NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREEAND SIX MONTHS ENDED JUNE 30, 2020 AND 2019 (UNAUDITED)
NOTE
1 – ORGANIZATION AND PRINCIPAL ACTIVITIES
Corporate
History and Background
Reign
Resources 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. On January 1, 2019, Reign Brands, Inc., a subsidiary of Reign Resources 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.
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”).
On
November 13, 2019, the Company changed its corporate name to Reign Resources Corporation.
On
February 18, 2020, the Company’s board of directors and majority voting shareholder approved an amendment to the Company’s certificate
of incorporation, in order to increase the number of authorized shares of the Company’s common stock, par value $0.0001 per share,
from 150,000,000, to 1,000,000,000. On May 12, 2020, the Company received the amended certificate of incorporation from the Delaware
Secretary of State, citing the increase in the Company’s authorized common shares from 150,000,000 to 1,000,000,000.
NOTE
2 – BASIS OF PRESENTATION
The
included (a) condensed consolidated balance sheet as of December 31, 2019, which has been derived from audited financial statements,
and (b) the unaudited condensed financial statements as of June 30, 2020 and 2019, 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, 2019 and 2018 audited financial statements filed on Form 10-K on March 30, 2020. 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, 2019 as filed on March 30, 2020, 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 $16,345,000 and $16,076,000 at June 30, 2020 and December 31, 2019, respectively,
had a working capital deficit of approximately $2,703,000 and $2,514,000 at June 30, 2020 and December 31, 2019, respectively,
had a net loss of approximately $269,000 and $63,000 for the six months ended June 30, 2020 and 2019, respectively, and net cash
used in operating activities of approximately $5,000 and $65,000 for the six months ended June 30, 2020 and 2019, 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.
ASC
810 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 $0 and $1,000, and $1,000 and $10,000 for the three and six months ended June 30, 2020 and 2019,
respectively.
Comprehensive
Income
Comprehensive
income is reported in accordance with FASB ASC Topic 220 “Comprehensive Income,” which established standards for reporting
and displaying comprehensive income and its components in a financial statement that is displayed with the same prominence as
other financial statements.
Total
comprehensive income is defined as all changes in shareholders’ equity during a period, other than those resulting from investments
by and distributions to shareholders (i.e., issuance of equity securities and dividends). Generally, total comprehensive income
(loss) equals net income (loss) plus or minus adjustments for currency translation. There are no items other than net loss affecting
comprehensive loss for the three and six months ended June 30, 2020 and 2019.
Revenue
Recognition
On
January 1, 2018, the Company adopted Accounting Standards Codification ASC 606 (“ASC 606”), Revenue from Contracts
with Customers, using the modified retrospective approach for all contracts not completed as of the date of adoption. Results
for the reporting periods beginning on January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted
and continue to be reported in accordance with accounting under ASC 605, Revenue Recognition. As a result of adopting ASC
606, amounts reported under ASC 606 were not materially different from amounts that would have been reported under the previous
revenue guidance of ASC 605, as such, no cumulative adjustment to retained earnings.
The
Company generates all of its revenue from contracts with customers. The Company recognizes revenue when we satisfy a performance
obligation by transferring control of the promised services to a customer in an amount that reflects the consideration that we
expect to receive in exchange for those services. The Company determines revenue recognition through the following steps:
|
1.
|
Identification of the contract, or contracts, with a customer.
|
|
2.
|
Identification of the performance obligations in the contract.
|
|
3.
|
Determination of the transaction price.
|
|
4.
|
Allocation of the transaction price to the performance obligations in the contract
|
|
5.
|
Recognition of revenue when, or as, we satisfy a performance obligation.
|
At
contract inception, the Company assesses the services promised in our contracts with customers and identify a performance obligation
for each promise to transfer to the customer a service (or bundle of services) that is distinct. To identify the performance obligations,
the Company considers all of the services promised in the contract regardless of whether they are explicitly stated or are implied
by customary business practices. The Company allocates the entire transaction price to a single performance obligation.
