NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2018 AND 2017
NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES
Description of Business
Cerebain Biotech Corp. (Formerly Discount Dental Materials, Inc.) (“Cerebain Biotech”), was incorporated on December 18, 2007 under the laws of Nevada. The Company is a smaller reporting biomedical company and through its wholly-owned subsidiary, Cerebain Operating, Inc. (Formerly Cerebain Biotech Corp.) (collectively referred to as the “Company”), the Company’s business revolves around the discovery of products for the treatment of Alzheimer’s disease utilizing Omentum. The Company plans to produce products that will include both a medical device solution as well as a synthetic drug solution.
Cerebain Operating, Inc. was incorporated on February 22, 2010, in the State of Nevada.
NOTE 2 – BASIS OF PRESENTATION
The Company operates in one segment in accordance with accounting guidance Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280,
Segment Reporting
. Our Chief Executive Officer has been identified as the chief operating decision maker as defined by FASB ASC Topic 280.
Going Concern
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company had an accumulated deficit of approximately $32,450,000 and $27,500,000 at June 30, 2018 and 2017, respectively, had a net loss of approximately $4,900,000 and $16,000,000 for the fiscal years ended June 30, 2018 and 2017, respectively, and net cash used in operating activities of approximately $750,000 and $665,000 for the fiscal years ended June 30, 2018 and 2017, respectively, with no revenue earned since inception, limited cash of $65,000 and $11,000 at June 30, 2018 and 2017, respectively, and a lack of operational history. These matters raise substantial doubt about our ability to continue as a going concern.
While the Company is attempting to commence operations and generate revenues, the Company’s cash position may not be significant enough to support the Company’s daily operations. Management intends to raise additional funds by way of a public or private offering. Management believes that the actions presently being taken to further implement its business plan and generate revenues provide the opportunity for the Company to continue as a going concern. While the Company believes in the viability of its strategy to generate revenues and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate revenues.
The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s consolidated financial statements. The consolidated financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to GAAP and have been consistently applied in the preparation of the consolidated financial statements.
Use of Estimates
The preparation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of net sales and expenses during the reported periods. Actual results may differ from those estimates and such differences may be material to the consolidated financial statements. The more significant estimates and assumptions by management include among others: valuation of equity instruments, valuation of derivative liabilities, and valuation of warrants and options.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Cerebain Biotech Corp. and its wholly-owned subsidiary, Cerebain Operating, Inc. There are no material intercompany transactions.
Advertising Costs
Advertising expenses are recorded as general and administrative expenses when they are incurred. Advertising expense charged to operations was approximately $9,000 and $10,000 for the years ended June 30, 2018 and 2017, respectively.
Research and Development
The Company expenses the cost of research and development as incurred. Research and development costs charged to operations for the years ended June 30, 2018 and 2017 were approximately $295,000 and $241,000, respectively, (See Note 4).
Debt
The Company issues debt that may have separate warrants, conversion features, or no equity-linked attributes.
Debt with warrants
In accordance with ASC Topic 470-20-25, when the Company issues debt with warrants, the Company treats the warrants as a debt discount, record as a contra-liability against the debt, and amortizes the balance over the life of the underlying debt as amortization of debt discount expense in the consolidated statements of operations. The offset to the contra-liability is recorded as additional paid in capital in our consolidated balance sheets. The Company determines the value of the warrants using the Black-Scholes Option Pricing Model (“Black-Scholes”) using the stock price on the date of issuance, the risk-free interest rate associated with the life of the debt, and the volatility of the stock. If the debt is retired early, the associated debt discount is then recognized immediately as amortization of debt discount expense in the consolidated statements of operations. The debt is treated as conventional debt.
Convertible debt
–
derivative treatment
When the Company issues debt with a conversion feature, the Company must first assess whether the conversion feature meets the requirements to be treated as a derivative, as follows: a) one or more underlying’s, typically the price of our common stock; b) one or more notional amounts or payment provisions or both, generally the number of shares upon conversion; c) no initial net investment, which typically excludes the amount borrowed; and d) net settlement provisions, which in the case of convertible debt generally means the stock received upon conversion can be readily sold for cash. An embedded equity-linked component that meets the definition of a derivative does not have to be separated from the host instrument if the component qualifies for the scope exception for certain contracts involving an issuer’s own equity. The scope exception applies if the contract is both a) indexed to its own stock; and b) classified in stockholders’ equity in its statement of financial position.
If the conversion feature within convertible debt meets the requirements to be treated as a derivative, the Company estimates the fair value of the convertible debt derivative using the Black-Scholes Option Pricing Model upon the date of issuance. If the fair value of the convertible debt derivative is higher than the face value of the convertible debt, the excess is immediately recognized as interest expense. Otherwise, the fair value of the convertible debt derivative is recorded as a liability with an offsetting amount recorded as a debt discount, which offsets the carrying amount of the debt. The convertible debt derivative is revalued at the end of each reporting period and any change in fair value is recorded as a gain or loss in the consolidated statements of operations. The debt discount is amortized through interest expense over the life of the debt.
Convertible debt – beneficial conversion feature
If the conversion feature is not treated as a derivative, the Company assesses whether it is a beneficial conversion feature (“BCF”). A BCF exists if the conversion price of the convertible debt instrument is less than the stock price on the commitment date. This typically occurs when the conversion price is less than the fair value of the stock on the date the instrument was issued. The value of a BCF is equal to the intrinsic value of the feature, the difference between the conversion price and the common stock into which it is convertible and is recorded as additional paid in capital and as a debt discount in the consolidated balance sheets. The Company amortizes the balance over the life of the underlying debt as amortization of debt discount expense in the consolidated statements of operations. If the debt is retired early, the associated debt discount is then recognized immediately as amortization of debt discount expense in the consolidated statements of operations.
If the conversion feature does not qualify for either the derivative treatment or as a BCF, the convertible debt is treated as traditional debt.
Debt Modifications and Extinguishments
When the Company modifies or extinguishes debt, it does so in accordance with ASC Topic 470-50-40, which requires modification to debt instruments to be evaluated to assess whether the modifications are considered “substantial modifications”. A substantial modification of terms shall be accounted for like an extinguishment. Based on the guidance relied upon and the analysis performed, if the Company believes the embedded conversion feature has no fair value on the date of issuance (measurement date) and the embedded conversion feature has no beneficial conversion feature, the embedded conversion feature does not meet the criteria in ASC 470-50-40-10 or 470-20-25 and the issuance of the convertible note payable is considered a modification, and not an extinguishment that would require the recognition of a gain or loss. If the Company determines the change in terms meet the criteria for substantial modification under ASC 470 it will treat the modification as extinguishment and recognize a loss from debt extinguishment.
Fair Value of Financial Instruments
The Company applies the provisions of accounting guidance, FASB Topic ASC 825 that requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value, and defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of June 30, 2018 and 2017, the fair value of cash, accounts payable, related party payables, and notes payable to stockholders approximated carrying value due to the short maturity of the instruments, quoted market prices or interest rates which fluctuate with market rates.
Fair Value Measurements
FASB ASC Topic 825 “Financial Instruments,” requires disclosure about fair value of financial instruments.
The FASB ASC Topic 820,
Fair Value Measurement
, clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements.
The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized in the three broad levels listed below.
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·
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Level 1 – observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets.
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·
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Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.).
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·
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Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).
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The carrying value of financial assets and liabilities recorded at fair value is measured on a recurring or nonrecurring basis. Financial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. The Company had no financial assets or liabilities carried and measured on a nonrecurring basis during the reporting periods. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. The warrant and derivative liabilities are recognized at fair value on a recurring basis at June 30, 2018 and are Level 3 measurements. There have been no transfers between levels.
Concentrations, Risks, and Uncertainties
The Company is in its early stages of its life cycle and subject to the substantial business risks and uncertainties inherent to such an entity, including the potential risk of business failure.
Basic and Diluted Earnings Per Share
Basic earnings (loss) per common share is computed by dividing net earnings applicable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, using the treasury stock method, consisting of shares that might be issued upon exercise of common stock warrants and conversion of convertible notes. In periods where losses are reported, the weighted-average number of common stock outstanding excludes common shares equivalents, because their inclusion would be anti-dilutive.
