Notes to Financial Statements
Years Ended December 31, 2017 and 2016
1. ORGANIZATION AND LINE OF BUSINESS
Organizational History
Digital Locations, Inc. (the “Company”) was incorporated in the State of Nevada on August 25, 2006 as Zingerang, Inc. On April 2, 2007, the Company changed its name to Carbon Sciences, Inc. and on September 14, 2017, the Company changed its name to Digital Locations, Inc.
Overview of Business
In June 2014, the Company entered into its first Sponsored Research Agreement (“SRA #1”) with the University of California at Santa Barbara (“UCSB”) to develop a low-cost method to produce graphene. SRA #1 expired on June 30, 2015. In December 2015, the Company entered into a second Sponsored Research Agreement (“SRA #2”) with UCSB to develop a new graphene-based optical modulator, a critical fiber optics component for enabling ultrafast fiber optics communication in data centers for Cloud computing. SRA #2 expired on June 30, 2016. In March 2017, the Company entered into a third Sponsored Research Agreement (“SRA #3”) with UCSB to continue the development of a new graphene-based optical modulator. SRA #3 concluded on September 30, 2017.
On October 30, 2017, the Company provided UCSB with notice to exercise its right to negotiate a license for use of any invention subject to SAR #3. The Company has 90 days from the date of its notice to conclude a license agreement with UCSB. If the Company successfully concludes a license agreement with UCSB, then it must diligently proceed with the commercial development and early marketing of the invention.
The Company’s current business focus is a growth-by-acquisition strategy to extend its presence in the information technology (“IT”) market.
Going Concern
The accompanying financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities, and commitments in the normal course of business. The accompanying financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company does not generate any revenue, and has negative cash flows from operations, which raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon, among other things, raising additional capital. Since its inception through December 31, 2017, the Company has obtained funds primarily from the issuance of common stock and debt. Management believes this funding will continue, and is continually seeking new investors. Management believes the existing shareholders and lenders and prospective new investors will provide the additional cash needed to meet the Company’s obligations as they become due, and will allow the development of its core of business. There can be no assurance that we will be successful in accomplishing our objectives. Without such additional capital we may be required to cease operations. The accompanying financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.
Revenue Recognition
We will recognize revenue when services are performed, and at the time of shipment of products, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured. To date, we have had no revenues.
Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.
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 amounts reported in the accompanying financial statements. Significant estimates made in preparing these financial statements include the estimate of useful lives of property and equipment, the deferred tax valuation allowance, the fair value of stock options and derivative liabilities. Actual results could differ from those estimates.
Property and Equipment
Property and equipment are stated at cost, and are depreciated using the straight line method over the following estimated useful lives:
Computer equipment
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3 Years
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Machinery and equipment
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7 Years
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Depreciation expense for the years ended December 31, 2017 and 2016 was $675 and $617, respectively.
Derivative Liabilities
We have identified the conversion features of our convertible notes payable and our Series B preferred stock as derivatives. We estimate the fair value of the derivatives using a multinomial lattice model based on a probability weighted discounted cash flow model. We estimate the fair value of the derivative liabilities at the inception of the financial instruments, at the date of conversions to equity and at each reporting date, recording a derivative liability, debt discount, additional paid-in capital and a gain or loss on change in derivative liabilities as applicable. These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price volatility, variable conversion prices based on market prices as defined in the respective agreements and probabilities of certain outcomes based on management projections. These inputs are subject to significant changes from period to period and to management’s judgment; therefore, the estimated fair value of the derivative liabilities will fluctuate from period to period, and the fluctuation may be material.
Fair Value of Financial Instruments
Disclosures about fair value of financial instruments require disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of December 31, 2017 and 2016, we believe the amounts reported for cash, prepaid expenses, accounts payable, accrued interest, accrued expenses and other current liabilities, and convertible notes payable approximate fair value because of their short maturities.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
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·
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Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
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·
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Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
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·
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Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
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We measure certain financial instruments at fair value on a recurring basis. Liabilities measured at fair value on a recurring basis are as follows at December 31, 2017 and 2016:
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Total
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Level 1
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Level 2
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Level 3
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December 31, 2017:
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|
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|
|
|
|
|
|
|
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Derivative liabilities
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|
$
|
8,072,904
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|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,072,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total liabilities measured at fair value
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$
|
8,072,904
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|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,072,904
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|
|
|
|
|
|
|
|
|
|
|
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December 31, 2016:
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|
|
|
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|
|
|
|
|
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Derivative liabilities
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$
|
6,690,697
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|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,690,697
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total liabilities measured at fair value
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|
$
|
6,690,697
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,690,697
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|
During the years ended December 31, 2017 and 2016, the Company had the following activity in its derivative liabilities account:
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Convertible
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Series B
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Notes
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Preferred
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Payable
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Stock
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Total
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Derivative liabilities at December 31, 2015
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$
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13,184,369
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|
|
$
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-
|
|
|
$
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13,184,369
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|
Addition to liability for new debt/shares issued
|
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707,000
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|
|
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3,908,211
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|
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4,615,211
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Elimination of liability on conversion to common shares
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(33,756
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)
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-
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|
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(33,756
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)
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Elimination of liability on conversion to preferred shares
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(9,750,930
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)
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-
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|
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(9,750,930
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)
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Contribution of liability to capital on settlement of related party debt
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(106,858
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)
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-
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|
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(106,858
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)
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Change in fair value
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(663,919
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)
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(553,420
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)
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(1,217,339
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)
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Derivative liabilities at December 31, 2016
|
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3,335,906
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3,354,791
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6,690,697
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Addition to liability for new debt/shares issued
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855,000
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-
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855,000
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Elimination of liability on conversion to common shares
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(111,225
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)
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|
-
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|
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|
(111,225
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)
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Change in fair value
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1,162,081
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(523,649
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)
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638,432
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|
|
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|
|
|
|
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|
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Derivative liabilities at December 31, 2017
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|
$
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5,241,762
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|
|
$
|
2,831,142
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|
|
$
|
8,072,904
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Loss per Share Calculations
Basic net income or loss per common share is computed by dividing net income or loss by the weighted average number of common shares outstanding. Diluted net income or loss per common share is computed by dividing net income or loss by the sum of the weighted average number of common shares outstanding and the dilutive potential common share equivalents then outstanding. Potential dilutive common share equivalents consist of shares issuable upon the exercise of outstanding stock options and warrants to acquire common stock using the treasury stock method and the average market price per share during the period, and shares issuable upon exercise of convertible notes payable and convertible preferred stock.
