NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2019 AND 2018 (UNAUDITED)
NOTE 1 –
ORGANIZATION
AND PRINCIPAL ACTIVITIES
Corporate History and Background
Reign Sapphires – Continuing Operations:
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.
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.
The Company has begun its planned principal
operations, and accordingly, the Company has prepared its consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America (“GAAP”).
Coordinates Collection – Discontinued
Operations:
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 successor. Such accounting generally results
in increased amortization and depreciation reported in future periods. 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.
On January 1, 2019, Reign Brands, Inc.,
a subsidiary of Reign Sapphire Corporation, entered into an Asset Purchase Agreement (the “Agreement”) with Co-Op Jewelers
LLC (“Co-Op”), whereby Reign Brands, Inc. sold operating assets of Reign Brands, Inc., consisting of substantially
all of the assets related to Coordinates Collection (“CCI”). On January 1, 2019 (the “Closing Date”), the
parties executed the Asset Purchase Agreement and the final exhibits.
Upon the closing of the Agreement, Reign
Brands, Inc. sold substantially all of the operating assets of the CCI business, consisting of fixed assets and intellectual property
in exchange for an aggregate of $100,000 in cash. The Agreement contained customary closing conditions.
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 March 31, 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, 2018 and 2017
audited financial statements filed on Form 10-K on April 2, 2019. 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, 2018 as filed on April 2, 2019, 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 $12,947,000 and $13,001,000 at March 31, 2019 and December 31, 2018, respectively, had a working capital
deficit of approximately $3,771,000 and $3,844,000 at March 31, 2019 and December 31, 2018, respectively, had net income of approximately
$54,000 and a net loss of approximately $739,000 for the three months ended March 31, 2019 and 2018, respectively, and net cash
used in operating activities of approximately $73,000 and $322,000 for the three months ended March 31, 2019 and 2018, 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 consolidated financial statements. The 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 consolidated
financial statements.
Consolidation
The 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 consolidated financial
statements in accordance with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities
at the dates of the 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 consolidated 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.
Cash
The Company’s cash is held in bank
accounts in the United States and is insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. The Company has
not experienced any cash losses.
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 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 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.
Advertising and Marketing Costs
Advertising and marketing costs are recorded
as general and administrative expenses when they are incurred. Advertising and marketing expenses were recorded of approximately
$9,000 ($9,000 from continuing operations and $0 from discontinued operations) and $175,000 ($39,000 from continuing operations
and $136,000 from discontinued operations) for the three months ended March 31, 2019 and 2018, respectively.
Comprehensive Income
Comprehensive income is reported in accordance
with 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, 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
months ended March 31, 2019 and 2018.
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.
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Identification of the contract, or contracts, with
a customer.
|
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2.
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Identification of the performance obligations in the
contract.
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3.
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Determination of the transaction price.
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4.
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Allocation of the transaction price to the performance
obligations in the contract
|
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5.
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Recognition of revenue when, or as, we satisfy a performance
obligation.
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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 months ended March 31, 2019 and 2018, the Company recorded
retail sales of $0 and $217,636 ($0 from continuing operations and $217,636 from discontinued operations), respectively.
Wholesale sales
– The Company
offers product sold in bulk to distributors. During the three months ended March 31, 2019 and 2018, the Company recorded wholesale
sales of $41,554 ($41,554 from continuing operations and $0 from discontinued operations) and $55,614 ($23,149 from continuing
operations and $32,465 from discontinued operations), 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 totaling $0 and $21,977 as of March 31, 2019 and December 31,
2018, respectively, is included in current liabilities of discontinued operations and assets held for sale in the accompanying
consolidated Balance Sheets.
Inventories
Reign Sapphire
Inventories are stated at the lower of
cost or market (net realizable value) 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 March 31, 2019 and December 31, 2018, the Company carried primarily loose sapphire jewels,
jewelry for sale on our website, and jewelry 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 as of March 31, 2019. 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. The estimated fair value per management’s internal assessment
is greater than the cost, therefore, there is no indicator of impairment as of March 31, 2019.
Le Bloc
Le Bloc products are outsourced to a third
party for manufacture, made to order, and when completed are shipped to the customer. The inventory for Le Bloc is considered immaterial
as of March 31, 2019 and December 31, 2018.
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.
Intangible Assets
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 was an impairment charge of $0 for the three months ended March 31, 2019 and 2018 and
$481,947 of impairment charge was recorded in the fourth quarter of year December 31, 2018.
