NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Q2Power Technologies, Inc.
(hereinafter the “Company”) was incorporated in Delaware on August 26, 2004. The Company is primarily a holding
company for its sole subsidiary, Q2Power Corp. Formerly, the Company’s name was Anpath Group, Inc. (“Anpath”).
Q2Power Corp. (the
“Subsidiary” or “Q2P”), has operated a renewable power R&D company focused on the conversion of
waste to energy and other valuable “reuse” products since July 2014. The operations of the Company are
essentially those of the Subsidiary. In May 2016, the Company began exploring other synergistic business lines, such as
composting from waste water biosolids. Although no operations in these fields have commenced, management has made progress
towards identifying certain operational composting facilities in the U.S. for potential acquisition or partnership.
Moving forward, the Company intends to phase out its R&D activities and focus entirely on the business of compost and
engineered soils manufacturing and sales.
On
November 12, 2015, the Company and its special purpose merger subsidiary completed a merger (the “Merger”) with Q2P.
As a result of the Merger, all outstanding shares of Q2P were exchanged for 24,034,475 shares of the Company’s common stock.
In addition, the Company assumed both the Q2P 2014 Founders Stock Option Plan and the 2014 Employees Stock Option Plan (the “Option
Plans”), and 1,095,480 options outstanding thereunder. Also pursuant to the Merger, the officers and directors of Q2P assumed
control over the management and Board of Directors of the Company. Subsequent to the Merger, the Company officially changed its
name to Q2Power Technologies, Inc.
On
December 1, 2015, in connection with the Merger the Company also sold its prior operating subsidiary, EnviroSystems Inc. (“ESI”),
to three former shareholders in exchange for a return of 470,560 shares of the Company’s common stock. ESI assumed all debt,
payables and a litigation judgment that was on its books as of the Merger date.
On
February 12, 2016, the Board of Directors of the “Company approved a change in the fiscal year end for the Company from
March 31 to December 31. This change is a result of the Merger, and reflects the fiscal year-end period for Q2P.
NOTE
2 – BASIS OF PRESENTATION AND GOING CONCERN
The Company has incurred
net losses of $1,497,723 and $3,536,021 for the years ended December 31, 2016 and 2015, respectively. The accumulated deficit
since inception is $6,863,103, which is comprised of operating losses (which were paid in cash, stock for services and other equity
instruments) and other expenses. The Company has a working capital deficit at December 31, 2016 of $1,766,620. These conditions
raise substantial doubt about the Company’s ability to continue as a going concern. There is no guarantee whether
the Company will be able to generate enough revenue and/or raise capital sufficient to support its operations. The ability of
the Company to continue as a going concern is dependent on management’s plans which include implementation of its business
model to generate revenue from power purchase agreements, product sales, and continuing to raise funds through debt or equity
offerings. The Company will also likely continue to rely upon related-party debt or equity financing, which may not be available
at the time required by the Company or under terms favorable to the Company. See also Note 13, Subsequent Events.
The
consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
U.S.
Generally Accepted Accounting Principles (“GAAP”) requires the Company to make judgments, estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements, the reported amounts of revenues and expenses, cash flows and the related footnote disclosures
during the period. On an on-going basis, the Company reviews and evaluates its estimates and assumptions, including, but not limited
to, those that relate to the realizable value of identifiable intangible assets and other long-lived assets, derivative liabilities,
income taxes and contingencies. Actual results could differ from these estimates.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The consolidated financial
statements include the accounts of the Company and its Subsidiary. All significant inter-company transactions and balances have
been eliminated in consolidation. References herein to the Company include the Company and its Subsidiary, unless the context
otherwise requires.
Cash
The
Company considers all unrestricted cash, short-term deposits, and other investments with original maturities of no more than ninety
days when acquired to be cash and cash equivalents for the purposes of the statement of cash flows. The Company maintains cash
balances at two financial institutions, and has experienced no losses with respect to amounts on deposit.
Revenue
Recognition
Revenue
from the Company’s waste-to-power operations is recognized at the date of shipment of engines and systems, engine prototypes,
engine designs or other deliverables to customers when a formal arrangement exists, the price is fixed or determinable, the delivery
or milestone deliverable is completed, no other significant obligations of the Company exist and collectability is reasonably
assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as deferred
revenue. The Company will not allow its customers to return prototype products.
For
the year ended December 31, 2016, the Company recognized revenue $40,000 related to the first achieved milestone and delivery
under a technology sales agreement. The Company also received an additional $50,000 upon signing of that agreement, which is accounted
for as deferred revenue that will be recognized upon contract completion. In 2015, the Company recognized revenue of $20,000 related
to two engineering services agreements with one customer.
Research
and Development
Research and development
activities for product development are expensed as incurred and are primarily comprised of salaries. Costs for years ended
December 31, 2016 and 2015 were $352,583 and $1,423,769, respectively.
Stock
Based Compensation
The
Company applies the fair value method of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 718, “
Share Based Payment
”, in accounting for its stock based compensation. This standard
states that compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service
period, which is usually the vesting period. The Company values stock based compensation at the market price for the Company’s
common stock and other pertinent factors at the grant date.
The
Company accounts for transactions in which services are received from non-employees in exchange for equity instruments based on
the fair value of the equity instruments exchanged, in accordance with ASC 505-50, “
Equity Based payments to Non-employees
”.
The Company measures the fair value of the equity instruments issued based on the market price of the Company’s stock at
the time services or goods are provided.
Common
Stock Options
The
Black-Scholes option pricing valuation method is used to determine fair value of these options consistent with ASC 718, “
Share
Based Payment”.
Use of this method requires that the Company make assumptions regarding stock volatility, dividend yields,
expected term of the awards and risk-free interest rates.
Derivatives
Derivatives
are recognized initially at fair value. Subsequent to initial recognition, derivatives are measured at fair value, and changes
are therein generally recognized in profit or loss.
Software,
Property and Equipment
Software,
property and equipment are recorded at cost. Depreciation is computed on the straight-line method, based on the estimated useful
lives of the assets as follows:
|
Years
|
Software
|
2
|
Furniture
and equipment
|
7
|
Computers
|
5
|
Expenditures
for maintenance and repairs are charged to operations as incurred.
Impairment
of Long Lived Assets
The
Company continually evaluates the carrying value of intangible assets and other long lived assets to determine whether there are
any impairment losses. If indicators of impairment are present and future cash flows are not expected to be sufficient to recover
the assets’ carrying amount, an impairment loss would be charged to expense in the period identified. To date, the Company
has not recognized any impairment charges.
Income
Taxes
Income
taxes are accounted for under the asset and liability method as stipulated by FASB ASC 740, “Income Taxes” (“ASC
740”). 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 and operating loss
and tax credit carry forwards. 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. Under ASC 740, the effect on
deferred tax assets and liabilities or a change in tax rate is recognized in income in the period that includes the enactment
date. Deferred tax assets are reduced to estimated amounts to be realized by the use of a valuation allowance. A valuation allowance
is applied when in management’s view it is more likely than not (50%) that such deferred tax will not be utilized.
