Notes
to Condensed Consolidated Financial Statements
MyDx, Inc. (the “Company”,
“we”, “us” or “our”) (formally known as Brista Corp.) was incorporated under the laws of the
State of Nevada on December 20, 2012. The Company’s wholly owned subsidiary, CDx, Inc., was incorporated under the laws of
the State of Delaware on September 16, 2013.
MyDx is a science and technology company
that develops and deploys products and services in the following focus areas:
|
1)
|
Consumer Products
– smart devices and consumables
|
|
2)
|
Data Analytics
– pre-clinical chemical analysis and patient feedback ecosystem
|
|
3)
|
Biopharmaceuticals
– identifying ‘green Active Pharmaceutical Ingredients
TM
, (gAPI
TM
) and corresponding formulations
|
|
4)
|
Software as a Service (SaaS)
– Software services for prescribers, patient groups, cultivators, and regulators
|
We are committed to addressing areas of
critical national need to promote public safety, transparency and regulation in the various markets we serve.
The Company’s first product, MyDx
®
,
also known as “My Diagnostic”, is a patented multiuse hand-held chemical analyzer made for consumers and professional
users which feeds our data analytics platform and SaaS business. MyDx is intended to allow consumers to Trust & Verify
®
what they put into their mind and body by using our science and technology to test for pesticides in food, chemicals in water,
toxins in the air, and the safety and potency of cannabis samples, which is our initial focus.
The Company has adopted ASU No. 2014-15,
“Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern (“ASU 2014-15”)
.
The Company’s condensed consolidated
financial statements have been prepared assuming it will continue as a going concern, which contemplates continuity of operations,
realization of assets, and liquidation of liabilities in the normal course of business.
As reflected in the condensed consolidated
Financial Statements, the Company had an accumulated deficit at September 30, 2018 and a net cash used in operating activities
for the nine months ended September 30, 2018. These factors raise substantial doubt about the Company’s ability to continue
as a going concern.
The Company is attempting to further implement
its business plan and generate sufficient revenues; however, its cash position may not be sufficient to support its daily operations.
The Company has a limited operating history and its prospects are subject to risks, expenses and uncertainties frequently encountered
by early-stage companies. These risks include, but are not limited to, the uncertainty of availability of financing and the uncertainty
of achieving future profitability. Management anticipates that the Company will be dependent, for the near future, on investment
capital to fund operating expenses. The Company intends to position itself so that it may be able to raise funds through the capital
markets. There can be no assurance that such financing will be available at terms acceptable to the Company, if at all. Failure
to generate sufficient cash flows from operations, raise capital or reduce certain discretionary spending could have a material
adverse effect on the Company’s ability to achieve its intended business objectives. We reported negative cash flow from
operations for the nine months ended September 30, 2018. It is anticipated that we will continue to report negative operating cash
flow in future periods, likely until one or more of our products generates sufficient revenue to cover our operating expenses.
If any of the warrants are exercised, all net proceeds of the warrant exercise will be used for working capital to fund negative
operating cash flow.
Our cash balance of $30,599 at September
30, 2018 will not be sufficient to fund our operations for the next 12 months. Additionally, if we are unable to generate sufficient
revenues to pay our expenses, we will need to raise additional funds to continue our operations. We have historically financed
our operations through private equity and debt financings. We do not have any commitments for financing at this time, and financing
may not be available to us on favorable terms, if at all. If we are unable to obtain debt or equity financing in amounts sufficient
to fund our operations, if necessary, we will be forced to suspend or curtail our operations. In that event, current stockholders
would likely experience a loss of most or all of their investment. Additional funding that we do obtain may be dilutive to the
interests of existing stockholders.
The condensed consolidated financial statements
do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification
of liabilities that might be necessary should the Company be unable to continue as a going concern.
4.
|
Summary of Significant Accounting Policies
|
Basis of Presentation - Unaudited
Interim Financial Information
The accompanying unaudited interim condensed
consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”) for interim financial information, and in accordance with the rules and
regulations of the United States Securities and Exchange Commission (the “SEC”) with respect to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete
financial statements. The unaudited interim condensed consolidated financial statements furnished reflect all adjustments (consisting
of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the results for the
interim periods presented. Interim results are not necessarily indicative of the results for the full year. These unaudited interim
condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and
notes thereto contained in the Company’s annual report on Form 10-K for the year ended December 31, 2017.
Use of Estimates
The preparation of the consolidated finance
statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated
Financial Statements and the reported amounts of revenues and expenses during the reporting period. Such management estimates include
allowance for doubtful accounts, estimates of product returns, warranty expense, inventory valuation, valuation allowances of deferred
taxes, stock-based compensation expenses and fair value of warrants and derivatives. The Company bases its estimates on historical
experience and on assumptions that it believes are reasonable. The Company assesses these estimates on a regular basis; however,
actual results could materially differ from those estimates.
Concentration of Risk Related to
Third-party Suppliers
We depend on a limited number of third-party
suppliers for the materials and components required to manufacture our products. A delay or interruption by our suppliers may harm
our business, results of operations, and financial condition, and could also adversely affect our future profit margins. In addition,
the lead time needed to establish a relationship with a new supplier can be lengthy, and we may experience delays in meeting demand
in the event we must change or add new suppliers. Our dependence on our suppliers exposes us to numerous risks, including but not
limited to the following: our suppliers may cease or reduce production or deliveries, raise prices, or renegotiate terms; we may
be unable to locate a suitable replacement supplier on acceptable terms or on a timely basis, or at all; and delays caused by supply
issues may harm our reputation, frustrate our customers, and cause them to turn to our competitors for future needs.
Fair Value of Financial Instruments
The Company recognizes and discloses the
fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant
to the valuation (Level 3 measurements). Each level of input has different levels of subjectivity and difficulty involved in determining
fair value.
|
Level 1
|
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurable date.
|
|
|
|
|
Level 2
|
Inputs, other than quoted prices included in Level 1, that are observable for the asset or liability through corroboration with market data at the measurement date.
|
|
|
|
|
Level 3
|
Unobservable inputs that reflect management’s best estimate of what participants would use in pricing the asset or liability at the measurement date.
|
The carrying amounts of the Company’s
financial assets and liabilities, including cash, accounts receivable, accounts payable, and accrued liabilities approximate fair
value because of the short maturity of these instruments. The carrying value of the Company’s loan payable and convertible
notes payable approximates fair value based upon borrowing rates currently available to the Company for loans with similar terms.
