Notes to Condensed Consolidated Financial
Statements
September 30, 2019
(Unaudited)
NOTE 1 – ORGANIZATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Findex.com, Inc. (“Findex”) was
incorporated under the laws of the State of Nevada on November 7, 1997, and is headquartered in Lake Park, Florida with its base
of business operations co-located in the same facility. The Company is currently comprised of two operating companies, RexPro Sealers
and Coatings (“RexPro”), a Florida corporation (formerly EcoSmart Surface & Coating Technologies, Inc.), and Advanced
Cement Sciences, LLC, a Florida limited liability company (“ACS”). RexPro has historically been the driver of both
operating overhead and revenue. RexPro was acquired by the Company in a merger in 2014 and centers around a proprietary line of
specialty surface coatings that have a broad range of value-adding industrial, commercial, residential and consumer applications.
ACS is a Florida-based, engineered cement technology and products firm founded in mid-2016 and currently focused on developing
and commercializing a line of proprietary admixtures to be used in the production of ultra-lightweight, high-strength concrete
and high-performance stucco.
BASIS
OF PRESENTATION
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with Generally Accepted Accounting Principles for interim financial information
and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by Generally Accepted Accounting Principles for complete financial statements. The accompanying unaudited
condensed consolidated financial statements reflect all adjustments, consisting of normal and reoccurring adjustments, that, in
the opinion of management, are considered necessary for a fair presentation of the financial position, results of operations, and
cash flows for the periods presented. The results of operations for such periods are not necessarily indicative of the results
expected for the full year or for any future period. The December 31, 2018 condensed consolidated balance sheet data was derived
from audited financial statements. The accompanying financial statements should be read in conjunction with the audited consolidated
financial statements of Findex.com, Inc. included in the Company’s Form 10-K for the year ended December 31, 2018 filed with
the Securities and Exchange Commission on April 16, 2019.
Principles
of Consolidation
The condensed consolidated financial statements
include the accounts of the Company, its wholly-owned subsidiaries (Reagan Holdings, Inc., Findex.com, Inc. Delaware, ESCT Acquisition
Corp. and ACS). All inter-company balances and transactions have been eliminated in consolidation.
Use
of Estimates
The preparation of financial statements in
conformity with U.S. Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company bases its estimates and assumptions on current facts, historical experience and
various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent
from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s
estimates. To the extent there are material differences between the estimates and the actual results, future results of operations
will be affected. Significant estimates include an evaluation for slow moving and obsolete inventory, collectability of accounts
receivable, assessing intangibles for impairment, useful lives of assets, and valuation of stock based compensation and settlements
and consideration of variable interest entities.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with
an original maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
Within the Company’s operations as a
whole, the Company’s products are sold to resellers and distributors generally under terms appropriate for the creditworthiness
of the customer. Terms generally range from cash on delivery, net 10 days or net 30 days. Receivables from customers are unsecured.
The Company continuously monitors its customer account balances and actively pursues collections on past due balances.
The Company maintains an allowance for doubtful
accounts comprised of two components, (i) historical collections performance and (ii) specific collection issues. If actual bad
debts differ from the reserves calculated based on historical trends and known customer issues, an adjustment to bad debt expense
is recorded in the period in which the difference occurs. Such adjustment could result in additional expense or a reduction of
expense.
The Company’s accounts receivable go
through a collection process that is based on the age of the invoice and requires attempted contacts with the customer at specified
intervals and the assistance from other personnel within the Company who have a relationship with the customer. If after a number
of days, the Company has been unsuccessful in its collections efforts, it may turn the account over to a collection agency. The
Company writes-off accounts to the allowance when it has determined that collection is unlikely. The factors considered in reaching
this determination are (i) the apparent financial condition of the customer, (ii) the success the Company has in contacting and
negotiating with the customer and (iii) the number of days the account has been outstanding. To the extent that the Company’s
collections do not correspond with historical experience, it may be required to incur additional charges.
INVENTORY
The Company’s inventories are recorded
at the lower and cost or market using the first in, first out method. The Company’s inventory consists of raw materials and
finished goods. The Company takes into consideration certain inventory items that are slow moving and obsolete and calculates a
provision for these inventory items.
INTANGIBLE ASSETS OTHER THAN GOODWILL
The Company’s intangible assets consist
of patents and trade secrets acquired from third parties, and are recorded at accumulated cost less amortization and impairments. In accordance with Financial Accounting Standards
Board Accounting Standards Codification (“ASC”) 350-30, General Intangibles Other Than Goodwill, intangible
assets with an indefinite useful life are not amortized. Intangible assets with a finite useful life are amortized on the straight-line
method over the estimated useful lives, approximately 11 years. All intangible assets are tested for impairment annually during
the fourth quarter. For the nine months ended September 30, 2019 and 2018, the Company did not recognize any impairment expense
related to intangible assets. See Note 5.
REVENUE
RECOGNITION
The Company recognizes revenues in accordance
with the provisions of FASB Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers,
which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the Securities
and Exchange Commission. ASC 606 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure
related to revenue recognition policies. The Company recognizes revenue upon transfer of control of promised products to customers
in an amount that reflects the consideration the Company expects to receive in exchange for those products. The Company at times
may enter into contracts that can include various combinations of products and services, which are generally capable of being distinct
and accounted for as separate performance obligations. In such cases, revenue would be recognized at the time of delivery for each
identified product or performance of service. Revenue is recognized net of allowances for returns and any taxes collected from
customers, which are subsequently remitted to governmental authorities.
Distribution Rights
The Company at times may derive part of its
revenue from the sale of distribution rights within a designated territory for a period of time. Licenses for an exclusive territory
provides a single distributor with the right to use and sell the distribution rights within the specified designated territory
for a specified period. The determination of when the Company recognizes revenue is based on whether the distribution rights transfers
to the distributor at (i) a point in time or (ii) over time. Furthermore, the Company needs to determine in accordance with ASC
606 if the distribution rights is (i) functional intellectual property that has significant standalone functionality or is (ii)
symbolic intellectual property that requires ongoing activities from the Company. In June 2018, the Company received payment in
the amount of $100,000 from the sale of distribution rights within a designated territory for a period of time of thirty years
to a distributor. In August 2018, the Company received an additional payment in the amount of $90,000 for the sale of distribution
rights within a separate designated territory for a period of thirty years to a distributor. The Company determined that the associated
revenue would be recognized over the period of thirty years as the agreements for the sale of the distribution rights also called
for the Company to continue to produce the product for the distributor over the term of the agreements. Therefore, the distribution
rights were deemed to be symbolic intellectual property in accordance with ASC 606 as it requires ongoing activities from the Company.
From time to time, and where strategic
determinations or economic considerations dictate, the Company also derives revenue from the sale of its intellectual
properties (proprietary formulations) into select vertical markets. The Company continues to enhance and improve upon certain
of its intellectual properties currently used in non-core vertical markets as well as develop new variations on its existing
portfolio of intellectual properties. The determination of when the Company recognizes revenue is based on whether the
following two criteria are met (i) the customer can benefit from the intellectual property either on its own or together with
other resources that are readily available to the customer, and (ii) the Company’s promise to transfer the intellectual
property is distinct within the context of the contract. In August 2019, the Company entered into an intellectual property
sale and assignment agreement with a now exclusive worldwide HVAC distributor in exchange for a one-time cash payment of
$200,000. The agreement includes a provision establishing a transitional manufacturing period of no less than six months
during which the Company will continue to manufacture the product for the HVAC marketer and distributor at a predetermined,
fixed-price per gallon. This agreement supersedes all prior agreements with the counter-party (specifically, the June 2018
and August 2018 agreements referenced in the immediately preceding paragraph), and, as such, triggers immediate recognition
of the remaining contract liabilities under the previous distribution agreements. For the nine months ended September 30,
2019 and 2018, the Company recognized a contract liability in the amount of $0 and $188,639, respectively and revenue in the
amount of $387,056 and $1,361, respectively from such sales of intellectual property and distribution rights. In
addition, for the nine months ended September 30, 2019, the Company recognized additional contract liability in the amount of
$9,200 as a result of advanced payments received from customers for performance obligations yet to be performed by the
Company.
