Rego Payment Architectures, Inc. (formerly Virtual Piggy, Inc.)
Notes to the Financial Statements
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of the Business
Rego Payment Architectures, Inc. (formerly Virtual Piggy, Inc.) (the “Company”) was incorporated in the state of Delaware on February 11, 2008. Effective February 28, 2017, the Company changed its name from Virtual Piggy, Inc to Rego Payment Architectures, Inc.
The Company is a technology company that will deliver an online and mobile payment platform solution for the family. The system allows parents and their children to manage, allocate funds and track their expenditures, savings and charitable giving on both a mobile device and online through the Company’s web portal. The Company’s system is designed to allow a minor to transact both online and in traditional brick and mortar retail outlets using the telephone handset as a payment device. The new payment platform automatically monitors regulatory compliance in real-time for all transactions; including protection of vendors from unintended regulatory infractions. In addition utilizing the same architecture we allow individual parents to create a contract with each child that sets the rules and parameters of how the child may use the mobile payment system with as much or as little parental oversight as the parent determines is necessary. In addition, the Company is including specialized technology that increases and improves the security of the system and protects the user’s identity while in use.
Management believes that building on its COPPA advantage that the future of the Company will be based on the foundational architecture of the system that will allow its use across multiple financial markets where secure controlled payments are needed. For the under seventeen years of age market, the Company will use its OINK. Com brand. The Company intends to license in each alternative field of use the ability for its partners, distributors and/or value added resellers to private label each of the alternative markets. These partners will deploy, customize and support each implementation under their own label but with acknowledgement of the Company’s proprietary intellectual assets as the base technology. Management believes this approach will enable the company to reduce expenses while broadening its reach.
Revenues generated from this system are contemplated to come from multiple sources depending on the level of service and facilities requested by the parent. There will be levels of subscription revenue paid monthly, service fees, transaction fees and in some cases revenue sharing with banking and distribution partners.
In addition, the Company is analyzing specific components of the technology for individual monetization as well as exploring opportunities in the Business to Business (“B2B”) realm. The new architecture lends itself to provide closed network capability that allow B2B transactions outside of the traditional payment processing interchange services. This reduces the cost of transacting between businesses. Businesses that join the B2B will be able to perform instant settlements of transactions at lower fees than traditional services.
The Company’s principal office is located in Palm Beach, Florida, and in 2013 the Company opened an office in London, England to support the sales and marketing efforts in Europe and the development of its mobile applications. The London office was closed in September 2015.
On December 3, 2015, Finity, Inc. was incorporated as a wholly owned subsidiary of the Company. On December 11, 2015, Finity, Inc. changed its name to Finitii, Inc. Finitii, Inc. was established as a not for profit entity for the purpose of teaching children financial literacy. On November 29, 2016, Finitii, Inc. was dissolved, without having any operations since inception.
Basis of Presentation
The accompanying financial statements of Rego Payment Architectures, Inc. (formerly Virtual Piggy, Inc.) have been prepared in accordance with accounting principles generally accepted in the United States of America.
The Company’s activities are subject to significant risks and uncertainties, including failing to secure additional financing to operationalize the Company’s current technology before another company develops similar technology to compete with the Company.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Comprehensive Income
The Company follows Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 220 in reporting comprehensive income. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. The Company has one item of other comprehensive income, consisting of a foreign translation adjustment.
Fair Value of Financial Instruments
The Company’s financial instruments consist of accounts receivable, accounts payable and accrued expenses and notes payable. The carrying value of accounts receivable, accounts payable and accrued expenses approximate their fair value because of their short maturities. The Company believes the carrying amount of its notes payable approximate fair value based on rates and other terms currently available to the Company for similar debt instruments.
The Company follows FASB ASC 820,
Fair Value Measurements and Disclosures
, and applies it to all assets and liabilities that are being measured and reported on a fair value basis. The statement requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
Level 1: Quoted market price in active markets for identical assets or liabilities
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs that are not corroborated by market data
The level in the fair value hierarchy within which a fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
Foreign Currency Translation
The functional currency of operations outside the U.S. was British Pounds. The Company closed its sales office in England in September 2015, and the cumulative translation adjustment was reported as part of the gain on closing the England office in accordance with FASB ASC 830-30,
Foreign Currency Matters
.
Concentration of Credit Risk Involving Cash
The Company may have deposits with a financial institution which at times exceed Federal Deposit Insurance Corporation (“FDIC”) coverage. The Company has not experienced any losses from maintaining cash accounts in excess of federally insured limits.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all cash accounts, which are not subject to withdrawal restrictions or penalties, and certificates of deposit and commercial paper with original maturities of 90 days or less to be cash or cash equivalents.
Property and Equipment
Property, equipment and leasehold improvements are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Maintenance and repairs of property are charged to operations, and major improvements are capitalized. Upon retirement, sale, or other disposition of property and equipment, the costs and accumulated depreciation are eliminated from the accounts, and any resulting gain or loss is included in operations. The cost of leasehold improvements is amortized over the lesser length of the related leases or the estimated useful lives of the assets. Depreciation expense related to property and equipment was $7,064 and $76,866 for the years ended December 31, 2016 and 2015 and is included in general and administrative expenses.
The Company’s depreciation and amortization policies on property and equipment are as follows:
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Useful life
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(in years)
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Computer equipment
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3 - 5
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Furniture and fixtures
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7
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Leasehold improvements
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Term of lease
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Patents and Trademarks
The Company has four issued patents with the United States Patent and Trademark Office (“USPTO”), entitled “System and Method for Verifying the Age of an Internet User,” “System and Method for Virtual Piggy Bank Wish-List,” ”Parent Match” and “System and Method for Virtual Piggy Bank.” The Company has filed for one provisional U.S. patent application, as well as twelve non-provisional U.S. patent applications, three of which are pending, four of which have been allowed, and five of which have been abandoned. Additionally, the Company has been granted two patents, entitled “Virtual Piggy Bank” and “Parent Match,” in each of Germany, Canada, and Australia. The Company also has patents pending in the Republic of Korea under the Patent Cooperation Treaty (“PCT”). Costs associated with the registration and legal defense of the patents have been capitalized and are amortized on a straight-line basis over the estimated lives of the patents.
Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets in accordance with FASB ASC 360 “Property, Plant, and Equipment.” The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets are measured by a comparison of the carrying amount of an asset to future cash flows expected to be generated by the asset, undiscounted and without interest or independent appraisals. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the assets.
Deferred Financing Costs
Costs incurred in securing long-term debt are deferred and amortized, as a charge to interest expense, over the term of the related debt. In the case of long-term debt modifications, the Company follows the guidance provided by FASB ASC 470-50,
Debt-Modification and Extinguishments
.
Convertible Notes Payable
Convertible notes payable, for which the embedded conversion feature does not qualify for derivative treatment, are evaluated to determine if the effective or actual rate of conversion per the terms of the convertible note agreement is below market value. In these instances, the Company accounts for the value of the beneficial conversion feature (“BCF”) as a debt discount, which is then accreted to interest expense over the life of the related debt using the straight-line method, which approximates the effective interest method.
Revenue Recognition
In accordance with FASB ASC 605,
Revenue Recognition
, the Company will recognize revenue when (i) persuasive evidence of a customer or distributor arrangement exists or acceptance occurs, (ii) a retailer, distributor or wholesaler receives the goods, (iii) the price is fixed or determinable, and (iv) collectability of the sales revenues is reasonably assured. Subject to these criteria, the Company will generally recognize revenue at the time of the sale of the associated product.
Income Taxes
The Company follows FASB ASC 740 when accounting for income taxes, which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for temporary differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Tax years from 2013 through 2016 remain subject to examination by major tax jurisdictions.
Stock-based Payments
The Company accounts for stock-based compensation under the provisions of FASB ASC 718,
Compensation—Stock Compensation
which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. The Company estimates the fair value of stock-based awards on the date of grant using the Black-Scholes model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method. The Company accounts for stock-based compensation awards to non-employees in accordance with FASB ASC 505-50,
Equity-Based Payments to Non-Employees
. Under FASB ASC 505-50, the Company determines the fair value of the warrants or stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. All issuances of stock options or other equity instruments to non-employees as consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued. Non-employee equity based payments that do not vest immediately upon grant are recorded as an expense over the service period, as if the Company had paid cash for the services. At the end of each financial reporting period, prior to the completion of the services, the fair value of the equity based payments will be re-measured and the non-cash expense recognized during the period will be adjusted accordingly. Since the fair value of equity based payments granted to non-employees is subject to change in the future, the amount of the future expense will include fair value re-measurements until the equity based payments are fully vested or the service is completed.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs were $0 and $119,036 for the years ended December 31, 2016 and 2015. These costs are included in sales and marketing expenses.
Product Development Costs
In accordance with FASB ASC 730, research and development costs are expensed when incurred. Research and development costs were $830,052 and $1,643,327 for the years ended December 31, 2016 and 2015.
Loss Per Share
The Company follows FASB ASC 260 when reporting Earnings Per Share resulting in the presentation of basic and diluted earnings per share. Because the Company reported a net loss for each of the years ended December 31, 2016 and 2015, common stock equivalents, including preferred stock, stock options and warrants were anti-dilutive; therefore, the amounts reported for basic and diluted loss per share were the same.
Start-up Costs
In accordance with FASB ASC 720
,
start-up costs are expensed as incurred.
Segment Information
The Company is organized and operates as one operating segment. In accordance with FASB ASC 280,
Segment Reporting
, the chief operating decision-maker has been identified as the Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company subject to Board approval. Since the Company operates in one segment and provides one group of similar products, all financial segment and product line information required by FASB ASC 280 can be found in the financial statements.
Recently Adopted Accounting Pronouncements
In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
. The amendments in this Update provide guidance about management’s responsibility to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued and to provide related footnote disclosures. Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The amendments were adopted as of December 31, 2016, see Note 2 for management’s evaluation and disclosure.
Recently Issued Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of Update 2014-09 to annual reporting periods beginning after December 15, 2017. The Company anticipates that the impact of this guidance on the financial statements will not be material.
In November 2015, the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes
. The amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The Company does not anticipate the adoption of this standard to have a material effect on the financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. The amendments in this Update specify the accounting for leases. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company anticipates that the impact of this guidance on the financial statements will not be material.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which simplifies several aspects of the accounting for share-based payment award transactions, including: (1) income tax consequences; (2) classification of awards as either equity or liabilities, and (3) classification on the statement of cash flows. For public companies, the amendments in the ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently assessing the impact of adoption that this guidance will have on the financial statements.
NOTE 2 – GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred significant losses and experienced negative cash flow from operations since inception. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Since inception, the Company has focused on developing and implementing its business plan. The Company believes that its existing cash resources will not be sufficient to sustain operations during the next twelve months.
The Company currently needs to generate revenue in order to sustain its operations. In the event that the Company cannot generate sufficient revenue to sustain its operations, the Company will need to reduce expenses or obtain financing through the sale of debt and/or equity securities. The issuance of additional equity would result in dilution to existing shareholders. If the Company is unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms acceptable to the Company, the Company would be unable to execute upon the business plan or pay costs and expenses as they are incurred, which would have a material, adverse effect on the business, financial condition and results of operations.
The Company’s current monetization model is to derive revenues from levels of subscription revenue paid monthly, service fees, transaction fees and in some cases revenue sharing with banking and distribution partners. As these bases of revenues grow, the Company expects to generate additional revenue to support operations.
As of March 31, 2017, the Company has a cash position of approximately
$21,000
. Based upon the current cash position and the Company’s planned expense run rate, management believes the Company has funds currently to finance its operations through April 2017.
NOTE 3 – PATENTS AND TRADEMARKS
The Company continues to apply for patents and purchased the Oink trademark in November 2013. Accordingly, costs associated with the registration of the patents have been capitalized and are amortized on a straight-line basis over the estimated lives of the patents (20 years). The trademark is also being amortized on a straight-line basis over its estimated useful life of 20 years. At December 31, 2016 and 2015, capitalized patent and trademark costs, net of accumulated amortization, were $552,573 and $589,420. Amortization expense for patents and trademarks was $36,848 and $37,209 for the years ended December 31, 2016 and 2015.
During 2016 and 2015, the Company abandoned its application for several of its patents and trademarks. Accordingly, the Company recorded a charge to general and administrative expenses for $0 and $43,391 relating to costs previously capitalized with respect to these applications.
