The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization
-
Creative Medical Technology Holdings, Inc., formerly Jolley Marketing, Inc. (the “
Company
” or “
CMTH
”) was incorporated on December 3, 1998, in Nevada. On May 18, 2016, the Company consummated an Agreement and
Plan of Merger to acquire all of the outstanding capital stock of Creative Medical Technologies, Inc. (“
CMT
”)
in a transaction which has been accounted for as a recapitalization, reverse merger, of the Company as follows:
|
a.
|
CMT
advanced $25,000 for payment of accounts payable and an outstanding note payable at the closing;
|
|
b.
|
The
Company exchanged 97,000,000 newly issued shares of common stock for all CMT outstanding common stock (at the ratio of 6.466666
shares of the Company’s common stock for each share of CMT);
|
|
c.
|
As part
of the acquisition, CMT purchased 15,100,000 shares of the previously outstanding common stock from an officer and director
of CMTH for $5,000, which shares were immediately cancelled following the purchase;
|
|
d.
|
The
shareholders of CMT acquired voting and operating control of the Company after the recapitalization; and
|
|
e.
|
The
financial operations of the Company, as reported after the merger, are the historical information of CMT.
|
CMT was incorporated in the State of Nevada
on December 30, 2015 (“
Inception
”), and, subject to the reverse merger discussed above, elected December
31 as the Company’s year-end. The Company’s activities to date have consisted of developing a business plan, raising
capital through the issuance of equity instruments and notes payable from related and third parties, and obtaining the rights
via license agreements to certain medical technology.
On September 14, 2016, CMT filed a certificate
of organization for Amniostem LLC, a Nevada limited liability company and wholly owned subsidiary of CMT. Amniostem, LLC was
formed to create and/or license intellectual property in the area of amniotic fluid derived stem cells for therapeutic applications.
With this, management intends to address what it believes are unmet medical needs through development and commercialization of
amniotic fluid stem cell based technologies. Management intends to seek in licensing opportunities as well as create intellectual
property in-house for this newly created entity. In May 2017, we formed StemSpine, LLC (“ StemSpine ”), in Nevada
for the purpose of creating and/or licensing intellectual property in the area of utilizing stem cells to treat lower back pain.
Risks and Uncertainties
-
The Company has a limited operating history and has not generated material revenues from its planned principal operations.
The Company’s business and operations
are sensitive to general business and economic conditions in the U.S. and worldwide. These conditions include short-term and long-term
interest rates, inflation, fluctuations in debt and equity capital markets and the general condition of the U.S. and world economy.
A host of factors beyond the Company’s control could cause fluctuations in these conditions, including the political environment
and acts or threats of war or terrorism. Adverse developments in these general business and economic conditions, including through
recession, downturn or otherwise, could have a material adverse effect on the Company’s financial condition and the results
of its operations.
The Company currently has limited sales
and marketing and/or distribution capabilities. The Company has limited experience in developing, training or managing a sales
force and will incur substantial additional expenses if it decides to market any of its current and future products and services
with an internal sales organization. Developing a marketing and sales force is also time consuming and could delay launch of its
future products and services. In addition, the Company will compete with many companies that currently have extensive and well-funded
marketing and sales operations. The Company’s marketing and sales efforts may be unable to compete successfully against
these companies. In addition, the Company has limited capital to devote to sales and marketing.
The Company’s industry is characterized
by rapid changes in technology and customer demands. As a result, the Company’s products and services may quickly become
obsolete and unmarketable. The Company’s future success will depend on its ability to adapt to technological advances, anticipate
customer demands, develop new products and services and enhance the Company’s current products and services on a timely
and cost-effective basis. Further, the Company’s products and services must remain competitive with those of other companies
with substantially greater resources. The Company may experience technical or other difficulties that could delay or prevent the
development, introduction or marketing of new products and services or enhanced versions of existing products and services. Also,
the Company may not be able to adapt new or enhanced products and services to emerging industry standards, and the Company’s
new products and services may not be favorably received. In addition, the Company may not have the capital resources to further
the development of existing and/or new ones.
Use of Estimates
-
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the
U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Basis of Presentation
-
The consolidated financial statements and accompanying notes have been prepared in accordance with U.S. generally accepted accounting
principles (“
U.S. GAAP
”). The consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of
the Company’s management, the consolidated financial statements include all adjustments, which include only normal recurring
adjustments, necessary for the fair presentation of the Company’s financial position for the periods presented.
Going Concern -
The
accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted
in the U.S., which contemplate continuation of the Company as a going concern. However, during the fiscal year ended December
31, 2017, the Company incurred a net loss of $2,659,108, had negative cash flows from operating activities of $889,621, had negative
working capital of $2,416,696 at December 31, 2017 and had minimal revenue-generating activities. These factors raise substantial
doubt about the ability of the Company to continue as a going concern. In this regard, management is proposing to raise any necessary
additional funds not provided by operations through loans or through additional sales of common stock. There is no assurance that
the Company will be successful in raising this additional capital or in achieving profitable operations. The financial statements
do not include any adjustments that might result from the outcome of these uncertainties.
Concentration Risks -
The
Federal Deposit Insurance Corporation insures cash deposits in most general bank accounts for up to $250,000 per institution.
The Company maintains its cash balances at one financial institution and at times the cash balances may exceed this amount.
Cash Equivalents -
The
Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Fair Value of Financial Instruments
- The Company’s financial instruments consist of cash and cash equivalents, convertible notes, and
payables. The carrying amount of cash and cash equivalents and payables approximates fair value because of the short-term
nature of these items.
Fair value is an exit price, representing
the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between
market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market
participants would use in pricing an asset or liability. Fair value measurements are required to be disclosed by level within
the following fair value hierarchy:
Level 1 – Inputs are unadjusted,
quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2 – Inputs (other
than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation
with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3 – Inputs lack
observable market data to corroborate management’s estimate of what market participants would use in pricing the asset or
liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent
in the inputs to the model.
When determining fair value, whenever
possible the Company uses observable market data, and relies on unobservable inputs only when observable market data is not available.
As of December 31, 2017 the Company has fair level 3 fair value calculations on derivative liabilities. As of December 31,2016,
the Company didn’t have any Level 2 or 3 financial instruments. The table below reflects the results of our Level 3 fair
value calculations:
|
|
Notes
|
|
|
Warrants
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability at December 31, 2016
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Addition of new conversion option derivatives
|
|
|
919,372
|
|
|
|
115,697
|
|
|
|
1,035,069
|
|
Conversion of note derivatives
|
|
|
(245,956
|
)
|
|
|
-
|
|
|
|
(245,956
|
)
|
Change in fair value
|
|
|
386,899
|
|
|
|
133,178
|
|
|
|
520,077
|
|
Derivative liability at December 31, 2017
|
|
$
|
1,060,315
|
|
|
$
|
248,875
|
|
|
$
|
1,309,190
|
|
Impairment
- The Company
records impairment losses when indicators of impairment are present and undiscounted cash flows estimated to be generated by those
assets are less than the assets’ carrying amount. Furthermore, the Company will make periodic assessments of
technology and clinical testing to determine if it plans to continue to pursue the technology and if the license, patent or other
rights have value. To date no impairment has been recorded.
