| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| Nevada | 23-3023677 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
12 West 21st Street, New York, NY | 10010 | |
| (Address of Principal Executive Offices) | (Zip Code) | |
| Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
| Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x | |||
May 18, 2016.
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| PART II - OTHER INFORMATION | |||||||||
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| 9-16 | ||||
| September 30, 2015 | December 31, 2014 | |||||||
| (Unaudited) | (Audited) | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 277,967 | $ | 63,956 | ||||
Accounts receivable | 69,237 | — | ||||||
Inventory | 98,581 | 97,360 | ||||||
Prepaid expenses | 171,053 | 181,086 | ||||||
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TOTAL CURRENT ASSETS | 616,838 | 342,402 | ||||||
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PROPERTY AND EQUIPMENT | ||||||||
Capital equipment, net of accumulated depreciation of $213,226 and $161,205 as of September 30, 2015 and December 31, 2014 | 25,232 | 74,821 | ||||||
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OTHER ASSETS | ||||||||
Deposits | 37,197 | 37,197 | ||||||
Patents and Trademark, net of accumulated amortization of $131,111 and $118,502 as of September 30, 2015 and December 31, 2014 | 95,077 | 107,586 | ||||||
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| 132,274 | 144,783 | |||||||
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TOTAL ASSETS | $ | 774,344 | $ | 562,006 | ||||
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LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable and accrued expenses | $ | 509,485 | $ | 5,217,770 | ||||
Accrued interest - related parties | — | 43,215 | ||||||
Deferred revenue | — | 16,667 | ||||||
Senior secured convertible notes payable - related parties | — | 114,000 | ||||||
Notes payable | 50,000 | 812,553 | ||||||
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TOTAL CURRENT LIABILITIES | 559,485 | 6,204,205 | ||||||
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LONG-TERM LIABILITIES | ||||||||
Warrant liability | 1,829,757 | 6,370,709 | ||||||
Accrued interest - related parties | — | 112,885 | ||||||
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TOTAL LONG-TERM LIABILITIES | 1,829,757 | 6,483,594 | ||||||
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TOTAL LIABILITIES | 2,389,242 | 12,687,799 | ||||||
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CONTINGENCIES | ||||||||
STOCKHOLDERS’ DEFICIT | ||||||||
Series A Convertible Preferred Stock, $ .001 par value; 37,564,767 shares authorized; 441,938 shares issued and outstanding as of September 30, 2015 and 75,000,000 shares authorized; 248,366 issued and outstanding as of December 31, 2014 | 442 | 633,333 | ||||||
Series B Convertible Preferred Stock, $.001 par value; 85 shares authorized; 1 share issued and outstanding as of September 30, 2015 and 0 shares authorized; 0 issued and outstanding as of December 31, 2014 | — | — | ||||||
Common stock, $.001 par value; 675,000,000 shares authorized; 6,259,727 and 3,969,106 shares issued, and 5,909,187 and 3,618,566 shares outstanding at September 30, 2015 and December 31, 2014 | 5,909 | 3,618 | ||||||
Additional paid in capital | 39,120,912 | 25,047,050 | ||||||
Treasury stock, at cost (350,540 shares at September 30, 2015 and December 31, 2014) | (113,389 | ) | (113,389 | ) | ||||
Deferred compensation | (1,928,742 | ) | — | |||||
Accumulated deficit | (38,700,030 | ) | (37,696,405 | ) | ||||
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STOCKHOLDERS’ DEFICIT | (1,614,898 | ) | (12,125,793 | ) | ||||
