NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 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, 2018, which has been derived from audited financial statements, and (b) the unaudited condensed
financial statements as of September 30, 2019 and 2018, 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 $13,203,000 and $13,001,000 at September 30, 2019 and December 31, 2018, respectively, had a working capital
deficit of approximately $3,987,000 and $3,844,000 at September 30, 2019 and December 31, 2018, respectively, had a net loss of
approximately $201,000 and $1,403,000 for the nine months ended September 30, 2019 and 2018, respectively, and net cash used in
operating activities of approximately $114,000 and $298,000 for the nine months ended September 30, 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
$1,100 ($1,100 from continuing operations and $0 from discontinued operations) and $11,000 ($11,000 from continuing operations
and $0 from discontinued operations), and $38,700 ($200 from continuing operations and $38,500 from discontinued operations) and
$337,700 ($44,600 from continuing operations and $293,100 from discontinued operations) for the three and nine months ended September
30, 2019 and 2018, respectively.
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:
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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 does not offer a warranty on its products. The Company allocates the entire transaction price to a single
performance obligation.
A description of our principal revenue generating activities
are as follows:
Retail sales – The Company
offers consumer products through its online websites. During the three and nine months ended September 30, 2019 and 2018, the Company
recorded retail sales of $0 and $0, and $88,461 ($0 from continuing operations and $88,461 from discontinued operations) and $461,163
($0 from continuing operations and $461,163 from discontinued operations), respectively.
Wholesale sales – The Company
offers product sold in bulk to distributors. During the three and nine months ended September 30, 2019 and 2018, the Company recorded
wholesale sales of $32,100 ($32,100 from continuing operations and $0 from discontinued operations) and $137,983 ($137,983 from
continuing operations and $0 from discontinued operations), and $1,990 ($0 from continuing operations and $1,990 from discontinued
operations) and $79,468 ($28,349 from continuing operations and $51,119 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 $0 as of September 30, 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 September 30, 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 for the nine months ended September 30, 2019 and 2018. The Company performs
its own in-house assessment based on gem guide and the current market price for metals to value its inventory on an annual basis
or if circumstances dictate sooner to determine if the estimated fair value is greater or less than cost. In addition, the inventory
is reviewed each quarter by the Company against industry prices from gem-guide and if there is a potential impairment, the Company
would appraise the inventory. The estimated fair value is subject to significant change due to changes in popularity of cut, perceived
grade of the clarity of the sapphires, the number, type and size of inclusions, the availability of other similar quality and size
sapphires, and other factors. As a result, the internal assessed value of the sapphires could be significantly lower from the current
estimated fair value. Loose sapphire jewels do not degrade in quality over time. The estimated fair value per management’s
internal assessment is greater than the cost, therefore, there is no indicator of impairment as of September 30, 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 September 30, 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 and nine months ended September 30, 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 and nine months ended September 30, 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 September
30, 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 September 30, 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 and nine months ended September 30, 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, the Company'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 two customers that accounted
for 100% of total revenues for the three and nine months ended September 30, 2019. There was one customer that accounted for 10%
of total revenue for the nine months ended September 30, 2018. There were no customers that accounted for 10% of total revenue
for the three months ended September 30, 2018. The Company had no customers that accounted for 10% or more of total accounts receivable
at September 30, 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.
Recently Issued Accounting Pronouncements Not Yet Adopted
Fair Value
Measurements
In August 2018, the FASB amended "Fair
Value Measurements" to modify the disclosure requirements related to fair value. The amendment removes requirements to
disclose (1) the amount of and reasons for transfers between levels 1 and 2 of the fair value hierarchy, (2) our policy related
to the timing of transfers between levels, and (3) the valuation processes used in level 3 measurements. It clarifies that, for
investments measured at net asset value, disclosure of liquidation timing is only required if the investee has communicated the
timing either to us or publicly. It also clarifies that the narrative disclosure of the effect of changes in level 3 inputs should
be based on changes that could occur at the reporting date. The amendment adds a requirement to disclose the range and weighted
average of significant unobservable inputs used in level 3 measurements. The guidance is effective for the Company with the Company’s
quarterly filing for the period ended March 31, 2020 and the Company will make the required disclosure changes in that filing.
Adoption will not have an impact on the Company’s consolidated results of operations, consolidated financial position, and
cash flows.
