NOTES
TO THE CONDENSED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
FOR
THE QUARTER ENDED JUNE 30, 2019
Note
1 - Organization and Operations
Capital
Park Holdings Corp., which we refer to as “the Company,” “our Company,” “we,” “us”
or “our,” was originally incorporated under the laws of the State of Nevada as Snap Online Marketing Inc. on
June 4, 2012 and subsequently changed its name to LifeLogger Technologies Corp., which we were referred to as “LifeLogger.”
On April 10, 2019, we reincorporated as a Delaware corporation and changed our name to Capital Park Holdings Corp. Our principal
business address is 8117 Preston Road, Suite 300, Dallas, Texas 75225, and our telephone number is (972) 525-8546. We registered
as a reporting company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) on April 26, 2013.
We are currently listed for trading on the OTC Pink under the trading symbol “LOGG.” We are in the process of registering
a new trading symbol on the OTC Pink. See Note 13 “Subsequent Events” for organizational and operational changes that
occurred after March 31, 2019.
On
January 9, 2019, Capital Park Opportunities Fund LP, which we refer to as “Capital Park Opportunities Fund,” acquired
(i) from SBI Investments LLC, 2014-1, a statutory series of Delaware limited liability corporation (“SBI”) and Old
Main Capital, LLC, a Florida series limited liability corporation (“Old Main,” together with SBI, the “Selling
Shareholders”) 335,183 shares of the Company’s common stock (the “Common Stock”) owned by the Selling
Shareholders and (ii) from Stewart Garner (the “Series A Preferred Stock Holder”) 1,000 shares of the Company’s
Series A Preferred Stock (the “Preferred Stock”), collectively representing 84.4% of the voting power of the Company’s
voting stock. Capital Park Opportunities Fund is managed by Eric Blue, our Chairman, Chief Executive Officer (“CEO”)
and Chief Investment Officer (“CIO”).
On
April 10, 2019, we converted from a Nevada corporation to a Delaware corporation and adopted new bylaws and a new certificate
of incorporation, which amended and restated the company’s Articles of Incorporation in Nevada. Under the new certificate
of incorporation, we created an additional series of our stock now named Class B common stock, par value $0.001 per share. Each
share of Class B common stock is identical to the Class A common stock in liquidation, dividend and similar rights. The only difference
between our Class B common stock and our Class A common stock is that each share of Class B common stock has 10 votes for each
share held, while the Class A common stock has a single vote per share, and certain actions cannot be taken without the approval
of the holders of the Class B common stock.
Corporate
Structure
The
Company is structured as a Delaware corporation that we expect to be treated as a corporation for U.S. federal income tax purposes.
Your rights as a holder of shares, and the fiduciary duties of the Company’s Board of Directors and executive officers,
and any limitations relating thereto are set forth in the documents governing the Company and may differ from those applying to
a Delaware corporation. However, the documents governing the Company specify that the duties of its directors and officers will
be generally consistent with the duties of a director of a Delaware corporation. The Company’s Board of Directors will oversee
the management of the Company and our businesses. Initially, the Company’s Board of Directors will be comprised of five
(5) directors, with three (3) of those directors appointed by holders of the Company’s Class A common stock and two (2)
of those directors appointed by holders of the Company’s Class B common stock, and at least three (3) of whom will be the
Company’s independent directors.
Prior
to the transactions that took place on January 9, 2019, we were a lifelogging software company that developed and hosted a proprietary
cloud-based software solution accessible on iOS and Android devices that offers an enhanced media experience for consumers
by augmenting videos, livestreams and photos with additional context information and providing a platform that makes it easy
to find and use that data when viewing or sharing media. Subsequent to transactions that took place on January 9, 2019, in
addition to its lifelogging software business, the Company has been structured as a holding company with a business strategy
focused on owning subsidiaries engaged in a number of diverse business activities.
Note
2 - Summary of Significant Accounting Policies
Liquidity
and Basis of Presentation
The
accompanying unaudited condensed interim financial statements are expressed in United States dollars (“USD”) and
related Notes have been prepared in accordance with accounting principles generally accepted in the United States of America
(“U.S. GAAP”) for interim financial information, and with the rules and regulations of the United States Securities
and Exchange Commission (“SEC”) to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited condensed interim
financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of
management, necessary to present a fair statement of the results for the interim periods presented. Unaudited interim results
are not necessarily indicative of the results for the full fiscal year. These unaudited condensed interim financial
statements should be read in conjunction with the financial statements of the Company for the year ended December 31, 2018
and Notes thereto contained in the information as part of the Company’s Annual Report on Form 10-K, which was filed
with the Securities and Exchange Commission on April 15, 2019.
As
discussed in Note 10, the Company has been successful in obtaining financing of $30 million to
acquire certain assets from The Procter & Gamble Company, an Ohio corporation (“P&G”).
Use
of Estimates
The
preparation of condensed interim financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the condensed interim financial statements and the reported
amounts of expenses during the reporting period. Areas involving significant estimates and assumptions include deferred income
tax assets and related valuation allowance, accruals, useful lives of property and equipment and intangible assets, and assumptions
used in the going concern assessment. Actual results could differ from those estimates. These estimates are reviewed periodically,
and, as adjustments become necessary, they are reported in earnings in the period in which they become known.
Fair
Value of Financial Instruments
The
Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial
instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to
measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in
accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value
measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37
establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three
(3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical
assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by
Paragraph 820-10-35-37 are described below:
Level
1
|
Quoted
market prices available in active markets for identical assets or liabilities as of the reporting date.
|
|
|
Level
2
|
Pricing
inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date.
|
|
|
Level
3
|
Pricing
inputs that are generally observable inputs and not corroborated by market data.
|
Financial
assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or
similar techniques and at least one significant model assumption or input is unobservable.
Note
2 - Summary of Significant Accounting Policies (continued)
Fair
Value of Financial Instruments (continued)
The
fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within
more than one level described above, the categorization is based on the lowest level input that is significant to the fair value
measurement of the instrument. The Company’s assessment of the significance of a particular input to the fair value measurement
in its entirety requires judgment and considers factors specific to the asset or liability including certain market assumptions
and pertinent information available to management. The carrying amount of the Company’s financial assets and liabilities,
such as cash, accounts payable and accrued liabilities approximate their fair value because of the short maturity of those instruments.
The non-current financial liabilities including Notes payables and derivative liabilities are fair valued as described below.
Related
Parties
The
Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure
of related party transactions.
Commitments
and contingencies
The
Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain
conditions may exist as of the date the condensed interim financial statements are issued, which may result in a loss to the Company,
but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities,
and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings
that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived
merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected
to be sought therein.
If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in the Company’s condensed interim financial statements.
If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable
but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable
and material, is disclosed.
Loss
contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would
be disclosed
Note
2 - Summary of Significant Accounting Policies (continued)
Deferred
Tax Assets and Income Tax Provision
The
Company accounts for income taxes under Section 740-10-30 of the FASB Accounting Standards Codification, which requires recognition
of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the condensed
interim financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences
between the condensed interim financial statement and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent
management concludes it is more likely than not that the assets will not be realized.
Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the statements of operations in the period that includes the enactment date. Management makes judgments
as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax
liability. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable
income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
Earnings
per Share
Earnings
Per Share (“EPS”) is the amount of earnings attributable to each share of common stock. For convenience, the term
is used to refer to either earnings or loss per share. EPS is computed pursuant to section 260-10-45 of the FASB Accounting Standards
Codification. Pursuant to ASC Paragraphs 260-10-45-10 through 260-10-45-16. Basic EPS shall be computed by dividing income available
to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the
period. Income available to common stockholders shall be computed by deducting both the dividends declared in the period on preferred
stock (whether or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not earned)
from income from continuing operations (if that amount appears in the statements of operations) is increased to include the number
of additional common shares that would have been outstanding if the dilutive potential common shares had been issued during the
period to reflect the potential dilution that could occur from common shares issuable through contingent shares issuance arrangement,
stock options or warrants.
Diluted
earnings per share exclude all potentially dilutive shares if their effect is anti-dilutive.
Subsequent
Events
The
Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent
events. The Company will evaluate subsequent events through the date when the financial statements were issued
Recently
issued accounting pronouncements
In
August, 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure
Requirements for Fair Value Measurement, which eliminates disclosures such as the amount of and reasons for transfers between
Level 1 and Level 2 of the fair value hierarchy and adds new disclosure requirements for Level 3 measurements. The ASU is effective
for fiscal years beginning after December 15, 2019, with early adoption is permitted. We are currently in the process of evaluating
the effects of this pronouncement on our financial statements, including potential early adoption.
Note
2 - Summary of Significant Accounting Policies (continued)
Recently
issued accounting pronouncements (continued)
In
August 2018, the FASB issued ASU 2018-13, “Changes to Disclosure Requirements for Fair Value Measurements”, which
will improve the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard
removes, modifies, and adds certain disclosure requirements, and is effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2019. The Company will be evaluating the impact this standard will have on the Company’s
financial statements.
In
June 2018, the FASB issued an accounting pronouncement (FASB ASU 2018-07) to expand the scope of ASC Topic 718, Compensation -
Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. The pronouncement
is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early
adoption permitted. We are currently in the process of evaluating the effects of this pronouncement on our financial statements,
including potential early adoption.
In
February 2016, an accounting pronouncement was issued by the FASB to replace existing lease accounting guidance. This pronouncement
is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding
lease liabilities on the balance sheet for most leases. Expenses associated with leases will continue to be recognized in a manner
similar to current accounting guidance. This pronouncement is effective for annual and interim periods beginning after December
15, 2018, with early adoption permitted. The adoption is required to be applied on a modified retrospective basis for each prior
reporting period presented. The Company has not yet determined the effect that the adoption of this pronouncement may have on
the financial position and/or results of operations.
Simplifying
the measurement for goodwill – In January 2017, the FASB issued guidance to simplify the accounting for goodwill impairment.
The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill
impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying
amount of goodwill. The new guidance will be applied prospectively and is effective January 1, 2020, with early adoption permitted
beginning January 1, 2017.
The
Company has evaluated all other new ASUs issued by FASB and has concluded that these updates do not have a material effect on
the Company’s condensed interim financial statements as of June 30, 2019.
Note
3 - Accounts Payable
|
|
As at
|
|
|
|
June 30, 2019
|
|
|
December 31,
2018
|
|
Accounts payable
|
|
$
|
505,837
|
|
|
$
|
181,831
|
|
Trades payable
|
|
|
2,215,538
|
|
|
|
-
|
|
Other payable
|
|
|
24,307
|
|
|
|
24,307
|
|
|
|
$
|
2,745,682
|
|
|
$
|
206,138
|
|
Accounts
payable include $nil (2018: $28,623) due to a former executive of the Company. The payable balance arose primarily due to consulting
charges. The payable is unsecured, non-interest bearing and due on demand.
Accounts
payable include $251,498 (2018: $49,441) due to a related party. The payable balance arose primarily due to financing received
from a related party to settle outstanding accounts payable. The payable is unsecured, non-interest bearing and due on demand.
Note
4 – Convertible Notes Payable
The
movement in convertible Notes payable is as follows:
|
|
|
|
Original Amount
|
|
|
Unamortized Discount
|
|
|
Guaranteed Interest Accrued
|
|
|
Net Settlement
|
|
|
December 31, 2018
|
|
Opening as of January 1, 2016
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Conversion on opening balance
|
|
(i)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issued: March 9, 2016
|
|
(ii)
|
|
|
250,000
|
|
|
|
-
|
|
|
|
10,000
|
|
|
|
-
|
|
|
|
260,000
|
|
Issued: March 9, 2016
|
|
(iii)
|
|
|
296,153
|
|
|
|
-
|
|
|
|
14,808
|
|
|
|
(180,908
|
)
|
|
|
130,053
|
|
Issued: June 9, 2016
|
|
(iv)
|
|
|
87,912
|
|
|
|
-
|
|
|
|
4,396
|
|
|
|
-
|
|
|
|
92,308
|
|
Issued: June 30, 2016
|
|
(v)
|
|
|
550,000
|
|
|
|
(8,956
|
)
|
|
|
22,000
|
|
|
|
(99,713
|
)
|
|
|
463,331
|
|
Issued: April 11, 2017
|
|
(vi)
|
|
|
19,167
|
|
|
|
-
|
|
|
|
958
|
|
|
|
-
|
|
|
|
20,125
|
|
Issued: April 11, 2017
|
|
(vii)
|
|
|
19,167
|
|
|
|
-
|
|
|
|
958
|
|
|
|
-
|
|
|
|
20,125
|
|
Issued: May 2, 2017
|
|
(vi)
|
|
|
14,444
|
|
|
|
-
|
|
|
|
722
|
|
|
|
-
|
|
|
|
15,166
|
|
Issued: May 2, 2017
|
|
(vii)
|
|
|
14,444
|
|
|
|
-
|
|
|
|
722
|
|
|
|
-
|
|
|
|
15,166
|
|
Issued: June 1, 2017
|
|
(vi)
|
|
|
15,000
|
|
|
|
-
|
|
|
|
750
|
|
|
|
-
|
|
|
|
15,750
|
|
Issued: June 1, 2017
|
|
(vii)
|
|
|
15,000
|
|
|
|
-
|
|
|
|
750
|
|
|
|
-
|
|
|
|
15,750
|
|
Issued: August 8, 2017
|
|
(vi)
|
|
|
12,778
|
|
|
|
(566
|
)
|
|
|
639
|
|
|
|
-
|
|
|
|
12,851
|
|
Issued: August 8, 2017
|
|
(vii)
|
|
|
12,778
|
|
|
|
(567
|
)
|
|
|
639
|
|
|
|
-
|
|
|
|
12,851
|
|
Issued: September 1, 2017
|
|
(vi)
|
|
|
11,667
|
|
|
|
(725
|
)
|
|
|
584
|
|
|
|
-
|
|
|
|
11,526
|
|
Issued: November 15, 2017
|
|
(vi)
|
|
|
10,278
|
|
|
|
(996
|
)
|
|
|
514
|
|
|
|
-
|
|
|
|
10,294
|
|
Issued: November 15, 2017
|
|
(vi)
|
|
|
10,278
|
|
|
|
(994
|
)
|
|
|
514
|
|
|
|
-
|
|
|
|
10,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending as of December 31, 2018
|
|
|
|
$
|
1,339,066
|
|
|
$
|
(11,809
|
)
|
|
$
|
58,954
|
|
|
$
|
(280,621
|
)
|
|
$
|
1,105,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note Conversion: January 9, 2019
|
|
|
|
$
|
(1,339,066
|
)
|
|
$
|
11,809
|
|
|
$
|
(58,954
|
)
|
|
$
|
280,621
|
|
|
$
|
(1,105,590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending as of June 30, 2019
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Note
4 – Convertible Notes Payable (continued)
(i)
Equity Line of Credit
On
March 9, 2016, the Company issued an 8% convertible promissory Note in the principal amount of $250,000 to Old Main Capital, LLC
(“Old Main”) as a commitment fee for entering into a term sheet whereby Old Main agreed to provide the Company
with up to $5,000,000 in financing over a 24 month period through the purchase of the Company’s common stock.