RESEARCH AND DEVELOPMENT
The Company’s
research and development costs consist of labor directly associated with the development of projects and outside consultants, and
indirect costs such as those associated with facilities use. For labor costs and costs of outside consultants, the Company records
the research and development costs as a reduction against either personnel costs or professional fees. For facilities leasing related
expenses, the Company records the research and development costs as a reduction against rent. For the nine months ended September
30, 2019 and 2018, the Company recognized $24,268 and $180,760, respectively, in research and development costs.
PREFERRED STOCK
In May 2019, the Company’s board of directors,
pursuant to its authority to designate serial preferred stock from time to time under Article V Section B of the Company’s
Articles of Incorporation (as amended to date, the “Company Articles”), adopted a resolution providing for the designation,
powers, preferences, privileges, limitations, restrictions, and relative rights and terms of (i) one million five hundred thousand
(1,500,000) shares of Series RX-1 Redeemable, Convertible Preferred Stock, par value $0.001 per share (the “Series RX-1 Preferred
Stock”), (ii) one million (1,000,000) shares of Series RX-2 Convertible Preferred Stock, par value $0.001 per share (the
“Series RX-2 Preferred Stock”) and (iii) five hundred thousand (500,000) shares of Series RX-3 Convertible Preferred
Stock, par value $0.001 per share (the “Series RX-3 Preferred Stock”). The Company filed certificates of designations
amending the Company Articles and reflecting the Series RX-1 Preferred Stock, Series RX-2 Preferred Stock and the Series RX-3 Preferred
Stock with the Nevada Secretary of State.
The Series RX-1 Preferred Stock carries
the following rights, preferences and privileges:
|
▪
|
automatic conversion into shares of Company common stock on a 100-for-1 basis immediately upon the Company either (i) issuing any shares of any series of preferred stock senior to or parri passu with the Series RX-1 Preferred Stock in liquidation, or (ii) subdividing the outstanding shares of Company common stock into a greater number of shares (a forward stock-split), or (iii) combining the outstanding shares of Company common stock into a smaller number of shares of Company common stock (a reverse stock-split);
|
|
▪
|
voluntary conversion to Company common stock at the same 100-for-1 conversion ratio any time prior to automatic conversion;
|
|
▪
|
voting on an as-converted-to-common-stock basis, together as a single class, with the Company common stock, on all matters requiring the approval, ratification or consent of holders of the common stock; and
|
|
▪
|
a senior liquidation preference entitling its holders to be paid $1.00 per share out of the assets of the Company in the event of any liquidation, dissolution, or winding-up of the Company, whether voluntary or involuntary, before any distribution or payment is made to any holders of any shares of the Company's common stock.
|
All of the foregoing notwithstanding, the Series
RX-1 Preferred Stock is redeemable by the Company at any time prior to conversion at a price of $1.00 per share.
The Series RX-2 Preferred Stock carries
the following rights, preferences and privileges:
|
▪
|
automatic conversion into shares of Company common stock on a 100-for-1 basis immediately upon the effectiveness of any amendment to the Company Articles increasing the authorized number of shares of Company common stock from 900,000,000 to a number equal to or greater than 1,600,000,000;
|
|
▪
|
voting on an as-converted-to-common-stock basis, together as a single class, with the Company common stock, on all matters requiring the approval, ratification or consent of holders of the common stock; and
|
|
▪
|
a ranking in liquidation of the Company pari passu with the Company common stock on an as-converted basis, and junior to all other classes and series of equity securities of the Corporation which by their terms do not rank pari passu, though subordinate and junior to all indebtedness of the Company.
|
The Series RX-3 Preferred Stock carries
the following rights, preferences and privileges:
|
▪
|
automatic conversion into shares of Company common stock on a 1,000-for-1 basis immediately upon the effectiveness of any amendment to the Company Articles increasing the authorized number of shares of Company common stock from 900,000,000 to a number equal to or greater than 1,600,000,000;
|
|
▪
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voting on an as-converted-to-common-stock basis, together as a single class, with the Company common stock, on all matters requiring the approval, ratification or consent of holders of the common stock; and
|
|
▪
|
a ranking in liquidation of the Company pari passu with the Company common stock on an as-converted basis, and junior to all other classes and series of equity securities of the Corporation which by their terms do not rank pari passu, though subordinate and junior to all indebtedness of the Company.
|
As of September 30, 2019, the Company has outstanding
1,418,615 shares of RX-1 Preferred Stock and -0- and -0-, respectively, shares of RX-2 Preferred Stock and RX-3 Preferred Stock.
Furthermore, as of September 30, 2019, the Company has outstanding six warrants to purchase a total of 981,316 shares of RX-2 Preferred
Stock and three warrants to purchase a total of 481,212 shares of RX-3 Preferred Stock. For the nine
months ended September 30, 2019, no preferred stock warrants were exercised. See Note 10.
STOCK-BASED COMPENSATION
The Company recognizes share-based compensation
in accordance with ASC 718, Compensation – Stock Compensation. ASC 718 requires that the Company measure the cost
of the employee services received in exchange for an award for equity instruments based on the grant-date fair value and to recognize
this cost over the requisite service period. See Note 10.
EARNINGS (LOSS) PER SHARE
The Company follows the guidance of ASC 260,
Earnings Per Share, to calculate and report basic and diluted earnings per share (“EPS”). Basic EPS is computed
by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the
period. Diluted EPS is computed by giving effect to all dilutive potential shares of common stock that were outstanding during
the period. For the Company, dilutive potential shares of common stock consist of the incremental shares of common stock issuable
upon the exercise of warrants for all periods and convertible preferred stock and notes payable.
When discontinued operations, extraordinary
items, and/or the cumulative effect of an accounting change are present, income before any of such items on a per share basis represents
the “control number” in determining whether potential shares of common stock are dilutive or anti-dilutive. Thus, the
same number of potential shares of common stock used in computing diluted EPS for income from continuing operations is used in
calculating all other reported diluted EPS amounts. In the case of a net loss, it is assumed that no incremental shares would be
issued because they would be anti-dilutive. In addition, certain options and warrants are considered anti-dilutive because the
exercise prices were above the average market price during the period. Anti-dilutive shares are not included in the computation
of diluted EPS, in accordance with ASC 260-10-45-17.
The calculations of net income per share for
the nine months ended September 30, 2019 and 2018 excluded the impact of the following potential common shares as their inclusion
would be anti-dilutive.
For the Nine Months Ended September 30,
|
|
2019
|
|
2018
|
Shares Issuable Upon Exercise of Outstanding Warrants - Series RX-2
|
|
|
98,131,600
|
|
|
|
—
|
|
Shares Issuable Upon Exercise of Outstanding Warrants - Series RX-3
|
|
|
481,212,000
|
|
|
|
—
|
|
Shares Issuable Upon Conversion of Outstanding Convertible Note Payables
|
|
|
—
|
|
|
|
298,510,401
|
|
Total weighted average anti-dilutive potential common shares
|
|
|
579,343,600
|
|
|
|
298,510,401
|
|
The Outstanding Warrants - Series RX-2 and
RX-3 were excluded from diluted earnings per share because the contingencies in place to exercise and vest these shares did not
take place and were not probable to occur as of September 30, 2019.