In
the event that an uncertain tax position exists in which the Company could incur income taxes, the Company would evaluate whether
there is a probability that the uncertain tax position taken would be sustained upon examination by the taxing authorities. Reserves
for uncertain tax positions would be recorded if the Company determined it is probable that a position would not be sustained
upon examination or if payment would have to be made to a taxing authority and the amount is reasonably estimated. As of December
31, 2016, the Company does not believe it has any uncertain tax positions that would result in the Company having a liability
to the taxing authorities. Interest and penalties related to the unrecognized tax benefits is recognized in the consolidated financial
statements as a component of income taxes.
Basic
and Diluted Loss Per Share
Net loss per share is
computed by dividing the net loss less preferred dividends by the weighted average number of common shares outstanding during
the period. Diluted net loss per share is calculated by dividing the net loss less preferred dividends by the weighted average
number of common shares outstanding during the period plus any potentially dilutive shares related to the issuance of stock options,
shares from the issuance of stock warrants, shares issued from the conversion of redeemable convertible preferred stock
and shares issued from the conversion of convertible debt. There were no dilutive shares as of December 31, 2016 and 2015.
At December 31, 2016,
there were the following potentially dilutive securities that were excluded from diluted net loss per share because their effect
would be anti-dilutive: 6,115,480 shares from common stock options, 1,568,845 shares from common stock warrants, 785,714 shares
from the conversion of debentures, 126,923 shares from the conversion of notes payable, 413,719 shares from the conversion of
notes payable – related parties and 2,857,142 shares from the conversion of redeemable convertible preferred stock. At December
31, 2015, there were the following potentially dilutive securities that were excluded from diluted net loss per share because
their effect would be anti-dilutive: 1,745,480 shares from common stock options, 1,376,538 shares from common stock warrants,
2,075,000 shares from the conversion of debentures and 2,380,952 shares from the conversion of redeemable convertible preferred
stock. Subsequent to December 31, 2016, the Company completed a convertible debt offering which resulted in an additional amount
of potentially dilutive shares upon the conversion of these securities (see Note 13 – Subsequent Events).
Recent
Accounting Pronouncements
In
May 2014, the FASB issued Accounting Standards Update (“ASU”), No. 2014-09, “
Revenue from Contracts with
Customers
”, to replace the existing revenue recognition criteria for contracts with customers and to establish the disclosure
requirements for revenue from contracts with customers. The ASU is effective for interim and annual periods beginning after December
15, 2017. Adoption of the ASU is either retrospective to each prior period presented or retrospective with a cumulative adjustment
to retained earnings or accumulated deficit as of the adoption date. The Company is currently assessing the future impact of the
ASU on its consolidated financial statements; however, in light of the material changes in the Company’s business model
which have occurred after December 31, 2016, the Company expects to do further review in the second quarter of 2017.
In
August 2014, the FASB issued ASU No. 2014-15, “
Presentation of Financial Statements – Going Concern
”,
to provide guidance within GAAP requiring management to evaluate whether there is substantial doubt about an entity’s ability
to continue as a going concern and requiring related disclosures. The ASU is effective for annual periods ending after December
15, 2016. The Company adopted this ASU effective December 31, 2016. The adoption of this ASU did not have a material impact to
the Company’s financial position, results of operations or cash flows.
In
November 2015, the FASB issued ASU No. 2015-17, “
Balance Sheet Classification of Deferred Assets
”, requiring
management to provide a classification of all deferred taxes as noncurrent assets or noncurrent liabilities. This ASU is effective
for annual periods beginning after December 15, 2016. The Company does not anticipate this ASU will have a material impact to
the Company’s financial position, results of operations or cash flows.
In January 2016, the FASB
issued ASU No. 2016-01, “
Recognition and Measurement of Financial Assets and Financial Liabilities
”, requiring
management to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This
ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The
Company is currently assessing the impact of the ASU on its financial position, results of operations or cash flows.
In February 2016, the
FASB issued ASU No. 2016-02, “
Leases (Topic 842) (the Update)
”, requiring management to recognize any right-to-use-asset
and lease liability on the statement of financial position for those leases previously classified as operating leases. The criteria
used to determine such classification is essentially the same as under the previous guidance, but it is more subjective. The lessee
would classify the lease as a finance lease if certain criteria at lease commencement are met. This ASU is effective for fiscal
years beginning after December 15, 2018. The Company is currently assessing the impact of the ASU on its financial position,
results of operations or cash flows.
In March 2016, the FASB
issued ASU 2016-06, “
Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (a consensus
of the FASB Emerging Issues Task Force)
”, which applies to all entities that are issuers of or investors in debt instruments
(or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options, and requires that
embedded derivatives be separated from the host contract and accounted for separately as derivatives if certain criteria are met.
One criterion is that the economic characteristics and risks of the embedded derivatives are not clearly and closely related to
the economic characteristics and risks of the host contract. This ASU is effective for financial statements issued for fiscal
years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including
adoption in an interim period. The Company is currently assessing the impact of the ASU on its financial position, results
of operations or cash flows.
In March 2016, the FASB
issued ASU 2016-09, “
Improvements to Employee Share-Based Payment Accounting
,” which amends ASC Topic 718,
“
Compensation – Stock Compensation
.” The ASU includes provisions intended to simplify various aspects
related to how share-based payments are accounted for and presented in the financial statements, including the income tax effects
of share-based payments and accounting for forfeitures. This ASU is effective for public business entities for annual reporting
periods beginning after December 15, 2016, and interim periods within that reporting period. The Company is currently assessing
the impact of the ASU on its financial position, results of operations or cash flows.
In August 2016, the FASB
issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments. This standard
amends and adjusts how cash receipts and cash payments are presented and classified in the statement of cash flows.
ASU 2016-15
is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and will require
adoption on a retrospective basis unless impractical. If impractical the Company would be required to apply the amendments prospectively
as of the earliest date possible. The Company is currently evaluating the impact that
ASU 2016-15
will have on its financial
position, results of operations or cash flows.
Concentration of Risk
The Company does not have
any off-balance sheet concentrations of credit risk. The Company expects cash and accounts receivable to be the two assets most
likely to subject the Company to concentrations of credit risk. The Company’s policy is to maintain its cash with high credit
quality financial institutions to limit its risk of loss exposure.
The Company historically
purchased much of its machined parts through Precision CNC, a related party company that sub-let office space to Q2P through
June 27, 2016 and owns a non-controlling interest in the Company. See Note 6.
