statements filed on Form 10-K on April 2, 2018. In the opinion of
management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position
and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim
periods are not necessarily indicative of the results to be expected for future quarters or for the full year. Notes to the condensed
consolidated financial statements which substantially duplicate the disclosure contained in the financial statements as reported
in the Annual Report on Form 10-K for the year ended December 31, 2017 as filed on April 2, 2018, have been omitted.
The
Company currently operates in one business segment. The Company is not organized by market and is managed and operated as one
business. A single management team reports to the chief operating decision maker, the Chief Executive Officer, who comprehensively
manages the entire business. The Company does not currently operate any separate lines of businesses or separate business entities.
Going
Concern
The
accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern,
which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business.
The Company had an accumulated deficit of approximately $11,784,000 and $10,381,000 at September 30, 2018 and December 31, 2017,
respectively, had a working capital deficit of approximately $3,814,000 and $3,404,000 at September 30, 2018 and December 31,
2017, respectively, had a net loss of approximately $1,403,000 and $3,076,000 for the nine months ended September 30, 2018 and
2017, respectively, and net cash used in operating activities of approximately $298,000 and $181,000 for the nine months ended
September 30, 2018 and 2017, respectively, with limited revenue earned since inception, and a lack of operational history. These
matters raise substantial doubt about the Company’s ability to continue as a going concern.
While
the Company is attempting to expand operations and increase revenues, the Company’s cash position may not be significant
enough to support the Company’s daily operations. Management intends to raise additional funds by way of a public or private
offering. Management believes that the actions presently being taken to further implement its business plan and generate revenues
provide the opportunity for the Company to continue as a going concern. While the Company believes in the viability of its strategy
to generate revenues and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the
Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and
generate revenues. Our current burn rate to maintain the minimal level of operations for us to be in a position to execute our
business plan upon funding is anticipated to be no greater than $25,000 per month in cash. Joseph Segelman, our President and
CEO, has agreed to underwrite these costs, if necessary, until we are then able to begin execution of our business plan.
The
condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This
summary of significant accounting policies of the Company is presented to assist in understanding the Company’s condensed
consolidated financial statements. The condensed consolidated financial statements and notes are representations of the Company’s
management, which is responsible for their integrity and objectivity. These accounting policies conform to GAAP and have been
consistently applied in the preparation of the condensed consolidated financial statements.
Consolidation
The
condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Reign Brands,
Inc. All significant intercompany accounts and transactions are eliminated in consolidation.
Use
of Estimates
The
preparation of these condensed consolidated financial statements in accordance with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities
at the dates of the condensed consolidated financial statements and the reported amounts of net sales and expenses during the
reported periods. Actual results may differ from those estimates and such differences may be material to the financial statements.
The more significant estimates and assumptions by management include among others: inventory valuation, derivative liabilities,
warrant liabilities, common stock and option valuation, valuation of acquired intangible assets, and the recoverability of intangibles.
The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.
Income
Taxes
Income
taxes are accounted for under an asset and liability approach. This process involves calculating the temporary and permanent differences
between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax
purposes. The temporary differences result in deferred tax assets and liabilities, which would be recorded on the Balance Sheets
in accordance with Accounting Standards Codification (“ASC”) 740, which established financial accounting and reporting
standards for the effect of income taxes. The likelihood that its deferred tax assets will be recovered from future taxable income
must be assessed and, to the extent that recovery is not likely, a valuation allowance is established. Changes in the valuation
allowance in a period are recorded through the income tax provision in the condensed consolidated Statements of Operations.
ASC
740-10-30 was adopted from the date of its inception. ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized
in an entity’s consolidated financial statements and prescribes a recognition threshold and measurement attributes for financial
statement disclosure of tax positions taken or expected to be taken on a tax return. Under ASC 740-10, the impact of an uncertain
income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained
upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50%
likelihood of being sustained. Additionally, ASC 740-10 provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. As a result of the implementation of ASC 740-10, the Company does not
have a liability for unrecognized income tax benefits.
Comprehensive
Income
The
Company reports comprehensive income in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 220
“Comprehensive Income,” which established standards for reporting and displaying comprehensive income and its components
in a financial statement that is displayed with the same prominence as other financial statements.
Total
comprehensive income is defined as all changes in shareholders’ equity during a period, other than those resulting from
investments by and distributions to shareholders (i.e., issuance of equity securities and dividends). Generally, for the Company,
total comprehensive income (loss) equals net income (loss) plus or minus adjustments for currency translation. There are no items
other than net loss affecting comprehensive loss for the three and nine months ended September 30, 2018 and 2017, respectively.
Foreign
Currency - Functional and Presentation Currency
The
functional currency represents the currency of the primary economic environment in which the entity operates. Management has determined
the functional currency of the Company to be the USD, as sales prices and major costs of operating expenses are primarily influenced
by fluctuations in the USD, and with its Chief Executive Officer and director (“CEO”), and employees of the Company
headquartered and operating in the United States.
The
results of transactions in foreign currency are remeasured into the functional currency at the average rate of exchange during
the reporting period. The Company had no aggregate net foreign currency remeasurements included in general and administrative
expenses in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30,
2018 and 2017, respectively.
Assets
and liabilities denominated in foreign currencies at the balance sheet date are translated into the Company’s reporting
currency of USD at the exchange rates prevailing at the balance sheet date. All translation adjustments resulting from the translation
of the financial statements into the reporting currency at USD are dealt with as a separate component within shareholders’
equity. There were no translation adjustments for the three and nine months ended September 30, 2018 and 2017.
Revenue
Recognition
On
January 1, 2018, the Company adopted Accounting Standards Codification ASC 606 (“ASC 606”),
Revenue from Contracts
with Customers,
using the modified retrospective approach for all contracts not completed as of the date of adoption. Results
for the reporting periods beginning on January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted
and continue to be reported in accordance with accounting under ASC 605,
Revenue Recognition
. As a result of adopting ASC
606, amounts reported under ASC 606 were not materially different from amounts that would have been reported under the previous
revenue guidance of ASC 605, as such, no cumulative adjustment to retained earnings.
The
Company generates all of its revenue from contracts with customers. The Company recognizes revenue when we satisfy a performance
obligation by transferring control of the promised services to a customer in an amount that reflects the consideration that we
expect to receive in exchange for those services. The Company determines revenue recognition through the following steps:
|
1.
|
Identification
of the contract, or contracts, with a customer.
|
|
2.
|
Identification
of the performance obligations in the contract.
|
|
3.
|
Determination
of the transaction price.
|
|
4.
|
Allocation
of the transaction price to the performance obligations in the contract
|
|
5.
|
Recognition
of revenue when, or as, we satisfy a performance obligation.
|
At
contract inception, the Company assesses the services promised in our contracts with customers and identify a performance obligation
for each promise to transfer to the customer a service (or bundle of services) that is distinct. To identify the performance obligations,
the Company considers all of the services promised in the contract regardless of whether they are explicitly stated or are implied
by customary business practices. The Company allocates the entire transaction price to a single performance obligation.
A
description of our principal revenue generating activities are as follows:
Retail
sales
– The Company offers consumer products through its online websites. During the three and nine months ended September
30, 2018 and 2017, the Company recorded retail sales of $89,031 and $483,322 and $219,433 and $777,259, respectively.
Wholesale
sales
– The Company offers product sold in bulk to distributors. During the three and nine months ended September 30,
2018 and 2017, the Company recorded wholesale sales of $1,420 and $57,309 and $36,542 and $183,238, respectively.
Revenue
is recognized from retail and wholesale sales when the product is shipped to the customer, provided that collection of the resulting
receivable is reasonably assured. Credit is granted for wholesale sales generally for terms of 7 to 90 days, based on credit evaluations.
No allowance has been provided for uncollectible accounts. Management has evaluated the receivables and believes they are collectable
based on the nature of the receivables, historical experience of credit losses, and all other currently available evidence. Discounts
are recorded as a reduction of the transaction price. Revenue excludes any amounts collected on behalf of third parties, including
sales taxes.
The
Company evaluates whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned
as commissions. Generally, when the Company is primarily obligated in a transaction, are subject to inventory risk, have latitude
in establishing prices and selecting suppliers, or have several but not all of these indicators, revenue is recorded at the gross
sale price. The Company generally records the net amounts as commissions earned if we are not primarily obligated and do not have
latitude in establishing prices. The Company records all revenue transactions at the gross sale price.
There
is a no return policy. The return policy is currently being evaluated to be more in line with industry standards.
Deferred
revenue
Deferred
revenue consists of customer orders paid in advance of the delivery of the order. Deferred revenue is classified as short-term
as the typical order ships within approximately three weeks of placing the order. Deferred revenue is recognized as revenue when
the product is shipped to the customer and all other revenue recognition criteria have been met. Deferred revenue as of December
31, 2017 was $81,455, which was recognized as revenue during the nine months ended September 30, 2018, including adjustments related
to the new revenue recognition guidance. Deferred revenue totaling $20,616 and $81,455 as of September 30, 2018 and December 31,
2017, respectively, is included in current liabilities in the accompanying condensed consolidated Balance Sheets.
Inventories
Reign
Sapphires
Inventories
are stated at the lower of cost or market on a lot basis each quarter. A lot is determined by the cut, clarity, size, and weight
of the sapphires. Inventory consists of sapphire jewels that meet rigorous grading criteria and are of cuts and sizes most commonly
used in the jewelry industry. As of September 30, 2018 and December 31, 2017, the Company carried primarily loose sapphire jewels
and loose sapphire jewels held as samples. Samples are used to show potential customers what the jewelry would look like. Promotional
items given to customers that are not expected to be returned will be removed from inventory and expensed. There have been no
promotional items given to customers during the nine months ended September 30, 2018. The Company performs its own in-house assessment
based on gem guide and the current market price for metals to value its inventory on an annual basis or if circumstances dictate
sooner to determine if the estimated fair value is greater or less than cost. In addition, the inventory is reviewed each quarter
by the Company against industry prices from gem-guide and if there is a potential impairment, the Company would appraise the inventory.
The estimated fair value is subject to significant change due to changes in popularity of cut, perceived grade of the clarity
of the sapphires, the number, type and size of inclusions, the availability of other similar quality and size sapphires, and other
factors. As a result, the internal assessed value of the sapphires could be significantly lower from the current estimated fair
value. Loose sapphire jewels do not degrade in quality over time and are not subject to fashion trends. The estimated fair value
per management’s internal assessment is greater than the cost, therefore, there is no indicator of impairment as of September
30, 2018.
CCI,
Le Bloc and ION Collection
CCI,
Le Bloc and ION Collection products are outsourced to a third party for manufacture, made to order, and, when completed, are shipped
to the customer. The inventory for CCI, Le Bloc and ION Collection are considered immaterial as of September 30, 2018 and December
31, 2017.
Property
and Equipment
Property
and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets,
generally five years. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized.
When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting
gains or losses are included in income in the year of disposition. Fixed assets are examined for the possibility of decreases
in value when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Business
Combinations
Amounts
paid for acquisitions are allocated to the assets acquired and liabilities assumed based on their estimated fair value at the
date of acquisition. The fair value of identifiable intangible assets is based on detailed valuations that use information and
assumptions provided by management, including expected future cash flows. We allocate any excess purchase price over the fair
value of the net assets and liabilities acquired to goodwill. Identifiable intangible assets with finite lives are amortized over
their useful lives. Acquisition-related costs, including advisory, legal, accounting, valuation and other costs, are expensed
in the periods in which the costs are incurred. The results of operations of acquired businesses are included in the condensed
consolidated financial statements from the acquisition date.
Intangible
Assets and Goodwill
Goodwill
is the cost of an acquisition less the fair value of the net assets of the acquired business.
Intangible
assets consist primarily of tradenames, proprietary designs, developed technology – website, and developed technology –
Ipad application. Our intangible assets are being amortized on a straight-line basis over a period of three to ten years.
Impairment
of Long-lived Assets and Goodwill
We
evaluate goodwill for impairment annually in the fourth quarter, and whenever events or changes in circumstances indicate it is
more likely than not that the fair value of a reporting unit containing goodwill is less than its carrying amount. The goodwill
impairment test consists of a two-step process, if necessary. The first step is to compare the fair value of a reporting unit
to its carrying value, including goodwill. We typically use discounted cash flow models to determine the fair value of a reporting
unit. The assumptions used in these models are consistent with those we believe hypothetical marketplace participants would use.
If the fair value of the reporting unit is less than its carrying value, the second step of the impairment test must be performed
in order to determine the amount of impairment loss, if any. The second step compares the implied fair value of the reporting
unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill
exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess. There are no impairments
as of September 30, 2018 and December 31, 2017.
We
periodically evaluate whether the carrying value of property, equipment and intangible assets has been impaired when circumstances
indicate the carrying value of those assets may not be recoverable. The carrying amount is not recoverable if it exceeds the sum
of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying value is
not recoverable, the impairment loss is measured as the excess of the asset’s carrying value over its fair value. There
are no impairments as of September 30, 2018 and December 31, 2017.