For the three and nine months ended September
30, 2019 and 2018 there were not adjustments to earnings for earnings per share calculations. Dilutive potential common shares
were determined as follows:
|
|
For the Three Months Ended September 30,
|
|
For the Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Weighted-average Common Shares
|
|
|
722,836,769
|
|
|
|
533,913,355
|
|
|
|
718,732,314
|
|
|
|
532,994,267
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average of Shares Issuable Upon Conversion of Preferred Stock Series RX-1
|
|
|
141,861,500
|
|
|
|
—
|
|
|
|
57,160,311
|
|
|
|
—
|
|
Dilutive Potential Common Shares
|
|
|
864,698,269
|
|
|
|
533,913,355
|
|
|
|
775,892,626
|
|
|
|
532,994,267
|
|
DISCONTINUED
OPERATIONS
As of September 30, 2019 and 2018, the Company
has presented $114,368 of Accrued royalties in discontinued operations. The royalties pertain to the Company’s sale of the
QuickVerse® product line in 2011. There were no effects on the Company’s Condensed Consolidated Statements of Operations
for the nine months ended September 30, 2019 and 2018. See Note 13.
RECENT
ACCOUNTING PRONOUNCEMENTS
In February 2016, the FASB issued ASU 2016-02,
Leases. The standard requires all leases with lease terms over 12 months to be capitalized as a right-of-use asset and lease
liability on the balance sheet at the date of lease commencement. Leases will be classified as either finance or operating. This
distinction will be relevant for the pattern of expense recognition in the income statement. This standard is effective for the
calendar year ending December 31, 2019. The Company does not have any leases that qualify under the new standard.
In January 2017, the FASB issued ASU 2017-04,
Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment. The standard simplifies the subsequent measurement
of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendments of ASU 2017-04, an entity should perform
its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize
an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss cannot
exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 is effective for the calendar year ending December
31, 2020. The amendments require a prospective approach to adoption and early adoption is permitted for interim or annual goodwill
impairment tests. The Company is presently evaluating the impact this standard would have.
NOTE 2 – GOING CONCERN
The accompanying condensed consolidated financial
statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which
contemplates the Company’s continuation as a going concern. However, as of September 30, 2019, the Company had negative working
capital of $530,326, an accumulated deficit of $7,213,864, a net income of $1,752,826 and cash used from operations of $66,390.
These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management has taken several
actions in an attempt to mitigate this risk. These actions include capital raising initiatives involving the issuance of equity
and/or notes payable to investors, as well as cash conservation initiatives involving the issuance of equity and/or notes payable
to employees and related parties. The accompanying condensed consolidated financial statements do not include any adjustments related
to these uncertainties.
NOTE 3 – INVENTORIES
Inventories consisted of the following:
|
|
September 30, 2019
|
|
December 31, 2018
|
Raw materials
|
|
$
|
27,600
|
|
|
$
|
23,050
|
|
Finished goods
|
|
|
1,720
|
|
|
|
1,498
|
|
Reserve for obsolete inventory
|
|
|
(900
|
)
|
|
|
(1,500
|
)
|
Inventories
|
|
$
|
28,420
|
|
|
$
|
23,048
|
|
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
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|
September 30, 2019
|
|
December 31, 2018
|
Office equipment
|
|
$
|
3,466
|
|
|
$
|
3,466
|
|
Warehouse equipment
|
|
|
76,339
|
|
|
|
76,339
|
|
Computer equipment
|
|
|
8,708
|
|
|
|
8,708
|
|
Research lab
|
|
|
10,334
|
|
|
|
10,334
|
|
Office fixtures
|
|
|
3,750
|
|
|
|
3,750
|
|
Less: accumulated depreciation
|
|
|
(97,342
|
)
|
|
|
(95,154
|
)
|
Property and equipment
|
|
$
|
5,255
|
|
|
$
|
7,443
|
|
For the nine months ended September 30, 2019
and 2018, the Company recorded depreciation expense of $2,188 and $4,195 respectively.
NOTE 5 – INTANGIBLE ASSETS
The Company’s intangible assets consist
of patents and trade secrets acquired from third parties, and are recorded at cost. The Company amortizes the costs of its intangible
assets over their estimated useful lives of approximately 11 years. Amortizable intangible assets are tested for impairment based
on undiscounted cash flows and, if impaired, written down to fair value based on either discounted cash flows or appraised values.
Intangible assets with indefinite lives are tested for impairment, at least annually, and written down to fair value as required.
The Company’s intangible assets, net
of accumulated amortization consisted of the following:
Patents and trade secrets, net
|
|
September 30, 2019
|
|
December 31, 2018
|
Cost
|
|
$
|
697,955
|
|
|
$
|
697,955
|
|
Accumulated Amortization
|
|
|
(540,401
|
)
|
|
|
(504,042
|
)
|
Net intangible assets
|
|
$
|
157,554
|
|
|
$
|
193,913
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
Beginning balance for total intangible assets, net
|
|
$
|
193,913
|
|
|
$
|
261,849
|
|
Amortization expense
|
|
|
(36,359
|
)
|
|
|
(67,936
|
)
|
Intangible assets, net
|
|
$
|
157,554
|
|
|
$
|
193,913
|
|
The Surface Modification Technologies assets
include a patent and trade secrets on certain manufacturing processes and know-how. For the nine months ended September 30, 2019
and 2018, the Company recorded amortization expense of $36,359 and $35,635, respectively. See Note 1.
As of September 30, 2019, future amortization
for the next four years for the Company’s intangible assets consist of the following:
Year
|
|
Anticipated Amortization
|
|
2019
|
|
|
$
|
11,154
|
|
|
2020
|
|
|
|
47,513
|
|
|
2021
|
|
|
|
47,513
|
|
|
2022
|
|
|
|
47,513
|
|
|
Thereafter
|
|
|
|
3,861
|
|
|
Total anticipated amortization of intangible assets
|
|
|
$
|
157,554
|
|
NOTE 6 – NOTES PAYABLE AND NOTES PAYABLE
- RELATED PARTIES
At September 30, 2019 and December 31, 2018, notes payable consisted
of the following categories:
|
|
September 30, 2019
|
|
December 31, 2018
|
Notes payable
|
|
$
|
28,783
|
|
|
$
|
328,783
|
|
Notes payable, convertible
|
|
|
—
|
|
|
|
25,000
|
|
Notes payable, related parties
|
|
|
40,000
|
|
|
|
926,475
|
|
Notes payable, related parties, convertible
|
|
|
—
|
|
|
|
1,327,450
|
|
Total
|
|
$
|
68,783
|
|
|
$
|
2,607,708
|
|
Notes Payable
Notes payable consisted of two unsecured notes.
The first note payable in the amount of $28,783 as of September 30, 2019 and December 31, 2018, respectively, is to a former shareholder
with a due date of January 2012, together with accrued interest at 5% APR and interest on overdue principal accruing at 10% APR.
The second note payable in the amount of $0 as of September 30, 2019 and $300,000 as of December 31, 2018 was to a shareholder
with a due date of August 1, 2015, together with accrued interest at 10% APR. In June 2019, as part of the Company’s debt
restructuring initiative, the Company issued the holder of the note a total of 324,262 shares of the Company’s Series RX-1
preferred stock in exchange for the $300,000 of debt owed, inclusive of accrued interest (total $458,729). See Note 10.
At September 30, 2019, the Company was in default
for the unsecured note payable in the amount of $28,783 and all related accrued interest.
Notes Payable, Convertible
Notes payable, convertible consisted of one
note payable in the amount of $0 as of September 30, 2019 and $25,000 as of December 31, 2018 to an investor with a due date of
January 20, 2018, together with accrued interest at 10% APR and was convertible at $0.01 per share of common stock. In June 2019,
as part of the Company’s debt restructuring initiative, the Company issued the holder of the note a total of 26,568 shares
of the Company’s Series RX-1 preferred stock in exchange for the $25,000 of debt owed, inclusive of accrued interest (total
$34,952). See Note 10.