A
description of our principal revenue generating activities are as follows:
Retail
sales – The Company offers consumer products through its online websites. During the three and six months ended June
30, 2020 and 2019, the Company recorded retail sales of $0 and $0, and $0 and $0, respectively.
Wholesale
sales – The Company offers product sold in bulk to distributors. During the three and six months ended June 30, 2020
and 2019, the Company recorded wholesale sales of $0 and $756, and $64,329 and $105,883, 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 June 30, 2020 and December 31, 2019, respectively.
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 June 30, 2020 and December 31, 2019, the Company carried primarily
loose sapphire jewels, jewelry for sale on our website, and jewelry held as samples. Samples are used to show potential customers
what the jewelry would look like. Promotional items given to customers that are not expected to be returned will be removed from
inventory and expensed. There have been no promotional items given to customers as of June 30, 2020. 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 June 30, 2020.
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 no impairment charge for the
three and six months ended June 30, 2020 and 2019.
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 no impairment charge for the three and six months ended June 30, 2020 and 2019.
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 June 30, 2020 and December 31, 2019, 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:
|
•
|
Level
1 – Quoted prices in active markets for identical assets or liabilities.
|
|
•
|
Level
2 – Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities.
|
|
•
|
Level
3 – Unobservable inputs that are supported by little or no market activity and that are significant to the measurement of
the fair value of the assets or liabilities
|
The
carrying value of financial assets and liabilities recorded at fair value is measured on a recurring or nonrecurring basis. Financial
assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs.
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 estimated fair value of stock issued for services and the embedded derivative liabilities are recognized at fair
value on a recurring basis at June 30, 2020 and are Level 3 measurements (see Note 8). There have been no transfers between levels.
The
derivatives are evaluated under the hierarchy of ASC 480-10, ASC Paragraph 815-25-1 and ASC Subparagraph 815-10-15-74 addressing
embedded derivatives. The fair value of the Level 3 financial instruments was performed internally by the Company using Monte
Carlo valuation method.
The
following table summarize the Company’s fair value measurements by level at June 30, 2020 for the assets measured at fair
value on a recurring basis:
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Estimated fair value of stock issued for services
|
|
$
|
43,250
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The
following table summarize the Company’s fair value measurements by level at June 30, 2019 for the assets measured at fair
value on a recurring basis:
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Derivative liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
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 six months ended June 30, 2020 and 2019,
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.
Concentrations,
Risks, and Uncertainties
Business
Risk
Substantial
business risks and uncertainties are inherent to an entity, including the potential risk of business failure.
The
Company is headquartered and operates in the United States. To date, the Company has generated limited revenues from operations.
There can be no assurance that the Company will be able to successfully continue to produce its products and failure to do so
would have a material adverse effect on the Company’s financial position, results of operations and cash flows. Also, the
success of the Company’s operations is subject to numerous contingencies, some of which are beyond management’s control.
These contingencies include general economic conditions, price of raw material, competition, governmental and political conditions,
and changes in regulations. Among other risks, the Company’s operations will be subject to risk of restrictions on transfer
of funds, domestic and international customs, changing taxation policies, foreign exchange restrictions, and political and governmental
regulations.
Interest
rate risk
Financial
assets and liabilities do not have material interest rate risk.
Credit
risk
The
Company is exposed to credit risk from its cash in banks and accounts receivable. The credit risk on cash in banks is limited
because the counterparties are recognized financial institutions.
The
Company had one customer that accounted for all revenues for the three and months ended June 30, 2020 and 2019. The Company had
no customers that accounted for 10% or more of total accounts receivable at June 30, 2020 and December 31, 2019.