Since we had no dilutive effect of stock options, warrants, convertible notes payable and convertible preferred stock for the years ended December 31, 2017 and 2016, our basic weighted average number of common shares outstanding is the same as our diluted weighted average number of common shares outstanding. For the year ended December 31, 2017, the Company has excluded 1,408,750 common shares for exercisable options, 6,000 common shares for exercisable warrants, approximately 502,772,000 shares issuable upon conversion of convertible notes payable and approximately 367,000,000 common shares upon conversion of convertible Series B preferred stock. For the year ended December 31, 2016, the Company has excluded 1,410,000 common shares for exercisable options, 46,000 common shares for exercisable warrants, approximately 157,269,000 shares issuable upon conversion of convertible notes payable and approximately 367,000,000 common shares upon conversion of convertible Series B preferred stock.
Income Taxes
We account for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Research and Development
Research and development costs are expensed as incurred. Total research and development costs were $65,009 and $65.497 for the years ended December 31, 2017 and 2016, respectively.
Advertising Costs
We expense the cost of advertising and promotional materials when incurred. We incurred no advertising costs for the years ended December 31, 2017 and 2016.
Stock-Based Compensation
Stock-based compensation is measured at the grant date based on the value of the award granted using the Black-Scholes option pricing model, and recognized over the period in which the award vests. For stock awards no longer expected to vest, any previously recognized stock compensation expense is reversed in the period of termination. The stock-based compensation expense is included in general and administrative expenses.
Comprehensive Loss
Comprehensive loss is the same as net loss for all years presented.
Reclassifications
Certain amounts in the prior years have been reclassified to conform to the current year presentation.
Recently Issued Accounting Pronouncements
In July 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception.” Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, “Distinguishing Liabilities from Equity,” because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently unable to determine the impact on its consolidated financial statements of the adoption of this new accounting pronouncement.
Although there are several other new accounting pronouncements issued or proposed by the FASB, which the Company has adopted or will adopt, as applicable, the Company does not believe any of these accounting pronouncements has had or will have a material impact on its financial position or results of operations.
3. CAPITAL STOCK
At December 31, 2017, the Company’s authorized stock consisted of 2,000,000,000 shares of common stock, with a par value of $0.001 per share. The Company is also authorized to issue 20,000,000 shares of preferred stock, with a par value of $0.001 per share. The rights, preferences and privileges of the holders of the preferred stock will be determined by the Board of Directors prior to issuance of such shares.
Series A Preferred Stock
On August 31, 2017, the Company filed a Withdrawal of Certificate of Designation for its original Series A Preferred Stock with the Secretary of State of Nevada. On September 4, 2017, the Board of Directors of the Company authorized (a) the execution and recording with the Nevada Secretary of State of a new Certificate of Designation (the “Series A Certificate”) for its new Series A Preferred Stock, authorizing up to 1,000 shares of it, and (b) the issuance of 1,000 shares of Series A Preferred Stock to the Company’s President and Director, William E. Beifuss, Jr., which shares were issued and outstanding at December 31, 2017.
The shares of Series A Preferred Stock have a par value of $0.001 per share. The shares of Series A Preferred Stock do not have a dividend right or rate, or liquidation preference, and are not convertible into shares of common stock.
For so long as any shares of the Series A Preferred Stock remain issued and outstanding, the holders thereof, voting separately as a class, shall have the right, on or after September 7, 2017, to vote in an amount equal to 51% of the total vote (representing a super majority voting power) with respect to any proposal relating to (a) any amendment to the Company’s Articles of Incorporation changing the name of the Company, (b) increasing the authorized share capital of the Company, and (c) effecting any reverse stock split of the Company’s issued and outstanding shares of capital stock. Such vote shall be determined by the holder(s) of a majority of the then issued and outstanding shares of Series A Preferred Stock.
The shares of the Series A Preferred Stock shall be automatically redeemed by the Company at their par value on the first to occur of the following: (i) a date 120 days after the effective date of the Series A Certificate, (ii) on the date that Mr. Beifuss ceases, for any reason, to serve as officer, director or consultant of the Company, or (iii) on the date that the Company’s shares of common stock first trade on any national securities exchange provided that the listing rules of any such exchange prohibit preferential voting rights of a class of securities of the Company, or listing on any such national securities exchange is conditioned upon the elimination of the preferential voting rights of the Series A Preferred Stock set forth in Series A Certificate.
Additionally, the Company is prohibited from adopting any amendments to the Company’s Bylaws or Articles of Incorporation, as amended, that adversely affect the Series A Preferred Stock, effect any reclassification of the Series A Preferred Stock, or designate an additional series of preferred stock which adversely affects the Series A Preferred Stock without the affirmative vote of at least 66-2/3% of the outstanding shares of Series A Preferred Stock. However, the Company may, by any means authorized by law and without any vote of the holders of shares of Series A Preferred Stock, make technical, corrective, administrative or similar changes to such Series A Certificate that do not, individually or in the aggregate, adversely affect the rights or preferences of the holders of shares of Series A Preferred Stock.