Revenue -
The Company
recognizes revenue as it is earned as defined by U.S. GAAP. From Inception to December 31, 2017, there was minimal revenue recognized.
During 2018, the Company anticipates there will be revenue to report. We have adopted the new revenue recognition standards that
went into effect on January 1, 2018. All revenues reported in 2018 and beyond will reflect those standards.
Research and Development
- Research and development will continue to be a major function of the Company. Research and development costs will be expensed
as incurred. Expenses in the accompanying financial statements include certain costs which are directly associated with
the Company’s research and development:
|
1.
|
Erectile
Dysfunction Technology based upon the use of stem cells. These costs, which consist primarily of monies paid for clinical
trial expenses, materials and supplies and compensation costs amounted to $233,061 for the year ended December 31, 2017. There
were $88,834 in research costs for the period ended December 31, 2016;
|
|
2.
|
Amniotic
Fluid-based Stem Cells. Pre-clinical research costs, which consist primarily of monies paid for laboratory space, materials
and supplies amounted to $27,024 for the year ended December 31, 2017. There were no research costs for the period ended December
31, 2016.
|
Stock-Based Compensation –
The Company accounts for its stock-based compensation in accordance with Accounting Standards Codification (“
ASC
”) 718, Compensation - Stock Compensation. The Company accounts for all stock-based compensation using a fair-value
method on the grant date and recognizes the fair value of each award as an expense over the requisite vesting period.
The Company follows ASC 505-50, Equity-Based
Payments to Non-Employees, for stock options and warrants issued to consultants and other non-employees. In accordance with ASC
505-50, these stock options and warrants issued as compensation for services provided to the Company are accounted for based upon
the fair value of the services provided or the estimated fair market value of the option or warrant, whichever can be more clearly
determined. The fair value of the equity instrument, which is revalued at each reporting period, is charged directly to compensation
expense and additional paid-in capital over the period during which services are rendered.
Income Taxes
– The
Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or in
the Company’s tax returns. Deferred income taxes are recognized for differences between financial reporting and tax bases
of assets and liabilities at the enacted statutory tax rates in effect for the years in which the temporary differences are expected
to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment
date. The Company evaluates the realizability of deferred tax assets and valuation allowances are provided when necessary to reduce
net deferred tax assets to the amounts expected to be realized.
The Company recognizes a tax benefit from
an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such
positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement.
The Company will recognize interest and penalties related to unrecognized tax benefits in the income tax provision in the accompanying
statement of operations.
The Company calculates the current and
deferred income tax provision based on estimates and assumptions that could differ from the actual results reflected in income
tax returns filed in subsequent years. Adjustments based on filed income tax returns are recorded when identified. The amount
of income taxes paid is subject to examination by U.S. federal and state tax authorities. The estimate of the potential outcome
of any uncertain tax issue is subject to management’s assessment of relevant risks, facts and circumstances existing at
that time. To the extent that the assessment of such tax positions change, the change in estimate is recorded in the period in
which the determination is made.
Basic and Diluted Loss Per Share –
The Company follows Financial Accounting Standards Board (“
FASB
”) ASC 260 Earnings per Share to account
for earnings per share. Basic earnings per share (“
EPS
”) calculations are determined by dividing net loss
by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share calculations
are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding.
During loss periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation. During
the year ended December 31, 2017, the Company had 500,000 options and 23,426,087 warrants to purchase common stock outstanding;
however, the effects were anti-dilutive due to the net loss.
Recent Accounting Pronouncements –
The Company has reviewed all recently issued, but not yet adopted, accounting standards in order to determine their effects,
if any, on its results of operation, financial position or cash flows. Based on that review, the Company believes that none
of these pronouncements will have a significant effect on its financial statements.
NOTE 2 – LICENSING
AGREEMENTS
ED Patent
– The Company
acquired a patent from CMH, a related company on February 2, 2016, in exchange for 64,666,667 shares of CMTH restricted common
stock valued at $100,000. CMH holds a significant amount of the Company’s common stock. The patent expires in 2025 and the
Company has elected to amortize the patent over a ten year period on a straight line basis. Amortization expense of $10,000 was
recorded for the year ended December 31, 2017. As of December 31, 2017, the carrying value of the patent was $80,876. The Company
expects to amortize $10,000 annually through 2025 related to the patent costs.
Male Infertility License Agreement
-
The Company has acquired a royalty license from Los Angeles Biomedical Research Institute at Harbor-UCLA Medical Center
(“
LABIOMED
”) granting the exclusive license to the products and services of a LABIOMED patent.
The license was acquired for a cash payment
of $5,000, issuance of 323,333 shares of restricted common stock of the Company (valued at $1,000, which is the par value of $0.01
per share), and an agreement to reimburse LABIOMED up to $1,800 for expenses incurred by LABIOMED in reviving and defending their
patent. The Company has expensed the cash paid, the value of the stock issued, and the expected reimbursement of $1,800 for a
total intangible royalty expense – license fees of $7,800.
The Company is subject to a 6% royalty
payment to LABIOMED on net sales of any products under this license and 25% on any non-royalty sublicense income. Commencing three
years after the date of the agreement, and each subsequent year thereafter, the Company is required to pay to LABIOMED annual
maintenance royalties of $20,000, unless during the prior one-year period the Company paid $50,000 or more in actual royalty payments.
Finally, the Company agreed to pay LABIOMED certain milestone payments upon achieving the milestones set forth in the agreement.
As of December 31, 2017, no amounts are currently due to LABIOMED.
Multipotent Amniotic Fetal Stem
Cells License Agreement -
On August 25, 2016, CMT entered into a License Agreement dated August 25, 2016, with a University.
This license agreement grants to CMT the exclusive right to all products derived from a patent for use of multipotent amniotic
fetal stem cells composition of matter throughout the world during the period ending on the expiration date of the longest-lived
patent rights under the patent. The license agreement also permits CMT to grant sublicenses. Under the terms of the license agreement,
CMT is required to diligently develop, manufacture, and sell any products licensed under the agreement. CMT paid the University
an initial license fee within 30 days of entering into the agreement. CMT is also required to pay annual license maintenance fees
on each anniversary date of the agreement, which maintenance fees would be credited toward any earned royalties for any given
period. The License Agreement provides for payment of various milestone payments and earned royalties on the net sales of licensed
products by CMT or any sub licensee. CMT is also required to reimburse the University for any future costs associated with maintaining
the patent. CMT may terminate the license agreement for any reason upon 90 days’ written notice and the University may terminate
the agreement in the event CMT fails to meet its obligations set forth therein, unless the breach is cured within 30 days of the
notice from the University specifying the breach. CMT is also obligated to indemnify the University against claims arising due
to the exercise of the license by CMT or any sub licensee. As of December 31, 2017, no amounts are currently due to the University.
The Company estimates that the patent
expires in February 2026 and has elected to amortize the patent through the period of expiration on a straight line basis. Amortization
expense of $995 was recorded for the year ended December 31, 2017. As of December 31, 2017, the carrying value of the patent was
$8,773. The Company expects to amortize approximately $1,200 annually through 2026 related to the patent costs.