NOTE
4 – SOFTWARE, PROPERTY AND EQUIPMENT, NET
Software,
property and equipment, net consists of the following:
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
Software
|
|
$
|
-
|
|
|
$
|
83,735
|
|
Furniture and Computers
|
|
|
1,328
|
|
|
|
51,643
|
|
Shop Equipment
|
|
|
9,540
|
|
|
|
9,540
|
|
Total
|
|
|
10,868
|
|
|
|
144,918
|
|
Accumulated depreciation
and amortization
|
|
|
4,136
|
|
|
|
44,184
|
|
Net software,
property and equipment
|
|
$
|
6,732
|
|
|
$
|
100,734
|
|
At
December 31, 2015, the Company had software under capital leases with gross value of $24,671, net of accumulated depreciation
and amortization of $15,419. The software was included in the disposal of assets to Precision CNC discussed below in Note 6; however,
the Company must continue to pay all outstanding amounts under the capital leases, a balance of $1,586 as of December 31, 2016.
Depreciation
and amortization expense for the years ended December 31, 2016 and 2015 was $27,520 and $39,866, respectively.
The
Company disposed of $70,495 of net software, property and equipment for the settlement of related party accounts payable in 2016
(see Note 6).
NOTE
5 – CYCLONE LICENSE RIGHTS AND DEFERRED REVENUE
In
2014, Q2P purchased for $175,000 certain licensing rights to use Cyclone’s patented technology on a worldwide, exclusive
basis for 20 years with two 10-year renewal terms for Q2P’s waste heat and waste-to-power business. This agreement contains
a royalty provision equal to 5% of gross sales payable to Cyclone on sales of engines derived from technology licensed from Cyclone.
Also, as part of the separation from Cyclone, Q2P assumed a license agreement between Cyclone and Phoenix Power Group, which included
deferred revenue of $250,000 from payments previously made to Cyclone for undelivered products.
The
net balances as of December 31, 2016 and 2015 for the Cyclone licensing rights were $69,271 and $113,021, respectively, and the
net balances as of December 31, 2016 and 2015 for the Phoenix deferred revenue were both $250,000, which are included as a component
of deferred revenue on the consolidated balance sheets. Under the terms of the revised agreement with Phoenix Power Group, revenue
associated with these deferrals will be recognized subject to the achievement of certain milestones, as follows: (1) on the completion
of certain performance testing of the engine, deferred revenue of $150,000 will be recognized; and (2) on the delivery of the
first 10 “Generation 1 Engines”, other deferred revenue will be recognized at a rate of $10,000 per delivered engine.
In
connection with the separation from Cyclone, the Company also assumed a contract with Clean Carbon of Australia and a corresponding
$10,064 prepayment for services or other value to be provided in the future. This deposit has been presented as deferred revenue
on the December 31, 2016 and 2015 consolidated balance sheets.
The
licensing rights are amortized over its estimated useful life of 4 years. Amortization expense for the years ended December 31,
2016 and 2015 was $43,750 and $43,750, respectively.
NOTE
6 – RELATED PARTY TRANSACTIONS
Expenses
prepaid with common stock at December 31, 2016 and 2015 totaled $0 and $43,333, respectively. The balance at December 31, 2015
relates to stock issued to GBC for future services with a remaining amount of $119,167, and shares purchased by the CEO and paid
for through salary deductions with a remaining amount of $16,154. Our CEO is a Managing Director of GBC, although he has no equity
or voting rights in GBC.
Through
June 2016, the Company sub-leased approximately 2,500 square feet of assembly, warehouse and office space within the Precision
CNC facility located at 1858 Cedar Hill Road in Lancaster, Ohio. The sublease provided for the Company to pay rent monthly in
the amount of $2,500, which covered space and some utilities. Occupancy costs for the years ended December 31, 2016 and 2015 were
$15,000 and $30,000, respectively. The sublease has been terminated as of June 27, 2016.
The Company also purchased
much of its machined parts through Precision CNC up until June 2016. Precision CNC owns a non-controlling interest in the
Company. For the years ended December 31, 2016 and 2015, the amounts paid to Precision CNC totaled $13,868 and $160,601, respectively,
and consisted of rent and research and development expenses for machined parts.
On
June 27, 2016, the Company and Precision CNC entered into an agreement to eliminate $49,299 in payables owed to Precision CNC
in return for the transfer of certain net assets of the Company with a remaining book value of $70,495, which included office
furniture, software and computer systems, and 50,000 shares of restricted common stock valued at $10,500. The Company recorded
a loss on this transaction in the amount of $31,696. Accounts payable and accrued expenses at December 31, 2016 and December 31,
2015 include $0 and $31,048, respectively, to Precision CNC.
The
Company also maintains an executive office in Florida, which is leased by GBC and is used by the Company’s CEO. The Company
has no formal agreement for this space, but paid GBC $0 and $10,000 for the space for the years ended December 31, 2016 and 2015,
respectively.
During
2016 members of the Company’s Board of Directors made several loans and advances to the Company, as follows:
●
On
January 8, 2016, a member of the Board of Directors made an advance to the Company totaling $10,500 with a 6% per annum
rate, payable on demand. As of December 31, 2016, such advance is still outstanding.
●
On April 29, 2016, the Company’s three independent Directors loaned the Company a total of $60,200 pursuant to three Convertible
Notes which are automatically convertible into the equity securities issued in the Company’s next financing of at least
$1,000,000 at the same price and same terms. The Convertible Notes bear 8% interest and have a 10% Original Issuance Discount.
The total principal amount of all three Notes was $66,000. The total original issuance discount of $5,800 was recognized as
a component of financing costs in the consolidated statement of operations for the year ended December 31, 2016. The Notes matured
October 2016, and can be converted to common stock at $0.26 per share if a qualified financing event has not occurred by such
time. As of December 31, 2016, these notes are still outstanding.
●
On June 13, 2016, one of the Company’s independent directors loaned $15,000 to the Company on the same terms as the April
2016 notes, with a principal amount of $16,667. The original issuance discount of $1,667 was recognized as a component of financing
costs in the consolidated statement of operations for the year ended December 31, 2016. As of December 31, 2016, this note is
still outstanding.
●
In September 2016, three of the Company’s Directors advanced $1,000 each for payment of insurance premiums. In November
and December 2016, the three Directors made six additional advances to the Company in the aggregate amount of $11,400.
There were no formal terms for these advances; however, the Company imputed 8% per annum interest in connection with the March
2017 conversion advances into the Convertible Promissory Note Bridge offering (see below). As of December 31, 2016, these advances
are still outstanding.
In March 2017, all outstanding
Director notes and advances with an aggregate amount outstanding of
$156,368
were
converted into the Company’s new $1,500,000 Convertible Promissory Note Bridge offering (see Note 13, Subsequent Events).