Notes Payable, Related Parties
Notes payable, related parties consisted of
the following:
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
Note payable to the Company’s general counsel (also a principal shareholder), due November 10, 2017.
|
|
|
(a)
|
|
|
$
|
—
|
|
|
$
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to an independent contractor (also a minority shareholder), which note payable was due December 3, 2017.
|
|
|
(b)
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to an independent contractor (also a minority shareholder), which note payable was due December 20, 2017.
|
|
|
(c)
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to an independent contractor (also a minority shareholder), which note payable was due March 16, 2018.
|
|
|
(d)
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to an independent contractor (also a minority shareholder), which note payable was due June 22, 2018.
|
|
|
(e)
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two notes payable ($150,000 and $120,000) each to the Company’s general counsel (also a principal shareholder), due on demand together with accrued interest at 4.5% APR.
|
|
|
(f)
|
|
|
|
—
|
|
|
|
270,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to the Company’s general counsel (also a principal shareholder), due on demand together with accrued interest at 12% APR.
|
|
|
(g)
|
|
|
|
—
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two notes payable ($349,329 and $87,532) each to the Company’s president and chief executive officer (also a principal shareholder), due on demand together with accrued interest at 4.5% APR.
|
|
|
(h)
|
|
|
|
—
|
|
|
|
436,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two notes payable ($134,604 and $28,010) each to the Company’s controller (also a shareholder), due on demand together with accrued interest at 4.5% APR.
|
|
|
(i)
|
|
|
|
—
|
|
|
|
162,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
40,000
|
|
|
$
|
926,475
|
|
At September 30, 2019, the Company was in default
with the contractual payment terms with the unsecured term note payables (b), (c), (d) and (e) to an independent contractor, also
a minority shareholder.
Notes (a) and (g) reflect debt investments
made by the Company’s general counsel, who is also a principal shareholder, to the Company. In
June 2019, as part of the Company’s debt restructuring initiative, the Company issued the holder of the notes a total of
17,759 shares of the Company’s Series RX-1 preferred stock in exchange for the $7,000 and $10,000 notes payable, inclusive
of accrued interest (total $21,137). See Note 10.
Note (f) reflects two unsecured notes payable
for payment obligations owed to the Company’s general counsel, who is also a principal shareholder, for legal services incurred
by the Company for the years ended December 31, 2015 and 2014. In June 2019, as part of the Company’s
debt restructuring initiative, the Company issued the holder of the notes a warrant for a total of 110,416 shares of the Company’s
Series RX-3 preferred stock in exchange for the $270,000 of debt owed, inclusive of accrued interest (total $324,856). See Note
10.
Note (h) reflects two unsecured notes payable
for amounts due to the Company’s president and chief executive officer, who is also a principal shareholder, for previously
accrued base salary. In June 2019, as part of the Company’s debt restructuring initiative, the
Company issued the holder of the notes a warrant for a total of 170,009 shares of the Company’s Series RX-3 preferred stock
in exchange for the $436,861 of debt owed, inclusive of accrued interest (total $489,566). See Note 10.
Note (i) reflects two unsecured notes payable
for amounts due to the Company’s controller, who is also a shareholder, for previously accrued base salary. In
June 2019, as part of the Company’s debt restructuring initiative, the Company issued the holder of the notes a warrant for
a total of 63,291 shares of the Company’s Series RX-3 preferred stock in exchange for the $162,614 of debt owed, inclusive
of accrued interest (total $182,413). See Note 10.
On December 24, 2018, and in connection with
the Company’s acquisition of Advanced Cement Sciences LLC, each holder of notes (f), (h) and (i) agreed to relinquish their
previous respective rights of conversion on the Company promissory notes held by them.
Notes Payable, Related Parties, Convertible
Notes payable, related parties, convertible
consisted of the following:
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
Note payable to a company controlled by an outside director (also a principal shareholder), due on demand together with accrued interest at 4.5% APR, and convertible at $0.01 per share of common stock.
|
|
|
(a)
|
|
|
$
|
—
|
|
|
$
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three notes payable ($30,000, $55,500 and $28,500) each to an outside director (also a principal shareholder), due on demand together with accrued interest at 4.5% APR, and convertible at $0.01, $0.007 and $0.015, respectively, per share of common stock.
|
|
|
(b)
|
|
|
|
—
|
|
|
|
114,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to a related party investor (by virtue of shareholding percentage, both actual and on an as-converted basis), due November 13, 2018 together with accrued interest at 10% APR, and convertible at $0.01 per share of common stock.
|
|
|
(c)
|
|
|
|
—
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to a related party investor (by virtue of shareholding percentage, both actual and on an as-converted basis), due March 4, 2017 together with accrued interest at 10% APR, and convertible at $0.01 per share of common stock.
|
|
|
(d)
|
|
|
|
—
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to a related party investor (by virtue of shareholding percentage, both actual and on an as-converted basis), due March 18, 2019 together with accrued interest at 10% APR, and convertible at $0.01 per share of common stock.
|
|
|
(e)
|
|
|
|
—
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to a related party investor (by virtue of shareholding percentage, both actual and on an as-converted basis), due May 12, 2019 together with accrued interest at 10% APR, and convertible at $0.01 per share of common stock.
|
|
|
(f)
|
|
|
|
—
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to a related party investor (by virtue of shareholding percentage, both actual and on an as-converted basis), due June 7, 2019 together with accrued interest at 10% APR, and convertible at $0.01 per share of common stock.
|
|
|
(g)
|
|
|
|
—
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to a related party investor (by virtue of shareholding percentage, both actual and on an as-converted basis), due July 28, 2019 together with accrued interest at 10% APR, and convertible at $0.01 per share of common stock.
|
|
|
(h)
|
|
|
|
—
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two notes payable ($20,500 and $9,500) each to an outside director (also a minority shareholder), due on demand together with accrued interest at 4.5% APR, and convertible at $0.007 and $0.015, respectively, per share of common stock.
|
|
|
(i)
|
|
|
|
—
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to the Company’s former vice president of research and development (also a minority shareholder), due on demand together with accrued interest at 4.5% APR, and convertible at $0.007 per share of common stock.
|
|
|
(j)
|
|
|
|
—
|
|
|
|
49,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to an independent contractor (also a minority shareholder), due on demand together with interest at 4.5% APR, and convertible at $0.007 per share of common stock.
|
|
|
(k)
|
|
|
|
—
|
|
|
|
25,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable in the name of a son of an outside director (also a principal shareholder), due on demand together with accrued interest at 4.5% APR, and convertible at $0.05 per share of common stock.
|
|
|
(l)
|
|
|
|
—
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two notes payable ($81,250 and $77,500) each to an independent contractor (also a minority shareholder), due on demand together with interest at 4.5% APR, and convertible at $0.01 per share of common stock.
|
|
|
(m)
|
|
|
|
—
|
|
|
|
158,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to an investor (also a minority shareholder), due on demand together with interest at 10% APR, and convertible at $0.01 per share of common stock.
|
|
|
(n)
|
|
|
|
—
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to a related party investor (by virtue of shareholding percentage, both actual and on an as-converted basis), due June 15, 2018 together with accrued interest at 10% APR, and convertible at $0.01 per share of common stock.
|
|
|
(o)
|
|
|
|
—
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
—
|
|
|
$
|
1,327,450
|
|
Notes (a), (b) and (l) reflect amounts due
to a single outside director of the Company, who also is a principal shareholder, based on such director having (i) made certain
vendor obligation payments directly on behalf of and for the benefit of the Company, (ii) having advanced certain funds to the
Company at various dates for general working capital purposes, and (iii) having accrued director’s fees earned through June
30, 2017. In June 2019, as part of the Company’s debt restructuring initiative, the Company issued the holder of note (a)
a total of 65,396 shares of the Company’s Series RX-1 preferred stock in exchange for $60,000 of debt owed, inclusive of
accrued interest (total $73,560). The Company also issued the holder of note (b) a total of 32,367 shares of the Company’s
Series RX-1 preferred stock and a warrant for the total of 187,396 shares of the Company’s Series RX-2 preferred stock in
exchange for the cumulative $114,000 of debt owed, inclusive of accrued interest (total $130,281). In addition, the Company has
recorded accounts payable, related parties, in the amount of $18,426 to the holder of notes (a), (b), and (l). See Note 10.
