Notes to Consolidated Financial Statements
Note 1 – History and organization of the company
The Company was originally organized on September 11, 2006 (Date of Inception) under the laws of the State of Nevada, as The Engraving Masters, Inc. The Company was authorized to issue up to 100,000,000 shares of its common stock and 100,000,000 shares of preferred stock, each with a par value of $0.001 per share.
On March 14, 2014, the Company acquired Blue Line Protection Group, Inc., a Colorado corporation formed in February 2014 ("Blue Line Colorado"), as a wholly-owned subsidiary of the Company. Blue Line Colorado provides protection, compliance and financial services to the lawful cannabis industry.
On May 2, 2014, the Company changed its name from The Engraving Masters, Inc. to Blue Line Protection Group, Inc. ("BLPG")
On May 6, 2014, the Company effected a forward stock split and a pro-rata increase in its authorized common stock on a basis of 14-to-1, whereby each shareholder received 14 newly issued shares of common stock for each 1 share held. Additionally, the authorized capital of the Company concurrently increased to 1,400,000,000 shares of common stock. All references to share and per share amounts in the consolidated financial statements and accompanying notes thereto have been retroactively restated to reflect the forward stock split.
The Company provides armed protection, logistics, and compliance services for businesses engaged in the legal cannabis industry. The Company offers asset logistic services, such as armored transportation service; security services, including shipment protection, money escorts, security monitoring, asset vaulting, VIP and dignitary protection, financial services, such as handling transportation and storage of currency; training; and compliance services.
Note 2 – Accounting policies and procedures
Principles of consolidation
For the years ended December 31, 2017 and 2016, The consolidated financial statements include the accounts of Blue Line Protection Group, Inc. (formerly The Engraving Masters, Inc.), Blue Line Advisory Services, Inc. (a Nevada corporation; "BLAS"), Blue Line Capital, Inc. (a Colorado corporation; "Blue Line Capital"), Blue Line Protection Group (California), Inc. (a California corporation; "Blue Line California"), Blue Line Colorado, Blue Line Protection Group Illinois, Inc. (an Illinois corporation; "Blue Line Illinois"), BLPG, Inc. (a Nevada corporation; "Blue Line Nevada"), Blue Line Protection Group (Washington), Inc. (a Washington corporation; "Blue Line Washington"). All significant intercompany balances and transactions have been eliminated. BLPG and its subsidiaries are collectively referred herein to as the "Company."
Basis of presentation
The financial statements present the balance sheets, statements of operations, stockholder's equity (deficit) and cash flows of the Company. The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America.
The Company has adopted December 31 as its fiscal year end.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles 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 financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
The Company maintains a cash balance in a non-interest-bearing account that currently does not exceed federally insured limits. For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. There were no cash equivalents as of December 31, 2017 and 2016. As of December 31, 2016 the Company had a cash overdraft of $30,462.
Accounts receivable
Accounts receivable are stated at the amount the Company expects to collect from outstanding balances and do not bear interest. The Company provides for probable uncollectible amounts through an allowance for doubtful accounts, if an allowance is deemed necessary. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future. On a periodic basis, management evaluates its accounts receivable and determines the requirement for an allowance for doubtful accounts based on its assessment of the current and collectible status of individual accounts with past due balances over 90 days. Account balances are charged against the allowance after all collection efforts have been exhausted and the potential for recovery is considered remote.
Allowance for uncollectible accounts
The Company estimates losses on receivables based on known troubled accounts, if any, and historical experience of losses incurred. There was no allowance for doubtful customer receivables at December 31, 2017 and 2016.
Property and equipment
Property and equipment is recorded at cost and capitalized from the initial date of service. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. The Company uses other depreciation methods (generally accelerated) for tax purposes where appropriate. The estimated useful lives for significant property and equipment categories are as follows:
Automotive Vehicles
|
5 years
|
Furniture and Equipment
|
7 years
|
Buildings and Improvements
|
15 years
|
The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment there was no impairment as December 31, 2017 and 2016. Depreciation expense for the years ended December 31, 2017 and 2016 totaled $50,332 and $67,094, respectively.
Impairment of long-lived assets
The Company accounts for its long-lived assets in accordance with ASC Topic 360-10-05, "Accounting for the Impairment or Disposal of Long-Lived Assets." ASC Topic 360-10-05 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost or carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset's carrying value and its fair value or disposable value. As of December 31, 2017 and 2016, the Company determined that none of its long-term assets were impaired.
Concentration of business and credit risk
The Company has no significant off-balance sheet risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. The Company's financial instruments that are exposed to concentration of credit risks consist primarily of cash. The Company maintains its cash in bank accounts, which may at times, exceed federally insured limits.
The Company had two major customers which generated approximately 40% (26%, and 14%) of total revenue in the year ended December 31, 2017.
The Company had two major customers which generated approximately 40% (25% and 15%) of total revenue in the year ended December 31, 2016.
Related party transactions
FASB ASC 850, "Related Party Disclosures" requires companies to include in their financial statements disclosures of material related party transactions. The Company discloses all material related party transactions. Related parties are defined to include any principal owner, director or executive officer of the Company and any immediate family members of a principal owner, director or executive officer.
Fair value of financial instruments
The carrying amounts reflected in the balance sheets for cash, accounts payable and related party payables approximate the respective fair values due to the short maturities of these items. The Company does not hold any investments that are available-for-sale.
As required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The three levels of the fair value hierarchy are described below:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
The following table presents the derivative financial instruments, the Company's only financial liabilities measured and recorded at fair value on the Company's consolidated balance sheet on a recurring basis, and their level within the fair value hierarchy as of December 31, 2017 and 2016:
December 31, 2017
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Embedded conversion derivative liability
|
|
$
|
1,580,517,
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,580,517
|
|
Warrant derivative liabilities
|
|
$
|
299,413
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
299,413
|
|
Total
|
|
$
|
1,879,930
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,879,930
|
|
December 31, 2016
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Embedded conversion derivative liability
|
|
$
|
-,
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Warrant derivative liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The embedded conversion feature in the convertible debt instruments that the Company issued, that became convertible during the year ended December 31, 2017, qualified them as derivative instruments since the number of shares issuable under the notes are indeterminate based on guidance in FASB ASC 815, Derivatives and Hedging. These convertible notes tainted all other equity linked instruments including outstanding warrants and fixed rate convertible debt on the date that the instrument became convertible. The valuation of the derivative liability of the warrants was determined through the use of Black Scholes option-pricing model (See Note 8).
Revenue recognition
The Company recognizes revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of its fees is reasonably assured.
Other Income
The Company received a reimbursement of $72,890 from its insurance company for damages caused by a hail storm during the year ended December 31, 2017.
Advertising costs
The Company expenses all costs of advertising as incurred. There were $8,119 and $12,480 in advertising costs for the years ended December 31, 2017 and 2016, respectively.