Our
impairment analyses require management to apply judgment in estimating future cash flows as well as asset fair values, including
forecasting useful lives of the assets, assessing the probability of different outcomes, and selecting the discount rate that
reflects the risk inherent in future cash flows. If the carrying value is not recoverable, we assess the fair value of long-lived
assets using commonly accepted techniques, and may use more than one method, including, but not limited to, recent third party
comparable sales and discounted cash flow models. If actual results are not consistent with our assumptions and estimates, or
our assumptions and estimates change due to new information, we may be exposed to an impairment charge in the future.
Advertising
and Marketing Expenses
Advertising
and marketing expenses are recorded as marketing expenses when they are incurred. Advertising and marketing expense was approximately
$38,700 and $337,700, and $171,300 and $394,600, for the three and nine months ended September 30, 2018 and 2017, respectively.
Fair
Value of Financial Instruments
The
Company applies the provisions of accounting guidance, FASB Topic ASC 825 that requires all entities to disclose the fair value
of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable
to estimate fair value, and defines fair value of a financial instrument as the amount at which the instrument could be exchanged
in a current transaction between willing parties. As of September 30, 2018 and December 31, 2017, the fair value of cash, accounts
receivable, accounts payable and accrued expenses, notes payable, and convertible debt approximated carrying value due to the
short maturity of the instruments, quoted market prices or interest rates which fluctuate with market rates.
Fair
Value Measurements
Fair
value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on
the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize
the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered
observable and the last unobservable, as follows:
|
●
|
Level
1 – Quoted prices in active markets for identical assets or liabilities.
|
|
●
|
Level
2 – Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities.
|
|
●
|
Level
3 – Unobservable inputs that are supported by little or no market activity and
that are significant to the measurement of the fair value of the assets or liabilities
|
The
carrying value of financial assets and liabilities recorded at fair value is measured on a recurring or nonrecurring basis. Financial
assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs.
The Company had no financial assets or liabilities carried and measured on a nonrecurring basis during the reporting periods.
Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial
statement is prepared. The embedded derivative liabilities are recognized at fair value on a recurring basis at September 30,
2018 and are Level 3 measurements. There have been no transfers between levels.
Debt
The
Company issues debt that may have separate warrants, conversion features, or no equity-linked attributes.
Debt
with warrants
– When the Company issues debt with warrants, the Company treats the warrants as a debt discount, record
as a contra-liability against the debt, and amortize the balance over the life of the underlying debt as amortization of debt
discount expense in the condensed consolidated statements of operations. When the warrants require equity treatment under ASC
815, the offset to the contra-liability is recorded as additional paid in capital in our condensed consolidated balance sheet.
When the Company issues debt with warrants that require liability treatment under ASC 815, such as a clause requiring repricing,
the warrants are considered to be a derivative that is recorded as a liability at fair value. If the initial value of the warrant
derivative liability is higher than the fair value of the associated debt, the excess is recognized immediately as interest expense.
The warrant derivative liability is adjusted to its fair value at the end of each reporting period, with the change being recorded
as expense or gain to Other (income) expense in the condensed consolidated Statements of Operations. If the debt is retired early,
the associated debt discount is then recognized immediately as amortization of debt discount expense in the condensed consolidated
statement of operations. The debt is treated as conventional debt.
Convertible
debt – derivative treatment
– When the Company issues debt with a conversion feature, we must first assess whether
the conversion feature meets the requirements to be treated as a derivative, as follows: a) one or more underlyings, typically
the price of our common stock; b) one or more notional amounts or payment provisions or both, generally the number of shares upon
conversion; c) no initial net investment, which typically excludes the amount borrowed; and d) net settlement provisions, which
in the case of convertible debt generally means the stock received upon conversion can be readily sold for cash. An embedded equity-linked
component that meets the definition of a derivative does not have to be separated from the host instrument if the component qualifies
for the scope exception for certain contracts involving an issuer’s own equity. The scope exception applies if the contract
is both a) indexed to its own stock; and b) classified in shareholders’ equity in its statement of financial position.
If
the conversion feature within convertible debt meets the requirements to be treated as a derivative, we estimate the fair value
of the convertible debt derivative using Monte Carlo Method upon the date of issuance. If the fair value of the convertible debt
derivative is higher than the face value of the convertible debt, the excess is immediately recognized as interest expense. Otherwise,
the fair value of the convertible debt derivative is recorded as a liability with an offsetting amount recorded as a debt discount,
which offsets the carrying amount of the debt. The convertible debt derivative is revalued at the end of each reporting period
and any change in fair value is recorded as a gain or loss in the statement of operations. The debt discount is amortized through
interest expense over the life of the debt.
Convertible
debt – beneficial conversion feature
– If the conversion feature is not treated as a derivative, we assess whether
it is a beneficial conversion feature (“BCF”). A BCF exists if the conversion price of the convertible debt instrument
is less than the stock price on the commitment date. This typically occurs when the conversion price is less than the fair value
of the stock on the date the instrument was issued. The value of a BCF is equal to the intrinsic value of the feature, the difference
between the conversion price and the common stock into which it is convertible, and is recorded as additional paid in capital
and as a debt discount in the condensed consolidated balance sheet. The Company amortizes the balance over the life of the underlying
debt as amortization of debt discount expense in the statement of operations. If the debt is retired early, the associated debt
discount is then recognized immediately as amortization of debt discount expense in the condensed consolidated Statement of Operations.
If
the conversion feature does not qualify for either the derivative treatment or as a BCF, the convertible debt is treated as traditional
debt.
Employee
Stock Based Compensation
Stock
based compensation issued to employees and members of our board of directors is measured at the date of grant based on the estimated
fair value of the award, net of estimated forfeitures. The grant date fair value of a stock based award is recognized as an expense
over the requisite service period of the award on a straight-line basis.
For
purposes of determining the variables used in the calculation of stock based compensation issued to employees
,
the Company
performs an analysis of current market data and historical data to calculate an estimate of implied volatility, the expected term
of the option and the expected forfeiture rate. With the exception of the expected forfeiture rate, which is not an input, we
use these estimates as variables in the Black-Scholes option pricing model. Depending upon the number of stock options granted
any fluctuations in these calculations could have a material effect on the results presented in our condensed consolidated Statements
of Operations. In addition, any differences between estimated forfeitures and actual forfeitures could also have a material impact
on our condensed consolidated financial statements.
Non-Employee
Stock Based Compensation
Issuances
of the Company’s common stock or warrants for acquiring goods or services are measured at the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more reliably measurable. The measurement date for the
fair value of the equity instruments issued to consultants or vendors is determined at the earlier of (i) the date at which a
commitment for performance to earn the equity instruments is reached (a “performance commitment” which would include
a penalty considered to be of a magnitude that is a sufficiently large disincentive for nonperformance) or (ii) the date at which
performance is complete. Although situations may arise in which counter performance may be required over a period of time, the
equity award granted to the party performing the service is fully vested and non-forfeitable on the date of the agreement. As
a result, in this situation in which vesting periods do not exist as the instruments fully vested on the date of agreement, the
Company determines such date to be the measurement date and will record the estimated fair market value of the instruments granted
as a prepaid expense and amortize such amount to general and administrative expense in the accompanying statement of operations
over the contract period. When it is appropriate for the Company to recognize the cost of a transaction during financial reporting
periods prior to the measurement date, for purposes of recognition of costs during those periods, the equity instrument is measured
at the then-current fair values at each of those interim financial reporting dates.
Non-Cash
Equity Transactions
Shares
of equity instruments issued for non-cash consideration are recorded at the fair value of the consideration received based on
the market value of services to be rendered, or at the value of the stock given, considered in reference to contemporaneous cash
sale of stock.
Earnings
per Share
Diluted
earnings (loss) per share are computed on the basis of the weighted average number of common shares (including common stock subject
to redemption) plus dilutive potential common shares outstanding for the reporting period. In periods where losses are reported,
the weighted-average number of common stock outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
The
total number of potential additional dilutive securities outstanding for the three and nine months ended September 30, 2018 and
2017, was none since the Company had net losses and any additional potential common shares would have an anti-dilutive effect.
Related
Parties
Related
parties are any entities or individuals that, through employment, ownership or other means, possess the ability to direct or cause
the direction of the management and policies of the Company.
Concentrations,
Risks, and Uncertainties
Business
Risk
The
Company is subject to the substantial business risks and uncertainties inherent to such an entity, including the potential risk
of business failure.
The
Company is headquartered and operates in the United States. As the Company generates significant revenues from operations, business
activities will also include Australia and Asia and geographic segment reporting will be provided. There can be no assurance that
the Company will be able to successfully continue to manufacture its products and failure to do so would have a material adverse
effect on the Company’s financial position, results of operations and cash flows. Also, the success of the Company’s
operations is subject to numerous contingencies, some of which are beyond management’s control. These contingencies include
general economic conditions, price of raw material, competition, governmental and political conditions, and changes in regulations.
Because the Company is dependent on foreign trade in Australia and Asia, the Company is subject to various additional political,
economic and other uncertainties. Among other risks, the Company’s operations will be subject to risk of restrictions on
transfer of funds, domestic and international customs, changing taxation policies, foreign exchange restrictions, and political
and governmental regulations.
The
Company has business activities in Australia and Asia, which may give rise to significant foreign currency risks from fluctuations
and the degree of volatility of foreign exchange rates between USD and the Australian currency AUD. The results of operations
denominated in foreign currency are translated at the average rate of exchange during the reporting period. Aggregate net foreign
currency transactions included in the condensed consolidated Statements of Operations was immaterial for the three and nine months
ended September 30, 2018 and 2017.
Interest
rate risk
Financial
assets and liabilities do not have material interest rate risk.
Credit
risk
The
Company is exposed to credit risk from its cash in bank and accounts receivable. The credit risk on cash in banks is limited because
the counterparties are recognized financial institutions.
The
Company had no customers that accounted for 10% or more of total revenues for the three and months ended September 30, 2018. The
Company had one customer that accounted for 10%, comprising 10% and 14%, or more of total revenue for the three and nine months
ended September 30, 2017, respectively. The Company had no customers that accounted for 10% or more of total accounts receivable
at December 31, 2018 and 2017, respectively.
Foreign
currency risk
The
Company has transactions settled in AUD. Thus, the Company has foreign currency risk exposure.
Seasonality
The
business is subject to substantial seasonal fluctuations. Historically, a significant portion of net sales and net earnings have
been realized during the period from October through December.
Recent
Accounting Pronouncements
FASB
ASU 2017-11 “
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging
(Topic 815)
” - In July 2017, the FASB issued 2017-11. The guidance eliminates the requirement to consider “down
round” features when determining whether certain equity-linked financial instruments or embedded features are indexed to
an entity’s own stock. Our warrants issued with our convertible notes are treated as derivative instruments, because they
include a “down round” feature. The ASU is effective for annual periods beginning after December 15, 2018, and for
interim periods within those years, with early adoption permitted. We do not expect this ASU to have a significant impact on our
condensed consolidated financial statements and related disclosures.
FASB
ASU 2017-09 “
Scope of Modification Accounting (Topic 718)
” - In May 2017, the FASB issued 2017-09. The guidance
clarifies the accounting for when the terms of a share-based award are modified. The ASU is effective for annual reporting periods
beginning after December 15, 2017, and for interim periods within those years, with early adoption permitted. This new guidance
would only impact our condensed consolidated financial statements if, in the future, we modified the terms of any of our employee
and non-employee share-based awards.
FASB
ASU 2017-04
“Simplifying the Test for Goodwill Impairment (Topic 350)”
– In January 2017, the FASB issued
2017-04. The guidance removes “Step Two” of the goodwill impairment test, which required a hypothetical purchase price
allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value,
not to exceed the carrying amount of goodwill. The ASU is effective for annual reporting periods beginning after December 15,
2019, and for interim periods within those years, with early adoption permitted. We do not expect this ASU to have a significant
impact on our condensed consolidated financial statements and related disclosures unless we experience an impairment on goodwill.
FASB
ASU 2017-01
“Clarifying the Definition of a Business (Topic 805)”
– In January 2017, the FASB issued
2017-1. The new guidance that changes the definition of a business to assist entities with evaluating when a set of transferred
assets and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value of the
gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set
of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive
process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606. The ASU is
effective for annual reporting periods beginning after December 15, 2017, and for interim periods within those years. Adoption
of this ASU did not have a significant impact on our condensed consolidated financial statements and related disclosures.
FASB
ASU 2016-15
“Statement of Cash Flows (Topic 230)” –
In August 2016, the FASB issued 2016-15. Stakeholders
indicated that there is a diversity in practice in how certain cash receipts and cash payments are presented and classified in
the statement of cash flows. ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing
diversity in practice. This ASU is effective for annual reporting periods beginning after December 15, 2017, and interim periods
within those fiscal years. Early adoption is permitted. Adoption of this ASU did not have a significant impact on our statement
of cash flows.
