ON THE MOVE SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
__________
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*
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The indicated notes were in default and bear default interest of between 18% and 25% per annum.
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**
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The indicated notes were in default with no default interest due.
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(1)
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The note is convertible beginning six months after the date of issuance.
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(2)
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The notes are accounted for and evaluated under ASC 480 as discussed in Note 3.
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During the three months ended May 31, 2018 and 2017, the Company incurred original issue discounts of $48,893 and $0, respectively, and derivative discounts of $800,608 and $0, respectively, related to new convertible notes payable. These amounts are included in discounts on convertible notes payable and are being amortized to interest expense over the life of the convertible notes payable. During the three months ended May 31, 2018 and 2017, the Company recognized interest expense related to the amortization of debt discount of $1,133,763 and $0, respectively.
All the notes above are unsecured. As of May 31, 2018, the Company had total accrued interest payable of $960,608, of which $898,929 is classified as current and $61,679 is classified as noncurrent.
Convertible notes issued
On January 5, 2018, the Company issued an additional convertible promissory note to an investor with an aggregate principal amount of $250,000, due on January 5, 2019 for cash proceeds of $225,000 payable in tranches, with an original issue discount of $25,000. Each tranche matures one year after disbursement. The promissory note is convertible into common shares of the Company and a conversion price equal to 60% of the lowest trading price of the Company’s common stock for the last 25 trading days prior to conversion, and has a 10% per annum interest rate commencing on January 5, 2018. On March 14, 2018, this note was amended to include the issuance of warrants to purchase 333,333 shares of the Company’s common stock with an exercise price of $0.15 with a 3-year maturity, and to change the date of the note to March 14, 2018, coinciding with the payment of the first tranche of $50,000 including cash proceeds of $43,000, fees of $2,000 and an original issue discount of $5,000.
On March 1, 2018, the Company issued a convertible redeemable note to an investor with an aggregate principal amount of $95,000, due on March 1, 2019 for cash proceeds of $95,000. The promissory note is convertible into units of the Company comprised of one share of common stock and one warrant to purchase a share of common stock with a three-year maturity and a conversion price equal to 50% of the lowest bid price of the Company’s common stock for the last 40 trading days prior to conversion, and has a 15% per annum interest rate commencing on March 1, 2018.
In March 2018 and April 2018, $200,000 was paid on the June 7, 2017 back end note for $200,000 from an investor maturing June 7, 2018. The note is convertible into common shares of the Company and a conversion price equal to 60% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has an 8% per annum interest rate.
On April 9, 2018, the Company issued a convertible redeemable note to an investor with an aggregate principal amount of $55,000, due on April 9, 2019 for cash proceeds of $55,000. The promissory note is convertible into units of the Company comprised of one share of common stock and one warrant to purchase a share of common stock with a three-year maturity and a conversion price equal to 50% of the lowest bid price of the Company’s common stock for the last 40 trading days prior to conversion, and has a 15% per annum interest rate commencing on April 9, 2018.
In April 2018, the Company received $76,000 of proceeds from an investor for two back-end notes with a total principal amount of $80,000, including original issue discounts of $4,000 and a one-year maturity. The back-end notes are convertible into common shares of the Company at a conversion price equal to 60% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and have an 8% per annum interest rate.
On May 2, 2018, the Company received $70,000 of proceeds from an investor for a promissory note with a principal amount of $77,000, including an original issue discounts of $7,000 and an eight-month maturity. The promissory note is convertible into common shares of the Company at a conversion price equal to 60% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has a 10% per annum interest rate commencing on May 2, 2018.
- 16 -
ON THE MOVE SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On May 4, 2018, the Company received $71,500 of proceeds from an investor for a promissory note with a principal amount of $82,500, including an original issue discounts of $19,892 and a one-year maturity. The promissory note is convertible into common shares of the Company at a conversion price equal to 50% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has a 12% per annum interest rate commencing on May 4, 2018.
On May 23, 2018, the Company received $90,108 of proceeds from an investor for a promissory note with a principal amount of $110,000, including an original issue discounts of $19,892 and an eight-month maturity. The promissory note is convertible into common shares of the Company at a conversion price equal to 50% of the lowest trading price of the Company’s common stock for the last 40 trading days prior to conversion, and has a 10% per annum interest rate commencing on May 23, 2018.
During the three months ended May 31, 2018, a debt holder transferred debt of $344,040, including accrued interest to third parties, who exchanged it for new convertible notes totaling $344,040; $100,000 with a one-year maturity, maturing on April 17, 2019, and bearing interest at 8% per annum; $144,404, with a one-year maturity, maturing on April 20, 2019, and bearing interest at 8% per annum; and $100,000 with an eight-month maturity, maturing on December 14, 2018, bearing interest at 10% per annum. A gain on settlement of debt of $268,145 was recorded that includes the amount of associated derivative liability that was written off.