General and administrative expenses
The significant components of general and administrative expenses consist mainly of legal and professional fees and compensation.
Stock-based compensation
The Company records stock-based compensation in accordance with FASB ASC Topic 718, "Compensation – Stock Compensation." FASB ASC Topic 718 requires companies to measure compensation cost for stock-based employee compensation at fair value at the grant date and recognize the expense over the employee's requisite service period. The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of ASC 505-50, "Equity-Based Payments to Non-Employees", which requires that such equity instruments are recorded at their fair value on the measurement date, with the measurement of such compensation being subject to periodic adjustment as the underlying equity instruments vest.
Cost of Revenue
The Company's cost of revenue primarily consists of labor, fuel costs and items purchased by the Company specifically purposed for the benefit of the Company's client.
Basic and Diluted Earnings per share
Net loss per share is provided in accordance with FASB ASC 260-10, "Earnings per Share". Basic loss per share is computed by dividing losses available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share gives effect to all dilutive potential common shares outstanding during the period. Dilutive loss per share excludes all potential common shares if their effect is anti-dilutive. During 2017 and 2016 all convertible instruments were excluded from the calculation of diluted loss per share.
Dividends
The Company has not yet adopted any policy regarding payment of dividends. No dividends have been paid or declared since inception.
Income Taxes
The Company follows FASB Codification Topic 740-10-25 (ASC 740-10-25) for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.
Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.
Recent Pronouncements
In February 2016, the FASB issued ASU 2016-02,
Leases
, which will amend current lease accounting to require lessees to recognize (i) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.
In March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting
, which relates to the accounting for employee share-based payments. This standard addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. This standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted this standard as of December 31, 2016. The adoption of this standard had no effect on our results of operation, cash flows, other than presentation, or financial condition.
In April 2016, the FASB issued ASU 2016–10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments in this Update do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. Topic 606 includes implementation guidance on (a) contracts with customers to transfer goods and services in exchange for consideration and (b) determining whether an entity's promise to grant a license provides a customer with either a right to use the entity's intellectual property (which is satisfied at a point in time) or a right to access the entity's intellectual property (which is satisfied over time). The amendments in this Update are intended render more detailed implementation guidance with the expectation to reduce the degree of judgement necessary to comply with Topic 606. The Company is has reviewed the provisions of this ASU to and determined there will be no material impact on our results of operations, cash flows or financial condition.
In April 2016, the FASB issued ASU No. 2016-15,
"Classification of Certain Cash Receipts and Cash Payments"
ASU 2016 - provides guidance regarding the classification of certain items within the statement of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, with early adoption permitted. The Company does not believe this ASU will have an impact on our results of operation, cash flows, other than presentation, or financial condition.
On November 17, 2016, the FASB issued ASU No. 2016-18, "
Statement of Cash Flows (Topic 230): Restricted Cash"
, a consensus of the FASB's Emerging Issues Task Force (the "Task Force"). The new standard requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. ASU No. 2016-18 is effective for public business entities for fiscal years beginning after December 15, 2017. The Company does not believe this ASU will have an impact on our results of operation, cash flows, other than presentation, or financial condition
The Company evaluated all recent accounting pronouncements issued and determined that the adoption of these pronouncements would not have a material effect on the financial position, results of operations or cash flows of the Company.
Note 3 – Going concern
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As shown in the accompanying financial statements, the Company has a net loss for the year ended December 31, 2017, accumulated deficit and had a working capital deficit as of December 31, 2017. These conditions raise substantial doubt about the Company's ability to continue as a going concern.
In order to continue as a going concern, the Company will need, among other things, additional capital resources. The Company is significantly dependent upon its ability, and will continue to attempt, to secure additional equity and/or debt financing. There are no assurances that the Company will be successful and without sufficient financing it would be unlikely for the Company to continue as a going concern.
The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue in existence. These financial statements do not include any adjustments that might arise from this uncertainty.
Note 4 – Commitments and contingencies
Contingencies
On December 28, 2015 Patrick Deparini, the Company's former CFO resigned. Mr. Deparini purports his resignation was made pursuant to a termination clause for other than cause if he is required to undertake other responsibilities other then set forth in his employment agreement. Mr., Deparini claims through the date of his resignation he is owed a total of $154,000 in unreimbursed compensation, $575 in accrued authorized expenses and the remaining balance of his base salary as defined in the employment agreement in the amount of $179,000. As of December 31, 2017 and 2016 the Company has accrued a total of $125,575 contingent liabilities On February 6, 2017, The Company received a Notification of Wage Claim from the State of Nevada Department of Business & Industry Office of the Labor Commissioner stating that Patrick Deparini had filed a claim for unpaid wages with the Office of the Labor Commissioner (the "Commissioner"). The notification states that Mr. Deparini maintains he was not paid for all hours worked between February 3, 3015 and December 28, 2015 for a total amount owed of $99,000. The Company disputed Mr. Deparini's claim with the Commissioner and responded by explaining to the Commissioner that Mr. Deparini improperly categorized his dispute with the Company as a wage claim, which it is not. If litigation is commenced the Company will attempt a reasonable out-of-court settlement and if such efforts are not successful, will defend the litigation. The Labor Commission informed the Company on August 24, 2017 that the claim was closed.
On November 6, 2015 Daniel Sullivan sent a wage claim demand. Mr. Sullivan purports to have had an Independent Contractor Agreement with the Company which provides he is entitled to certain compensation and to be reimbursed for Company expenses. The demand claims unpaid compensation in the amount of $8,055 and unreimbursed expenses in the amount of $154,409. The Company denies the agreement was ever signed. As of December 31, 2017 and December 31, 2016 the Company accrued a total of $88,968 contingent liabilities. If litigation is commenced the Company will attempt a reasonable out-of-court settlement and if such efforts are not successful, will defend the litigation.
Mile High Real Estate Group, an entity owned by Mr. Sullivan, sent correspondence stating the Mr. Sullivan and/or Mile High Real Estate loaned the Company either directly or directly to contractors, material suppliers or utilities for operating and building remodeling in the amount of $98,150. Counsel for Mr. Sullivan stated that he was still compiling information. The Company is investigating whether Mr. Sullivan and/or Mile High Real Estate Group ever made the alleged loans. If the alleged loan was actually made, the Company will seek an out-of-court settlement. As of December 31, 2017 and December 31, 2016 the Company accrued a total of $98,150.
On April 14, 2016, the Company entered into an agreement with an unrelated third party to provide the Company with investor relations services. Upon signing the agreement, the Company paid the investor relations consultant $75,000 and agreed to issue the consultant 1,500,000 shares of its restricted common stock. The agreement requires the Company to pay the consultant an additional $75,000 prior to June 14, 2016. The Company cancelled the agreement and is of the opinion that the shares are not owed to the consultant. As of December 31, 2017 and December 31, 2016 there was no payable recorded.