NOTE 4 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES – RELATED PARTIES
The Company owes the Chief Executive Officer a total of $37,670 as of December 31, 2016, including unpaid salary of $32,697 and expenses of $4,973.
The Company owes the Chief Financial Officer a total of $17,011 as of December 31, 2016, including unpaid salary of $16,969 and expenses of $42.
The Company owes the Secretary of the Company a total of $3,143 for unpaid salary.
The Company owes the Chief Executive Officer’s brother $1,500 for development work that he is providing under a consulting agreement.
NOTE 5 – 10% SECURED CONVERTIBLE NOTES PAYABLE - STOCKHOLDERS
On March 6, 2015, the Company, pursuant to a Securities Purchase Agreement (the “Purchase Agreement”), issued $2,000,000 aggregate principal amount of its 10% Secured Convertible Promissory Notes due March 5, 2016 (the “Notes”) to certain stockholders. On May 11, 2015, the Company issued an additional $940,000 of Notes to stockholders. The maturity dates of the Notes were extended to March 5, 2017 with the consent of the Note holders.
On May 5, 2016, the Company issued an additional $100,000 of Notes to stockholders.
Of the $3,040,000 of Notes, $150,000 were exchanged for 3.5% Secured Convertible Promissory Notes on August 26, 2016 (See Note 6).
The Notes are convertible by the holders, at any time, into shares of the Company’s Series B Preferred Stock at a conversion price of $90.00 per share, subject to adjustment for stock splits, stock dividends and similar transactions with respect to the Series B Preferred Stock only. Each share of Series B Preferred Stock is currently convertible into 100 shares of the Company’s common stock at a current conversion price of $0.90 per share, subject to anti-dilution adjustment as described in the Certificate of Designation of the Series B Preferred Stock. In addition, pursuant to the terms of a Security Agreement entered into on May 11, 2015 by and among the Company, the Investors and a collateral agent acting on behalf of the Investors (the “Security Agreement”), the Notes are secured by a lien against substantially all of the Company’s business assets. Pursuant to the Purchase Agreement, the Company also granted piggyback registration rights to the holders of the Series B Preferred Stock upon a conversion of the Notes.
On August 26, 2016, the Company exchanged in total $2,029,364, including principal amount of previously unsecured notes payable of $1,685,000, accounts payable of $143,793, accrued interest of $123,658 and commitment fees of $76,913, for 10% Secured Convertible Promissory Notes, which are now due March 2018. Of these notes, $460,100 were subsequently exchanged for 3.5% Secured Convertible Notes.
On November 9, 2016, the Company exchanged $100,000 principal amount of the 10% Secured Convertible Promissory Notes for $100,000 of the 3.5% Secured Convertible Notes (See Note 6).
On December 9, 2016, the Company exchanged $99,000 principal amount of the 10% Secured Convertible Promissory Notes for $99,000 of the 3.5% Secured Convertible Notes (See Note 6).
In addition, the maturity date of all of the 10% Secured Convertible Promissory Notes have been extended to March 2018, subsequent to December 31, 2016.
The Notes are recorded as a current liability, in the amount of $4,260,264 as of December 31, 2016. Interest accrued on the notes was $575,022 and $225,452 as of December 31, 2016 and 2015. Interest expense related to these notes payable was $109,533 and $74,104 for the years ended December 31, 2016 and 2015.
NOTE 6 – NOTES PAYABLE - STOCKHOLDERS
On July 20, 2015, the Company entered into agreements with three stockholders that each included notes payable in the amount of $250,200, and two-year warrants to purchase 50,000 shares of the Company’s common stock at $0.90. The notes bore interest at 10% per annum and notes payable in the amount of $200,200 contained a commitment fee of 7.5%, which with the principal balance are payable upon the earlier of:
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a.
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The 6 month anniversary of the note payable;
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b.
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The Company closing a specific joint venture agreement; or
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c.
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The Company completes an additional $1 million minimum financing pursuant to its offering of 10% Secured Convertible Promissory Notes.
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The warrants were valued at $4,073, fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 114.9%, risk free interest rate of .71% and expected option life of 2 years. The warrant values were treated as a discount to the value of the note payable in accordance with FASB ASC 835-30-25,
Recognition
and were accreted over the term of the note payable for financial statement purposes.
On August 12, 2015, the Company entered into an agreement with a stockholder that included a note payable in the amount of $100,100, and two-year warrants to purchase 20,000 shares of the Company’s common stock at $0.90. The notes bore interest at 10% per annum and had the same repayment terms as above. The warrants were valued at $1,175, fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 118.7%, risk free interest rate of .67% and expected option life of 2 years. The warrant values were treated as a discount to the value of the note payable in accordance with FASB ASC 835-30-25,
Recognition,
and were accreted over the term of the note payable for financial statement purposes.
On September 18, 2015, the Company entered into an agreement with a stockholder that included a note payable in the amount of $125,000, and two-year warrants to purchase 25,000 shares of the Company’s common stock at $0.90. The note bore interest at 10% per annum, contained a commitment fee of 7.5%, and had the same repayment terms as above. The warrants were valued at $3,093 fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 118.7%, risk free interest rate of 0.67% and expected option life of 2 years. The warrant values were treated as a discount to the value of the note payable in accordance with FASB ASC 835-30-25,
Recognition
and were accreted over the term of the note payable for financial statement purposes.
Between October 6 and 9, 2015, the Company entered into agreements with four stockholders that included notes payable in the aggregate amount of $150,000, and two-year warrants to purchase 75,000 shares of the Company’s common stock at $0.90. The notes bore interest at 10% per annum, and had the same repayment terms as above. The warrants were valued at $13,106 fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 132.9% to 133.2%, risk free interest rate of 0.61% to 0.65% and expected option life of 2 years. The warrant values were treated as a discount to the value of the note payable in accordance with FASB ASC 835-30-25,
Recognition
and were accreted over the term of the note payable for financial statement purposes.