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 June 30, 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:
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Loose stones
|
|
$
|
390,725
|
|
|
$
|
390,988
|
|
Finished goods
|
|
|
134,145
|
|
|
|
134,145
|
|
Samples
|
|
|
62,977
|
|
|
|
62,977
|
|
Total
|
|
$
|
587,847
|
|
|
$
|
588,110
|
|
NOTE
5 – PROPERTY AND Equipment
Property
and equipment consisted of the following as of:
|
|
Estimated Life
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Office equipment
|
|
5 years
|
|
$
|
5,481
|
|
|
$
|
5,481
|
|
Computer equipment
|
|
3 years
|
|
|
40,171
|
|
|
|
40,171
|
|
Accumulated depreciation
|
|
|
|
|
(43,233
|
)
|
|
|
(42,542
|
)
|
Total
|
|
|
|
$
|
2,419
|
|
|
$
|
3,110
|
|
Depreciation
expense was $346 and $691 and $3,059 and $6,301 for the three and six months ended June 30, 2020 and 2019, respectively, and is
classified in general and administrative expenses in the condensed consolidated Statements of Operations.
NOTE
6 – INTANGIBLE ASSETS
Intangible
assets consisted of the following as of:
|
|
Estimated Life
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
3.3 – 4.5 years
|
|
$
|
260,000
|
|
|
$
|
260,000
|
|
Accumulated amortization
|
|
|
|
|
(228,484
|
)
|
|
|
(209,575
|
)
|
Total
|
|
|
|
$
|
31,516
|
|
|
$
|
50,425
|
|
Future
amortization expense related to intangible assets are approximately as follows:
|
|
Intangible
Assets
|
|
2020
|
|
$
|
18,910
|
|
2021
|
|
|
12,606
|
|
|
|
$
|
31,516
|
|
Amortization
expense was $9,455 and $18,909 and $16,297 and $32,593 for the three and six months ended June 30, 2020 and 2019, and is classified
in general and administrative expenses in the condensed consolidated Statements of Operations.
NOTE
7 – DUE TO RELATED PARTY
During
the six months ended June 30, 2020, the Company received no advances from Joseph Segelman, the Company’s CEO, incurred business
expenses that were paid by the CEO/director of $115,482 (comprised of operating expenses) and had repayments of $70,700. The Company
has a balance owed to the related party of $1,209,952 and $1,165,171 at June 30, 2020 and December 31, 2019, respectively. As
of June 30, 2020 and December 31, 2019, accrued compensation-related party was $0 and $0, respectively. At December 31, 2019,
the CEO and Secretary forgave all deferred compensation totaling $1,499,750 and based on ASC 470-50-40, Extinguishments of
Debt, was included in Additional paid-in-capital in the accompanying consolidated Balance Sheets.
NOTE
8 – CONVERTIBLE NOTES PAYABLE
Convertible
notes payable consists of the following:
|
|
June
30,
2020
|
|
|
December
31,
2019
|
|
September
2019 Notes, issued September 29, 2019, with a maturity date of September 29, 2020, with an interest rate of 15%.
|
|
$
|
75,020
|
|
|
$
|
70,020
|
|
January and February
2018 Notes, issued January 3, 2018 and February 16, 2018, respectively, with a maturity date of March 31, 2020, 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, 2020, 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, 2020, 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, 2020, 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.
|
|
|
852,500
|
|
|
|
862,500
|
|
Total convertible notes
payable
|
|
|
1,796,524
|
|
|
|
1,801,524
|
|
Debt discount
|
|
|
—
|
|
|
|
—
|
|
Convertible notes payable,
net of unamortized debt discount
|
|
$
|
1,796,524
|
|
|
$
|
1,801,524
|
|
The
following represents a summary of the convertible debt terms at June 30, 2020:
|
|
Amount of
Notes
|
|
Debt
Discount
|
|
Maturity
Dates thru
|
|
Conversion
Price
|
|
|
|
|
|
|
|
|
|
|
|
September 2019 Notes
|
|
$
|
75,020
|
|
$
|
—
|
|
|
9/29/2020
|
|
$
|
0.0025
|
|
January and February 2018 Notes
|
|
|
294,000
|
|
|
—
|
|
|
3/31/2020
|
|
$
|
0.0025
|
|
November 2017 Notes
|
|
|
287,502
|
|
|
—
|
|
|
3/31/2020
|
|
$
|
0.0025
|
|
November 2016 Notes
|
|
|
287,502
|
|
|
—
|
|
|
3/31/2020
|
|
$
|
0.0025
|
|
December 2015 Notes
|
|
|
852,500
|
|
|
—
|
|
|
3/31/2020
|
|
$
|
0.0025
|
|
Total
|
|
$
|
1,796,524
|
|
$
|
—
|
|
|
|
|
|
|
|
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, Brio
Capital, and Crossover Capital. As of June 30, 2020 and December 31, 2019, $75,020 and $70,020, respectively, was loaned, in aggregate,
by the investors.