Notes (c), (e) through (h) and (o) reflect
amounts due to a certain related party investor and principal shareholder for convertible debt
investments made from time to time as indicated. In June 2019, as part of the Company’s debt restructuring
initiative, the Company issued the holder of the notes a total of 822,639 shares of the Company’s Series RX-1 preferred stock
in exchange for the cumulative $800,000 of debt owed, inclusive of accrued interest (total $1,070,974). See Note 10.
Note (d) reflects an amount due to a certain
related party investor and principal shareholder for convertible debt investments made from time to time as indicated. In
June 2019, as part of the Company’s debt restructuring initiative, the Company issued the holder of the note a total of 52,325
shares of the Company’s Series RX-1 preferred stock in exchange for $50,000 of debt owed, inclusive of accrued interest (total
$69,041). See Note 10.
Notes (i) reflects two notes payable for amounts
due to an outside director, who is also a minority shareholder, for accrued director’s fees earned through June 30, 2017.
In June 2019, as part of the Company’s debt restructuring initiative, the Company issued the holder
of the notes a warrant for a total of 66,966 shares of the Company’s Series RX-2 preferred stock in exchange for $30,000
of debt owed, inclusive of accrued interest (total $33,483). See Note 10.
Note (j) reflects amounts due to the Company’s
former vice president of research and development, who is also a minority shareholder, for previously accrued wages. In May 2019,
the holder of the note exercised the right to convert the $49,000 note, inclusive of accrued interest (total $55,237) into 7,890,958
shares of common stock at the conversion rate of $0.007 per share per the terms of the note. See Note 10.
Note (k) reflects amounts due to an independent
contractor who had served as a senior executive of one of the Company’s predecessor divisions prior to the merger with the
Company and a current minority shareholder of the Company, for past earnings. In June 2019, as part
of the Company’s debt restructuring initiative, the Company issued the holder of the note a warrant for a total of 58,006
shares of the Company’s Series RX-2 preferred stock in exchange for $25,700 of debt owed, inclusive of accrued interest (total
$29,003). See Note 10.
Note (m) reflects two notes payable for amounts
due to an independent contractor, who is also minority shareholder, for previously accrued business development services. On October
31, 2018, the holder of one note with an original face value of $137,500 exercised the right to convert $60,000 of the note into
six million shares (6,000,000) of common stock at the conversion rate of $0.01 per share per the terms of the note. In
June 2019, as part of the Company’s debt restructuring initiative, the Company issued the holder of the notes a warrant for
a total of 337,320 shares of the Company’s Series RX-2 preferred stock in exchange for $158,780 of debt owed, inclusive of
accrued interest (total $168,660). See Note 10.
Note (n) reflects an amount due to a certain
related party investor, who is also a minority shareholder, for a convertible debt investment. In
June 2019, as part of the Company’s debt restructuring initiative, the Company issued the holder of the note a total of 20,483
shares of the Company’s Series RX-1 preferred stock in exchange for $20,000 of debt owed, inclusive of accrued interest (total
$22,580). See Note 10.
For the nine months ended September 30, 2019,
the Company did not receive any proceeds from the issuance of notes payable. For the year ended December 31, 2018, the Company
received proceeds from the issuance of notes payable to related parties in the amount of $20,000 and convertible notes payable
to related parties in the amount of $70,000 (total $90,000).
NOTE 7 – GAIN ON INTANGIBLE ASSET
In February 2019, the Company entered into
an agreement with Ducora, Inc., a Florida corporation engaged in the direct marketing of certain consumer products (“Ducora”),
to assign and sell to Ducora a patent owned by the Company, together with certain related and proprietary trade secret information,
the subject of which is a process for producing a certain coating product usable on automobiles and motorcycles, among other potential
surfaces. At December 31, 2018, the Company did not have a value assigned to the intangible assets consisting of the patent and
proprietary trade secret information. In exchange for the conveyance of this intellectual property, which was effective immediately
upon execution of the agreement, the Company received a one-time cash payment in the amount of $150,000. As a result, the Company
recognized a gain on the sale of an intangible asset of $150,000 on our Condensed Consolidated Statement of Operations for the
nine months ended September 30, 2019.
NOTE 8 – GAIN ON DEBT SETTLEMENT
In June 2019, the Company finalized a debt
restructuring initiative with the Company’s then debtholders. In particular to one of the Company’s previous investors
who held a note payable and was not a related party or shareholder of the Company, the note holder agreed to settle such note in
exchange for the Company’s Series RX-1 preferred stock. As a result, the Company recognized a gain on debt settlement of
$34,925 on our Condensed Consolidated Statement of Operations for the nine months ended September 30, 2019.
NOTE 9 – GAIN ON DERIVATIVE-BASED RESTRUCTURING OF SERVICE-RELATED
OBLIGATIONS
In June 2019, pursuant to certain securities
exchange agreements and securities purchase agreements between the Company and certain of its directors and current and former
employees, and in exchange for an aggregate $490,658 in debt owed to such parties as of such dates, inclusive of accrued interest,
(a portion of which debt had been convertible into Company common stock in accordance with its stated terms and the remainder of
which had not), the Company issued to such individuals warrants to purchase a total of 981,316 shares of Company Series RX-2 preferred
stock at a price per share of $0.50 for a gain of $182,523. Also in June 2019, pursuant to certain securities exchange agreements
and securities purchase agreements between the Company and certain of its outside professional consultants and employees, and in
exchange for a gain of $1,397,644 in debt owed to such parties as of such dates, inclusive of accrued interest, (a portion of which
debt had at one point in time been convertible into Company common stock in accordance with its stated terms and the remainder
of which had not), the Company issued to such individuals warrants to purchase a total of 481,212 shares of Company Series RX-3
preferred stock at a price per share of $5.00. In connection with this serial restructuring of service-related obligations taken
as a whole, and based on the relevant accounting guidance, the Company recognized a gain on restructuring of service-related obligations
of $1,580,167 on our Condensed Consolidated Statement of Operations for the nine months ended September 30, 2019.
NOTE 10 – STOCKHOLDERS’ DEFICIT
Common
Stock
In May 2019, the Company’s former vice
president of research and development (also a shareholder) held a convertible note and elected to convert such note, together with
all then-accrued interest, totaling $55,237 into 7,890,958 shares of common stock. See Note 6.
COMMON
STOCK WARRANTS
The Company did
not issue common stock warrants for the nine months ended September 30, 2019 and 2018 and no common stock warrants were exercised.
As of September 30, 2019, there were no common stock warrants outstanding.