Series B Preferred Stock
On March 2, 2016, the Company filed a Certificate of Designation for its Series B Preferred Stock (the “Series B Certificate”) with the Secretary of State of Nevada designating 30,000 shares of its authorized preferred stock as Series B Preferred Stock. The shares of Series B Preferred Stock have a par value of $0.001 per share.
The total face value of this entire series is three million dollars ($3,000,000). Each share of Series B Preferred Stock has a stated face value of One Hundred Dollars ($100) (“Share Value”), and is convertible into shares of fully paid and non-assessable shares of common stock (“Common Stock”) of the Company.
As of December 31, 2017 and 2016, the Company had 16,155 shares of Series B Preferred Stock outstanding, with a face value of $1,615,500. These shares were issued in March 2016 for the redemption and cancellation of $1,615,362 of convertible promissory notes and $264,530 of accrued interest payable.
The holders of outstanding shares of the Series B Preferred Stock (the “Holders”) are entitled to receive dividends pari passu with the holders of Common Stock, except upon a liquidation, dissolution and winding up of the Company, in which case the Series B Preferred Stock has a preference. Such dividends will be paid equally to all outstanding shares of Series B Preferred Stock and Common Stock, on an as-if-converted basis with respect to the Series B Preferred Stock. The Holders may elect to use the most favorable conversion price for the purpose of determining the as-if-converted number of shares.
In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the Holder of each outstanding share of the Series B Preferred Stock shall be entitled to receive, out of the assets of the Company available for distribution to its shareholders upon such liquidation, whether such assets are capital or surplus of any nature, an amount equal to one hundred dollars ($100) for each such share of the Series B Preferred Stock (as adjusted for any combinations, consolidations, stock distributions, stock splits or stock dividends with respect to such shares), plus all dividends, if any, declared and unpaid thereon as of the date of such distribution, before any payment is made or any assets distributed to the holders of the Common Stock. After such payment, the remaining assets of the Company will be distributed to the holders of Common Stock.
If the assets to be distributed to the Holders of the Series B Preferred Stock are insufficient to permit the receipt by such Holders of the full preferential amounts, then all of such assets will be distributed among such Holders ratably in accordance with the number of such shares then held by each such Holder.
The sale of all or substantially all of the Company’s assets, any consolidation or merger of the Company with or into any other entity or person, or any other corporate reorganization, in which the stockholders of the Company immediately prior to such consolidation, merger or reorganization, own less than fifty percent (50%) of the Company’s voting power immediately after such consolidation, merger or reorganization, or any transaction or series of related transactions to which the Company is a party in which in excess of fifty percent (50%) of the Company’s voting power is transferred, excluding any consolidation or merger effected exclusively to change the domicile of the Company, is deemed to be a liquidation, dissolution or winding up.
The Series B Preferred Stock is convertible into Common Stock.
The Holder has the right, at any time, at its election, to convert all or part of the Share Value into shares of Common Stock. The conversion price is the lesser of (1) Fifty Percent (50%) of the lowest trade price of Common Stock recorded on any trade day after December 12, 2012 or (2) the lowest effective price per share granted to any person or entity, including the Holder but excluding officers and directors of the Company, to acquire Common Stock, or adjusted, whether by operation of purchase price adjustment, settlement agreements, exchange agreements, reset provision, floating conversion or otherwise, any outstanding warrant, option or other right to acquire Common Stock or outstanding Common Stock equivalents (the “Conversion Price”).
The conversion formula is as follows: The number of shares receivable upon conversion equals the Share Value divided by the Conversion Price. A conversion notice (the “Conversion Notice”) may be delivered to Company by any method of Holder’s choice (including but not limited to email, facsimile, mail, overnight courier, or personal delivery), and all conversions will be cashless and not require further payment from the Holder. If no objection is delivered from the Company to the Holder, with respect to any variable or calculation reflected in the Conversion Notice, within 24 hours of delivery of the Conversion Notice, the Company will thereafter be deemed to have irrevocably confirmed and ratified such notice of conversion and waived any objection. The Company will deliver the shares of Common Stock from any conversion to the Holder (in any name directed by the Holder) within three (3) business days of Conversion Notice delivery. If the Company is participating in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer (“FAST”) program, then upon request of the Holder and provided that the shares to be issued are eligible for transfer under Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”), or are effectively registered under the Securities Act, the Company will cause its transfer agent to electronically issue the Common Stock issuable upon conversion to the Holder through the DTC Direct Registration System (“DRS”). If the Company is not participating in the DTC FAST program, then the Company agrees in good faith to apply and cause the approval for participation in the DTC FAST program.
The Conversion Price is subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Company relating to the Company’s securities or the securities of any subsidiary of the Company, combinations, recapitalization, reclassifications, extraordinary distributions and similar events. No fractional shares of the Common Stock shall be issuable upon the conversion of shares of the Series B Preferred Stock and the Company shall pay the cash equivalent of any fractional share upon such conversion.
If the Company fails to deliver shares in accordance with the required time frame, then for each conversion, a penalty of $1,500 per day will be assessed for each day after the third business day (inclusive of the day of the conversion) until share delivery is made. Such penalty may be converted into Common Stock at the Conversion Price or payable in cash, at the sole option of the Holder (under the Holder’s and the Company’s expectations that any penalty amounts shall tack back to the original date of the issuance of Series B Preferred Stock, consistent with applicable securities laws).