Leases
On February 15, 2014 the Company entered into a sublease agreement for approximately 2,000 square feet of office space on a month to month basis contingent on the lessor's master lease for the premises. The lease amount adjusts yearly and the current lease is $1,614 per month.
On October 27, 2016 the Company sold its building located at 5765 Logan Street, Denver, Colorado to an unrelated third party for $1,400,000. The Company repaid the mortgage on the building in the amount of $677,681. After the sale, the Company leased the building from the purchaser of the property. The lease is for an initial term of ten years, with the Company having the option to extend the term of the lease for two additional five year periods. The lease requires rental payments of $10,000 per month and will increase 2% annually. The Company paid a $30,000 deposit at the inception of the lease.
Future minimum lease payments
:
|
|
|
|
2018
|
|
$
|
122,604
|
|
2019
|
|
|
125,056
|
|
2020
|
|
|
127,557
|
|
2021
|
|
|
130,108
|
|
2022
|
|
|
268,075
|
|
2023 and thereafter
|
|
|
386,454
|
|
Total minimum lease payments
|
|
$
|
1,159,864
|
|
Note 5 – Fixed assets and construction in progress
Machinery and equipment consisted of the following at:
|
December 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
Automotive vehicles
|
|
$
|
194,882
|
|
|
$
|
194,882
|
|
Furniture and equipment
|
|
|
85,437
|
|
|
|
53,314
|
|
Fixed assets, total
|
|
|
280,319
|
|
|
|
248,196
|
|
Total : accumulated depreciation
|
|
|
(165,642
|
)
|
|
|
(115,309
|
)
|
Fixed assets, net
|
|
$
|
114,677
|
|
|
$
|
132,887
|
|
Total depreciation expenses for the years ended December 31, 2017 and 2016 were $50,332 and $67,094, respectively.
On July 15, 2014, the Company purchased a commercial building for a total purchase price of $750,000, for which the Company paid a down payment of $75,000 and financed the remaining $675,000 in the form of a promissory note. The note bears interest at a rate of 5% per annum on the unpaid principal balance and is due on July 31, 2016. Interest is paid monthly, in arrears, in the amount of $2,813 beginning August 31, 2014. Through December 31, 2015, approximately $363,377 in capital improvements and $33,762 of capitalized expenses have been made to the property. Prior to December 31,, 2016, the Company has completed the construction on the property and it was available and ready for use, accordingly. As of December 31, 2016, the balance of construction in progress was $0. During the year ended December 31, 2016, $14,078 of interest expense was capitalized as construction in progress.
On October 27, 2016 the Company sold its building located at 5765 Logan Street, Denver, Colorado to an unrelated third party for $1,313,961 net of closing cost of $86,039.Up till the date of sale the Company had recorded depreciation expense on the building of $20,868. The Company repaid the mortgage on the building in the amount of $677,681 and recognized a loss on the sale of the building of $312,053. The Company received net cash proceeds of $722,319. After the sale, the Company leased the building from the purchaser of the property (see Note 4).
Note 6 – Notes payable
Notes payable to non-related parties
On July 15, 2014, the Company purchased a commercial building for $750,000, for which the Company made a down payment of $75,000 and financed the remaining $675,000 with a promissory note. The note bears interest at a rate of 5% per annum on the unpaid principal balance and is originally due in full on July 31, 2016. On June 30, 2016, the Company extended the maturity date to October 31, 2016. Interest is paid monthly, in arrears, in the amount of $2,813 beginning August 31, 2014. On October 27, 2016 the Company sold its building located at 5765 Logan Street, Denver, Colorado to an unrelated third party for $1,400,000. The Company repaid the mortgage on the building in the amount of $677,681 and interest of $2,866.
During February 2015, the Company borrowed $50,000 from a non-affiliated person. The loan is due and payable on demand with interest at 10% per annum. As of December 31, 2017 and December 31, 2016, the principal balance owed on this loan was $50,000 and $50,000, respectively.
During April 2015, the Company borrowed $25,000 from a non-affiliated person. The loan is due and payable May 1, 2015 with interest at 6% per year and has a 5% per month penalty upon default. As of December 31, 2017 and December 31, 2016, the principal balance owed on this loan was $25,000 and $25,000, respectively. The note is currently past due.
On January 5, 2016, the Company borrowed $10,000 from a non-affiliated person. The loan was due and payable on January 5, 2017 and bore interest at 5% per annum. The principal balance owed on this loan at December 31, 2017 and December 31, 2016 was $10,000 and $10,000, respectively. The note is currently past due.
On September 21, 2016, the Company borrowed $100,000 from a non-affiliated person. The loan was due and payable on December 21, 2016 and bore interest at 60% per year. The lender extended the loan and waived the default fee of 120%. The loan was repaid on February 15, 2017. The Company paid $5,000 in fees in connection with this loan in 2016. As of December 31, 2017 and December 31, 2016, the principal balance owed on this loan was $0 and $100,000, respectively.
On April 13, 2017 the Company signed a Merchant Agreement with a lender. Under the agreement the Company received $63,700 in exchange for rights to all customer receipts until the lender is paid $89,700, which is collected at the rate of $11,213 per month with 15% interest per year. The Company recorded a debt discount of $26,000 and recorded $26,000 amortization expense for the year ended December 31, 2017. As of December 31, 2017 the unamortized discount was $0 and outstanding loan amount was $0. The Company repaid a total of $89,700 during the year ended December 31, 2017.
On August 24, 2017 the Company signed a Merchant Agreement with a lender. Under the agreement the Company received $50,000 in exchange for rights to all customer receipts until the lender is paid $69,000 which is collected at the rate of $410.71 per day with 15% interest per year. The Company recorded a debt discount of $19,000 and recorded $8,444 amortization expense for the year ended December 31, 2017. As of December 31, 2017 the unamortized discount was $10,556 and outstanding loan amount was $35,782. The Company repaid a total of $33,218 during the year ended December 31, 2017. The payments were secured by second position rights to all customer receipts until the loan has been paid in full.
Amortization of debt discount on the non-related party notes payable for the year ended December 31, 2017 amounted to $34,444.
Convertible notes payable to non-related party
In January 2016 the Company borrowed $58,000 from an unrelated third party. The Company paid fees of $3,000 associated with this note which were recognized as a discount to the note. The Company is amortizing the debt discount of $3,000 over the term of the loan. For the year ended December 31, 2016, the Company recorded amortization expenses of $3,000. The loan has a maturity date of November 1, 2016 and bears interest at the rate of 8% per year. If the loan is not paid when due, any unpaid loan amount will bear interest at 22% per year. The Lender is entitled, at its option, at any time after July 26, 2016 to convert all or any part of the outstanding and unpaid principal and accrued interest into shares of the Company's common stock at a price per share equal to 58% of the average of the three lowest trading prices for the 10 trading days immediately preceding the conversion date. The Company was funded on February 3, 2016, and the note is not convertible till 180 days after the issuance date, which is August 1, 2016. The Company repaid the loan in full on July 27, 2016 with the premium of $20,300 and there was no outstanding balance as of December 31, 2016.