On June 29, 2020, Alpha Capital
Anstalt assigned all of its debt and common shares to Osher Capital Partners LLC.
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 conversion price for the principal and interest in connection with voluntary conversions by
a holder of a Note is $0.0025 per share, as amended on December 31, 2019, 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, 2020, as amended on December 31, 2019 and provide for interest to accrue at
an interest rate equal to 10% per annum or the maximum rate permitted under applicable law after the occurrence of any event of
default as provided in the Convertible Notes. The note is in default and the Company is currently in discussions to restructure
the terms of the note. 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 conversion
price for the principal and interest in connection with voluntary conversions by a holder of the Convertible Notes is $0.0025
per share, as amended on December 31, 2019, subject to adjustment as provided therein,
such as stock splits and stock dividends. 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. On June 26, 2020, the noteholder agreed to cancel all of its warrants
resulting in no financial impact to the Company.
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 June 30,
2020, 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, 2020, 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 calculates the fair value of the Warrants at $95,324 and $65,292 at January 3, 2018 and February 16, 2018, respectively,
using the Black-Scholes option-pricing method. The Black-Scholes option-pricing method requires the use of subjective assumptions,
including stock price volatility, the expected life of stock options, risk free interest rate and the fair value of the underlying
common stock on the date of grant. On June 26, 2020, the noteholder agreed to cancel all of its warrants resulting in no financial
impact to the Company.
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 $0 and $0 to interest expense in the condensed consolidated Statements
of Operations during the three and six months ended June 30, 2020 and 2019, respectively, and has $0 of unamortized debt discount
remaining as of June 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 $0.0025, as amended on December 31, 2019, 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.
On
June 29, 2020, Alpha Capital Anstalt assigned all of its debt and common shares to Osher Capital Partners LLC.
The
November 2017 Notes matured on March 31, 2020, as amended on December 31, 2019, and provide for interest to accrue at an interest
rate equal to the lesser of 15% per annum or the maximum rate permitted under applicable law after the occurrence of any event
of default as provided in the November 2017 Notes. The note is in default and the Company is currently in discussions to restructure
the terms of the note. 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 conversion price for the principal and interest in connection with voluntary conversions by a holder of a Note is $0.0025
per share, as amended on December 31, 2019, 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 June 30, 2020 and December 31, 2019, the Optional Redemption was fair valued to be $0, respectively. During the three and six
months ended June 30, 2020 and 2019, the Company recorded $0 and $0, and $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 June 30,
2020, 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 June 30, 2020, the embedded
derivative was re-measured at fair value that was determined to be $0. During the three and six months ended June 30, 2020 and
2019, the Company recorded no change, respectively, on embedded derivative re-valuation.
On
November 16, 2017, the November 2017 Notes were modified in accordance with ASC 470-50-40 and ASC 815 and the Company re-measured
the embedded derivative at fair value, which was determined to be $155,000 and recorded a modification of derivative liability
charge of $5,000.
On
January 25, 2018, the November 2017 Notes, November 2016 Notes, and December 2015 Notes were again modified in accordance with
ASC 470-50-40 and ASC 815 in which the Company issued a total of 2,395,650 restricted common shares, valued at $263,522 (based
on the Company’s stock price on the measurement date) in consideration of the maturity date of the outstanding November
2017, November 2016, and December 2015 convertible notes being extended to December 31, 2018. The Company re-measured the embedded
derivative at fair value just prior to and subsequent to the modification and recorded an extinguishment of debt of $12,000 in
the three months ended June 30, 2018. In addition, the value of the restricted common shares of $263,522 was recorded as an extinguishment
of debt in the three months ended June 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.