Lower Back Patent
–
The Company, through a newly created subsidiary of CMT, StemSpine, LLC, acquired a patent from CMH, a related company, on May
17, 2017, for $100,000, payable in cash or stock. The patent expires on May 19, 2027 and the Company has elected to amortize the
patent over a ten-year period on a straight line basis. Amortization expense of $5,000 was recorded for the year ended December
31, 2017. As of December 31, 2017, the carrying value of the patent was $95,000. The company expect to amortize approximately
$10,000 annually through 2027 related to the patent costs.
For a period of five years from the date
of the first sale of any product derived from the patent, StemSpine is required to make royalty payments of 5% from gross sales
of products. StemSpine has also agreed to pay royalties of 50% of sale price or ongoing payments from third parties for licenses
granted under the patent to third parties. In addition, StemSpine has agreed to make progress payments under the patent purchase
agreement determined by whether the technology represented by the patent is tested by use of autologous cells or allogenic cells.
In the case of pursuit of the technology using autologous cells, StemSpine has agreed to pay CMH $100,000 upon the signing of
an agreement with a university for the initiation of an IRB clinical trial and $200,000 upon completion of the clinical trial.
In the event StemSpine determines to pursue the technology using allogenic cells, StemSpine has agreed to pay CMH $100,000 upon
the filing for IND with the FDA; $200,000 upon the dosing of the first patient in Phase 1-2 clinical trial; and $400,000 upon
the dosing of the first patient in Phase 3 clinical trial. In each case StemSpine has the option to make these payments in cash
or in shares of the Company’s common stock at a discount to the market price of the stock at the time of the transaction.
The parties to the patent purchase agreement have agreed that in no event will the aggregate royalty payments under the agreement
exceed $2,500,000.
As of December 31, 2017, future expected
amortization of these assets is as follows:
For the year ended December
31,
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
21,144
|
|
2019
|
|
|
21,144
|
|
2020
|
|
|
21,144
|
|
2021
|
|
|
21,144
|
|
2022
|
|
|
21,144
|
|
Thereafter
|
|
|
78,929
|
|
Total
|
|
$
|
184,649
|
|
NOTE 3 – RELATED PARTY
TRANSACTIONS
The Company has incurred a monetary obligation
to a related corporation to reimburse the cost of services provided to the Company (management and consulting) through December
31, 2017. Each of the Company’s executive officers is employed by the parent company, CMH, and will continue to receive
his or her salary or compensation from CMH. The Company has an agreement with CMH which obligates the Company to reimburse CMH
$35,000 per month for such services beginning January 2016. The compensation paid by CMH will include an allocation of services
performed for CMH and for the Company. The amounts are presented as a “management fee payable - related party” on
the accompanying unaudited condensed consolidated balance sheets. The liability is non-interest bearing, unsecured, and will be
due upon the Company successfully raising at least $1,000,000 through the sale of equity. As of December 31, 2017, amounts due
to CMH under the arrangement were $352,750.
On November 17, 2017, the Company entered
into a Management Reimbursement Agreement dated November 17, 2017, with Creative Medical Technologies, Inc. (“ CMT ”),
the wholly owned subsidiary of the Company, and with Creative Medical Health, Inc., the parent of the Company (“ CMH ”).
The Agreement memorializes the arrangement between the parties whereby the Company has, since January 1, 2016, reimbursed CMH
$35,000 per month for the services of management and consultants employed by CMH and performing services for the Company and CMT.
At the option of CMH, the reimbursable amounts set forth in the Agreement may be paid from time to time in shares of common stock
of the Company at a price equal to a 30% discount to the lowest closing price during the 20 trading days prior to time the notice
is given. The Agreement may be terminated by either party upon 30 days’ prior written notice.
During 2016, the Company entered into
three note payable agreements with CMH in which the proceeds were used in operations. The notes payable were dated February 2,
2016, May 1, 2016 and May 18, 2016 and resulted in borrowings of $50,000, $50,000 and $25,000, respectively. Notes payable of
$50,000 mature on April 30, 2018, $50,000 on July 31, 2018 and $25,000 on May 18, 2018. On May 4, 2017, CMT and CMH entered into
a Note Extension and Limited Waiver Agreement whereby the parties extended the maturity date of the 8% Promissory Note dated February
2, 2016, in the principal amount of $50,000, from April 30, 2017, to April 30, 2018, and CMH waived the nonpayment of the Note
by CMT on the original maturity date. On extension, CMT paid to CMH accrued interest related to the extended note of $4,050. On
July 31, 2017, CMT and CMH entered into a Note Extension and Limited Waiver Agreement whereby the parties extended the maturity
date of the 8% Promissory Note dated May 1, 2016, in the principal amount of $50,000, from July 31, 2017, to July 31, 2018, and
CMH waived the nonpayment of the Note by CMT on the original maturity date. On extension, CMT paid to CMH accrued interest related
to the extended note of $4,050.The notes incur interest at 8% per annum on the outstanding balance of the notes. As of December
31, 2017, accrued, unpaid interest was $8,236. As of December 31, 2016, accrued interest was $6,398.
On August 12, 2016, CMH advanced the Company
$2,000 for operations. The amount is due on demand and does not incur interest.
On May 17, 2017, StemSpine, LLC (“
StemSpine ”), a newly formed Nevada limited liability company and wholly owned subsidiary of Creative Medical Technologies,
Inc. (“ CMT ”), the wholly owned subsidiary of the Company, entered into a Patent Purchase Agreement dated May 17,
2017 (the “ Agreement ”), with Creative Medical Holdings, Inc. (“ CMH ”). Under the terms of the Agreement,
StemSpine acquired U.S. Patent No. 9,598,673 covering use of various stem cells for treatment of lower back pain (the “
Patent ”). On or before June 29, 2017, StemSpine agreed to pay CMH $100,000 for the Patent. Under the terms of the Agreement,
StemSpine also agreed for a period of five years from the date of the first sale of any product derived from the Patent to make
royalty payments of 5% from gross sales of such products. StemSpine has also agreed to pay royalties of 50% of sale price or ongoing
payments from third parties for licenses granted under the Patent to third parties. In addition, StemSpine agreed to make progress
payments under the Agreement determined by whether the technology represented by the Patent is tested by use of autologous cells
or allogenic cells. In the case of pursuit of the technology using autologous cells, StemSpine agreed to pay CMH $100,000 upon
the signing of an agreement with a university for the initiation of an IRB clinical trial; and $200,000 upon completion of the
clinical trial. In the event StemSpine determines to pursue the technology using allogenic cells, StemSpine agreed to pay CMH
$100,000 upon the filing for IND with the FDA; $200,000 upon the dosing of the first patient in Phase 1-2 clinical trial; and
$400,000 upon the dosing of the first patient in Phase 3 clinical trial. In each case, except for the initial payment of $100,000
on or before June 29, 2017, StemSpine has the option to make these payments in cash or in shares of the Company’s common
stock at a 30% discount to the market price of the stock at the time of the transaction. The parties to the Agreement have agreed
that in no event will the aggregate royalty payments under the Agreement exceed $2,500,000.