Basic earnings per share are based on the weighted-average number of shares of common stock outstanding. Diluted earnings per share is based on the weighted-average number of shares of common stock outstanding adjusted for the effects of common stock that may be issued as a result of the following types of potentially dilutive instruments:
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·
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Warrants,
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·
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Convertible notes,
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·
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Employee stock options, and
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·
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Other equity awards, which include long-term incentive awards.
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The FASB ASC Topic 260, “
Earnings Per Share”
, requires the Company to include additional shares in the computation of earnings per share, assuming dilution. The additional shares included in diluted earnings per share represents the number of shares that would be issued if all of the Company’s outstanding dilutive instruments were converted into common stock.
Diluted earnings per share are based on the assumption that all dilutive options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options, warrants, and convertible notes are assumed to be exercised at the time of issuance, and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
Basic and diluted earnings (loss) per share are the same since the Company had net losses for all periods presented and including the additional potential common shares would have an anti-dilutive effect.
Recent Accounting Pronouncements
FASB ASU 2018-07 “Compensation – Stock Compensation (Topic 718) - In June 2018, the FASB issued ASU 2018-07. This update is intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to non-employees (for example, service providers, external legal counsel, suppliers, etc.). The ASU expands the scope of Topic 718, Compensation—Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. This standard will be effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2018. Early adoption of the standard is permitted. The standard will be applied in a retrospective approach for each period presented. The Company currently does not plan to early adopt this guidance and is evaluating the potential impact of this guidance on the consolidated financial statements as well as transition methods.
NOTE 4 –
COMMITMENTS AND CONTINGENCIES
Commitments
In September 2012, the Company entered into an agreement with Sonos Models, Inc. (“Sonos”) to build up to three medical device prototypes to be used for testing. In April 2014, the Company entered into an addendum to the agreement with Sonos, which included a commitment by the Company to pay Sonos up to One Million Dollars ($1,000,000) cash, excluding stock-based compensation, for research and development costs. These costs will be recognized in research and development expense as costs are incurred. To date, Sonos has been issued 325,000 restricted shares of the Company’s stock and the Company has paid approximately $320,000, of which $165,000 has been incurred towards the Company’s monetary commitment.
To date, the results of the research suggest we have three options for implantable devices with a bias towards having them as non-invasive as possible. The options are comprised of two electro-stim types that have a multitude of variable test parameters that can be changed and modified externally as the testing facility conducts clinical trials on each patient. It is theorized that if a patient’s response to the Omentum stimulation is successful, the clinical facility should be able to perform various tests for the purpose of setting “markers” for the patient and then perform the standardized cognitive testing for Alzheimer’s patient with the intent of developing a testing matrix. It is our objective to test various methods and modalities with the aim of developing an enormous matrix of input to direct us to the best solution.
Consulting Agreements
Between December 2016 and June 2018, the Company entered into service and consulting agreements with various vendors to provide assistance to the Company in several areas including the marketing of its biomedical products upon the availability of the device, capital markets and marketing strategies, research and development, advertising services and assistance in the introduction of the Company to medical device testing organization and to facilitate access to doctors in numerous countries, including Poland, Uzbekistan and China. They were compensated an approximate aggregate 1,935,000 shares of the Company’s fully vested and non-forfeitable common stock. These contracts are for twelve to thirty-six months and may be renewed or extended for any period as may be agreed by the parties. As of June 30, 2018, the Company has extended some of the contracts for additional periods. Any of the parties may terminate their respective agreement by providing thirty (30) days written notice of such termination. The Company has recognized $30,000 in accounts payable which is in arrears with one contractual obligation and is in discussions with the consultant to renegotiate the terms of the contract. As these contracts are for a period of up to twelve months to thirty-six months, the Company recorded the original approximate $2,670,000 as the value of the shares issued to prepaid expense and is amortizing the expense associated with these issuances over a twelve to thirty-six-month period. For the fiscal years ended June 30, 2018 and 2017, the Company amortized from prepaid expenses to selling, general and administrative expenses approximately $125,000 and $593,000, respectively. The unamortized prepaid expenses of these contracts are approximately $4,000 and included in prepaid expenses on the consolidated balance sheets at June 30, 2018 compared to $94,000 for the fiscal year ended June 30, 2017.
In January 2016, the Company entered into a consulting agreement with an individual to provide business consulting services for a period of thirty-six months. Compensation was the issuance of 75,000 shares (included in the preceding paragraph) of the Company’s stock and fully vested and non-forfeitable options to acquire up to 300,000 shares of the Company’s common stock, at an exercise price of $0.33 per share. Fair Market Value of these options totaled approximately $83,500 and is being recognized ratably over the service period in selling, general and administrative expense. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 210%; risk-free interest rate of 1.07%; expected term of 3 years; and 0% dividend yield. For the fiscal years ended June 30, 2018 and 2017, the Company amortized from prepaid expenses to selling, general and administrative expenses approximately $28,000. The unamortized prepaid expense of this contract is approximately $21,000 and included in prepaid expenses on the consolidated balance sheets at June 30, 2018.
In October 2016, the Company entered into a consulting agreement with an individual to provide business consulting services for a period of twelve months. Compensation was issuance of 300,000 shares of the Company’s stock (See Note 7) and fully vested and non-forfeitable warrants to acquire up to 300,000 shares of the Company’s common stock, at an exercise price of $0.40 per share. Fair Market Value of these warrants totaled approximately $171,000 and is to be recognized ratably over the service period in selling, general and administrative expense. The warrants were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 205%; risk-free interest rate of 0.63%; expected term of 1 year(s); and 0% dividend yield. For the fiscal years ended June 30, 2018 and 2017, the Company amortized from prepaid expenses to selling, general and administrative expenses approximately $43,000 and $128,000, respectively. The prepaid expense of this contract has been fully amortized as of June 30, 2018.
As of June 30, 2018, future maturities of prepaid expenses on value of shares and options issued for consulting are as follows:
Fiscal year ended June 30,
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2019
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$
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25,235
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Total
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$
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25,235
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Legal
On July 21, 2016, the Company was sued in the United States District Court for the Eastern District of Pennsylvania (
Miriam Weber Miller v. Cerebain Biotech Corp. and Eric Clemons
, Civil Action No. 16-3943) by Miriam Weber Miller, with Mr. Clemons named as an individual defendant. According to the Complaint, the Plaintiff alleged: (i) she was hired by the Company to perform public relations, investor relations, corporate growth strategies, and was to be an advisor to the Company’s Chief Executive Officer, (ii) she performed services, and (iii) that she was not fully compensated for those services. The Complaint claimed causes of action for breach of contract, violation of the Pennsylvania wage payment and collection law, and unjust enrichment, and sought damages of approximately $400,000. On April 3, 2017, without admitting fault or liability, and still denying the same, the Company made a business decision to resolve the lawsuit and it is now settled, effectively ending the litigation. In consideration for signing the agreement, the Company agreed to pay Ms. Miller as follows:
The Company paid Ms. Miller the total gross amount of one hundred twenty thousand dollars ($120,000) as follows:
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a)
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One payment of twenty thousand dollars ($20,000) within thirty (30) days after March 29, 2017; and
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b)
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Beginning within ninety (90) days after March 29, 2017, the Company made monthly payments of fifteen thousand dollars ($15,000) to Ms. Miller’s representative until such time that Ms. Miller and her representative has received the gross amount of $120,000.
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Upon all payments being made pursuant to the terms set forth in the agreement, Ms. Miller agreed to knowingly and voluntarily release and discharge the Company of and from all claims, demands, liabilities, obligations, promises, controversies, compensation, wages, bonuses, commissions, damages, rights, actions and causes of action known and unknown, at law or in equity, which Ms. Miller has or may have against the Company as of the date of execution of the settlement agreement.