Retirement
Plans
In August 2018, the FASB amended "Retirement
Plans" to modify the disclosure requirements for defined benefit plans. For the Company, the amendment requires the disclosure
of the weighted average interest crediting rate used for cash balance plans and an explanation of the reasons for significant gains
and losses related to changes in the benefit obligation for the period. It removes the requirement to disclose the approximate
amount of future benefits covered by insurance contracts. The guidance is effective for the Company with the Company’s annual
filing for the year ended December 31, 2020 and the Company will make the required disclosure changes in that filing. Adoption
will not have an impact on the Company’s consolidated results of operations, consolidated financial position, and cash flows.
Intangibles
– Goodwill and other – Internal-Use Software
In August 2018, the FASB issued ASU No.
2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard aligns the requirements
for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing
implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use
software license). The Company’s accounting for the service element of a hosting arrangement that is a service contract is
not affected by the proposed amendments and will continue to be expensed as incurred in accordance with existing guidance. This
standard does not expand on existing disclosure requirements except to require a description of the nature of hosting arrangements
that are service contracts. This standard is effective for fiscal years, and for interim periods within those fiscal years, beginning
after December 15, 2019. Early adoption is permitted, including adoption in any interim period for which financial statements have
not been issued. Entities can choose to adopt the new guidance prospectively or retrospectively. The Company plans to adopt the
updated disclosure requirements of ASU No. 2018-15 prospectively in the first quarter of fiscal 2020, coinciding with the standard’s
effective date, and expects the impact from this standard to be immaterial.
Improvements
to Nonemployee Share-based Payment Accounting
In June 2018, the FASB issued ASU No. 2018-07
“Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”). ASU 2018-07 aligns the accounting
for share-based payment awards to employees and non-employees. Under ASU 2018-07 the existing employee guidance will
apply to nonemployee share-based transactions, except for specific guidance related to the attribution of compensation cost. ASU
2018-07 should be applied to all new awards granted after the date of adoption. ASU 2018-07 is effective for annual and interim
periods beginning after December 15, 2018, and early adoption is permitted. The Company adopted ASU 2018-07 effective
January 1, 2019; such adoption had no material impact on the Company’s consolidated financial statements.
Income Statement
– Reporting Comprehensive Income
In February 2018, the FASB issued Accounting
Standards Update No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220) (ASU 2018-02), which amends existing
standards for income statement-reporting comprehensive income to allow a reclassification from accumulated other comprehensive
income to retained earnings for stranded tax effects resulting from Tax Cuts and Jobs Act and improve the usefulness of information
reported to financial statements users. ASU 2018-02 will be effective for beginning after December 15, 2018, and early adoption
is permitted. The Company adopted ASU 2018-02 effective January 1, 2019; such adoption had no material impact on the Company’s
consolidated financial statements.
Goodwill
In January 2017, the FASB amended "Goodwill"
to simplify the subsequent measurement of goodwill. The amended guidance eliminates Step 2 from the goodwill impairment test. Instead,
impairment is defined as the amount by which the carrying value of the reporting unit exceeds its fair value, up to the total amount
of goodwill of the reporting unit. The new guidance is effective for the Company on January 1, 2020 and is not expected to have
an impact on our consolidated results of operations, consolidated financial position, and cash flows.
Financial
Instruments
In June 2016, the FASB amended "Financial
Instruments" to provide financial statement users with more decision-useful information about the expected credit losses on
debt instruments and other commitments to extend credit held by a reporting entity at each reporting date. During November 2018
and April 2019, the FASB made amendments to the new standard that clarified guidance on several matters, including accrued interest,
recoveries, and various codification improvements. The new standard, as amended, replaces the incurred loss impairment methodology
in the current standard with a methodology that reflects expected credit losses and requires consideration of a broader range of
reasonable and supportable information to support credit loss estimates. The new guidance is effective for us on January
1, 2020, and in the first half of 2019, we established an implementation team and began analyzing the impact on our current policies
and procedures to identify potential differences that would result from applying the requirements of the new standard. The implementation
team reports findings and progress of the project to management on a frequent basis. Through this process, we have identified appropriate
changes to our processes, systems, and controls to support recognition and disclosure under the new standard. The Company
is still evaluating the impact of the new standard on the Company’s consolidated results of operations, consolidated financial
position, and cash flows.
Other recently
issued accounting updates are not expected to have a material impact on the Company’s Interim Financial Statements.
Recently Adopted Accounting Pronouncements
Statement
of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU No. 2016-15, Statement
of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), to address
diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.