On
June 26, 2020, the noteholder agreed to cancel all of its warrants resulting in no financial impact to the Company.
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 six months ended June 30, 2018 with a debt discount of $0 as of June 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 December 31, 2019 to $0.0025 per share, 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.
On June 29, 2020, Alpha Capital
Anstalt assigned all of its debt and common shares to Osher Capital Partners LLC.
The
November 2016 Notes matured on March 31, 2020, as amended on December 31, 2019, and provide for interest to accrue at an interest
rate equal to the lesser of 15% per annum or the maximum rate permitted under applicable law after the occurrence of any event
of default as provided in the November 2016 Notes. The note is in default and the Company is currently in discussions to restructure
the terms of the note. 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 December 31, 2019 to $0.0025, 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.
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 June 30, 2020 and December 31, 2019, 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 June 30, 2020 and December 31, 2019. During the three and six months ended June 30, 2020 and 2019, the
Company recorded $0 and $0, and $0 and $0, respectively, on Optional Redemption valuation.
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 June 30, 2020, 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 June 30, 2020, the embedded
derivative was re-measured at fair value that was determined to be $0. During the three and six months ended June 30, 2020 and
2019, the Company recorded $0 and $0, and $0 and $0, 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 six months ended June 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 six months ended March 31, 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.
On
June 26, 2020, the noteholder agreed to cancel all of its warrants resulting in no financial impact to the Company.
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 six months ended June 30, 2020 and 2019, respectively, and has an unamortized debt discount
of $0 as of June 30, 2020.
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 December 31, 2019 to $0.0025, 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.
On June 29, 2020, Alpha Capital
Anstalt assigned all of its debt and common shares to Osher Capital Partners LLC.
The
December 2015 Notes matured on March 31, 2020, as amended on December 31, 2019, and provide for interest to accrue at an interest
rate equal to the lesser of 15% per annum or the maximum rate permitted under applicable law after the occurrence of any event
of default as provided in the December 2015 Notes. The note is in default and the Company is currently in discussions to restructure
the terms of the note. 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 December 31, 2019 to $0.0025, 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.
In
January and March 2020, holders of the Company’s December 2015 Notes elected to convert principal of $10,000 and $7,500
of accrued interest due on the December 2015 Notes into a total of 7,000,000 common shares.
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 June
30, 2020 and December 31, 2019. During the three and six months ended June 30, 2020 and 2019, the Company recorded $0 and $0,
and $0 and $0, respectively, on Optional Redemption valuation.
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 June 30, 2020, the December 2015 Note would have been convertible into 10,781,250 shares of our common
stock.
The
Company evaluated the note under the requirements of ASC 480 “Distinguishing Liabilities From Equity” and concluded
that the December 2015 Note does not fall within the scope of ASC 480. The Company next evaluated the December 2015 Note under
the requirements of ASC 815 “Derivatives and Hedging”. Due to the existence of the anti-dilution provision which reduces
the December 2015 Purchaser Conversion Price in the event of subsequent dilutive issuances by the Company below the December 2015
Purchaser Conversion Price as described above, the December 2015 Purchaser Conversion feature does not meet the definition of
“indexed to” the Company’s stock, and the scope exception to ASC 815’s derivative accounting provisions
does not apply. The Company also evaluated the embedded derivative criteria in ASC 815, and concluded that the December 2015 Purchaser
Conversion feature meets all of the embedded derivative criteria in ASC 815, and therefore, the December 2015 Purchaser Conversion
feature meets the definition of an embedded derivative that should be separated from the note and accounted for as a derivative
liability.
The
embedded derivative was recorded as a derivative liability on the condensed consolidated Balance Sheet using “Monte Carlo
Method” modeling and at each subsequent reporting date, the fair value of the embedded derivative liability will be remeasured
and changes in the fair value will be recorded in the condensed consolidated Statements of Operations. The original fair value
of the derivative was $88,983 and at March 31, 2019, the embedded derivative was re-measured at fair value that was determined
to be $0. During the three and six months ended June 30, 2020 and 2019, the Company recorded $0 and $0, and $0 and $0, 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 six months ended June 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 six months ended June 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.