The Company had recognized an accrual in Accounts Payable for payment of the agreed upon settlement, but no accrual has been made for additional legal contingencies in the consolidated financial statements as of June 30, 2018. For the fiscal year ended June 30, 2018, the Company paid Ms. Miller $85,000 as agreed in the settlement agreement. As of June 30, 2018, the terms of the settlement agreement have been met and Ms. Miller has been paid in full.
NOTE 5 – PATENT RIGHTS
On June 10, 2010, the Company entered into a Patent License Agreement under which the Company acquired the exclusive rights to certain intellectual property (patent pending) related to using Omentum for treating dementia conditions. Under the agreement, the Company has paid rights fees of $50,000 to Dr. Saini, and the Company issued Dr. Saini 825,000 shares of our common stock, valued at $6,600 (based on the fair market value on the date of grant) restricted in accordance with Rule 144. In addition, Dr. Saini will have the option to participate in the sale of equity by the Company in the future, up to ten percent (10%) of the money raised, in exchange for the shares issued under the pertinent section of the agreement. To date, Dr. Saini has not participated in any sales of equity.
The Patent License agreement provides for a royalty payment of six (6) percent of the value of the net sales, as defined, generated from the sale of licensed products. The agreement also provides for yearly minimum royalty payments of $50,000 for the fourth (June 2014), fifth (June 2015), and sixth (June 2016) anniversary of the date of the agreement, and a yearly minimum royalty payment of $100,000 for each year thereafter during the term of the agreement. The Company has accrued the minimum patent royalty expense associated with the patent rights in accounts payable and is currently in arrears and in discussions to renegotiate the terms of the agreement. The term of the agreement shall continue until the patent in the intellectual property expires, unless terminated sooner under the provisions of the agreement, as defined.
Legal fees, pertaining to the patent, are recorded as general and administrative expenses when they are incurred. Legal fees charged to operations were approximately $4,400 and $7,500 for the fiscal years ended June 30, 2018 and 2017, respectively.
The Company recognized a patent royalty expense of approximately $100,000 for the fiscal year ended June 30, 2018 compared to $100,000 for the fiscal year ended June 30, 2017. The accrued payable of $350,000 pertaining to the patent royalty expense at June 30, 2018 is included in related party payables.
NOTE
6
– NOTES PAYABLE
Short Term Notes Payable to Stockholders
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Short Term Notes Payable to Stockholders
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June 30,
2018
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June 30,
2017
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Short term notes payable (A)
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$
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114,000
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$
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114,000
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Short term notes payable (B)
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250,000
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175,000
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Short term notes payable (C)
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100,000
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-
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Net total
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$
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464,000
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$
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289,000
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Short Term Notes Payable to Stockholders
(A)
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In 2012, the Company issued a short term note payable to a non-affiliate stockholder. The note was scheduled to mature on December 31, 2013 and accrued interest at seven and one-half (7.5) percent per annum. In February 2016, the noteholder provided the Company with an additional $1,000. As of June 30, 2018, the outstanding balance was $114,000. The Company is currently in default and is in discussions with the noteholder to restructure the terms of the note.
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(B)
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In 2017, the Company issued short term notes payable to a non-affiliate stockholder. The notes were scheduled to mature on June 30, 2017 and accrued no interest. In addition, the Company issued to the noteholder 50,000 shares of the Company’s common stock. In connection with the issuance of the 50,000 shares of stock, the Company recorded the approximate $26,000 value of the shares issued as debt discount cost. The expense has been fully amortized at June 30, 2017. The Company used a recent sale of stock to an independent third party for cash to determine the fair market value of the transaction. As of June 30, 2017, the outstanding principal balance was $175,000. On August 29, 2017, the Company issued a $250,000 amended and consolidated note payable. The amended and consolidated note payable is a consolidation of the $175,000 notes payable and an additional $75,000. The amended and consolidated promissory note was scheduled to mature on December 31, 2017 and accrues no interest. In addition, the Company issued to the noteholder 200,000 shares of the Company’s common stock (see Note 7). In connection with the issuance of the 200,000 shares of stock, the Company recorded the approximate $30,000 value of the shares issued as loss on extinguishment of debt. The Company is currently in default and is in discussions with the noteholder to restructure the terms of the note.
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(C)
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In June 2018, the Company issued a short term note payable to a non-affiliate stockholder. The note matured on August 14, 2018 and accrues no interest. On August 14, 2018, the Company issued an addendum to the short term note payable. The addendum extended the maturity date of the note to December 31, 2018.
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Short Term Convertible Notes Payable
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Short Term Convertible
Notes Payable
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June 30,
2018
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June 30,
2017
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Crown Bridge Partners
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$
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65,000
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$
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-
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Auctus Fund
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110,000
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-
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EMA Financial
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110,000
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-
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Subtotal
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285,000
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-
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Debt discount
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(177,094
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)
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-
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Net total
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$
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107,906
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$
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-
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Crown Bridge Partners
On March 2, 2018, the Company held an initial closing under a Securities Purchase Agreement (the “Crown SPA”) and corresponding Convertible Promissory Note (the “Crown Note”) with Crown Bridge Partners, LLC (“Crown”), dated February 14, 2018. Under the Crown SPA and the Crown Note, Crown agreed to loan the Company up to One Hundred Thirty Thousand Dollars ($130,000) in tranches. The Crown Note has an original issuance discount of $13,000, meaning the maximum amount the Company can borrow under the Crown Note is $117,000. The initial tranche on March 2, 2018 was $65,000, with the Company receiving $58,500 and the remaining $6,500 being retained by Crown as the portion of the prorated original issuance discount. The Crown Note bears interest at Ten Percent (10%) per annum and matures twelve (12) months from the date of each tranche, with the initial tranche of $65,000 maturing on March 2, 2019. Under the terms of the Crown Note, Crown has the right, at any time to convert all or part of the amounts due to it under the Crown Note into shares of the Company’s common stock. The conversion price is 55% of the lesser of (a) the lowest traded price or (b) the lowest closing bid price, of the Company’s common stock on the twenty-five trading days prior to the conversion date. However, Crown may not convert the amounts due under the Note into shares of the Company’s common stock if such conversion would cause it to own more than 4.99% of the Company’s then-outstanding common stock, which limitation may be waived by Crown upon 61 days-notice. In the event the Company defaults under the terms of the Crown Note, the Company owes 150% of the principal amount then due under the Note, plus any unpaid interest, immediately. The Company may prepay the amounts loaned to the Company under the Crown Note as follows: (i) during the initial 60-day period after each tranche, at 125% multiplied by the amount the Company is prepaying, (ii) during the 61st through 120 days after each tranche, at 135% multiplied by the amount the Company is prepaying, and (iii) during the 121st through 180th day after each tranche, at 150% multiplied by the amount the Company is prepaying. Any prepayments are subject to Crown’s written acceptance of such prepayment. After 180 days from each tranche the Company cannot prepay that tranche in cash.
While this Note is outstanding, if the Company enters into a Section 3(a)(9) transaction, as defined by the Securities Act, (including but not limited to the issuance of new promissory notes or of a replacement promissory note), or Section 3(a)(10) transaction, as defined by the Securities Act, in which any 3rd party has the right to convert monies owed to that 3rd party (or receive shares pursuant to a settlement or otherwise) at a discount to market greater than the Variable Conversion Price in effect at that time (prior to all other applicable adjustments in the Note), then the Variable Conversion Price shall be automatically adjusted to such greater discount percentage (prior to all applicable adjustments in this Note) until this Note is no longer outstanding. Each time, while this Note is outstanding, the Company enters into a Section 3(a)(9) transaction, as defined by the Securities Act, (including but not limited to the issuance of new promissory notes or of a replacement promissory note), or Section 3(a)(10) transaction, as defined by the Securities Act, in which any 3rd party has a look back period greater than the look back period in effect under the Note at that time, then the Holder’s look back period shall automatically be adjusted to such greater number of days until this Note is no longer outstanding.