PreFERRED
Stock
In June, 2019, pursuant to certain securities
exchange agreements and securities purchase agreements between the Company and various private investors, and in exchange for an
aggregate $1,826,180 in debt owed to such parties, inclusive of accrued interest, (a portion of which debt had been convertible
into Company common stock in accordance with its stated terms and the remainder of which had not), the Company issued to such private
investors a total of 1,418,615 shares of Company Series RX-1 Preferred Stock of which $1,791,000 was recorded in additional paid-in
capital as this debt restructuring was for related parties and approximately $35,000 was recorded as a gain on settlement for a
non-related party. The following table summarizes the Series RX-1 Preferred Stock Transactions:
Series RX-1 Preferred Stock Debt Holder
|
|
Aggregate Principal and Interest Consideration Exchanged/Paid
|
|
Total Number of Series RX-1 Preferred Shares Issued
|
|
Total Number of Common Shares Into Which Shares are Convertible (Before Any Potential Adjustment)
|
Related party investor (also a shareholder)
|
|
$
|
69,041
|
|
|
|
52,325
|
|
|
|
5,232,500
|
|
Related party investor (also a shareholder)
|
|
|
458,729
|
|
|
|
324,262
|
|
|
|
32,426,200
|
|
Company’s outside director (also a shareholder)
|
|
|
73,560
|
|
|
|
65,396
|
|
|
|
6,539,600
|
|
Company’s outside director (also a shareholder)
|
|
|
36,583
|
|
|
|
32,367
|
|
|
|
3,236,700
|
|
Company’s outside director (also a shareholder)
|
|
|
22,510
|
|
|
|
20,351
|
|
|
|
4,070,200
|
|
Related party investor (also a shareholder)
|
|
|
22,580
|
|
|
|
20,483
|
|
|
|
2,048,300
|
|
Company’s general counsel (also a shareholder)
|
|
|
37,251
|
|
|
|
33,873
|
|
|
|
3,387,300
|
|
Related party investor (also a shareholder)
|
|
|
1,070,974
|
|
|
|
822,639
|
|
|
|
82,263,900
|
|
Non-related party investor
|
|
|
34,952
|
|
|
|
26,568
|
|
|
|
2,656,800
|
|
Combined Total
|
|
$
|
1,826,180
|
|
|
|
1,418,615
|
|
|
|
141,861,500
|
|
The Company used the Option Pricing Method
to determine the fair value of the issued and outstanding shares of RX-1 Preferred Stock as this series of preferred stock has
a liquidation preference over the Company’s other classes of stock. Based on the calculations within the Option Pricing Method,
the fair value of the outstanding 1,418,615 shares of RX-1 Preferred Stock is $674,103. Of those individuals who were issued shares
of the Company’s RX-1 Preferred Stock, all were deemed related parties except for one individual. For the related party individuals,
the difference between the fair value of the RX-1 Preferred Stock and the aggregate principal and interest of the debt liabilities
then owed totaling $1,789,836 was recognized as additional paid in capital. For the non-related party individual, the difference
between the fair value of the RX-1 Preferred Stock and the aggregate principal and interest of the debt liability then owed was
recognized as a gain. As a result, the Company recognized a gain on debt settlement of $34,925 on our
Condensed Consolidated Statement of Operations for the nine months ended September 30, 2019. See Note 8.
PREFERRED
STOCK WARRANTS
Series RX-2 Warrants
In June 2019, pursuant to certain securities
exchange agreements and securities purchase agreements between the Company and certain of its directors and current and former
employees, and in exchange for an aggregate $490,658 in debt owed to such parties, inclusive of accrued interest, (a portion of
which debt had been convertible into Company common stock in accordance with its stated terms and the remainder of which had not),
the Company issued to such individuals warrants to purchase a total of 981,316 shares of Company Series RX-2 Preferred Stock at
a price per share of $0.50 (collectively, the “Series RX-2 Warrants”). The Series RX-2 Warrants are exercisable at
any time prior to the earlier of (i) the effectiveness of any capital reorganization of the Company, any reclassification of the
capital stock of the Company, any consolidation or merger of the Company with or into another corporation (other than a consolidation
or merger in which the Company is the surviving entity), or any transfer of all or substantially all of the assets of the Company,
or other similar occurrence involving the Company, or (ii) December 31, 2021. If all Series RX-2
warrants are exercised to purchase a total of 981,316 shares of Series RX-2 Preferred Stock at $0.50 per share, the amount of cash
realizable by the Company is $490,658. The following table summarizes the transactions for the Series RX-2 Warrants:
Series RX-2 Preferred Stock Warrant Debt Holder
|
|
Aggregate Principal and Interest Consideration Exchanged/Paid
|
|
Total Number of RX- 2 Shares For Which Warrants Issued Are Exercisable
|
|
Total Number of Common Shares Into Which Shares are Convertible (Before Any Potential Adjustment)
|
Related party employee (also a shareholder)
|
|
$
|
29,003
|
|
|
|
58,006
|
|
|
|
5,800,600
|
|
Company’s outside director (also a shareholder)
|
|
|
149,021
|
|
|
|
298,042
|
|
|
|
29,804,200
|
|
Company’s outside director (also a shareholder)
|
|
|
51,924
|
|
|
|
103,848
|
|
|
|
10,384,800
|
|
Related party consultant (also a shareholder)
|
|
|
87,009
|
|
|
|
174,018
|
|
|
|
17,401,800
|
|
Related party consultant (also a shareholder)
|
|
|
81,651
|
|
|
|
163,302
|
|
|
|
16,330,200
|
|
Related party consultant (also a shareholder)
|
|
|
92,050
|
|
|
|
184,100
|
|
|
|
18,410,000
|
|
Combined Total
|
|
$
|
490,658
|
|
|
|
981,316
|
|
|
|
98,131,600
|
|
The Company used the Black Scholes Method to
determine the fair value of the outstanding Series RX-2 Warrants as the underlying preferred stock does not grant its holders any
additional economic value over common stock holders, there is no liquidation preference and no one holder would control the Company
upon exercise. Based on the calculations within the Black Scholes Method, the fair value of the outstanding Series RX-2 Warrants
to purchase a total of 981,316 shares of RX-2 Preferred Stock is $308,133. All individuals who were issued Series RX-2 Warrants
were deemed related parties and all amounts then owned, aggregate of principal and interest, were for services performed on behalf
of the Company and those services were previously recognized as an expense (such as directors fees or contractor fees) to the Company.
As a result, the Company recognized a gain on restructuring of service-related obligations of $182,523 (part of total $1,580,167)
on our Condensed Consolidated Statement of Operations for the nine months ended September 30, 2019.
See Note 9.
Series RX-3 Warrants
In June 2019, pursuant to certain securities
exchange agreements and securities purchase agreements between the Company and certain of its outside professional consultants
and employees, and in exchange for an aggregate $1,397,647 in debt owed to such parties, inclusive of accrued interest, (a portion
of which debt had at one point in time been convertible into Company common stock in accordance with its stated terms and the remainder
of which had not), the Company issued to such individuals warrants to purchase a total of 481,212 shares of Company Series RX-3
Preferred Stock at a price per share of $5.00 (collectively, the “Series RX-3 Warrants”). Except in the event that
certain intervening corporate events trigger acceleration, the rights of the recipients of Series RX-3 Warrants shall only vest
and become exercisable as follows:
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▪
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until such time following the date of any Series RX-3 Warrant, if at all, that the gross profit of the Company as reported in the Company’s consolidated and audited financial statements contained within its Annual Report on Form 10-K (the “Form 10-K”) filed with the U.S. Securities and Exchange Commission (the “SEC”) for any then preceding fiscal year during which such Series RX-3 Warrant is outstanding (“Reported Annual Gross Profit”), equals or exceeds $1,000,000, such Series RX-3 Warrants shall not be exercisable for any shares of Series RX-3 Preferred Stock;
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▪
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upon achievement for the first time following the date of any Series RX-3 Warrant, if at all, of a Reported Annual Gross Profit equal to or exceeding $1,000,000, then such Series RX-3 Warrant shall become exercisable for twenty-five percent (25%) of the number of shares of Series RX-3 Preferred Stock for which it is stated to be exercisable in the aggregate as of the date of the filing of the Form 10-K in which the corresponding financial statements have been included;
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▪
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upon achievement for the first time following the date of any Series RX-3 Warrant, if at all, of a Reported Annual Gross Profit equal to or exceeding $2,000,000, then such Series RX-3 Warrant shall become exercisable for twenty-five percent (25%) of the number of shares of Series RX-3 Preferred Stock for which it is stated to be exercisable in the aggregate as of the date of the filing of the Form 10-K in which the corresponding financial statements have been included; provided, however, that, if the achievement of the Reported Annual Gross Profit hurdle set forth in subsection (ii) above shall occur concurrently with the achievement of the Reported Annual Gross Profit hurdle set forth in this subsection (iii), then and in such event, the vesting of the exercise rights relative to shares of Series RX-3 Preferred Stock under such Series RX-3 warrant shall be cumulative (i.e. fifty percent [50%]);
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▪
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upon achievement for the first time following the date of any Series RX-3 Warrant, if at all, of a Reported Annual Gross Profit equal to or exceeding $4,000,000, then such Series RX-3 Warrant shall become exercisable for twenty-five percent (25%) of the number of shares of Series RX-3 Preferred Stock for which it is stated to be exercisable in the aggregate as of the date of the filing of the Form 10-K in which the corresponding financial statements have been included; provided, however, that, if the achievement of the Reported Annual Gross Profit hurdle set forth in subsection (ii) and/or (iii) above shall occur concurrently with the achievement of the Reported Annual Gross Profit hurdle set forth in subsection (iv), then and in such event, the vesting of the exercise rights relative to shares of Series RX-3 Preferred Stock under such Series RX-3 Warrant shall be cumulative (i.e. either fifty percent [50%] or seventy-five percent [75%], as applicable);
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upon achievement for the first time following the date of any Series RX-3 Warrant, if at all, of a Reported Annual Gross Profit equal to or exceeding $8,000,000, then such Series RX-3 Warrant shall become exercisable for twenty-five percent (25%) of the number of shares of Series RX-3 Preferred Stock for which it is stated to be exercisable in the aggregate as of the date of the filing of the Form 10-K in which the corresponding financial statements have been included; provided, however, that, if the achievement of the Reported Annual Gross Profit hurdle set forth in subsection (ii), (iii), and/or (iv) above shall occur concurrently with the achievement of the Reported Annual Gross Profit hurdle set forth in this subsection (v), then and in such event, the vesting of the exercise rights relative to shares of Series RX-3 Preferred Stock under such Series RX-3 Warrant shall be cumulative (i.e. either fifty percent [50%], seventy-five percent [75%], or one hundred percent [100%], as applicable).