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 was an impairment charge of $0 for the
three months ended March 31, 2019 and 2018 and $460,789 of impairment charge was recorded in the fourth quarter of year December
31, 2018.
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.
Fair Value of Financial Instruments
The provisions of accounting guidance,
FASB Topic ASC 825 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 March
31, 2019 and December 31, 2018, the fair value of cash, accounts receivable, accounts payable, 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:
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Level 1 – Quoted prices in active markets for identical assets or liabilities.
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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.
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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
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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. There were 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 warrant and the
embedded derivative liabilities are recognized at fair value on a recurring basis at March 31, 2019 and are Level 3 measurements
(see Note 8). There have been no transfers between levels.
The carrying values of the Company’s
financial instruments, including cash, other current assets, accounts payable, accruals, and other current liabilities approximate
their fair values due to the short period of time to maturity or repayment.
Convertible Notes Payable
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 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 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 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 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 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 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 consolidated statements of operations. In addition, any differences between estimated forfeitures
and actual forfeitures could also have a material impact on our 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 months ended March 31, 2019 and 2018, 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. Australian Sapphire Corporation (“ASC”), a shareholder of the Company which is wholly-owned
by Joseph Segelman,
t
h
e Comp
a
n
y’s
Chief Executive Officer ("
CEO”), is inactive and we have no transactions with ASC.
Segment Reporting
Accounting Standards Codification (“ASC”)
280, “Segment Reporting,” requires public companies to report financial and descriptive information about their reportable
operating segments. The Company identifies operating segments based on how our chief operating decision maker internally evaluates
separate financial information, business activities and management responsibility. Accordingly, the Company has one reportable
segment.
Reclassifications
Certain amounts
in previously issued financial statements have been reclassified to conform to the presentation following the January 2019 sale
of CCI, which includes the reclassification of the combined financial position as assets and liabilities held for sale (see Note
15) for all periods presented.
Discontinued
Operations
Pursuant to ASC
205-20 Discontinued Operations, in determining whether a group of assets that is disposed (or to be disposed) should be presented
as a discontinued operation, we analyze whether the group of assets being disposed represents a component of the Company; that
is, whether it had historic operations and cash flows that were clearly distinguished, both operationally and for financial reporting
purposes. In addition, we consider whether the disposal represents a strategic shift that has or will have a major effect on our
operations and financial results. The results of discontinued operations, as well as any gain or loss on the disposal, if applicable,
are aggregated and separately presented in our consolidated statements of operations, net of income taxes. The historical financial
position of discontinued operations are aggregated and separately presented in our accompanying consolidated balance sheets.
Concentrations, Risks, and Uncertainties
Business Risk
Substantial business risks and uncertainties
are inherent to an entity, including the potential risk of business failure.
The Company is headquartered and operates
in the United States. To date, the Company has generated limited revenues from operations. There can be no assurance that the Company
will be able to successfully continue to produce 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. 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.
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 banks and accounts receivable. The credit risk on cash in banks is limited because the counterparties are recognized
financial institutions.
The Company had one customer that accounted
for 96% of total revenues for the three months ended March 31, 2019. There was one customer that accounted for 10% of total revenue
for the three months ended March 31, 2018. The Company had no customers that accounted for 10% or more of total accounts receivable
at March 31, 2019 and December 31, 2018, respectively.
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.
Major Suppliers
The Company does not manufacture its own
products and currently depends primarily upon third parties to manufacture its products.
In the event that the manufacturing provided
by our current supplier were discontinued, it is believed that alternate suppliers could be identified which would be able to provide
it with sufficient levels of products at terms similar to those of our current supplier.
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 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 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 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 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 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 consolidated financial statements and related disclosures.