Conversions to common stock
During the three months ended May 31, 2018, holders of certain convertible notes payable elected to convert principal and accrued interest in the amounts shown below into shares of common stock. No gain or loss was recognized on conversions as they occurred within the terms of the agreement that provided for conversion.
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Conversion Date
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Principal Converted
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Interest Converted
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Fees Converted
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Total Amount Converted
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Shares Converted
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April 16, 2018
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$
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132,160
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$
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—
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$
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—
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$
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132,160
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6,400,000
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April 26, 2018
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14,500
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—
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500
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15,000
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1,428,572
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May 1, 2018
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26,250
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—
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—
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26,250
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2,500,000
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May 3, 2018
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5,000
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—
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—
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5,000
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476,190
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May 7, 2018
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27,900
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—
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—
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27,900
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3,000,000
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May 10, 2018
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32,400
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—
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—
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32,400
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4,000,000
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May 11, 2018
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14,500
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—
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500
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15,000
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1,851,852
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May 15, 2018
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7,060
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—
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500
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7,560
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1,600,000
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May 15, 2018
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8,000
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—
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—
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8,000
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987,654
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May 21, 2018
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20,250
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—
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—
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20,250
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2,500,000
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May 22, 2018
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6,075
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—
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—
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6,075
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900,000
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May 24, 2018
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13,056
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3,300
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—
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16,356
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2,096,923
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May 30, 2018
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8,182
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—
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—
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8,182
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1,515,152
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May 30, 2018
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15,000
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—
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—
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15,000
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3,000,000
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$
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330,333
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$
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3,300
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$
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1,500
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$
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335,133
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32,256,343
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11. RELATED PARTY TRANSACTIONS
For the three months ended May 31, 2018, the Company received net advances of $37,309 from its loan payable with a related party. At May 31, 2018, the balance due to the related party was $353,451, and $316,142 at February 28, 2018.
During the three months ended May 31, 2018, the Company paid $135,340 in consulting fees for research and development to a company owned by a principal shareholder.
- 17 -
ON THE MOVE SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
12. OTHER DEBT – VEHICLE LOANS
In December 2016, RAD entered into a vehicle loan for $47,704 secured by the vehicle. The loan is repayable over 5 years maturing November 9, 2021 and repayable at $1,019 per month including interest and principal. In November 2017, the Company entered into another vehicle loan secured by the vehicle for $47,704. The loan is repayable over 5 years, maturing October 24, 2022 and repayable at $923 per month including interest and principal. The principal repayments were $4,435 and $1,945 for the three months ended May 31, 2018 and 2017, respectively. The balances of the amounts owed on the vehicle loan were $77,727 and $82,162 as of May 31, 2018 and February 28, 2018, respectively, of which $17,830 and $17,830 were classified as current and $59,897 and $64,332 as long-term, respectively.
13. DERIVATIVE LIABILITES
As of May 31, 2018, the Company revalued the fair value of all of the Company’s derivative liabilities associated with the conversion features on the convertible notes payable and determined that it had total derivative liabilities of $13,910,995.
The Company estimated the fair value of the derivative liabilities using the Monte-Carlo model using the following key assumptions during the three months ended May 31, 2018:
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Strike price
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$1.00 - $0.001
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Fair value of Company common stock
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$0.0739 - $0.0110
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Dividend yield
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0.00%
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Expected volatility
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258% - 116%
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Risk free interest rate
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1.20% - 2.32%
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Expected term (years)
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0.00 - 3.66
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During the three months ended May 31, 2018, the Company released $685,130 and $0, respectively, of the Company’s derivative liability to equity due to the conversions of principal and interest on the associated notes.
The changes in the derivative liabilities (Level 3 financial instruments) measured at fair value on a recurring basis for the nine months ended May 31, 2018 were as follows:
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Balance as of February 28, 2018
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$
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31,113,844
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Release of derivative liability on conversion of convertible notes payable to equity
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(484,161
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)
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Debt discount due to derivative liabilities
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800,608
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Derivative liability in excess of face value of debt recorded to interest expense
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599,842
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Reduction in derivative liability due to debt settlement
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(267,245
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)
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Change in fair value of derivative liabilities
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(17,851,893
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)
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Balance as of May 31, 2018
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$
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13,910,995
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14. SHAREHOLDERS’ DEFICIT
Summary of Preferred Stock Activity
During the three months ended May 31, 2018, the Company received $174,070 for the sale of 65 Series F preferred shares. As of the reporting date these shares have not been issued and are included in preferred stock to be issued on the balance sheet.
Summary of Common Stock Activity
During the three months ended May 31, 2018, the Company issued 32,256,343 shares of its common stock for the conversion of debt and related interest and fees totaling $335,133, including $330,333 for of principal, $3,300 interest and $1,500 in fees in connection with debt converted during the period.