Business Segments
ASC 280 defines operating segments as components
of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in assessing performances. Currently, ASC 280 has no effect on the Company’s
condensed consolidated financial statements as substantially all of the Company’s operations are conducted in one industry
segment.
Cash
The Company considers all highly liquid
investments with original maturities of three months or less to be cash equivalents. As of September 30, 2018 and December 31,
2017, the Company held no cash equivalents.
The Company’s policy is to place
its cash with high credit quality financial instruments and institutions and limit the amounts invested with any one financial
institution or in any type of instrument. Deposits held with banks may exceed the amount of insurance provided on such deposits.
The Company has not experienced any losses on its deposits of cash.
Accounts Receivable and Allowance
for Doubtful Accounts
Accounts receivable are recorded at the
invoiced amount and are not interest bearing. The Company maintains an allowance for doubtful accounts for estimated losses resulting
from the inability of its customers to make required payments. The Company makes ongoing assumptions relating to the collectability
of its accounts receivable in its calculation of the allowance for doubtful accounts. In determining the amount of the allowance,
the Company makes judgments about the creditworthiness of customers based on ongoing credit evaluations and assesses current economic
trends affecting its customers that might impact the level of credit losses in the future and result in different rates of bad
debts than previously seen. The Company also considers its historical level of credit losses. As of September 30, 2018 and December
31, 2017, there was an allowance for doubtful accounts of $27,851 and $27,851 respectively.
During the nine months ended September
30, 2018 the Company recorded a bad debt expense of $0.
Inventory
Inventory is stated at the lower of cost
or market value. Inventory is determined to be salable based on demand forecast within a specific time horizon, generally eighteen
months or less. Inventory in excess of salable amounts and inventory which is considered obsolete based upon changes in existing
technology is written off. At the point of recognition, a new lower cost basis for that inventory is established and subsequent
changes in facts and circumstances do not result in the restoration or increase in that new cost basis.
Property and Equipment
Property and equipment are recorded at
cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method
over the useful life as follows:
Internal-use software
|
|
3 years
|
Equipment
|
|
3 to 5 years
|
Computer equipment
|
|
3 to 7 years
|
Furniture and fixtures
|
|
5 to 7 years
|
Leasehold improvements
|
|
Shorter of life of asset or lease
|
Accounting for Website Development
Costs
The Company capitalizes certain external
and internal costs, including internal payroll costs, incurred in connection with the development of its website. These costs are
capitalized beginning when the Company has entered the application development stage and cease when the project is substantially
complete and is ready for its intended use. The website development costs are amortized using the straight-line method over the
estimated useful life of three years.
Impairment of Long-Lived Assets
Long-lived assets, such as property and
equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets
may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair
value of the asset. Assets to be disposed of would be separately presented in the balance sheets and reported at the lower of the
carrying amount or fair value less costs to sell, and no longer depreciated. The assets and liabilities of a disposed group classified
as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheets.
Debt Discount and Debt Issuance Costs
Debt discounts and debt issuance costs
incurred in connection with the issuance of debt are capitalized and amortized to interest expense based on the related debt agreements
using the straight-line method. Unamortized discounts are netted against long-term debt.
Derivative Liability
In accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Paragraph 815-15-25-1 the conversion
feature and certain other features are considered embedded derivative instruments, such as a conversion reset provision, a penalty
provision and redemption option, which are to be recorded at their fair value as its fair value can be separated from the convertible
note and its conversion is independent of the underlying note value. The Company records the resulting discount on debt related
to the conversion features at initial transaction and amortizes the discount using the effective interest rate method over the
life of the debt instruments. The conversion liability is then marked to market each reporting period with the resulting gains
or losses shown in the statements of operations.
In circumstances where the embedded conversion
option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the
convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single,
compound derivative instrument.
The Company follows ASC Section 815-40-15
(“Section 815-40-15”) to determine whether an instrument (or an embedded feature) is indexed to the Company’s
own stock. Section 815-40-15 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial
instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and
settlement provisions. The adoption of Section 815-40-15 has affected the accounting for (i) certain freestanding warrants that
contain exercise price adjustment features and (ii) convertible bonds issued by foreign subsidiaries with a strike price denominated
in a foreign currency.
The Company evaluates its convertible debt,
options, warrants or other contracts, if any, to determine if those contracts or embedded components of those contracts qualify
as derivatives to be separately accounted for in accordance with paragraph 810-10-05-4 and Section 815-40-25 of the FASB Accounting
Standards Codification. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market
each balance sheet date and recorded as either an asset or a liability. In the event that the fair value is recorded as a liability,
the change in fair value is recorded in the consolidated statement of operations as other income or expense. Upon conversion, exercise
or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation
and then that the related fair value is reclassified to equity.
The Company utilizes the binomial option
pricing model to compute the fair value of the derivative and to mark to market the fair value of the derivative at each balance
sheet date. The binomial option pricing model includes subjective input assumptions that can materially affect the fair value estimates.
The expected volatility is estimated based on the most recent historical period of time equal to the remaining contractual term
of the instrument granted.
Revenue Recognition
The Company adopted
ASC 606 effective January 1, 2018 using the modified retrospective method which would require a cumulative effect adjustment for
initially applying the new revenue standard as an adjustment to the opening balance of retained earnings and the comparative information
would not require to be restated and continue to be reported under the accounting standards in effect for those periods.
Based on the Company’s
analysis the Company did not identify a cumulative effect adjustment for initially applying the new revenue standards. The Company
principally generates revenue through providing product, services and licensing revenue
The adoption of ASC
606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company’s
services and will provide financial statement readers with enhanced disclosures. In accordance with ASC 606, revenue is recognized
when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which the
Company expects to be entitled to receive in exchange for these services. To achieve this core principle, the Company applies the
following five steps:
1)
|
Identify the contract with a customer
|
A contract with a customer exists when
(i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the services
to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial substance and, (iii)
the Company determines that collection of substantially all consideration for services that are transferred is probable based on
the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s
ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience
or, in the case of a new customer, published credit and financial information pertaining to the customer.