In no event will the Holder be entitled to convert any Series B Preferred Stock, such that upon conversion the sum of (1) the number of shares of Common Stock beneficially owned by the Holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of this Series B Preferred Stock or the unexercised or unconverted portion of any other security of the Company subject to a limitation on conversion or exercise analogous to these limitations), and (2) the number of shares of Common Stock issuable upon the conversion of Series B Preferred Stock, would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock. The limitations on conversion may be waived by the Holder upon, at the election of the Holder, not less than 61 days prior notice to the Company, and the provisions of the conversion limitation shall continue to apply until such 61st day (or such later date, as determined by the Holder, as may be specified in such notice of waiver).
Except as required by law, the Holders of Series B Preferred Stock are not entitled to vote, as a separate class or otherwise, on any matter presented to the stockholders of the Company for their action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu of meeting). Each Holder of outstanding shares of Series B Preferred Stock will be entitled, on the same basis as holders of Common Stock, to receive notice of such action or meeting.
So long as any shares of the Series B Preferred Stock remain outstanding, the Company will not, without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series B Preferred Stock voting together as one class: (a) alter or change the rights, preferences or privileges of the shares of the Series B Preferred Stock so as to affect materially and adversely such shares; or (b) create any new class of shares having preference over the Series B Preferred Stock.
The Holder has the right, at its sole discretion, to elect a fixed conversion price for the Series B Preferred Stock. The Fixed Conversion Price may not be lower than the Conversion Price. The Company will not, by amendment of its Certificate of Incorporation, bylaws or through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Series B Certificate, and will at all times carry out all the provisions of the Series B Certificate.
On March 2, 2016, the Company filed a Certificate of Designation for its Series B Preferred Stock (the “Series B Certificate”) with the Secretary of State of Nevada designating 30,000 shares of its authorized preferred stock as Series B Preferred Stock. The shares of Series B Preferred Stock have a par value of $0.001 per share.
Common Stock
On April 20, 2016, the Company amended its articles of incorporation to reduce the number of authorized shares of common stock from 1,000,000,000 to 100,000,000 and to affect a one-for-ten reverse stock split of its authorized, issued and outstanding shares of common stock. The Company has given retroactive affect for the reverse stock split in all periods presented in the accompanying financial statements.
On April 29, 2016, our Board of Directors and the holder of a majority of the total issued and outstanding voting stock of the Company authorized and approved an amendment to the Company’s articles of incorporation to increase the number of authorized shares of common stock from 100,000,000 to 2,000,000,000.
During the year ended December 31, 2017, the Company issued a total of 3,597,812 shares of common stock at fair value in conversion of $35,000 of convertible promissory notes, accrued interest payable of $6,552 and derivative liability of $111,225. We recognized a gain of $11,643 on conversion of the notes.
During the year ended December 31, 2016, the Company issued a total of 3,028,018 shares of common stock at fair value in conversion of $10,450 of convertible promissory notes, accrued interest payable of $3,176 and derivative liability of $33,756. We recognized a loss of $39,005 on conversion of the notes. The Company also increased the number of outstanding common shares by 816 shares pursuant to the reverse stock split, increasing common stock by $1 and decreasing additional paid-in capital by $1.
4. STOCK OPTIONS AND WARRANTS
Stock Options
As of December 31, 2017, the Board of Directors of the Company had granted non-qualified stock options exercisable for a total of 1,408,750 shares of common stock to its employees, officers, and consultants. Stock-based compensation cost is measured at the grant date based on the value of the award granted using the Black-Scholes option pricing model, and recognized over the period in which the award vests, which is generally 25 months. We recognized no stock-based compensation expense for the years ended December 31, 2017 and 2016. As of December 31, 2017, we had no unrecognized stock-based compensation expense.
A summary of the Company’s stock option awards as of December 31, 2017, and changes during the two years then ended is as follows:
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Shares
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|
Weighted
Average
Exercise Price
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|
Weighted Average
Remaining
Contract Term
(Years)
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|
Aggregate
Intrinsic
Value
|
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|
|
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Outstanding at December 31, 2015
|
|
|
1,410,000
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|
|
$
|
0.19
|
|
|
|
|
|
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Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
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Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
1,410,000
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(1,250
|
)
|
|
$
|
29.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2017
|
|
|
1,408,750
|
|
|
$
|
0.17
|
|
|
|
2.72
|
|
|
$
|
-
|
|
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the closing price of our common stock of $0.023 as of December 31, 2017, which would have been received by the holders of in-the-money options had the option holders exercised their options as of that date.
Warrants
As of December 31, 2017 and December 31, 2016, the Company had 6,000 and 46,000 common stock purchase warrants outstanding, respectively, with an exercise price of $5.00 per share and expiring on various dates in 2017 and 2018.
Chief Executive Officer Option
On October 12, 2017, Unleashed Future Holdings, LLC, a limited liability company owned by a retirement account of which Mr. Gerard Hug, the chief executive officer and a director of the Company, is a beneficiary, purchased an option for $7,000 to buy up to 7,000 shares of Series B Preferred Stock (the “Shares”) from the Current Holder (the “Option”). The exercise price of the Option is $100 per Share for a total exercise price of $700,000. The Option may be exercised on a cash or a cashless basis. Each Share is convertible into shares of the Company’s common stock in accordance with the terms and conditions of the Series B Certificate. Unleashed Future Holdings, LLC is eligible to exercise all or part of the Option after the Company’s consolidated gross revenue, calculated in accordance with generally accepted accounting principles, consistently applied, equals or exceeds $2,000,000, on an annualized basis, as reported in the Company’s quarterly or annual financial statements.