FASB
ASU 2016-12
“Revenue from Contracts with Customers (Topic 606)”
– In May 2016, the FASB issued 2016-12.
The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. ASU 2016-12 provides clarification on assessing collectability, presentation of sales taxes, noncash consideration,
and completed contracts and contract modifications. This ASU is effective for annual reporting periods beginning after December
15, 2017, with the option to adopt as early as December 15, 2016. Adoption of this ASU did not have a significant impact on our
financial statements.
FASB
ASU 2016-11
“Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815)”
– In May 2016,
the FASB issued 2016-11, which clarifies guidance on assessing whether an entity is a principal or an agent in a revenue transaction.
This conclusion impacts whether an entity reports revenue on a gross or net basis. This ASU is effective for annual reporting
periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. Adoption of this ASU did not
have a significant impact on our financial statements.
FASB
ASU 2016-10
“Revenue from Contracts with Customers (Topic 606)”
– In April 2016, the FASB issued ASU
2016-10, clarify identifying performance obligations and the licensing implementation guidance, while retaining the related principles
for those areas. This ASU is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt
as early as December 15, 2016. Adoption of this ASU did not have a significant impact on our financial statements.
FASB
ASU 2016-02
“Leases (Topic 842)” –
In February 2016, the FASB issued ASU 2016-02, which will require
lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement
purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will
be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines.
Lessor accounting is similar to the current model but updated to align with certain changes to the lessee model and the new revenue
recognition standard. This ASU is effective for fiscal years beginning after December 18, 2018, including interim periods within
those fiscal years. We are currently evaluating the potential impact this standard will have on our condensed consolidated financial
statements and related disclosures.
FASB
ASU 2015-17
“Income Taxes (Topic 740)” –
In November 2015, the FASB issued ASU 2015-17, which simplifies
the presentation of deferred tax assets and liabilities on the balance sheet. Previous GAAP required an entity to separate deferred
income tax liabilities and assets into current and noncurrent amounts on the balance sheet. The amendment requires that deferred
tax liabilities and assets be classified as noncurrent in a classified balance sheet. This ASU is effective for annual periods
beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Adoption of this
ASU did not have a significant impact on our condensed consolidated financial statements and related disclosures.
NOTE
4 – INVENTORY
Inventories
consisted of the following as of:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
468,039
|
|
|
$
|
474,983
|
|
Work-in-process
|
|
|
121,411
|
|
|
|
117,012
|
|
Samples
|
|
|
134,145
|
|
|
|
134,145
|
|
|
|
$
|
723,595
|
|
|
$
|
726,140
|
|
NOTE
5 –
Equipment
Equipment
consisted of the following as of:
|
|
Estimated Life
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
|
|
Office equipment
|
|
5 years
|
|
$
|
3,391
|
|
|
$
|
3,391
|
|
Computer equipment
|
|
3 years
|
|
|
40,171
|
|
|
|
39,311
|
|
Accumulated depreciation
|
|
|
|
|
(26,894
|
)
|
|
|
(17,424
|
)
|
|
|
|
|
$
|
16,668
|
|
|
$
|
25,278
|
|
Depreciation
expense was $3,157 and $9,470, and $3,445 and $10,266 for the three and nine months ended September 30, 2018 and 2017, respectively,
and is classified in general and administrative expenses in the condensed consolidated Statements of Operations.
NOTE
6 –
INTANGIBLE ASSETS
Intangible
assets consisted of the following as of:
|
|
Estimated Life
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
3.3 – 4.5 years
|
|
$
|
260,000
|
|
|
$
|
260,000
|
|
Website
|
|
3 years
|
|
|
118,832
|
|
|
|
113,253
|
|
Acquired tradename
|
|
10 years
|
|
|
365,000
|
|
|
|
365,000
|
|
Acquired proprietary design
|
|
5 years
|
|
|
80,000
|
|
|
|
80,000
|
|
Acquired developed technology - website
|
|
3 years
|
|
|
117,500
|
|
|
|
117,500
|
|
Acquired developed technology – Ipad application
|
|
3 years
|
|
|
117,500
|
|
|
|
117,500
|
|
Accumulated amortization
|
|
|
|
|
(425,733
|
)
|
|
|
(249,947
|
)
|
|
|
|
|
$
|
633,099
|
|
|
$
|
803,306
|
|
|
|
Estimated
Life
|
|
|
September
30,
2018
|
|
December
31,
2017
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
indefinite
|
|
|
$
|
481,947
|
|
$
|
481,947
|
|
Future
amortization expense related to intangible assets are approximately as follows:
|
|
|
|
|
|
|
|
|
|
|
Acquired
|
|
|
|
|
|
|
|
Trademarks
|
|
|
Website
|
|
|
Intangibles
|
|
Total
|
|
2018
(remainder of fiscal year)
|
|
|
$
|
32,593
|
|
|
$
|
19,793
|
|
|
$
|
65,417
|
|
$
|
117,803
|
|
2019
|
|
|
|
62,907
|
|
|
|
38,919
|
|
|
|
124,306
|
|
|
226,132
|
|
2020
|
|
|
|
37,818
|
|
|
|
13,524
|
|
|
|
52,500
|
|
|
103,842
|
|
2021
|
|
|
|
12,606
|
|
|
|
916
|
|
|
|
51,167
|
|
|
64,689
|
|
2022
|
|
|
|
—
|
|
|
|
—
|
|
|
|
36,500
|
|
|
36,500
|
|
Thereafter
|
|
|
|
—
|
|
|
|
—
|
|
|
|
142,957
|
|
|
142,957
|
|
|
|
|
$
|
145,924
|
|
|
$
|
73,152
|
|
|
$
|
472,847
|
|
$
|
691,923
|
|
Amortization
expense was $58,901 and $175,786, and $55,284 and $162,270 for the three and nine months ended September 30, 2018 and 2017, respectively,
and is classified in general and administrative expenses in the condensed consolidated Statements of Operations.
NOTE
7 –
DUE TO RELATED PARTY
During
the nine months ended September 30, 2018, the Company received no advances from its CEO/director, incurred business expenses that
were paid by the CEO/director of $1,456,311 (comprised of operating expenses of $1,447,723, website development costs of $5,529,
inventory purchases totaling $2,200, and equipment purchases of $860) and had repayments of $1,076,191. The Company has a balance
owed to the related party of $1,101,555 and $721,434 at September 30, 2018 and December 31, 2017, respectively. During the nine
months ended September 30, 2018, the Company incurred $135,000 of compensation related to the CEO/director’s employment
agreement and $60,000 of deferred compensation related to the Secretary’s employment agreement. As of September 30, 2018
and December 31, 2017, accrued compensation-related party was $1,174,750 and $1,036,000, respectively.
NOTE
8 –
CONVERTIBLE NOTES PAYABLE
The
following represents a summary of the convertible debt terms at September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
Amount of
|
|
|
|
|
|
Maturity
|
|
Conversion
|
|
|
Number of
|
|
|
Exercise
|
|
|
Exercisable
|
|
|
|
|
Notes
|
|
|
Debt Discount
|
|
|
Dates thru
|
|
Price
|
|
|
Warrants
|
|
|
Price
|
|
|
thru
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January and February
2018 Notes
|
|
|
$
|
294,000
|
|
|
$
|
(19,726
|
)
|
|
10/3/2018 to 11/16/2018
|
|
$
|
0.08
|
|
|
1,960,000
|
|
|
$
|
0.15
|
|
|
2/16/2023
|
|
November 2017 Notes
|
|
|
|
287,502
|
|
|
|
—
|
|
|
12/31/2018
|
|
$
|
0.08
|
|
|
3,593,776
|
|
|
$
|
0.15
|
|
|
11/10/2022
|
|
November 2016 Notes
|
|
|
|
287,502
|
|
|
|
—
|
|
|
12/31/2018
|
|
$
|
0.08
|
|
|
3,593,776
|
|
|
$
|
0.15
|
|
|
11/10/2022
|
|
December 2015 Notes
|
|
|
|
862,500
|
|
|
|
—
|
|
|
12/31/2018
|
|
$
|
0.08
|
|
|
10,781,250
|
|
|
$
|
0.15
|
|
|
11/10/2022
|
|
Total
|
|
|
$
|
1,731,504
|
|
|
$
|
(19,726
|
)
|
|
|
|
|
|
|
|
19,928,802
|
|
|
|
|
|
|
|
|
January
and February 2018
In
January and February 2018, the Company entered into Securities Purchase Agreements (the “Purchase Agreement”) with
respect to the sale and issuance to Crossover Capital Fund II, LLC (“Crossover”) totaling (i) 833,332 shares of the
Company’s Common Stock (the “Commitment Shares”); (ii) 3,000,000 redeemable shares (the “Redeemable Shares”),
(iii) $294,000 aggregate principal amount of a convertible promissory notes (the “Convertible Notes”) and (iv) Common
Stock Purchase Warrants to purchase up to an aggregate of 1,960,000 shares of the Company’s common stock (the “Warrants”)
for aggregate consideration of $250,000 cash
which
was issued at a $44,000 original issue discount from the face value of the Note
.
The
January and February 2018 Convertible Notes mature on October 3, 2018 and November 16, 2018, respectively, and provide for interest
to accrue at an interest rate equal to 18% per annum or the maximum rate permitted under applicable law after the occurrence of
any event of default as provided in the Convertible Notes. At any time after 180 days from the issue date, the holder, at its
option, may convert the outstanding principal balance and accrued interest into shares of common stock of the Company. The initial
conversion price for the principal and interest in connection with voluntary conversions by a holder of the Convertible Notes
is $0.08 per share, subject to adjustment as provided therein. There is also a one-time interest charge of 10% due at maturity.
If
the Convertible Notes are prepaid on or prior to the maturity dates, all of the Redeemable Shares shall be returned to the treasury
shares of the Company, without any payment by the Company for the Redeemable Shares. Further, if the Company prepays a portion
of the Convertible Notes, but not the entire Convertible Notes, on or before the maturity dates, a pro rata portion of the Redeemable
Shares shall be returned to the Company’s treasury in proportion to the prepayment amount as it relates to the entire Convertible
Notes balance.
On the 180
th
day, the
conversion feature will be a derivative and recorded as interest expense.
The
exercise price for the Warrants is $0.15, subject to adjustment, are exercisable for five years after the date of the Warrants
and are exercisable
in whole or in part, as either
a cash exercise or as a “cashless” exercise.
Purchaser
Conversion
The
January and February 2018 Convertible Notes
purchaser has the right at any time after
180 days after the issue date until the outstanding balance of the Note has been paid in full, to
convert
the outstanding principal balance and accrued interest into shares of common stock of the Company
divided by the
January
and February 2018 Convertible Notes
purchaser conversion price of $0.08, subject to potential future adjustments. If the
total outstanding balance of the November 2017 Note were convertible as of September 30, 2018, the November 2017 Note would have
been convertible into 3,675,000 shares of our common stock. No derivative liability has been recorded as of September 30, 2018,
as conversion was contingent. On the 180
th
day, the conversion feature will be a derivative and recorded as interest
expense. Subsequent to September 30, 2018, the 180 day period has expired and the Company is in the process of determining the
fair value of the derivative.
Interest
The
January and February 2018 Convertible Notes
provide
a
one-time interest charge of 10% due at maturity totaling $29,400 that has been accrued within other current liabilities in the
accompanying condensed consolidated balance sheets.
The interest was recorded as a debt discount to be accreted over the
term of the convertible notes to interest expense in the accompanying condensed consolidated Statements of Operations.
Redeemable
Shares
The
January and February 2018 Convertible Notes
provide for a total of 3,000,000 redeemable
common shares, valued totaling $450,000 and $103,560 based on the fair value and the relative fair value of each issuance, respectively.
The relative fair value of the redeemable shares was recorded as a debt discount to be accreted over the term of the convertible
notes to interest expense in the accompanying condensed consolidated Statements of Operations. Although the contingency has not
lapsed, the Company recorded the liability as it is remote that the notes will be repaid prior to maturity and the shares returned
to the Company.
Common
Stock
The
January and February 2018 Convertible Notes purchasers
were issued a total of 833,332
shares of the Company’s common stock, valued at $125,000 and $28,767 based on the fair value and relative fair value of
the stock on the date of grant, respectively.
Warrants
The
Company calculates the fair value of the Warrants at $95,324 and $65,292 at January 3, 2018 and February 16, 2018, respectively,
using the Black-Scholes option-pricing method. The Black-Scholes option-pricing method requires the use of subjective assumptions,
including stock price volatility, the expected life of stock options, risk free interest rate and the fair value of the underlying
common stock on the date of grant. The assumptions used in the Black-Scholes option-pricing method is set forth below:
|
|
January 3, 2018
|
|
|
February 16, 2018
|
|
Common stock price
|
|
$
|
0.17
|
|
|
$
|
0.13
|
|
Term
|
|
|
5 years
|
|
|
|
5 years
|
|
Strike price
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
Dividend yield
|
|
|
0
|
|
|
|
0
|
|
Risk free rate
|
|
|
2.25
|
%
|
|
|
2.63
|
%
|
Volatility
|
|
|
62.5
|
%
|
|
|
62.5
|
%
|
Dividend
yield
. The Company bases the expected dividend yield assumption on the fact that the Company has never paid cash dividends
and has no present intention to pay cash dividends on the Company’s common stock.