On October 15, 2015, the Company entered into an agreement with a stockholder that included a note payable in the amount of $200,000, and two-year warrants to purchase 40,000 shares of the Company’s common stock at $0.90. The note bore interest at 10% per annum, contained a commitment fee of 7.5%, and had the same repayment terms as above. The warrants were valued at $7,262 fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 133.0%, risk free interest rate of 0.61% and expected option life of 2 years. The warrant values were treated as a discount to the value of the note payable in accordance with FASB ASC 835-30-25,
Recognition
and were accreted over the term of the note payable for financial statement purposes.
On November 19, 2015, the Company entered into an agreement with the Chairman of the Board (who is also a stockholder) that included a note payable in the amount of $20,000, and two-year warrants to purchase 4,000 shares of the Company’s common stock at $0.90. The note bore interest at 10% per annum and had the same repayment terms as above. The warrants were valued at $664 fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 133.6%, risk free interest rate of 0.91% and expected option life of 2 years. The warrant values were treated as a discount to the value of the note payable in accordance with FASB ASC 835-30-25,
Recognition,
and were accreted over the term of the note payable for financial statement purposes.
On December 1, 2015, the Company entered into an agreement with a stockholder that included a note payable in the amount of $16,000, and two-year warrants to purchase 3,200 shares of the Company’s common stock at $0.90. The note bore interest at 10% per annum and had the same repayment terms as above. The warrants were valued at $416 fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 133.6%, risk free interest rate of 0.91% and expected option life of 2 years. The warrant values were treated as a discount to the value of the note payable in accordance with FASB ASC 835-30-25,
Recognition
and were accreted over the term of the note payable for financial statement purposes.
On December 8, 2015, the Company entered into an agreement with its Chairman of the Board (who is also a stockholder) that included a note payable in the amount of $100,100, and two-year warrants to purchase 20,000 shares of the Company’s common stock at $0.90. The note bore interest at 10% per annum, contained a commitment fee of 7.5%, and had the same repayment terms as above. The warrants were valued at $2,348 fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 133.6%, risk free interest rate of 0.94% and expected option life of 2 years. The warrant values were treated as a discount to the value of the note payable in accordance with FASB ASC 835-30-25,
Recognition
and were accreted over the term of the note payable for financial statement purposes.
On December 28 and 29, 2015, the Company entered into agreements with two stockholders that included notes payable in the aggregate amount of $65,000, and two-year warrants to purchase 13,000 shares of the Company’s common stock at $0.90. The notes bore interest at 10% per annum, and had the same repayment terms as above. The warrants were valued at $964 fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 134.8% to 134.9%, risk free interest rate of 1.05% to 1.09% and expected option life of 2 years. The warrant values were treated as a discount to the value of the note payable in accordance with FASB ASC 835-30-25,
Recognition
and were accreted over the term of the note payable for financial statement purposes.
On January 15 and 19, 2016, the Company entered into agreements with two stockholders that included notes payable in the aggregate amount of $62,500, and two-year warrants to purchase 12,500 shares of the Company’s common stock at $0.90. The notes bore interest at 10% per annum, and had the same repayment terms as above.
The warrants were valued at $775 fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 135.7% to 135.8%, risk free interest rate of 0.85% to 0.88% and expected option life of 2 years. The warrant values were treated as a discount to the value of the note payable in accordance with FASB ASC 835-30-25,
Recognition
and were accreted over the term of the note payable for financial statement purposes.
On January 29 and February 3, 2016, the Company entered into agreements with two stockholders that included notes payable in the aggregate amount of $90,000, and two-year warrants to purchase 18,000 shares of the Company’s common stock at $0.90. The notes bore interest at 10% per annum, and had the same repayment terms as above.
The warrants were valued at $1,321 fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 135.5% to 135.6%, risk free interest rate of 0.72% to 0.76% and expected option life of 2 years. The warrant values were treated as a discount to the value of the note payable in accordance with FASB ASC 835-30-25,
Recognition
and were accreted over the term of the note payable for financial statement purposes.
On February 23, 2016, the Company entered into agreements with three stockholders that included notes payable in the aggregate amount of $26,000, and two-year warrants to purchase 5,200 shares of the Company’s common stock at $0.90 per share. The notes bore interest at 10% per annum, and had the same repayment terms as above.
The warrants were valued at $345 fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 135.4% to 135.9%, risk free interest rate of 0.71% to 0.78% and expected option life of 2 years. The warrant values were treated as a discount to the value of the note payable in accordance with FASB ASC 835-30-25,
Recognition
and were accreted over the term of the note payable for financial statement purposes.
On March 2, 2016, the Company entered into an agreement with a stockholder that included a note payable in the amount of $5,000, and two-year warrants to purchase 1,000 shares of the Company’s common stock at $0.90 per share. The note bore interest at 10% per annum and had the same repayment terms as above.
The warrants were valued at $58 fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 137.9%, risk free interest rate of 0.85% and expected option life of 2 years. The warrant values were treated as a discount to the value of the note payable in accordance with FASB ASC 835-30-25,
Recognition
and were accreted over the term of the note payable for financial statement purposes.
On March 4, 2016, the Company entered into an agreement with a stockholder that included a note payable in the amount of $100,100, and two-year warrants to purchase 20,020 shares of the Company’s common stock at $0.90 per share. The note bore interest at 10% per annum and had the same repayment terms as above.
The warrants were valued at $1,178 fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 138.3%, risk free interest rate of 0.88% and expected option life of 2 years. The warrant values were treated as a discount to the value of the note payable in accordance with FASB ASC 835-30-25,
Recognition
and were accreted over the term of the note payable for financial statement purposes.
On March 15, 2016, the Company entered into an agreement with a stockholder that included a note payable in the amount of $200,000, and two-year warrants to purchase 40,000 shares of the Company’s common stock at $0.90 per share. The note bore interest at 10% per annum and had the same repayment terms as above.
The warrants were valued at $2,682 fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 139.3%, risk free interest rate of 0.98% and expected option life of 2 years. The warrant values were treated as a discount to the value of the note payable in accordance with FASB ASC 835-30-25,
Recognition
and were accreted over the term of the note payable for financial statement purposes.
On April 18, 2016, the Company entered into an agreement with two stockholders that included a note payable in the amount of $20,000 and two-year warrants to purchase 4,000 shares of Company common stock at an exercise price of $0.90 per share. The Notes bore interest at 10% per annum and had the same repayment terms as above.