On
June 26, 2020, the noteholder agreed to cancel all of its warrants resulting in no financial impact to the Company.
December
2015 Purchaser Common Stock
The
December 2015 Purchasers were issued a total of 2,500,000 shares of the Company’s common stock, valued at $625,000 (based
on the estimated fair value of the stock on the date of grant).
Debt
Discount
The
Company issued the December 2015 Notes with warrants that require liability treatment under ASC 815. As such, the proceeds of
the notes were allocated, based on fair values, as follows: original issue discount of $138,000, $625,000 to the common shares
issued, $439,107 to the warrants granted, and $88,983 to the embedded derivative, resulting in a debt discount to such notes of
$862,500 with the remaining amount of approximately $429,000 expensed at inception of the note. The debt discount is accreted
to interest expense over the term of the note.
The
Company recorded debt discount accretion of $0 and $0, and $0 and $0, to interest expense in the condensed consolidated Statements
of Operations during the three and six months ended June 30, 2020 and 2019, respectively, and has no unamortized debt discount
remaining as of June 30, 2020.
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.
On June 29, 2020, Alpha Capital
Anstalt assigned all of its debt and common shares to Osher Capital Partners LLC.
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
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.
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
On
March 31, 2020, the Company issued a total of 2,500,000 restricted common shares to a third-party in conjunction with a joint
venture, valued at $13,750 (based on the Company’s stock price on the measurement date) (see Note 14).
On
February 25, 2020, the Company issued a total of 5,000,000 restricted common shares to a third-party for outside consulting services
with 1,666,666 shares vesting each month for three months. The Company recorded $16,334 and $13,166 in the three and six months
ended June 30, 2020 (based on the Company’s stock price on the measurement date). The Company valued the shares at each
vesting period and recognized expense for the portion of the shares earned.
In
January and March 2020, holders of the Company’s December 2015 Notes elected to convert principal of $10,000 and $7,500
of accrued interest due on the December 2015 Notes into a total of 7,000,000 common shares.
NOTE
11 – STOCK BASED COMPENSATION
2015
Equity Incentive Plan
As
of March 31, 2019, the board of directors and shareholders of the Company previously authorized the adoption and implementation
of the Company’s 2015 Equity Incentive Plan (the “2015 Plan”). The principal purpose of the 2015 Plan is to
attract, retain and motivate employees, officers, directors, consultants, agents, advisors and independent contractors of the
Company and its related companies by providing them the opportunity to acquire a proprietary interest in the Company and to link
their interests and efforts to the long-term interests of the Company’s shareholders. Under the 2015 Plan, an aggregate
of 20,000,000 shares of the Company’s common stock have initially been reserved for issuance pursuant to a variety of stock-based
compensation awards, including stock options, stock appreciation rights, stock awards, restricted stock, restricted stock units
and other stock and cash-based awards. The exercise price for each option may not be less than fair market value of the common
stock on the date of grant, and shall vest as determined by the Company’s board of directors but shall not exceed a ten-year
period.
In
April 2018, the Company issued a total of 98,000 restricted common shares to its employees, valued at $7,742 (based on our stock
price on the date of grant) as compensation pursuant to the Company’s 2015 Equity Incentive Plan.
As
of March 31, 2018, the Company issued a total of 100,000 restricted common shares to members of its advisory committee (“Advisors”),
valued at $15,000 (based on the estimated fair value of the stock on the date of grant) for outside advisory and consulting services
pursuant to the Company’s 2015 Equity Incentive Plan. One-twelfth (1/12) of the shares will be earned each month. The Company
will revalue the shares at each vesting period and recognize expense for the portion of the shares earned. The Company recognized
compensation expense of $0 and $0, and $0 and $3,750 under general and administrative expenses in the accompanying condensed consolidated
Statements of Operations for the three and six months ended June 30, 2020 and 2019, respectively, with $0 remaining to be amortized.
As of June 30, 2019, the Advisors had vested in 100,000 shares with 0 shares to vest over the remaining vesting period.