The
terms and conditions of the $250,000 Note are substantially identical to the March 2016 Note below except the interest rate which
is 8% per annum, half of which is guaranteed and the total amount of interest due on the Note for a period of six months is deemed
earned as of the date the Note was issued.
During
the six months ended June 30, 2019, the remaining balance had been converted into equity shares. Refer to Note 9 for further details.
As
at June 30, 2019, the Company owed $nil in principal and the accrued interest was $0.
(ii)
Securities Purchase Agreement and Convertible Notes Issued to Old Main Capital, LLC
On
March 9, 2016 (the “Issuance Date”) the Company closed on the transaction contemplated by the securities purchase
agreement (the “SPA”) the Company entered into with Old Main Capital, LLC (“Old Main”), whereby Old Main
agreed to purchase from the Company a convertible promissory Note (the “March 2016 Note”) in the original principal
amount of $296,153 for $269,500, net of an original issuance discount of $26,653 (the “Purchase Price”), included
in interest expenses. The March 2016 Note bears interest at the rate of 10% per annum, of which there is a guaranteed interest
for a period of six (6) months as of the Issuance date. The Purchase Price paid were as follows: (i) $84,500 was paid in cash
to the Company on March 12, 2016 (ii) $100,000 was paid in cash to the Company on April 6, 2016 (iii) $85,000 May 6, 2016. The
principal from each funding date and the accrued and unpaid interest relating to that principal amount is due and payable on March
9, 2017 (the “Maturity Date”). Any amount of principal or interest that is due under the March 2016 Note which is
not paid by the Maturity Date will bear interest at the rate of 24% per annum until it is paid and subject to further increase
as discussed below.
On
June 9, 2016 the Company amended the March 2016 Note whereby the Company revised the Note to remove the equity condition limitations,
removed the amortization payment requirements and to permit voluntary conversions in common stock. The Company also revised the
conversion price to mean the lesser of (a) the closing price of the Company’s common stock on March 9, 2016 or (b) 60% of
the lowest VWAP price of the Company’s common stock for the 15 consecutive trading days ending on the trading day that is
immediately prior to any applicable conversion date. The amendment was accounted for using the extinguishment of debt method.
The Company recorded nil (December 31, 2016 - $88,956) loss on extinguishment of debt, which is included in other expenses.
During
the six months ended June 30, 2019, the remaining balance had been converted into equity shares. Refer to Note 9 for further details.
As
at December 31, 2018 the Company owed $115,245 (June 30, 2019- $nil) in principal and the accrued interest was $197,149 (June
30, 2019- $nil), which consisted of the guaranteed interest accrued of $14,808 (June 30, 2019- $nil) included in the convertible
Notes balance and the remainder of $182,341 (June 30, 2019- $nil) was recorded in accrued expenses on convertible Notes payable,
which included the accrued interest and penalty charges.
Note
4 – Convertible Notes Payable (continued)
(iii)
Securities Purchase Agreement and Convertible Notes Issued to Old Main Capital, LLC
On
June 9, 2016 (the “Issuance Date”), the Company closed on the transaction contemplated by the securities purchase
agreement (the “SPA”) the Company entered into with Old Main Capital, LLC (“Old Main”), whereby Old Main
agreed to purchase from the Company a convertible promissory Note (the “Note”) in the original principal amount of
$87,912 for $80,000, net of an original issuance discount of $7,912 (the “Purchase Price”). The Note bears interest
at the rate of 10% per annum, of which there is a guaranteed interest for a period of six (6) months as of the Issuance date.
The Purchase Price was paid on June 9, 2016 in cash. The principal from the funding date and the accrued and unpaid interest relating
to that principal amount was due and payable on June 9, 2017 (the “Maturity Date”). Any amount of principal or interest
that is due under the Note which is not paid by the Maturity Date will bear interest at the rate of 24% per annum until it is
paid and subject to further increase as discussed below. The conversion price is the lesser of (a) the closing price of our common
stock on June 9, 2016 or (b) 60% of the lowest VWAP price of the Company’s common stock for the 15 consecutive trading days
ending on the trading day that is immediately prior to any applicable conversion date.
During
the six months ended June 30, 2019, the remaining balance had been converted into equity shares. Refer to Note 9 for further details.
As
at December 31, 2018 the Company owed $87,912 (June 30, 2019 - $nil) in principal and the accrued interest was $120,317 (June
30, 2019- $nil), which consisted of the guaranteed interest accrued of $4,396 (June 30, 2019- $nil) included in the convertible
Notes balance and the remainder of $115,921 (June 30, 2019- $nil) was recorded in accrued expenses on convertible Notes payable,
which included the accrued interest and penalty chares.
(iv)
Securities Purchase Agreement and Convertible Note Issued to SBI Investments LLC, 2014-1
On
June 30, 2016 (the “Issuance Date”) the Company closed on the transaction contemplated by the securities purchase
agreement (the “SPA”) the Company entered into with SBI Investments LLC, 2014-1 (“SBI”), whereby SBI agreed
to purchase from the Company a convertible promissory Note (the “Note”) in the original principal amount of $550,000
for $500,000 net of an original issuance discount of $50,000 (the “Purchase Price”). The Note bears interest at the
rate of 8% per annum, half of which is guaranteed and the total amount of interest due on the Note for a period of six months
is deemed earned as of the date the Note was issued. The Purchase Price was paid on June 30, 2016 in cash. The principal from
the funding date and the accrued and unpaid interest relating to that principal amount was due and payable on June 30, 2017 (the
“Maturity Date”). Any amount of principal or interest that is due under the Note which is not paid by the Maturity
Date will bear interest at the rate of 24% per annum until it is paid and subject to further increase as discussed below. The
conversion price is the lesser of (a) the closing price of the Company’s common stock on June 30, 2016 ($2.40 per share)
or (b) 60% of the lowest VWAP price of the Company’s common stock for the 20 consecutive trading days ending on the trading
day that is immediately prior to any applicable conversion date. This convertible debt has been accounted for as a derivative
liability and is included in the Note 6 derivative liability calculations below.
Beginning
six (6) months after the Issuance Date, the Company are required to make bi-weekly amortization payments (one payment every 2
weeks), consisting of 1/12th of the outstanding principal and interest, until the Note is no longer outstanding (each a “Bi-Weekly
Payment”). Such Bi- Weekly Payments may be made in cash, or in the Company’s common stock (“Common Stock”)
if certain equity conditions are satisfied. Such equity conditions include but are not limited to an average daily dollar volume
of the Common Stock greater than $25,000 for the 20 trading days prior to a Bi-Weekly Payment. If the equity conditions are satisfied,
and the Company decide to make a Bi-Weekly payment in Common Stock, then the shares of Common Stock to be delivered shall be calculated
as follows: the amount of the Bi-Weekly Payment divided by the Base Conversion Price (as defined below). The Base Conversion Price
shall equal the lower of (i) the closing price of the Common Stock on June 30, 2016, $2.40 per share, or (ii) 60% of the lowest
VWAP of the Common Stock for the 20 trading days immediately prior to the date of the Bi- Weekly Payment.