NOTE 4 – INVENTORIES
Inventories consisted of the following
as of:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Loose stones
|
|
$
|
518,229
|
|
|
$
|
526,473
|
|
Finished goods
|
|
|
134,145
|
|
|
|
134,145
|
|
Samples
|
|
|
62,977
|
|
|
|
62,977
|
|
|
|
$
|
715,351
|
|
|
$
|
723,595
|
|
NOTE 5 –
PROPERTY
AND Equipment
Property and equipment consisted of
the following as of:
|
|
Estimated Life
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Office equipment
|
|
5 years
|
|
$
|
5,481
|
|
|
$
|
5,481
|
|
Computer equipment
|
|
3 years
|
|
|
40,171
|
|
|
|
40,171
|
|
Accumulated depreciation
|
|
|
|
|
(33,364
|
)
|
|
|
(30,122
|
)
|
|
|
|
|
$
|
12,288
|
|
|
$
|
15,530
|
|
Depreciation expense was $3,242 and $3,156
for the three months ended March 31, 2019 and 2018, 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
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
3.3 – 4.5 years
|
|
$
|
260,000
|
|
|
$
|
260,000
|
|
Accumulated amortization
|
|
|
|
|
(162,966
|
)
|
|
|
(146,669
|
)
|
|
|
|
|
$
|
97,034
|
|
|
$
|
113,331
|
|
Future amortization expense related to intangible assets are
approximately as follows:
|
|
|
Total
|
|
2019
|
|
|
$
|
46,610
|
|
2020
|
|
|
|
37,818
|
|
2021
|
|
|
|
12,606
|
|
|
|
|
$
|
97,034
|
|
Amortization expense was $16,297 and $58,443
for the three months ended March 31, 2019 and 2018, and is classified in general and administrative expenses in the condensed consolidated
Statements of Operations.
NOTE 7 –
DUE
TO RELATED PARTY
During the three months ended March 31,
2019, the Company received no advances from its CEO/director, incurred business expenses that were paid by the CEO/director of
$486,384 (comprised of operating expenses) and had repayments of $466,090. The Company has a balance owed to the related party
of $1,267,099 and $1,246,805 at March 31, 2019 and December 31, 2018, respectively. During the three months ended March 31, 2019,
the Company incurred $45,000 of compensation related to the CEO/director’s employment agreement and $20,000 of deferred compensation
related to the Secretary’s employment agreement. As of March 31, 2019 and December 31, 2018, accrued compensation-related
party was $1,304,750 and $1,239,750, respectively.
NOTE 8 –
CONVERTIBLE
NOTES PAYABLE
Convertible notes payable consists of the
following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
January and February 2018 Notes, issued January 3, 2018 and February 16, 2018, respectively, with a maturity date of March 31, 2019, as amended, with an interest rate of 10%.
|
|
$
|
294,000
|
|
|
$
|
294,000
|
|
November 2017 Notes, issued November 10, 2017, with a maturity date of March 31, 2019, as amended, bearing no interest, and secured by substantially all of the Company’s assets and guarantees of payment by the Company’s CEO, and Australian Sapphire Corporation (“ASC”), a shareholder of the Company which is wholly-owned by the Company’s CEO.
|
|
|
287,502
|
|
|
|
287,502
|
|
November 2016 Notes, issued November 10, 2016, with a maturity date of March 31, 2019, as amended, bearing no interest, and secured by substantially all of the Company’s assets and guarantees of payment by the Company’s CEO, and ASC.
|
|
|
287,502
|
|
|
|
287,502
|
|
December 2015 Notes, issued December 23, 2015, with a maturity date of March 31, 2019, as amended, bearing no interest, and secured by substantially all of the Company’s assets and guarantees of payment by the Company’s CEO, and ASC.
|
|
|
862,500
|
|
|
|
862,500
|
|
Total convertible notes payable
|
|
|
1,731,504
|
|
|
|
1,731,504
|
|
Debt discount
|
|
|
—
|
|
|
|
—
|
|
Convertible notes payable, net of unamortized debt discount
|
|
$
|
1,731,504
|
|
|
$
|
1,731,504
|
|
The following represents a summary of
the convertible debt terms at March 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
—
|
|
|
3/31/2019
|
|
$
|
0.08
|
|
|
|
1,960,000
|
|
|
$
|
0.15
|
|
|
2/16/2023
|
|
November 2017 Notes
|
|
|
287,502
|
|
|
|
—
|
|
|
3/31/2019
|
|
$
|
0.08
|
|
|
|
3,593,776
|
|
|
$
|
0.15
|
|
|
11/10/2022
|
|
November 2016 Notes
|
|
|
287,502
|
|
|
|
—
|
|
|
3/31/2019
|
|
$
|
0.08
|
|
|
|
3,593,776
|
|
|
$
|
0.15
|
|
|
11/10/2022
|
|
December 2015 Notes
|
|
|
862,500
|
|
|
|
—
|
|
|
3/31/2019
|
|
$
|
0.08
|
|
|
|
10,781,250
|
|
|
$
|
0.15
|
|
|
11/10/2022
|
|
Total
|
|
$
|
1,731,504
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
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
matured on March 31, 2019, as amended on December 31, 2018. The note is in default
and the Company is currently in discussions to restructure the terms of the note
and provides
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, such as
stock splits and stock dividends. If the total outstanding balance of the November 2017 Note were convertible as of March 31, 2019,
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 March 31, 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 has determined
the fair value of the derivative to be immaterial.