In February 2016 the Company borrowed $110,000 from an unrelated third party. The Company paid fees of $7,250 associated with this note which were recognized as a discount to the note. The Company paid $7,250 in fees in connection with this loan. The Company is amortizing the debt discount of $7,250 over the term of the loan. For the year ended December 31, 2016, the Company recorded amortization expenses of $7,250. The loan has a maturity date of November 11, 2016 and bears interest at the rate of 10% per year. If the loan is not paid when due, any unpaid amount will bear interest at 24% per year. The Lender is entitled, at its option, at any time after August 9, 2016 to convert all or any part of the outstanding and unpaid principal and accrued interest into shares of the Company's common stock at a price per share equal to 50% of the average of the five lowest trading prices for the 25 trading days immediately preceding the conversion date. The Company paid premium of $51,384 to postpone the lender's conversion right to August 25, 2016. The Company repaid the loan in full on August 23, 2016 and there was no outstanding balance as of December 31, 2016.
On January 4, 2017 the Company borrowed $125,000 from an unrelated third party. The loan has a maturity date of October 28, 2017 and bears interest at the rate of 8% per year. The Company paid $2,000 of fees associated with the loan, which was fully amortized during the year ended December 31, 2017. If the loan is not paid when due, any unpaid amount will bear interest at 22% per year. The Lender is entitled, at its option, at any time after July 3, 2017, (180 days from date of the note) to convert all or any part of the outstanding and unpaid principal and accrued interest into shares of the Company's common stock at a price per share equal to 58% of the average of the three lowest trading prices for the 10 trading days immediately preceding the conversion date. On July 13, 2017, the Company paid total $173,901 including prepayment penalty and interest expense. The Note was in default for 10 days prior to its repayment. The Company did not record a derivative as it would have been immaterial to the financial statements.
On April 13, 2017 the Company borrowed $65,500 from an unrelated third party. The loan has a maturity date of January 25, 2018 and bears interest at the rate of 8% per year. The Company paid $3,500 of fees associate with the loan, which was fully amortized during the year ended December 31, 2017. If the loan is not paid when due, any unpaid amount will bear interest at 22% per year. The Lender is entitled, at its option, at any time after October 10, 2017 to convert all or any part of the outstanding and unpaid principal and accrued interest into shares of the Company's common stock at a price per share equal to 58% of the average of the three lowest trading prices for the 10 trading days immediately preceding the conversion date. The loan was repaid during the year ended December 31, 2017.
The note was discounted for a derivative (see note 8 for details) and the discount of $50,368 is being amortized over the life of the note using the effective interest method resulting in $50,368 of interest expense for the year ended December 31, 2017.
On July 18, 2017 the Company borrowed $125,000 from an unrelated third party. The loan has a maturity date of April 30, 2018 and bears interest at the rate of 8% per year. The Company paid $3,000 of fees associated with the loan, during the year ended December 31, 2017 the Company had amortized $1,741of the discount If the loan is not paid when due, any unpaid amount will bear interest at 22% per year. The Lender is entitled, at its option, at any time after January 14, 2018, (180 days from date of the note) to convert all or any part of the outstanding and unpaid principal and accrued interest into shares of the Company's common stock at a price per share equal to 58% of the average of the three lowest trading prices for the 10 trading days immediately preceding the conversion date. The note is not convertible as of December 31, 2017, therefore no derivatives were recorded. The balance outstanding on the note at December 31, 2017 is $125,000.
On August 24, 2017 the Company borrowed $58,500 from an unrelated third party. The Company paid $3,500 of fees associated with the loan,
which was recorded as discount and to be amortized over the term of the debt
the Company amortized $1,618 as of December 31, 2017. The loan has a maturity date of May 30, 2018 and bears interest at the rate of 8% per year. If the loan is not paid when due, any unpaid amount will bear interest at 22% per year. The Lender is entitled, at its option, at any time after February 20, 2018 to convert all or any part of the outstanding and unpaid principal and accrued interest into shares of the Company's common stock at a price per share equal to 58% of the average of the three lowest trading prices for the 25 trading days immediately preceding the conversion date. The note is not convertible as of December 31, 2017, therefore no derivatives were recorded. The balance outstanding on the note at December 31 2017 is $58,500. As of December 31, 2017 the unamortized discount amounted to $1,882.
On October 18, 2017 The Company the Company borrowed $150,000 from an unrelated third party. The Company paid $15,250 of fees associated with the loan,
which was recorded as discount and to be amortized over the term of the debt
and had amortized $4,164 of the costs as of December 31, 2017. The loan bears Interest at a rate: 10% (default interest 24%) and has a maturity date of July 16, 2018. The Holder has the option to convert the outstanding principal and accrued interest into common stock of the Company. The conversion price is the lesser of (1) lowest trading price during the previous 25 days prior to the note agreement or (2) 50% lowest trading price during the 25 days prior to conversion. Covenants: The Borrower shall not, without the Holder's consent, sell, lease or dispose of any significant portion of its assets outside the ordinary course of business.
The note was discounted for a derivative (see note 8 for details) and the discount of $134,750 is being amortized over the life of the note using the effective interest method resulting in $36,795 of interest expense for the year ended December 31, 2017.
As of December 31, 2017 the unamortized discount amounted to $11,086.
On October 19, 2017 the Company borrowed $73,000 from an unrelated third party. The Company paid $3,000 of fees associated with the loan,
which was recorded as discount and to be amortized over the term of the debt
the Company amortized $771 as of December 31, 2017. The loan has a maturity date of July 30, 2018 and bears interest at the rate of 8% per year. If the loan is not paid when due, any unpaid amount will bear interest at 22% per year. The Lender is entitled, at its option, at any time after April 17, 2018 to convert all or any part of the outstanding and unpaid principal and accrued interest into shares of the Company's common stock at a price per share equal to 58% of the average of the three lowest trading prices for the 10 trading days immediately preceding the conversion date. The note is not convertible as of December 31, 2017, therefore no derivatives were recorded. The balance outstanding on the note at December 31 2017 is $73,000.
On November 24, 2017, the Company borrowed $75,000 from an unrelated third party. The Company paid $7,000 of fees associated with the loan, and had amortized $717 of the costs as of December 31, 2017. The note bears an interest rate: 12% (default interest
lesser of 15% or maximum permitted by law
) and matures on November 20, 2018. The conversion Feature
Convertible immediately
after the issuance, the Holder has the option to convert the outstanding principal and accrued interest into common stock of the Company. The Conversion price is 55% of the lowest trading price during the 25 Trading Day periods prior to the Conversion. Covenants: The Borrower shall not, without the Holder's consent, sell, lease or dispose of any significant portion of its assets outside the ordinary course of business.