Note
4 – Convertible Notes Payable (continued)
During
the six months ended June 30, 2019, the remaining principal l (December 31, 2018 – $7,709) balance had been converted into
equity shares. Refer to Note 9 for further details.
As
at December 31, 2018, the Company owed $450,287 (June 30, 2019- $nil) in principal and the accrued interest was $498,424 (June
30, 2019- $nil), which consisted of the guaranteed interest accrued of $22,000 (June 30, 2019- $nil) included in the convertible
Notes balance and $476,424 (June 30, 2019- $nil) was recorded in accrued expenses on convertible Notes payable, which included
the accrued interest and penalty chares.
(v)
Securities Purchase Agreement and Convertible Note Issued to Old Main Capital
On
April 7, 2017, the Company entered into a Securities Purchase Agreement with Old Main whereby it agreed to and issued a 10% Convertible
Promissory Note in the principal amount of up to $75,000 (the “April 2017 Old Main Note”) payable in tranches as follows:
Tranche 1 paid on April 11, 2017: $19,167 consisting of $17,250 (less $1,250 for Old Main’s legal fees) paid to the Company
in cash, and less original issue discount of $1,917. Tranche 2 paid on May 2, 2017: $14,444 consisting of $13,000 paid to the
Company in cash, and less original issue discount of $1,444. Tranche 3 paid on June 1, 2017: $15,000 consisting of $13,500 paid
to the Company in cash, and less original issue discount of $1,500. Tranche 4 paid on August 8, 2017: $12,778 consisting of $11,500
paid to the Company in cash, and less original issue discount of $1,278. Tranche 5 paid on September 1, 2017: $11,667 consisting
of $10,500 paid to the Company in cash, and less original issue discount of $1,167. Tranche 6 paid on November 15, 2017: $10,278
consisting of $9,250 paid to the Company in cash, and less original issue discount of $1,028.
The
Old Main has the right to convert all or any part of the outstanding and unpaid principal and interest into shares of the Company’s
common stock. The terms of the Convertible Note are as follows:
|
1.
|
Old
Main has the right from and after a 180 day delay from the Date of Issuance, and until any time until the Note is fully paid,
to convert any outstanding and unpaid principal portion of the Note, and accrued interest, into fully paid and non–assessable
shares of Common (par value $.001 per share). Bi–weekly amortization payments are due after 6 months.
|
|
|
|
|
2.
|
The
Convertible Notes are convertible at a fixed rate of $0.07 with no reset provisions.
|
|
|
|
|
3.
|
Beneficial
ownership is limited to 9.99%.
|
|
|
|
|
4.
|
The
Company may redeem the Notes for 150% of the redemption amount and accrued interest at any time upon ten days written notice
to the Old Main.
|
|
|
|
|
5.
|
In
the event of an event of default the Note bears interest at 24% per annum.
|
During
the six months ended June 30, 2019, the remaining balance had been converted into equity shares. Refer to Note 9 for further details.
As
at December 31, 2018 the Company owed $83,333 (June 30, 2019- $nil) in principal and the accrued interest was $98,553 (June 30,
2019- $nil), which consisted of the guaranteed interest accrued of $4,167 (June 30, 2019- $nil) included in the convertible Notes
balance and $94,346 (June 30, 2019- $nil) was recorded in accrued expenses on convertible Notes payable, which included the accrued
interest and penalty.
Note
4 – Convertible Notes Payable (continued)
(vi)
Securities Purchase Agreement and Convertible Note Issued to SBI Investments LLC, 2014-1
On
April 7, 2017, the Company entered into a Securities Purchase Agreement with SBI Investments LLC, 2014-1 (“SBI”) whereby
it agreed to and issued a 10% Convertible Promissory Note in the principal amount of up to $75,000 (the “April 2017 SBI
Note”) in tranches as follows: Tranche 1 paid on April 11, 2017: $19,167 consisting of $17,250 (less $1,250 for SBI’s
legal fees) paid to the Company in cash, and less original issue discount of $1,917. Tranche 2 paid on May 2, 2017: $14,444 consisting
of $13,000 paid to the Company in cash, and less original issue discount of $1,444. Tranche 3 paid on June 1, 2017: $15,000 consisting
of $13,500 paid to the Company in cash, and less original issue discount of $1,500. Tranche 4 paid on August 8, 2017: $12,778
consisting of $11,500 paid to the Company in cash, and less original issue discount of $1,678. Tranche 5 paid on November 15,
2017: $10,278 consisting of $9,250 paid to the Company in cash, and less original issue discount of $1,028.
SBI
may pay such additional amounts of the Consideration and at such dates as mutually agreed upon by the Borrower and SBI. The maturity
date for each tranche funded shall be twelve (12) months from the effective date of each payment (each a “Maturity Date”)
(or such earlier date as the April 2017 SBI is required or permitted to be repaid as provided hereunder, and is the date upon
which the principal sum of each respective tranche, as well as any accrued and unpaid interest and other fees relating to that
respective tranche, shall be due and payable. The SBI has the right to convert all or any part of the outstanding and unpaid principal
and interest into shares of the Company’s common stock. The terms of the Convertible Note are as follows:
|
1.
|
SBI
has the right from and after a 180 day delay from the Date of Issuance, and until any time until the Note is fully paid, to
convert any outstanding and unpaid principal portion of the Note, and accrued interest, into fully paid and non–assessable
shares of Common (par value $.001 per share). Bi–weekly amortization payments are due after 6 months.
|
|
|
|
|
2.
|
The
Convertible Notes are convertible at a fixed rate of $0.07 with no reset provisions.
|
|
|
|
|
3.
|
Beneficial
ownership is limited to 9.99%.
|
|
|
|
|
4.
|
The
Company may redeem the Notes for 150% of the redemption amount and accrued interest at any time upon ten days written notice
to the SBI.
|
|
|
|
|
5.
|
In
the event of an event of a default the Note bears interest at 24% per annum.
|
During
the six months ended June 30, 2019, the remaining balance had been converted into equity shares. Refer to Note 9 for further details.
As
at December 31, 2018 the Company owed $71,667 (June 30, 2019 – $nil) in principal and the accrued interest was $84,605 (June
30, 2019 - $nil), which consisted of the guaranteed interest accrued of $3,583 (June 30, 2019 - $nil) included in the convertible
Notes balance and $81,022 (June 30, 2019 – $nil) was recorded in accrued expenses on convertible Notes payable, which includes
the accrued interest and penalty chares.
Note
5 – Derivative Liability
In
connection with the sale of debt or equity instruments, the Company may sell options or warrants to purchase the Company’s
common stock. In certain circumstances, these options or warrants may be classified as derivative liabilities, rather than as
equity. Additionally, the debt or equity instruments may contain embedded derivative instruments, such as embedded derivative
features which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for
separately as a derivative instrument liability.
The
Company’s derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair
value of the derivative liability recorded as charges or credits to income in the period in which the changes occur. For options,
warrants and bifurcated embedded derivative features that are accounted for as derivative instrument liabilities, the Company
estimates fair value using either quoted market prices of financial instruments with similar characteristics or other valuation
techniques. The valuation techniques require assumptions related to the remaining term of the instruments and risk-free rates
of return, the Company’s current common stock price and expected dividend yield, and the expected volatility of the Company’s
common stock price over the life of the instrument.