2)
|
Identify the performance obligations in the contract
|
Performance obligations promised in a contract
are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby
the customer can benefit from the service either on its own or together with other resources that are readily available from third
parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately
identifiable from other promises in the contract. To the extent a contract includes multiple promised services, the Company must
apply judgment to determine whether promised services are capable of being distinct and distinct in the context of the contract.
If these criteria are not met the promised services are accounted for as a combined performance obligation.
3)
|
Determine the transaction price
|
The transaction price is determined based
on the consideration to which the Company will be entitled in exchange for transferring services to the customer. To the extent
the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be
included in the transaction price utilizing either the expected value method or the most likely amount method depending on the
nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment,
it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of the Company’s
contracts as of September 30, 2018 contained a significant financing component. Determining the transaction price requires significant
judgment, which is discussed by revenue category in further detail below.
4)
|
Allocate the transaction price to performance obligations in the contract
|
If the contract contains a single performance
obligation, the entire transaction price is allocated to the single performance obligation. However, if a series of distinct services
that are substantially the same qualifies as a single performance obligation in a contract with variable consideration, the Company
must determine if the variable consideration is attributable to the entire contract or to a specific part of the contract. For
example, a bonus or penalty may be associated with one or more, but not all, distinct services promised in a series of distinct
services that forms part of a single performance obligation. Contracts that contain multiple performance obligations require an
allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless the
transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service
that forms part of a single performance obligation. The Company determines standalone selling price based on the price at which
the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the
Company estimates the standalone selling price taking into account available information such as market conditions and internally
approved pricing guidelines related to the performance obligations.
5)
|
Recognize revenue when or as the Company satisfies a performance obligation
|
The Company satisfies performance obligations
either over time or at a point in time. Revenue is recognized at the time the related performance obligation is satisfied by transferring
a promised service to a customer.
Product revenue
Revenue from multiple-element arrangements
is allocated among separate elements based on their estimated sales prices, provided the elements have value on a stand-alone basis.
Licensing revenue
Some of the Company’s revenues are
generated from software-as-a-service (“SaaS”) subscription offerings and related product support and maintenance.
SaaS revenues stem mainly from annual subscriptions and are recorded evenly over the term of the subscription. Any customer payments
received in advance are deferred until they are earned. Consulting and training revenues are recognized as work is performed.
Product Returns
For any product in its original, undamaged
and unmarked condition, with its included accessories and packaging along with the original receipt (or gift receipt) within 30
days of the date the customer receives the product, the Company will exchange it or offer a refund based upon the original payment
method.
Customer Deposits
The Company accounts for funds received
from crowdfunding campaigns and pre-sales as a liability on the consolidated balance sheets as the investments made entitle the
investor to apply these funds towards future shipments once the product has been developed and available for commercial use.
Research and Development Costs
Research and development costs are charged
to expense as incurred. These costs consist primarily of salaries and direct payroll-related costs. It also includes purchased
materials and services provided by independent contractors, software developed by other companies and incorporated into or used
in the development of our final products. Research and development expenses for the nine months ended September 30, 2018 and 2017
were $283,869 and $87,602, respectively.
Advertising Costs
Advertising costs are charged to sales
and marketing expenses and general and administrative expenses as incurred. Advertising expenses, which are recorded in sales and
marketing and general and administrative expenses, totaled $130,475 and $741,813 for the nine months ended September 30, 2018 and
2017, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation
in accordance with ASC Topic 718, “
Compensation – Stock Compensation”
(“ASC 718”) which establishes
financial accounting and reporting standards for stock-based employee compensation. It defines a fair value based method of accounting
for an employee stock option or similar equity instrument. Accordingly, stock-based compensation is recognized in the consolidated
statements of operations as an operating expense over the requisite service period. The Company uses the Black-Scholes option pricing
model adjusted for the estimated forfeiture rate for the respective grant to determine the estimated fair value of stock-based
compensation arrangements on the date of grant and expenses this value ratably over the requisite service period of the stock option.
The Black-Scholes option pricing model requires the input of highly subjective assumptions. Because the Company’s stock options
have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management’s opinion, the existing models may not provide a reliable single
measure of the fair value of the Company’s stock options. In addition, management will continue to assess the assumptions
and methodologies used to calculate estimated fair value of stock-based compensation. Circumstances may change and additional data
may become available over time, which could result in changes to these assumptions and methodologies for future grants, and which
could materially impact the Company’s fair value determination.
The Company accounts for share-based payments
to non-employees in accordance with ASC 505-50 “
Equity Based Payments to Non-Employees
”. If the equity instrument
is a stock option, the Company uses the Black-Scholes option pricing model to determine the fair value. Assumptions used to value
the equity instruments are consistent with equity instruments issued to employees as the terms of the awards are similar. The Company
recognizes the fair value of the equity instruments as expense over the term of the service agreement and revalues that fair value
at each reporting period over the vesting periods of the equity instruments.
Warranty
The Company provides a limited warranty
for its analyzers and sensors for a period of 1 year from the date of shipment that such goods will be free from material defects
in material and workmanship. The Company has assessed the historical claims and, to date, warranty claims have not been significant.
The Company will continue to assess the need to record a warranty accrual at the time of sale going forward.
Collaborative Arrangements
The Company and its collaborative partners
are active participants in the collaborative arrangements and both parties are exposed to significant risks and rewards depending
on the commercial success of the activity. The Company records all expenses related to collaborative arrangements as research and
development expense in the consolidated statements of operations as incurred.
Earnings per Share
Basic net loss per common share is
computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during
the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during
the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, which is the case
for the nine months ended September 30, 2018 and 2017 presented in these condescend consolidated financial statements, the weighted-average
number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.
The Company had the following common stock
equivalents at September 30, 2018 and 2017:
|
|
September 30, 2018
|
|
|
September 30,
2017
|
|
Series A Preferred stock
|
|
|
51
|
|
|
|
51
|
|
Series B Preferred stock
|
|
|
1,906,270,000
|
|
|
|
3,000,000,000
|
|
Convertible notes payable
|
|
|
140,209,819
|
|
|
|
26,462,823
|
|
Convertible accounts payable
|
|
|
300,000,000
|
|
|
|
273,860,683
|
|
Options
|
|
|
1,496,250
|
|
|
|
1,490,026
|
|
Warrants
|
|
|
1,267,454,215
|
|
|
|
260,345,149
|
|
Totals
|
|
|
3,615,430,335
|
|
|
|
3,562,158,732
|
|
There
were approximately 3,615,430,335 potentially outstanding dilutive common shares for the period ended September 30, 2018.