For public entities, the standard is effective for annual periods beginning after December 15, 2017, including interim periods
within those fiscal years. For all other entities, the standard is effective for fiscal years beginning after December 15,
2018, and interim periods within fiscal years beginning after December 15, 2019. The Company adopted ASU 2016-15 effective
January 1, 2018; such adoption had no material impact on the Company’s consolidated financial statements.
Leases (ASU
2019-01)
In March 2019, the FASB issued ASU 2019-01,
Leases (Topic 842) Codification Improvements, which removed the requirement for an entity to disclose in the interim periods after
adoption, the effect of the change on income from continuing operations, net income, any other affected financial statement line
item, and any affected per share amount. For lessors, the new leasing standard requires leases to be classified as a sales-type,
direct financing or operating leases. These criteria focus on the transfer of control of the underlying lease asset. This standard
and related update was effective for fiscal years beginning after December 15, 2018, and interim periods within those
fiscal years. Early adoption is permitted. The Company adopted ASU 2016-02 effective January 1, 2019; such adoption had no material
impact on the Company’s financial statements, given that the noncancelable term of the Company’s current lease is less
than 12 months.
Leases (ASU
2016-02)
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842), which requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for those
leases currently classified as operating leases under ASC 840 “Leases.” These amendments also require qualitative disclosures
along with specific quantitative disclosures. These amendments are effective for fiscal years beginning after December 15,
2018, including interim periods within those fiscal years. Early application is permitted. The Company can elect to record a cumulative-effect
adjustment as of the beginning of the year of adoption or apply a modified retrospective transition approach. The Company expects
that substantially all of its operating lease commitments will be subject to the new guidance and will be recognized as operating
lease liabilities and right-of-use assets upon adoption. The Company adopted ASU 2016-02 effective January 1, 2019; such adoption
had no material impact on the Company’s financial statements, given that the noncancelable term of the Company’s current
lease is less than 12 months.
NOTE 4 – INVENTORIES
Inventories consisted of the following
as of:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Loose stones
|
|
$
|
494,919
|
|
|
$
|
526,473
|
|
Finished goods
|
|
|
134,145
|
|
|
|
134,145
|
|
Samples
|
|
|
62,977
|
|
|
|
62,977
|
|
|
|
$
|
692,041
|
|
|
$
|
723,595
|
|
NOTE 5 – PROPERTY AND Equipment,
NET
Property and equipment consisted of the
following as of:
|
|
Estimated Life
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Office equipment
|
|
5 years
|
|
$
|
5,481
|
|
|
$
|
5,481
|
|
Computer equipment
|
|
3 years
|
|
|
40,171
|
|
|
|
40,171
|
|
Accumulated depreciation
|
|
|
|
|
(39,482
|
)
|
|
|
(30,122
|
)
|
|
|
|
|
$
|
6,170
|
|
|
$
|
15,530
|
|
Depreciation expense was $3,059 and $9,360,
and $3,157 and $9,470 for the three and nine months ended September 30, 2019 and 2018, respectively, and is classified in general
and administrative expenses in the condensed consolidated Statements of Operations.
NOTE 6 – INTANGIBLE
ASSETS, NET
Intangible assets consisted of the following
as of:
|
|
Estimated Life
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
3.3 – 4.5 years
|
|
$
|
260,000
|
|
|
$
|
260,000
|
|
Accumulated amortization
|
|
|
|
|
(195,559
|
)
|
|
|
(146,669
|
)
|
|
|
|
|
$
|
64,441
|
|
|
$
|
113,331
|
|
Future amortization expense related to intangible assets are
approximately as follows:
|
|
Total
|
|
2019
|
|
$
|
14,017
|
|
2020
|
|
|
37,818
|
|
2021
|
|
|
12,606
|
|
|
|
$
|
64,441
|
|
Amortization expense was $16,297 and $48,890,
and $58,901 and $175,786 for the three and nine months ended September 30, 2019 and 2018, respectively, and is classified in general
and administrative expenses in the condensed consolidated Statements of Operations.
NOTE 7 – DUE
TO RELATED PARTY
During the nine months ended September
30, 2019, the Company received no advances from its CEO/director, incurred business expenses that were paid by the CEO/director
of $1,262,816 (comprised of operating expenses) and had repayments of $1,253,666. The Company has a balance owed to the related
party of $1,255,955 and $1,246,805 at September 30, 2019 and December 31, 2018, respectively. During the three and nine months
ended September 30, 2019, the Company incurred $45,000 and $90,000, respectively, of compensation related to the CEO/director’s
employment agreement and $20,000 and $40,000, respectively, of deferred compensation related to the Secretary’s employment
agreement. As of September 30, 2019 and December 31, 2018, accrued compensation-related party was $1,434,750 and $1,239,750, respectively.