- 18 -
ON THE MOVE SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Summary of Stock Option Activity
As part of the asset purchase agreement described in Note 7, the Company issued 450,000 options to purchase shares at an exercise price of $0.05 per share that vest on October 2, 2021.
The options have a fair value of $27,843, based on the Black-Scholes Option Pricing model with the following assumptions:
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Strike price
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$0.05
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Fair value of Company’s common stock
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$0.06
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Dividend yield
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0.00%
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Expected volatility
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303.81%
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Risk free interest rate
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1.94%
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Expected term (years)
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4.00
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The Company will amortize the $27,843 over the four-year term on a straight-line basis as stock-based compensation. For the three-month period ended May 31, 2018, the Company amortized $1,753 to stock-based compensation with a corresponding adjustment to additional paid-in capital. At May 31, 2018, the unamortized expense was $23,250 and the intrinsic value was $0.
On April 16, 2018, the Company issued warrants to purchase 6,400,000 shares of the Company’s common stock in connection with its issuance of 6,400,000 shares of the Company’s common stock to an investor as a part of a debt conversion (see Note 10). The warrants have an exercise price of $0.02 per share and a three-year term.
The warrants have a fair value of $472,960, based on the Black-Scholes Option Pricing model with the following assumptions:
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Strike price
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$0.02
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Fair value of Company’s common stock
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$0.07
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Dividend yield
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0.00%
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Expected volatility
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305.71%
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Risk free interest rate
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2.52%
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Expected term (years)
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5.00
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The Company recorded $472,960 to stock-based compensation with a corresponding adjustment to additional paid-in capital.
15. COMMITMENTS AND CONTINGENCIES
Litigation
Occasionally, the Company may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision for a liability when it believes that is both probable that a liability has been incurred, and the amount can be reasonably estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s condensed consolidated financial statements. Contingencies are inherently unpredictable, and the assessments of the value can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions.
In February 2016, OMVS received notice that it had been sued in the Clark County District Court of Nevada. The plaintiff alleges that OMVS obtained certain trade secrets through a third party also named in the suit. OMVS believes the suit is without merit and intend to vigorously defend it. An arbitration was conducted on May 9, 2017, and the Plaintiff filed a Notice of Trial de Novo, seeking a review of the merit dismissal. It is counsel’s opinion this Trial de Novo is without merit and OMVS should prevail.
Operating Lease
The Company’s principal facility is located in Orange County, California. The lease agreement includes, escalating lease payments, renewal provisions and other provisions. The lease began in April 2017 and expires in March 2022. Rent expense is recorded over the lease terms on a straight-line basis. The security deposit of $25,747 was recorded as a long-term asset as of August 31, 2017.
- 19 -
ON THE MOVE SYSTEMS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company also leases premises in northern California. The lease began in August 2017 and expires in August 2020. The security deposit of $5,126 was paid on September 1, 2017. The Company shares premises with a supplier, who is the co-lessee. Through agreement with the supplier, the Company agreed to pay 75% of the lease costs and the supplier agreed to pay 25%.
On February 1, 2018, the Company entered into an additional lease for premises for a robotic control center. The lease runs from February 1, 2018 to January 31, 2021 for $550 per month.
The Company’s leases are accounted for as operating leases. Rent expense is recorded over the lease terms on a straight-line basis. Rent expense was $29,605 for the three months ended May 31, 2018. Rent expense was $11,229 for the three months ended May 31, 2017.
At May 31, 2018, the Company’s future minimum payments are as follows:
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Twelve Months Ended
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Amount
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May 31, 2019
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$
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117,425
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May 31, 2020
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120,576
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May 31, 2021
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77,439
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May 31, 2022
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48,298
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$
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363,738
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16. SUBSEQUENT EVENTS
Subsequent to May 31, 2018, convertible note holders converted $116,570 of principal and $1,000 in fees into 29,445,020 shares of the Company’s common stock.
Additionally, 1,600,000 shares of the Company’s common stock were cancelled by a convertible note holder. The Company added back the $7,060 of principal that was converted to the convertible note as a result of this cancellation.
On June 6, 2018, a note holder transferred debt of $299,200, including accrued interest, to a related party to the note holder who exchanged it for a new convertible note for the same value under the same terms and conditions.
On June 11, 2018, the Company entered into a promissory note for cash proceeds of $48,000. The note bears interest at 25% per annum on the unpaid principal portion. The principal and a portion of the interest is payable in twelve equal monthly instalments of $4,562.12. An additional 2% per annum penalty per day is incurred if the Company is in default of the note. The note is secured by specific fixed assets of the Company. In addition as part of the note, the Company issued warrants to purchase 250,000 shares of the Company’s common stock with an exercise price of $0.03 per share, a three-year maturity and a grant date fair value of $3,225 based on the Black-Scholes Option Pricing model.
- 20 -