Since the Company incurred a net loss for the period ended September 30, 2018, the inclusion of any common stock equivalents
would have been anti-dilutive.
Recent Accounting Guidance Adopted
In April 2016, the FASB issued ASU No.
2016-10, “
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing
” (topic 606).
In March 2016, the FASB issued ASU No. 2016-08, “
Revenue from Contracts with Customers: Principal versus Agent Considerations
(Reporting Revenue Gross versus Net)”
(topic 606). These amendments provide additional clarification and implementation
guidance on the previously issued ASU 2014-09, “Revenue from Contracts with Customers”. The amendments in ASU 2016-10
provide clarifying guidance on materiality of performance obligations; evaluating distinct performance obligations; treatment of
shipping and handling costs; and determining whether an entity’s promise to grant a license provides a customer with either
a right to use an entity’s intellectual property or a right to access an entity’s intellectual property. The amendments
in ASU 2016-08 clarify how an entity should identify the specified good or service for the principal versus agent evaluation and
how it should apply the control principle to certain types of arrangements. The adoption of ASU 2016-10 and ASU 2016-08 is to coincide
with an entity’s adoption of ASU 2014-09, which we adopted for interim and annual reporting periods beginning after December
15, 2017. The adoption of ASU 2016-10 had no material effect on its financial position or results of operations or cash flows.
In May 2016, the FASB issued ASU No. 2016-12,
“Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”, which narrowly
amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition
and is effective during the same period as ASU 2014-09. The adoption of ASU 2016-12 had no material effect on its financial position
or results of operations or cash flows.
Management does not believe that any recently
issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying condensed
consolidated financial statements.
Inventory as of September 30, 2018 and
December 31, 2017 is as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Finished goods
|
|
$
|
18,103
|
|
|
$
|
49,889
|
|
Raw materials
|
|
|
130,614
|
|
|
|
130,614
|
|
|
|
$
|
148,717
|
|
|
$
|
180,503
|
|
Convertible Notes
The following table shows the outstanding
balance as of September 30, 2018 and December 31, 2017 respectively.
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Convertible Note - February 6, 2017
|
|
|
265,750
|
|
|
|
295,750
|
|
Convertible Note - July 23, 2018
|
|
|
25,000
|
|
|
|
-
|
|
|
|
|
290,750
|
|
|
|
295,750
|
|
Less: Debt Discount
|
|
|
(15,465
|
)
|
|
|
-
|
|
Total
|
|
$
|
275,285
|
|
|
$
|
295,750
|
|
During the nine months ended September 30, 2018 Hasfer, Inc
and Carte Blanche, LLC entered into a note purchase agreement. Hasfer assigned $60,000 to Carte Blanche, LLC. The Company received
additional proceeds of $30,000.
During the nine months ended the lenders converted $60,000 of
the outstanding principal into 26,086,956 shares of the Company’s common stock.
On July 23, 2018 the Company issued convertible notes to third
party lenders totaling $25,000. These notes accrue interest at a rate of 12% per annum and mature with interest and principal due
July 23, 2019. The note and accrued interest are convertible at a conversion price equal to a 30% discount of the Company’s
common stock prior day close price.
Due to the fact that these convertible notes have an option
to convert at a variable amount, they are subject to derivative liability treatment. The Company has applied ASC 815, due to the
potential for settlement in a variable quantity of shares. The conversion feature has been measured at fair value using a Binomial
Option Pricing model at the issuance date and the period end. The conversion feature of the convertible note gave rise to a derivative
liability of $19,070 which was recorded as a debt discount. The debt discount is charged to other expense ratably over the term
of the convertible note.
Due to related party
On May 16, 2018, the Company’s officer
made non-interest bearing loans of $75,000 to the Company in the form of cash. The loan is due on demand and unsecured.
On May 22, 2018, the Company’s officer
made non-interest bearing loans of $30,000 to the Company in the form of cash. The loan is due on demand and unsecured.
As of September 30, 2018 and December 31,
2017, the Company is reflecting a liability of $151,075, and $46,075, respectively.
7.
|
Derivative Liabilities
|
The Company has identified derivative instruments
arising from embedded conversion features in the Company’s convertible notes payable and accounts payable at September 30,
2018.
The following summarizes the Binomial-lattice
model assumptions used to estimate the fair value of the derivative liability and warrant liability at the date of issuance and
for the convertible notes converted during the nine months ended September 30, 2018.
|
|
Low
|
|
|
High
|
|
Annual dividend rate
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life in years
|
|
|
0
|
|
|
|
1.00
|
|
Risk-free interest rate
|
|
|
1.93
|
%
|
|
|
2.59
|
%
|
Expected volatility
|
|
|
112
|
%
|
|
|
182
|
%
|
Risk-free interest rate: The Company uses
the risk-free interest rate of a U.S. Treasury Note with a similar term on the date of the grant.
Dividend yield: The Company uses a 0% expected
dividend yield as the Company has not paid dividends to date and does not anticipate declaring dividends in the near future.
Volatility: The volatility was estimated
using the historical volatilities of the Company’s common stock.
Remaining term: The Company’s remaining
term is based on the remaining contractual maturity of the convertible notes payable and accounts payable.
The following are the changes in the derivative liabilities
during the nine months ended September 30, 2018.
|
|
Nine Months Ended September 30, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liabilities as January 1, 2018
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,596,005
|
|
Addition
|
|
|
-
|
|
|
|
-
|
|
|
|
300,585
|
|
Gain on extinguishment of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
(59,364
|
)
|
Loss on settlement of vendor liability
|
|
|
-
|
|
|
|
-
|
|
|
|
(516,734
|
)
|
Gain on changes in fair value
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,817,014
|
)
|
Derivative liabilities as September 30, 2018
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
503,478
|
|
The following are the changes in the warrant liabilities during
the nine months ended September 30, 2018.
|
|
Nine Months Ended September 30, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Loss on settlement of vendor liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,517,577
|
|
Gain on changes in fair value
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,091,663
|
)
|
Derivative liabilities as September 30, 2018
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,425,914
|
|
Reverse Capitalization
Pursuant to the Merger Agreement, upon
consummation of the Merger, each share of CDx’s capital stock issued and outstanding immediately prior to the Merger was
converted into the right to receive one (1) share of Company common stock, par value $0.001 per share. Additionally, pursuant to
the Merger Agreement, upon consummation of the Merger, the Company assumed all of CDx’s options and warrants issued and outstanding
immediately prior to the Merger, 6,069,960 and 7,571,395 shares of common stock, respectively.