NOTE 8 – CONVERTIBLE
NOTES PAYABLE
Convertible notes payable consists of the
following:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
September 2019 Notes, issued September 29, 2019, with a maturity date of September 29, 2020, with an interest rate of 15%.
|
|
$
|
40,010
|
|
|
$
|
-
|
|
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
|
|
|
1,771,514
|
|
|
|
1,731,504
|
|
Debt discount
|
|
|
-
|
|
|
|
-
|
|
Convertible notes payable, net of unamortized debt discount
|
|
$
|
1,771,514
|
|
|
$
|
1,731,504
|
|
The following represents a summary of the
convertible debt terms at September 30, 2019:
|
|
Amount of Notes
|
|
|
Debt Discount
|
|
|
Maturity Dates thru
|
|
Conversion Price
|
|
|
Number of Warrants
|
|
|
Exercise Price
|
|
|
Warrants Exercisable thru
|
September 2019 Notes
|
|
$
|
40,010
|
|
|
$
|
-
|
|
|
9/29/2020
|
|
$
|
0.01
|
|
|
|
-
|
|
|
$
|
-
|
|
|
-
|
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
|
|
$
|
1,771,514
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
19,928,802
|
|
|
|
|
|
|
|
September 2019 Notes
On September 29,
2019 (“Issue Date”), the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”)
with respect to the sale and issuance of up to $125,000 aggregate principal amount of convertible promissory notes (the “Notes”)
with Alpha Capital and Brio Capital. On September 29, 2019, an initial investment amount of $40,010 was loaned, in aggregate, by
the investors.
The Notes mature
on September 29, 2020, and provide for interest to accrue at a 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 Notes. At any time after the Issue Date, the
holder of a Note, 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 a Note is $0.005 per share, subject to adjustment as provided therein. The Notes, for example, are subject to adjustment upon
certain events such as stock splits and if the Company issues any securities with more favorable terms than are described in the
Notes, the holder of a Note, may, at the holder’s option, become a part of the more favorable transaction documents. Each
Note also contains a prepayment penalty of 125% of the amount outstanding under the Note. The holder of a Note does not have the
right to convert any portion of their 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 “Beneficial Ownership Limitation”).
The 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 holder of a Note may be entitled to take various actions, which may include the acceleration of
amounts due under such Note and accrual of interest.
The Purchase Agreement includes additional
purchaser rights and Company obligations including obligations on the Company to satisfy the current public information requirements
under SEC Rule 144(c), to reserve a sufficient number of shares underlying the Notes, and other customary representations and warranties.
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 180th 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 September 30,
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 June 30, 2018, as conversion was contingent. On the 180th 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 calculated
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 $0, and $80,822 and $222,740 to interest expense in the condensed consolidated Statements of Operations during the three
and nine months ended September 30, 2019 and 2018, respectively, and has $0 of unamortized debt discount remaining as of September
30, 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 September 30, 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 September 30, 2019 and December
31, 2018. During the three and nine months ended September 30, 2019 and 2018, the Company recorded $0 and $0, respectively, on
Optional Redemption valuation.
Purchaser Conversion
The November 2017 Purchaser has the right
at any time after the November 2017 Original Issue Date until the outstanding balance of the Note has been paid in full, to convert
all or any part of the outstanding balance into shares (“November 2017 Purchaser Conversion Shares”) of the Company’s
common stock, of the portion of the outstanding balance being converted (the “November 2017 Conversion Amount”) divided
by the November 2017 Purchaser Conversion Price of $0.08, subject to potential future adjustments described below. If the total
outstanding balance of the November 2017 Note were convertible as of September 30, 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 September 30, 2019, the embedded derivative was re-measured
at fair value that was determined to be $0. During the three and nine months ended September 30, 2019 and 2018, the Company recorded
no change, and a gain of $0 and $75,000, 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 and nine months ended September 30, 2018. In
addition, the value of the restricted common shares of $263,522 was recorded as an extinguishment of debt in the three and nine
months ended September 30, 2018.
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 and nine months ended
September 30, 2018 with a debt discount of $0 as of September 30, 2018.
