Quarterly report pursuant to Section 13 or 15(d)

STOCKHOLDERS' EQUITY (DEFICIT)

v3.19.1
STOCKHOLDERS' EQUITY (DEFICIT)
3 Months Ended
Mar. 31, 2019
Equity [Abstract]  
STOCKHOLDERS' EQUITY (DEFICIT)

On January 11, 2019, the Board of Directors of the Company approved a reverse stock split of the Company’s Common Stock at a ratio of 1-for-8 (the “Reverse Stock Split”) including shares issuable upon conversion of the Company’s outstanding convertible securities. All share and per share values of the Company’s common stock for all periods presented in the accompanying consolidated financial statements are retroactively restated for the effect of the Reverse Stock Split.

 

Preferred Stock

The Company’s authorized preferred stock consists of 50,000,000 shares with a par value of $0.0001.  

 

Series A - On February 17, 2016, the Board of Directors voted to designate a class of preferred stock entitled Series A Preferred Stock, consisting of up to five million (5,000,000) shares, par value $0.0001 per share.  

 

On December 21, 2018, we filed a Certificate of Cancellation of our previously filed Certificate of Designation of Preferences, Rights and Limitations of Series A Preferred Stock in order to designate 1,000,000 shares as a new Series of Preferred Stock for issuance to former Holders of our Notes under the Exchange Agreements (See Note 8), and filed a new Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock.

 

Pursuant to the Series A Preferred Certificate of Designation, the Company issued shares of Series A Preferred. Each share of Series A Preferred has a stated value of $1.00 per share.  In the event of a liquidation, dissolution or winding up of the Company, each share of Series A Preferred Stock will be entitled to a payment as set forth in the Certificate of Designation. The Series A Preferred is convertible into such number of shares of the Company’s common stock, par value $0.0001 per share equal to the Stated Value of $1.00, divided by $0.20, subject to adjustment in the event of stock split, stock dividends, and recapitalization or otherwise.  Pursuant to the Exchange Agreements each holder of Notes shall be issued Series A Preferred in the amount of the purchase price paid for such Notes by the buyer under the Exchange Agreement, including any penalty, interest and premium payments. Each share of Series A Preferred entitles the holder to vote on all matters voted on by holders of Common Stock as a single class. With respect to any such vote, each share of Series A Preferred entitles the holder to cast such number of votes equal to the number of shares of Common Stock such share of Series A Preferred is convertible into at such time, but not in excess of the conversion limitations set forth in the Series A Preferred Certificate of Designation. The Series A Preferred will be entitled to dividends to the extent declared by the Company.

 

During the three months ended March 31, 2019, the Company issued an aggregate of 849,360 Series A preferred stock to various note holders and also sold an aggregate of 55,090 shares of Series A preferred stock for $55,090 which were used to repay and convert a total of $842,791 of principal amount (includes penalty fees of $149,313 during the three months ended March 31, 2019) and accrued interest of $61,569 pursuant to Exchange Agreements. Accordingly, the Company recognized deemed dividend of $904,450 during the three months ended March 31, 2019 in connection with the issuance of these Series A preferred stock.

 

During the three months ended March 31, 2019, the Company converted 296,441 Series A Preferred Stock into 1,482,205 shares of common stock.  There are 608,009 and 0 shares of Series A preferred stock outstanding as of March 31, 2019 and December 31, 2018, respectively.

 

Series B-1 - On February 29, 2016, the Company’s Board of Directors voted to designate a class of preferred stock entitled Series B-1 Convertible Preferred Stock (“Series B-1 Preferred Stock”), consisting of up to thirty-two million (32,000,000) shares, par value $0.0001.  With respect to rights on liquidation, winding up and dissolution, the Series B-1 Preferred Stock ranks pari passu to the class of common stock. Shares of Series B-1 Preferred Stock have no dividend rights except as may be declared by the Board in its sole and absolute discretion, out of funds legally available for that purpose. Shares of Series B-1 Preferred Stock are convertible, at the option of the holder, into shares of common stock at a conversion rate of 0.125 shares for 1 share basis. Holders of Series B-1 Preferred Stock have the right to vote as-if-converted to common stock on all matters submitted to a vote of holders of the Company’s common stock. On February 29, 2016, the Company issued 30,000,000 shares of Series B-1 Preferred Stock, of which 2,800,000 remain outstanding as of December 31, 2018 and 2017.