Volatility
.
The expected stock-price volatility assumption is based on volatilities of the guideline public companies that are comparable
to Reign Sapphire.
Risk-free
interest rate
. We based the risk-free interest rate assumption on the observed Daily Treasury Yield Curve Rate for a five-year
obligation.
Expected
term of options
. The contractual life of warrants represents the period of time that warrants are expected to be outstanding.
Because the Company does not have historic exercise behavior, the Company determines the expected life assumption using the simplified
method, which is an average of the contractual term of the warrant and its ordinary vesting period.
Debt
Discount
The
Company issued the
January and February 2018 Convertible Notes
with warrants that
require equity treatment under ASC 815. As such, the proceeds of the notes were allocated, based on relative fair values, as follows:
original issue discount of $44,000, interest of $29,400, $28,767 to the common shares issued, $36,739 to the warrants granted,
and $103,560 to the redeemable shares, resulting in a debt discount to such notes of $242,466. The debt discount is accreted to
interest expense over the term of the note.
|
|
January
3, 2018
|
|
|
February
16, 2018
|
|
|
|
Fair
value
|
|
|
Relative
fair value
|
|
|
Fair
value
|
|
|
Relative fair value
|
|
Warrant
|
|
$
|
95,324
|
|
|
$
|
19,784
|
|
|
$
|
65,292
|
|
|
$
|
16,955
|
|
Common sock
|
|
$
|
70,833
|
|
|
$
|
14,701
|
|
|
$
|
54,167
|
|
|
$
|
14,066
|
|
Redeemable shares
|
|
$
|
255,000
|
|
|
$
|
52,923
|
|
|
$
|
195,000
|
|
|
$
|
50,637
|
|
Remaining note
value
|
|
$
|
110,300
|
|
|
$
|
22,892
|
|
|
$
|
110,300
|
|
|
$
|
28,642
|
|
Total
|
|
$
|
531,457
|
|
|
$
|
110,300
|
|
|
$
|
424,759
|
|
|
$
|
110,300
|
|
The
Company recorded debt discount accretion of $80,822 and $222,740 and $0 and $0 to interest expense in the condensed consolidated
Statements of Operations during the three and nine months ended September 30, 2018 and 2017, respectively, and has $19,726 of
unamortized debt discount remaining as of September 30, 2018.
November
2017
On
November 10, 2017, the Company entered into a Securities Purchase Agreement (the “November 2017 Purchase Agreement”)
with respect to the sale and issuance to certain institutional investors Alpha Capital Anstalt and Brio Capital Master Fund Ltd.
(collectively “November 2017 Purchasers”) of up to (i) 833,354 shares of the Company’s Common Stock (the “November
2017 Incentive Shares”); (ii) $287,502 aggregate principal amount of Secured Convertible Notes (the “November 2017
Notes”) and (iii) Common Stock Purchase Warrants to purchase up to an aggregate of 3,593,776, shares of the Company’s
Common Stock (the “November 2017 Warrants”). The November 2017 Incentive Shares, November 2017 Notes and November
2017 Warrants were issued on November 10, 2017 (the “November 2017 Original Issue Date”). November 2017 Purchasers
received (i) November 2017 Incentive Shares at the rate of 2.8986 November 2017 Incentive Shares for each $1.00 of November 2017
Note principal issued to such November 2017 Purchaser; (ii) a November 2017 Note with a principal amount of $1.00 for each $0.86956
for each $1.00 paid by each purchaser for such purchaser’s November 2017 Note; and (iii) November 2017 Warrants to purchase
up to a number of shares of Common Stock equal to 100% of such purchaser’s November 2017 Note principal amount divided by
$0.08 (“Purchaser Conversion Price”), the conversion price in effect on the Initial Closing Date, with a per share
exercise price equal to $0.15, as amended on November 16, 2017, subject to adjustment. The aggregate cash subscription amount
received by the Company from the purchasers for the issuance of the November 2017 Incentive Shares, November 2017 Notes and November
2017 Warrants was approximately $250,002 (the “Subscription Amount”) which was issued at a $37,500 original issue
discount from the face value of the Note.
The
November 2017 Notes mature on December 31, 2018, as amended on January 25, 2018, and provide for interest to accrue at an interest
rate equal to the lesser of 15% per annum or the maximum rate permitted under applicable law after the occurrence of any event
of default as provided in the November 2017 Notes. At any time after the November 2017 Original Issue Date, the holders, at their
option, may convert the outstanding principal balance and accrued interest into shares of our Common Stock. The initial conversion
price for the principal and interest in connection with voluntary conversions by a holder of a Note is $0.08 per share, subject
to adjustment as provided therein. Each November 2017 Note, for example, is subject to adjustment upon certain events such as
stock splits and has full ratchet anti-dilution protections for issuance of securities by us at a price that is lower than the
conversion price. Each November 2017 Note also contains certain negative covenants, including prohibitions on incurrence of indebtedness,
liens, charter amendments, dividends, redemption. None of the holders of the November 2017 Note have the right to convert any
portion of their November 2017 Note if it (together with its affiliates) would beneficially own in excess of 9.99% of the number
of shares of Common Stock outstanding immediately after giving effect to the exercise. The November 2017 Notes include customary
events of default, including, among other things, payment defaults, covenant breaches, certain representations and warranties,
certain events of bankruptcy, liquidation and suspension of the Company’s Common Stock from trading. If such an event of
default occurs, the holders of the November 2017 Notes may be entitled to take various actions, which may include the acceleration
of amounts due under the November 2017 Notes and accrual of interest as described above. The November 2017 Notes are collectively
collateralized by substantially all of the Company’s assets and guarantees of payment of the November 2017 Notes have also
been delivered by Joseph Segelman, the Chief Executive Officer and President of the Company, and Australian Sapphire Corporation
(“ASC”), a shareholder of the Company which is wholly-owned by Joseph Segelman, guaranteed payment of all amounts
owed under the November 2017 Notes, subject to the terms of such guaranty agreements.
The
November 2017 Purchase Agreement
is being entered into in accordance with the halachically
accepted exemptions on the paying of interest payments in business transactions known as “heter iska”.
The
Company
is still accounting for the interest in accordance with GAAP.
Optional
Redemption
The
November 2017 Notes provide that commencing six (6) months after the November 2017 Original Issue Date, the Company will have
the option of prepaying the outstanding principal amount of the November 2017 Notes (an “November 2017 Optional Redemption”),
in whole or in part, by paying to the holders a sum of money in cash equal to one hundred percent (100%) of the principal amount
to be redeemed, together with accrued but unpaid interest thereon, if any, and any and all other sums due, accrued or payable
to the holder arising under the November 2017 Note through the November 2017 Redemption Payment Date and 2.8986 shares of the
Company’s Common Stock for each $1.00 of November 2017 Note principal amount being redeemed. A Notice of Redemption, if
given, may be given on the first Trading Day following twenty (20) consecutive Trading Days during which all of the “Equity
Conditions”, as defined, have been in effect.
The
Company evaluated the Optional Redemption in ASC 815, and concluded that the Optional Redemption meets the criteria in ASC 815,
and therefore, is accounted for as a liability.
As
of September 30, 2018, the Optional Redemption was recorded as a derivative liability on the condensed consolidated Balance Sheets
using “Monte Carlo Method” modeling and at each subsequent reporting date, the fair value of the Optional Redemption
liability will be re-measured and changes in the fair value will be recorded in the condensed consolidated Statements of Operations.
The Optional Redemption liability fair value was originally valued at $6,375 and was re-measured at fair value to be $6,375 at
September 30, 2018. During the three and nine months ended September 30, 2018 and 2017, the Company recorded $0 and $0, and $0
and $0, respectively, on Optional Redemption valuation.
The
fair value of the embedded derivative liability is measured in accordance with ASC 820 “Fair Value Measurement”, using
“Monte Carlo Method” modeling incorporating the following inputs:
|
|
September 30, 2018
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
Risk-free interest rate
|
|
|
2.11
|
%
|
Expected term of options (years)
|
|
|
0.5
|
|
Stock price
|
|
$
|
0.019
|
|
Conversion price
|
|
$
|
0.08
|
|
Purchaser
Conversion
The
November 2017 Purchaser has the right at any time after the November 2017 Original Issue Date until the outstanding balance of
the Note has been paid in full, to convert all or any part of the outstanding balance into shares (“November 2017 Purchaser
Conversion Shares”) of the Company’s common stock, of the portion of the outstanding balance being converted (the
“November 2017 Conversion Amount”) divided by the November 2017 Purchaser Conversion Price of $0.08, subject to potential
future adjustments described below. If the total outstanding balance of the November 2017 Note were convertible as of September
30, 2018, the November 2017 Note would have been convertible into 3,593,776 shares of our common stock.
The
Company evaluated the note under the requirements of ASC 480 “Distinguishing Liabilities From Equity” and concluded
that the Note does not fall within the scope of ASC 480. The Company next evaluated the November 2017 Note under the requirements
of ASC 815 “Derivatives and Hedging”. Due to the existence of the anti-dilution provision which reduces the November
2017 Purchaser Conversion Price in the event of subsequent dilutive issuances by the Company below the November 2017 Purchaser
Conversion Price as described above, the November 2017 Purchaser Conversion feature does not meet the definition of “indexed
to” our stock, and the scope exception to ASC 815’s derivative accounting provisions does not apply. The Company also
evaluated the embedded derivative criteria in ASC 815, and concluded that the Purchaser Conversion feature meets all of the embedded
derivative criteria in ASC 815, and therefore, the November 2017 Purchaser Conversion feature meets the definition of an embedded
derivative that should be separated from the note and accounted for as a derivative liability.
The
embedded derivative was recorded as a derivative liability on the condensed consolidated Balance Sheet at its fair value of $165,000
at the date of issuance. At each subsequent reporting date, the fair value of the embedded derivative liability will be remeasured
and changes in the fair value will be recorded in the condensed consolidated Statements of Operations. At September 30, 2018,
the embedded derivative was re-measured at fair value that was determined to be $0. During the three and nine months ended September
30, 2018 and 2017, the Company recorded a gain of $0 and $75,000 and $0 and $0, respectively, on embedded derivative re-valuation.
On
November 16, 2017, the November 2017 Notes were modified in accordance with ASC 470-50-40 and ASC 815 and the Company re-measured
the embedded derivative at fair value, which was determined to be $155,000 and recorded a modification of derivative liability
charge of $5,000.
On
January 25, 2018, the November 2017 Notes, November 2016 Notes, and December 2015 Notes were again modified in accordance with
ASC 470-50-40 and ASC 815 in which the Company issued a total of 2,395,650 restricted common shares, valued at $263,522 (based
on the Company’s stock price on the measurement date) in consideration of the maturity date of the outstanding November
2017, November 2016, and December 2015 convertible notes being extended to December 31, 2018. The Company re-measured the embedded
derivative at fair value just prior to and subsequent to the modification and recorded an extinguishment of debt of $12,000 in
the nine months ended September 30, 2018. In addition, the value of the restricted common shares of $263,522 was recorded as an
extinguishment of debt in the nine months ended September 30, 2018.
The
fair value of the embedded derivative liability is measured in accordance with ASC 820 “Fair Value Measurement”, using
“Monte Carlo Method” modeling incorporating the following inputs:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
47.5
|
%
|
Risk-free interest rate
|
|
|
2.11
|
%
|
|
|
1.53
|
%
|
Expected term of options (years)
|
|
|
0.5
|
|
|
|
0.5
|
|
Stock price
|
|
$
|
0.019
|
|
|
$
|
0.12
|
|
Conversion price
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
November
2017 Purchaser Warrants
The
November 2017 Purchaser Warrants allow the November 2017 Purchaser to purchase up to a number of shares of common stock equal
to 100% of such purchaser’s Note principal amount divided by $0.08, with a per share exercise price equal to $0.15, subject
to adjustment.
The
term of the Purchaser Warrants is at any time on or after the six (6) month anniversary of the November 2017 Original Issue Date
and on or prior to the five (5) year anniversary of the November 2017 Initial Trading Date of our common stock on a Trading Market.
The
exercise price of the November 2017 Purchaser Warrants is $0.15 per share of our common stock, as may be adjusted from time to
time pursuant to the antidilution provisions of the November 2017 Purchaser Warrants.
The
November 2017 Purchaser Warrants are exercisable by the November 2017 Purchaser in whole or in part, as either a cash exercise
or as a “cashless” exercise.