5. CONVERTIBLE NOTES PAYABLE
Convertible Promissory Notes - Services of $58,600
On December 31, 2012, we entered into 5% convertible promissory notes with two individuals in exchange for services rendered in the aggregate amount of $58,600. The notes are convertible into shares of our common stock at a conversion price equal to the lesser of $2.00 per share or the closing price per share of common stock recorded on the trading day immediately preceding the date of conversion. We recorded a total debt discount of $57,050 related to the conversion feature of the notes, which has been fully amortized to interest expense, along with a derivative liability at inception. One of the notes with a principal balance of $25,980 at December 31, 2017 matured on December 31, 2014 and is currently in default. The maturity date of a second note with a principal balance of $32,620 at December 31, 2017 has been extended to December 31, 2018.
Convertible Promissory Note – Accounts Payable of $29,500
On March 14, 2013, we entered into a 5% convertible promissory note in the principal amount of $29,500, which is convertible into shares of our common stock at a conversion price equal to the lesser of $1.50 per share or the closing price per share of common stock recorded on the trading day immediately preceding the date of conversion. The note, with a principal balance of $29,500 at December 31, 2017, matured two years from its effective date, or March 14, 2015, and is currently in default.
Convertible Promissory Note – Services of $25,000
On June 4, 2013, we entered into a 5% convertible promissory note with a former member of our Board of Directors in exchange for services rendered in the amount of $25,000. The note was convertible into shares of common stock of the Company at a conversion price equal to the lesser of $0.35 per share or the closing price per share of common stock recorded on the trading day immediately preceding the date of conversion. We entered into an agreement to repay this note with 12 equal monthly payments of principal and interest of $2,352 beginning in June 2016. The note was paid in full as of December 31, 2017.
Convertible Promissory Note – $5,000 Exchanged Note
On September 6, 2013, we exchanged a $5,000 promissory note for a 10% convertible promissory note in the aggregate principal amount of $5,000. The note was convertible into shares of our common stock at a price equal to a conversion price of the lesser of $0.042 per share or fifty percent (50%) of the lowest trade price recorded after the effective date. We recorded a debt discount of $2,536, which has been fully amortized to interest expense, along with a derivative liability at inception. In February 2017, we issued the lender 1,496,499 shares of our common stock in consideration for the conversion of principal of $5,000 and accrued interest of $1,734.
March 2016 Convertible Promissory Note – $1,000,000
On March 4, 2016, we entered into a convertible promissory note in the aggregate principal amount of up to $1,000,000 (the “March 2016 $1,000,000 CPN”). The lender may advance the Company consideration for the note in such amounts as the lender may choose in its sole discretion. The note is convertible into shares of our common stock at a price per share equal to the lesser of: $0.03; 50% of the lowest trade price of our common stock subsequent to the effective date of the note; or the lowest effective price per share granted to any person or entity (exclusive of our officers and directors) to acquire common stock subsequent to the effective date of the note. The note initially matured, with respect to each advance, one year from the effective date of each advance. Subsequently, the lender extended the maturity date, with the note payable upon demand, but in no event later than 60 months from March 4, 2016.
On March 4, 2016, we received proceeds of $25,000 pursuant to the March 4, 2016 $1,000,000 CPN. We recorded a debt discount of $25,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2017 and 2016, amortization of debt discount was recorded to interest expense in the amount of $4,315 and $20,685, respectively, and the debt discount was fully amortized to interest expense. In September and December 2017, we issued the lender a total of 1,632,272 shares of our common stock in consideration for the conversion of principal of $25,000 and accrued interest of $3,956, extinguishing the note in full.
On March 14, 2016, we received proceeds of $27,000 pursuant to the March 4, 2016 $1,000,000 CPN. We recorded a debt discount of $27,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2017 and 2016, amortization of debt discount was recorded to interest expense in the amount of $5,400 and $21,600, respectively, and the debt discount was fully amortized to interest expense. In December 2017, we issued the lender 469,041 shares of our common stock in consideration for the conversion of principal of $5,000 and accrued interest of $863, resulting in a principal balance of $22,000 at December 31, 2017.
On March 17, 2016, we received proceeds of $33,000 pursuant to the March 4, 2016 $1,000,000 CPN. We recorded a debt discount of $33,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2017 and 2016, amortization of debt discount was recorded to interest expense in the amount of $11,392 and $21,608, respectively, and the debt discount was fully amortized to interest expense.
On April 11, 2016, we received proceeds of $90,000 pursuant to the March 4, 2016 $1,000,000 CPN. We recorded a debt discount of $90,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2017 and 2016, amortization of debt discount was recorded to interest expense in the amount of $24,904 and $65,096, respectively, and the debt discount was fully amortized to interest expense.
On May 20, 2016, we received proceeds of $60,000 pursuant to the March 4, 2016 $1,000,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2017 and 2016, amortization of debt discount was recorded to interest expense in the amount of $23,014 and $36,986, respectively, and the debt discount was fully amortized to interest expense.
On June 22, 2016, we received proceeds of $50,000 pursuant to the March 4, 2016 $1,000,000 CPN. We recorded a debt discount of $50,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2017 and 2016, amortization of debt discount was recorded to interest expense in the amount of $23,699 and $26,301, respectively, and the debt discount was fully amortized to interest expense.
On July 6, 2016, we received proceeds of $87,000 pursuant to the March 4, 2016 $1,000,000 CPN. We recorded a debt discount of $87,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2017 and 2016, amortization of debt discount was recorded to interest expense in the amount of $44,573 and $42,427, respectively, and the debt discount was fully amortized to interest expense.