November 2016
As of December 31, 2016, the Company previously
entered into a Securities Purchase Agreement (the “November 2016 Purchase Agreement”) with respect to the sale and
issuance to certain institutional investors Alpha Capital Anstalt and Brio Capital Master Fund Ltd. (collectively “November
2016 Purchasers”) of up to (i) 833,354 shares of the Company’s Common Stock (the “November 2016 Incentive Shares”);
(ii) $287,502 aggregate principal amount of Secured Convertible Notes (the “November 2016 Notes”) and (iii) Common
Stock Purchase Warrants to purchase up to an aggregate of 3,593,775, as amended, shares of the Company’s Common Stock (the
“November 2016 Warrants”). The November 2016 Incentive Shares, November 2016 Notes and November 2016 Warrants were
issued on November 10, 2016 (the “November 2016 Original Issue Date”). November 2016 Purchasers received (i) November
2016 Incentive Shares at the rate of 2.8986 November 2016 Incentive Shares for each $1.00 of November 2016 Note principal issued
to such November 2016 Purchaser; (ii) a November 2016 Note with a principal amount of $1.00 for each $0.86956 for each $1.00 paid
by each purchaser for such purchaser’s November 2016 Note; and (iii) November 2016 Warrants to purchase up to a number of
shares of Common Stock equal to 100% of such purchaser’s November 2016 Note principal amount divided by $0.12 (“Purchaser
Conversion Price”), the conversion price in effect on the Initial Closing Date, as amended on May 30, 2017 to $0.08, with
a per share exercise price equal to $0.30, subject to adjustment. The aggregate cash subscription amount received by the Company
from the purchasers for the issuance of the November 2016 Incentive Shares, November 2016 Notes and November 2016 Warrants was
approximately $244,945 (the “Subscription Amount”) which was issued at a $42,557 original issue discount from the face
value of the Note.
The November 2016 Notes 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 September 30, 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 September
30, 2019 and December 31, 2018. During the three and nine months ended September 30, 2019 and 2018, the Company recorded $0 and
a gain of $21,080 and $32,585, respectively, on Optional Redemption valuation in the change in fair value of derivative liabilities
in the accompanying condensed consolidated Statements of Operations.
Purchaser Conversion
The November 2016 Purchaser has the right
at any time after the November 2016 Original Issue Date until the outstanding balance of the Note has been paid in full, to convert
all or any part of the outstanding balance into shares (“November 2016 Purchaser Conversion Shares”) of the Company’s
common stock, of the portion of the outstanding balance being converted (the “November 2016 Conversion Amount”) divided
by the November 2016 Purchaser Conversion Price of $0.08, as amended on May 30, 2017, subject to potential future adjustments described
below. If the total outstanding balance of the November 2016 Note were convertible as of September 30, 2019, the November 2016
Note would have been convertible into 3,593,775 shares of our common stock.
The Company evaluated the note under the
requirements of ASC 480 “Distinguishing Liabilities From Equity” and concluded that the Note does not fall within the
scope of ASC 480. The Company next evaluated the November 2016 Note under the requirements of ASC 815 “Derivatives and Hedging”.
Due to the existence of the anti-dilution provision which reduces the November 2016 Purchaser Conversion Price in the event of
subsequent dilutive issuances by the Company below the November 2016 Purchaser Conversion Price as described above, the November
2016 Purchaser Conversion feature does not meet the definition of “indexed to” our stock, and the scope exception to
ASC 815’s derivative accounting provisions does not apply. The Company also evaluated the embedded derivative criteria in
ASC 815, and concluded that the Purchaser Conversion feature meets all of the embedded derivative criteria in ASC 815, and therefore,
the November 2016 Purchaser Conversion feature meets the definition of an embedded derivative that should be separated from the
note and accounted for as a derivative liability.
The embedded derivative was recorded as
a derivative liability on the condensed consolidated Balance Sheet at its fair value of $32,016 at the date of issuance. At each
subsequent reporting date, the fair value of the embedded derivative liability will be remeasured and changes in the fair value
will be recorded in the condensed consolidated Statements of Operations. At September 30, 2019, the embedded derivative was re-measured
at fair value that was determined to be $0. During the three and nine months ended September 30, 2019 and 2018, the Company recorded
$0 and a gain of $0 and $75,000, 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 and nine months ended September 30, 2018. In
addition, the value of the restricted common shares of $263,522 was recorded as an extinguishment of debt in the three and nine
months ended September 30, 2018.
November 2016 Purchaser Warrants
The November 2016 Purchaser Warrants allow
the November 2016 Purchaser to purchase up to a number of shares of common stock equal to 100% of such purchaser’s Note principal
amount divided by $0.08, as amended on May 30, 2017, with a per share exercise price equal to $0.15, as amended on November 16,
2017, subject to adjustment.