The note was discounted for a derivative (see note 8 for details) and the discount of $68,000 is being amortized over the life of the note using the effective interest method resulting in $6,970 of interest expense for the year ended December 31, 2017.
On December 15, 2017 the Company borrowed $63,000 from an unrelated third party. The Company paid $3,000 of fees associated with the loan, the Company amortized $771 as of December 31, 2017. The loan has a maturity date of September 15, 2018 and bears interest at the rate of 8% per year. If the loan is not paid when due, any unpaid amount will bear interest at 22% per year. The Lender is entitled, at its option, at any time after
June 13, 2018
to convert all or any part of the outstanding and unpaid principal and accrued interest into shares of the Company's common stock at a price per share equal to
58% of the average of the lowest 3 trading prices during the 10 days prior to conversion
date. The note is not convertible as of December 31, 2017, therefore no derivatives were recorded. The balance outstanding on the note at December 31 2017 is $63,000.
During the year ended December 31, 2017, the Company recognized amortization expense of $14,687 from deferred financing cost and amortization expense of $94,133 of discount from derivative liabilities.
Note 7 – Notes payable – related parties
On July 31, 2014, the Company borrowed $98,150 from an entity controlled by an officer and shareholder of the Company. The loan is due and payable on demand and bears no interest. As of December 31, 2017 and December 31, 2016, the principal balance owed on this loan is $98,150 and $98,150, respectively.
As of December 31, 2014, a related party loaned the Company $10,000, in the form of cash and expenses paid on behalf of the Company. The loan is due and payable on demand and bears no interest. During the year ended December 31, 2015 the Company borrowed an additional $20,000. As of December 31, 2017 and December 31, 2016, the principal balance owed on this loan was $30,000 and $30,000, respectively.
As of December 31, 2014, a related party loaned the Company $180,121, in the form of cash and expenses paid on behalf of the Company. The loan is due and payable on demand and bears no interest. The Company repaid $125,500 towards this note during 2015 and as of December 31, 2017 and December 31, 2016; the principal balance owed on this loan was $54,621 and $54,621, respectively.
During 2015, the Company borrowed $43,575 from its former CFO and repaid $43,000 of the loan. The note is non-interest bearing, and due on demand. As of December 31, 2017 and December 31, 2016 the principal amount owed on this loan was $575.
During October 2015, the Company borrowed $30,000 from an entity controlled by an officer of the Company. The loan is due and payable on demand and is non-interest bearing. During the year ended December 31, 2016, the Company repaid $135,000 and borrowed an additional $135,000 from the same related party. During the year ended December 31, 2017, the Company repaid $251,363 and borrowed an additional $265,363 from the same related party. As of December 31, 2017 and December 31, 2016, the principal balance owed on this loan was $44,000 and $30,000, respectively.
On July 7, 2016, the Company borrowed $73,000 from a related party. The loan was due and payable on July 7, 2017 and bore interest at 5% per annum. The principal balance owed on this loan at December 31, 2017 and December 31, 2016 was $73,000 and $73,000, respectively. The holder of the note has agreed to extend the default date of the note to March 30, 2018.
On August 8, 2016, the Company entered into, an promissory note with Hypur Inc., a Nevada Corporation which is a related party pursuant to which the Company to borrow $52,000. If an Event of Default remains uncured after 30 days Holder has the option to convert the outstanding principal balance and any accrued but unpaid interest, into unrestricted $0.001 par value common stock of the Borrower The loan was due and payable on August 10, 2017 and bore interest at 18% per annum. The principal balance owed on this loan at December 31, 2017 and December 31, 2016 was $52,000 and $52,000, respectively. The Note is currently in default at bears a default rate of interest of 24% per annum as part of the default terms of this note. The lender waived the conversion option through October 1, 2017. On October 1, 2017
it was determined this note had derivative.
On September 20, 2016, the Company borrowed $47,500 from Hypur Inc., which is a related party. The loan is due and payable on December 20, 2016 and bears interest at 18% per annum. If an Event of Default remains uncured after 30 days Holder has the option to convert the outstanding principal balance and any accrued but unpaid interest, into unrestricted $0.001 par value common stock of the Borrower. The principal balance owed on this loan at December 31, 2017 and December 31, 2016 was $47,500 and $47,500, respectively. The loan is currently past due and in default. The Note is currently in default at bears a default rate of interest of 24% per annum as part of the default terms of this note. The lender waived the conversion option through October 1, 2017.. On October 1, 2017
it was determined this note had derivative. l.
On July 13, 2017, the Company borrowed $150,000 from Hypur Inc., which is a related party. The loan is due and payable on July 17, 2017 and bears interest at 18% per annum. The Company repaid the loan prior to December 31, 2017.
During 2017, the Company borrowed $47,880 from its Vice President of Operations and repaid $27,880 of the loan. The note is non-interest bearing, and due on demand. As of December 31, 2017 the principal amount owed on this loan was $20,000.
Convertible notes payable to related party
In November 2015, the Company entered into an arrangement with a related party, whereby the Company borrowed $25,000 in Convertible Notes. The Convertible Note bears interest at a rate of 5% per annum and payable quarterly in arrears and matures twelve months from the date of issuance, and is convertible into shares of the Company's common stock at a per share conversion price equal to $0.025 the note was due on November 4, 2016. In December 2015 the lender loaned the Company an additional $20,000 with same terms except that it is payable upon demand. As of December 31, 2017 and December 31, 2016, the Company owed a total of $45,000 and $45,000, respectively. The holder of the note has agreed to extend the default date of the note to March 30, 2018
In July 2015, the Company entered into an arrangement with a related party, whereby the Company could borrow up to $500,000 in Convertible Notes. The Convertible Note bears interest at a rate of 5% per annum and payable quarterly in arrears and matures twelve months from the date of issuance, and is convertible into shares of the Company's common stock at a per share conversion price equal to $0.025. Upon the occurrence and during the continuation of an event of default, the holder may require the Company to redeem all or any portion of this Note in cash at a price equal to 150% of the principal amount. During the year ended December 31, 2017, the Company borrowed an additional $110,000. As of December 31, 2017 and December 31, 2016, the Company owed a total of $500,000 and $390,000, respectively. As of December 31, 2017 and December 31, 2016 there is a total of $390,000 and $390,000 of the notes are past due, respectively. Since the debt holder has not elect the right to require the Company to redeem the note at a price equal to 150% of the principal amount, the terms stated prior to maturity are still in effect. The holder has waived the default term and the note is not considered to be in default as of December 31, 2017.