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. In October 2018, the January and February 2018 Crossover Purchase
Agreement was amended to extend the maturity date to December 31, 2018 and to remove the right of the Company to 3,000,000 of the
Redeemable Shares and Crossover was issued the shares.
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 $250,000 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
|
|
Additional discount (interest)
|
|
$
|
—
|
|
|
$
|
13,808
|
|
|
$
|
—
|
|
|
$
|
8,058
|
|
The Company recorded debt discount accretion
of $0 and $61,096 to interest expense in the condensed consolidated Statements of Operations during the three months ended March
31, 2019 and 2018, respectively, and has $0 of unamortized debt discount remaining as of March 31, 2019.
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 matured on March
31, 2019, as amended on January 2, 2019. The note is in default and the Company is currently in discussions to restructure the
terms of the note and provides 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 March 31, 2019 and December 31, 2018,
the Optional Redemption was recorded as a derivative liability on the consolidated Balance Sheets using the “Black Scholes
Merton Method” 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 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 $0 at March 31, 2019 and December 31, 2018.
During the three months ended March 31, 2019 and 2018, the Company recorded $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”, incorporating the following inputs:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
47.5
|
%
|
Risk-free interest rate
|
|
|
2.40
|
%
|
|
|
2.45
|
%
|
Expected term of options (years)
|
|
|
0.8
|
|
|
|
0.3
|
|
Stock price
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
Conversion price
|
|
$
|
0.08
|
|
|
$
|
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 March 31, 2019, 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 March 31, 2019, the embedded derivative was re-measured
at fair value that was determined to be $0. During the three months ended March 31, 2019 and 2018, the Company recorded a loss
of $0 and $52,000, 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 three months ended March 31, 2018. In addition, the
value of the restricted common shares of $263,522 was recorded as an extinguishment of debt in the three months ended March 31,
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:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
47.5
|
%
|
Risk-free interest rate
|
|
|
2.40
|
%
|
|
|
2.45
|
%
|
Expected term of options (years)
|
|
|
0.8
|
|
|
|
0.3
|
|
Stock price
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
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 three months ended March
31, 2018 with a debt discount of $0 as of March 31, 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 matured on March
31, 2019, as amended on January 2, 2019. The note is in default and the Company is currently in discussions to restructure the
terms of the note and provides 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 March 31, 2019 and December 31, 2018,
the Optional Redemption was recorded as a derivative liability on the condensed consolidated Balance Sheets using “Black
Scholes Merton 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 $0 at March 31,
2019 and December 31, 2018. During the three months ended March 31, 2019 and 2018, the Company recorded $0 and $11,505, 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:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
47.5
|
%
|
Risk-free interest rate
|
|
|
2.40
|
%
|
|
|
2.45
|
%
|
Expected term of options (years)
|
|
|
0.8
|
|
|
|
0.3
|
|
Stock price
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
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 December 31, 2017, 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 March 31, 2019, the embedded derivative was re-measured
at fair value that was determined to be $0. During the three months ended March 31, 2019 and 2018, the Company recorded a gain
of $0 and $52,000, respectively, on embedded derivative re-valuation, respectively.
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 months ended March 31, 2018. In addition, the
value of the restricted common shares of $263,522 was recorded as an extinguishment of debt in the three months ended March 31,
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:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
47.5
|
%
|
Risk-free interest rate
|
|
|
2.40
|
%
|
|
|
2.45
|
%
|
Expected term of options (years)
|
|
|
0.8
|
|
|
|
0.3
|
|
Stock price
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
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 to interest expense in the condensed consolidated Statements of Operations during the three months ended March 31,
2019 and 2018, respectively, and has an unamortized debt discount of $0 as of March 31, 2019.