In addition to issuing the Crown Note, the Company agreed to issue Crown a warrant with each funding tranche. Each warrant will be for the purchase of shares of the Company’s common stock equal to 75% of the face value of the tranche divided by $0.50. For example, the first tranche of funding is for $65,000, the Company issued a warrant to purchase 97,500 shares of the Company’s common stock at an exercise price of $0.50 per share. The warrant contains a cashless exercise provision. Each warrant expires five years after the date of issuance.
In connection with the warrants, if the Company, at any time from and after the Issuance Date, shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise dispose of, sell or issue (or announce any offer, sale, grant or any option to purchase or other disposition of) any Common Stock or Common Stock Equivalents entitling any person, firm, association or entity to acquire shares of Common Stock at an effective price per share less than the then-current Exercise Price (including but not limited to under the Note), as adjusted hereunder (any such issuance being referred to as a “
Dilutive Issuance
,” subject, however, to the provision contained in the further definition of the term “Dilutive Issuance” contained in the agreement, then (a) the Exercise Price shall be adjusted to match the lowest price per share at which such Common Stock was issued or may be acquired pursuant to such Common Stock Equivalents in the Dilutive Issuance, and (b) the number of Warrant Shares issuable upon the exercise of this Warrant shall be increased to an amount equal to the number of Warrant Shares Holder could purchase hereunder for the aggregate Exercise Price, as reduced pursuant to the agreement, equal to the aggregate Exercise Price payable immediately prior to such reduction in Exercise Price. Additionally, following the occurrence of a Dilutive Issuance, all references in this Warrant to “Warrant Shares” shall be a reference to the Warrant Shares as increased pursuant to the agreement, and all references in this Warrant to “Exercise Price” shall be a reference to the Exercise Price as reduced pursuant to the agreement, as the same may occur from time to time hereunder. Subject to the anti-dilution provision, the Company adjusted Crown’s warrant to purchase 243,750 shares of our common stock at an exercise price of $0.20 per share as a result of the warrant issued to Auctus Fund on March 8, 2018.
Auctus Fund
On March 8, 2018, the Company closed a Securities Purchase Agreement (the “Auctus SPA”) and corresponding Convertible Promissory Note (the “Auctus Note”) with Auctus Fund, LLC (“Auctus”), dated February 15, 2018. Under the Auctus SPA and the Auctus Note, Auctus agreed to loan the Company One Hundred Ten Thousand Dollars ($110,000). The Auctus Note bears interest at Ten Percent (10%) per annum and matures on November 15, 2018. Under the terms of the Auctus Note, Auctus has the right, at any time to convert all or part of the amounts due to it under the Auctus Note into shares of the Company’s common stock. The conversion price is 55% multiplied by the lowest Trading Price during the twenty-five trading days prior to the conversion date. However, Auctus may not convert the amounts due under the Note into shares of the Company’s common stock if such conversion would cause it to own more than 4.99% of the Company’s then-outstanding common stock, which limitation may be waived by Auctus upon 61 days-notice. In the event the Company defaults under the terms of the Auctus Note, the Company owes 150% of the principal amount then due under the Note, plus any unpaid interest, immediately. The Company may prepay the amounts loaned to the Company under the Auctus Note as follows: (i) during the initial 90-day period after the issue date, at 135% multiplied by the amount the Company is prepaying, and (ii) from the 91st through the 180th day after the issue date, at 150% multiplied by the amount the Company is prepaying. Any prepayments are subject to Auctus’ written acceptance of such prepayment. After 180 days from the issue date the Company cannot prepay the Auctus Note.
While this Note is outstanding, if the Company enters into a Section 3(a)(9) transaction, as defined by the Securities Act, (including but not limited to the issuance of new promissory notes or of a replacement promissory note), or Section 3(a)(10) transaction, as defined by the Securities Act, in which any 3rd party has the right to convert monies owed to that 3rd party (or receive shares pursuant to a settlement or otherwise) at a discount to market greater than the Variable Conversion Price in effect at that time (prior to all other applicable adjustments in the Note), then the Variable Conversion Price shall be automatically adjusted to such greater discount percentage (prior to all applicable adjustments in this Note) until this Note is no longer outstanding. Each time, while this Note is outstanding, the Company enters into a Section 3(a)(9) transaction, as defined by the Securities Act, (including but not limited to the issuance of new promissory notes or of a replacement promissory note), or Section 3(a)(10) transaction, as defined by the Securities Act, in which any 3rd party has a look back period greater than the look back period in effect under the Note at that time, then the Holder’s look back period shall automatically be adjusted to such greater number of days until this Note is no longer outstanding.
In addition to issuing the Auctus Note, the Company agreed to issue Auctus a warrant to acquire 275,000 shares of the Company’s common stock at an exercise price of $0.20 per share. The warrant contains a cashless exercise provision and expires on the fifth anniversary of the warrant.
In connection with the warrants, if the Company, at any time from and after the Issuance Date, shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise dispose of, sell or issue (or announce any offer, sale, grant or any option to purchase or other disposition of) any Common Stock or Common Stock Equivalents entitling any person, firm, association or entity to acquire shares of Common Stock at an effective price per share less than the then-current Exercise Price (including but not limited to under the Note), as adjusted hereunder (any such issuance being referred to as a “
Dilutive Issuance
,” subject, however, to the proviso contained in the further definition of the term “Dilutive Issuance” contained in the agreement, then (a) the Exercise Price shall be adjusted to match the lowest price per share at which such Common Stock was issued or may be acquired pursuant to such Common Stock Equivalents in the Dilutive Issuance, and (b) the number of Warrant Shares issuable upon the exercise of this Warrant shall be increased to an amount equal to the number of Warrant Shares Holder could purchase hereunder for the aggregate Exercise Price, as reduced pursuant to the agreement, equal to the aggregate Exercise Price payable immediately prior to such reduction in Exercise Price. Additionally, following the occurrence of a Dilutive Issuance, all references in this Warrant to “Warrant Shares” shall be a reference to the Warrant Shares as increased pursuant to the agreement, and all references in this Warrant to “Exercise Price” shall be a reference to the Exercise Price as reduced pursuant to the agreement, as the same may occur from time to time hereunder.
EMA Financial
On March 8, 2018, the Company closed a Securities Purchase Agreement (the “EMA SPA”) and corresponding Convertible Promissory Note (the “EMA Note”) with EMA Financial, LLC (“EMA”), dated February 12, 2018. Under the EMA SPA and the EMA Note, EMA agreed to loan the Company One Hundred Ten Thousand Dollars ($110,000). The EMA Note has an original issuance discount of $6,600, meaning the amount the Company received at funding was $103,400. The EMA Note bears interest at Ten Percent (10%) per annum and matures on February 12, 2019. Under the terms of the EMA Note, EMA has the right, at any time to convert all or part of the amounts due to it under the EMA Note into shares of the Company’s common stock. The conversion price is 55% multiplied by the lowest Trading Price during the twenty trading days prior to the conversion date. However, EMA may not convert the amounts due under the Note into shares of the Company’s common stock if such conversion would cause it to own more than 4.99% of the Company’s then-outstanding common stock, which limitation may be waived by EMA upon 61 days-notice. In the event the Company defaults under the terms of the EMA Note, the Company owes 150% of the principal amount then due under the Note, plus any unpaid interest, immediately. The Company may prepay the amounts loaned to the Company under the EMA Note as follows: (i) during the initial 90-day period after the issue date, at 135% multiplied by the amount the Company is prepaying, and (ii) from the 91st through the 180th day after the issue date, at 150% multiplied by the amount the Company is prepaying. Any prepayments are subject to EMA’s written acceptance of such prepayment. After 180 days from the issue date the Company cannot prepay the EMA Note.
While this Note is outstanding, if the Company enters into a Section 3(a)(9) transaction, as defined by the Securities Act, (including but not limited to the issuance of new promissory notes or of a replacement promissory note), or Section 3(a)(10) transaction, as defined by the Securities Act, in which any 3rd party has the right to convert monies owed to that 3rd party (or receive shares pursuant to a settlement or otherwise) at a discount to market greater than the Variable Conversion Price in effect at that time (prior to all other applicable adjustments in the Note), then the Variable Conversion Price shall be automatically adjusted to such greater discount percentage (prior to all applicable adjustments in this Note) until this Note is no longer outstanding. Each time, while this Note is outstanding, the Company enters into a Section 3(a)(9) transaction, as defined by the Securities Act, (including but not limited to the issuance of new promissory notes or of a replacement promissory note), or Section 3(a)(10) transaction, as defined by the Securities Act, in which any 3rd party has a look back period greater than the look back period in effect under the Note at that time, then the Holder’s look back period shall automatically be adjusted to such greater number of days until this Note is no longer outstanding.