The term of the Purchaser Warrants is at
any time on or after the six (6) month anniversary of the November 2016 Original Issue Date and on or prior to the five (5) year
anniversary of the November 2016 Initial Trading Date of our common stock on a Trading Market.
The exercise price of the November 2016
Purchaser Warrants is $0.15, as amended on November 16, 2017, per share of our common stock, as may be adjusted from time to time
pursuant to the antidilution provisions of the November 2016 Purchaser Warrants.
The November 2016 Purchaser Warrants are
exercisable by the November 2016 Purchaser in whole or in part, as either a cash exercise or as a “cashless” exercise.
The Company evaluated the November 2016
Warrants under ASC 480 “Distinguishing Liabilities From Equity” and ASC 815 “Derivatives and Hedging”.
Due to the existence of the antidilution provision, which reduces the November 2016 Exercise Price and November 2016 Conversion
Price in the event of subsequent November 2016 Dilutive Issuances, the November 2016 Purchaser Warrants are not indexed to our
common stock, and the Company has determined that the November 2016 Purchaser Warrants meet the definition of a derivative under
ASC 815. Accordingly, the November 2016 Purchaser Warrants were recorded as derivative liabilities in the condensed consolidated
Balance Sheet at their fair value of $108,597 at the date of issuance. At each subsequent reporting date, the fair value of the
Purchaser Warrants will be remeasured and changes in the fair value will be reported in the condensed consolidated Statements of
Operations. On November 16, 2017, the November 2016 Warrants were modified in accordance with ASC 470-50-40 and ASC 815 which eliminated
the antidilution provision of the exercise price, fixed the exercise price at $0.15 per share, and fixed the number of shares the
warrants can be exercised into; thereby eliminating the requirement for derivative accounting and liability classification. As
a result, the warrant re-valuation was reclassified to additional paid-in-capital resulting in a warrant liability of $0 as of
November 16, 2017.
November 2016 Purchaser Common Stock
The November 2016 Purchasers were issued
a total of 833,354 shares of the Company’s common stock, valued at $100,002 (based on the stock price on the date of issuance).
As of December 31, 2016, the total proceeds
of $244,945 previously received by the Company for the November 2016 Note, November 2016 Purchaser Common Stock, and November 2016
Purchaser Warrants, was allocated first to the November 2016 Purchaser Common Stock, November 2016 Purchaser Warrants, and embedded
derivative liabilities at their initial fair values determined at the issuance date. Since the difference between the full fair
value of November 2016 Purchaser Common Stock, November 2016 Purchaser Warrants, and embedded derivative liabilities of $240,615
was less than the proceeds of $244,945, no additional amounts were recorded.
Debt Discount
The Company issued the November 2016 Notes
with warrants and conversion features that require liability treatment under ASC 815. As such, the proceeds of the notes were allocated,
based on fair values, as follows: $100,002 to the common shares issued; $108,567 to the warrants granted; $42,557 to the original
issue discount; and $32,016 to the embedded derivative, resulting in a debt discount to such notes of $283,172. The debt discount
is accreted over the term of the convertible notes to interest expense in the accompanying condensed consolidated Statements of
Operations.
The Company recorded debt discount accretion
of $0 and $0, and $0 and $0 to interest expense in the condensed consolidated Statements of Operations during the three and nine
months ended September 30, 2019 and 2018, respectively, and has an unamortized debt discount of $0 as of September 30, 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 September 30, 2019 and December 31, 2018. During
the three and nine months ended September 30, 2019 and 2018, the Company recorded $0 and a gain of $0 and $97,755, respectively,
on Optional Redemption valuation in the change in fair value of derivative liabilities in the accompanying condensed consolidated
Statements of Operations.
December 2015 Purchaser Conversion
The December 2015 Purchaser has the right
at any time after the December 2015 Original Issue Date until the outstanding balance of the December 2015 Note has been paid in
full, to convert all or any part of the outstanding balance into shares (“December 2015 Purchaser Conversion Shares”)
of the Company’s common stock, of the portion of the outstanding balance being converted (the “December 2015 Conversion
Amount”) divided by the December 2015 Purchaser Conversion Price of $0.08, as amended on May 30, 2017, subject to potential
future adjustments described below. If the total outstanding balance of the Note were convertible as of September 30, 2019, the
December 2015 Note would have been convertible into 10,781,250 shares of our common stock.