As
of March 31, 2018, the Company previously granted to its CEO, options to purchase 10,000,000 shares of our common stock under
the 2015 Plan, valued at $2,500,000 (based on the Black Scholes valuation model on the date of grant). The Black-Scholes option-pricing
model used the following weighted average assumptions as of December 31, 2016: (i) no dividend yield for each year, (ii) volatility
of 35.6 percent, (iii) risk-free interest rate of 1.87 percent, (iv) stock price of $0.25, (v) exercise price of $0.005, and (vi)
expected life of 6.0 years. The options will vest 50% on the first anniversary of the grant date (“First Year Vest”)
and the remaining 50% of the shares shall vest in twelve (12) equal installments on the first day of each calendar month following
the first anniversary of the grant date beginning on June 1, 2016 and ending on June 1, 2017 (“Second Year Vest”),
provided that CEO is continuously employed by the Company from the grant date through such applicable vesting date. Notwithstanding
the foregoing, 100% of the shares of the Company’s common stock subject to the option shall fully vest if the Company shall
successfully sell all of the shares of its common stock included in the primary offering of such common stock by the Company pursuant
to the registration statement on Form S-1 to be filed with the Securities and Exchange Commission within ninety (90) days of the
grant date. The First Year Vest options will amortize to expense over a 12 month period beginning May 2015 through April 2016
and the Second Year Vest options will amortize to expense over a 24 month period beginning May 2015 through April 2017. The Company
recognized expense of $0 and $0, and $0 and $0 for the three and six months ended June 30, 2020 and 2019, 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 June 30, 2020 and changes
during the period then ended:
|
|
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Intrinsic Value *
|
|
Outstanding at January 1, 2019
|
|
|
10,000,000
|
|
|
$
|
0.005
|
|
|
$
|
120,000
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired/Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at December 31, 2019
|
|
|
10,000,000
|
|
|
$
|
0.005
|
|
|
$
|
40,000
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired/Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at June 30, 2020
|
|
|
10,000,000
|
|
|
$
|
0.005
|
|
|
$
|
66,000
|
|
Exercisable at June 30, 2020
|
|
|
10,000,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Expected to be vested
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
* Based on the Company’s stock price on June 30, 2020, December 31, 2019, and January 1, 2019, 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
Beginning
June 1, 2017, the Company leases its customer service and distribution facility on a month-to-month basis for $4,000 per month
from a third party.
Employment
Agreements
The
Company previously had a consulting agreement with its CEO under which he was compensated $120,000 per annum. Beginning June 20,
2013, this contract was to continue unless and until terminated at any time by either the Company or CEO giving two month notice
in writing. Such consulting agreement was terminated by mutual agreement as of May 1, 2015 and superseded by the employment agreement
effective May 1, 2015. The initial term of employment agreement expired on December 31, 2018, unless earlier terminated by either
party. The agreement provides for automatic one-year renewals, unless either party gives notice of their intention not to extend
at least 90 days prior to the expiration of any term. Under this employment agreement, the CEO receives a minimum annual base
salary of $180,000, is eligible to receive an annual performance bonus each year, if performance goals established by the Company’s
board of directors are met, and is entitled to participate in customary benefit plans. There have been no performance goals established.
If the Company terminates the CEO’s employment without cause, he will be entitled to the following: (i) payment of (x) accrued
compensation and unpaid base salary through the date of such termination, (y) any amounts previously deferred by CEO and (z) the
payment or reimbursement for expenses incurred prior to the date of such termination; (ii) an amount equal to 200% of the base
salary and (iii) continued participation, at the Company’s expense, in the Company’s health and welfare programs for
a period of two years after the date of termination. The Company incurred compensation expense of $0 and $0, and $45,000 and $90,000
for the three and six months ended June 30, 2020 and 2019, respectively. At December 31, 2019, the CEO forgave all deferred compensation
totaling $1,499,750 and based on ASC 470-50-40, Extinguishments of Debt, was included in Additional paid-in-capital in
the accompanying consolidated Balance Sheets. In addition, we incurred employee benefits on behalf of the CEO totaling approximately
$3,673 and $13,338, and $1,261 and $4,868 for the three and six months ended June 30, 2020 and 2019, respectively. Employee benefits
include health and dental coverage, use of a car, car insurance, and a gym membership.