The
following table summarizes the warrant derivative liabilities and convertible Notes activity for the six months ended June 30,
2019:
Description
|
|
Derivative
Liabilities
|
|
Fair value at December 31, 2017
|
|
$
|
347,700
|
|
Change due to Issuances
|
|
|
-
|
|
Change due to Exercise/Conversion
|
|
|
(596
|
)
|
Change in Fair Value of warrants and Notes
|
|
|
114,435
|
|
Fair value at December 31, 2018
|
|
$
|
461,539
|
|
Change due to Exercise/Conversion/Cancellation
|
|
|
(461,539
|
)
|
Change in Fair Value of warrants and Notes
|
|
|
0
|
|
Fair value at June 30, 2019
|
|
$
|
-
|
|
The
lattice methodology was used to value the embedded derivatives within the convertible Note and the warrants issued, with the following
assumptions.
Assumptions
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
Dividend yield
|
|
|
-
|
|
|
|
0.00
|
%
|
Risk-free rate for term
|
|
|
-
|
|
|
|
1.93-2.33
|
%
|
Volatility
|
|
|
-
|
|
|
|
347.0%-348.4
|
%
|
Maturity dates
|
|
|
-
|
|
|
|
0.50-1.69 years
|
|
Stock Price
|
|
|
-
|
|
|
|
0.00
|
|
Note
6 – Fair Value of Financial Instruments
The
Company’s financial instruments consist of cash and cash equivalents, accounts payable and accrued expenses, derivative
liabilities and convertible debt. The estimated fair value of cash and cash equivalents, accounts payable and accrued liabilities
approximate their carrying amounts due to the short-term nature of these instruments.
The
Company utilizes various types of financing to fund its business needs, including convertible debt with warrants attached. The
Company reviews its warrants and conversion features of securities issued as to whether they are freestanding or contain an embedded
derivative and, if so, whether they are classified as a liability at each reporting period until the amount is settled and reclassified
into equity with changes in fair value recognized in current earnings. The fair value of the warrants and the embedded conversion
feature of the convertible debt is classified as a liability. Some of these units have embedded conversion features that are treated
as a discount on the Notes. Such financial instruments are initially recorded at fair value and amortized to interest expense
over the life of the debt using the effective interest method. Inputs used in the valuation to derive fair value are classified
based on a fair value hierarchy which distinguishes between assumptions based on market data (observable inputs) and an entity’s
own assumptions (unobservable inputs). The hierarchy consists of three levels:
Level
one - Quoted market prices in active markets for identical assets or liabilities;
Level
two - Inputs other than level one inputs that are either directly or indirectly observable; and
Level
three - Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect
those assumptions that a market participant would use.
Determining
which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy
disclosures each quarter. The Company’s derivative liability is measured at fair value on a recurring basis. The Company
classifies the fair value of these convertible Notes and warrants derivative liability under level three. The Company’s
settlement payable is measured at fair value on a recurring basis based on the most recent settlement offer. The Company classifies
the fair value of the settlement payable under level three. The Company’s rescission liability is measured at fair value
on a recurring basis based on the most recent stock price. The Company classifies the fair value of the rescission liability under
level one.
Based
on ASC Topic 815 and related guidance, the Company concluded the common stock purchase warrants are required to be accounted for
as derivatives as of the issue date due to a reset feature on the exercise price. At the date of issuance warrant derivative liabilities
were measured at fair value using either quoted market prices of financial instruments with similar characteristics or other valuation
techniques. The Company records the fair value of these derivatives on its balance sheet at fair value with changes in the values
of these derivatives reflected in the statements of operations as “Gain (loss) on derivative liabilities.” These derivative
instruments are not designated as hedging instruments under ASC 815-10 and are disclosed on the balance sheet under Derivative
Liabilities.
The
following table presents liabilities that are measured and recognized at fair value on a recurring and non-recurring basis:
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Gains
(Losses)
|
|
Derivatives
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Fair Value at June 30, 2019
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
461,539
|
|
|
$
|
(114,435
|
)
|
Fair Value at December 31, 2018
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
461,539
|
|
|
$
|
(114,435
|
)
|
Note
7 – Stock Options:
The
following is a summary of stock option activity:
|
|
|
|
|
Weighted
|
|
|
Weighted
Average
|
|
|
|
|
|
|
Options
|
|
|
Average
Exercise
|
|
|
Remaining
Contractual
|
|
|
Aggregate
Intrinsic
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Life
|
|
|
Value
|
|
Outstanding,
December 31, 2018
|
|
|
200,000
|
|
|
$
|
3 .00
|
|
|
|
1.42
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(200,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
June 30, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Exercisable,
June 30, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
The
fair value of the stock options was amortized to stock option expense over the vesting period. The Company recorded stock option
expense of $nil, included in operating expenses, during the six months ended June 30, 2019, and $106,370 during the year ended
December 31, 2018. At June 30, 2019, the unamortized stock option expense was $nil (December 31, 2018 - $nil)
The
assumptions used in calculating the fair value of options granted using the Black-Scholes option- pricing model for options granted
were as follows:
|
|
2019
|
|
Risk-free interest rate
|
|
|
1.93% to 2.33
|
%
|
Expected life of the options
|
|
|
0.50 to 2.44 years
|
|
Expected volatility
|
|
|
316.6% to 420.8
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
As
at June 30, 2019, the Company had the following warrant securities outstanding:
|
|
Common Stock
Warrants
|
|
December 31, 2018
|
|
|
36,667
|
|
Less: Exercised
|
|
|
-
|
|
Less: Expired/Cancelled
|
|
|
36,667
|
|
Add: Issued
|
|
|
-
|
|
June 30, 2019
|
|
|
-
|
|
During
the six-month period ended June 30, 2019, nil warrants expired unexercised and 36,667 warrants were cancelled.
Note
8 – Related Party Transactions
Related
Parties
Related
parties with whom the Company had transactions are:
Related
Parties
|
|
Relationship
|
|
|
|
Stew
Garner
|
|
Chairman,
CEO, CFO and director (resigned effective January 9, 2019)
|
Eric
Blue
|
|
Chairman,
CEO, CFO and director (effective January 9, 2019)
|
Consulting
services from Officer
Consulting
services provided by the officer for the six months ended June 30, 2019 and 2018
|
|
|
June
30, 2019
|
|
|
|
June
30, 2018
|
|
|
|
|
|
|
|
|
|
|
President,
Chief Executive Officer and Chief Financial Officer
|
|
$
|
nil
|
|
|
$
|
nil
|
|
$281,115
is receivable from related party as at six months ended June 30, 2019. The receivable is unsecured, non-interest bearing with
no terms of repayment. There are no indications for impairment.
Note
9- Stockholders’ Deficiency
Shares
Authorized
The
Company’s authorized capital stock consists of 22,500,000 shares of Class A common stock, par value $0.001 per share, 2,500,000
Class B common stock, par value $0.001per share, 5,000,000 shares of Series A preferred stock, par value $0.001 per share and
96,428 Series B preferred stock, par value $0.001 per share.