The Company evaluated the note under the
requirements of ASC 480 “Distinguishing Liabilities From Equity” and concluded that the December 2015 Note does not
fall within the scope of ASC 480. The Company next evaluated the December 2015 Note under the requirements of ASC 815 “Derivatives
and Hedging”. Due to the existence of the anti-dilution provision which reduces the December 2015 Purchaser Conversion Price
in the event of subsequent dilutive issuances by the Company below the December 2015 Purchaser Conversion Price as described above,
the December 2015 Purchaser Conversion feature does not meet the definition of “indexed to” the Company’s stock,
and the scope exception to ASC 815’s derivative accounting provisions does not apply. The Company also evaluated the embedded
derivative criteria in ASC 815, and concluded that the December 2015 Purchaser Conversion feature meets all of the embedded derivative
criteria in ASC 815, and therefore, the December 2015 Purchaser Conversion feature meets the definition of an embedded derivative
that should be separated from the note and accounted for as a derivative liability.
The embedded derivative was recorded as
a derivative liability on the condensed consolidated Balance Sheet using “Monte Carlo Method” modeling and at each
subsequent reporting date, the fair value of the embedded derivative liability will be remeasured and changes in the fair value
will be recorded in the condensed consolidated Statements of Operations. The original fair value of the derivative was $88,983
and at September 30, 2019, the embedded derivative was re-measured at fair value that was determined to be $0. During the three
and nine months ended September 30, 2019 and 2018, the Company recorded $0, and a gain of $0 and $224,998 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 and nine months ended September 30, 2018. In
addition, the value of the restricted common shares of $263,522 was recorded as an extinguishment of debt in the three and nine
months ended September 30, 2018.
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 and nine months ended
September 30, 2019 and 2018, respectively, and has no unamortized debt discount remaining as of September 30, 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 $0 at September 30, 2019 was $88,937 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 December 31, 2018, the board of directors and shareholders of the Company previously authorized the adoption and implementation
of the Company’s 2015 Equity Incentive Plan (the “2015 Plan”). The principal purpose of the 2015 Plan is to
attract, retain and motivate employees, officers, directors, consultants, agents, advisors and independent contractors of the
Company and its related companies by providing them the opportunity to acquire a proprietary interest in the Company and to link
their interests and efforts to the long-term interests of the Company's shareholders. Under the 2015 Plan, an aggregate of 20,000,000
shares of the Company's common stock have initially been reserved for issuance pursuant to a variety of stock-based compensation
awards, including stock options, stock appreciation rights, stock awards, restricted stock, restricted stock units and other stock
and cash-based awards. The exercise price for each option may not be less than fair market value of the common stock on the date
of grant, and shall vest as determined by the Company’s board of directors but shall not exceed a ten-year period.
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 June 30, 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 $0, and $3,750 and $11,250 under general and administrative expenses in the accompanying condensed
consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018, respectively, with $0 remaining
to be amortized. As of September 30, 2019, the Advisors had vested in 100,000 shares with 0 shares to vest over the remaining
vesting period.
As
of June 30, 2018, the Company previously granted to its CEO, options to purchase 10,000,000 shares of our common stock under the
2015 Plan, valued at $2,500,000 (based on the Black Scholes valuation model on the date of grant). The Black-Scholes option-pricing
model used the following weighted average assumptions as of December 31, 2016: (i) no dividend yield for each year, (ii) volatility
of 35.6 percent, (iii) risk-free interest rate of 1.87 percent, (iv) stock price of $0.25, (v) exercise price of $0.005, and (vi)
expected life of 6.0 years. The options will vest 50% on the first anniversary of the grant date (“First Year Vest”)
and the remaining 50% of the shares shall vest in twelve (12) equal installments on the first day of each calendar month following
the first anniversary of the grant date beginning on June 1, 2016 and ending on June 1, 2017 (“Second Year Vest”),
provided that CEO is continuously employed by the Company from the grant date through such applicable vesting date. Notwithstanding
the foregoing, 100% of the shares of the Company’s common stock subject to the option shall fully vest if the Company shall
successfully sell all of the shares of its common stock included in the primary offering of such common stock by the Company pursuant
to the registration statement on Form S-1 to be filed with the Securities and Exchange Commission within ninety (90) days of the
grant date. The First Year Vest options will amortize to expense over a 12 month period beginning May 2015 through April 2016