On August 8, 2016, we received proceeds of $60,000 pursuant to the March 4, 2016 $1,000,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2017 and 2016, amortization of debt discount was recorded to interest expense in the amount of $36,164 and $23,836, respectively, and the debt discount was fully amortized to interest expense.
On September 13, 2016, we received proceeds of $55,000 pursuant to the March 4, 2016 $1,000,000 CPN. We recorded a debt discount of $55,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2017 and 2016, amortization of debt discount was recorded to interest expense in the amount of $38,575 and $16,425, respectively, and the debt discount was fully amortized to interest expense.
On October 17, 2016, we received proceeds of $55,000 pursuant to the March 4, 2016 $1,000,000 CPN. We recorded a debt discount of $55,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2017 and 2016, amortization of debt discount was recorded to interest expense in the amount of $43,699 and $11,301, respectively, and the debt discount was fully amortized to interest expense.
On November 8, 2016, we received proceeds of $55,000 pursuant to the March 4, 2016 $1,000,000 CPN. We recorded a debt discount of $55,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2017 and 2016, amortization of debt discount was recorded to interest expense in the amount of $47,014 and $7,986, respectively, and the debt discount was fully amortized to interest expense.
On December 6, 2016, we received proceeds of $60,000 pursuant to the March 4, 2016 $1,000,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the years ended December 31, 2017 and 2016, amortization of debt discount was recorded to interest expense in the amount of $56,233 and $3,767, respectively, and the debt discount was fully amortized to interest expense.
On January 10, 2017, we received proceeds of $60,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $58,356, resulting in a remaining discount of $1,644 at December 31, 2017.
On February 13, 2017, we received proceeds of $60,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $52,767, resulting in a remaining discount of $7,233 at December 31, 2017.
On March 9, 2017, we received proceeds of $60,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $48,822, resulting in a remaining discount of $11,178 at December 31, 2017.
On April 12, 2017, we received proceeds of $95,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $95,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $68,452, resulting in a remaining discount of $26,548 at December 31, 2017.
On May 8, 2017, we received proceeds of $60,000 pursuant to the March 2016 $1,000,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $38,959, resulting in a remaining discount of $21,041 at December 31, 2017.
June 2017 Convertible Promissory Note – $500,000
On June 2, 2017, we entered into a convertible promissory note in the aggregate principal amount of up to $500,000 (the “June 2017 $500,000 CPN”). The lender may advance the Company consideration for the note in such amounts as the lender may choose in its sole discretion. The note is convertible into shares of our common stock at a price per share equal to the lesser of: $0.03; 50% of the lowest trade price of our common stock subsequent to the effective date of the note; or the lowest effective price per share granted to any person or entity (exclusive of our officers and directors) to acquire common stock subsequent to the effective date of the note. The note matures, with respect to each advance, one year from the effective date of each advance.
On June 2, 2017, we received proceeds of $60,000 pursuant to the June 2017 $500,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $34,849, resulting in a remaining discount of $25,151 at December 31, 2017.
On July 10, 2017, we received proceeds of $80,000 pursuant to the June 2017 $500,000 CPN. We recorded a debt discount of $80,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $38,137, resulting in a remaining discount of $41,863 at December 31, 2017.
On August 11, 2017, we received proceeds of $80,000 pursuant to the June 2017 $500,000 CPN. We recorded a debt discount of $80,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $31,123, resulting in a remaining discount of $48,877 at December 31, 2017.
On September 12, 2017, we received proceeds of $85,000 pursuant to the June 2017 $500,000 CPN. We recorded a debt discount of $85,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $25,616, resulting in a remaining discount of $59,384 at December 31, 2017.
On October 13, 2017, we received proceeds of $80,000 pursuant to the June 2017 $500,000 CPN. We recorded a debt discount of $80,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $18,397, resulting in a remaining discount of $61,603 at December 31, 2017.
On November 8, 2017, we received proceeds of $75,000 pursuant to the June 2017 $500,000 CPN. We recorded a debt discount of $75,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $12,342, resulting in a remaining discount of $62,658 at December 31, 2017.
December 2017 Convertible Promissory Note – $500,000
On December 14, 2017, we entered into a convertible promissory note in the aggregate principal amount of up to $500,000 (the “December 2017 $500,000 CPN”). The lender may advance the Company consideration for the note in such amounts as the lender may choose in its sole discretion. The note is convertible into shares of our common stock at a price per share equal to the lesser of: $0.03; 50% of the lowest trade price of our common stock subsequent to the effective date of the note; or the lowest effective price per share granted to any person or entity (exclusive of our officers and directors) to acquire common stock subsequent to the effective date of the note. The note matures, with respect to each advance, one year from the effective date of each advance.
On December, 2017, we received proceeds of $60,000 pursuant to the December 2017 $500,000 CPN. We recorded a debt discount of $60,000 related to the conversion feature of the note, along with a derivative liability at inception. During the year ended December 31, 2017, amortization of debt discount was recorded to interest expense in the amount of $3,959, resulting in a remaining discount of $56,041 at December 31, 2017.
The total gain on settlement of debt, including conversions to common stock, was $11,643 for the year ended December 31, 2017 and the total loss on settlement of debt was $33,561 for the year ended December 31, 2016.
6. DERIVATIVE LIABILITIES
The fair value of the Company’s derivative liabilities is estimated at the issuance date and is revalued at each subsequent reporting date. We estimate the fair value of derivative liabilities associated with our convertible notes payable and our Series B preferred stock using a multinomial lattice model based on a probability weighted discounted cash flow model.