On November 14, 2017, StemSpine, entered
into an amendment to the Patent Purchase Agreement dated May 17, 2017 (the “ Amendment ”). The Amendment waives the
nonpayment by StemSpine of the initial payment of $100,000 to CMH which was due and payable 30 business days following the date
of the agreement. The Amendment further amends the payment terms of the initial payment to be made upon 30 days’ prior written
demand of CMH and the payment of the progress payments to be made upon 30 days’ prior written demand of CMH, following achievement
of the designated milestones. The initial payment, the progress payments, and the royalties are payable by StemSpine in cash or
Company stock, at the option of CMH. Stock payments are to be made at a discount of 30% to the market price of the Company’s
common stock, based on lowest closing price of the stock during the 20 trading days prior to the date of demand for payment. In
the event the trading price is less than $0.01 per share for two or more consecutive trading days, the number of any shares issuable
doubles. CMH has the right to terminate the agreement upon 10 days’ notice if StemSpine fails to make its required payments.
See Note 2 for discussion of an additional
related party transaction with CMH.
NOTE 4 – DEBT
$100,000 Loan
On April 13, 2017, the Company received
a loan from an accredited investor in the face amount of $100,000, for which $90,000 in proceeds were received. The loan is evidenced
by a promissory note dated April 13, 2017, which bears interest at 12% and which matures on October 13, 2018. We are negotiating
an extension on the loan. In addition, at maturity the Company must pay 125% of principal and interest at maturity. The promissory
note is secured by 400,000 shares of common stock held by the lender. The Company is amortizing the on issuance discount of $35,000
to interest expense using the straight-line method over the term of the loan. During the year ended December 31, 2017 the Company
amortized $35,000 to interest expense. As of December 31, 2017, a discount of $0 remained.
$400,000 Convertible Debenture
On May 2, 2017, the Company entered into
a convertible debenture agreement with a third party for an aggregate principal amount of up to $400,000, for which up to $360,000
in proceeds is to be received. On May 2, 2017, the Company received the first tranche of proceeds of $85,000 for which the Company
issued a convertible debenture in the face amount of $100,000. Under the terms of the agreement, the convertible debenture incurs
interest at 0% per annum with an effective interest rate at 5% per annum and has a maturity date of three years from the date
of funding, which represents May 2, 2020 for the first tranche of proceeds received. Additionally, the Company issued to the holder
50,000 shares of common stock. The convertible note was fully discounted upon issuance due to an on issuance discount of $10,000,
legal processing fees of $5,000 and the remaining discount of $85,000 due to the recording of a derivative liability as discussed
in Note 5. The Company is amortizing the total discount of $100,000 to interest expense using the straight-line method over the
term of the loan. During the year ended December 31, 2017 the Company amortized $45,915 to interest expense. As of December 31,
2017, a discount of $54,085 remained.
The debenture is convertible under the
following terms: 1) any time from issuance until 180 days at a fixed rate of $0.25 per share; 2) any time during the period beginning
on the date which is 180 days following the date of the issuance at the lower of $0.25 or a conversion price equal to 65% (adjusted
to 60% based upon the conversion rate of the $115,000 convertible note discussed below) of the second lowest closing trade price
of the Company’s common stock for the 15 trading days immediately preceding the conversion date. The Company is required
at all times to reserve shares of the Company’s common stock equal to 700% of the number of shares the convertible debenture
is convertible into.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible debenture. On the date of issuance, the Company accounted for the
conversion feature as a derivative liability, See Note 5. Derivative accounting applies as there are various terms in which the
conversion price is variable and does not have a floor as to the number of common shares in which could be converted. Thus, if
the convertible debenture is not repaid prior to the debenture being convertible, significant pressure may be put on the Company’s
stock price and additional dilution of current shareholders may take place. As of December 31, 2017, the lender has converted
$45,000 of principal into 5,357,142 shares of common stock with 54,090,908 shares reserved with our transfer agent with a potential
of up to 64,166,667 being reserved if and when the lender issues a request to our transfer agent.
In the event of default, the holder has
the right to require the Company to repay in cash all or a portion of the convertible debenture at a price equal to 110% of the
aggregate principal amount of the convertible debenture plus all accrued and unpaid interest on the principal amount. In addition,
the default interest rate would increase to the greater of 18% or the maximum amount allowable under the applicable law.
The Company has the option to redeem the
convertible debentures within 90 days from the date of issuance at 105% of the principal and interest; between 91 and to 120 days
from the date of issuance at 115% of the principal and interest; between 121 days and 150 days from the date of issuance at 120%
of the principal and interest; between 151 days and to 180 days from the date of issuance at 130% of the principal and interest;
and after 180 days from the date of issuance at 140% of the principal and interest.
$115,000 Convertible Note
On April 10, 2017, the Company entered
into a convertible note agreement with a third party for an aggregate principal amount of $115,000, for which $103,250 in proceeds
were received on May 5, 2017. Under the terms of the agreement, the convertible note incurs interest at 10% per annum and has
a maturity date of January 10, 2018. The convertible note is convertible upon issuance into shares of the Company’s common
stock at a conversion price equal to 60% of the two lowest trading prices of the Company’s common stock during the previous
25 trading days preceding the conversion date. The Company is required at all times to reserve shares of the Company’s common
stock equal to 10 times the number of common shares the convertible note is convertible into. The Company is amortizing the on
issuance discount of $10,000 and legal processing fees of $1,750 and the remaining discount of $103,250 due to the recording of
a derivative liability as discussed in Note 5. The Company is amortizing the total discount of $115,000 to interest expense using
the straight-line method over the term of the loan. During the year ended December 31, 2017, the Company amortized $110,400 to
interest expense. As of December 31, 2017, a discount of $4,600 remained.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company accounted for the conversion
feature as a derivative liability, see Note 5. Derivative accounting applies as the conversion price is variable and does not
have a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid prior
to the note being converted significant pressure maybe put on the Company’s stock price and additional dilution of current
shareholders may take place. As of December 31, 2017, the lender has converted $13,110 of principal, accrued interest and conversion
fees into 1,295,000 shares of common stock with 148,553,067 reserved with our transfer agent with a potential of up to 317,180,996
being reserved if and when the lender issues a request to our transfer agent.
In the event of default, the holder has
the right to require the Company to repay in cash all or a portion of the convertible note at a price equal to 150% of the aggregate
principal amount of the convertible note plus all accrued and unpaid interest on the principal amount. In addition, the default
interest rate would increase to the greater of 24% or the maximum amount allowable under the applicable law.
$55,000 Convertible Note
On April 24, 2017, the Company entered
into a convertible note agreement with a third party for an aggregate principal amount of $55,000, for which $47,500 in proceeds
were received on May 8, 2017. Under the terms of the agreement, the convertible note incurs interest at 10% per annum and has
a maturity date of April 24, 2018. The convertible note is convertible upon issuance and convertible into shares of the Company’s
stock at a conversion price equal to 60% of the lowest trading price of the Company’s common stock during the previous 20
trading days preceding the conversion date. The Company is required at all times to reserve shares of the Company’s common
stock equal to three times the number of common shares the convertible note is convertible into. In conjunction with the issuance
of the note, the Company issued 200,000 five-year warrants to purchase common stock at $0.25 per share to the note issuer. The
Company is amortizing the on issuance discount of $5,000 and legal processing fees of $2,500 and the remaining discount of $47,500
due to the recording of a derivative liability as discussed in Note 5. The Company is amortizing the total discount of $55,000
to interest expense using the straight-line method over the term of the loan. During the year ended December 31, 2017 the Company
amortized $37,137 to interest expense. As of December 31, 2017, a discount of $17,863 remained.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company accounted for the conversion
feature and the warrants as derivative liabilities, see Note 5. Derivative accounting applies as the conversion price is variable
and does not have a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not
repaid prior to the note being converted significant pressure maybe put on the Company’s stock price and additional dilution
of current shareholders may take place. The warrants were considered derivative liabilities as there are various reset provisions
to the exercise price based upon additional issuances of common stock and equivalents. As of December 31, 2017, the lender has
converted $13,000 of principal, interest and fees into 1,833,334 common shares with 28,035,256 shares reserved with our transfer
agent with a potential of up to 23,513,230 being reserved if and when the lender issues a request to our transfer agent.