Prior to and as a condition to the closing
of the Merger, each then-current Company stockholder agreed to sell certain shares of common stock held by such holder to the Company
and the then-current Company stockholders retained an aggregate of 1,990,637 shares of common stock.
Preferred Stock
On September 30, 2016, the Company filed
a Certificate of Amendment to Articles of Incorporation with the Secretary of State of the State of Nevada to authorize for issuance
ten million (10,000,000) shares of blank check preferred stock, par value $0.001 (“Blank Check Preferred Stock”) as
included on Form 8-K filed with the SEC on October 4, 2016.
Series A Preferred Stock
As of September 30, 2018, and December
31, 2017, the Company has designated 51 shares of Series A Preferred Stock par value $0.001 and 51 shares are issued and outstanding.
The Series A Preferred Stock can convert into common stock at a 1:1 ratio. Each one (1) share of the Series A Preferred shall have
voting rights equal to (x) 0.019607 multiplied by the total issued and outstanding shares of Common Stock eligible to vote at the
time of the respective vote (the “Numerator”), divided by (y) 0.49, minus (z) the Numerator. For purposes of illustration
only, if the total issued and outstanding shares of Common Stock eligible to vote at the time of the respective vote is 5,000,000,
the voting rights of one share of the Series A Preferred Stock shall be equal to 102,036 (0.019607 x 5,000,000) / 0.49) –
(0.019607 x 5,000,000) = 102,036). On December 23, 2016 the 51 shares were issued to Mr. Yazbeck, the Company’s sole officer
and the sole member of the Board. Mr. Yazbeck, via his ownership of the 51 shares of the Series A Preferred, has control of the
majority of the Company’s voting stock.
Series B Preferred Stock
The Series B Preferred is convertible into
shares of Common Stock at a conversion price of $0.0001. Holders of the Series B Preferred are entitled to receive dividends annually
equal to $0.10 for each share of Series B Preferred held. In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company, the holders of Series B Preferred then outstanding shall be entitled to be paid out of the assets
of the Company available for distribution to its stockholders, before any payment shall be made to the holders of Common Stock.
Until such time as there are fewer than 20,000 shares of Series B Preferred outstanding, the Company needs to obtain the majority
votes of the holders of Series B Preferred with regard to certain actions. Holders of Series B Preferred shares are entitled to
one vote for each share held, are entitled to elect up to two members to the Board, and, absent such election, are provided certain
voting and veto rights with regard to any vote by the Board.
During the year ended December 31, 2017
an investor converted 3,300 Series B Preferred stock in to 33,000,000 shares of common stock.
On July 31, 2018, the Company issued 38,272
shares of the Company’s Series B Preferred at a value of $1.00 per Series B Preferred share to settle outstanding vendor
liability. The Company also agreed to the assignment or issuance of three warrants giving the holder the right to purchase seven
and one half percent (7.5%) of the Company’s shares of common stock issued and outstanding at the time of exercise and having
an exercise price of $0.001 per share. This form of warrant is referred to herein as the “7.5% Warrant.” The Company
agreed to the assignment of one previously issued 7.5% Warrant to an entity related to BCI Advisors. This 7.5% Warrant expires
on January 15, 2019. In addition, the Company also agreed to the assignment of another previously issued 7.5% Warrant to an entity
related to BCI Advisors and agreed to extend the expiration date from March 1, 2019 to March 1, 2022. Finally, the Company agreed
to issue a new 7.5% Warrant which will expire on January 15, 2022.
On July 30, 2018, the Company issued 45,355
shares of the Company’s Series B Preferred at a value of $1.00 per Series B Preferred share to settle outstanding vendor
liability. The Company also agreed to issue a 7.5% Warrant with an expiration date of August 1, 2022.
During the nine months ended September
30, 2018 investors converted 189,700 Series B Preferred stock in to 1,897,000,000 shares of common stock.
Common Stock
On September 30, 2016, the Company amended
articles of incorporation to increase the number of authorized commons shares to 10,000,000,000 as included on Form 8-K filed with
the SEC on October 4, 2016.
On January 24, 2018, the Company issued
5,000,000 shares common stock to settle outstanding vendor liabilities of $30,000. In connection with this transaction the Company
also recorded a gain on settlement of vendor liabilities of $4,500.
During the nine months ended September
30, 2018, the Company issued 85,871,212 shares of common stock in exchange for services at a fair value of $358,875.
During the nine months ended September
30, 2018, the Company issued 4,285,714 shares of its restricted common stock to consultants in exchange for services at a fair
value of $13,286. These shares were recorded as common stock issued for prepaid services and will be expensed over the life of
the consulting contract to share based payments. During the nine months ended September 30, 2018 the Company recorded $13,286 to
share based payments.
Total stock-based compensation expense,
for both employee and non-employee options, recognized by the Company for the nine months ended September 30, 2018 was $1,971.
No tax benefits were recognized in the nine months ended September 30, 2018.
9.
|
Commitments and Contingencies
|
Distribution and License Agreement and Joint Development
Agreements
The Company entered into a Distribution
and License Agreement with a third-party for the purpose of developing a sensor array to be used in the Company’s product.
The Distribution and License Agreement has an initial term of ten years, but can be terminated earlier if the project does not
meet the specifications of the Company. The Company will obtain exclusive rights to sell and distribute once a successful sensor
prototype is developed. In exchange for a functional prototype, the Company will pay the third-party a 7% royalty on net sales.
During the nine months ended September 30, 2018, the Company did not incur any development costs related to the Distribution and
License Agreement.
On November 1, 2013, the Company entered
into a two-year Joint Development Agreement (the “Agreement”) with an unrelated third-party to develop chemical sensors
and peripheral sensing equipment and software for the detection and characterization of cannabis and compounds associated with
cannabis.
The Agreement provides for, among other
things, any arising intellectual property rights (as defined) outside of the field (as defined), and any arising intellectual property
rights relating to improvements to detection materials shall belong to the Joint Venture Developer.