The warrants were valued at $112 fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 146.9% to 149.2%, risk free interest rate of 0.75% to 0.80 and expected option life of 2 years. The warrant values were treated as a discount to the value of the note payable in accordance with FASB ASC 835-30-25,
Recognition
and were accreted over the term of the note payable for financial statement purposes.
On April 20, 2016, the Company entered into an agreement with a stockholder that included a note payable in the amount of $5,000 and two-year warrants to purchase 1,000 shares of Company common stock at an exercise price of $0.90 per share. The Notes bore interest at 10% per annum and had the same repayment terms as above.
The warrants were valued at $27 fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 149.2%, risk free interest rate of 0.80 and expected option life of 2 years. The warrant values were treated as a discount to the value of the note payable in accordance with FASB ASC 835-30-25,
Recognition
and were accreted over the term of the note payable for financial statement purposes.
On April 25, 2016, the Company entered into an agreement with a stockholder that included a note payable in the amount of $50,000 and two-year warrants to purchase 10,000 shares of Company common stock at an exercise price of $0.90 per share. The Notes bore interest at 10% per annum and had the same repayment terms as above.
The warrants were valued at $308 fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 151.5%, risk free interest rate of 0.77 and expected option life of 2 years. The warrant values were treated as a discount to the value of the note payable in accordance with FASB ASC 835-30-25,
Recognition
and were accreted over the term of the note payable for financial statement purposes.
On June 1, 2016, the Company entered into an agreement with a stockholder that included a note payable in the amount of $50,000 and two-year warrants to purchase 10,000 shares of Company common stock at an exercise price of $0.90 per share. The Notes bore interest at 10% per annum and had the same repayment terms as above.
The warrants were valued at $665 fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 182.6%, risk free interest rate of 0.91 and expected option life of 2 years. The warrant values were treated as a discount to the value of the note payable in accordance with FASB ASC 835-30-25,
Recognition
and were accreted over the term of the note payable for financial statement purposes.
On June 9, 2016, the Company entered into an agreement with a stockholder that included a note payable in the amount of $50,000 and two-year warrants to purchase 10,000 shares of Company common stock at an exercise price of $0.90 per share. The Notes bore interest at 10% per annum and had the same repayment terms as above.
The warrants were valued at $1,067 fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 183.1%, risk free interest rate of 0.77 and expected option life of 2 years. The warrant values were treated as a discount to the value of the note payable in accordance with FASB ASC 835-30-25,
Recognition
and were accreted over the term of the note payable for financial statement purposes.
The 7.5% commitment fees, amounting to $54,405, on the Notes Payable were treated as a discount to the value of the notes payable in accordance with FASB ASC 835-30-25,
Recognition
and were accreted over the term of the note payable for financial statement purposes. The same amount was included in accrued interest until the liability is paid.
All of the above notes payable, accrued interest and commitment fees were exchanged for 10% Secured Promissory Notes on August 26, 2016 (See Note 5).
On December 29, 2016, the Company issued a $67,500 principal amount unsecured Promissory Note to an accredited investor pursuant to a Promissory Note Agreement. The Investor received a five year Warrant to purchase 100,000 shares of Company common stock at an exercise price of $0.90 per share.
The note bears interest at a rate of ten percent (10%) per annum and matures one month after the issuance date, or on such earlier date that (i) the Company completes the closing of a specified joint venture agreement or (ii) the Company completes the sale of at least an additional $1 million of 10% Secured Convertible Promissory Notes.
The warrants were valued at $29,139, fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 177.2%, risk free interest rate of 1.96% and expected option life of 5 years. The warrant values were treated as a discount to the value of the note payable in accordance with FASB ASC 835-30-25,
Recognition
and were accreted over the term of the note payable for financial statement purposes.
The notes payable are recorded as a current liability in the amount of $38,361 as of December 31, 2016. Interest accrued on the outstanding notes payable during the years ended December 31, 2016 and 2015 was $0 and $81,831.
The note has been extended until April 29, 2017
and the Company has paid $15,000 against the principal and interest subsequent to December 31, 2016.
NOTE 7 – 3.5% SECURED CONVERTIBLE PROMISSORY NOTES PAYABLE
On August 26, 2016, the Company, pursuant to a Securities Purchase Agreement (the “Purchase Agreement”), issued $600,000 aggregate principal amount of its 3.5% Secured Convertible Promissory Notes due June 30, 2018 (the “New Secured Notes”) to certain accredited investors (the “Investors”), The aggregate consideration provided in the New Secured Note Offering consisted of $300,000 in cash and the exchange of $300,000 outstanding principal amount of 10% Secured Convertible Promissory Notes due March 6, 2017 (the “Prior Secured Notes”) for New Secured Notes.
In September 2016, the Company issued $820,200 aggregate principal amount of its New Secured Notes to certain accredited investors. The aggregate consideration provided consisted of $510,100 in cash and the exchange of $310,100 outstanding principal amount of 10% Secured Convertible Promissory Notes.
In November 2016, the Company issued $450,000 aggregate principal amount of its New Secured Notes to certain accredited investors. The aggregate consideration provided consisted of $350,000 in cash and the exchange of $100,000 outstanding principal amount of 10% Secured Convertible Promissory Notes.
In December 2016, the Company issued $199,000 aggregate principal amount of its New Secured Notes to certain accredited investors. The aggregate consideration provided consisted of $100,000 in cash and the exchange of $99,000 outstanding principal amount of 10% Secured Convertible Promissory Notes.
The New Secured Notes are convertible by the holders, at any time, into shares of the Company’s newly authorized Series C Cumulative Convertible Preferred Stock (“Series C Preferred Stock”) at a conversion price of $90.00 per share, subject to adjustment for stock splits, stock dividends and similar transactions with respect to the Series C Preferred Stock only. Each share of Series C Preferred Stock is currently convertible into 100 shares of the Company’s common stock at a current conversion price of $0.90 per share, subject to full ratchet anti-dilution adjustment for one year and weighted average anti-dilution adjustment thereafter, as described in the Certificate of Designation of the Series C Preferred Stock. Upon a liquidation event, the Company shall first pay to the holders of the Series C Preferred Stock, on a pari passu basis with the holders of the Company’s outstanding Series A Preferred Stock and Series B Preferred Stock, an amount per share equal to 700% of the conversion price (i.e., $630.00 per share of Series C Preferred Stock), plus all accrued and unpaid dividends on each share of Series C Preferred Stock (the “Series C Preference Amount”). The Series C Preference Amount shall be paid prior and in preference to payment of any amounts to the Common Stock. After the payment of all preferential amounts required to be paid to the holders of shares of Series C Preferred Stock, Series A Preferred Stock, Series B Preferred Stock and any additional senior preferred stock, the Series C Preferred Stock participates in further distributions subject to an aggregate cap of seven and one-half times (7.5x) the original issue price thereof, plus all accrued and unpaid dividends.