NOTE
7 – INCOME TAXES
A
reconciliation of the differences between the effective income tax rates and the statutory federal tax rates for the years ended
December 31, 2016 and 2015 (computed by applying the U.S. Federal corporate tax rate of 34 percent to the loss before taxes) is
as follows:
|
|
2016
|
|
|
2015
|
|
Tax benefit at U.S. statutory
rate
|
|
$
|
509,226
|
|
|
$
|
1,202,247
|
|
State taxes, net of federal benefit
|
|
|
—
|
|
|
|
—
|
|
Stock and stock based compensation
|
|
|
(362,519
|
)
|
|
|
(350,942
|
)
|
Net derivative expenses
|
|
|
274,724
|
|
|
|
(44,659
|
)
|
Amortization of preferred stock discount
|
|
|
(46,779
|
)
|
|
|
(4,587
|
)
|
Other permanent differences
|
|
|
(24,877
|
)
|
|
|
(1,213
|
)
|
Increase in valuation
allowance
|
|
|
(349,775
|
)
|
|
|
(800,846
|
)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The
tax effect of temporary differences that give rise to significant portions of the deferred tax assets and liabilities for the
years ended December 31, 2016 and 2015 consisted of the following:
|
|
2016
|
|
|
2015
|
|
Net operating loss carry-forward
|
|
$
|
1,410,055
|
|
|
$
|
1,165,617
|
|
Deferred tax assets –
accrued salaries
|
|
|
79,412
|
|
|
|
(14,656
|
)
|
Deferred tax assets –
accrued interest
|
|
|
11,269
|
|
|
|
—
|
|
Depreciation expense
|
|
|
509
|
|
|
|
509
|
|
Net deferred tax assets
|
|
|
1,501,245
|
|
|
|
1,151,470
|
|
Valuation allowance
|
|
|
(1,501,245
|
)
|
|
|
(1,151,470
|
)
|
Total net deferred
tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
At
December 31, 2016 and 2015, the Company had net deferred tax assets of $1,501,245 and $1,151,470 principally arising from net
operating loss carry-forwards for income tax purposes. As management of the Company cannot determine that it is more likely than
not that the Company will realize the benefit of the net deferred tax asset, a valuation allowance equal to the net deferred tax
asset has been established at December 31, 2016 and 2015. At December 31, 2016, the Company has net operating loss carry forwards
totaling $4,766,850, which will begin to expire in 2034.
The
Company’s NOL and tax credit carryovers may be significantly limited under the Internal Revenue Code (IRC). NOL and tax
credit carryovers are limited under Section 382 when there is a significant “ownership change” as defined in the IRC.
During the year ended December 31, 2016 and in prior years, the Company may have experienced such ownership changes, which could
impose such limitations.
The
limitations imposed by the IRC would place an annual limitation on the amount of NOL and tax credit carryovers that can be utilized.
When the Company completes the necessary studies, the amount of NOL carryovers available may be reduced significantly. However,
since the valuation allowance fully reserves for all available carryovers, the effect of the reduction would be offset by a reduction
in the valuation allowance.
NOTE
8 – NOTES PAYABLE AND DEBENTURES
On
July 2, 2014, the Company (then Anpath, under different management) closed a financing by which one accredited investor purchased
two Original Issue Discount Senior Secured Convertible Debentures (the “Debentures”) in the total aggregate principal
amount of $435,500 due March 31, 2015, and a Common Stock Purchase Warrant to purchase a total of 415,000 shares at $2.45 per
share (based on post 7:1 reverse split numbers), exercisable for a period of five years.
The
Debentures do not bear interest, but contained an Original Issue Discount of $20,750. All assets of the Company are secured under
the Debentures, including our Subsidiary and its assets. The Debentures and warrants contain certain anti-dilutive protection
provisions in the instance that the Company issues stock at a price below the stated conversion price of the debentures, as well
as other standard protections for the holder.
On
September 23, 2015, the Company entered into a Modification and Extension Agreement with the two holders to modify the terms of
the Debentures to extend the maturity date to July 31, 2016, and reset the conversion price of the Debentures to $0.21. Pursuant
to the Merger, the Debentures and warrants remained an outstanding obligation of the Company, thus were assumed by Q2P.
In January 2016, another
accredited investor purchased $105,000 in outstanding principal amount of the Debentures from the current holder. The Company
did not receive any consideration in this transaction as it was a transfer amongst the holders of the Debentures.
In March 2017, the Company
entered into a second Modification and Extension Agreement with the two holders to extend the maturity date to July 31, 2017, reset
the conversion price to $0.15, and waive any defaults under the Debentures. The warrants’ exercise price, which had been
reset to $0.50 per verbal agreement of the parties in the third quarter of 2016, was formally documented under this March 2017
modification agreement.
During the year ended December
31, 2016, aggregate principal of $270,750 was converted to 1,289,285 shares of common stock (see Note 9).
On
March 15, 2016, the Company entered into a 120-day term note payable with one accredited investor in the principal amount
of $150,000. The note bears 20% interest with interest payments due monthly. The Company incurred issuance costs of 100,000
shares of common stock valued at $26,000, $3,000 cash and provided a second security interest in the assets of the Company to
the holders. Issuance costs expensed during the year ended December 31, 2016 were $29,000. At December 31, 2016, the issuance
costs had been fully amortized and the loan balance was $150,000, and accrued interest related to the note was $11,667. This loan
matured on July 15, 2016, and a 10% late penalty was assessed on July 15, 2016.
On
March 22, 2017, the Company and the note holder entered into an Addendum to the loan agreement which extended the maturity
date to December 31, 2017, allowed for conversion of the principal amount and accrued interest at the discretion of the holder
to common stock at a price of $0.15 per share, and waived all defaults in return for payment of $30,000 which included the late
fee and accrued but unpaid interest.
In May 2016, three investors
loaned to the Company a total of $26,709 pursuant to three notes, which are automatically convertible into the equity securities
issued in the Company’s next financing of at least $1,000,000 at the same price and same terms. These notes are the same
securities issued to the Company’s Directors in April and June 2016 (see Note 6). The notes bear 8% interest and have a
10% Original Issuance Discount. The total principal amount of all three notes was $33,000. The notes mature in six months, and
can be converted to common stock at $0.26 per share if a qualified financing event has not occurred by such time. In March 2017,
$11,000 of these notes were converted into the Company’s new $1,500,000 Convertible Promissory Note Bridge offering (see
Note 13, Subsequent Events). The remaining $22,000 of these notes remain are in default as of December 31, 2016.
NOTE
9 – FAIR VALUE MEASUREMENT AND DERIVATIVES
The
Company measures fair value in accordance with a fair value hierarchy that prioritizes the inputs to valuation techniques used
to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets
or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels
of the fair value hierarchy are described below:
Level
1
|
Unadjusted
quoted prices in active markets that are accessible at the measurement date for identical,
unrestricted assets or liabilities;
|
|
|
Level
2
|
Quoted
prices in markets that are not active, or inputs that are observable, either directly
or indirectly, for substantially the full term of the asset or liability; and
|
|
|
Level
3
|
Prices
or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported
by little or no market activity).
|
All derivatives recognized
by the Company are reported as derivative liabilities on the consolidated balance sheets and are adjusted to their fair value
at each reporting date. Unrealized gains and losses on derivative instruments are included in change in value of derivative liabilities
on the consolidated statements of operations.