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TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 774,344 | $ | 562,006 | ||||
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2015
| March 31, 2016 | December 31, 2015 | |||||||
| (Unaudited) | (Audited) | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 608,891 | $ | 4,152 | ||||
| Inventory | 48,807 | 28,687 | ||||||
| Employee advances | 36,083 | - | ||||||
| TOTAL CURRENT ASSETS | 693,781 | 32,839 | ||||||
| PROPERTY AND EQUIPMENT | ||||||||
| Capital equipment, net of accumulated depreciation of $231,430 and $230,621 as of March 31, 2016 and December 31, 2015 | 7,029 | 7,838 | ||||||
| OTHER ASSETS | ||||||||
| Deposits | - | 37,197 | ||||||
| Patents and Trademark, net of accumulated amortization of $173,729 and $166,894 as of March 31, 2016 and December 31, 2015 | 252,459 | 259,294 | ||||||
| 252,459 | 296,491 | |||||||
| TOTAL ASSETS | $ | 953,269 | $ | 337,168 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable and accrued expenses | $ | 514,471 | $ | 652,973 | ||||
| Note payable | 50,000 | 50,000 | ||||||
| Embedded derivative liability | 1,698,000 | - | ||||||
| Warrant liability | 1,839,018 | 1,802,375 | ||||||
| TOTAL CURRENT LIABILITIES | 4,101,489 | 2,505,348 | ||||||
| CONTINGENCIES | ||||||||
| STOCKHOLDERS' DEFICIT | ||||||||
| Series A Convertible Preferred Stock, $ .001 par value; 37,564,767 shares authorized; 427,218 shares issued and outstanding | ||||||||
| as of March 31, 2016 and 75,000,000 shares authorized; 441,938 issued and outstanding as of December 31, 2015 | 427 | 442 | ||||||
| Series B Convertible Preferred Stock, $.001 par value; 85 shares authorized; 0.97 shares issued and outstanding | ||||||||
| as of March 31, 2016 and 1 share issued and outstanding as of December 31, 2015 | - | - | ||||||
| Series C Convertible Preferred Stock, $.001 par value; 7,500,000 shares authorized; 3,087,500 shares issued and outstanding | ||||||||
| as of March 31, 2016 and 0 shares issued and outstanding as of December 31, 2015 | 3,088 | - | ||||||
| Common stock, $ .001 par value; 675,000,000 shares authorized; 6,937,250 and 6,327,570 shares issued, 6,586,710 and 5,977,030 | ||||||||
| shares outstanding at March 31, 2016 and December 31, 2015 | 6,586 | 5,977 | ||||||
| Additional paid in capital | 40,027,210 | 39,779,414 | ||||||
| Treasury stock, at cost (350,540 shares at March 31, 2016 and December 31, 2015) | (113,389 | ) | (113,389 | ) | ||||
| Deferred compensation | (1,557,518 | ) | (1,842,334 | ) | ||||
| Accumulated deficit | (41,514,624 | ) | (39,998,290 | ) | ||||
| STOCKHOLDERS' DEFICIT | (3,148,220 | ) | (2,168,180 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ | 953,269 | $ | 337,168 | ||||
| Three Months | Three Months | |||||||
| Ended | Ended | |||||||
| March 31, | March 31, | |||||||
| 2016 | 2015 | |||||||
| NET REVENUES | ||||||||
| Sales | - | $ | - | |||||
| Royalties | - | 6,250 | ||||||
| TOTAL NET REVENUE | - | 6,250 | ||||||
| COST OF SALES | - | - | ||||||
| GROSS PROFIT | - | 6,250 | ||||||
| OPERATING EXPENSES | ||||||||
| General and administrative | 117,758 | 83,901 | ||||||
| Legal and accounting | 115,345 | 11,113 | ||||||
| Payroll expenses (a) | 627,923 | 170,904 | ||||||
| Research and development | 89,335 | 120,386 | ||||||
| Sales and marketing (b) | 65,331 | 22,808 | ||||||
| Total operating expenses | 1,015,692 | 409,112 | ||||||
| LOSS BEFORE OTHER INCOME | (1,015,692 | ) | (402,862 | ) | ||||
| OTHER INCOME (EXPENSE) | ||||||||
| Interest expense | (1,000 | ) | (30,250 | ) | ||||
| Change in fair value of warrants | 1,730,933 | 169,476 | ||||||