The New Secured Notes are recorded as a long-term liability in the amount of $2,069,200 as of December 31, 2016. Interest accrued on the New Secured Notes was $19,833 and $0 as of December 31, 2016 and December 31, 2015. Interest expense related to these notes payable was $19,833 and $0 for the years ended December 31, 2016.
NOTE 8 - INCOME TAXES
The Company follows FASB ASC 740-10-10 whereby an entity recognizes deferred tax assets and liabilities for future tax consequences or events that have been previously recognized in the Company’s financial statements or tax returns. The measurement of deferred tax assets and liabilities is based on provisions of enacted tax law. The effects of future changes in tax laws or rates are not anticipated.
At December 31, 2016, the Company has a net operating loss (“NOL”) that approximates $59 million. Consequently, the Company may have NOL carryforwards available for federal income tax purposes, which would begin to expire in 2028. Deferred tax assets would arise from the recognition of anticipated utilization of these net operating losses to offset future taxable income.
The income tax (benefit) provision consists of the following:
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Current
|
|
$
|
(1,655,000
|
)
|
|
$
|
(2,714,000
|
)
|
|
Deferred
|
|
|
(322,000
|
)
|
|
|
(402,000
|
)
|
|
Change in valuation allowance
|
|
|
1,977,000
|
|
|
|
3,116,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The following is a reconciliation of the tax derived by applying the U.S. Federal Statutory Rate of 35% to the earnings before income taxes and comparing that to the recorded tax provisions:
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
U.S federal income tax benefit at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal statutory rate
|
|
$
|
(1,689,000
|
)
|
|
|
(35
|
)
|
|
$
|
(2,681,000
|
)
|
|
|
(35
|
)
|
|
State tax, net of federal tax effect
|
|
|
(289,000
|
)
|
|
|
(6
|
)
|
|
|
(460,000
|
)
|
|
|
(6
|
)
|
|
Non-deductible share-based compensation
|
|
|
-
|
|
|
|
(0
|
)
|
|
|
-
|
|
|
|
(0
|
)
|
|
Non-deductible other expenses
|
|
|
1,000
|
|
|
|
-
|
|
|
|
25,000
|
|
|
|
-
|
|
|
Change in valuation allowance
|
|
|
1,977,000
|
|
|
|
41
|
|
|
|
3,116,000
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
The primary components of the Company’s December 31, 2016 and 2015 deferred tax assets, liabilities and related valuation allowances are as follows:
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset for NOL carryforwards
|
|
$
|
(24,084,000
|
)
|
|
$
|
(22,428,000
|
)
|
|
Deferred tax asset for stock based compensation
|
|
|
(2,560,000
|
)
|
|
|
(2,239,000
|
)
|
|
Valuation allowance
|
|
|
26,644,000
|
|
|
|
24,667,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE 9 – CONVERTIBLE PREFERRED STOCK
Series A Preferred Stock
The conversion feature of the additional Series A Preferred Stock is an embedded derivative, which is classified as a liability in accordance with FASB ASC 815 and was valued in accordance with FASB ASC 470 as a beneficial conversion feature at a fair market value of $3,489,000 at April 30, 2014 and $0 at December 31, 2016. This was classified as an embedded derivative liability and a discount to Series A Preferred Stock. Since the Series A Preferred Stock can be converted at any time, the full amount of the discount was accreted and reflected as a deemed distribution.
Series B Preferred Stock
The conversion feature of the Series B Preferred Stock is an embedded derivative, which is classified as a liability in accordance with FASB ASC 815 and was valued in accordance with FASB ASC 470 as a beneficial conversion feature at a fair market value of $375,841 at October 30, 2014, and $0 at December 31, 2016. This was classified as an embedded derivative liability and a discount to Series B Preferred Stock. Since the Series B Preferred Stock can be converted at any time, the full amount of the discount was accreted and reflected as a deemed distribution.
Because the Series B Preferred Stock can be converted at any time, the embedded derivative is classified as a current liability.
The Warrants associated with the Series B Preferred Stock were also classified as equity, in accordance with FASB ASC 480-10-25. Therefore it is not necessary to bifurcate these Warrants from the Series B Preferred Stock.
The Series B Preferred Stock is pari passu with the Series A Preferred Stock and has a preference in liquidation equal to two times the Original Issue Price to be paid out of assets available for distribution prior to holders of common stock and thereafter participates with the holders of common stock in any remaining proceeds subject to an aggregate cap of 2.5 times the Original Issue Price. The Series B Preferred Stockholders may cast the number of votes equal to the number of whole shares of common stock into which the shares of Series B Preferred Stock can be converted. The Series B Preferred Stock also contains customary approval rights with respect to certain matters.
The conversion price of the Series B Preferred Stock is currently $0.90 per share. The Series B Preferred Stock is subject to mandatory conversion if certain registration or related requirements are satisfied and the average closing price of the Company’s common stock exceeds 2.5 times the conversion price over a period of twenty consecutive trading days.
Series C Preferred Stock
In August 2016, the Company authorized 150,000 shares of the Company’s Series C Cumulative Convertible Preferred Stock (“Series C”). As of December 31, 2016, none of the Series C shares are issued or outstanding. After the date of issuance of Series C, dividends at the rate of $7.20 per share will begin accruing and will be cumulative. The Series C Preferred Stock is pari passu with the Series A Preferred Stock and Series B Preferred Stock and has a preference in liquidation equal to seven times the Original Issue Price to be paid out of assets available for distribution prior to holders of common stock and thereafter participates with the holders of common stock in any remaining proceeds subject to an aggregate cap of 7.5 times the Original Issue Price. The Series C Preferred Stockholders may cast the number of votes equal to the number of whole shares of common stock into which the shares of Series C Preferred Stock can be converted. The Series C Preferred Stock also contains customary approval rights with respect to certain matters.