and the Second Year Vest options will amortize to expense over a 24 month period beginning May 2015 through April 2017. The Company
recognized expense of $0 and $0 for the three and nine months ended September 30, 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 September 30, 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 June 30, 2019
|
|
|
10,000,000
|
|
|
$
|
0.005
|
|
|
$
|
121,000
|
|
Exercisable at June 30, 2019
|
|
|
10,000,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Expected to be
vested
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
*
|
Based
on the Company’s stock price on September 30, 2019 and December 31, 2018, 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
$1,800 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 months 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 $90,000 for the
three and nine months ended September 30, 2019 and 2018, respectively. Deferred compensation totaling $967,750 as of September
30, 2019, is included in Accrued Compensation in the accompanying condensed consolidated Balance Sheet. Deferred compensation
includes $753,750 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 $0 and $6,768, and $3,600 and $9,100 for the three and nine months
ended September 30, 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 months 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 $40,000 for the three and nine months ended September 30, 2019 and 2018,
respectively. Deferred compensation totaling $467,000 as of September 30, 2019, is included in Accrued Compensation in the accompanying
condensed consolidated Balance Sheets. Deferred compensation includes $353,333 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
$0 and $2,433, and $1,800 and $5,400 for the three and nine months ended September 30, 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 Nine Months Ended
September 30,
|
|
|
For the Three Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Loss from continuing operations
|
|
$
|
(439,747
|
)
|
|
$
|
(1,092,999
|
)
|
|
$
|
(138,575
|
)
|
|
$
|
(328,539
|
)
|
Discontinued operations
|
|
|
-
|
|
|
|
(309,687
|
)
|
|
|
-
|
|
|
|
(27,448
|
)
|
Gain of disposal of discontinued operations
|
|
|
238,315
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net loss attributable to the common stockholders
|
|
$
|
(201,432
|
)
|
|
$
|
(1,402,686
|
)
|
|
$
|
(138,575
|
)
|
|
$
|
(355,987
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average outstanding shares of common stock
|
|
|
81,272,408
|
|
|
|
61,710,263
|
|
|
|
81,272,408
|
|
|
|
65,460,451
|
|
Dilutive effect of options and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted weighted average common stock and common stock equivalents
|
|
|
81,272,408
|
|
|
|
61,710,263
|
|
|
|
81,272,408
|
|
|
|
65,460,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share from continuing operations, basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
Net loss per share from discontinued operations, basic and diluted
|
|
|
-
|
|
|
|
(0.01
|
)
|
|
|
-
|
|
|
|
(0.00
|
)
|
Net loss per share total, basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(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 $10,500 and $33,064, and $6,013 and $34,056 for the three and nine months ended September 30, 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 (“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 and recognized a gain of $238,315 on
the disposal of discontinued operations. The Agreement contained customary closing conditions.
The
following table reconciles the gain realized from the disposal of discontinued operations:
|
|
January 1,
|
|
|
|
2019
|
|
Cash
|
|
$
|
100,000
|
|
Intangble assets, net
|
|
|
481,947
|
|
Goodwill
|
|
|
(481,947
|
)
|
Estimated fair value of contingent payments, net
|
|
|
137,007
|
|
Other current liabilities
|
|
|
1,308
|
|
Gain on disposal of discontinued operations
|
|
$
|
238,315
|
|
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 and nine months ended September 30, 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 and nine months ended September 30,
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
Nine Months Ended
|
|
|
For the
Three Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
512,282
|
|
|
$
|
90,451
|
|
Cost of sales
|
|
|
156,530
|
|
|
|
12,660
|
|
Gross profit
|
|
|
355,752
|
|
|
|
77,791
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Advertising and marketing expenses
|
|
|
293,087
|
|
|
|
38,526
|
|
Stock based compensation - related party
|
|
|
-
|
|
|
|
-
|
|
General and administrative
|
|
|
372,352
|
|
|
|
66,713
|
|
Total operating expenses
|
|
|
665,439
|
|
|
|
105,239
|
|
|
|
|
|
|
|
|
|
|
Net loss of discontinued operations and held for sale
|
|
$
|
(309,687
|
)
|
|
$
|
(27,448
|
)
|
NOTE
16 – SUBSEQUENT EVENTS
Effective
September 26, 2019, the Board of Directors and the majority shareholder approved a reverse stock split of the Company’s
issued and outstanding common stock at a ratio of 1-for-150. The Board of Directors fixed September 25, 2019 as the record date
for determining the stockholders entitled to receive notice of the proposed reverse stock split. The reverse stock split will
take effect upon the filing of a certificate of amendment with the State of Delaware, and approval by the Financial Industry Regulatory
Authority (“FINRA”).
There
were no other events subsequent to September 30, 2019, and up to the date of this filing that would require disclosure.