In addition to issuing the EMA Note, the Company agreed to issue EMA a warrant to acquire 137,500 shares of the Company’s common stock at an exercise price of $0.40 per share. The warrant contains a cashless exercise provision and expires on the fifth anniversary of the warrant.
In connection with the warrants, if the Company, at any time from and after the Issuance Date, shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise dispose of, sell or issue (or announce any offer, sale, grant or any option to purchase or other disposition of) any Common Stock or Common Stock Equivalents entitling any person, firm, association or entity to acquire shares of Common Stock at an effective price per share less than the then-current Exercise Price (including but not limited to under the Note), as adjusted hereunder (any such issuance being referred to as a “
Dilutive Issuance
,” subject, however, to the proviso contained in the further definition of the term “Dilutive Issuance” contained in the agreement, then (a) the Exercise Price shall be adjusted to match the lowest price per share at which such Common Stock was issued or may be acquired pursuant to such Common Stock Equivalents in the Dilutive Issuance, and (b) the number of Warrant Shares issuable upon the exercise of this Warrant shall be increased to an amount equal to the number of Warrant Shares Holder could purchase hereunder for the aggregate Exercise Price, as reduced pursuant to the agreement, equal to the aggregate Exercise Price payable immediately prior to such reduction in Exercise Price. Additionally, following the occurrence of a Dilutive Issuance, all references in this Warrant to “Warrant Shares” shall be a reference to the Warrant Shares as increased pursuant to the agreement, and all references in this Warrant to “Exercise Price” shall be a reference to the Exercise Price as reduced pursuant to the agreement, as the same may occur from time to time hereunder. Subject to the anti-dilution provision and as a result of the warrant issued to Auctus detailed above, the Company issued EMA an amended and restated warrant to purchase 275,000 shares of our common stock at an exercise price of $0.20 per share, which replaced the original warrant issued to EMA.
Short Term Convertible Notes Conversion
The Company evaluated the notes under the requirements of ASC 480 “Distinguishing Liabilities From Equity” (ASC 480) and concluded that the notes do not fall within the scope of ASC 480. The Company next evaluated the notes under the requirements of ASC 815 “Derivatives and Hedging”. Due to the existence of the anti-dilution provisions which reduces the purchaser’s conversion price in the event of subsequent dilutive issuances by the Company below the purchaser’s conversion price as described above, the conversion features do not meet the definition of “indexed to” the Company’s stock, and the scope exception to ASC 815’s derivative accounting provisions does not apply. The Company also evaluated the embedded derivative criteria in ASC 815, and concluded that the conversion features meet all the embedded derivative criteria in ASC 815, and therefore, the conversion features meet the definition of an embedded derivative that should be separated from the notes and accounted for as a derivative liability.
The embedded derivatives were recorded as a derivative liability on the consolidated Balance Sheet at their fair value of $330,000 at the date of issuance. At each subsequent reporting date, the fair value of the embedded derivative liabilities will be remeasured and changes in the fair value will be recorded in the consolidated Statements of Operations. At June 30, 2018, the embedded derivatives were re-measured at fair value that was determined to be $285,000. During the fiscal year ended June 30, 2018, the Company recorded a gain on embedded derivative re-valuation of $45,000.
The fair value of the embedded derivative liabilities is measured in accordance with ASC 820 “Fair Value Measurement”, using the “Monte Carlo Method” modeling incorporating the following inputs:
|
|
June 30,
|
|
|
March 2,
|
|
Crown Bridge Partners
|
|
2018
|
|
|
2018
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
260.0
|
%
|
|
|
255.0
|
%
|
Risk-free interest rate
|
|
|
2.22
|
%
|
|
|
2.06
|
%
|
Stock price
|
|
$
|
0.14
|
|
|
$
|
0.18
|
|
Conversion price
|
|
$
|
0.07
|
|
|
$
|
0.06
|
|
|
|
June 30,
|
|
|
March 8,
|
|
Auctus Fund
|
|
2018
|
|
|
2018
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
100.0
|
%
|
|
|
275.0
|
%
|
Risk-free interest rate
|
|
|
2.02
|
%
|
|
|
1.97
|
%
|
Stock price
|
|
$
|
0.14
|
|
|
$
|
0.16
|
|
Conversion price
|
|
$
|
0.07
|
|
|
$
|
0.05
|
|
|
|
June 30,
|
|
|
March 8,
|
|
EMA Financial
|
|
2018
|
|
|
2018
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
210.0
|
%
|
|
|
265.0
|
%
|
Risk-free interest rate
|
|
|
2.22
|
%
|
|
|
2.05
|
%
|
Stock price
|
|
$
|
0.14
|
|
|
$
|
0.16
|
|
Conversion price
|
|
$
|
0.07
|
|
|
$
|
0.06
|
|
Short Term Convertible Notes Warrants
The Company evaluated the Warrants under ASC 480 “Distinguishing Liabilities From Equity” and ASC 815 “Derivatives and Hedging”. Due to the existence of the antidilution provision, which reduces the Exercise Price and Conversion Price in the event of subsequent issuances, the Warrants are not indexed to our common stock, and the Company has determined that the Warrants meet the definition of a derivative under ASC 815. Accordingly, the Warrants were recorded as derivative liabilities in the consolidated Balance Sheet at their fair value of $96,289 at the date of issuance. At each subsequent reporting date, the fair value of the Warrants will be remeasured and changes in the fair value will be reported in the consolidated Statements of Operations. At June 30, 2018, the warrant liability was re-measured at fair value that was determined to be $85,058. During the fiscal year ended June 30, 2018, the Company recorded a gain on warrant re-valuation of $11,231.
The fair value of the Warrants is measured in accordance with ASC 820 “Fair Value Measurement”, using “Monte Carlo simulation” modeling, incorporating the following inputs:
Crown Bridge Partners
|
|
June 30,
2018
|
|
|
March 2,
2018
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
215.0
|
%
|
|
|
215.0
|
%
|
Risk-free interest rate
|
|
|
2.74
|
%
|
|
|
2.63
|
%
|
Stock price
|
|
$
|
0.14
|
|
|
$
|
0.18
|
|
Exercise price
|
|
$
|
0.20
|
|
|
$
|
0.50
|
|
Auctus Fund
|
|
June 30,
2018
|
|
|
March 8,
2018
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
215.0
|
%
|
|
|
215.0
|
%
|
Risk-free interest rate
|
|
|
2.74
|
%
|
|
|
2.63
|
%
|
Stock price
|
|
$
|
0.14
|
|
|
$
|
0.16
|
|
Exercise price
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
EMA Financial
|
|
June 30,
2018
|
|
|
March 8,
2018
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
215.0
|
%
|
|
|
215.0
|
%
|
Risk-free interest rate
|
|
|
2.73
|
%
|
|
|
2.63
|
%
|
Stock price
|
|
$
|
0.14
|
|
|
$
|
0.16
|
|
Exercise price
|
|
$
|
0.20
|
|
|
$
|
0.40
|
|
Debt Discount
The Company issued the notes with warrants that require liability treatment under ASC 815. As such, the proceeds of the notes were allocated, based on fair values, as follows: original issue discount of approximately $32,000, approximately $96,000 to the warrants granted, and approximately $330,000 to the embedded derivative, resulting in a debt discount to such notes of approximately $285,000 with the remaining amount of approximately $173,000 expensed at inception of the note. The debt discount is accreted to interest expense over the term of the note.
The Company recorded debt discount accretion of approximately $107,000 and $0 to interest expense for the fiscal years ended June 30, 2018 and 2017, respectively. The accretion of debt discount expense to be recognized in future years is approximately $177,000.