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 matured on March
31, 2019, as amended on January 2, 2019. The note is in default and the Company is currently in discussions to restructure the
terms of the note and provides 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 $0 at March 31, 2019 and December 31, 2018. During the
three months ended March 31, 2019 and 2018, the Company recorded $0 and $34,515, 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:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
47.5
|
%
|
Risk-free interest rate
|
|
|
2.40
|
%
|
|
|
2.45
|
%
|
Expected term of options (years)
|
|
|
0.8
|
|
|
|
0.3
|
|
Stock price
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
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 December 31, 2017, 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 March 31, 2019, the embedded derivative was re-measured at fair value that was determined to be $0. During the three months
ended March 31, 2019 and 2018, the Company recorded a gain of $0 and a gain of $155,998 on embedded derivative re-valuation, respectively.
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 three months ended March 31, 2018. In addition, the
value of the restricted common shares of $263,522 was recorded as an extinguishment of debt in the three months ended March 31,
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:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
47.5
|
%
|
Risk-free interest rate
|
|
|
2.40
|
%
|
|
|
2.45
|
%
|
Expected term of options (years)
|
|
|
0.8
|
|
|
|
0.3
|
|
Stock price
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
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 to interest expense in the condensed consolidated Statements of Operations during the three months ended March 31,
2019 and 2018, respectively, and has no unamortized debt discount remaining as of March 31, 2019.
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 has
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 $18,500 at March 31, 2019 was $79,687 with an availability of approximately $880,000
on the Note. In January 2019, the Company paid a principal payment of $33,333 against 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 year ended December 31, 2018, the Company had borrowings of $35,000 and repayments of $35,171 for a balance
due of $0 at December 31, 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
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).
NOTE 11 –
STOCK
BASED COMPENSATION
2015 Equity
Incentive Plan
As of March 31,
2019, 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.
In April 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.
As of March 31,
2018, the Company issued a total of 100,000 restricted common shares to members of its advisory committee (“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 $0 and $3,750 under general and administrative expenses in the accompanying condensed consolidated Statements
of Operations for the three months ended March 31, 2019 and 2018, respectively, with $0 remaining to be amortized. As of March
31, 2019, the Advisors had vested in 100,000 shares with 0 shares to vest over the remaining vesting period.
As of March 31,
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 for the three months ended March 31, 2019 and 2018, 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
March 31, 2019
and changes during the period then ended:
|
|
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Intrinsic Value *
|
|
Outstanding at December 1, 2018
|
|
|
10,000,000
|
|
|
$
|
0.005
|
|
|
$
|
1,200,000
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired/Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at December 31, 2018
|
|
|
10,000,000
|
|
|
$
|
0.005
|
|
|
$
|
120,000
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired/Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at March 31, 2019
|
|
|
10,000,000
|
|
|
$
|
0.005
|
|
|
$
|
210,000
|
|
Exercisable at March 31, 2019
|
|
|
10,000,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Expected to be vested
|
|
|
10,000,000
|
|
|
$
|
0.005
|
|
|
$
|
—
|
|
* Based on the Company’s stock price on March
31, 2018 and December 31, 2017, respectively.
NOTE 12 –
Related
Party Transactions
Other than as set forth below, and as disclosed
in Notes 7, 8, 9, 10, 11 and 14, 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.
Sublease
The Company’s customer service and
distribution facility is subleased at $7,834 per month through CCI for a period of eighteen months. On March 1, 2017, the Company
gave ninety day written notice to terminate the sublease with no costs to terminate the lease. Beginning June 1, 2017, the Company
leases its customer service and distribution facility on a month-to-month basis for $4,000 per month from a third party.