The Agreement also provides that any arising
intellectual property rights other than those covered above shall belong to the Company. To the extent that it is necessary to
do so to enable the Company to use and exploit its respective arising intellectual property rights, the Joint Developer grants
the Company a perpetual, irrevocable, exclusive, and royalty free license (including the right to assign the license and to grant
sub-licenses) to use and exploit the Joint Developer’s arising intellectual property rights in the field. Under the terms
of the Agreement, either party may cancel the Agreement as the specific tasks provided for in the Agreement have been completed
or for causes specifically provided for in the Agreement.
On May 19, 2015, the Company entered into
an Exclusive Patent Sublicense Agreement (the “License Agreement”) with Next Dimension Technologies, Inc. (“NDT”).
The License Agreement grants the Company a worldwide right to the patents licensed by NDT from the California Institute of Technology.
The License Agreement grants both exclusive and non-exclusive patent rights. The license granted in the License Agreement permits
the Company to make, have made, use, sell and offer for sale sublicensed products in the field of use. The License Agreement continues
until the expiration, revocation, invalidation or enforceability of the rights licensed. The License Agreement provides for the
payment of a license fee and royalty payments by CDx to NDT. The License Agreement also contains minimum royalty payments and milestone
payments by CDx to NDT. NDT has a right to terminate the License Agreement in the event of an uncured breach by CDx; the insolvency
or bankruptcy of CDx; or if CDx does not meet certain productivity milestones. The License Agreement also contains representations,
warranties and indemnity obligations for each of CDx and NDT. In connection with the License Agreement, on May 19, 2015, CDx and
NDT also executed an Amended Amendment No. 4 (the “Amended Amendment No. 4”) to the Joint Development Agreement, dated
as of November 1, 2013, between CDx and NDT, which extended the date of negotiation for the License Agreement through May 19, 2015.
On February 8, 2017, MyDx, Inc. entered
into an option agreement (the “Option Agreement’) with the Torque Research & Development, Inc. (“TRD”).
The Option Agreement provides MyDx with the exclusive right to license two patent pending inventions (the “TRD Inventions”),
and requires MyDx to make annual payments to TRD as well as royalty payments on any products that are commercialized which are
based on the TRD Inventions. MyDx’s rights under the Option Agreement require customary measures of performance on the part
of MyDx in terms of patent cost maintenance and other payments of costs associated with the TRD Inventions. With respect to the
Option Agreement, MyDx rights are broad in terms of the potential access MyDx has to use the TRD Inventions in products, and services
and many of the key economic terms of a future license, should MyDx exercise its rights under the Option Agreement, are agreed
to in the Option Agreement.
In addition to the Option Agreement with
the TRD, on February 8, 2017, MyDx has entered into a research and development agreement (the “RD Agreement”) with
TRD for the Project titled “Manufacturable, Medical Grade Smart Vape Devices and Related Medical Software Applications for
Prescribers, Administrators and Patient Applications.” The RD Agreement allows MyDx to fund research based on the TRD Inventions
with a three year budget of $280,371 and a deferred payment of $75,000 within ninety days of the Effective Date. The RD Agreement
provides MyDx with an exclusive right to license all technology that is discovered from the monies funded to TRD through the RD
Agreement (the “Derivative IP”). To the extent that MyDx exercises its rights under the RD Agreement, MyDx will be
required to make customary annual payments to TRD, who shall be the owners of any Derivative IP, as well as royalty payments as
any commercialization of such Derivative IP occurs. TRD may elect to accept payment in whole or in part in cash or the companies
restricted common stock priced at the Effective Date. During the nine months ended September 30, 2018, the Company converted the
vendor liability into 45,355 Series B Preferred shares. In connection with this transaction the Company recorded a loss on settlement
of vendor liability of $5,233,314.
On January 26, 2018 the Company entered
into a joint venture with Ganja Gold to form “NewCo”. With the formation of NewCo, the intent is for the Parties to
manufacture and distribute a new premium line of physiological based Vape formulations under Ganja Gold Vape Brand (“GGV
Brand”). The GGV Brand will be powered by MYDX data and formulations utilizing the Eco Smart Pen Device under an exclusive
license of MYDX Power Formulations. MyDx will have the option to acquire 50% of NewCo.
License and Distribution Agreement
On June 12, 2017, MyDx, Inc. (the “Company”
or “Licensor”) entered into a license and services agreement (the “License Agreement”) with Black Swan,
LLC (the “Licensee”). The Licensor agrees to grant to the Licensee the Access License which shall consist of:
|
(a)
|
access to the database to enable Licensee to engage in formulation queries regarding the effects of having different amounts of terpene or other chemicals in cannabis strains;
|
|
(b)
|
access to the database’s chemical profile library and related definitions;
|
|
(c)
|
access to a list with the contact information and fee schedule of cannabis extractors with state licenses so that Licensee can submit the formulation query results to such licensed cannabis extractors. Such licensed extractor list may change and Licensor shall have no obligation to provide Licensee with an updated list; and
|
|
(d)
|
access to the CannaDxTM mobile application to track feedback and reviews by up to 20,000 users of Licensee’s products.
|
The Licensor will provide the Product Services
which shall consist of:
|
(1)
|
Licensor providing annual MyDx360 SAAS Premium Subscription at a cost of $15,000 per annum
|
|
(2)
|
Licensor providing 6,000 Cartridges every six months to the Licensee at a cost of $2.49 per Cartridge ($14,940 in total every six months). It shall be a requirement of this Agreement that Licensee order 6,000 Cartridges from Licensor every six months;
|
|
(3)
|
Licensor providing 1,000 Eco Smart Pens to the Licensee, when available, over the three-year term of this Agreement at a cost of $25 per Eco Smart Pen ($25,000 in total); and
|
|
(4)
|
Licensor providing 6,000 batteries to the Licensee over the three-year term of this Agreement at a cost of $3.99 per battery ($23,940 in total).
|
The term of this Agreement shall be three
(3) years. Licensor shall have the right, in its sole discretion, to terminate this Agreement if Licensee does not order and pay
for at least 6,000 Cartridges every six months at a cost of $2.49 per Cartridge ($14,940 in total every six months).
On April 26, 2018, MyDx, Inc. (the “Company”
or “Licensor”) entered into a license and services agreement (the “License Agreement”) with Humanity Holdings
(the “Licensee”). The Licensor agrees to grant to the Licensee access to the MyDx360 platform. The Licensor agrees
to issue the Licensee $25,000 of shares on the 45
th
day anniversary of this agreement. These shares will vest with achievement-based
milestones. As of the date of this filing these shares have not been issued. The Licensee will pay a support and service fee equal
to 20% of net sales and a royalty of 30% of net sales. The term of this Agreement shall be two (2) years.