In the event of default, the holder has
the right to require the Company to repay in cash all or a portion of the convertible note at a price equal to 150% of the aggregate
principal amount of the convertible note plus all accrued and unpaid interest on the principal amount. In addition, the default
interest rate would increase to the greater of 22% or the maximum amount allowable under the applicable law.
$50,000 Secured Convertible Note
On June 26, 2017, the Company entered
into a convertible note agreement with a third party for an aggregate principal amount of $50,000, for which $50,000 in proceeds
were received on June 26, 2017. Under the terms of the agreement, the convertible note incurs interest at 12% per annum and matured
on December 26, 2017. We are negotiating an extension on the note. The convertible note is convertible upon issuance and convertible
into shares of the Company’s stock at a conversion price equal to or greater than $0.25 or a conversion price equal to 60%
of the average closing trading price of the Company’s common stock during the previous 20 trading days preceding the conversion
date. The Company has pledged 200,000 shares of common stock as security on the note. The Company recorded a discount of $40,681
due to the recording of a derivative liability as discussed in Note 5. The Company amortized the total discount of $40,681 to
interest expense using the straight-line method over the term of the loan. During the year ended December 31, 2017, the Company
amortized $40,681 to interest expense. As of December 31, 2017, a discount of $0 remained.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company accounted for the conversion
feature as a derivative liability, see Note 5. Derivative accounting applies as the conversion price is variable and does not
have a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid prior
to the note being converted significant pressure maybe put on the Company’s stock price and additional dilution of current
shareholders may take place.
In the event of default, the holder has
the right to exercise the Stock Power granted and have the stock certificate representing the pledged stock transferred into the
holder or its broker’s name.
$50,000 Convertible Note
On July 19, 2017, the Company entered
into a convertible note agreement with a third party for an aggregate principal amount of $50,000, for which $43,000 in proceeds
were received on July 25, 2017. Under the terms of the agreement, the convertible note incurs interest at 5% per annum and has
a maturity date of July 19, 2018. The convertible note is convertible upon issuance and convertible into shares of the Company’s
stock at a conversion price equal to 60% of the lowest trading price of the Company’s common stock during the previous 20
trading days preceding the conversion date. The Company is required at all times to reserve shares of the Company’s common
stock equal to ten times the number of common shares the convertible note is convertible into. In conjunction with the issuance
of the note, the Company issued 166,667 five-year warrants to purchase common stock at $0.30 per share to the note issuer. The
Company is amortizing the on issuance discount of $5,000 and legal processing fees of $2,000 and the remaining discount of $43,000
due to the recording of a derivative liability as discussed in Note 5. The Company is amortizing the total discount of $50,000
to interest expense using the straight-line method over the term of the loan. During the year ended December 31, 2017 the Company
amortized $22,603 respectively to interest expense. As of December 31, 2017, a discount of $27,397 remained.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company accounted for the conversion
feature as a derivative liability, see Note 5. Derivative accounting applies as the conversion price is variable and does not
have a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid prior
to the note being converted significant pressure maybe put on the Company’s stock price and additional dilution of current
shareholders may take place. As of December 31, 2017, there were 194,029,660 shares reserved with our transfer agent with a potential
of 85,216,895 being reserved if and when the lender issues a request to our transfer agent.
In the event of default, the default interest
rate would increase to the lesser of 12% or the maximum amount allowable under the applicable law.
The Company has the option to redeem the
convertible notes within 60 days from the date of issuance at 120% of the principal and interest; between 61 and to 120 days from
the date of issuance at 135% of the principal and interest; between 61 days and 90 days from the date of issuance at 125% of the
principal and interest; between 121 days and to 180 days from the date of issuance at 150% of the principal and interest; and
after 180 days the right of prepayment expires.
$55,000 Convertible Note
On August 31, 2017, the Company entered
into a convertible note agreement with a third party for an aggregate principal amount of $55,000, for which $47,500 in proceeds
were received on September 1, 2017. Under the terms of the agreement, the convertible note incurs interest at 22% per annum and
has a maturity date of August 31, 2018. The convertible note is convertible upon issuance and convertible into shares of the Company’s
stock at a conversion price equal to 60% of the lowest trading price of the Company’s common stock during the previous 20
trading days preceding the conversion date. The Company is required at all times to reserve shares of the Company’s common
stock equal to three times the number of common shares the convertible note is convertible into. The Company is amortizing the
on issuance discount of $5,000 and legal processing fees of $2,500 and the remaining discount of $47,500 due to the recording
of a derivative liability as discussed in Note 5. The Company is amortizing the total discount of $55,000 to interest expense
using the straight-line method over the term of the loan. During the year ended December 31, 2017 the Company amortized $18,384
to interest expense. As of December 31, 2017, a discount of $36,616 remained.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company accounted for the conversion
feature as a derivative liability, see Note 5. Derivative accounting applies as the conversion price is variable and does not
have a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid prior
to the note being converted significant pressure maybe put on the Company’s stock price and additional dilution of current
shareholders may take place. As of December 31, 2017, there were 2,115,384 shares reserved with our transfer agent with a potential
of up to 29,522,192 being reserved if and when the lender issues a request to our transfer agent.
In the event of default, the holder has
the right to require the Company to decrease the conversion price equal to 45% of the lowest trading price of the Company’s
common stock during the previous 20 trading days preceding the conversion date. In addition, the default interest rate would increase
to 22%.
The Company has the option to redeem the
convertible notes within 30 days from the date of issuance at 115% of the principal and interest; between 31 and to 60 days from
the date of issuance at 120% of the principal and interest; between 61 days and 90 days from the date of issuance at 125% of the
principal and interest; between 91days and to 120 days from the date of issuance at 130% of the principal and interest; between
121 days and to 180 days from the date of issuance at 135% of the principal and interest; and after 180 days the right of prepayment
expires.
$30,250 Convertible Note
On October 23, 2017, the Company entered
into a convertible note agreement with a third party for an aggregate principal amount of $30,250, for which $25,000 in proceeds
were received on October 30, 2017. Under the terms of the agreement, the convertible note incurs interest at 10% per annum and
has a maturity date of October 23, 2018. The convertible note is convertible upon issuance and convertible into shares of the
Company’s stock at a conversion price equal to 60% of the lowest trading price of the Company’s common stock during
the previous 20 trading days preceding the conversion date. The Company is required at all times to reserve shares of the Company’s
common stock equal to five times the number of common shares the convertible note is convertible into. The Company is amortizing
the on issuance discount of $2,750 and legal processing fees of $2,500 and the remaining discount of $25,000 due to the recording
of a derivative liability as discussed in Note 5. The Company is amortizing the total discount of $30,250 to interest expense
using the straight-line method over the term of the loan. During the year ended December 31, 2017 the Company amortized $5,718
to interest expense. As of December 31, 2017, a discount of $24,532 remained.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company accounted for the conversion
feature as a derivative liability, see Note 5. Derivative accounting applies as the conversion price is variable and does not
have a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid prior
to the note being converted significant pressure maybe put on the Company’s stock price and additional dilution of current
shareholders may take place. As of December 31,2017 , there were 15,125,000 shares reserved with our transfer agent with a potential
of up to 25,470,776 being reserved if and when the lender issues a request to our transfer agent.