The following two tables set forth the Company’s
consolidated financial assets and liabilities measured at fair value by level within the fair value hierarchy at December 31,
2016 and 2015. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant
to the fair value measurement.
|
|
Fair
value at
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2016
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Preferred stock embedded
conversion feature
|
|
$
|
123,266
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
123,266
|
|
Anti-dilution provision in common stock
warrants included with preferred stock
|
|
|
52,904
|
|
|
|
-
|
|
|
|
-
|
|
|
|
52,904
|
|
Debenture embedded conversion feature
|
|
|
25,884
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,884
|
|
Anti-dilution
provision in common stock warrants included with debentures
|
|
|
10,988
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,988
|
|
Total derivatives
|
|
$
|
213,042
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
213,042
|
|
|
|
Fair
value at
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2015
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Preferred stock embedded
conversion feature
|
|
$
|
376,065
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
376,065
|
|
Anti-dilution provision in common stock
warrants included with preferred stock
|
|
|
51,203
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51,203
|
|
Debenture embedded conversion feature
|
|
|
560,778
|
|
|
|
-
|
|
|
|
-
|
|
|
|
560,778
|
|
Anti-dilution
provision in common stock warrants included with debentures
|
|
|
79,943
|
|
|
|
-
|
|
|
|
-
|
|
|
|
79,943
|
|
Total derivatives
|
|
$
|
1,067,989
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,067,989
|
|
There
were no transfers between levels during the year ended December 31, 2016.
As part of the Merger,
the Company assumed debentures that are convertible into shares of common stock, which Anpath issued in July 2014 (see Note 8).
The debentures conversion price will be adjusted depending on various circumstances. The conversion options embedded in these
instruments contain no explicit limit to the number of shares to be issued upon settlement and as a result are classified as liabilities
under ASC 815. Additionally, the Company issued in connection with the debentures 415,000 warrants to purchase the Company’s
common stock. The conversion price will be adjusted depending on various circumstances, and as there is no explicit limit
to the number of shares to be issued upon settlement they are classified as liabilities under ASC 815.
The
terms of the convertible redeemable preferred stock (see Note 10) include an anti-dilution provision that requires an adjustment
in the common stock conversion ratio should subsequent issuances of the Company’s common stock be issued below the instruments’
original conversion price of $0.26 per share, subject to certain defined excluded issuances. In 2015 per a modification agreement
with the holder, the conversion price was reset to $0.21. Accordingly, we bifurcated the embedded conversion feature, which is
shown as a derivative liability recorded at fair value on the consolidated balance sheet.
The
agreement setting forth the terms of the common stock warrants issued to the holders of the convertible preferred stock (see Note
10) also includes an anti-dilution provision that requires a reduction in the warrant’s exercise price of $0.50 should the
conversion ratio of the convertible preferred stock be adjusted due to anti-dilution provisions. Accordingly, the warrants do
not qualify for equity classification, and, as a result, the fair value of the derivative is shown as a derivative liability on
the consolidated balance sheet.
During
2016, the two debenture holders converted a total of $270,750 of their debentures for 1,289,285 shares of common stock. Pursuant
to the conversion of these debentures, the Company reclassified a total of $125,975 of derivative liabilities to additional paid
in capital during 2016. The changes in fair value of these derivative liabilities were recorded in the consolidated statement
of operations until the date of conversion.
The following tables
present a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis that use
significant unobservable inputs (Level 3) and the related realized and unrealized (gains) losses recorded in the consolidated
statements of operations during the period:
|
Year
Ended December 31, 2016
|
|
|
Preferred
stock embedded conversion feature
|
|
|
Anti-dilution
provision in common stock warrants included with preferred stock
|
|
|
Debenture
embedded conversion feature
|
|
|
Anti-dilution
provision in common stock warrants included with debentures
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, December 31, 2015
|
|
$
|
376,065
|
|
|
$
|
51,203
|
|
|
$
|
560,778
|
|
|
$
|
79,943
|
|
|
$
|
1,067,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gain on derivatives
|
|
|
(277,337
|
)
|
|
|
(52,800
|
)
|
|
|
(408,919
|
)
|
|
|
(68,955
|
)
|
|
|
(808,011
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
and issuances (sales and settlements)
|
|
|
24,538
|
|
|
|
54,501
|
|
|
|
(125,975
|
)
|
|
|
—
|
|
|
|
(46,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, December 31, 2016
|
|
$
|
123,266
|
|
|
$
|
52,904
|
|
|
$
|
25,884
|
|
|
$
|
10,988
|
|
|
$
|
213,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in unrealized gains, included in income on instruments held at end of year
|
|
$
|
(277,337
|
)
|
|
$
|
(52,800
|
)
|
|
$
|
(408,919
|
)
|
|
$
|
(68,955
|
)
|
|
$
|
(808,011
|
)
|
|
|
Year Ended December 31,
2015
|
|
|
|
Preferred stock embedded
conversion feature
|
|
|
Anti-dilution provision
in common stock warrants included with preferred stock
|
|
|
Debenture embedded conversion
feature
|
|
|
Anti-dilution provision
in common stock warrants included with debentures
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, December 31, 2014
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized (gains)/loss on derivatives
|
|
|
205,509
|
|
|
|
23,503
|
|
|
|
(85,319
|
)
|
|
|
(12,163
|
)
|
|
|
131,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
and issuances
(sales and settlements)
|
|
|
170,556
|
|
|
|
27,700
|
|
|
|
646,097
|
|
|
|
92,106
|
|
|
|
936,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value, December 31, 2015
|
|
$
|
376,065
|
|
|
$
|
51,203
|
|
|
$
|
560,778
|
|
|
$
|
79,943
|
|
|
$
|
1,067,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized (gains)/losses, included in income on instruments held at
end of year
|
|
$
|
205,509
|
|
|
$
|
23,503
|
|
|
$
|
(85,319
|
)
|
|
$
|
(12,163
|
)
|
|
$
|
131,530
|
|
The Company’s derivative
liabilities are valued by using Monte Carlo Simulation methods, which simulate a range of possible future stock prices and
estimates the probabilities and timing of future financing events. Where possible, the Company verifies the values produced
by its pricing models to market prices. Valuation models require a variety of inputs, including contractual terms, market prices,
yield curves, credit spreads, measures of volatility and correlations of such inputs. These derivative liabilities do not trade
in liquid markets, and as such, model inputs cannot generally be verified and do involve significant management judgment. Such
instruments are typically classified within Level 3 of the fair value hierarchy. The following assumptions were used to value
the Company’s derivative liabilities at December 31, 2016: dividend yield of -0-%, volatility of 63.86 – 115.9%, risk
free rates of 0.85 - 1.93% and an expected term of 0.6 years to 4.0 years.