| Change in fair value of embedded derivative liability | (463,000 | ) | - | |||||
| Fair value of warrants in excess of consideration for convertible preferred stock | (1,767,575 | ) | - | |||||
| (500,642 | ) | 139,226 | ||||||
| NET LOSS | $ | (1,516,334 | ) | $ | (263,636 | ) | ||
| LOSS PER SHARE | ||||||||
| BASIC | $ | (0.25 | ) | $ | (0.07 | ) | ||
| DILUTED | $ | (0.25 | ) | $ | (0.07 | ) | ||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | ||||||||
| BASIC | 6,139,460 | 3,618,566 | ||||||
| DILUTED | 6,139,460 | 3,618,566 | ||||||
(Unaudited)
| Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
| Ended | Ended | Ended | Ended | |||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
NET REVENUES | ||||||||||||||||
Sales | $ | 138,475 | $ | 53,260 | 200,600 | $ | 118,408 | |||||||||
Royalties | 4,167 | — | 16,667 | — | ||||||||||||
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TOTAL NET REVENUE | 142,642 | 53,260 | 217,267 | 118,408 | ||||||||||||
COST OF SALES | 28,689 | 50,160 | 64,768 | 104,600 | ||||||||||||
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GROSS PROFIT | 113,953 | 3,100 | 152,499 | 13,808 | ||||||||||||
OPERATING EXPENSES | ||||||||||||||||
General and administrative | 215,787 | 180,626 | 379,817 | 420,937 | ||||||||||||
Legal and accounting | 170,506 | 50,714 | 398,941 | 341,912 | ||||||||||||
Payroll expenses (a) | 747,333 | 230,399 | 1,037,472 | 1,743,572 | ||||||||||||
Research and development (b) | 58,415 | 106,674 | 2,194,801 | 1,055,290 | ||||||||||||
Sales and marketing (c) | 37,189 | 40,656 | 60,316 | 166,475 | ||||||||||||
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Total operating expenses | 1,229,230 | 609,069 | 4,071,347 | 3,728,186 | ||||||||||||
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LOSS BEFORE OTHER INCOME | (1,115,277 | ) | (605,969 | ) | (3,918,848 | ) | (3,714,378 | ) | ||||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||
Interest expense | (4,284 | ) | (83,663 | ) | (59,438 | ) | (107,691 | ) | ||||||||
Gain (loss) on extinguishment of debt | (19,395 | ) | — | 332,523 | (82,000 | ) | ||||||||||
Change in fair value of warrants | 1,355,293 | (824,283 | ) | 2,642,138 | 2,012,289 | |||||||||||
Change in fair value of embedded derivative liability | — | (200,000 | ) | — | 400,000 | |||||||||||
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| 1,331,614 | (1,107,946 | ) | 2,915,223 | 2,222,598 | ||||||||||||
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NET INCOME (LOSS) | $ | 216,337 | $ | (1,713,915 | ) | $ | (1,003,625 | ) | $ | (1,491,780 | ) | |||||
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EARNINGS (LOSS) PER SHARE | ||||||||||||||||
BASIC | $ | 0.04 | $ | (0.47 | ) | $ | (0.22 | ) | $ | (0.42 | ) | |||||
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DILUTED | $ | 0.03 | $ | (0.47 | ) | $ | (0.22 | ) | $ | (0.42 | ) | |||||
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WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | ||||||||||||||||
BASIC | 5,859,187 | 3,618,566 | 4,474,383 | 3,559,528 | ||||||||||||
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DILUTED | 7,462,128 | 3,618,566 | 4,474,383 | 3,559,528 | ||||||||||||
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$(54,834) for the three months ended March 31, 2016 and 2015
| Series A Convertible Preferred Stock | Series B Convertible Preferred Stock | Common Stock | Additional | Treasury Stock | Deferred Compensation | Accumulated Deficit | Total | |||||||||||||||||||||||||||||||||||||
| Number of Shares | Amount | Number of Shares | Amount | Number of Shares | Amount | Paid-In Capital | ||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2014 (Audited) | 248,366 | $ | 633,333 | — | $ | — | 3,618,566 | $ | 3,618 | $ | 25,047,050 | $ | (113,389 | ) | $ | — | $ | (37,696,405 | ) | $ | (12,125,793 | ) | ||||||||||||||||||||||