On
January 9, 2019, the Company entered into a Note Conversion Agreement (the “Conversion Agreement”) with SBI Investments
LLC, 2014-1, a statutory series of Delaware limited liability corporation (“SBI”), and Old Main Capital, LLC, a Florida
series limited liability corporation (“Old Main”). Pursuant to the Conversion Agreement, SBI converted $916,666.67
of principal and accrued interest owed to SBI by the Company pursuant to a promissory Note into 54,000 shares of the Company’s
Series B Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”), in full satisfaction of such
obligation. Pursuant to the Conversion Agreement, Old Main converted $733,333.33 of principal and accrued interest owed to Old
Main by the Company pursuant to a promissory Note into 42,429 shares of the Company’s Series B Preferred Stock in full satisfaction
of such obligation.
Effective
as of April 10, 2019, the Company reincorporated to the State of Delaware from the State of Nevada and amended its Articles of
Incorporation to decrease its authorized capital stock from 500,000,000 to 30,000,000 shares, of which 25,000,000 will
be common stock and 5,000,000 will be preferred stock, of which, 1,000 shares have been previously designated as Series A
Preferred Stock (the “Series A Preferred Stock”) and 96,428 shares have been designated as Series B Preferred Stock
(the “Series B Preferred Stock”). In connection with the Company reincorporating to the State of Delaware, the Company
also filed certificates of designation, preferences and rights for the Series A Preferred Stock and Series B Preferred Stock with
the Secretary of State of the State of Delaware.
Note
9- Stockholders’ Deficiency (continued)
Common
Stock
Common
Shares Issued for Cash
No
common shares were issued for cash during the six months ended June 30, 2019.
Common
Shares Issued for Non- Cash
No
common shares were issued for non-cash during the six months ended June 30, 2019.
Preferred
Stock
On
January 9, 2019, the Company entered into a Note Conversion Agreement (the “Conversion Agreement”) with SBI Investments
LLC, 2014-1, a statutory series of Delaware limited liability corporation (“SBI”), and Old Main Capital, LLC, a Florida
series limited liability corporation (“Old Main”). Pursuant to the Conversion Agreement, SBI converted $916,666.67
of principal and accrued interest owed to SBI by the Company pursuant to a promissory Note into 54,000 shares (the “SBI
Conversion Shares”) of the Company’s Series B Preferred Stock in full satisfaction of such obligation and Old Main
converted $733,333.33 of principal and accrued interest owed to Old Main by the Company pursuant to a promissory Note into 42,429
shares (the “Old Main Conversion Shares”) of the Company’s Series B Preferred Stock in full satisfaction of
such obligation.
On
October 24, 2019, the Company entered into an equity purchase agreement (the “Purchase Agreement”) with SBI and Oasis
Capital, LLC, a Puerto Rico limited liability company (“Oasis” and together with SBI, the “Investors”,
and each, an “Investor”), pursuant to which the Investors agreed to, in the aggregate between the Investors, purchase
from the Company up to Ten Million Dollars ($10,000,000.00)(the “Maximum Commitment Amount”) of the Common Stock.
Under
the terms of the Purchase Agreement, the Company shall have the right, but not the obligation, to direct an Investor, by its delivery
to the Investor of a put notice (the “Put Notice”) from time to time beginning on the execution date of the Purchase
Agreement and ending on the earlier to occur of: (i) the date on which the Investors shall have purchased Put Shares equal to
the Maximum Commitment Amount, (ii) October 24, 2021, or (iii) written notice of termination by the Company to the Investors (together,
the “Commitment Period”), to purchase Put Shares.
Notwithstanding
any other terms of the Purchase Agreement, in each instance, (i) the amount that is the subject of a Put Notice (the “Investment
Amount”) is not more than the Maximum Put Amount (as defined below), (ii) the aggregate Investment Amount of all Put Notices
shall not exceed the Maximum Commitment Amount and (iii) the Company cannot deliver consecutive Put Notices and/or consummate
closings to the same Investor, meaning for the avoidance of doubt, that Put Notices delivered by the Company must alternate between
Oasis and SBI. “Maximum Put Amount” means the lesser of (i) such amount that equals two hundred fifty percent (250%)
of the average daily trading volume of the Common Stock and (ii) One Million Dollars ($1,000,000.00). The price paid for each
share of Common Stock (the “Purchase Price”) subject to a Put Notice (each, a “Put Share”) shall be 85%
of the Market Price (as defined below) on the date upon which the Purchase Price is calculated in accordance with the terms and
conditions of the Purchase Agreement. “Market Price” means the one (1) lowest traded price of the Common Stock on
the principal market for any trading day during the Valuation Period (as defined below), as reported by Bloomberg Finance L.P.
or other reputable source. “Valuation Period” means the period of five (5) consecutive trading days immediately following
the Clearing Date (as defined below) associated with the applicable Put Notice during which the Purchase Price of the Common Stock
is valued, provided, however, that the Valuation Period shall instead begin on the Clearing Date if the respective Put Shares
are received as DWAC Shares in the applicable Investor’s brokerage account prior to 11:00 a.m. EST on the respective Clearing
Date. “Clearing Date” means the date on which an Investor receives the Put Shares as DWAC Shares in its brokerage
account.
Note
9- Stockholders’ Deficiency (continued)
Concurrently
with the execution of the Purchase Agreement, the Company, SBI and Oasis entered into a Registration Rights Agreement, dated as
of October 24, 2019 (the “Registration Rights Agreement”). Pursuant to the Registration Rights Agreement, the Company
shall by December 8, 2019, file with the SEC an initial registration statement on Form S-1 covering the maximum number of Registrable
Securities (as defined below) as shall be permitted to be included in accordance with applicable SEC rules, regulations and interpretations
so as to permit the resale of such Registrable Securities by the Investors, including but not limited to under Rule 415 under
the Securities Act at then prevailing market prices (and not fixed prices), as mutually determined by both the Company and the
Investors in consultation with their respective legal counsel. “Registrable Securities” means all of the Put Shares
which have been, or which may, from time to time be issued, including without limitation all of the shares of Common Stock which
have been issued or will be issued to an Investor under the Purchase Agreement (without regard to any limitation or restriction
on purchases), and any and all shares of capital stock issued or issuable with respect to Put Shares (as such terms are defined
in the Purchase Agreement) issued or issuable to an Investor, and shares of Common Stock issued to an Investor with respect to
the Put Shares and the Purchase Agreement as a result of any stock split, stock dividend, recapitalization, exchange or similar
event or otherwise, without regard to any limitation on purchases under the Purchase Agreement.
As
compensation for the commitments made under the Purchase Agreement, the Company paid to the Investors a commitment fee equal to
four percent (4%) of the Maximum Commitment Amount (the “Commitment Fee”). The Commitment Fee was paid by the Company
by issuing to the Investors 28,752 shares of the Company’s Series B Preferred Stock.
Prior
to and in connection with the execution and delivery of the Loan Agreement, Capital Park formed C-PAK Holdings and incorporated
C-PAK PREFCO SPV I, INC., a Delaware corporation (“PrefCo”).
Under
the terms of the Amended and Restated Certificate of Incorporation of PrefCo (the “PrefCo Certificate of Incorporation”),
(i) Capital Park purchased 10,000 shares of Common Stock from PrefCo for $1,000; and (ii) an affiliate of PLC ECI-Master Fund,
Piney Lakes Opportunities NON-ECI Master Fund, LP, a Cayman Islands exempted limited partnership (“PLC NON-ECI Master Fund”),
purchased 3,000 shares of Preferred Stock in PrefCo for $3,000,000.