During 2016, the Company
continues to refine its estimates and has updated the volatility used in its valuation models and the underlying number of shares
of common stock for the derivative warrants. The net impact of these adjustments resulted in a $117,456 decrease in the fair value
of derivative liabilities during the year ended December 31, 2016, which could have been reflected as part of the estimated fair
value of these derivative liabilities at December 31, 2015. However, the Company recorded these true-up adjustments during 2016
given the inherent estimated nature of Level 3 fair value measures. The Company recorded a total gain of $808,011 and loss
of $131,530 for the change in fair value of all the Level 3 derivatives during the years ended December 31, 2016 and 2015, respectively.
NOTE
10 – COMMON STOCK, PREFERRED STOCK AND WARRANTS
Common
Stock
During
2016, the Company issued 3,027,204 shares of restricted common stock valued at $678,609. Details of these issuances are provided
below.
On
January 1, 2016, the Company issued 187,919 shares of restricted common stock valued at $49,859 as consideration for the payment
of accounts payable to vendors resulting in no gain or loss.
On
February 2, 2016, the two debenture holders converted a total of $40,000 of their debentures for 190,476 shares of common stock.
On
February 25, 2016, the Company issued 450,000 shares of restricted common stock valued at $117,000 to three key employees, including
its CTO. These employees were terminated during 2016; however, they were permitted to retain their shares upon termination.
On
March 11, 2016, one of the debenture holders converted $31,500 of their debentures for 150,000 shares of restricted common stock.
On
March 15, 2016, the Company issued 100,000 shares of restricted common stock to the holder of the Company’s 120-day term
loan valued at $26,000 for the fair value of the services rendered related to this loan.
On
April 8, 2016, the Company issued 100,000 shares of restricted common stock valued at $26,000 to a consultant in connection with
the negotiation of the settlement with Cyclone.
On
June 22, 2016, one debenture holder converted a total of $31,500 of its debenture for 150,000 shares of common stock.
On
June 27, 2016, the Company issued 50,000 shares of restricted common stock valued at $10,500 as partial consideration for the
payment of accounts payable to an affiliated vendor.
Between
July 11, 2016 and August 16, 2016, the two debenture holders converted a total of $167,750 of their debentures for 798,809 shares
of restricted common stock.
Between
July 20, 2016 and August 9, 2016, six accredited investors purchased a total of 750,000 shares of restricted common stock at a
price of $0.21 per share for $157,500.
On
October 1, 2016, the Company issued 100,000 shares of restricted common stock valued at $21,000 to a consultant for services rendered
during the fourth quarter of 2016.
Redeemable
Convertible Preferred Stock
On January 11, 2016,
the Company issued 100 shares of Redeemable Convertible Preferred Stock (the “Preferred Stock”) for proceeds of $100,000
to an accredited investor. The Company issued 500 shares of Preferred Stock to another accredited investor for $500,000 in December
2015.
The
Company’s Preferred Stock was convertible at $0.21 per share of the Company’s common stock (the “Conversion
Price”) as of September 30, 2016. In March 2017, that conversion price was reset to $0.15 per the terms of a Modification
and Extension Agreement. The Preferred Stock bears a 6% dividend per annum, calculable and payable per quarter in cash or additional
shares of common stock as determined in the Certificate of Designation. The Preferred Stock has no voting rights until converted
to common stock, and has a liquidation preference equal to the Purchase Price. On the second anniversary of the Original Issue
Date (the “Two Year Redemption Date”), the Company is obligated to redeem all of the then outstanding Preferred Stock,
for an amount in cash equal to the Two Year Redemption Amount (such redemption, the “Two Year Redemption”). Each share
of Preferred Stock receives warrants (the “Warrants”) equal to one-half of the Purchase Price to purchase common stock
in the Company exercisable for five (5) years following closing at a price of $0.50 per share.
The
Preferred Stock has price protection provisions in the case that the Company issues any shares of stock not pursuant to an “Exempt
Issuance” at a price below the Conversion Price. Exempt Issuances include: (i) shares of Common Stock or common stock equivalents
issued pursuant to the Merger or any funding contemplated by the Merger; (ii) any common stock or convertible securities outstanding
as of the date of closing; (iii) common stock or common stock equivalents issued in connection with strategic acquisitions; (iv)
shares of common stock or equivalents issued to employees, directors or consultants pursuant to a plan, subject to limitations
in amount and price; and (v) other similar transactions. The Certificate of Designation contains restrictive covenants not to
incur certain debt, repurchase shares of common stock, pay dividends or enter into certain transactions with affiliates without
consent of holders of 67% of the Preferred Stock. The unconverted shares of Preferred Stock must be redeemed in two years from
issuance.
Management
has determined that the Preferred Stock is more akin to a debt security than equity primarily because it contains a mandatory
2-year redemption at the option of the holder, which only occurs if the Preferred Stock is not converted to common stock. Therefore,
management has presented the Preferred Stock outside of permanent equity as mezzanine equity, which does not factor in to the
totals of either liabilities or equity. The proceeds have been allocated between the three features of the stock offering: the
embedded conversion feature in the Preferred Stock, the warrants, and the Preferred Stock itself. The fair values of the embedded
conversion feature and warrants were recorded as a discount against the stated value of the Preferred Stock on the date of issuance.
This discount is amortized to interest expense over the term of the redemption period (2 years), which will result in the accretion
of the Preferred Stock to its full redemption value. Unamortized discount as of December 31, 2016 and 2015 was $126,217 and $184,764,
respectively. Interest expense related to the preferred stock discount for the years ended December 31, 2016 and 2015 was $137,585
and $13,492, respectively.
The
Preferred Stock also carries a 6% per annum dividend calculated on the stated value of the stock and is cumulative and payable
quarterly beginning July 1, 2016. These dividends are accrued at each reporting period. They add to the redemption value of the
stock; however, as the Company shows an accumulated deficit, the charge has been recognized in additional paid-in capital. The
Company has accrued but not paid these dividends beginning July 1, 2016.