On September 1, 2016, the Company entered into, an convertible promissory note with Hypur Ventures, L.P., a Delaware limited partnership (the "Hypur Ventures") which is a related party pursuant to which the Company to borrow $75,000. The loan was due 180 days from the date of issuance and bears interest at 10% per annum. The note is convertible into common stock at a price of $.05 per share. The note is mandatory redeemable into common stock if the price per share is over $.50 per share during a 10 day period. The principal balance owed on this loan at December 31, 2017 and December 31, 2016 was $75,000 and $75,000, respectively. Upon default, the note bears a default rate of interest of 15% per annum, and if the default has not been remedied within 30 days, the redemption price would be 150% of the principal amount. The holder has waived the default term and agreed to extend the default date to March 31, 2018.
On October 14, 2016, the Company entered into, an convertible promissory note with Hypur Ventures, L.P., a Delaware limited partnership (the "Hypur Ventures") which is a related party pursuant to which the Company to borrow $100,000. The loan was due 180 days from the date of issuance and bears interest at 10% per annum. The note is convertible into common stock at a price of $.05 per share. The note is mandatory redeemable into common stock if the price per share is over $.50 per share during a 10 day period. The principal balance owed on this loan at December 31, 2017 and December 31, 2016 was $100,000 and $100,000, respectively. Upon default, the note bears a default rate of interest of 15% per annum, and if the default has not been remedied within 30 days, the redemption price would be 150% of the principal amount. The holder has waived the default term and agreed to extend the default date to March 31, 2018.
On March 7, 2017, the Company borrowed $100,000 from Hypur Ventures, L.P., a related party. The loan is due 180 days from March 7, 2017 and bears interest at 10% per annum. The loan is convertible into shares of the Company's common stock at a price of $.05 per share. The loan will automatically convert into shares of the Company's common stock if the price of the Company's common stock is over $.50 per share during any ten-day period. The principal balance owed on this loan at December 31, 2017 was $100,000. Upon default, the note bears a default rate of interest of 15% per annum, and if the default has not been remedied within 30 days, the redemption price would be 150% of the principal amount. The holder has waived the default term and agreed to extend the default date to March 31, 2018.
On May 26, 2017, the Company borrowed $100,000 from CGDK, a related party. The loan is due 360 days from May 26, 2017 and bears interest at 5% per annum. The loan is convertible into shares of the Company's common stock at a price of $.025 per share. The loan will automatically convert into shares of the Company's common stock if the price of the Company's common stock is over $.25 per share during any ten-day period. The principal balance owed on this loan at December 31, 2017 was $100,000.
On July 13, 2017, the Company borrowed $150,000 from CGDK, a related party. The loan is due 360 days from July 13, 2017 and bears interest at 5% per annum. The loan is convertible into shares of the Company's common stock at a price of $.05 per share. The loan will automatically convert into shares of the Company's common stock if the price of the Company's common stock is over $.25 per share during any ten-day period. The principal balance owed on this loan at December 31, 2017 was $150,000.
The Company evaluated the convertible note for possible embedded derivatives and concluded that none exist. However, the Company concluded a portion of the note should be allocated to additional paid-in capital as a beneficial conversion feature at the issuance date, since the conversion price on that date was lower than the fair market value of the underlying stock. Resultantly, a discount of $71,400 was attributed to the beneficial conversion feature of the note, which amount is being amortized through the maturity date of the note. As of December 31, 2017 a total of $59,126 has been amortized and recorded as interest expense, leaving a balance of $12,274 in discounts related to the beneficial conversion feature of this note. The carrying amount of the convertible note, net of the unamortized debt discount, was $1,057,726 as of December 31, 2017.
On October 1, 2017 these notes were tainted by the variable conversion price notes and $180,997 was reclassed from additional paid in capital to derivative liabilities. See Note 8.
NOTE 8 – Derivative Liability
The Company analyzed the conversion options for derivative accounting consideration under ASC 815, Derivatives and Hedging, and hedging, and determined that the instrument should be classified as a liability when the conversion option becomes effective.
The derivative liability in connection with the conversion feature of the convertible debt is measured using, level 3 inputs.
The change in the fair value of derivative liabilities is as follows:
Balance - December 31, 2016
|
|
$
|
-
|
|
Addition of new derivative as a debt discount
|
|
|
253,188
|
|
Reclass from additional paid in capital to derivative liabilities due to tainting
|
|
|
317,224
|
|
Loss on change in fair value of the derivative
|
|
|
1,309,588
|
|
Balance - December 31, 2017
|
|
$
|
1,879,930
|
|
The table below shows the Black-Scholes option-pricing model inputs used by the Company to value the derivative liability at each measurement date:
|
Year ended
December 31,
|
|
Year ended
December 31,
|
|
|
2017
|
|
2016
|
|
Expected term
|
0.02 – 3.65 years
|
|
|
|
-
|
|
Expected average volatility
|
|
|
108.61% -584.87
|
%
|
|
|
-
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Risk-free interest rate
|
|
|
1.53% - 1.98
|
%
|
|
|
-
|
|
Note 9 – Long term notes payable
On November 21, 2014, the Company purchased a vehicle for $20,827, net of discounts. The Company financed the $20,827 at an interest rate of 2.42% for five years, with a maturity date of December 5, 2019. As of December 31, 2017 and December 31, 2016, the total principal balance of the note is $8,639 and $12,801, respectively, of which $6,518 and $8,664 is considered a long-term liability and $2,121 and $4,137 is considered a current liability
Note 10 – Stockholders' equity
The Company was originally authorized to issue 100,000,000 shares of common stock and 100,000,000 shares of preferred stock. On May 6, 2014, the Company effected a forward stock split and a pro-rata increase in its authorized common stock on a basis of 14-to-1, whereby each shareholder received 14 newly issued shares of common stock for each 1 share held. Additionally, the number of authorized shares increased to 1,400,000,000 shares of common stock. All references to share and per share amounts in the consolidated financial statements and these notes thereto have been retroactively restated to reflect the forward stock split.
Common stock
During the year ended December 31, 2016, the Company entered two consulting agreements for business advisory services. During the year ended December 31, 2016 the Company issued a total of 2,000,000 shares of common stock to the consultant for business advisory services valued at $88,000. The certificate for these shares was issued subsequent to December 31, 2016.
During the year ended December 31, 2017, the Company entered into a consulting agreement for business advisory services. The Company issued a total of 2,000,000 shares of common stock to the consultant for business advisory services valued at $46,583 the fair value measurement on the common stock, which was at service completion
date
. The certificate for 1,000,000 of these shares was issued subsequent to December 31, 2017.