The significant assumptions used in the valuation of the derivative liabilities at December 31, 2017 are as follows:
Conversion to stock
|
|
Monthly
|
|
Stock price on the valuation date
|
|
$
|
0.0230
|
|
Conversion price
|
|
$
|
0.0045
|
|
Years to maturity
|
|
|
15.0
|
|
Expected volatility
|
|
186.3 – 211.0
|
%
|
The value of the derivative liabilities associated with our convertible notes payable was estimated at $5,241,762 and $3,335,906 at December 31, 2017 and December 31, 2016, respectively. The value of the derivative liability associated with our Series B convertible preferred stock at was estimated at $2,831,142 and $3,354,791 at December 31, 2017 and December 31, 2016, respectively..
The calculation input assumptions are subject to significant changes from period to period and to management’s judgment; therefore, the estimated fair value of the derivative liability will fluctuate from period to period, and the fluctuation may be material.
7. SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
During the years ended December 31, 2017 and 2016, we paid no amounts for income taxes.
During the years ended December 31, 2017 and 2016, we paid cash for interest expense of $1,328 and $1,860, respectively.
During the year ended December 31, 2017, the Company had the following non-cash investing and financing activities:
|
·
|
The Company issued a total of 3,597,812 shares of common stock for the conversion of $35,000 in convertible notes payable, plus $6,552 of accrued interest payable, increasing common stock by $3,597, increasing additional paid-in capital by $137,537, decreasing derivative liabilities by $111,225 and recording a gain on settlement of debt of $11,643.
|
|
|
|
|
·
|
The Company increased debt discount and derivative liabilities by $855,000 for the issuance of new convertible debt.
|
During the year ended December 31, 2016, the Company had the following non-cash investing and financing activities:
|
·
|
The Company issued a total of 3,028,018 shares of common stock for the conversion of $10,450 in convertible notes payable, plus $3,176 of accrued interest payable, increasing common stock by $3,028, increasing additional paid-in capital by $83,359, decreasing derivative liabilities by $33,756 and recording a loss on settlement of debt of $39,005.
|
|
|
|
|
·
|
The Company increased debt discount and derivative liabilities by $707,000 for the issuance of new convertible debt.
|
|
|
|
|
·
|
The Company issued a total of 16,155 shares of Series B preferred stock for the conversion of $1,615,362 in convertible notes payable, plus $264,530 of accrued interest payable, increasing Series B preferred stock by $16, increasing additional paid-in capital by $11,630,806 and decreasing derivative liabilities by $9,750,930.
|
|
|
|
|
·
|
The Company increased derivative liabilities and decreased additional paid-in capital by $3,908,211 for derivative liabilities associated with the issuance of Series B preferred stock.
|
|
|
|
|
·
|
The Company increased common stock and decreased additional paid-in capital by $1 for the par value of additional shares of common stock issued in the reverse stock split.
|
|
|
|
|
·
|
The Company decreased convertible notes payable by $185,752, accrued interest payable by $33,199 and derivative liabilities by $106,858 and increased additional paid-in capital by $325,809 for settlement of related party debt recorded as a contribution to capital.
|
8. RESEARCH AGREEMENTS AND FORMATION OF SUBSIDIARY
On June 18, 2014, we entered into a Sponsored Research Agreement (“SRA #1”) with UCSB, pursuant to which UCSB performed research work for the mutual benefit of UCSB and the Company. The purpose of SRA #1 included the development of a low-cost and scalable method to produce large-area graphene for transparent electrode applications. The term of SRA #1 commenced on July 1, 2014 and expired on June 30, 2015. The total cost to the Company was $387,730.
On December 15, 2015, we entered into a second Sponsored Research Agreement (“SRA #2”) with UCSB, pursuant to which UCSB performed research work for the mutual benefit of UCSB and the Company. The purpose of SRA #2 included the development of a graphene based optical modulator for the high-speed transmission of digital data in fiber optic networks. The term of SRA #2 commenced on January 1, 2016 and expired on June 30, 2016. The total cost to the Company was $65,497.
On March 9, 2017, we entered into our third Sponsored Research Agreement (“SRA #3”) with UCSB, pursuant to which UCSB will continue the development of a graphene based optical modulator for the high-speed transmission of digital data in fiber optic networks. The term of SRA #3 commenced on April 1, 2017 and concluded on September 30, 2017. The total cost to the Company was $65,009.
On January 5, 2015, Digital Locations formed Transphene, Inc., a Nevada corporation (“Transphene”), of which the Company owns 50% of the total issued and outstanding capital stock. The remaining 50% is owned by Dr. Kaustav Banerjee (“Banerjee”), a director and Chief Technical Officer of Transphene. Transphene was formed to commercialize any technology that the Company licensed from UCSB as a result of SRA #1. In consideration for its interest in Transphene, the Company agreed to assign the intellectual property rights acquired by the Company from SRA #1 to Transphene. At this time, the Company does not see an opportunity to commercialize the research findings of SRA #1, has not licensed any intellectual property from UCSB, and therefore has not assigned any intellectual property to Transphene. Therefore, we terminated our joint venture through Transphene and wound up and dissolved Transphene in 2016. There have been no financial transactions in Transphene and no impact on our financial statements.