Warrants
The
following is a summary of all outstanding common stock warrants as of December 31, 2016:
|
|
Number
of warrants
|
|
|
Exercise
price per share
|
|
|
Average
remaining term in years
|
|
|
Aggregate
fair value
|
|
Warrants issued in connection
with issuance of Debentures
|
|
|
415,000
|
|
|
$
|
0.50
|
|
|
|
2.50
|
|
|
$
|
10,988
|
|
Warrants issued in connection with issuance
of Preferred Stock
|
|
|
1,153,845
|
|
|
$
|
0.50
|
|
|
|
3.95
|
|
|
$
|
52,904
|
|
NOTE
11 – STOCK OPTIONS AND RESTRICTED STOCK UNITS
On
July 31, 2014, the Board of Directors of Q2P approved the Founders Stock Option Plan (“Founders Plan”) and the 2014
Employee Stock Option Plan (the “2014 Plan”), collectively the “Option Plans”. The Option Plans were developed
to provide a means whereby directors and selected employees, officers, consultants, and advisors of the Company may be granted
incentive or non-qualified stock options to purchase restricted common stock of the Company. On February 25, 2016, to accommodate
the appointment of new Board members and additional incentive stock options and stock grants to key employees of the Company,
the Board approved the 2016 Omnibus Equity Incentive Plan (“2016 Plan”), which allowed for an additional 4 million
shares of common stock, stock options, stock rights (restricted stock units), or stock appreciation rights to be granted by the
Board in its discretion.
In
recognition of and compensation for services rendered by employees for the year ended December 31, 2016, the Company issued 710,000
common stock options under the Founders Plan on February 25, 2016. Of these 710,000 options, all are vested as of December 31,
2016, and 40,000 options previously granted in 2015 were cancelled in 2016 due to termination of employment.
In
recognition of and compensation for services rendered by the Company’s Board Chairman, the Company issued 400,000 common
stock options under the 2014 Plan on February 25, 2016, which contained vesting provisions that provided for immediate vesting
of 200,000, and 200,000 on August 25, 2016.
In
recognition of and compensation for services rendered by employees and members of the Company’s Board of Directors, the
Company issued 3,300,000 common stock options, 450,000 restricted stock units and 450,000 shares of common stock under the 2016
Plan as follows:
On
February 25, 2016, the Company issued 1,800,000 common stock options to the Company’s Board Chairman, which contains provisions
for vesting upon the achievement of specific milestones. As of December 31, 2016, by action of the Board of Directors, all 1,800,000
were deemed vested.
The 450,000 restricted
stock units were issued on February 25, 2016, and provide for vesting in full on February 21, 2017; however, as of September 30,
2016, all these restricted stock units had been terminated as the relevant employees were no longer with the Company.
On
March 21, 2016, the Company issued 400,000 common stock options to a member of the Board of Directors, which provided for immediate
vesting of 200,000 shares and 200,000 shares vested on September 21, 2016.
In
June 2016, the Company issued 150,000 common stock options under the 2016 Plan to one new Board of Advisors Member. The options
vest one-half in six months and the balance in 12 months, with a 10-year term and exercisable at a price of $0.30 per share (re-priced
to $0.21 per share as discussed below).
In
August 2016, the Company issued 150,000 common stock options under the 2016 Plan to one new Board of Advisors Member. The options
vest one-half in six months and the balance in 12 months, with a 10-year term and exercisable at a price of $0.21 per share.
In
December 2016, the Company issued 800,000 common stock options under the 2016 Plan to two members of the Board of Directors. The
options vest one half in six months and the balance in 12 months, with a 5-year term and exercisable at a price of $0.21 per share.
Options
awarded under the Option Plans and the 2016 Plan for year ended December 31, 2016 were valued at $530,000 (pursuant to the Black
Scholes valuation model, and as shown in the table detailing the calculation of fair value below), with a weighted average exercise
price of $0.21 per share and with a weighted average contractual life of 5.5 years.
In October 2016,
per resolution of the Board of Directors, all outstanding stock options were reset to a $0.21 per share exercise price. The Company
recorded a corresponding expense of $157,225.
For the year ended December
31, 2016, the charge to the consolidated statements of operations for the amortization of stock option grants and restricted
stock units awarded under the Option Plans and the 2016 Plan was $665,680. The remaining unamortized stock option expense for
all outstanding stock options at December 31, 2016 was $142,339. On May 27, 2016, the majority of the employees of the Subsidiary
were terminated in an effort to reduce expenses, and were allowed to retain their options, which were immediately vested. The
expense related to the outstanding options previously granted to these terminated employees was recognized in full in this period
as they were no longer subject to a service requirement with respect to vesting of the award.
A
summary of the common stock options issued under the Option Plans and the 2016 Plan for the period from December 31, 2015 through
December 31, 2016 follows:
|
|
Number
Outstanding
|
|
|
Weighted
Avg. Exercise Price
|
|
|
Weighted
Avg. Remaining Contractual Life (Years)
|
|
Balance, December 31, 2014
|
|
|
714,000
|
|
|
$
|
0.11
|
|
|
|
8.1
|
|
Options issued
|
|
|
1,076,580
|
|
|
|
0.30
|
|
|
|
8.2
|
|
Options exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Options cancelled
|
|
|
(45,100
|
)
|
|
|
0.30
|
|
|
|
8.7
|
|
Balance, December 31, 2015
|
|
|
1,745,480
|
|
|
$
|
0.30
|
|
|
|
8.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options issued
|
|
|
4,410,000
|
|
|
|
0.21
|
|
|
|
4.5
|
|
Options exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Options cancelled
|
|
|
(40,000
|
)
|
|
|
(0.30
|
)
|
|
|
—
|
|
Balance, December 31, 2016
|
|
|
6,115,480
|
|
|
$
|
0.21
|
|
|
|
6.1
|
|
The
vested and exercisable options at period end follows:
|
|
Exercisable/
Vested Options Outstanding
|
|
|
Weighted
Avg. Exercise Price
|
|
|
Weighted
Avg. Remaining Contractual Life (Years)
|
|
Balance, December 31, 2016
|
|
|
4,917,147
|
|
|
$
|
0.21
|
|
|
|
6.1
|
|
The
fair value of new stock options granted using the Black-Scholes option pricing model was calculated using the following assumptions:
|
|
Year
Ended
December 31, 2016
|
|
Year
Ended
December 31, 2015
|
|
Risk
free interest rate
|
|
0.97%
- 1.79%
|
1.93%
- 2.35%
|
|
Expected
volatility
|
|
82.76%
- 83.14%
|
109.95%
- 152.10%
|
|
Expected
dividend yield
|
|
0%
|
0%
|
|
Expected
term in years
|
|
3.5
|
3.5
|
|
Average
value per options
|
|
$0.120
- $0.121
|
$0.178
- $0.230
|
|
Expected
volatility is based on historical volatility of two securities which the Company believes best match the characteristics of the
Company for purposes of measuring volatility in the absence of a market trading history of the Company’s common stock. Short
Term U.S. Treasury rates were utilized as the risk free interest rate. The expected term of the options was calculated using the
alternative simplified method codified as ASC 718 “
Accounting for Stock Based Compensation,
” which defined
the expected life as the average of the contractual term of the options and the weighted average vesting period for all issuances.