Marketing and Advertising Advisory
Services Agreement
On April 5, 2016, the Company entered into
a Marketing and Advertising Advisory Services Agreement (the “Agreement”) with Growth Point Advisors, Ltd. (“Growth
Point”) for Growth Point to provide a comprehensive marketing, advertising and branding campaign for the Greater China Region
on behalf of the Company’s MyDx AquaDx sensor. The campaign shall include, but not be limited to, the development of both
the front and back-end of an e-commerce web site targeting the Chinese audience as well as introductions to potential key personnel
to launch and manage the campaign.
In consideration for the services described
above, the Company shall pay Growth Point a monthly service fee of $30,000. Should the Company fail to pay the monthly service
fee, Growth Point shall have the right to convert the monthly service fee into the Company’s common stock at a 50% discount
of the lowest closing price of the Company’s common stock for the 15 trading days upon send notice of non-payment to the
Company.
On May 16, 2017, the Company terminated
its Marketing and Advertising Advisory Services Agreement with Growth Point Advisors, Ltd. (“Growth Point”) entered
into in April 2016. Growth Point had been expected to provide a comprehensive marketing, advertising and branding campaign for
the Greater China Region on behalf of the Company’s MyDx AquaDx sensor. Growth Point failed to satisfy the agreed upon deliverables
as stated in the agreement. As of the date of this filing the Company has not received communication from Growth Point.
On February 17, 2017 MyDx and Libre Design,
LLC (“LDL”) entered into a twelve (12) month Research, Branding, Advertising and Marketing Services Agreement (“Agency
Agreement”). The Company agreed to pay deferred cash compensation as follows of three thousand dollars ($3,000) upon execution
and one thousand five hundred dollars ($1,500) per month for a subsequent eleven (11) payments thereafter on or before the first
(1st) of each month. In addition, Agency is entitled to receive sixty seven million shares of restricted common stock at a closing
market price equal to $0.0011.
On March 1st and 15th, 2017, MyDx, Inc.
received a payment demand for the initial and subsequent payment of $50,000 and $25,000 per month respectively, exclusive of costs
and other fees, due and owing under the BCI Advisors, LLC (“BCI”) advisory services agreement (the “Advisory
Services Agreement”). The Company elected in lieu of cash to pay in unrestricted common stock, registered in form S-8. The
Company made an initial payment of seventy five million shares in partial satisfaction of the amount due and owing that does not
exceed the Company’s obligations under the Advisory Services Agreement to restrict BCI’s beneficial ownership to 4.99%.
During the nine months ended September 30, 2018 this agreement was canceled and the Company converted the vendor liability into
38,272 Series B Preferred shares. In connection with this transaction the Company recorded a loss on settlement of vendor liability
of $2,884,074.
On November 3, 2017 the Company and Phylos
Bioscience, Inc. (“Phylos”) entered into a License, Co-Marketing, and Data Sharing Agreement (the “Phylos Agreement”).
Pursuant to the Phylos Agreement, the Company and Phylos each granted a non-exclusive license to the other party to access their
data and use their trademarks and logo on marketing materials. Neither party paid cash or issued shares in connection with the
Phylos Agreement. The license was the consideration given by each party. The term of the Phylos Agreement is five (5) years.
On February 1, 2018 MyDx and Erai Beckmann
entered into a twelve (12) month Research, Manufacturing, Advertising and Marketing Services Agreement. The Company agrees to pay
$15,000 in restricted common stock on the first day of each quarter. In addition, Erai Beckmann is entitled to 2,500,000 of the
Company’s common stock on the 60
th
day anniversary of this agreement.
Litigation
In the normal course of business, the Company
may be subject to other legal proceedings, lawsuits and other claims. Although the ultimate aggregate amount of probable monetary
liability or financial impact with respect to these matters is subject to many uncertainties and is therefore not predictable with
assurance, the Company’s management believes that any monetary liability or financial impact to the Company from these other
matters, individually and in the aggregate, would not be material to the Company’s financial condition, results of operations
or cash flows.
However, there can be no assurance with
respect to such result, and monetary liability or financial impact to the Company from these other matters could differ materially
from those projected.
Subsequent to September 30, 2018, the Company
issued 20,000,000 shares of its restricted common stock to consultants in exchange for services.
Subsequent to September 30, 2018, the Company
issued 16,250,000 shares of its restricted common stock to consultants in exchange for services.
Geneva Securities Purchase Agreement
Effective October 1, 2018, the Company
entered into a securities purchase agreement (the “Geneva Purchase Agreement”) with Geneva Roth Remark Holdings, Inc.,
(“Geneva”), pursuant to which Geneva purchased a 10% unsecured convertible promissory note (the “Geneva Note”)
from the Company in the aggregate principal amount of $74,800, such principal and the interest thereon convertible into shares
of the Company’s common stock at the option of Geneva.
The purchase price of $74,800 of the
Geneva Note was paid in cash by Geneva on October 2, 2018. After payment of transaction-related expenses, net proceeds to the Company
from the Geneva Note totaled $65,000.
The maturity date of the Geneva Note is
October 1, 2019 (the “Geneva Maturity Date”). The Geneva Note shall bear interest at a rate of ten percent (10%) per
annum (the “Geneva Interest Rate”), which interest shall be paid by the Company to Geneva in shares of common stock
at any time Geneva sends a notice of conversion to the Company. Geneva is entitled to, at its option, convert all or any amount
of the principal face amount and any accrued but unpaid interest of the Geneva Note into shares of the Company’s common stock,
at any time after March 20, 2019, at a conversion price for each share of common stock equal to 71% multiplied by the average of
the lowest three (3) trading prices (as defined in the Geneva Purchase Agreement) for the common stock during the fifteen (15)
Trading Day period (as defined in the Geneva Purchase Agreement) ending on the latest complete trading day prior to the conversion
date.
The Geneva Note may be prepaid until 170
days from the issuance date in accordance with its terms.
The Company shall reserve 270,905,432 of
its authorized and unissued common stock (the “Geneva Reserved Amount”), free from preemptive rights, to provide for
the issuance of Common Stock upon the full conversion of the Geneva Note.