Preferred stock
On May 3, 2016, the Company entered into, an agreement with Hypur Ventures, L.P., a Delaware limited partnership (the "Hypur Ventures") which is a related party pursuant to which the Company sold to Hypur Ventures, in a private placement, 10,000,000 shares of the Company's preferred stock and 5,000,000 common stock warrants with a five year term and an exercise price of $0.10, at a purchase price of $0.05 per share for gross proceeds of $500,000. The shares of preferred stock are convertible into shares of the Company's common stock. The preferred stock shall have such other rights, preferences and privileges to be set forth in a certificate of designation to be filed with the Secretary of State. The Company evaluated the convertible preferred stock under FASB ASC 470-20-30 and determined it contained a beneficial conversion feature. The intrinsic value of the beneficial conversion feature was determined to be $114,229. The beneficial conversion feature was fully amortized and recorded as a deemed dividend.
Between July and August of 2016 Hypur Ventures purchased an additional 10,000,000 shares of the Company's preferred stock and 5,000,000 common stock warrants with a five year term and an exercise price of $0.10, at a purchase price of $0.05 per share for net proceeds of $445,000, net of legal fees of $55,000. The shares of preferred stock are convertible into shares of the Company's common stock. The preferred stock shall have such other rights, preferences and privileges to be set forth in a certificate of designation to be filed with the Secretary of State. The Company evaluated the convertible preferred stock under FASB ASC 470-20-30 and determined it does not contain a beneficial conversion feature. The intrinsic value of the beneficial conversion feature was determined to be $0.The preferred stock is convertible at any time at the election of Hypur Ventures. The preferred stock shall automatically convert to common stock if the closing price of the Company's common stock equals or exceeds $.50 per share over any consecutive twenty day trading period. The preferred stock terms include a one-time purchase price preference. No preferential dividends apply to the preferred stock. The preferred stock attributes include weighted average anti-dilution protection, rights to appoint one director, pre-emptive rights to purchase future offerings of securities by the Company, demand and piggy-back registration rights.
The preferred stock is convertible at any time at the election of Hypur Ventures. The preferred stock shall automatically convert to common stock if the closing price of the Company's common stock equals or exceeds $.50 per share over any consecutive twenty day trading period. The preferred stock terms include a one-time purchase price preference. No preferential dividends apply to the preferred stock. The preferred stock attributes include weighted average anti-dilution protection, rights to appoint one director, pre-emptive rights to purchase future offerings of securities by the Company, demand and piggy-back registration rights.
The Company has reserved thirty million shares of common stock that may be issued upon the conversion and/or exercise of the preferred stock and the warrants. The preferred stock sold to Hypur Ventures will be subject to the terms and conditions of the Certificate of Designation, as well as further documentation to be drafted in accordance with the terms and conditions agreed upon between the Company and Hypur Ventures.
Note 11 – Options and warrants
Options
All stock options have an exercise price equal to the fair market value of the common stock on the date of grant. The fair value of each option award is estimated using a Black-Scholes-Merton option valuation model. The Company has not paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes-Merton option valuation model. Volatility is an estimate based on the calculated historical volatility of similar entities in industry, in size and in financial leverage, whose share prices are publicly available. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company has no historical experience with which to establish a basis for determining an expected life of these awards. Therefore, the Company only gave consideration to the contractual terms and did not consider the vesting schedules, exercise patterns and pre-vesting and post-vesting forfeitures significant to the expected life of the option award. The Company bases the risk-free interest rate used in the Black-Scholes-Merton option valuation model on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term equal to the expected life of the award.
On December 28, 2016, the Company issued stock options to various offices and employees of the Company to purchase 7,950,000 shares of the Company's common stock at an exercise price of $0.05 per share. The options vest immediately. The options carry a life of three years.
During the year ended December 31, 2016 a total of 453,333 stock options were forfeited by various employees of the Company.
During the year ended December 31, 2017 a total of 40,000 stock options were forfeited by various employees of the Company.
The following is a summary of the Company's stock option activity for the years ended December 31, 2017 and 2016:
|
|
Number Of Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
17,256,738
|
|
|
$
|
0.14
|
|
Granted
|
|
|
7,950,000
|
|
|
$
|
0.05
|
|
Exercised
|
|
|
-
|
|
|
$
|
0.00
|
|
Cancelled
|
|
|
(453,333
|
)
|
|
$
|
0.18
|
|
Outstanding at December 31, 2016
|
|
|
24,753,405
|
|
|
$
|
0.11
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
Expired
|
|
|
(235,000
|
)
|
|
$
|
0.13
|
|
Cancelled
|
|
|
(40,000
|
)
|
|
$
|
0.13
|
|
Outstanding at December 31, 2017
|
|
|
24,478,405
|
|
|
$
|
0.11
|
|
Options exercisable at December 31, 2016
|
|
|
20,000,484
|
|
|
$
|
0.11
|
|
Options exercisable at December 31, 2017
|
|
|
24,471,738
|
|
|
$
|
0.11
|
|
The following tables summarize information about stock options outstanding and exercisable at December 31, 2017 and December 31, 2016:
OPTIONS OUTSTANDING AND EXERCISABLE AT DECEMBER 31, 2017
|
|
Range of
Exercise Prices
|
|
|
Number of
Options
Outstanding
|
|
|
Weighted-Average
Remaining
Contractual
Life in Years
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Number Exercisable
|
|
|
Weighted-
Average
Exercise Price
|
|
$
|
0.035 – 1.00
|
|
|
|
24,478,405
|
|
|
|
2.313
|
|
|
$
|
0.11
|
|
|
|
24,471,738
|
|
|
$
|
0.11
|
|
OPTIONS OUTSTANDING AND EXERCISABLE AT DECEMBER 31, 2016
|
|
Range of
Exercise Prices
|
|
|
Number of
Options
Outstanding
|
|
|
Weighted-Average
Remaining
Contractual
Life in Years
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Number Exercisable
|
|
|
Weighted-
Average
Exercise Price
|
|
$
|
0.035 – 1.00
|
|
|
|
24,753,405
|
|
|
|
3.313
|
|
|
$
|
0.11
|
|
|
|
20,000,484
|
|
|
$
|
0.11
|
|
Total stock-based compensation expense in connection with options and modified awards recognized in the consolidated statement of operations for years ended December 31, 2017 and 2016 was $79,840 and $248,136, respectively.