  

During the three months ended March 31, 2019, the Company converted 400,000 Series B-1 Preferred Stock into 50,000 shares of common stock.  There are 2,400,000 and 2,800,000 shares of Series B-1 preferred stock outstanding as of March 31, 2019 and December 31, 2018, respectively.

 

Series B-2 - Also on February 17, 2016, the Company’s Board of Directors voted to designate a class of preferred stock entitled Series B-2 Convertible Preferred Stock (“Series B-2 Preferred Stock”), consisting of up to six million (6,000,000) shares, par value $0.0001, with a stated value of $0.25 per share.  With respect to rights on liquidation, winding up and dissolution, holders of Series B-2 Preferred Stock will be paid in cash in full, before any distribution is made to any holder of common or other classes of capital stock, an amount of $0.25 per share. Shares of Series B-2 Preferred Stock have no dividend rights except as may be declared by the Board in its sole and absolute discretion, out of funds legally available for that purpose. Shares of Series B-2 Preferred Stock are convertible, at the option of the holder, into shares of common stock at a conversion rate of 0.125 shares for 1 share basis.  Holders of Series B-2 Preferred Stock have the right to vote as-if-converted to common stock on all matters submitted to a vote of the holders of the Company’s common stock. For so long as any shares of Series B-2 Preferred Stock are issued and outstanding, the Corporation shall not issue any notes, bonds, debentures, shares of preferred stock, or any other securities that are convertible to common stock unless such conversion rights are at a fixed ratio or a fixed monetary price (Note 9). On February 29, 2016, the Company issued 2,084,000 shares of Series B-2 Preferred Stock.

 

During the three months ended March 31, 2019, the Company converted 1,000,000 Series B-2 Preferred Stock into 125,000 shares of common stock.  There are 7,684,000 and 8,684,000 shares of Series B-1 preferred stock outstanding as of March 31, 2019 and December 31, 2018, respectively.

 

Series C - On June 30, 2016, the Company’s Board of Directors approved a Certificate of Designation authorizing 1,733,334 shares of new Series C Preferred Stock, par value $0.0001.  The Series C Preferred Stock ranks equally with the Company’s common stock with respect to liquidation rights and is convertible to common stock at a conversion rate of 0.125 shares for 1 share basis.  The conversion rights of holders of the Series C Preferred Stock are limited such that no holder may convert any shares of preferred stock to the extent that such holder, immediately following the conversion, would own in excess of 4.99% of the Company’s issued and outstanding shares of common stock.  This limitation may be increased to 9.99% upon 61 days written notice by a holder of the Series C Preferred Stock to the Company.   As of March 31, 2019 and December 31, 2018, 1,733,334 shares of Series C Preferred Stock are issued and outstanding.

 

Series D - On March 1, 2018, the Company’s Board of Directors voted to designate a class of preferred stock entitled Series D Convertible Preferred Stock consisting of up to 200 shares, par value $0.0001 to offer for sale to certain accredited investors, including affiliates of the Company, with a maximum offering amount of $2,200,000. Pursuant to the terms of the Series D Subscription Agreement, immediately following the consummation of an offering of the Company’s Common Stock for which the gross proceeds of the offering exceed $5,000,000, each share of Series D automatically converts into 25,000 shares of Common Stock. Upon the liquidation, dissolution or winding up of the Company, each holder of Series D Convertible Preferred Stock shall be entitled to receive, for each share of Series D Convertible Preferred Stock held, $10,000 per share payable pari passu with the Company’s Series B-2 Convertible Preferred Stock.    Shares of Series D Preferred Stock have no dividend rights except as may be declared by the Board in its sole and absolute discretion, out of funds legally available for that purpose. Holders of Series D Preferred Stock have the right to vote as-if-converted to common stock on all matters submitted to a vote of holders of the Company’s common stock. At no time may shares of Series D Convertible Preferred Stock be converted if such conversion would cause the holder to hold in excess of 4.99% of our issued and outstanding common stock, subject to an increase in such limitation up to 9.99% of the issued and outstanding common stock on 61 days’ written notice to the Company. 