In the event of default, the holder has
the right to require the Company to pay an amount equal to 150% multiplied by the then outstanding entire balance of the note,
including principal and accrued unpaid interest.
The Company has the option to redeem the
convertible notes within 180 days from the date of issuance at 140% of the principal and interest.
$58,000 Convertible Note
On November 27, 2017, the Company entered
into a convertible note agreement with a third party for an aggregate principal amount of $58,000, for which $55,000 in proceeds
were received on December 1, 2017. Under the terms of the agreement, the convertible note incurs interest at 12% per annum and
has a maturity date of November 27, 2018. The convertible note is convertible upon issuance and convertible into shares of the
Company’s stock at a conversion price equal to 61% of the average of the two lowest traded prices of the Company’s
common stock during the previous 15 trading days preceding the conversion date. The Company is required at all times to reserve
shares of the Company’s common stock equal to six times the number of common shares the convertible note is convertible
into. The Company is amortizing the on issuance discount of $3,000 and the remaining discount of $55,000 due to the recording
of a derivative liability as discussed in Note 5. The Company is amortizing the total discount of $58,000 to interest expense
using the straight-line method over the term of the loan. During the year ended December 31, 2017 the Company amortized $5,403
to interest expense. As of December 31, 2017, a discount of $52,597 remained.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company accounted for the conversion
feature as a derivative liability, see Note 5. Derivative accounting applies as the conversion price is variable and does not
have a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid prior
to the note being converted significant pressure maybe put on the Company’s stock price and additional dilution of current
shareholders may take place. As of December 31, 2017, there were 16,299,765 shares reserved with our transfer agent with a potential
of up to 57,799,416 being reserved if and when the lender issues a request to our transfer agent.
In the event of default, the holder has
the right to require the Company to pay an amount equal to 150% multiplied by the then outstanding entire balance of the note,
including principal and accrued unpaid interest.
The Company has the option to redeem the
convertible notes within 30 days from the date of issuance at 115% of the principal and interest; between 31 and to 60 days from
the date of issuance at 120% of the principal and interest; between 61 days and 90 days from the date of issuance at 125% of the
principal and interest; between 91days and to 120 days from the date of issuance at 130% of the principal and interest; between
121 days and to 150 days from the date of issuance at 135%, between 121 days and to 180 days from the date of issuance at 140%
of the principal and interest; and after 180 days the right of prepayment expires.
$30,000 Convertible Note
On December 18, 2017, the Company entered
into a convertible note agreement with a third party for an aggregate principal amount of $30,000, for which $27,000 in proceeds
were received on December 18, 2017. Under the terms of the agreement, the convertible note incurs interest at 12% per annum and
has a maturity date of December 18, 2018. The convertible note is convertible upon issuance and convertible into shares of the
Company’s stock at a conversion price equal to 61% of the average of the two lowest traded prices of the Company’s
common stock during the previous 15 trading days preceding the conversion date. The Company is required at all times to reserve
shares of the Company’s common stock equal to six times the number of common shares the convertible note is convertible
into. The Company is amortizing the on issuance discount of $3,000 and the remaining discount of $27,000 due to the recording
of a derivative liability as discussed in Note 5. The Company is amortizing the total discount of $30,000 to interest expense
using the straight-line method over the term of the loan. During the year ended December 31, 2017 the Company amortized $1,315
to interest expense. As of December 31, 2017, a discount of $28,685 remained.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company accounted for the conversion
feature as a derivative liability, see Note 5. Derivative accounting applies as the conversion price is variable and does not
have a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid prior
to the note being converted significant pressure maybe put on the Company’s stock price and additional dilution of current
shareholders may take place. As of December 31, 2017, there were 21,777,266 shares reserved with our transfer agent with a potential
of up to 29,634,314 being reserved if and when the lender issues a request to our transfer agent.
In the event of default, the holder has
the right to require the Company to pay an amount equal to 150% multiplied by the then outstanding entire balance of the note,
including principal and accrued unpaid interest.
The Company has the option to redeem the
convertible notes within 30 days from the date of issuance at 115% of the principal and interest; between 31 and to 60 days from
the date of issuance at 120% of the principal and interest; between 61 days and 90 days from the date of issuance at 125% of the
principal and interest; between 91days and to 120 days from the date of issuance at 130% of the principal and interest; between
121 days and to 150 days from the date of issuance at 135%, between 121 days and to 180 days from the date of issuance at 140%
of the principal and interest; and after 180 days the right of prepayment expires.
As of December 31, 2017, future loan maturities
are as follows:
For the year ended December
31,
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
393,250
|
|
2019
|
|
|
-
|
|
2020
|
|
|
100,000
|
|
Total
|
|
$
|
493,250
|
|
NOTE 5 – DERIVATIVE LIABILITIES
Derivative Liabilities
In connection with convertible notes payable,
the Company records derivative liabilities for the conversion feature. In addition, the Company has warrants for which the exercise
prices reset upon future events. These warrants are also considered to be derivative liabilities. The derivative liabilities are
valued on the date the convertible note payable become convertible and revalued at each reporting period. The warrants are valued
on the date of issuance and revalued at each reporting period. During the year ended December 31, 2017, the Company recorded initial
derivative liabilities of $1,035,069 based upon the following Black-Scholes option pricing model average assumptions: an exercise
price of $0.0040 to $0.3000 our stock price on the date of grant of $0.0226 to $0.4500, expected dividend yield of 0%, expected
volatility of 50% to 99%, risk free interest rate of 0.86% to 2.01% and expected terms ranging from 0.5 to 5.0 years. Upon initial
valuation, the derivative liability exceeded the face value certain of the convertible note payables by approximately $561,138,
which was recorded as a day one loss on derivative liability.
On December 31, 2017, the derivative liabilities
were revalued at $1,309,191 resulting in a loss of $520,078 related to the change in fair market value of the derivative liabilities.
The derivative liabilities were revalued using the Black-Scholes option pricing model with the following average assumptions:
an exercise price of $0.0040 to $0.0200, our stock price on the date of valuation $0.0135, expected dividend yield of 0%, expected
volatility of 83%, risk-free interest rate of 2.01%, and an expected terms ranging from 0.5 to 4.6 years.
Future Potential Dilution
Most of the Company’s convertible
notes payable contain adjustable conversion terms with significant discounts to market. As of December 31, 2017 the Company’s
convertible notes payable are potentially convertible into an aggregate of approximately 87.6 million shares of common stock.
In addition, due to the variable conversion prices on some of the Company’s convertible notes, the number of common shares
issuable is dependent upon the traded price of the Company’s common stock.