The
Company evaluated the November 2017 Warrants under ASC 480 “Distinguishing Liabilities From Equity” and ASC 815 “Derivatives
and Hedging”. Due to the existence of the antidilution provision, which reduces the November 2017 Exercise Price and November
2017 Conversion Price in the event of subsequent November 2017 Dilutive Issuances, the November 2017 Purchaser Warrants are not
indexed to our common stock, and the Company has determined that the November 2017 Purchaser Warrants meet the definition of a
derivative under ASC 815. Accordingly, the November 2017 Purchaser Warrants were recorded as derivative liabilities in the condensed
consolidated Balance Sheet at their fair value of $290,612 at the date of issuance. At each subsequent reporting date, the fair
value of the Purchaser Warrants will be remeasured and changes in the fair value will be reported in the condensed consolidated
Statements of Operations. On November 16, 2017, the November 2017 Warrants were modified in accordance with ASC 470-50-40 and
ASC 815 which eliminated the antidilution provision of the exercise price, fixed the exercise price at $0.15 per share, and fixed
the number of shares the warrants can be exercised into; thereby eliminating the requirement for derivative accounting and liability
classification. As a result, the warrant re-valuation was reclassified to additional paid-in-capital resulting in a warrant liability
of $0 as of November 16, 2017.
November
2017 Purchaser Common Stock
The
November 2017 Purchasers were issued a total of 833,354 shares of the Company’s common stock, valued at $163,171 (based
on the stock price on the date of issuance).
Debt
Discount
The
Company issued the November 2017 Notes with warrants and conversion features that required liability treatment under ASC 815.
As such, the proceeds of the notes were allocated, based on fair values, as follows: original issue discount of $37,497, $163,171
to the common shares issued; $290,612 to the warrants granted; and $165,000 to the embedded derivative, resulting in a debt discount
to such notes of $287,502 with the remaining amount of approximately $369,000 expensed at inception of the note. The debt discount
is accreted over the term of the convertible notes to interest expense in the accompanying condensed consolidated Statements of
Operations.
On
January 25, 2018, the November 2017 Notes were modified in accordance with ASC 470-50-40 and ASC 815. As a result, the Company
recorded the elimination of debt discount of $224,904 to extinguishment of debt in the condensed consolidated Statements of Operations
during the nine months ended September 30, 2018 with a debt discount of $0 as of September 30, 2018.
November
2016
As
of December 31, 2016, the Company previously entered into a Securities Purchase Agreement (the “November 2016 Purchase Agreement”)
with respect to the sale and issuance to certain institutional investors Alpha Capital Anstalt and Brio Capital Master Fund Ltd.
(collectively “November 2016 Purchasers”) of up to (i) 833,354 shares of the Company’s Common Stock (the “November
2016 Incentive Shares”); (ii) $287,502 aggregate principal amount of Secured Convertible Notes (the “November 2016
Notes”) and (iii) Common Stock Purchase Warrants to purchase up to an aggregate of 3,593,775, as amended, shares of the
Company’s Common Stock (the “November 2016 Warrants”). The November 2016 Incentive Shares, November 2016 Notes
and November 2016 Warrants were issued on November 10, 2016 (the “November 2016 Original Issue Date”). November 2016
Purchasers received (i) November 2016 Incentive Shares at the rate of 2.8986 November 2016 Incentive Shares for each $1.00 of
November 2016 Note principal issued to such November 2016 Purchaser; (ii) a November 2016 Note with a principal amount of $1.00
for each $0.86956 for each $1.00 paid by each purchaser for such purchaser’s November 2016 Note; and (iii) November 2016
Warrants to purchase up to a number of shares of Common Stock equal to 100% of such purchaser’s November 2016 Note principal
amount divided by $0.12 (“Purchaser Conversion Price”), the conversion price in effect on the Initial Closing Date,
as amended on May 30, 2017 to $0.08, with a per share exercise price equal to $0.30, subject to adjustment. The aggregate cash
subscription amount received by the Company from the purchasers for the issuance of the November 2016 Incentive Shares, November
2016 Notes and November 2016 Warrants was approximately $244,945 (the “Subscription Amount”) which was issued at a
$42,557 original issue discount from the face value of the Note.
The
November 2016 Notes mature on December 31, 2018, as amended on January 25, 2018, and provide for interest to accrue at an interest
rate equal to the lesser of 15% per annum or the maximum rate permitted under applicable law after the occurrence of any event
of default as provided in the November 2016 Notes. At any time after the November 2016 Original Issue Date, the holders, at their
option, may convert the outstanding principal balance and accrued interest into shares of our Common Stock. The initial conversion
price for the principal and interest in connection with voluntary conversions by a holder of a Note was $0.12 per share, as amended
on May 30, 2017 to $0.08, subject to adjustment as provided therein. Each November 2016 Note, for example, is subject to adjustment
upon certain events such as stock splits and has full ratchet anti-dilution protections for issuance of securities by us at a
price that is lower than the conversion price. Each November 2016 Note also contains certain negative covenants, including prohibitions
on incurrence of indebtedness, liens, charter amendments, dividends, redemption. None of the holders of the November 2016 Note
have the right to convert any portion of their November 2016 Note if it (together with its affiliates) would beneficially own
in excess of 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to the exercise. The November
2016 Notes include customary events of default, including, among other things, payment defaults, covenant breaches, certain representations
and warranties, certain events of bankruptcy, liquidation and suspension of the Company’s Common Stock from trading. If
such an event of default occurs, the holders of the November 2016 Notes may be entitled to take various actions, which may include
the acceleration of amounts due under the November 2016 Notes and accrual of interest as described above. The November 2016 Notes
are collectively collateralized by substantially all of the Company’s assets and guarantees of payment of the November 2016
Notes have also been delivered by Joseph Segelman, the Chief Executive Officer and President of the Company, and Australian Sapphire
Corporation (“ASC”), a shareholder of the Company which is wholly-owned by Joseph Segelman, guaranteed payment of
all amounts owed under the November 2016 Notes, subject to the terms of such guaranty agreements.
The
November 2016 Purchase Agreement
is being entered into in accordance with the halachically
accepted exemptions on the paying of interest payments in business transactions known as “heter iska”.
The
Company
is still accounting for the interest in accordance with GAAP.
As
a result of the failure to timely file our 2016 Form 10-K for the year ended December 31, 2016 and our Form 10-Q for the three
month period ended March 31, 2017, the November 2016 and December 2015 Notes were in default. On May 30, 2017, the Company entered
into a Second Consent, Waiver and Modification Agreement (the “Agreement”) with certain purchasers of convertible
promissory notes (the “Notes”) pursuant to securities purchase agreements dated December 23, 2015 and November 10,
2016, which were amended pursuant to a Consent, Waiver and Modification Agreement dated October 13, 2016. The waivers contained
in the Agreement were related to a waiver of the right to participate in additional offerings by the Company, allowing shares
of the Company’s common stock to be issued pursuant to a private offering at a price of not less than $0.08 per share as
well as warrants exercisable for a period of five years at $0.15 per share, as amended on November 16, 2017, adjusting the conversion
price of the Notes issued to the purchasers to $0.08 per share, extending the maturity date of the December 23, 2015 convertible
promissory notes to December 31, 2018 and waiving default provisions listed in the Notes related to the Company’s failure
to timely file its Form 10-K for the year ended December 31, 2016 and the Form 10-Q for the three month period ended March 31,
2017. Based on ASC 470-50-40,
Extinguishments of Debt
, the Company recognized $691,371 as an extinguishment of debt under
Other (income) expense in the accompanying condensed consolidated Statements of Operations for the year ended December 31, 2017
(Successor). The extinguishment of debt is comprised of changes in the fair value of warrant and derivative liabilities due to
the amendment of the notes that were measured immediately prior to and subsequent to the amendment that resulted in extinguishment
loss of $176,022 for the December 2015 Purchaser Warrants, $75,648 for the November 2016 Purchaser Warrants, $183,250 for the
December 2015 Purchaser Conversion Shares, and $41,842 for the November 2016 Purchaser Conversion Shares, as well as $178,409
for the unamortized debt discount associated with the November 2016 Notes and $36,200 for the unamortized debt discount associated
with the December 2015 Notes.
Optional
Redemption
The
November 2016 Notes provide that commencing six (6) months after the November 2016 Original Issue Date, the Company will have
the option of prepaying the outstanding principal amount of the November 2016 Notes (an “November 2016 Optional Redemption”),
in whole or in part, by paying to the holders a sum of money in cash equal to one hundred percent (100%) of the principal amount
to be redeemed, together with accrued but unpaid interest thereon, if any, and any and all other sums due, accrued or payable
to the holder arising under the November 2016 Note through the November 2016 Redemption Payment Date and 2.8986 shares of the
Company’s Common Stock for each $1.00 of November 2016 Note principal amount being redeemed. A Notice of Redemption, if
given, may be given on the first Trading Day following twenty (20) consecutive Trading Days during which all of the “Equity
Conditions”, as defined, have been in effect.
The
Company evaluated the Optional Redemption in ASC 815, and concluded that the Optional Redemption meets the criteria in ASC 815,
and therefore, is accounted for as a liability.
As
of September 30, 2018, the Optional Redemption was recorded as a derivative liability on the condensed consolidated Balance Sheets
using “Monte Carlo Method” modeling and at each subsequent reporting date, the fair value of the Optional Redemption
liability will be re-measured and changes in the fair value will be recorded in the condensed consolidated Statements of Operations.
The Optional Redemption liability fair value was originally valued at $35,015 and was re-measured at fair value to be $6,375 at
September 30, 2018. During the three and nine months ended September 30, 2018 and 2017, the Company recorded a gain of $0 and
$32,585 and a loss of $27,139 and $12,235, respectively, on Optional Redemption valuation in the change in fair value of derivative
liabilities in the accompanying condensed consolidated Statements of Operations.
The
fair value of the embedded derivative liability is measured in accordance with ASC 820 “Fair Value Measurement”, using
“Monte Carlo Method” modeling incorporating the following inputs:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
47.5
|
%
|
Risk-free interest rate
|
|
|
2.11
|
%
|
|
|
1.53
|
%
|
Expected term of options (years)
|
|
|
0.50
|
|
|
|
0.5
|
|
Stock price
|
|
$
|
0.019
|
|
|
$
|
0.12
|
|
Conversion price
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
Purchaser
Conversion
The
November 2016 Purchaser has the right at any time after the November 2016 Original Issue Date until the outstanding balance of
the Note has been paid in full, to convert all or any part of the outstanding balance into shares (“November 2016 Purchaser
Conversion Shares”) of the Company’s common stock, of the portion of the outstanding balance being converted (the
“November 2016 Conversion Amount”) divided by the November 2016 Purchaser Conversion Price of $0.08, as amended on
May 30, 2017, subject to potential future adjustments described below. If the total outstanding balance of the November 2016 Note
were convertible as of September 30, 2018, the November 2016 Note would have been convertible into 3,593,775 shares of our common
stock.
The
Company evaluated the note under the requirements of ASC 480 “Distinguishing Liabilities From Equity” and concluded
that the Note does not fall within the scope of ASC 480. The Company next evaluated the November 2016 Note under the requirements
of ASC 815 “Derivatives and Hedging”. Due to the existence of the anti-dilution provision which reduces the November
2016 Purchaser Conversion Price in the event of subsequent dilutive issuances by the Company below the November 2016 Purchaser
Conversion Price as described above, the November 2016 Purchaser Conversion feature does not meet the definition of “indexed
to” our stock, and the scope exception to ASC 815’s derivative accounting provisions does not apply. The Company also
evaluated the embedded derivative criteria in ASC 815, and concluded that the Purchaser Conversion feature meets all of the embedded
derivative criteria in ASC 815, and therefore, the November 2016 Purchaser Conversion feature meets the definition of an embedded
derivative that should be separated from the note and accounted for as a derivative liability.
The
embedded derivative was recorded as a derivative liability on the condensed consolidated Balance Sheet at its fair value of $32,016
at the date of issuance. At each subsequent reporting date, the fair value of the embedded derivative liability will be remeasured
and changes in the fair value will be recorded in the condensed consolidated Statements of Operations. At September 30, 2018,
the embedded derivative was re-measured at fair value that was determined to be $0. During the three and nine months ended September
30, 2018 and 2017, the Company recorded a gain of $0 and $75,000 and a loss of $93,875 and $39,163, respectively, on embedded
derivative re-valuation.
On
January 25, 2018, the November 2017 Notes, November 2016 Notes, and December 2015 Notes were again modified in accordance with
ASC 470-50-40 and ASC 815 in which the Company issued a total of 2,395,650 restricted common shares, valued at $263,522 (based
on the Company’s stock price on the measurement date) in consideration of the maturity date of the outstanding November
2017, November 2016, and December 2015 convertible notes being extended to December 31, 2018. The Company re-measured the embedded
derivative at fair value just prior to and subsequent to the modification and recorded an extinguishment of debt of $12,000 in
the three and nine months ended September 30, 2018. In addition, the value of the restricted common shares of $263,522 was recorded
as an extinguishment of debt in the nine months ended September 30, 2018.