GS Capital Securities Purchase Agreement
Effective October 4, 2018 the Company entered
into a securities purchase agreement (the “GSC Purchase Agreement”) with GS Capital Partners LLC, (“GSC”,
and together with Geneva, the “Investors”), pursuant to which GSC purchased a 8% unsecured convertible promissory note
from the Company in the aggregate principal amount of $75,000 (the “GSC Note”), such principal and the interest
thereon convertible into shares of the Company’s common stock at the option of GSC.
The purchase price of $75,000 of the
GSC Note was paid in cash by GSC on October 5, 2018. After payment of transaction-related expenses, net proceeds to the Company
from the First GSC Note totaled $68,500.
The maturity date of the GSC Note is October
4, 2019 (the “the GSC Maturity Date”). The GSC Note shall bear interest at a rate of eight percent (8%) per annum (the
“GSC Interest Rate”), which interest shall be paid by the Company to GSC in shares of common stock at any time GSC
sends a notice of conversion to the Company. GSC is entitled to, at its option, convert all or any amount of the principal face
amount and any accrued but unpaid interest of the GSC Note into shares of the Company’s common stock, at any time, at the
conversion price specified in the for each share of common stock equal to 71% of the average of the three lowest closing bid prices
of the common stock for the fifteen prior trading days including the day upon which a notice of conversion is received by the Company
or its transfer agent.
The GSC Note may be prepaid until 180 days
from the issuance date in accordance with its terms.
The Company shall reserve 211,267,000 of
its authorized and unissued common stock (the “GSC Reserved Amount”), free from preemptive rights, to provide for the
issuance of Common Stock upon the full conversion of the GSC Note.
Eagle and GSC Securities Purchase Agreements
Effective October 11, 2018, the Company
entered into a securities purchase agreement (the “Eagle Purchase Agreement”) with Eagle Equities, LLC (“Eagle”),
pursuant to which Eagle purchased an 8% unsecured convertible promissory note (the “Eagle Note”) from the Company in
the aggregate principal amount of $181,500, such principal and the interest thereon convertible into shares of the Company’s
common stock at the option of Eagle.
Effective October 11, 2018 the Company
entered into a securities purchase agreement (the “GSC Purchase Agreement” and together with the Eagle Purchase Agreement,
the “SPAs”) with GSC (together with Eagle, the “Investors”), pursuant to which GSC purchased an 8% unsecured
convertible promissory note (the “GSC Note” and together with the Eagle Note, the “Notes”) from the Company
in the aggregate principal amount of $102,000, such principal and the interest thereon convertible into shares of the Company’s
common stock at the option of GSC.
The purchase price of $181,500, and
of $102,000, of the Eagle Note and the GSC Note, respectively, was paid in cash by the Investors on October 11, 2018. After
payment of transaction-related expenses, net proceeds to the Company from the Eagle Note and the GSC Note totaled $165,000 and
$95,000, respectively.
The maturity date of the Notes is October
11, 2019 (the “Maturity Date”). The Notes shall bear interest at a rate of eight percent (8%) per annum (the “Interest
Rate”), which interest shall be paid by the Company to the Investors in shares of common stock at any time Eagle or GSC sends
a notice of conversion to the Company (the “Notice of Conversion”). The Investors are entitled to, at their option,
convert all or any amount of the principal face amount and any accrued but unpaid interest of their respective Notes into shares
of the Company’s common stock, at any time, at a conversion price for each share of common stock equal to 65% multiplied
by the lowest closing bid price of the common stock as reported on the marketplace upon which the Company’s shares are traded
during the fifteen (15) trading day period ending on the day upon which a Notice of Conversion is received by the Company.
The Notes may be prepaid until 180 days
from the issuance date in accordance with its terms.
The Company shall reserve 532,000,000,
and 299,000,000, of its authorized and unissued common stock free from preemptive rights, to provide for the issuance of Common
Stock upon the full conversion of the Eagle Note (the “Eagle Reserved Amount”), and the GSC Note (the “GSC Reserved
Amount” and together with the Eagle Reserved Amount, the “Total Reserved Amount”), respectively.
Change in Officers and Directors
On November 10, 2018, the Company entered
into a consulting agreement (the “Mr. Cannabis Consulting Agreement”) with Mr. Cannabis, Inc., a California corporation
(the “Consultant”), pursuant to which the Consultant would perform management type services for the Company as further
defined in the Mr. Cannabis Consulting Agreement. The term of the Mr. Cannabis Consulting Agreement is from November 10, 2018 through
November 9, 2021 (the “Term”). The Mr. Cannabis Consulting Agreement shall not be terminated within the first six months
of the Term. The Company or the Consultant may terminate this Agreement, with or without cause, at any time after the first six
months of the Term upon providing ninety day written notice to the other party.
Pursuant to, and in accordance with the
terms and conditions of the Mr. Cannabis Consulting Agreement, the Consultant was issued a common stock purchase warrant (the “Warrant”)
to purchase twenty two and one half percent (22.5%) of the issued and outstanding shares of the Company’s common stock, par
value $0.001 per share (the “Common Stock”) at the time of the first notice of exercise given by the Consultant to
the Company, exercisable at a price of $0.001 per share and for a term of three years from the date of issuance (the “Mr.
Cannabis Warrant”).
In connection with the Mr. Cannabis Consulting
Agreement, Mr. Daniel Yazbeck resigned from his position as the Company’s Chief Executive Officer (the “Yazbeck Resignation”),
but remains a member of the Company’s Board of Directors (the “Board”). Upon Mr. Yazbeck’s resignation,
the Board appointed Mr. Matthew Bucciero, an affiliate of the Consultant, as Chief Executive Officer of the Company. Additionally,
Mr. Erai Beckmann, currently President of the Consultant, was appointed to the Board
Mr. Beckmann was the CEO of Humanity Holdings
through February 2018. At the time the Company entered into the License and Services Agreement with Humanity Holdings in April
2018, Mr. Beckmann’s position was Co-Founder and he owned 23% of the entity. In addition, on February 1, 2018, the Company
and Mr. Beckmann entered into a twelve (12) month Research, Manufacturing, Advertising and Marketing Services Agreement. For the
nine months ended September 30, 2018, the Company has issued 43,906,926 restricted shares of common stock to Mr. Beckmann in connection
with the February agreement.