 

During the three months ended March 31, 2019, the Company converted 4 Series D Preferred Stock into 100,000 shares of common stock.  There are 41 and 45 shares of Series D preferred stock outstanding as of March 31, 2019 and December 31, 2018, respectively.

 

Common Stock

 

The Company’s authorized common stock consists of 650,000,000 shares with a par value of $0.0001 per share.

 

Common stock issued for private placement

 

During the three months ended March 31, 2019, the Company sold an aggregate of 15,382,090 shares of common stock for total proceeds of $3,309,653.

  

Common stock issued for Development Agreement

 

In consideration for the Development Agreement (see Note 9), C2M was issued 8,385,691 shares of our common stock on January 8, 2019. Additionally, the Company granted immediately vested 10 year options to purchase 750,000 shares of common stock, with exercise price of $0.32 per share to certain C2M founders. As a result, C2M became the Company’s largest shareholder holding (inclusive of the vested options held by its founders) approximately 51% of the Company’s outstanding common stock as of the date of the Development Agreement. Consequently, such transaction resulted in a change of control whereby, C2M obtained majority control through its common stock ownership (See Note 9). Therefore, the Company accounted for the 8,385,691 shares of common stock under ASC 845-10-S99 “Transfer of Nonmonetary Assets by Promoters or Shareholders” whereby the transfer of nonmonetary assets to a company by its promoters or shareholders in exchange for stock prior to or at the time of the company's initial public offering normally should be recorded at the transferors' historical cost basis determined under GAAP. The Company determined that the value of the Development Agreement is $0 and recording it in a step up basis would not be appropriate since C2M is considered a promoter, majority shareholder and also a related party having an ownership interest of 51% in the Company on the execution date of the Development Agreement. Accordingly, the Company recorded the issuance of 8,385,691 shares of common stock at par value. The 750,000 options were valued on the grant date at approximately $0.13 per option for a total of $96,000 using a Black-Scholes option pricing model with the following assumptions: stock price of $0.13 per share (based on the quoted trading price on the dates of grants), volatility of 296%, expected term of 10 year, and a risk free interest rate of 2.74%. During the three months ended March 31, 2019, the Company recorded stock based compensation of $96,000.

 

Common stock issued for membership interest in subsidiary

 

On March 11, 2019, with the assistance of C2M and assignment of rights, under the term of the Purchase Agreement, the Company acquired additional 20.1% from existing members in consideration for payment of 937,500 shares of common stock (see Note 3).  The 937,500 shares of common stock were valued at the fair value of $1.056 per common share or $990,000 based on the quoted trading price on the date of grant.

 

Common stock issued for settlement of debt

 

During the three months ended March 31, 2019, the Company issued 250,000 shares of common stock to note holders upon the conversion of $4,000 of accrued interest. The fair value of shares on conversion was $196,000 having a derivative value on date of conversion of $18,000 and the balance of $178,000 was recorded as loss on settlement of debt. Additionally, in March 2019, the Company issued an aggregate of 203,080 shares of common stock to a noteholder upon the conversion of $27,000 of principal amount, accrued interest of $3,267 and $10,349 of accrued expenses.

 

Common Stock Warrants

 

A summary of the Company’s outstanding stock warrants as of March 31, 2019 and changes during the period ended are presented below:   

 

    Number of Warrants    

Weighted

Average

Exercise

Price

   

Weighted

Average

Remaining

Contractual

Life

(Years)

 
Balance at December 31, 2018     644,083     $ 1.77       1.38  
Issued     718,750       0.20       5.00  
Cancelled                  
Exercised                  
Forfeited                  
Balance at March 31, 2019     1,362,833     $ 0.94       3.16  
                         
Warrants exercisable at March 31, 2019     1,362,833     $ 0.94       3.16  
                         
Weighted average fair value of warrants granted during the period           $ 1.55          

  

As of March 31, 2019, aggregate intrinsic value in connection with exercisable warrants amounted to $1,852,635.