The
fair value of the embedded derivative liability is measured in accordance with ASC 820 “Fair Value Measurement”, using
“Monte Carlo Method” modeling incorporating the following inputs:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
47.5
|
%
|
Risk-free interest rate
|
|
|
2.11
|
%
|
|
|
1.53
|
%
|
Expected term of options (years)
|
|
|
0.50
|
|
|
|
0.5
|
|
Stock price
|
|
$
|
0.019
|
|
|
$
|
0.12
|
|
Conversion price
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
November
2016 Purchaser Warrants
The
November 2016 Purchaser Warrants allow the November 2016 Purchaser to purchase up to a number of shares of common stock equal
to 100% of such purchaser’s Note principal amount divided by $0.08, as amended on May 30, 2017, with a per share exercise
price equal to $0.15, as amended on November 16, 2017, subject to adjustment.
The
term of the Purchaser Warrants is at any time on or after the six (6) month anniversary of the November 2016 Original Issue Date
and on or prior to the five (5) year anniversary of the November 2016 Initial Trading Date of our common stock on a Trading Market.
The
exercise price of the November 2016 Purchaser Warrants is $0.15, as amended on November 16, 2017, per share of our common stock,
as may be adjusted from time to time pursuant to the antidilution provisions of the November 2016 Purchaser Warrants.
The
November 2016 Purchaser Warrants are exercisable by the November 2016 Purchaser in whole or in part, as either a cash exercise
or as a “cashless” exercise.
The
Company evaluated the November 2016 Warrants under ASC 480 “Distinguishing Liabilities From Equity” and ASC 815 “Derivatives
and Hedging”. Due to the existence of the antidilution provision, which reduces the November 2016 Exercise Price and November
2016 Conversion Price in the event of subsequent November 2016 Dilutive Issuances, the November 2016 Purchaser Warrants are not
indexed to our common stock, and the Company has determined that the November 2016 Purchaser Warrants meet the definition of a
derivative under ASC 815. Accordingly, the November 2016 Purchaser Warrants were recorded as derivative liabilities in the condensed
consolidated Balance Sheet at their fair value of $108,597 at the date of issuance. At each subsequent reporting date, the fair
value of the Purchaser Warrants will be remeasured and changes in the fair value will be reported in the condensed consolidated
Statements of Operations. On November 16, 2017, the November 2016 Warrants were modified in accordance with ASC 470-50-40 and
ASC 815 which eliminated the antidilution provision of the exercise price, fixed the exercise price at $0.15 per share, and fixed
the number of shares the warrants can be exercised into; thereby eliminating the requirement for derivative accounting and liability
classification. As a result, the warrant re-valuation was reclassified to additional paid-in-capital resulting in a warrant liability
of $0 as of November 16, 2017.
November
2016 Purchaser Common Stock
The
November 2016 Purchasers were issued a total of 833,354 shares of the Company’s common stock, valued at $100,002 (based
on the stock price on the date of issuance).
As
of December 31, 2016, the total proceeds of $244,945 previously received by the Company for the November 2016 Note, November 2016
Purchaser Common Stock, and November 2016 Purchaser Warrants, was allocated first to the November 2016 Purchaser Common Stock,
November 2016 Purchaser Warrants, and embedded derivative liabilities at their initial fair values determined at the issuance
date. Since the difference between the full fair value of November 2016 Purchaser Common Stock, November 2016 Purchaser Warrants,
and embedded derivative liabilities of $240,615 was less than the proceeds of $244,945, no additional amounts were recorded.
Debt
Discount
The
Company issued the November 2016 Notes with warrants and conversion features that require liability treatment under ASC 815. As
such, the proceeds of the notes were allocated, based on fair values, as follows: $100,002 to the common shares issued; $108,567
to the warrants granted; $42,557 to the original issue discount; and $32,016 to the embedded derivative, resulting in a debt discount
to such notes of $283,172. The debt discount is accreted over the term of the convertible notes to interest expense in the accompanying
condensed consolidated Statements of Operations.
The
Company recorded debt discount accretion of $0 and $0, and $0 and $78,312 to interest expense in the condensed consolidated Statements
of Operations during the three and nine months ended September 30, 2018 and 2017, respectively, and has an unamortized debt discount
of $0 as of September 30, 2018.
December
2015
As
of December 31, 2016, the Company previously entered into a Securities Purchase Agreement (the “Purchase Agreement”)
with respect to the sale and issuance to certain institutional investors Alpha Capital Anstalt and Brio Capital Master Fund Ltd.
(collectively “Purchasers”) of up to (i) 2,500,000 shares of the Company’s Common Stock (the “December
2015 Incentive Shares”); (ii) $862,500 aggregate principal amount of Secured Convertible Notes (the “December 2015
Notes”) and (iii) December 2015 Common Stock Purchase Warrants to purchase up to an aggregate of 10,781,250, as amended,
shares of the Company’s Common Stock (the “December 2015 Warrants”). The December 2015 Incentive Shares, December
2015 Notes and December 2015 Warrants were issued on December 23, 2015 (the “Original Issue Date”). December 2015
Purchasers received (i) December 2015 Incentive Shares at the rate of 2.8986 December 2015 Incentive Shares for each $1.00 of
December 2015 Note principal issued to such December 2015 Purchaser; (ii) a December 2015 Note with a principal amount of $1.00
for each $0.86956 for each $1.00 paid by each purchaser for such purchaser’s December 2015 Note; and (iii) December 2015
Warrants to purchase up to a number of shares of Common Stock equal to 100% of such purchaser’s December 2015 Note principal
amount divided by $0.12 (“December 2015 Purchaser Conversion Price”), the conversion price in effect on the Initial
Closing Date, as amended on May 30, 2017 to $0.08, with a per share exercise price equal to $0.15, as amended on November 16,
2017, subject to adjustment. The aggregate cash subscription amount received by the Company from the purchasers for the issuance
of the December 2015 Incentive Shares, December 2015 Notes and December 2015 Warrants was approximately $724,500 (the “December
2015 Subscription Amount”) which was issued at a $138,000 original issue discount from the face value of the December 2015
Note.
The
December 2015 Notes mature on December 31, 2018, as amended on January 25, 2018, and provide for interest to accrue at an interest
rate equal to the lesser of 15% per annum or the maximum rate permitted under applicable law after the occurrence of any event
of default as provided in the December 2015 Notes. At any time after the December 2015 Original Issue Date, the holders, at their
option, may convert the outstanding principal balance and accrued interest into shares of the Company’s Common Stock. The
initial conversion price for the principal and interest in connection with voluntary conversions by a holder of a December 2015
Note was $0.12 per share, as amended on May 30, 2017 to $0.08, subject to adjustment as provided therein. Each December 2015 Note,
for example, is subject to adjustment upon certain events such as stock splits and has full ratchet anti-dilution protections
for issuance of securities by us at a price that is lower than the conversion price. Each December 2015 Note also contains certain
negative covenants, including prohibitions on incurrence of indebtedness, liens, charter amendments, dividends, redemption. None
of the holders of the December 2015 Note have the right to convert any portion of their December 2015 Note if it (together with
its affiliates) would beneficially own in excess of 9.99% of the number of shares of Common Stock outstanding immediately after
giving effect to the exercise. The December 2015 Notes include customary events of default, including, among other things, payment
defaults, covenant breaches, certain representations and warranties, certain events of bankruptcy, liquidation and suspension
of the Company’s Common Stock from trading. If such an event of default occurs, the holders of the December 2015 Notes may
be entitled to take various actions, which may include the acceleration of amounts due under the December 2015 Notes and accrual
of interest as described above. The December 2015 Notes are collectively collateralized by substantially all of our assets and
guarantees of payment of the December 2015 Notes have also been delivered by Joseph Segelman, the Chief Executive Officer and
President of the Company, and Australian Sapphire Corporation (“ASC”), a shareholder of the Company which is wholly-owned
by Joseph Segelman, guaranteed payment of all amounts owed under the December 2015 Notes, subject to the terms of such guaranty
agreements.
In
addition, until one year after the initial trading date of a Registration Statement which registers all then outstanding or issuable
underlying shares, the December 2015 Purchasers shall have the right to participate in an amount of subsequent financing equal
to 100% of the December 2015 Purchase Agreement. As of December 31, 2016, this requirement was waived pursuant to the terms of
the Consent, Waiver and Modification Agreement with certain Purchasers of Purchase Agreement dated December 23, 2015.
The
Purchase Agreement
is being entered into in accordance with the halachically accepted exemptions
on the paying of interest payments in business transactions known as “heter iska”.
The Company
is
still accounting for the interest in accordance with GAAP.
As
a result of the failure to timely file our 2016 Form 10-K for the year ended December 31, 2016 and our Form 10-Q for the three
month period ended March 31, 2017, the November 2016 and December 2015 Notes were in default. On May 30, 2017, the Company entered
into a Second Consent, Waiver and Modification Agreement with certain purchasers of convertible promissory notes (the “Notes”)
pursuant to securities purchase agreements dated December 23, 2015 and November 10, 2016, which were amended pursuant to a Consent,
Waiver and Modification Agreement dated October 13, 2016. The waivers contained in the Agreement were related to a waiver of the
right to participate in additional offerings by the Company, allowing shares of the Company’s common stock to be issued
pursuant to a private offering at a price of not less than $0.08 per share as well as warrants exercisable for a period of five
years at $0.15 per share, as amended on November 16, 2017, adjusting the conversion price of the Notes issued to the purchasers
to $0.08 per share, extending the maturity date of the December 23, 2015 convertible promissory notes to December 31, 2018, as
amended on November 16, 2017, and waiving default provisions listed in the Notes related to the Company’s failure to timely
file its Form 10-K for the year ended December 31, 2016 and the Form 10-Q for the three month period ended March 31, 2017. Based
on ASC 470-50-40,
Extinguishments of Debt
, the Company recognized $691,371 as an extinguishment of debt under Other (income)
expense in the accompanying condensed consolidated Statements of Operations for the year ended December 31, 2017 (Successor).
The extinguishment of debt is comprised of changes in the fair value of warrant and derivative liabilities due to the amendment
of the notes that were measured immediately prior to and subsequent to the amendment that resulted in extinguishment loss of $176,022
for the December 2015 Purchaser Warrants, $75,648 for the November 2016 Purchaser Warrants, $183,250 for the December 2015 Purchaser
Conversion Shares, and $41,842 for the November 2016 Purchaser Conversion Shares, as well as $178,409 for the unamortized debt
discount associated with the November 2016 Notes and $36,200 for the unamortized debt discount associated with the December 2015
Notes.
December
2015 Optional Redemption
The
December 2015 Notes provide that commencing six (6) months after the December 2015 Original Issue Date, the Company will have
the option of prepaying the outstanding principal amount of the December 2015 Notes (an “December 2015 Optional Redemption”),
in whole or in part, by paying to the holders a sum of money in cash equal to one hundred percent (100%) of the principal amount
to be redeemed, together with accrued but unpaid interest thereon, if any, and any and all other sums due, accrued or payable
to the holder arising under the December 2015 Note through the December 2015 Redemption Payment Date and 2.8986 shares of the
Company’s Common Stock for each $1.00 of December 2015 Note principal amount being redeemed. A Notice of Redemption, if
given, may be given on the first Trading Day following twenty (20) consecutive Trading Days during which all of the “Equity
Conditions”, as defined, have been in effect.
The
Company evaluated the Optional Redemption in ASC 815, and concluded that the Optional Redemption meets the criteria in ASC 815,
and therefore, is accounted for as a liability.
As
of December 31, 2016, the Optional Redemption was recorded as a derivative liability on the condensed consolidated Balance Sheet
using “Monte Carlo Method” modeling and at each subsequent reporting date, the fair value of the Optional Redemption
liability will be re-measured and changes in the fair value will be recorded in the condensed consolidated Statements of Operations.
The Optional Redemption liability fair value was originally valued at $199,150 and was re-measured at fair value to be $19,125
at September 30, 2018. During the three and nine months ended September 30, 2018 and 2017, the Company recorded a gain of $0 and
$97,755, and a loss of $89,996 and $62,652, respectively, on Optional Redemption valuation in the change in fair value of derivative
liabilities in the accompanying condensed consolidated Statements of Operations.
The
fair value of the embedded derivative liability is measured in accordance with ASC 820 “Fair Value Measurement”, using
“Monte Carlo Method” modeling incorporating the following inputs:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
47.5
|
%
|
Risk-free interest rate
|
|
|
2.11
|
%
|
|
|
1.53
|
%
|
Expected term of options (years)
|
|
|
0.5
|
|
|
|
0.5
|
|
Stock price
|
|
$
|
0.019
|
|
|
$
|
0.12
|
|
Conversion price
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
December
2015 Purchaser Conversion
The
December 2015 Purchaser has the right at any time after the December 2015 Original Issue Date until the outstanding balance of
the December 2015 Note has been paid in full, to convert all or any part of the outstanding balance into shares (“December
2015 Purchaser Conversion Shares”) of the Company’s common stock, of the portion of the outstanding balance being
converted (the “December 2015 Conversion Amount”) divided by the December 2015 Purchaser Conversion Price of $0.08,
as amended on May 30, 2017, subject to potential future adjustments described below. If the total outstanding balance of the Note
were convertible as of September 30, 2018, the December 2015 Note would have been convertible into 10,781,250 shares of our common
stock.