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Once vested pursuant to the foregoing schedule,
the Series RX-3 Warrants are exercisable in accordance with their terms at any time prior to the earlier of (i) the effectiveness
of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger
of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving entity),
or any transfer of all or substantially all of the assets of the Company, or other similar occurrence
involving the Company, or (ii) December 31, 2029. If all Series RX-3 warrants are exercised to purchase a total of 481,212
shares of Series RX-3 Preferred Stock at $5.00 per share, the amount of cash realizable by the Company is $2,406,060. The following
table summarizes the transactions for the Series RX-3 Warrants:
Series RX-3 Preferred Stock Warrant Debt Holder
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Aggregate Principal and Interest Consideration Exchanged/Paid
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Total Number of RX- 3 Shares For Which Warrants Issued Are Exercisable
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Total Number of Common Shares Into Which Shares are Convertible (Before Any Potential Adjustment)
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Company’s controller (also a shareholder)
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$
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235,775
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81,806
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81,806,000
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Company’s president and chief executive officer (also a shareholder)
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609,716
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211,733
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211,733,000
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Company’s general counsel (also a shareholder)
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552,156
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187,673
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187,673,000
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Combined Total
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$
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1,397,647
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481,212
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481,212,000
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The Company used the Black Scholes Method to
determine the fair value of the outstanding Series RX-3 Warrants as the underlying preferred stock does not grant its holders any
additional economic value over common stock holders, there is no liquidation preference and no one holder would control the Company
upon exercise. Based on the calculations within the Black Scholes Method, the fair value of the outstanding Series RX-3 Warrants
to purchase a total of 481,212 shares of RX-3 Preferred Stock is $1,737,175. All individuals who were issued Series RX-3 Warrants
were deemed related parties and all amounts then owned, aggregate of principal and interest, were for services performed on behalf
of the Company and those services were previously recognized as an expense (such as salaries and wages or contractor fees) to the
Company. Although the initial fair value of the RX-3 Warrants is greater than the amounts then owed, and because the RX-3 Warrants
carry milestones as described above to be met before any of the warrants shall vest and become exercisable, no expense is to be
recognized until if and when the vesting of the RX-3 Warrants becomes probable. No vesting has occurred as of September 30, 2019
and it is not probable as of the date. As a result, the Company recognized a gain on restructuring of service-related obligations
of $1,397,644 (part of total $1,580,167) on our Condensed Consolidated Statement of Operations for the
nine months ended September 30, 2019. See Note 9.
For the nine months ended September 30, 2019,
no Series RX-2 Warrants nor Series RX-3 Warrants were exercised.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings
and claims that may arise in the ordinary course of business. In the opinion of management, the amount of potential liability the
Company is likely to be found liable for otherwise incur as a result of these actions is not so much as would materially affect
the Company’s financial condition.
In July, 2014, the Company entered into an
employment agreement with the Company’s president and chief executive officer. The agreement provides for a base annual salary
of $162,500, a term of three (3) years, and contains a provision for an incentive-based cash bonus equal to one and one half percent
(1.5%) of free cash flow (as calculated pursuant to a stated formula) up to a maximum of $500,000 for any single fiscal year. As
of September 30, 2019 and December 31, 2018, no amounts for bonuses had been earned or accrued under this provision. In addition
to the bonus provision and the annual base salary, the employment agreement provides for payment of previously accrued base salary
in the amount of $0 and vested deferred vacation compensation in the amount of $12,500 as of September 30, 2019 and are included
in accrued payroll. The agreement further provides for severance compensation equal to the then base salary until the expiration
of the term of the agreement. There is no severance compensation in the event of voluntary termination or termination for cause.
In May 2017, the Company’s board of director’s, including the compensation committee thereof, reviewed the employment
agreement for Mr. Malone and extended the term thereof, otherwise due to expire on July 23, 2017, through July 23, 2020.
The Company occupies an office building for
its corporate headquarters located in Lake Park, Florida. In January 2015, the Company renewed a short-term lease agreement with
a shareholder for this 8,560 square foot facility under a five year lease agreement ending December 31, 2019 with an option to
renew for one successive term of five years at the then current occupancy rates. The monthly rent, including sales and use taxes,
is $7,429. In accordance with the terms of the leasehold agreement, the Company is responsible for all utilities, repairs and maintenance.
Total rent expense for the nine months ended
September 30, 2019 and 2018 for this facility, before adjustments of reclassified facilities cost for research and development,
totaled $64,915 and $63,115, respectively.
NOTE 12 – RELATED PARTY TRANSACTIONS
The Company’s executive officers and
employees, from time to time, make payments for materials and various expense items (including business related travel) in the
ordinary course of business via their personal credit cards in lieu of checks drawn on Company accounts. The Company does not provide
its employees or executive officers with corporate credit cards. Amounts due these officers and directors
(including one of the Company’s directors, the president and chief executive officer, and the controller) are included in
accounts payable, related parties, on the Condensed Consolidated Balance Sheets.
As of September 30, 2019, one of the Company’s
directors held five, separate convertible notes issued by the Company. These convertible notes reflected a portion of the aggregate
amount that such outside director is owed by the Company for a combination of (i) certain vendor payments made by him on the Company’s
behalf, (ii) cash previously advanced to the Company for working capital, and (iii) director’s fees earned through June 30,
2017. One of these notes, in the face amount of $60,000, was issued to a company controlled by the director, was due on demand,
together with accrued interest at 4.5% APR, and was convertible at $0.01 per share of common stock. Another of these notes, issued
to the director personally, was in the face amount of $30,000, was similarly due on demand, together with accrued interest at 4.5%
APR, and was convertible at $0.01 per share of common stock. The third of these notes, also issued to the director personally,
was in the face amount of $55,500, was due on demand, together with accrued interest at 4.5% and was convertible at $0.007 per
share of common stock. The fourth note, issued in the name of the director’s son, was in the face amount of $20,000, was
due on demand, together with accrued interest at 4.5% and was convertible at $0.005 per share of common stock. The fifth note,
issued to the director personally, was in the face amount of $28,500, was similarly due on demand, together with accrued interest
at 4.5% APR, and was convertible at $0.015 per share of common stock. In June 2019, in exchange for the five separate convertible
notes mentioned above, the Company issued a total of 118,114 shares of the Company’s Series RX-1 preferred stock in exchange
for a cumulative $110,000 of debt owed, inclusive of accrued interest (total $132,653) and a warrant for a total of 187,395 shares
of the Company’s Series RX-2 preferred stock total in exchange for a cumulative $84,000 of debt owed, inclusive of accrued
interest (total $93,698). In addition, the Company issued a warrant for a total of 110,647 shares of the Company’s Series
RX-2 preferred stock in exchange for previously accrued director’s fees earned through December 31, 2018 in the amount of
$54,000, inclusive of accrued interest (total $55,323). See Note 10.