Changes in the derivative and warrant liabilities were as follows:
Derivative liabilities:
|
|
|
|
March 2-8, 2018
|
|
$
|
330,000
|
|
Increase (decrease) in fair value
|
|
|
(45,000
|
)
|
June 30, 2018
|
|
$
|
285,000
|
|
|
|
|
|
|
Warrant liabilities:
|
|
|
|
|
March 2-8, 2018
|
|
$
|
96,289
|
|
Increase (decrease) in fair value
|
|
|
(11,231
|
)
|
June 30, 2018
|
|
$
|
85,058
|
|
Convertible Notes to Stockholders
|
|
Convertible Notes Payable
|
|
|
|
June 30,
2018
|
|
|
June 30,
2017
|
|
Convertible notes payable (A)
|
|
$
|
116,000
|
|
|
$
|
131,000
|
|
Convertible note payable (B)
|
|
|
260,000
|
|
|
|
260,000
|
|
Convertible notes payable (C)
|
|
|
2,560,112
|
|
|
|
2,460,112
|
|
Subtotal
|
|
|
2,936,112
|
|
|
|
2,851,112
|
|
Debt discount
|
|
|
(5,381
|
)
|
|
|
(12,053
|
)
|
Net total
|
|
$
|
2,930,731
|
|
|
$
|
2,839,059
|
|
Convertible Notes Payable (A)
Between September 2013 and December 2017, the Company entered into various unsecured convertible promissory notes with non-affiliate stockholders for principal amounts of approximately $7,500 to $30,000, totaling approximately $157,000, offset by the conversion of convertible notes payable to shares of the Company’s common stock of approximately $26,000 and the repayment of one note totaling $15,000, netting a balance of approximately $116,000. Under the terms of these notes, maturity dates range from June 2015 and July 2019, interest rates range from 7.5% to 8.0% per annum, and are convertible into shares of the Company’s common stock at rates that range from $0.20 and $5.00 per share, but only if such conversion would not cause the noteholders to own more than 9.9% of the Company’s outstanding common stock and contains piggyback registration rights. In addition, the Company granted to certain noteholders a cashless option to purchase one (1) share of the Company’s common stock, $.001 par value, at the exercise price of $0.50 to $1.25 per share, for each share the noteholders are entitled pursuant to the promissory notes. The options are fully vested and shall expire from one to three years from date of execution. For the period ended June 30, 2018, the Company is in default approximately $77,500 on various notes. As a result, these notes are included in the current portion of convertible notes payable, and the Company is in discussions with the noteholders to restructure the terms of the notes.
The Company determined that some of the notes had a beneficial conversion feature of approximately $38,000.
The Company recognized an accretion of debt discount expense of approximately $7,000 and $17,500 for the fiscal years ended June 30, 2018 and 2017, respectively. The accretion of debt discount expense to be recognized in future years is approximately $5,000.
Unsecured, Amended and Consolidated Convertible Note Payable (B)
December 2014 Convertible Note
In December 2014, the Company entered into an unsecured convertible promissory note with a non-affiliate stockholder for a principal amount of $200,000. The note payable accrued interest at 7.5% per annum and was convertible into shares of the Company’s common stock at a conversion rates of $1.00 per share, but only if such conversion would not cause the noteholder to own more than 9.9% of the Company’s outstanding common stock and contained piggyback registration rights. The note payable was extinguished in December 2015.
December 2015 Convertible Note
In December 2015, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of $260,000. In exchange, the Company extinguished a $10,000 short term note payable, the $200,000 convertible note payable issued in December 2014, and received cash of $50,000. The amended and consolidated note payable matures in October 2019, accrues interest at 7.5% per annum, and convertible into shares of the Company’s common stock at a conversion rates of $0.20 per share, but only if such conversion would not cause the noteholder to own more than 9.9% of the Company’s outstanding common stock, and contains piggyback registration rights. In addition, the Company granted to the noteholder a cashless warrant to purchase one (1) share of the Company’s common stock, $.001 par value, at the exercise price of $0.50 per share, for each share the noteholder is entitled pursuant to the promissory note. The options are fully vested and shall expire three years from date of execution.
The Company determined the estimated relative fair value discount of the warrants was approximately $128,000 which was valued using the Black-Scholes option pricing model with the following inputs: volatility of 240%; risk-free interest rate of 1.05%; expected term of 3 years; and 0% dividend yield.
Unsecured, Amended and Consolidated Convertible Notes Payable (C)
January 2017 Convertible Note
In January 2017, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of approximately $2,460,000. In exchange, the Company modified the $2,410,112 convertible promissory note payable issued in November 2016 and received cash of $50,000. The amended and consolidated convertible note payable matures in January 2019, accrues interest at 5% per annum, and is convertible into shares of the Company’s common stock at a conversion rate of $0.15 per share, but only if such conversion would not cause the noteholder to own more than 9.9% of the Company’s outstanding common stock, and contains piggyback registration rights. The note payable was extinguished in October 2017.
In connection with the $2,460,000 convertible note payable, the Company determined the embedded conversion feature does not meet the criteria in ASC 470-50-40-10 or 470-20-25, and the issuance of the convertible promissory note payable is considered a modification, and not an extinguishment that would require the recognition of a gain or loss.
October 2017 Convertible Note
In October 2017, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of approximately $2,560,000. In exchange, the Company modified the $2,460,112 convertible promissory note payable issued in January 2017 and received cash of $100,000. The amended and consolidated convertible promissory note matures in October 2019, accrues interest at 5% per annum and is convertible into shares of the Company’s common stock at a conversion rate of $0.10 per share, but only if such conversion would not cause the noteholder to own more than 9.9% of the Company’s outstanding common stock, and contains piggyback registration rights.
In connection with the $2,560,000 convertible note, the Company determined the embedded conversion feature does meet the criteria in ASC 470-50-40-10 or 470-20-25, and the issuance of the convertible promissory note payable is considered an extinguishment that would require the recognition of a gain or loss. The Company recognized a loss from extinguishment of debt of approximately $3.1 million for the year ended June 30, 2018.
The Company recognized interest expense on all notes payable to stockholders of approximately $174,000 and $157,000 for the fiscal years ended June 30, 2018 and 2017, respectively. Accrued interest on all notes payable to stockholders at June 30, 2018 and 2017 totaled approximately $430,000 and $260,000, respectively, and is included in accounts payable.
As of June 30, 2018, future maturities of all notes payable are as follows:
2019
|
|
|
1,109,000
|
|
2020
|
|
|
2,576,112
|
|
Total outstanding notes
|
|
|
3,685,112
|
|
Debt Discount
|
|
|
(182,475
|
)
|
Net Notes Payable
|
|
$
|
3,502,637
|
|
NOTE 7 – STOCK TRANSACTIONS
For the fiscal year ended June 30, 2018, the Company issued 144,000 shares of its common stock to a non-affiliate investor at $1.25 per share in exchange for $180,000. The investor had an existing stock purchase agreement with the Company that allowed him to purchase up to $2,000,000 worth of the Company’s common stock at $1.25 per share. In addition to the 144,000 shares of the Company’s common stock, the Company issued the investor a warrant to acquire 144,000 shares of the Company’s common stock at $2.50 per share. The warrants have been accounted for as an equity transaction under GAAP.
For the fiscal year ended June 30, 2018, the Company entered into stock purchase agreements with a non-affiliate stockholder, under which the Company issued 220,000 shares of its common stock, in exchange for $110,000. In connection with the stock purchase agreement, the Company issued 220,000 warrants at $1.00 per share. The warrants have been accounted for as an equity transaction under GAAP.
For the fiscal year ended June 30, 2018, the Company issued 795,000 fully vested, nonforfeitable shares of common stock to various individuals as payment for legal services, consulting services, employee stock award and financing fee per agreements dated between July 2017 and June 2018. The aggregate fair market value of these shares was approximately $138,000 as the fair market value of the stock was between $0.15 and $0.20 per share. The Company used recent sales of stock to determine the fair market value of these transactions.