NOTE 6 – STOCK-BASED COMPENSATION
The Company has reserved 2,000,000 shares
under its 2016 Stock Incentive Plan (the “
Plan
”). The Plan was adopted by the board of directors on May 18,
2016, as a vehicle for the recruitment and retention of qualified employees and consultants. The Plan is administered by the Board
of Directors. The Company may issue, to eligible employees or contractors, restricted common stock, options, stock appreciation
rights and restricted stock units. The terms and conditions of awards under the Plan will be determined by the Board of Directors.
In July and September 2016, the Company
granted 10-year options to two parties for accepting appointment to the Company’s scientific advisory board. Each award
consisted of options to purchase up to 250,000 shares at $0.175 per share. The options vest at a rate of 50,000 on each anniversary
date of the respective grants. The options are accounted for as non-employee stock options and thus revalued for reporting purposes
at the end of each quarter.
The fair value of each option award is
estimated using the Black-Scholes valuation model. Assumptions used in calculating the fair value during the year ended December
31, 2017 were as follows:
|
|
Weighted
Average
Inputs Used
|
|
|
|
|
|
Annual dividend yield
|
|
$
|
-
|
|
Expected life (years)
|
|
|
6.05-6.24
|
|
Risk-free interest rate
|
|
|
2.01
|
%
|
Expected volatility
|
|
|
82.97
|
%
|
Common stock price
|
|
$
|
0.0135
|
|
Since the expected life of the options
was greater than the Company’s historical stock information available, the Company determined the expected volatility based
on price fluctuations of comparable public companies.
Stock based compensation for the year
ended December 31, 2017 was $144,160, and included with general and administrative expenses. As of December 31, 2017, future estimated
stock based compensation expected to be recorded was estimated to be $1,800 which will be recognized through 2021.
Option activity for the year ended December
31, 2016 consists of the following:
|
|
Stock Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Life Remaining
|
|
Outstanding, December 31, 2016
|
|
|
500,000
|
|
|
$
|
0.18
|
|
|
|
9.65
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, December 31, 2016
|
|
|
500,000
|
|
|
$
|
0.18
|
|
|
|
8.65
|
|
Vested, December 31, 2017
|
|
|
100,000
|
|
|
$
|
0.18
|
|
|
|
8.65
|
|
There were no options issued during the
year ended December 31, 2017.
See Note 2 for discussion related to the
issuance of common stock in connection with licensing agreements. See Note 4 and 5 for discussion regarding warrants issued with
a convertible note payable.
NOTE 7 – STOCKHOLDERS’ DEFICIT
In August 2016, the Company commenced
a non-public offering of common stock at $0.10 per share, and at no additional cost, one warrant to purchase another share of
common stock at $0.10 per share for each ten shares purchased in the offering. The securities offered have not been and will not
be registered under the Securities Act of 1933, as amended, and may not be offered or sold in the U.S. absent registration or
an applicable exemption from registration requirements. From August 6, 2016 to December 31, 2016, the Company sold 5,000,000 shares
in this offering resulting in proceeds of $500,000 and the issuance of warrants to purchase 500,000 shares of common stock. Of
this amount $30,000 was received from CMH, a related party. The fair value of the warrants of $32,530 was estimated using the
Black-Scholes valuation model. The warrants were classified as equity as they were issued in connection with a capital raise.
Assumptions used in calculating the fair value of the warrants during the year ended December 31, 2016 were as follows:
|
|
Weighted Average
|
|
|
|
Inputs Used
|
|
Annual dividend yield
|
|
$
|
-
|
|
Expected life (years)
|
|
|
3.00
|
|
Risk-free interest rate
|
|
|
0.86
|
%
|
Expected volatility
|
|
|
102.59
|
%
|
Common stock price
|
|
$
|
0.10
|
|
In March 2017, the Company sold 1,000,000
shares to an accredited investor resulting in proceeds of $100,000 and the issuance of a 2.35 year warrant to purchase 100,000
shares of common stock at $0.10 per share. The fair value of the warrants of $5,546 was estimated using the Black-Scholes valuation
model. The warrants were classified as equity as they were issued in connection with a capital raise.
Assumptions used in calculating the fair
value of the warrant issued in March 2017 were as follows:
|
|
Weighted
Average
|
|
|
|
Inputs
Used
|
|
Annual dividend yield
|
|
$
|
-
|
|
Expected life (years)
|
|
|
2.36
|
|
Risk-free interest rate
|
|
|
0.86
|
%
|
Expected volatility
|
|
|
98.38
|
%
|
Common stock price
|
|
$
|
0.10
|
|
On May 8, 2017, the Company entered into
a convertible loan agreement with a third party that included 200,000 5-year warrants to purchase a share of common stock at $0.25
per share. On the date of issuance, the Company accounted for the conversion feature on the warrants as a derivative liabilities,
see Note 5. Derivative accounting applies as the number of warrants and the conversion price are variable and do not have a floor
as to the number of common shares in which could be converted. For the year ended December 31, 2017 the initial issuance of 200,000
warrants was increased to 11,956,522 to reflect the terms of the warrant agreement.
Assumptions used in calculating the fair
value of the warrant issued on May 8, 2017 at issuance and for the year ended December 31, 2017 were as follows:
|
|
2017
|
|
|
|
May 8
|
|
|
Dec 31
|
|
Annual dividend yield
|
|
$
|
-
|
|
|
$
|
-
|
|
Expected Life (years)
|
|
|
5.00
|
|
|
|
4.31
|
|
Risk-free interest rate
|
|
|
0.86
|
%
|
|
|
2.01
|
%
|
Expected volatility
|
|
|
91.08
|
%
|
|
|
82.97
|
%
|
Common Stock Price
|
|
$
|
0.4500
|
|
|
$
|
0.0135
|
|
On July 19 2017, the Company entered into
a convertible loan agreement with a third party that included 166,667 5-year warrants to purchase a share of common stock at $0.30
per share. On the date of issuance, the Company accounted for the conversion feature on the warrants as a derivative liabilities,
see Note 5. Derivative accounting applies as the number of warrants and the conversion price are variable and do not have a floor
as to the number of common shares in which could be converted. For the year ended December 31, 2017 the initial issuance of 166,667
warrants was increased to 10,869,565 to reflect the terms of the warrant agreement.
Assumptions used in calculating the fair
value of the warrant issued on July 19, 2017 at issuance and for the year ended December 31, 2017 were as follows:
|
|
2017
|
|
|
|
July 19
|
|
|
Dec 31
|
|
Annual dividend yield
|
|
$
|
-
|
|
|
$
|
-
|
|
Expected Life (years)
|
|
|
5.00
|
|
|
|
4.55
|
|
Risk-free interest rate
|
|
|
0.86
|
%
|
|
|
2.01
|
%
|
Expected volatility
|
|
|
78.71
|
%
|
|
|
82.97
|
%
|
Common Stock Price
|
|
$
|
0.4000
|
|
|
$
|
0.0135
|
|
Warrant activity for the year ended December
31, 2017 consists of the following:
|
|
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Life Remaining
|
|
Outstanding, December 31, 2016
|
|
|
500,000
|
|
|
$
|
0.1000
|
|
|
|
2.82
|
|
Issued
|
|
|
22,926,087
|
|
|
|
0.0046
|
|
|
|
4.43
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, December 31, 2016
|
|
|
23,426,087
|
|
|
$
|
0.0070
|
|
|
|
4.40
|
|
Vested, December 31, 2016
|
|
|
23,426,087
|
|
|
$
|
0.0070
|
|
|
|
4.40
|
|
See Note 2 for discussion related to the
issuance of common stock in connection with licensing agreements.