The
Company evaluated the note under the requirements of ASC 480 “Distinguishing Liabilities From Equity” and concluded
that the December 2015 Note does not fall within the scope of ASC 480. The Company next evaluated the December 2015 Note under
the requirements of ASC 815 “Derivatives and Hedging”. Due to the existence of the anti-dilution provision which reduces
the December 2015 Purchaser Conversion Price in the event of subsequent dilutive issuances by the Company below the December 2015
Purchaser Conversion Price as described above, the December 2015 Purchaser Conversion feature does not meet the definition of
“indexed to” the Company’s stock, and the scope exception to ASC 815’s derivative accounting provisions
does not apply. The Company also evaluated the embedded derivative criteria in ASC 815, and concluded that the December 2015 Purchaser
Conversion feature meets all of the embedded derivative criteria in ASC 815, and therefore, the December 2015 Purchaser Conversion
feature meets the definition of an embedded derivative that should be separated from the note and accounted for as a derivative
liability.
The
embedded derivative was recorded as a derivative liability on the condensed consolidated Balance Sheet using “Monte Carlo
Method” modeling and at each subsequent reporting date, the fair value of the embedded derivative liability will be remeasured
and changes in the fair value will be recorded in the condensed consolidated Statements of Operations. The original fair value
of the derivative was $88,983 and at September 30, 2018, the embedded derivative was re-measured at fair value that was determined
to be $0. During the three and nine months ended September 30, 2018 and 2017, the Company recorded a gain of $0 and $224,998,
and a loss of $320,000 and $134,430, respectively, on embedded derivative re-valuation.
On
January 25, 2018, the November 2017 Notes, November 2016 Notes, and December 2015 Notes were again modified in accordance with
ASC 470-50-40 and ASC 815 in which the Company issued a total of 2,395,650 restricted common shares, valued at $263,522 (based
on the Company’s stock price on the measurement date) in consideration of the maturity date of the outstanding November
2017, November 2016, and December 2015 convertible notes being extended to December 31, 2018. The Company re-measured the embedded
derivative at fair value just prior to and subsequent to the modification and recorded an extinguishment of debt of $35,999 in
the nine months ended September 30, 2018. In addition, the value of the restricted common shares of $263,522 was recorded as an
extinguishment of debt in the nine months ended September 30, 2018.
The
fair value of the embedded derivative liability is measured in accordance with ASC 820 “Fair Value Measurement”, using
“Monte Carlo Method” modeling incorporating the following inputs:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
47.5
|
%
|
Risk-free interest rate
|
|
|
2.11
|
%
|
|
|
1.53
|
%
|
Expected term of options (years)
|
|
|
0.5
|
|
|
|
0.5
|
|
Stock price
|
|
$
|
0.019
|
|
|
$
|
0.12
|
|
Conversion price
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
December
2015 Purchaser Warrants
The
December 2015 Purchaser Warrants allow the December 2015 Purchaser to purchase up to a number of shares of Common Stock equal
to 100% of such purchaser’s Note principal amount divided by $0.08, as amended on May 30, 2017, with a per share exercise
price equal to $0.15, as amended on November 16, 2017, subject to adjustment.
The
term of the December 2015 Purchaser Warrants is at any time on or after the six (6) month anniversary of the December 2015 Original
Issue Date and on or prior to the five (5) year anniversary of the December 2015 Initial Trading Date of the Company’s common
stock on a Trading Market.
The
exercise price of the December 2015 Purchaser Warrants is $0.15, as amended on November 16, 2017, per share of the Company’s
common stock, as may be adjusted from time to time pursuant to the antidilution provisions of the December 2015 Purchaser Warrants.
The
December 2015 Purchaser Warrants are exercisable by the Purchaser in whole or in part, as either a cash exercise or as a “cashless”
exercise.
The
Company evaluated the Warrants under ASC 480 “Distinguishing Liabilities From Equity” and ASC 815 “Derivatives
and Hedging”. Due to the existence of the antidilution provision, which reduces the Exercise Price and Conversion Price
in the event of subsequent Dilutive Issuances, the December 2015 Purchaser Warrants are not indexed to the Company’s common
stock, and the Company determined that the December 2015 Purchaser Warrants meet the definition of a derivative under ASC 815.
At
each subsequent reporting date, the fair value of the Purchaser Warrants will be remeasured and changes in the fair value will
be reported in the condensed consolidated Statements of Operations. The original fair value of the warrants were $439,107. On
November 16, 2017, the December 2015 Purchaser Warrants were modified in accordance with ASC 470-50-40 and ASC 815 which eliminated
the antidilution provision of the exercise price, fixed the exercise price at $0.15 per share, and fixed the number of shares
the warrants can be exercised into; thereby eliminating the requirement for derivative accounting and liability classification.
As a result, the warrant re-valuation was reclassified to additional paid-in-capital resulting in a warrant liability of $0 as
of November 16, 2017.
December
2015 Purchaser Common Stock
The
December 2015 Purchasers were issued a total of 2,500,000 shares of the Company’s common stock, valued at $625,000 (based
on the estimated fair value of the stock on the date of grant).
Debt
Discount
The
Company issued the December 2015 Notes with warrants that require liability treatment under ASC 815. As such, the proceeds of
the notes were allocated, based on fair values, as follows: original issue discount of $138,000, $625,000 to the common shares
issued, $439,107 to the warrants granted, and $88,983 to the embedded derivative, resulting in a debt discount to such notes of
$862,500 with the remaining amount of approximately $429,000 expensed at inception of the note. The debt discount is accreted
to interest expense over the term of the note.
The
Company recorded debt discount accretion of $0 and $0, and $96,008 and $237,660 to interest expense in the condensed consolidated
Statements of Operations during the three and nine months ended September 30, 2018 and 2017, respectively, and has no unamortized
debt discount remaining as of September 30, 2018.
Changes
in the derivative liabilities were as follows:
Derivative liabilities:
|
|
|
|
December 31, 2017
|
|
$
|
470,839
|
|
Change due to extinguishment of debt
|
|
|
59,999
|
|
Valuation of November 2017 Optional Redemption shares
|
|
|
6,375
|
|
Decrease in fair value
|
|
|
(505,338
|
)
|
September 30, 2018
|
|
$
|
31,875
|
|
NOTE
9 – SHORT TERM
NOTES PAYBALE
On
June 30, 2017, the Company entered into a Loan Agreement, a Secured Promissory Note (“Note”) and a personal guarantee
with respect to the funding by certain institutional investors
Alpha
Capital Anstalt and Brio Capital Master Fund Ltd.
of up to $1,125,000 in debt. The Company,
until December 31, 2018, has the ability to request quarterly advances of up to the lesser of (i) $250,000 or (ii) one sixth (1/6)
of the revenue reported in the Form 10-Q or 10-K for the previous calendar quarter or previous fiscal year, whichever is most
recent, provided that such revenue generated a profit of at least 10 percent (10%). The investors may advance the funds in their
absolute discretion. In June 2017, the Company was advanced $125,005. The Note shall become due and payable 18 months from each
advance date. The Company must make payments to the investors in an amount of $350, including interest at 10% per annum, every
business day from the date of the first advance, which shall be increased proportionately upon each advance. The Note is secured
with the assets of the Company pursuant to a security agreement dated December 23, 2015. In addition, the Company’s CEO
has personally guaranteed the Note. As additional consideration for the loan, the investors received 1,500,000 shares of restricted
common stock, in aggregate, valued at $105,000
(based on our stock price on the date of grant) along with $2,500 in cash
for reimbursement of expenses incurred and recorded as debt issuance costs with a balance at June 30, 2017 of $107,500
.
In
January 2018, the Company was advanced an additional $60,010 under the Note with no additional shares issued. In March 2018, the
Company was advanced an additional $60,010 under the Note with 600,000 additional shares to be issued. As of March 31, 2018, the
Company had not issued the shares and recorded a common stock payable and a debt discount of $55,500 (based on our stock price
on the date of grant). The shares were issued in April 2018 and the shares were reclassed from common stock payable to equity.
The debt discount is accreted to interest expense over the term of the note.
The
note payable balance net of debt discount of $54,500 at September 30, 2018 was $83,740 with an availability of approximately $880,000
on the Note.
The
Agreement
and Note are being entered into in accordance with the halachically accepted exemptions
on the paying of interest payments in business transactions known as “heter iska”.
The Company
is
still accounting for the interest in accordance with GAAP.
The
Company borrows funds from third parties from time to time for working capital purposes with an upfront fee of approximately $400,
paying no interest, and with no length of repayment. For the nine months ended
September
30
, 2018, the Company had borrowings of $35,000 and repayments of $30,952 for a balance of $4,218 at
September
30
, 2018. Repayments are based on 30% of amounts processed through PayPal until the balance is paid.
NOTE
10 –
STOCK TRANSACTIONS
Preferred
Stock
On
March 17, 2017, the Company held an annual meeting of its shareholders. At the annual meeting, the majority shareholders of the
Company approved an amendment to the articles of incorporation, authorizing one share of Series A Preferred stock, which would
be issued to Joseph Segelman. The share of Series A Preferred stock shall vote together as a single class with the holders of
the Company’s common stock, and the holders of any other class or series of shares entitled to vote with the common stock,
with the holder of the Series A Preferred stock being entitled to fifty-one percent (51%) of the total votes on all such matters
regardless of the actual number of shares of Series A Preferred stock then outstanding, and the holders of the common stock and
any other shares entitled to vote shall be entitled to their proportional share of the remaining forty-nine percent (49%) of the
total votes based on their respective voting power. The share of Series A Preferred stock shall not be entitled to receive any
distributions in the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary. The
share of Series A Preferred stock shall not be eligible to receive dividends. The class of Series A Preferred stock shall be automatically
cancelled ten (10) years after the initial issue date of such Series A Preferred stock.
On
May 19, 2017, the Company received the file stamped certificate of amendment from the state of Delaware, which lists an effective
date of March 20, 2017. On May 23, 2017, the Company issued the share of Series A Preferred stock to Joseph Segelman,
valued
at $270,000
(based on the estimated fair value of the stock and control premium on the date of grant), which will allow
Mr. Segelman to maintain fifty-one percent (51%) voting control of the Company regardless of how many shares of common stock are
issued and outstanding. Therefore, the Company considers the Series A Preferred stock to be issued on May 23, 2017.
Common
Stock
During
the nine months ended September 30, 2018, the Company issued 4,750,000 restricted common shares for services rendered of $126,680
(based on our stock price on the measurement date).
On
September 1, 2018, the Company issued 5,000,000 restricted common shares for payment of accounts payable of $88,165.
On
July 8, 2018, the Company issued 100,000 restricted common shares to an Advisor, valued at $2,390 (based on the estimated fair
value of the stock on the measurement date) for outside advisory and consulting services pursuant to the Company’s 2015
Equity Incentive Plan (see Note 11).
In
January and February 2018, the Company entered into Securities Purchase Agreements with respect to the sale and issuance to Crossover
Capital Fund II, LLC totaling (i) 833,332 shares of the Company’s Common Stock; (ii) 3,000,000 redeemable shares, (iii)
$294,000 aggregate principal amount of a convertible promissory note and (iv) Common Stock Purchase Warrants to purchase up to
an aggregate of 1,960,000 shares of the Company’s common stock for a net aggregate consideration of $250,000 cash (see Note
8).
In
January 2018, we issued 2,395,650 restricted common shares, valued at $263,522 (based on the Company’s stock price on the
measurement date), in consideration for the modification of the existing short term convertible notes and recorded as an extinguishment
of debt (see Note 8).
On
June 30, 2017, the Company entered into an Agreement and Note by certain institutional investors
Alpha
Capital Anstalt and Brio Capital Master Fund Ltd.
of up to $1,125,000 in debt. In March
2018, as additional consideration for the note, the investors received 600,000 shares of restricted common stock, in aggregate,
valued at $55,500
(based on our stock price on the date of grant) (see Note 9)
.
As
of September 30, 2018, the Company had not issued the shares and has recorded a common stock payable.
On
July 14, 2017, the Company entered into a contract with a third party for consulting services. The consulting agreement provides
for the consultant to receive 487,500 shares for entering into the agreement that were valued at $34,125 (based on our stock price
on the date of grant) and 162,500 restricted common shares each month beginning month four through month twelve. Through September
30, 2018, the consultant vested in 568,750 shares (162,500 shares vested in 2018), valued at $101,156 (based on our stock price
on the date of each grant). As of January 26, 2018, the Company had not issued the shares and recorded a common stock payable
of $101,156. The shares were issued in April 2018 and the shares were reclassed from common stock payable to equity. The contract
was terminated at January 26, 2018.