For the fiscal year ended June 30, 2017, the Company entered into various stock purchase agreements with third parties between July 2016 and June of 2017, under which the Company issued 152,000 shares of its common stock, in exchange for $136,000. The aggregate value of these shares was $136,000 as the price was between $0.50 and $1.25 per share. The stock purchase agreements include piggyback registration rights. In connection with one of the stock purchase agreements, the Company will also issue 80,000 warrants at $2.50 per share. The warrant agreement will be issued after the full amount of the investment is determined after December 31, 2017.
For the fiscal year ended June 30, 2017, the Company issued 72,000 shares of its common stock to an individual for conversion of notes payable. The aggregate value of these shares was approximately $14,400 as the conversion price was $0.20 per share.
For the fiscal year ended June 30, 2017, the Company issued 540,000 fully vested, nonforfeitable shares of common stock to various individuals as payment for consulting services and financing fee per agreements dated between April 2016 and June 2017. The aggregate Fair Market Value of these shares was approximately $343,000 as the fair market value of the stock was between $0.48 and $0.75 per share. The Company used recent sales of stock to determine the fair market value of these transactions.
On May 15, 2017, the Company issued a Private Placement Memorandum (“PPM”). The PPM authorizes the sale of up to 400 units, with each Unit consisting of one $10,000 Principal Amount Convertible Debenture and a warrant to purchase one share of the Company’s common stock, at a price of $1.25 per Unit. Each Unit includes a warrant to purchase 25,000 shares of the Company’s common stock, $.001 par value, at the exercise price of $0.80 per share. The Debentures will be convertible at Forty Cents ($0.40) per share. The Offering was to terminate on June 30, 2017, unless extended one or more times by us to a date not later than July 31, 2017. On August 18, 2017, by unanimous written consent of the Company’s directors, the company extended the offering through December 31, 2017. The Company received no subscriptions and the offering closed effective December 31, 2017.
NOTE 8 – OPTIONS AND WARRANTS
Options
For the fiscal year ended June 30, 2018, the Company had 910,000 options outstanding at a weighted average exercise price of $1.45 and a weighted average contractual life of 7.69 years, with 754,000 options exercisable at a weighted average exercise price of $1.57 and a weighted average contractual life of 7.21 years. For the fiscal years ended June 30, 2018 and 2017, the Company recognized an expense of approximately $64,000 and $341,000, respectively, which was recorded as compensation expense. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $69,000.
The following represents a summary of the Options outstanding at June 30, 2018 and changes during the periods then ended:
|
|
Options
|
|
|
Options Average
Exercise Price
|
|
|
Weighted Average
Contractual
Life
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding July 1, 2016
|
|
|
700,000
|
|
|
$
|
1.65
|
|
|
|
7.00
|
|
|
$
|
-
|
|
Granted
|
|
|
210,000
|
|
|
|
0.75
|
|
|
|
10.00
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired/Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, June 30, 2017
|
|
|
910,000
|
|
|
$
|
1.45
|
|
|
|
7.69
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired/Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, June 30, 2018
|
|
|
910,000
|
|
|
$
|
1.45
|
|
|
|
7.69
|
|
|
$
|
-
|
|
Exercisable at June 30, 2018
|
|
|
754,000
|
|
|
$
|
1.57
|
|
|
|
7.21
|
|
|
$
|
-
|
|
Expected to be vested
|
|
|
910,000
|
|
|
$
|
1.45
|
|
|
|
7.69
|
|
|
$
|
-
|
|
Compensation to be recognized
|
|
$
|
69,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture Rate
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Warrants
For the fiscal year ended June 30, 2018, the Company had approximately 3,200,000 warrants outstanding at an average exercise price of $0.78. For the fiscal years ended June 30, 2018 and 2017, the Company recognized an accretion of debt discount related to warrants expense of approximately $5,000 and $6,500, respectively. The approximate expense expected to be recognized in future years is $4,500.
The following represents a summary of the Warrants outstanding at June 30, 2018 and changes during the periods then ended:
|
|
Warrants
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding, June 30, 2016
|
|
|
1,477,000
|
|
|
$
|
0.59
|
|
Granted
|
|
|
400,000
|
|
|
|
0.43
|
|
Exercised
|
|
|
(72,000
|
)
|
|
|
0.50
|
|
Expired/Forfeited
|
|
|
(115,000
|
)
|
|
|
1.51
|
|
Outstanding, June 30, 2017
|
|
|
1,690,000
|
|
|
$
|
0.50
|
|
Granted
|
|
|
1,541,750
|
|
|
|
1.10
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired/Forfeited
|
|
|
(10,000
|
)
|
|
|
2.50
|
|
Outstanding, June 30, 2018
|
|
|
3,221,750
|
|
|
|
0.78
|
|
Exercisable at June 30, 2018
|
|
|
3,221,750
|
|
|
$
|
0.78
|
|
NOTE 9 – Related Party Transactions
Employment Agreements
Eric Clemons
On October 1, 2014, the Company entered into an addendum to the employment agreement. The addendum had no accounting impact on the prior agreement. Terms of the addendum include included the following:
|
·
|
Extension of employment until December 31, 2017. The Company has entered into a new employment agreement with Mr. Clemons.
|
|
|
|
|
·
|
Annual salary of One Hundred Ninety-Five Thousand Dollars ($195,000).
|
|
|
|
|
·
|
Option to acquire up to 100,000 shares of the Company’s common stock under the Company’s 2014 Omnibus Stock Grant and Option Plan at an exercise price of $1.20 per share subject to a vesting schedule. Fair Market Value of these options totaled approximately $112,000 and is recognized ratably over the vesting period in selling, general and administrative expense. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 262%; risk-free interest rate of 1.69%; expected term of 5 years; and 0% dividend yield. As of June 30, 2018, 80,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $22,000 for the fiscal years ended June 30, 2018 and 2017. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $4,500.
|
On March 1, 2015, the Company entered into an addendum to the employment agreement. The addendum had no accounting impact on the prior agreements. Terms of the addendum included a cash placement bonus equal to an amount up to 10% of the aggregate purchase price paid by each purchaser of the Company’s Securities and Convertible Debt, where the purchaser of said Securities and Convertible Debt has been directly introduced to the Company by Mr. Clemons. For the fiscal years ended June 30, 2018 and 2017, a cash placement bonus was earned of approximately $0 and $27,000, respectively, which was recognized as a reduction of the proceeds from the sale of shares of common stock and debt issuances and recorded as an expense.
On September 29, 2016, the Company issued Mr. Clemons an option to acquire up to 105,000 shares of the Company’s common stock under the Company’s 2014 Omnibus Stock Grant and Option Plan at an exercise price of $0.75 per share subject to a vesting schedule. Fair Market Value of these options totaled approximately $78,000 and is recognized ratably over the vesting period in selling, general and administrative expense. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 206%; risk-free interest rate of 1.13%; expected term of 6 years; and 0% dividend yield. As of June 30, 2018, 42,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $16,000 and $31,000 for the fiscal years ended June 30, 2018 and 2017, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $31,000.
On February 1, 2018, the Company entered into a new employment agreement with Eric Clemons, an officer of the company. The new contract had no accounting impact on the prior agreements. Terms of the agreement include the following:
|
·
|
Term of contract thirty-six months.
|
|
|
|
|
·
|
Annual salary of Two Hundred Fourteen Thousand Five Hundred Dollars ($214,500).
|
|
|
|
|
·
|
Stock grant of 800,000 of the Company’s common restricted shares for services provided to the Company. Stock grant is subject to a vesting schedule, of which 160,000 shares of stock were issued on February 1, 2018 (See Note 7). The aggregate fair market value of these shares was approximately $144,000 as the fair market value of the stock was $0.18 per share. The Company used recent sales of stock to determine the fair market value of this transaction. As of June 30, 2018, 160,000 shares have been issued. The Company recognized selling, general and administrative expense of approximately $41,000 and $0 for the fiscal years ended June 30, 2018 and 2017, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $103,000.
|
To date, employee and employer payroll taxes have been accrued but have not been remitted to taxing authorities by the Company for cash compensation paid. As a result, the Company is liable such payroll taxes and any related penalties and interest.