As of December 31, 2016, the value of the cumulative 8% dividends for all preferred stock was $2,877,424. Such dividends will be paid when and if declared payable by the Company’s board of directors or upon the occurrence of certain liquidation events. In accordance with FASB ASC 260-10-45-11, the Company has recorded these accrued dividends as a current liability.
NOTE 10 – STOCKHOLDERS’ EQUITY
Extension and Revaluation of Options and Warrants
In February 2015, the Board of Directors of the Company approved amendments extending the term of outstanding warrants to purchase in the aggregate 3,877,970 shares of common stock of the Company at exercise prices ranging from $0.01 per share to $1.00 per share. These warrants were scheduled to expire at various dates during 2015 and were each extended for an additional one year period from the applicable current expiration date, with the new expiration dates ranging from February 23, 2016 to December 28, 2016. The increase in fair value of this term extension was $219,051 which was expensed during the period. The Company used the Black-Scholes option pricing model to calculate the increase in fair value, with the following assumptions for the extended warrants: no dividend yield, expected volatility of 95.1%, risk free interest rate of 0.22%, and expected warrant life of 1.28 years.
In February 2015, the Company extended options previously granted to two of its executive officers, which included 3,500,000 options exercisable at $0.04 per share. The increase in fair value of this term extension was $9,692 which was expensed during the period. The Company used the Black-Scholes option pricing model to calculate the increase in fair value after the extension, with the following assumptions: no dividend yield, expected volatility of 96.4%, risk free interest rate of 0.64%, and expected option life of 2 years.
In April 2015, the Company extended options previously granted to an executive officer, which included 250,000 options exercisable at $0.75 per share and 250,000 options exercisable at $0.90 per share. The increase in fair value of this term extension was $25,175. The Company used the Black-Scholes option pricing model to calculate the increase in fair value after the extension, with the following assumptions; no dividend yield, expected volatility of 100.9%, risk free interest rate of 0.24% and 0.42% and expected life of 2.4 years and 2.6 years.
In November 2015, the Company extended and reduced the exercise price of options previously granted to an executive officer, which included 250,000 options exercisable at $1.01 per share and are now exercisable at $0.31 per share. The increase in fair value of this term extension and exercise price reduction was $38,109. The Company used the Black-Scholes option pricing model to calculate the increase in fair value after the extension, with the following assumptions; no dividend yield, expected volatility of 133.4%, risk free interest rate of 0.87%. and expected life of 2 years.
On January 25, 2016, the Board of Directors approved amendments extending the term of outstanding warrants to purchase in the aggregate 24,372,838 shares of common stock of the Company at exercise prices ranging from $0.01 per share to $3.00 per share. These warrants were scheduled to expire at various dates during 2016 and were each extended for an additional one year period from the applicable current expiration date, with the new expiration dates ranging from January 26, 2017 to December 28, 2017. The increase in fair value of this term extension was $1,305,411 which was expensed during the three months ended March 31, 2016. The Company used the Black-Scholes option pricing model to calculate the increase in fair value, with the following assumptions for the extended warrants: no dividend yield, expected volatility of 161.3%, risk free interest rate of 0.47%, and expected warrant life of 1.27 years.
On April 14, 2016, the Company appointed a new Chief Executive Officer and Chairman of the Board, with such appointments taking effect on April 18, 2016. In connection with his appointment, the Company also simultaneously entered into an Employment Agreement with the Chief Executive Officer and Chairman of the Board, pursuant to which he will be employed on an at will basis at an annual salary of $240,000 during the first year of employment. He also received options to purchase 3,000,000 shares of the Company’s common stock at an exercise price of $0.90 per share, vesting over three years and 500,000 shares of restricted stock, 250,000 of which vest immediately and the remainder vest on the one year anniversary of his employment.
The options were valued at $196,505 fair value using the Black-Scholes option pricing model to calculate the fair value, with the following assumptions: no dividend yield, expected volatility of 121.7%, risk free interest rate of 1.24%, and expected option life of 5 years.
In accordance with FASB ASC 505-50, options with performance conditions should be revalued based on the modification accounting methodology described in ASC 718-20. As such the Company has revalued certain options with consultants and determined that there was an increase in fair value of $6,247 during the year ended December 31, 2016 and a decrease in fair value of $86,663 during the year ended December 31, 2015. For the year ended December 31, 2016, the Company used the Black-Scholes option pricing model to calculate the decrease in fair value with the following assumptions; no dividend yield, volatility of 177.2%, risk free interest rate of 1.93% to and expected life of 4.4 years.
Issuance of Restricted Shares
A restricted stock award (“RSA”) is an award of common shares that is subject to certain restrictions during a specified period. Restricted stock awards are independent of option grants and are generally subject to forfeiture if employment terminates prior to the release of the restrictions. The grantee cannot transfer the shares before the restricted shares vest. Shares of nonvested restricted stock have the same voting rights as common stock, are entitled to receive dividends and other distributions thereon and are considered to be currently issued and outstanding. The Company’s restricted stock awards generally vest over a period of one year. The Company expenses the cost of the restricted stock awards, which is determined to be the fair market value of the shares at the date of grant, straight-line over the period during which the restrictions lapse. For these purposes, the fair market value of the restricted stock is determined based on the closing price of the Company’s common stock on the grant date.
During the second quarter of 2015, the Company issued a consultant a total of 150,000 shares of the Company’s common stock which were valued at the closing price on the date of issuance of $0.27, $0.40 and $0.30, valuing the total shares at $48,500, which was expensed immediately.
On November 16, 2015, the Company agreed to issue 500,000 shares of restricted stock to the former chief executive officer (“CEO”), of which half vested immediately and the other half vest on the one year anniversary of the original grant. The shares were valued at the closing stock price on the date of issuance which was $0.33, valuing the shares at $165,000, fair value, which are being expensed over the vesting term. The former CEO resigned on April 9, 2016.
The remaining value of the former CEO’s RSAs included in deferred compensation in the amount of $72,188 was reclassified to additional paid in capital upon her resignation and the Company reversed expense related to unvested restricted shares that were previously expensed as of December 31, 2015 in the amount of $10,312 upon her departure.