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 expired 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 $45,000 for the three months ended March 31,
2019 and 2018, respectively. Deferred compensation totaling $877,750 as of March 31, 2019, is included in Accrued Compensation
in the accompanying condensed consolidated Balance Sheet. Deferred compensation includes $663,750 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
$4,707 and $3,608 for the three months ended March 31, 2019 and 2018, 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 expired 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 $20,000 for the three months ended March 31, 2019 and 2018, respectively. Deferred
compensation totaling $427,000 as of March 31, 2019, is included in Accrued Compensation in the accompanying condensed consolidated
Balance Sheets. Deferred compensation includes $313,333 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 $1,202 and $1,802 for the
three months ended March 31, 2019 and 2018, 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 Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(184,355
|
)
|
|
$
|
(612,243
|
)
|
Discontinued operations
|
|
|
—
|
|
|
|
(127,149
|
)
|
Gain of disposal of discontinued operations
|
|
|
238,315
|
|
|
|
—
|
|
Net profit (loss) attributable to the common stockholders
|
|
$
|
53,960
|
|
|
$
|
(739,392
|
)
|
|
|
|
|
|
|
|
|
|
Basic weighted average outstanding shares of common stock
|
|
|
81,272,408
|
|
|
|
57,711,496
|
|
Dilutive effect of options and warrants
|
|
|
—
|
|
|
|
—
|
|
Diluted weighted average common stock and common stock equivalents
|
|
|
81,272,408
|
|
|
|
57,711,496
|
|
|
|
|
|
|
|
|
|
|
Profit (loss) per share:
|
|
|
|
|
|
|
|
|
Net profit (loss) per share from continuing operations, basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
Net loss per share from discontinued operations, basic and diluted
|
|
|
—
|
|
|
|
(0.00
|
)
|
Net Profit (loss) per share total, basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
NOTE 14 – COMMITMENTS AND CONTINGENCIES
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 $11,333
and $18,906 for the three months ended March 31, 2019 and 2018, 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
The Company’s Convertible Notes Payable are collateralized by substantially all of the Company’s assets
and are personally guaranteed by the Company’s CEO and Australian Sapphire Corporation, a shareholder of the Company which is wholly-owned
by the Company’s CEO.
NOTE 15 – DISCONTINUED OPERATIONS
AND ASSETS HELD FOR SALE
On January 1, 2019, Reign Brands, Inc.,
a subsidiary of Reign Sapphire Corporation, entered into an Asset Purchase Agreement (the “Agreement”) with Co-Op Jewelers
LLC (“Co-Op”), whereby Reign Brands, Inc. sold operating assets of Reign Brands, Inc., consisting of substantially
all of the assets related to Coordinates Collection (“CC”). On January 1, 2019 (the “Closing Date”), the
parties executed the Asset Purchase Agreement and the final exhibits.
Upon the closing of the Agreement, Reign
Brands, Inc. sold substantially all of the operating assets of the CCI business, consisting of fixed assets and intellectual property
in exchange for an aggregate of $100,000 in cash. The Agreement contained customary closing conditions.
As a result of the sale, the Company had
reclassified CCI as assets and liabilities held for sale as of December 31, 2018. Discontinued operations during the three months
ended March 31, 2018 consist of the operations from CCI.
The following tables lists the assets of
discontinued operations and held for sale and liabilities of discontinued operations and held for sale as of December 31, 2018
and the discontinued operations for CCI for the three months ended March 31, 2018:
|
|
December 31,
|
|
|
|
2018
|
|
ASSETS
|
|
|
|
Current Assets:
|
|
|
|
|
Accounts Receivable
|
|
$
|
2,096
|
|
Total Current Assets of Discontinued Operations
|
|
|
2,096
|
|
Property, Plant and Equipment, net
|
|
|
—
|
|
TOTAL ASSETS OF DISCONTINUED OPERATIONS AND HELD FOR SALE
|
|
$
|
2,096
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
Accounts Payable
|
|
$
|
—
|
|
Estimated fair value of contingent payments, net
|
|
|
137,007
|
|
Deferred revenue
|
|
|
21,977
|
|
Other current liabilities
|
|
|
3,994
|
|
Total Current Liabilities of Discontinued Operations
|
|
|
162,978
|
|
TOTAL LIABILITIES OF DISCONTINUED OPERATIONS AND HELD FOR SALE
|
|
$
|
162,978
|
|
|
|
For the Three
|
|
|
|
Months Ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
|
|
|
Net revenues
|
|
$
|
250,101
|
|
Cost of sales
|
|
|
72,868
|
|
Gross profit
|
|
|
177,233
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
Advertising and marketing expenses
|
|
|
136,519
|
|
Stock based compensation - related party
|
|
|
—
|
|
General and administrative
|
|
|
167,863
|
|
Total operating expenses
|
|
|
304,382
|
|
|
|
|
|
|
Net loss of discontinued operations and held for sale
|
|
$
|
(127,149
|
)
|
NOTE 16 – SUBSEQUENT EVENTS
The Company’s convertible notes matured on March 31, 2019.
The convertible notes are in default and the Company is currently in discussions to restructure the terms of the convertible notes.
There were no other events subsequent to
March 31, 2019, and up to the date of this filing that would require disclosure.