Wesley Tate
On October 1, 2014, the Company entered into an addendum to the employment agreement. The addendum had no accounting impact on the prior agreements. Terms of the agreement included the following:
|
·
|
Extension of employment until June 15, 2017. The Company entered into a new contract on October 1, 2015.
|
|
|
|
|
·
|
Annual salary of One Hundred Fifty-Six Thousand Dollars ($156,000).
|
|
|
|
|
·
|
Option to acquire up to 50,000 shares of the Company’s common stock under the Company’s 2014 Omnibus Stock Grant and Option Plan at an exercise price of $1.20 per share subject to a vesting schedule. Fair Market Value of these options totaled approximately $56,000 and is recognized ratably over the vesting period in selling, general and administrative expense. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 262%; risk-free interest rate of 1.69%; expected term of 5 years; and 0% dividend yield. As of June 30, 2018, 40,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $11,000 for the fiscal years ended June 30, 2018 and 2017, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $2,000.
|
On September 29, 2016, the Company issued Mr. Tate an option to acquire up to 105,000 shares of the Company’s common stock under the Company’s 2014 Omnibus Stock Grant and Option Plan at an exercise price of $0.75 per share subject to a vesting schedule. Fair Market Value of these options totaled approximately $78,000 and is recognized ratably over the vesting period in selling, general and administrative expense. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 206%; risk-free interest rate of 1.13%; expected term of 6 years; and 0% dividend yield. As of June 30, 2018, 42,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $16,000 and $31,000 for the fiscal years ended June 30, 2018 and 2017, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $31,000.
On February 1, 2018, the Company entered into a new employment agreement with Wesley Tate, an officer of the company. The new contract had no accounting impact on the prior agreements. Terms of the agreement include the following:
|
·
|
Term of contract thirty-six months.
|
|
|
|
|
·
|
Annual salary of One Hundred Eighty-Seven Thousand Two Hundred Dollars ($187,200).
|
|
|
|
|
·
|
Stock grant of 800,000 of the Company’s common restricted shares for services provided to the Company. Stock grant is subject to a vesting schedule of which 160,000 shares of stock were issued on February 1, 2018 (See Note 7). The aggregate fair market value of these shares was approximately $144,000 as the fair market value of the stock was $0.18 per share. The Company used recent sales of stock to determine the fair market value of this transaction. As of June 30, 2018, 160,000 shares have been issued. The Company recognized selling, general and administrative expense of approximately $41,000 and $0 for the fiscal years ended June 30, 2018 and 2017, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $103,000.
|
To date, employee and employer payroll taxes have been accrued but have not been remitted to taxing authorities by the Company for cash compensation paid. As a result, the Company is liable such payroll taxes and any related penalties and interest.
NOTE 10 –
EARNINGS PER SHARE
FASB ASC Topic 260,
Earnings Per Share
, requires a reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share (EPS) computations.
Basic earnings (loss) per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.
The total number of potential additional dilutive options and warrants outstanding was approximately 4.0 million and 2.6 million for the fiscal years ended June 30, 2018 and 2017, respectively. In addition, the convertible notes convert at an exercise price of between $0.10 and $5.00 per share of common stock representing approximately 30 million shares. The options, warrants and shares underlying the convertible note were considered for the dilutive calculation but in periods where losses are reported, the weighted-average number of common stock outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
The following table sets forth the computation of basic and diluted net income per share:
|
|
For the Fiscal Years Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net loss attributable to the common stockholders
|
|
$
|
(4,918,792
|
)
|
|
$
|
(16,012,615
|
)
|
|
|
|
|
|
|
|
|
|
Basic weighted average outstanding shares of common stock
|
|
|
8,533,169
|
|
|
|
7,514,226
|
|
Dilutive effect of options and warrants
|
|
|
-
|
|
|
|
-
|
|
Diluted weighted average common stock and common stock equivalents
|
|
|
8,533,169
|
|
|
|
7,514,226
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.58
|
)
|
|
$
|
(2.13
|
)
|
NOTE 11 –
INCOME TAXES
The provision (benefit) for income taxes for the period ended June 30, 2018 and 2017, assumes a 21% and 34% effective tax rate, respectively, for federal income taxes and 1.5% state income taxes liability:
|
|
June 30,
2018
|
|
|
June 30,
2017
|
|
|
|
|
|
|
|
|
Current tax provision:
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
Taxable income - federal
|
|
$
|
21.0
|
%
|
|
$
|
34.0
|
%
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
Taxable income - state
|
|
$
|
1.5
|
%
|
|
$
|
1.5
|
%
|
Total current tax provision
|
|
$
|
22.5
|
%
|
|
$
|
35.5
|
%
|
|
|
|
|
|
|
|
|
|
Deferred tax provision:
|
|
|
|
|
|
|
|
|
Federal and State
|
|
|
|
|
|
|
|
|
Total deferred tax provision
|
|
$
|
--
|
|
|
$
|
--
|
|
The Company had deferred income tax assets as of June 30, 2018 and 2017 are as follows:
|
|
June 30,
2018
|
|
|
June 30,
2017
|
|
|
|
|
|
|
|
|
Loss carryforwards
|
|
$
|
32,500,000
|
|
|
$
|
27,500,000
|
|
Less – valuation allowance
|
|
|
(32,500,000
|
)
|
|
|
(27,500,000
|
)
|
Total net deferred tax assets
|
|
$
|
--
|
|
|
$
|
--
|
|
The Company provided a valuation allowance equal to the deferred income tax assets for the fiscal years ended June 30, 2018 and 2017, respectively, because it is not presently known whether future taxable income will be sufficient to utilize the loss carryforwards.
At June 30, 2018, the Company had approximately $32,500,000 in Federal and State tax loss carryforwards that can be utilized in future periods to reduce taxable income and begin to expire in 2030. Pursuant to Internal Revenue Code Section 382, the future utilization of our net operating loss carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that may have occurred previously or that could occur in the future.
The Company did not identify any material uncertain tax positions on tax returns that will be filed.
The Company has not filed any of its income tax returns. The fiscal years ended June 30, 2010 thru 2018 are open for examination.
NOTE 12 –
SUBSEQUENT EVENTS
In September 2018, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of $2,937,113. In exchange, the Company modified the $2,560,112 convertible promissory note payable issued in October 2017, accounts payable related to accrued interest of approximately $293,001, and received cash of $75,000. The amended and consolidated convertible promissory note matures in October 2019, accrues interest at 5% per annum and is convertible into shares of the Company’s common stock at a conversion rate of $0.10 per share, but only if such conversion would not cause the noteholder to own more than 9.9% of the Company’s outstanding common stock, and contains piggyback registration rights.
In September 2018, Crown Bridge Partners, LLC elected to convert $5,049, consisting of $4,549 of principal and $500 of fees, into 90,000 shares of the Company’s Common Stock at an exercise price of $0.0561 pursuant to the convertible note dated February 14, 2018.
In September 2018, EMA Financial, LLC elected to convert $6,187.50, consisting of $5,437.50 of principal and $750 of fees, into 90,000 shares of the Company’s Common Stock at an exercise price of $0.06875 pursuant to the convertible note dated February 12, 2018.
In September 2018, Auctus Fund, LLC elected to convert $3,025, consisting of $2,525 of accrued and unpaid interest and $500 of fees, into 50,000 shares of the Company’s Common Stock at an exercise price of $0.06050 pursuant to the convertible note dated February 15, 2018.
In September 2018, EMA Financial, LLC elected to convert $4,800, consisting of $4,050 of principal and $750 of fees, into 300,000 shares of the Company’s Common Stock at an exercise price of $0.016 pursuant to the convertible note dated February 12, 2018.
In September 2018, Auctus Fund, LLC elected to convert $693, consisting of $193 of accrued and unpaid interest and $500 of fees, into 60,000 shares of the Company’s Common Stock at an exercise price of $0.01155 pursuant to the convertible note dated February 15, 2018.