NOTE
11 –
STOCK BASED COMPENSATION
2015
Equity Incentive Plan
As
of June 30, 2018, the board of directors and shareholders of the Company previously authorized the adoption and implementation
of the Company’s 2015 Equity Incentive Plan (the “2015 Plan”). The principal purpose of the 2015 Plan is to
attract, retain and motivate employees, officers, directors, consultants, agents, advisors and independent contractors of the
Company and its related companies by providing them the opportunity to acquire a proprietary interest in the Company and to link
their interests and efforts to the long-term interests of the Company’s shareholders. Under the 2015 Plan, an aggregate
of 20,000,000 shares of the Company’s common stock have initially been reserved for issuance pursuant to a variety of stock-based
compensation awards, including stock options, stock appreciation rights, stock awards, restricted stock, restricted stock units
and other stock and cash-based awards. The exercise price for each option may not be less than fair market value of the common
stock on the date of grant, and shall vest as determined by the Company’s board of directors but shall not exceed a ten-year
period.
During
the nine months ended September 30, 2018, the Company issued a total of 98,000 restricted common shares to its employees, valued
at $7,742 (based on our stock price on the date of grant) as compensation pursuant to the Company’s 2015 Equity Incentive
Plan.
In
July 2018, the Company issued a total of 100,000 restricted common shares, valued at $2,390 (based on our stock price on the date
of grant), to a member of its advisory committee (“Advisors”) as compensation pursuant to the Company’s 2015
Equity Incentive Plan.
As
of September 30, 2018, the Company issued a total of 100,000 restricted common shares to Advisors, valued at $15,000 (based on
the estimated fair value of the stock on the date of grant) for outside advisory and consulting services pursuant to the Company’s
2015 Equity Incentive Plan. One-twelfth (1/12) of the shares will be earned each month. The Company will revalue the shares at
each vesting period and recognize expense for the portion of the shares earned. The Company recognized compensation expense of
$3,750 and $11,250 under general and administrative expenses in the accompanying condensed consolidated Statements of Operations
for the three and nine months ended September 30, 2018 with $2,500 remaining to be amortized. As of September 30, 2018, the Advisors
had vested in 83,333 shares with 16,667 shares to vest over the remaining vesting period.
As
of September 30, 2018, the Company previously granted to its CEO, options to purchase 10,000,000 shares of our common stock under
the 2015 Plan, valued at $2,500,000 (based on the Black Scholes valuation model on the date of grant). The Black-Scholes option-pricing
model used the following weighted average assumptions as of December 31, 2016: (i) no dividend yield for each year, (ii) volatility
of 35.6 percent, (iii) risk-free interest rate of 1.87 percent, (iv) stock price of $0.25, (v) exercise price of $0.005, and (vi)
expected life of 6.0 years. The options will vest 50% on the first anniversary of the grant date (“First Year Vest”)
and the remaining 50% of the shares shall vest in twelve (12) equal installments on the first day of each calendar month following
the first anniversary of the grant date beginning on June 1, 2016 and ending on June 1, 2017 (“Second Year Vest”),
provided that CEO is continuously employed by the Company from the grant date through such applicable vesting date. Notwithstanding
the foregoing, 100% of the shares of the Company’s common stock subject to the option shall fully vest if the Company shall
successfully sell all of the shares of its common stock included in the primary offering of such common stock by the Company pursuant
to the registration statement on Form S-1 to be filed with the Securities and Exchange Commission within ninety (90) days of the
grant date. The First Year Vest options will amortize to expense over a 12 month period beginning May 2015 through April 2016
and the Second Year Vest options will amortize to expense over a 24 month period beginning May 2015 through April 2017. The Company
recognized expense of $0 and $0, and $4,560 and $45,391 for the three and nine months ended September 30, 2018 and 2017, respectively,
within stock based compensation – related party in the accompanying condensed consolidated Statements of Operations with
no amounts remaining to be recognized.
The
following represents a summary of the Options outstanding at
September 30, 2018
and
changes during the period then ended:
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted Average Exercise Price
|
|
|
Aggregate Intrinsic Value *
|
|
Outstanding at December 1, 2017
|
|
|
10,000,000
|
|
|
$
|
0.005
|
|
|
$
|
1,100,000
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired/Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at December 31, 2017
|
|
|
10,000,000
|
|
|
$
|
0.005
|
|
|
$
|
1,200,000
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired/Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at September 30, 2018
|
|
|
10,000,000
|
|
|
$
|
0.005
|
|
|
$
|
120,000
|
|
Exercisable at September 30, 2018
|
|
|
10,000,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Expected to be vested
|
|
|
10,000,000
|
|
|
$
|
0.005
|
|
|
$
|
—
|
|
*
Based on the Company’s stock price on September 30, 2018, December 31, 2017, and December 1, 2017, respectively.
NOTE
12 –
Related Party Transactions
Other
than as set forth below, and as disclosed in Notes 7, 8, 9, 10 and 11, the Company has not entered into or been a participant
in any transaction in which a related person had or will have a direct or indirect material interest.
Employment
Agreements
The
Company previously had a consulting agreement with its CEO under which he was compensated $120,000 per annum. Beginning June 20,
2013, this contract was to continue unless and until terminated at any time by either the Company or CEO giving two month notice
in writing. Such consulting agreement was terminated by mutual agreement as of May 1, 2015 and superseded by the employment agreement
effective May 1, 2015. The initial term of employment agreement expires on December 31, 2018, unless earlier terminated by either
party. The agreement provides for automatic one-year renewals, unless either party gives notice of their intention not to extend
at least 90 days prior to the expiration of any term. Under this employment agreement, the CEO receives a minimum annual base
salary of $180,000, is eligible to receive an annual performance bonus each year, if performance goals established by the Company’s
board of directors are met, and is entitled to participate in customary benefit plans. There have been no performance goals established.
If the Company terminates the CEO’s employment without cause, he will be entitled to the following: (i) payment of (x) accrued
compensation and unpaid base salary through the date of such termination, (y) any amounts previously deferred by CEO and (z) the
payment or reimbursement for expenses incurred prior to the date of such termination; (ii) an amount equal to 200% of the base
salary and (iii) continued participation, at the Company’s expense, in the Company’s health and welfare programs for
a period of two years after the date of termination. The Company incurred compensation expense of $45,000 and $90,000, and $45,000
$90,000 for the three and nine months ended September 30, 2018 and 2017, respectively. Deferred compensation totaling $787,750
as of September 30, 2018, is included in Accrued Compensation in the accompanying condensed consolidated Balance Sheet. Deferred
compensation includes $573,750 related to the employment agreement and $214,000 related to the consulting agreement. In addition,
we incurred employee benefits on behalf of the CEO totaling approximately $3,600 and $9,100, and $3,531 and $11,977 for the three
and nine months ended September 30, 2018 and 2017, respectively. Employee benefits include health and dental coverage, use of
a car, car insurance, and a gym membership.
The
Company previously had a consulting agreement with its secretary and director (“Secretary”) under which she was compensated
$60,000 per annum. Beginning June 20, 2013, this contract was to continue unless and until terminated at any time by either the
Company or Secretary giving two month notice in writing. Such consulting agreement was terminated by mutual agreement as of May
1, 2015 and superseded by the employment agreement effective May 1, 2015. The initial term of employment agreement expires on
December 31, 2018, unless earlier terminated by either party. The agreement provides for automatic one-year renewals, unless either
party gives notice of their intention not to extend at least 90 days prior to the expiration of any term. Under this employment
agreement, the Secretary receives a minimum annual base salary of $80,000. If the Company terminates the Secretary’s employment
without cause, she will be entitled to the following: (i) payment of (x) accrued compensation and unpaid base salary through the
date of such termination, (y) any amounts previously deferred by Secretary and (z) the payment or reimbursement for expenses incurred
prior to the date of such termination; (ii) an amount equal to 50% of the base salary and (iii) continued participation, at the
Company’s expense, in the Company’s health and welfare programs for a period of two years after the date of termination.
The Company incurred compensation expense of $20,000 and $40,000, $20,000 and $40,000 for the three and nine months ended September
30, 2018 and 2017, respectively. Deferred compensation totaling $387,000 as of September 30, 2018, is included in Accrued Compensation
in the accompanying condensed consolidated Balance Sheets. Deferred compensation includes $273,333 related to the employment agreement
and $113,667 related to the consulting agreement. In addition, we incurred employee benefits on behalf of the Secretary totaling
approximately $1,800 and $5,400, and $1,798 and $5,378 for the three and nine months ended September 30, 2018 and 2017, respectively.
Employee benefits include use of a car and car insurance.
NOTE
13 – EARNINGS PER SHARE
FASB
ASC Topic 260,
Earnings Per Share
, requires a reconciliation of the numerator and denominator of the basic and diluted
earnings (loss) per share (EPS) computations.
Basic
earnings (loss) per share are computed by dividing net earnings available to common shareholders by the weighted-average number
of common shares outstanding during the period. Diluted earnings (loss) per share is computed similar to basic earnings per share
except that the denominator is increased to include the number of additional common shares that would have been outstanding if
the potential common shares had been issued and if the additional common shares were dilutive. In periods where losses are reported,
the weighted-average number of common stock outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
Basic
and diluted earnings (loss) per share are the same since the Company had net losses for all periods presented and including the
additional potential common shares would have an anti-dilutive effect.
The
following table sets forth the computation of basic and diluted net income per share:
|
|
For the Nine Months Ended
September 30,
|
|
|
For the Three Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net loss attributable to the common stockholders
|
|
$
|
(1,402,686
|
)
|
|
$
|
(3,076,017
|
)
|
|
$
|
(355,987
|
)
|
|
$
|
(1,497,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average outstanding shares of common stock
|
|
|
61,710,263
|
|
|
|
45,372,823
|
|
|
|
65,460,451
|
|
|
|
48,034,278
|
|
Dilutive effect of options and warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Diluted weighted average common stock and common stock equivalents
|
|
|
61,710,263
|
|
|
|
45,372,823
|
|
|
|
65,460,451
|
|
|
|
48,034,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
NOTE
14 – COMMITMENTS AND CONTINGENCIES
Contingent
Payments
On
December 1, 2016, we acquired substantially all of the operating assets of CCI. As part of the purchase price of the operating
assets of CCI, there is a cash payment of $500,000 contingent upon a future offering and earn out payments for all sales of CCI
and RGNP products sold via CCI sales channels for the 2017, 2018, 2019 and 2020 calendar years. The estimated fair value of the
contingent payments totaled $424,511 and was recognized as a liability in the accompanying condensed consolidated balance sheets
as of December 31, 2016. During the three and nine months ended September 30, 2018, ASK Gold and CCI each earned $4,165 and $8,931,
respectively, of earn out payments for a total of $100,930. In addition, the Company paid $95,020 in reimbursement expenses (“Reimbursement
Expenses”) that were the responsibility of CCI and will be applied against current and future earn out payments to CCI.
The Company applied $50,465 of earn out payments owed to CCI against the Reimbursement Expenses for a net balance of $44,555 owed
by CCI to the Company as of September 30, 2018 that is recorded in estimated fair value of contingent payments, net in the accompanying
condensed consolidated balance sheets. As September 30, 2018, estimated fair value of contingent payments, net was $279,026.
Operating
Leases
The
Company has month-to month leases for its headquarters and its sales and marketing office. The total rent is approximately $1,955
per month.
The
Company’s customer service and distribution facility is located at 1933 S. Broadway. Los Angeles, California. This facility
is subleased on a month-to-month basis for $4,000 per month from a third party.
Rent
expense was approximately $6,013 and $34,056, and $18,138 and $85,811 for the three and nine months ended September 30, 2018 and
2017, respectively.
Legal
From
time to time, various lawsuits and legal proceedings may arise in the ordinary course of business. However, litigation is subject
to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business.
We are currently not aware of any legal proceedings or claims that it believes will have a material adverse effect on its business,
financial condition or operating results.
Guarantees
T
he
Co
mpa
ny
’
s Co
n
v
e
rti
b
l
e
N
ote
s
P
a
yab
l
e
are co
ll
at
er
a
li
ze
d
b
y
s
u
b
s
ta
n
t
i
a
ll
y
all
of
th
e
Com
p
a
n
y
’
s
a
s
se
t
s
a
nd
are pe
r
so
na
l
l
y
g
ua
ra
nte
e
d
b
y
th
e Co
m
pan
y
’
s
CE
O an
d
A
u
s
t
r
a
li
an
Sapphire Corpora
t
i
o
n
,
a
s
ha
re
ho
l
der
o
f
the Company w
hic
h
is wholly
-
o
w
ned by
t
h
e Comp
a
n
y’s
CEO.
NOTE
15 – SUBSEQUENT EVENTS
In
October 2018, the Company issued 150,000 restricted common shares for services rendered, valued at $2,685 (based on our stock
price on the date of grant).
In
October 2018, the January 2018 Crossover Purchase Agreement was amended to extend the maturity date to December 31, 2018 and to
remove the right of the Company to 1,500,000 of the Redeemable Shares.
There
were no other events subsequent to September 30, 2018, and up to the date of this filing that would require disclosure.