The RSAs granted in April 2016 to the new CEO were valued at $55,000 based on the market price of the shares on the issuance date, which was $0.11. The value of the 250,000 RSAs that vested immediately, or $27,500, was expensed immediately and the remainder was recorded as deferred compensation and is being amortized. For the years ended December 31, 2016 and 2015, $45,833 and $0 was expensed.
NOTE 11 - STOCK OPTIONS AND WARRANTS
During 2008, the Board of Directors (“Board”) of the Company adopted the 2008 Equity Incentive Plan (“2008 Plan”) that was approved by the shareholders. Under the Plan, the Company is authorized to grant options to purchase up to 25,000,000 shares of common stock to any officer, other employee or director of, or any consultant or other independent contractor who provides services to the Company. The Plan is intended to permit stock options granted to employees under the 2008 Plan to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (“Incentive Stock Options”). All options granted under the 2008 Plan, which are not intended to qualify as Incentive Stock Options are deemed to be non-qualified options (“Non-Statutory Stock Options”). As of December 31, 2016, options to purchase 9,188,333 shares of common stock have been issued and are unexercised, and 3,961,667 shares are available for grants under the 2008 Plan.
During 2013, the Board adopted the 2013 Equity Incentive Plan (“2013 Plan”), which was approved by stockholders at the 2013 annual meeting of stockholders. Under the 2013 Plan, the Company is authorized to grant awards of stock options, restricted stock, restricted stock units and other stock-based awards of up to an aggregate of 5,000,000 shares of common stock to any officer, employee, director or consultant. The 2013 Plan is intended to permit stock options granted to employees under the 2013 Plan to qualify as Incentive Stock Options. All options granted under the 2013 Plan, which are not intended to qualify as Incentive Stock Options are deemed to be Non-Statutory Stock Options. As of December 31, 2016, under the 2013 Plan grants of restricted stock and options to purchase 2,376,666 shares of common stock have been issued and are unvested or unexercised, and 2,623,334 shares of common stock remain available for grants under the 2013 Plan.
The 2008 Plan and 2013 Plan are administered by the Board or its compensation committee, which determines the persons to whom awards will be granted, the number of awards to be granted, and the specific terms of each grant, including the vesting thereof, subject to the terms of the applicable Plan.
In connection with Incentive Stock Options, the exercise price of each option may not be less than 100% of the fair market value of the common stock on the date of the grant (or 110% of the fair market value in the case of a grantee holding more than 10% of the outstanding stock of the Company).
Prior to January 1, 2014, volatility in all instances presented is the Company’s estimate of volatility that is based on the volatility of other public companies that are in closely related industries to the Company. Beginning January 1, 2014, volatility in all instances presented is the Company’s estimate of volatility that is based on the historical volatility of the Company’s stock history.
The following table presents the weighted-average assumptions used to estimate the fair values of the stock options granted during the years ended December 31, 2016 and 2015:
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Risk Free Interest Rate
|
|
|
1.19
|
%
|
|
|
1.52
|
%
|
|
Expected Volatility
|
|
|
136
|
%
|
|
|
108
|
%
|
|
Expected Life (in years)
|
|
|
4.5
|
|
|
|
5.0
|
|
|
Dividend Yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Weighted average estimated fair value of options
during the period
|
|
$
|
0.10
|
|
|
$
|
0.23
|
|
The following table summarizes the activities for our stock options for the years ended December 31, 2016 and 2015:
During the years ended December 31, 2016 and 2015, the weighted average fair value of stock options granted during the year was $0.09 and $0.24. The fair value of stock options is expensed over the vesting term in accordance with the terms of the related stock option agreements.
For the years ended December 31, 2016 and 2015, the Company expensed $436,127 and $341,585 relative to the fair value of stock options granted.
As of December 31, 2016, there was $319,803 of unrecognized compensation cost related to outstanding stock options. This amount is expected to be recognized over a weighted-average period of 1.4 years. To the extent the actual forfeiture rate is different from what we have estimated, stock-based compensation related to these awards will be different from our expectations. The difference between the stock options exercisable at December 31, 2016 and the stock options exercisable and expected to vest relates to management’s estimate of options expected to vest in the future.
The following table summarizes the activities for our unvested options for the year ended December 31, 2016:
The following table summarizes the activities for our warrants for the years ended December 31, 2016 and 2015:
For the years ended December 31, 2016 and 2015, total rent expense under leases amounted to $13,060 and $287,506. At December 31, 2016, the Company was not obligated under non-cancelable operating lease arrangements for property.
During the years ended December 31, 2016 and 2015, the certified public accounting firm owned by the current Chief Financial Officer billed $3,200 and $30,063 for accounting services of which was all paid as of December 31, 2016.
On December 8, 2015, the Company entered into an agreement with its former Chairman of the Board that includes a note payable in the amount of $100,100, and two-year warrants to purchase 20,000 shares of the Company’s common stock at $0.90 (see Note 6).
During November and December 2015, the former Chairman of the Board paid expenses totalling $45,008 on behalf of the Company, which were included in accounts payable and outstanding at December 31, 2015. During the year ended December 31, 2016, the former Chairman of the Board incurred an additional $98,785 of additional expenses on behalf of the Company. The total amount of $143,793 in accounts payable was converted into the same value of 10% Secured Convertible Notes (see Note 6).
On August 26, 2016, the Company issued $100,000 aggregate principal amount of its 3.5% Secured Convertible Promissory Notes due June 30, 2018 to a member of the Company’s Board of Directors.
The Company has entered into a consulting agreement with a company owned by a more than 5% beneficial owner, at a cost of $12,500 per month, plus expenses. As of December 31, 2016, the Company has paid $106,204 to the consulting company.
The Company has entered into a consulting agreement with the son of the principal of a company owned by a more than 5% beneficial owner, at a cost of $5,000 per month, plus expenses. As of December 31, 2016, the Company has paid $38,570 to this consultant.
The Company has entered into a consulting agreement with the brother of the Chief Executive Officer, at a cost of $500 per week. As of December 31, 2016, the Company has paid $7,500 and owed the consultant $1,500, which is included in accounts payable – related parties.