See Note 3 for discussion related to the
issuance of common stock to a related party for cash.
NOTE 8 – INCOME TAXES
The provision for income tax expense consists
of the following at December 31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
Income tax provision attributable to:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(691,368
|
)
|
|
$
|
(199,179
|
)
|
State and local
|
|
|
(212,729
|
)
|
|
|
(61,286
|
)
|
Valuation allowance
|
|
|
904,097
|
|
|
|
260,465
|
|
Net provision for income tax
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred tax assets consists of the following
at December 31, 2016 and 2015:
|
|
2017
|
|
|
2015
|
|
Deferred tax asset attributable to:
|
|
|
|
|
|
|
|
|
Net operating loss carryover
|
|
$
|
950,361
|
|
|
$
|
189,064
|
|
Accrued management fees, related party
|
|
|
142,800
|
|
|
|
71,400
|
|
Valuation allowance
|
|
|
(1,093,161
|
)
|
|
|
(260,464
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The primary difference between the statutory
federal rate and the Company’s effective tax rate for the year ended December 31, 2017 was due to the 100% valuation allowance.
As of December 31, 2017, the Company had
federal and state net operating loss carryforwards of approximately $557,000. The federal and state net operating losses and tax
credits expire in years beginning in 2036. Under Section 382 and 383 of the Internal Revenue Code of 1986, as amended, or
the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change
net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change
income may be limited. In general, an “ownership change” will occur if there is a cumulative change in our ownership
by “5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may
apply under state tax laws. To date, the Company hasn’t experienced “ownership changes” under section 382 of
the Code and comparable state tax laws. As of December 31, 2017, the Company estimates that none of the federal and state net
operating losses will be limited under Section 382 of the Code.
As of December 31, 2017 and 2016, the
Company maintained a full valuation allowance on its net deferred tax assets. The valuation allowance was determined in accordance
with the provisions of ASC 740, Accounting for Income Taxes, which requires an assessment of both positive and negative evidence
when determining whether it is more likely than not that deferred tax assets are recoverable. Such assessment is required on a
jurisdiction by jurisdiction basis. The Company’s history of cumulative losses, along with expected future U.S. losses required
that a full valuation allowance be recorded against all net deferred tax assets. The Company intends to maintain a full valuation
allowance on net deferred tax assets until sufficient positive evidence exists to support reversal of the valuation allowance.
The Company files income tax returns in
the U.S. and Arizona. All years presented remain subject to examination for U.S. federal and state purposes. The Company is not
currently under examination in federal or state jurisdictions.
NOTE 9 – SUBSEQUENT
EVENTS
On January 9, 2018, the stockholders of
the Company acted by way of non-unanimous majority written consent action (in lieu of a special meeting of stockholders) to approve
an amendment to the Company’s Articles of Incorporation, as amended and corrected, to increase the authorized shares of
Common Stock from 600,000,000 to 3,000,000,000, par value $0.001 per share. The amendment will be effective on February 22, 2018.
On January 12, 2018, the Company entered
into a Debt Settlement Agreement with Creative Medical Health, Inc., the parent of the Company, to exchange $150,000 in management
fees owed to Creative Medical Health, Inc. in exchange for 3,000,000 shares of Series A Preferred Stock. In turn, Creative Medical
Health, Inc. entered into a Debt Settlement Agreement with Timothy Warbington, our CEO, Chairman, and principal shareholder to
transfer the 3,000,000 shares of Series A Preferred Stock in exchange for $150,000 of unpaid compensation owed to Mr. Warbington.
In conjunction with the Debt Settlement
Agreement with Creative Medical Health, Inc., on January 12, 2018, the Board of Directors authorized, adopted, and filed the Certificate
of Designation creating the Series A Preferred Stock from the authorized preferred shares of the Company. The Series A Preferred
Stock has the following rights and preferences:
|
·
|
The
new series consists of 3,000,000 shares of the authorized but unissued preferred stock
of the Company;
|
|
·
|
Holders
of the Series A Preferred Stock will be entitled to participate with the holders of the
Company’s common stock pari passu in any dividends paid or set aside for payment
by the Board of Directors;
|
|
·
|
Upon
liquidation holders of shares of Series A Preferred Stock then outstanding will be entitled
to receive, before any payment is made or any assets distributed to the holders of the
common stock, an amount per share of the Series A Preferred Stock equal to $0.05 plus
simple interest at the rate of 8% per annum from the issuance date of the outstanding
shares of Series A Preferred Stock;
|
|
·
|
Each
Share of Series A Preferred Stock entitles the holder thereof to vote with the holders
of common stock, voting together as a single class, with respect to any and all matters
presented to the holders of common stock and entitles each share of Series A Preferred
Stock to cast 1,000 votes per share;
|
|
·
|
On
or after the fourth anniversary of the issuance date of shares of the Series A Preferred
Stock, the Company, at its option, may redeem all, but not less than all, of the outstanding
shares of Series A Preferred Stock by paying to the holder a cash amount equaling $0.05
plus simple interest at the rate of 8% per annum from the date of issuance of the shares,
plus any accrued and unpaid dividends thereon to the date fixed for redemption; and
|
|
·
|
The
Series A Preferred Stock is not convertible into common shares or any other class of
authorized stock of the Company.
|
On January 9, 2018, the Company entered
into a convertible note agreement with a lender for an aggregate principal amount of $30,000, in exchange for the release of 50,000
warrants issued with a May 18, 2017 convertible note. The note is convertible into shares of the Company’s stock at a conversion
price equal to 60% of the lowest traded price of the Company’s common stock during the previous 20 trading days preceding
the conversion date.
On January 17, 2018, the Company entered
into a convertible note agreement with a lender for an aggregate principal amount of $44,000, for which $19,000 in proceeds were
received on January 23, 2018 and the remaining $19,000 received on February 26, 2018. The note is convertible into shares of the
Company’s stock at a conversion price equal to 60% of the lowest traded price of the Company’s common stock during
the previous 20 trading days preceding the conversion date.
On January 22, 2018, the Company entered
into a convertible note agreement with a lender for an aggregate principal amount of $12,500, in exchange for services rendered.
The note is convertible into shares of the Company’s stock at a conversion price equal to 60% of the lowest traded price
of the Company’s common stock during the previous 20 trading days preceding the conversion date.
On February 15, 2018, the Company entered
into a convertible note agreement with a lender for an aggregate principal amount of $53,000, for which $50,000 in proceeds were
received on February 22, 2018. The note is convertible into shares of the Company’s stock at a conversion price equal to
61% of the average of the two lowest traded prices of the Company’s common stock during the previous 15 trading days preceding
the conversion date.
On March 9, 2018, the Company entered
into a convertible note agreement with a lender for an aggregate principal amount of $30,000, for which $23,500 in proceeds were
received on March 9, 2018. The note is convertible into shares of the Company’s stock at a conversion price equal to 60%
of the lowest traded price of the Company’s common stock during the previous 20 trading days preceding the conversion date.
From January 3, 2018 to March 14, 2018
convertible note holders converted $157,652 of principal and interest and $6,000 in legal fees into 130,016,169 common shares.