Immediately
upon receipt of proceeds from the sale of the 3,000 shares of Preferred Stock of PrefCo to PLC NON-ECI Master Fund, PrefCo purchased
3,000 Preferred Units of C-PAK Holdings for $3,000,000. In accordance with the terms of the Amended and Restated Limited Liability
Company Agreement of C-PAK Holdings, dated as of May 3, 2019 (the “C-PAK Holdings LLC Agreement”) and pursuant to
separate subscription agreements, (i) C-PAK Holdings issued and sold to PLC ECI-Master Fund 1,000 Common Units; and (ii) C-PAK
Holdings issued and sold to PrefCo 9,000 Common Units.
Under
the C-PAK Holdings LLC Agreement, holders of Preferred Units shall be entitled to receive cumulative preferred distributions which
shall accrue on the sum of $1,000, plus the amount of accrued and unpaid preferred distributions at a rate of 13% per annum plus
the LIBOR rate set forth under the Loan Agreement, as the same shall be increased by 2% per annum in the event the Company fails
(a) to properly redeem the Preferred Units as required under the C-PAK Holdings LLC Agreement, (b) to pay the Redemption Price
upon the liquidation, dissolution or winding-up of C-PAK Holdings; or (c) to redeem the Common Units owned by PLC ECI-Master Fund
when and if PLC ECI-Master Fund exercised its right to put the Common Units to C-PAK Holdings, at the then fair market value thereof.
The holders of the Preferred Units shall furthermore be entitled to receive distributions before the holders of the Common Units.
On each Distribution Payment Date up to fifty percent (50%) of any Preferred Unit distributions accrued during the quarter ending
on such date may be declared and paid in cash. For the portion of the distributions on Preferred Units that are not paid in cash
on the Distribution Payment Date, that amount shall be added to the Liquidation Preference and shall thereafter accrue and compound
at the Preferred Distribution Rate.
Note
9- Stockholders’ Deficiency (continued)
C-PAK
Holdings may redeem Preferred Units at any time upon payment of the Redemption Price. In the event of a change of control, insolvency,
or liquidation of C-PAK Holdings or any default and acceleration under the Loan Agreement, C-PAK Holdings must redeem the Preferred
Units at the Redemption Price. Finally, holders of Preferred Units may elect to sell their Preferred Units to the Company at any
time following May 2, 2024 at the applicable Redemption Price.
Under
the C-PAK Holdings LLC Agreement, the “Redemption Price” to be paid (i) before May 2, 2022 is equal to the sum of
two (2) times the sum of the sum of (A) $1,000, plus (B)(1) the amount of accrued and unpaid preferred distributions calculated
at a rate of 13% per annum plus the LIBOR rate set forth under the Loan Agreement, plus (2) the amount of the preferred distributions
that would accrue during the same period; and (ii) after May 2, 2022, shall be an amount equal to the sum of (Y) $1,000, plus
(Z) the amount of accrued and unpaid preferred distributions calculated at a rate of 13% per annum plus the LIBOR rate set forth
under the Loan Agreement, as the same may be adjusted to reflect defaults under the C-PAK Holdings LLC Agreement.
Under
certain circumstances of a redemption breach, PLC ECI-Master Fund shall have the right, and not the obligation, to force C-PAK
Holdings to affect a sale thereof.
The
terms of the PrefCo Certificate of Incorporation mirror the provisions of the C-PAK Holdings LLC Agreement with the terms of the
Preferred Stock and Common Stock being similar to the terms of the Preferred Units and the Common Units, respectively. Moreover,
the manner in which the Redemption Price on the Preferred Stock is calculated mirrors the manner in which the Redemption Price
on the Preferred Units is calculated. Once the Preferred Stock is redeemed under the PrefCo Certificate of Incorporation, PLC
NON-ECI Master Fund shall no longer hold an equity interest in PrefCo. Furthermore, at any time after November 2, 2024 through
and including November 2, 2025, PLC ECI-Master Fund may compel C-PAK Holdings LLC to repurchase its Common Units at the then fair
market value.
In
addition, Capital Park and/or its subsidiaries entered into additional agreements, including a Stockholders’ Agreement,
Investors’ Rights Agreement and Management Services Agreement, each dated as of May 3, 2019, which memorialize supplemental
agreements between the parties related to the transactions described above.
Note
10- Acquisition of Business
On
May 3, 2019, C-PAK, P&G, and Capital Park, solely in its capacity as guarantor, entered in an agreement (the “Transaction
Agreement”) and completed an acquisition under thereto of certain assets pertaining to the “Joy” and “Cream
Suds” trademarks for $30,000,000 plus assumption of certain liabilities.
In
the Transaction Agreement, C-PAK and P&G have agreed to certain customary representations, warranties and covenants, including,
but not limited to, certain representations as to the financial statements, contracts, liabilities, and other attributes of the
respective assets, and certain limited covenants of C-PAK not to solicit employees following the closing.
The
purchase price of $30,000,000 was allocated as follows:
Tangible assets
|
|
|
|
Molds
|
|
|
7,500
|
|
Prepaid expenses
|
|
|
20,000
|
|
Total
|
|
$
|
27,500
|
|
Transfer taxes
|
|
|
(1
|
)
|
Intangible asset
|
|
|
|
|
Intellectual Property/Technology
|
|
|
1,028,000
|
|
Customer Base
|
|
|
6,806,000
|
|
Tradenames - trademarks
|
|
|
4,775,000
|
|
Total
|
|
$
|
12,609,000
|
|
Goodwill
|
|
|
17,363,501
|
|
Total net assets acquired
|
|
$
|
30,000,000
|
|
Total cash consideration paid
|
|
$
|
30,000,000
|
|
Goodwill
represents the future economic benefits arising largely from the synergies expected from combining the operations of the Company
and acquisitions of the business that could not be individually identified and separately recognized. The Company reviews goodwill
for impairment at least annually and more frequently if events or changes in circumstances indicate it is more likely than not
that the fair value of a reporting unit is below its carrying amount. The annual review for goodwill impairment is performed as
of the first day of the fourth quarter of each fiscal year. The Company tests for goodwill impairment at the reporting unit level,
which is at or one level below the operating segment level. Management
determined there were no indications of impairment on the net assets acquired.
The
identifiable intangible assets are expected to be amortized on a straight-line basis over the estimated useful lives indicated.
The fair value of identifiable intangible assets acquired was determined using income approaches. Significant assumptions utilized
in the income approach were based on Company-specific information and projections, which are not observable in the market and
are thus considered Level 3 measurements as defined by authoritative guidance. The
intangible assets are amortized over a period of 10 years, in accordance with the terms of their purchase agreement with P&G.
Note
11- Promissory note
P&G
Secured Promissory Note
In
connection with the entering into of the Transaction Agreement, C-PAK (together with certain affiliates, the “Note Borrowers”)
entered into a Senior Secured Promissory Note (the “Secured Note”) in the original principal amount of $9,500,000
with P&G, in its respective capacity as the “Note Lender.”
The
interest rate applicable to the borrowing under the Secured Note is equal to 6.00% which is deferred and payable on the maturity
date of the Secured Note. Under the Secured Note, the Borrowers must repay the unpaid principal amount of the Secured Note on
September 13, 2019. The Note was not repaid as at maturity date and is currently undergoing renegotiations for terms of repayment.
The
Secured Note contains customary affirmative and negative covenants, which, among other things, limit the Borrower’s ability
to (i) incur additional indebtedness, (ii) pay dividends or make certain distributions or (iii) dispose of its assets, grant liens
or encumber its assets. These covenants are subject to a number of exceptions and qualifications. For the six-month period ended
June 30, 2019, the Company accrued $78,510 in interest, included in accounts payable.