As of September 30, 2019, the Company’s
general counsel held five notes issued by the Company. One such note reflected an amount due for legal services provided for the
year ended December 31, 2014 in the amount of $150,000. This note was payable by the Company on demand, together with accrued interest
at 4.5% APR. Another of these notes reflected an amount due for legal services provided for the year ended December 31, 2015 in
the amount of $120,000. This note was similarly payable on demand, together with accrued interest at 4.5% APR. A third note was
in the amount of $10,000, reflects funds advanced to the Company for working capital, was due on demand, together with accrued
interest at 12% APR. The fourth note of $7,000 reflected funds advanced to the Company for working capital on the basis of a 15-day
repayment obligation. The final note in the amount of $15,752, reflected funds advanced to Advanced Cement Sciences LLC for working
capital. No terms were set for this fifth note. On December 24, 2018, and in connection with the Company’s acquisition of
Advanced Cement Sciences LLC, the Company’s general counsel agreed to relinquish the previous respective rights of conversion
on the first three notes mentioned above. In June 2019, in exchange for the five separate notes mentioned above, the Company issued
a total of 33,873 shares of the Company’s Series RX-1 preferred stock in exchange for a cumulative $32,752 of debt owed,
inclusive of accrued interest (total $37,251) and a warrant for a total of 110,416 shares of the Company’s Series RX-3 preferred
stock in exchange for a cumulative of $270,000 of debt owed (total $324,856). In addition, the Company issued a warrant for a total
of 77,257 shares of the Company’s Series RX-3 preferred stock total in exchange for previously accrued contractor fees earned
through December 31, 2018 in the amount of $221,875, inclusive of accrued interest (total $227,300). See Note 10.
As of September
30, 2019, the Company had issued a total of seven (7) convertible notes to a certain related party investor and significant shareholder.
The first such note was in the amount of $100,000, was due on November 13, 2018, together with accrued interest at 10% APR, and
was convertible at $0.01 per share of common stock. The second such note was also in the amount of $100,000, was due on March 18,
2019, together with accrued interest at 10% APR, and was convertible at $0.01 per share of common stock. The third such note was
in the amount of $50,000, was due on May 12, 2019, together with accrued interest at 10% APR, and was convertible at $0.01 per
share of common stock. The fourth such note was in the amount of $200,000, was due on June 7, 2019, together with accrued interest
at 10% APR, and was convertible at $0.01 per share of common stock. The fifth such note was in the amount of $300,000, was due
on July 28, 2019, together with accrued interest at 10% APR, and was convertible at $0.01 per share of common stock. The
sixth such note was in the amount of $50,000, was due on demand, together with interest at 10% APR, and was convertible at $0.01
per share of common stock. And the seventh such note was in the amount of $50,000, was due on June 15, 2018, together with interest
at 10% APR, and was convertible at $0.01 per share of common stock. In June 2019, the Company issued
a total of 874,964 shares of the Company’s Series RX-1 preferred stock in exchange for the cumulative $850,000 of debt owed,
inclusive of accrued interest (total $1,140,015). See Note 10.
As of September 30, 2019, one of the Company’s
directors previously held two convertible notes issued by the Company. The first note, issued to the director personally for director’s
fees earned through September 15, 2016, was in the face amount of $20,500, due on demand, together with accrued interest at 4.5%
APR, and was convertible at $0.007 per share of common stock. The second note, issued to the director for director’s fees
earned through June 30, 2017, was in the face amount of $9,500, was similarly due on demand, together with accrued interest at
4.5% APR, and was convertible at $0.015 per share of common stock. In June 2019, the Company issued a warrant for a total of 66,966
shares of the Company’s Series RX-2 preferred stock in exchange for $30,000 of debt owed, inclusive of accrued interest (total
$33,483). In addition, the Company issued a warrant for a total of 36,882 shares of the Company’s Series RX-2 preferred stock
in exchange for previously accrued director’s fees earned through December 31, 2018 in the amount of $18,000, inclusive of
accrued interest (total $18,441). See Note 10.
The Company accrued payroll earned, by related
parties, during the nine months ended September 30, 2019 and the year ended December 31, 2018, respectively, in the total amount
of $0 and $182,396 for the Company’s president and chief executive officer and controller.
As of September
30, 2019, the Company’s president and chief executive officer previously held two notes issued by the Company. The first
note represented previously accrued base salary earned through September 15, 2016 in the amount of $349,329, was due on
demand, together with accrued interest at 4.5% APR. The second note represented previously accrued base salary earned through June
30, 2017 in the amount of $87,532, was due on demand, together with accrued interest at 4.5% APR. On
December 24, 2018, and in connection with the Company’s acquisition of Advanced Cement Sciences LLC, the Company’s
president and chief executive officer agreed to relinquish the previous respective rights of conversion on these two notes. In
June 2019, the Company issued a warrant for a total of 170,009 shares of the Company’s Series RX-3 preferred stock in exchange
for the $436,861 of debt owed for the two notes, inclusive of accrued interest (total $489,566). In addition, the Company issued
a warrant for a total of 41,724 shares of the Company’s Series RX-3 preferred stock in exchange for previously accrued base
salary earned through December 31, 2018 in the amount of $117,327, inclusive of accrued interest (total $120,150). See Note
10.
As of September
30, 2019, the Company’s controller previously held two notes issued by the Company. The first note represented previously
accrued base salary earned through September 15, 2016 in the amount of $134,604, was due on demand, together with accrued interest
at 4.5% APR. The second note represented previously accrued base salary earned through June 30,
2017 in the amount of $28,010, was due on demand, together with accrued interest at 4.5% APR. On December
24, 2018, and in connection with the Company’s acquisition of Advanced Cement Sciences LLC, the Company’s controller
agreed to relinquish the previous respective rights of conversion on these two notes. In June 2019, the Company issued a warrant
for a total of 63,291 shares of the Company’s Series RX-3 preferred stock in exchange for the $162,614 of debt owed for the
two notes, inclusive of accrued interest (total $182,413). In addition, the Company issued a warrant for a total of 18,515 shares
of the Company’s Series RX-3 preferred stock in exchange for previously accrued base salary earned through December 31, 2018
in the amount of $52,108, inclusive of accrued interest (total $53,362). See Note 10.
As of September
30, 2019, an independent contractor who had been the president of one of EcoSmart’s divisions prior to the merger
with the Company, who is also shareholder of the Company, previously held one convertible note representing accrued earnings in
the amount of $25,700. In June 2019, the Company issued the holder of the note a warrant for a total
of 58,006 shares of the Company’s Series RX-2 preferred stock in exchange for $25,700 of debt owed, inclusive of accrued
interest (total $29,003). See Note 10.
During the nine months ended September 30,
2019 and 2018, the Company recorded revenue for sales to related parties (also minority shareholders) in the amount of $29,920
and $59,7693, respectively. For the nine months ended September 30, 2019, one related party accounted for approximately 3% of Company
revenue, a second related party accounted for approximately 2%, and, as a group, the sales to related parties accounted for approximately
5% of Company revenues. These revenues are recorded as revenue, related party on the Company’s Condensed Consolidated Statements
of Operations.
NOTE 13 – DISCONTINUED OPERATIONS
As of September 30, 2019 and December 31, 2018,
the Company has presented $114,368 of Accrued royalties in discontinued operations. The royalties pertain to the Company’s
sale of the QuickVerse® product line in 2011. See Note 1.