NOTE
12 – COMMITMENTS AND CONTINGENCIES
The
Company has an employment agreement with Christopher Nelson, CEO (the “Executive”). As of September 30, 2016, the
Company’s employment agreement with Sudheer Pimputkar, CTO, was terminated by mutual agreement.
Christopher
Nelson’s agreement provides for a term of three (3) years from its Effective Date (July 31, 2014), with automatically renewing
successive one-year periods starting on the end of the third anniversary of the Effective Date. If the Executive is terminated
“without cause” or pursuant to a “change in control” of the Company, as both defined in the respective
agreements, the Executive shall be entitled to (i) any unpaid Base Salary accrued through the effective date of termination, (ii)
the Executive’s Base Salary at the rate prevailing at such termination through 24 months from the date of termination or
the end of his Term then in effect, whichever is longer, and (iii) all of the Executive’s stock options shall vest immediately.
On
June 2, 2015, in connection with the Right Offering, the Company’s CEO agreed to an amendment to his employment agreement
reducing his base salary from $180,000 per year to $138,000, and cancelled $28,000 in debt owed to him by the Company. Also concurrently
with the closing of the Rights Offering, our CEO satisfied a promissory note he owed to the Company in the amount of $99,900 created
in connection with the 2014 exercise of his warrants, which were issued in 2010 related to his services previously rendered, by
returning to the Company 370,000 shares of common stock. The Company forgave $5,250 in accrued interest. All other provisions
detailed in the July 31, 2014 employment agreement remain unchanged.
As
of April 1, 2017, the Company and Mr. Nelson entered into a new employment agreement (see Note 13, Subsequent Events).
Sudheer
Pimputkar had an employment agreement providing $170,000 per year base salary for a term of one (1) year from its Effective Date
(April 1, 2015), with automatically renewing successive one year periods starting on the end of the first anniversary of the Effective
Date. The Company and Mr. Pimputkar mutually terminated the agreement at September 30, 2016, and agreed to a settlement of all
amounts owed to him on March 22, 2017 consisting of $13,985 in cash and $55,938 payable in 372,923 shares of restricted stock.
In June 2015, the Company implemented
a compensation package for a director who also serves as SEC counsel for $4,000 per quarter and 250,000 stock options
per year vesting quarterly with a 10-year term and exercisable at $0.27 per share (now $0.21 per share), which vested in July
2016. For the year ended December 31, 2016, the charge to the consolidated statement of operations was $16,000. The Company’s
third independent director received a package of 400,000 stock options, half vesting after six months and half six months later.
As of the end of 2016, all independent directors received the same compensation package of 400,000 options per year. The charge
to the consolidated statement of operations for these options was $6,717.
NOTE 13 - SUBSEQUENT EVENTS
On March 31, 2017, the
Company closed the initial $1,000,000 in a Convertible Promissory Note “Bridge” offering (the “Bridge Offering”).
The total size of the Bridge Offering is $1,500,000, with an additional $500,000 over-allotment option at the Company’s
discretion. As of May 24, 2017, the Company had raised $1,400,000 in the Bridge offering with an additional $168,151 old debt
converted into the offering.
The
Convertible Promissory Notes (the “Notes”) convert at a 50% discount to the post-funding valuation of the Company
at the closing of its next offering in the minimum amount of $5,000,000 (the “Equity Offering”). The conversion valuation
has a ceiling of $12,000,000, and a “floor” company value of $6,000,000 in the event there is no Equity Offering before
the Notes are able to be converted.
The
Notes convert into common stock, or preferred stock if received by investors in the Equity Offering, commencing on the earliest
of the Equity Offering closing or December 31, 2017, at the discretion of the holder. Maturity is 36 months from issuance
with 15% annual interest which will be capitalized each year into the principal of the Notes and paid in kind. There are no warrants
issued in connection with the Offering.
Funds
from the Bridge Offering will be used to secure acquisitions of compost and soil companies with closings expected to occur concurrently
with the closing of the Equity Offering, and up to 12 months of operating capital. A limited portion of the funds will also be
used to eliminate liabilities on the Company’s balance sheet. The Bridge Offering was led by two accredited investors, and
joined by 19 additional accredited investors which included $75,000 of new cash investments by the Company’s Directors,
as well as conversion of $156,368 of old notes and advances made by them in 2016 and 2017. Management conducted the Offering and
no broker fees were paid in connection with the initial closing. All securities issued in the Offering and debt settlements were
issued pursuant to an exemption from registration under Section4(a)(2) under the Securities Act of 1933.
As
provided in the Bridge Offering as of March 31, 2017, the Company settled or restructured approximately $800,000 in balance sheet
liabilities, as follows:
●
In
connection with settlements of $189,449 owed to former employees, the Company paid $52,123 to these employees and issued 915,506
shares of restricted common stock;
● The
Company’s CEO agreed to waive $112,797 in salary and fees owed to him, and converted $100,000 deferred salary into 666,667
shares of restricted common stock;
● Board
of Director members and other shareholders of the Company converted $168,152 of loans and advances made to the Company in 2016
into the Bridge Offering Notes;
● The
Company renegotiated its pre-existing convertible notes in the principal amount of $165,000 to extend the maturity date to July
31, 2017, set the conversion price at $0.15, and waive any defaults;
● The
Company amended its existing term loan to extend the maturity date to December 31, 2017, waive all defaults, and allow the holder
to convert the principal and accrued interest into common stock at a price of $0.15 per share at its discretion; and
● Management
is in the process of reaching settlements on approximately $200,000 in additional payables and contract liabilities.
On
December 28, 2016, the Board approved an issuance of 10 million shares of common stock to the Company’s Chairman and 5 million
shares to the CEO. These shares were not actually issued until February 2017, and have significant restrictions. To fully earn
his shares, by July 2017, the Company’s Chairman must join the Company as a senior executive on a full-time basis for a
period of at least 12 months, during which 12 month or extended period: (1) the Company must complete at least $3 million in funding
and (2) complete its first strategic acquisition. To fully earn his shares, the Company’s CEO must continue to serve the
Company as a senior executive on a full-time basis for a period of at least 18 months, during which 18 month or extended period:
(1) the Company must complete at least $3 million in funding and (2) complete its first strategic acquisition. If these conditions
are not met, the executives may forfeit all of their shares.
On
April 1, 2017, the Company entered into new Employment Agreements with its Chairman and CEO. The Chairman will receive a $12,500
per month fee upon the closing of the Bridge Offering and until assumes the role of CEO on a full-time basis, at which time, his
base salary will be increased to $350,000 per year. The Company’s current CEO will receive a $10,000 per month fee upon
the closing of the Bridge Offering, and at such time that the Chairman assumes the role of CEO, he will move into the position
of President and General Counsel at a base salary of $220,000 per year. Both agreements have provisions for a 12 month severance
in the instance either executive is terminated without cause or after a change in control.