Warrants
The following is a summary of the Company's warrant activity for the years ended December 31, 2017:
|
|
Number Of Shares
|
|
|
Weighted-Average
Exercise Price
|
|
Outstanding at December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
10,000,000
|
|
|
$
|
0.10
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
10,000,000
|
|
|
$
|
0.10
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding at December 31, 2017
|
|
|
10,000,000
|
|
|
$
|
0.10
|
|
Warrants exercisable at December 31, 2016
|
|
|
10,000,000
|
|
|
$
|
0.10
|
|
Warrants exercisable at December 31, 2017
|
|
|
10,000,000
|
|
|
$
|
0.10
|
|
The following tables summarize information about warrants outstanding and exercisable at December 31, 2017 and December 31, 2016:
WARRANTS OUTSTANDING AND EXERCISABLE AT DECEMBER 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of
Exercise Prices
|
|
|
Number of
Warrants
Outstanding
|
|
|
Weighted-Average
Remaining
Contractual
Life in Years
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Number Exercisable
|
|
|
Weighted-
Average
Exercise Price
|
|
$
|
0.10
|
|
|
|
10,000,000
|
|
|
|
3.49
|
|
|
$
|
0.10
|
|
|
|
10,000,000
|
|
|
$
|
0.10
|
|
WARRANTS OUTSTANDING AND EXERCISABLE AT DECEMBER 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of
Exercise Prices
|
|
|
Number of
Warrants
Outstanding
|
|
|
Weighted-Average
Remaining
Contractual
Life in Years
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Number Exercisable
|
|
|
Weighted-
Average
Exercise Price
|
$
|
0.10
|
|
|
|
10,000,000
|
|
|
|
4.49
|
|
|
$
|
0.10
|
|
|
|
10,000,000
|
|
|
$
|
0.10
|
Note 12 – Income taxes
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the "TCJA") that significantly reforms the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"). The TCJA, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, effective as of January 1, 2018; limitation of the tax deduction for interest expense; limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, in each case, for losses arising in taxable years beginning after December 31, 2017 (though any such tax losses may be carried forward indefinitely); modifying or repealing many business deductions and credits, including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions generally referred to as "orphan drugs"; and repeal of the federal Alternative Minimum Tax ("AMT").
The staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. In connection with the initial analysis of the impact of the TCJA, the Company remeasured its deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The remeasurement of the Company's deferred tax assets and liabilities was offset by a change in the valuation allowance.
For the years ended December 31, 2017 and 2016, the Company incurred net operating losses and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets. At December 31, 2017 and 2016, the Company had approximately $5,734,309 and $4,818,279 of federal and state net operating losses. The net operating loss carry forwards, if not utilized, will begin to expire in 2028. The provision for income taxes consisted of the following components for the years ended December 31:
Components of net deferred tax assets, including a valuation allowance, are as follows at December 31:
|
December 31
|
|
|
2017
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
1,204,205
|
|
|
$
|
1,651,398
|
|
Valuation allowance
|
|
|
(1,204,205
|
)
|
|
|
(1,651,398
|
)
|
Total deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
FASB ASC 740,
Income Taxes,
requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, management has determined that a full valuation allowance of $12,547,096 and $16,869,912 against its net deferred taxes is necessary as of December 31, 2017 and December 31, 2016, respectively. The change in valuation allowance for the years ended December 31, 2017 and 2016 is $311,379 and $446,892 respectively.
At December 31, 2017 and December 31, 2016, respectively, the Company had $44,619,294 and $43,669,900, respectively, of U.S. net operating loss carryforwards remaining, which expire beginning in 2017.
As a result of certain ownership changes, the Company may be subject to an annual limitation on the utilization of its U.S. net operating loss carryforwards pursuant to Section 382 of the Internal Revenue Code. A study to determine the effect, if any, of this change, has not been undertaken.
Tax returns for the years ended December 31, 2017, 2016, 2015, 2014, and 2013 are subject to examination by the Internal Revenue Service.
A reconciliation of the Company's income taxes to amounts calculated at the federal statutory rate is as follows for the years ended December 31:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Federal statutory taxes
|
|
|
(35.00
|
)%
|
|
|
(35.00
|
)%
|
Change in tax rate estimate
|
|
|
14.00
|
%
|
|
|
—
|
|
Change in valuation allowance
|
|
|
21.00
|
%
|
|
|
35.00
|
%
|
|
|
|
—
|
%
|
|
|
—
|
%
|
The valuation allowance for deferred tax assets as of December 31, 2017 and 2016 was $1,204,205 and $1,651,398 respectively. In assessing the recovery of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the periods in which those temporary differences become deductible. Management considers the scheduled reversals of future deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As a result, management determined it was more likely than not the deferred tax assets would not be realized as of December 31, 2017 and 2016 and recorded a full valuation allowance.
Reconciliation between the statutory rate and the effective tax rate is as follows at December 31:
|
|
2017
|
|
|
2016
|
|
Federal statutory tax Reconciliation rate
|
|
|
(35.0
|
)%
|
|
|
(35.0
|
)%
|
Permanent difference and other
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Note 13 – Subsequent Events
On January 2, 2018 the Company drew down an additional $30,000 from Crown Bridge Partners pursuant to a 12% convertible note. The note bears an interest rate: 12% (default interest
lesser of 15% or maximum permitted by law
) and matures on November 20, 2018. The conversion Feature
Convertible immediately
after the issuance, the Holder has the option to convert the outstanding principal and accrued interest into common stock of the Company. The Conversion price is 55% of the lowest trading price during the 25 Trading Day periods prior to the Conversion. Covenants: The Borrower shall not, without the Holder's consent, sell, lease or dispose of any significant portion of its assets outside the ordinary course of business.
On January 25, 2018 the Company and JSJ Investments, Ins entered into a Securities Purchase Agreement for a convertible note of $150,000. The note bears an Interest rate: 12% (default interest 18%) and matures on January 25, 2019. The conversion Feature: Upon 180 days after the issuance, the Holder has the option to convert the outstanding principal and accrued interest into common stock of the Company. The Conversion price is 55% of the average of the lowest 3 trading prices during the 20 Trading Day period prior to the Conversion. Covenants: The Borrower shall not, without the Holder's consent, sell, lease or dispose of any significant portion of its assets outside the ordinary course of business.
On February 13, 2018 the Company and Power Up Lending, LTD., entered into a Securities Purchase Agreement for a convertible note of $128,000. The note bears an Interest rate: 8% (default interest 22%) and matures on November 30, 2018. The conversion Feature: Upon 180 days after the issuance, the Holder has the option to convert the outstanding principal and accrued interest into common stock of the Company. The Conversion price is 58% of the average of the lowest 3 trading prices during the 10 Trading Day period prior to the Conversion. Covenants: The Borrower shall not, without the Holder's consent, sell, lease or dispose of any significant portion of its assets outside the ordinary course of business.
Between January 25, 2018 and March 5, 2018 Power Up Lending, LTD converted notes payable in the amount of $183,500 and accrued interest of $7,340 into 7,901,260 shares of common stock.
On March 2, 2018, Steve Neumeyer filed a complaint against the Company in the Eighth Judicial District Court, Clark County, Nevada, alleging, among other matters, breach of contract, and seeking damages of an unspecified amount for allegedly providing services to the Company. The Company believes Mr. Neumeyer's complaint is without merit.
On March 19, 2018 the Company issued 1,000,000 shares of common stock to a consultant that were owed as of December 31, 2017.