Note
12 – Credit Facility
Senior
Secured Credit Facility
On
May 3, 2019, C-PAK Consumer Product Holdings LLC, a Delaware limited liability company (“C-PAK”) and C-PAK Consumer
Product IP SPV LLC, a Delaware limited liability company (“C-PAK IP”, together with C-PAK, the “Borrowers”)
entered into a loan agreement with Piney Lake Opportunities ECI Master Fund LP, a Cayman Islands exempted limited partnership
(“PLC ECI-Master Fund”), in its respective capacities as the “Administrative Agent”, “Collateral
Agent” and “Lender”, pursuant to which the Borrowers obtained a $22 million term loan (the “Loan Agreement”).
The proceeds of the loan were used to acquire certain assets from The Procter & Gamble Company, an Ohio corporation (“P&G”)
and to pay fees and expenses related thereto. The Borrowers are subsidiaries of a majority-owned subsidiary of the Company,
C-PAK Consumer Product Holdings SPV I LLC, a Delaware limited liability company (“C-PAK Holdings”). C-PAK Holdings
is a guarantor under the Loan Agreement. As disclosed in Note 9, an additional balance of $3,000,000 was obtained from PLC ECI-Master
Fund by related company, C-PAK. The terms are aligned with the Senior Secured Credit Facility below.
The
interest rate applicable to the borrowing under the Loan Agreement is equal to LIBOR plus a margin of 12.00% which is payable
monthly beginning on June 30, 2019. Under the Loan Agreement, the Borrowers must repay the unpaid principal amount of the loans
quarterly in an amount equal to $440,000 which was to begin on September 30, 2019. The Loan Agreement will mature on May 3, 2024.
As at September 30, 2019, the instalments were not yet repaid as management is currently renegotiating the terms of the Agreement
with the lender. For the six-month period ended June 30, 2019, the Company paid $500,961 in interest.
As
security for its obligations under the Loan Agreement, C-PAK Holdings and the Borrowers granted a lien on substantially all of
its assets to the Lender pursuant to a Guaranty and Security Agreement dated May 3, 2019, by and among the Borrowers, C-PAK Holdings
and the Collateral Agent (the “Guaranty and Security Agreement”) and a Trademark Security Agreement dated May 3, 2019
by and between C-PAK IP and the Collateral Agent (the “Trademark Security Agreement”). There was a total of $1,129,980
in original issuer discount (“OID”) and financing fees which is being accreted and expensed over the term of the loan
using the effective interest method. For the quarter ended June 30, 2019, a total of $38,892 in OID and financing fees were recorded
in the interim statements of operations.
The
Loan Agreement contains customary affirmative and negative covenants, which, among other things, limit the Borrower’s ability
to (i) incur additional indebtedness, (ii) pay dividends or make certain distributions or (iii) dispose of its assets, grant liens
or encumber its assets. These covenants are subject to a number of exceptions and qualifications.
Note
13 - Subsequent Events
The
Company’s management has evaluated subsequent events up to December 13, 2019, the date the condensed interim financial statements
were issued, pursuant to the requirements of ASC 855 and has determined the following material subsequent event:
Equity
Line of Credit
On
October 24, 2019, the Company entered into an equity purchase agreement (the “Purchase Agreement”) with SBI and Oasis
Capital, LLC, a Puerto Rico limited liability company (“Oasis” and together with SBI, the “Investors”,
and each, an “Investor”), pursuant to which the Investors agreed to, in the aggregate between the Investors, purchase
from the Company up to Ten Million Dollars ($10,000,000.00)(the “Maximum Commitment Amount”) of the Common Stock.
Under the terms of the Purchase Agreement, the Company shall have the right, but not the obligation, to direct an Investor, by
its delivery to the Investor of a put notice (the “Put Notice”) from time to time beginning on the execution date
of the Purchase Agreement and ending on the earlier to occur of: (i) the date on which the Investors shall have purchased Put
Shares equal to the Maximum Commitment Amount, (ii) October 24, 2021, or (iii) written notice of termination by the Company to
the Investors (together, the “Commitment Period”), to purchase Put Shares.
Notwithstanding
any other terms of the Purchase Agreement, in each instance, (i) the amount that is the subject of a Put Notice (the “Investment
Amount”) is not more than the Maximum Put Amount (as defined below), (ii) the aggregate Investment Amount of all Put Notices
shall not exceed the Maximum Commitment Amount and (iii) the Company cannot deliver consecutive Put Notices and/or consummate
closings to the same Investor, meaning for the avoidance of doubt, that Put Notices delivered by the Company must alternate between
Oasis and SBI. “Maximum Put Amount” means the lesser of (i) such amount that equals two hundred fifty percent (250%)
of the average daily trading volume of the Common Stock and (ii) One Million Dollars ($1,000,000.00). The price paid for each
share of Common Stock (the “Purchase Price”) subject to a Put Notice (each, a “Put Share”) shall be 85%
of the Market Price (as defined below) on the date upon which the Purchase Price is calculated in accordance with the terms and
conditions of the Purchase Agreement. “Market Price” means the one (1) lowest traded price of the Common Stock on
the principal market for any trading day during the Valuation Period (as defined below), as reported by Bloomberg Finance L.P.
or other reputable source. “Valuation Period” means the period of five (5) consecutive trading days immediately following
the Clearing Date (as defined below) associated with the applicable Put Notice during which the Purchase Price of the Common Stock
is valued, provided, however, that the Valuation Period shall instead begin on the Clearing Date if the respective Put Shares
are received as DWAC Shares in the applicable Investor’s brokerage account prior to 11:00 a.m. EST on the respective Clearing
Date. “Clearing Date” means the date on which an Investor receives the Put Shares as DWAC Shares in its brokerage
account.
Concurrently
with the execution of the Purchase Agreement, the Company, SBI and Oasis entered into a Registration Rights Agreement, dated as
of October 24, 2019 (the “Registration Rights Agreement”). Pursuant to the Registration Rights Agreement, the Company
shall by December 8, 2019, file with the SEC an initial registration statement on Form S-1 covering the maximum number of Registrable
Securities (as defined below) as shall be permitted to be included in accordance with applicable SEC rules, regulations and interpretations
so as to permit the resale of such Registrable Securities by the Investors, including but not limited to under Rule 415 under
the Securities Act at then prevailing market prices (and not fixed prices), as mutually determined by both the Company and the
Investors in consultation with their respective legal counsel. “Registrable Securities” means all of the Put Shares
which have been, or which may, from time to time be issued, including without limitation all of the shares of Common Stock which
have been issued or will be issued to an Investor under the Purchase Agreement (without regard to any limitation or restriction
on purchases), and any and all shares of capital stock issued or issuable with respect to Put Shares (as such terms are defined
in the Purchase Agreement) issued or issuable to an Investor, and shares of Common Stock issued to an Investor with respect to
the Put Shares and the Purchase Agreement as a result of any stock split, stock dividend, recapitalization, exchange or similar
event or otherwise, without regard to any limitation on purchases under the Purchase Agreement.
Note
13 - Subsequent Events (continued)
As
compensation for the commitments made under the Purchase Agreement, the Company paid to the Investors a commitment fee equal to
four percent (4%) of the Maximum Commitment Amount (the “Commitment Fee”). The Commitment Fee was paid by the Company
by issuing to the Investors 28,752 shares of the Company’s Series B Preferred Stock.