The
Company previously had a consulting agreement with its secretary and director (“Secretary”) under which she was compensated
$60,000 per annum. Beginning June 20, 2013, this contract was to continue unless and until terminated at any time by either the
Company or Secretary giving two month notice in writing. Such consulting agreement was terminated by mutual agreement as of May
1, 2015 and superseded by the employment agreement effective May 1, 2015. The initial term of employment agreement expired on
December 31, 2018, unless earlier terminated by either party. The agreement provides for automatic one-year renewals, unless either
party gives notice of their intention not to extend at least 90 days prior to the expiration of any term. Under this employment
agreement, the Secretary receives a minimum annual base salary of $80,000. If the Company terminates the Secretary’s employment
without cause, she will be entitled to the following: (i) payment of (x) accrued compensation and unpaid base salary through the
date of such termination, (y) any amounts previously deferred by Secretary and (z) the payment or reimbursement for expenses incurred
prior to the date of such termination; (ii) an amount equal to 50% of the base salary and (iii) continued participation, at the
Company’s expense, in the Company’s health and welfare programs for a period of two years after the date of termination.
The Company incurred compensation expense of $0 and $0, and $20,000 and $40,000 for the three and six months ended June 30, 2020
and 2019, respectively. At December 31, 2019, the Secretary forgave all deferred compensation totaling $487,000 and based on ASC
470-50-40, Extinguishments of Debt, was included in Additional paid-in-capital in the accompanying consolidated Balance
Sheets. In addition, we incurred employee benefits on behalf of the Secretary totaling approximately $0 and $0, and $1,832 and
$3,634 for the three and months ended June 30, 2020 and 2019, 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 Six Months Ended
June 30,
|
|
|
For the Three Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(268,869
|
)
|
|
$
|
(301,173
|
)
|
|
$
|
(115,655
|
)
|
|
$
|
(116,817
|
)
|
Gain of disposal of discontinued operations
|
|
|
—
|
|
|
|
238,315
|
|
|
|
—
|
|
|
|
—
|
|
Net income (loss) attributable to the common stockholders
|
|
$
|
(268,869
|
)
|
|
$
|
(62,858
|
)
|
|
$
|
(115,655
|
)
|
|
$
|
(116,817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average outstanding shares of common stock
|
|
|
90,229,368
|
|
|
|
81,272,408
|
|
|
|
94,307,206
|
|
|
|
81,272,408
|
|
Dilutive effect of options and warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Diluted weighted average common stock and common stock equivalents
|
|
|
90,229,368
|
|
|
|
81,272,408
|
|
|
|
94,307,206
|
|
|
|
81,272,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share total, basic and diluted
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
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.
Rent expense was approximately $5,400 and
$15,920, and $11,232 and $22,564 for the three and six months ended June 30, 2020 and 2019, 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.
Joint Venture
On
March 12, 2020, the Company entered into a Farm-in and JV Agreement (the "Agreement") with Gabriel Kushnir Holdings Pty
Ltd ("Kushnir"), whereby the Company intends to acquire a seventy-five percent interest in the Werribee Downs Project
associated with a tenement EL006892 application in Australia (the "Tenement") for the purpose of mining minerals. The
Company must incur minimum annual expenditures associated with the Tenement each year until the Company and Kushnir mutually decide
to mine the Tenement, at which time, the Company and Kushnir will enter into a joint venture agreement in order to pursue potential
development of all minerals in the Tenement. If the Company fails to provide the necessary annual minimum expenditures on the Tenement
pursuant to the Mineral Resource Act 1990, the Company will forfeit its ability to receive the seventy-five percent interest in
the Tenement. On March 31, 2020, the Company issued 2,500,000 shares of its common stock to Kushnir as consideration for the Agreement.
NOTE 15 – SUBSEQUENT EVENTS
There were no other events subsequent to
June 30, 2020, and up to the date of this filing that would require disclosure.