 

On March 21, 2019, the Company issued 718,750 warrants to purchase shares of the Company’s common stock in connection with a consulting agreement in exchange for corporate development and advisory services. The warrants have a term of 5 year from the date of grant and are exercisable at an exercise price of $0.20. The 718,750 warrants were valued on the grant date at approximately $1.55 per warrant for a total of $1,114,062 using a Black-Scholes option pricing model with the following assumptions: stock price of $1.55 per share (based on the quoted trading price on the dates of grants), volatility of 602%, expected term of 5 year, and a risk free interest rate of 2.35%. During the three months ended March 31, 2019, the Company recorded stock based compensation of $1,114,062.

 

Common Stock Options

 

Stock Option Plan

 

In September 2018, the Company’s stockholders approved the 2018 Equity Incentive Plan (the “2018 Plan”). The 2018 Plan provides for the issuance of incentive awards in the form of non-qualified and incentive stock options, stock appreciation rights, restricted stock awards, and restricted stock unit awards. The awards may be granted by the Company’s Board of Directors to its employees, directors and officers and to consultants, agents, advisors and independent contractors who provide services to the Company or to a subsidiary of the Company. The exercise price for stock options must not be less than the fair market value of the underlying shares on the date of grant. The incentive awards shall either be fully vested and exercisable from the date of grant or shall vest and become exercisable in such installments as the Board or Compensation Committee may specify. Stock options expire no later than ten years from the date of grant. The aggregate number of shares of Common Stock which may be issued pursuant to the Plan is 9,500,000.  Unless sooner terminated, the Plan shall terminate in 10 years.

 

Stock option activity for the three months ended March 31, 2019 is summarized as follows:

  

    Number of Options     Weighted Average ExercisePrice     Weighted Average Remaining Contractual Life(Years)  
Balance at December 31, 2018     959,375     $ 0.41       8.79  
Granted     4,475,000       0.19       10.00  
Balance at March 31, 2019     5,434,375       0.20       8.65  
Options exercisable at March 31, 2019     3,528,133     $ 0.27       8.10  

 

Weighted average fair value of options granted during the period $0.49

 

As of March 31, 2019, aggregate intrinsic value in connection with exercisable options amounted to $5,610,967. As of March 31, 2019, 1,906,242 outstanding options are unvested and there was $992,699 unrecognized compensation expense in connection with unvested stock options.

 

Between January 2019 and March 2019, the Company granted 3,975,000 options to purchase shares of the Company’s common stock to various members of the Board of directors of the company and consultants with vesting terms pursuant to their respective sock option agreements. The options have a term of 10 year from the date of grant and was exercisable at an exercise price ranging from $0.01 to $0.96. The Company recognized $891,799 of compensation expense relate to the vesting of stock options for the three months ended March 31, 2019. These amounts are included in general and administrative expenses on the accompanying statement of operations.

 

In February 2019, the Company granted 500,000 options to purchase shares of the Company’s common stock to an investor in connection with the sale of common stock. The options have a term of 9 month term from the date of grant and was exercisable at an exercise price of $0.50 per share. The fair value of the options granted amounted to $0.64 per option or $319,152.

 

The Company estimates the fair value of stock options using the Black-Scholes valuation model. Compensation expense related to stock options granted is measured at the grant date based on the estimated fair value of the award and is recognized on a straight-line basis over the requisite service period. The assumptions used in the Black-Scholes model for the options granted during the three months ended March 31, 2019 are presented below: 

 

Risk-free interest rate   2.61 – 2.74%
Expected volatility   293 – 296%
Expected term (in years)   10
Expected dividend yield   0%