9. INCOME TAXES
A reconciliation of the income tax provision (benefit) that would result from applying a combined U.S. federal and state rate of 43% to loss before income taxes with the provision (benefit) for income taxes presented in the financial statements is as follows:
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Income tax benefit at statutory rate
|
|
$
|
(1,027,000
|
)
|
|
$
|
(2,243,800
|
)
|
State income taxes, net of federal benefit
|
|
|
(300
|
)
|
|
|
(300
|
)
|
Nondeductible expenses
|
|
|
2,004,820
|
|
|
|
1,928,300
|
|
Other
|
|
|
(600
|
)
|
|
|
-
|
|
Valuation allowance
|
|
|
(976,920
|
)
|
|
|
315,800
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred tax assets (liabilities) are comprised of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
2,863,700
|
|
|
$
|
3,839,800
|
|
Research and development credit carryforward
|
|
|
125,200
|
|
|
|
125,200
|
|
Related party accrued expenses
|
|
|
-
|
|
|
|
600
|
|
Accrued compensated absences
|
|
|
600
|
|
|
|
900
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(2,989,500
|
)
|
|
|
(3,966,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”). The Tax Act establishes new tax laws that affect 2018 and future years, including a reduction in the U.S. federal corporate income tax rate to 21%, effective January 1, 2018. For certain deferred tax assets and deferred tax liabilities, we have recorded a provisional decrease of $1,382,720, with a corresponding net adjustment to valuation allowance of $1,382,720 as of December 31, 2017.
The ultimate realization of our deferred tax assets is dependent, in part, upon the tax laws in effect, our future earnings, and other events. As of December 31, 2017, we recorded a valuation allowance of $2,989,500 against net current deferred tax. In recording the valuation allowance, we were unable to conclude that it is more likely than not that our deferred tax assets will be realized.
As of December 31, 2017, we had a net operating loss carryforward available to offset future taxable income of approximately $9,875,000, which begins to expire at dates that have not been determined. If substantial changes in the Company’s ownership should occur, there would be an annual limitation of the amount of the net operating loss carryforward that could be utilized.
We perform a review of our material tax positions in accordance with recognition and measurement standards established by authoritative accounting literature, which requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. Based upon our review and evaluation, during the years ended December 31, 2017 and 2016, we concluded the Company had no unrecognized tax benefit that would affect its effective tax rate if recognized.
We file income tax returns in the U.S. federal jurisdiction and in the state of California. With few exceptions, we are no longer subject to U.S. federal, state or local income tax examinations by tax authorities for years before 2011.
We classify any interest and penalties arising from the underpayment of income taxes in our statements of operations and comprehensive loss in other income (expense). As of December 31, 2017 and 2016, we had no accrued interest or penalties related to uncertain tax positions.
10. RELATED PARTY TRANSACTIONS
See Note 3 for a discussion regarding the issuance in August 2017 of 1,000 shares of Series A Preferred Stock to the Company’s President and director, William E. Beifuss, Jr., for services rendered. The shares are to be automatically redeemed on the date 120 days after the effective date of the Series A Certificate.
See Note 5 for discussion of convertible notes payable with related parties, including multiple lenders who are also shareholders of the Company.
On December 12, 2012, we entered into a 5% convertible note with the Chairman of our Board of Directors and our former Chief Executive Officer in exchange for services valued at $185,852. The principal balance of this related party note was $185,852 as of December 31, 2015 and 2014, with accrued interest payable of $27,878 and $18,585 as of December 31, 2015 and 2014, respectively. The note was to mature on December 31, 2016. On July 27, 2016, we entered into a Settlement and Release Agreement with the Chairman for full extinguishment of the above described convertible promissory note with a principal balance of $185,852, plus accrued interest. We agreed to pay the Chairman $100 in cash and arranged for him to enter into an option agreement with our principal lender and a principal holder of our Series B preferred stock (“Lender”) to acquire 225 shares of our Series B preferred stock from the Lender upon the occurrence of certain events defined in the agreement. Due to the related party nature of this transaction, the extinguishments of the note principal of $185,752, accrued interest payable of $33,199 and associated derivative liability of $106,858 were recorded to additional paid-in capital as a contribution to capital totaling $325,809.
On June 4, 2013, we entered into a convertible note with a former member of our Board of Directors in exchange for services valued at $25,000. The note was to mature on June 4, 2016. We entered into an agreement to repay this note in 12 equal monthly payments of principal and interest of $2,352, beginning in June 2016. The note was paid in full as of December 31, 2017.
11. COMMITMENTS AND CONTINGENCIES
Operating Leases
Our office lease expired on September 30, 2017. On September 5, 2017, we entered into a new sublease for office space in our new location. The base rent for the new sublease is $1,000 per month for a period of one year and month-to-month thereafter. Rent expense for the years ended December 31, 2017 and 2016 was $47,068 and $53,026, respectively.
Consulting Agreements
We have a written consulting agreement, dated May 31, 2013 and amended effective November 1, 2016, with William E. Beifuss, Jr., our former Chief Executive Officer, and current President and Acting Chief Financial Officer, for the payment of monthly compensation of $10,000 per month. The agreement may be cancelled by either party with 30 days’ notice.
We entered into a consulting agreement, dated April 1, 2017, with Big Star Capital 1 for the payment of monthly consulting fees of $15,000 relating to the development of our business. The agreement is on a month-to-month basis until terminated by either party with a 10-day prior written notice.
12. SUBSEQUENT EVENTS
Management has evaluated subsequent events according to the requirements of ASC TOPIC 855, and has reported the following:
Subsequent Borrowings
We received advances under the December 14, 2017 $500,000 CPN of $70,000 in January 2018, $60,000 in February 2018 and $61,500 in March 2018.
Extension of Maturity Dates of Convertible Promissory Notes
Subsequent to December 31, 2017, the maturity date of a note payable issued for services with a principal balance of $32,620 at December 31, 2017 was extended from December 31, 2017 to December 31, 2018. See Note 5.
Redemption of Series A Preferred Stock
The 1,000 shares of the Series A Preferred Stock issued to Mr. Beifuss were automatically redeemed by the Company at their par value in January 2018, 120 days after the effective date of the Series A Certificate.