Conversion of Series A Convertible Preferred Stock into common stock | (248,366 | ) | (633,333 | ) | — | — | 248,366 | 248 | 633,085 | — | — | — | — | |||||||||||||||||||||||||||||||
Sale of Series A Convertible Preferred Stock | 389,668 | 390 | — | — | — | — | 1,278,111 | — | — | — | 1,278,501 | |||||||||||||||||||||||||||||||||
Conversion of stockholder deferred compensation into Series A Convertible Preferred Stock | 10,667 | 10 | — | — | — | — | 34,990 | — | — | — | 35,000 | |||||||||||||||||||||||||||||||||
Conversion of notes payable and accrued interest into Series A Convertible Preferred Stock | 41,603 | 42 | — | — | — | — | 136,771 | — | — | — | 136,813 | |||||||||||||||||||||||||||||||||
Conversion of accrued expenses into Series B Convertible Preferred Stock | — | — | 1 | — | — | — | 8,367,417 | — | — | — | 8,367,417 | |||||||||||||||||||||||||||||||||
Sale of common stock | — | — | — | — | 304,785 | 305 | 49,695 | — | — | — | 50,000 | |||||||||||||||||||||||||||||||||
Conversion of warrants into common stock | — | — | — | — | 43,529 | 44 | 36,956 | — | — | — | 37,000 | |||||||||||||||||||||||||||||||||
Conversion of stockholder notes payable and accrued interest into common stock, net of gain of $297,370 | — | — | — | — | 673,706 | 674 | 730,752 | — | — | — | 731,426 | |||||||||||||||||||||||||||||||||
Conversion of accounts payable and accrued expenses into common stock | — | — | — | — | 116,997 | 117 | 99,330 | — | — | — | 99,447 | |||||||||||||||||||||||||||||||||
Cashless exercise of options into common stock | — | — | — | — | 2,353 | 2 | (2 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||
Issuance of stock for services | — | — | — | — | 900,000 | 900 | 2,130,750 | — | (2,131,650 | ) | — | — | ||||||||||||||||||||||||||||||||
Forgiveness of stockholder compensation | — | — | — | — | — | — | 175,287 | — | — | — | 175,287 | |||||||||||||||||||||||||||||||||
Amortization of deferred compensation | — | — | — | — | — | — | — | — | 202,908 | — | 202,908 | |||||||||||||||||||||||||||||||||
Fair value of employee stock options | — | — | — | — | — | — | 400,721 | — | — | — | 400,721 | |||||||||||||||||||||||||||||||||
Rounding of partial shares relative to reverse split | — | — | — | 885 | 1 | (1 | ) | — | — | — | — | |||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | — | (1,003,625 | ) | (1,003,625 | ) | |||||||||||||||||||||||||||||||
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Balance at September 30, 2015 (Unaudited) | 441,938 | $ | 442 | 1 | $ | — | 5,909,187 | $ | 5,909 | $ | 39,120,912 | $ | (113,389 | ) | $ | (1,928,742 | ) | $ | (38,700,030 | ) | $ | (1,614,898 | ) | |||||||||||||||||||||
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March 31, 2016
| Series A | Series B | Series C | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible | Convertible | Convertible | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred | Preferred | Preferred | Common | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock | Stock | Stock | Stock | Additional | ||||||||||||||||||||||||||||||||||||||||||||||||
| Number of | Number of | Number of | Number of | Paid-In | Treasury | Deferred | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Stock | Compensation | Deficit | Total | ||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2015 (Audited) | 441,938 | $ | 442 | 1.00 | $ | - | 5,977,030 | $ | 5,977 | $ | 39,779,414 | $ | (113,389 | ) | $ | (1,842,334 | ) | $ | (39,998,290 | ) | $ | (2,168,180 | ) | |||||||||||||||||||||||||||||
| Conversion of Series A Convertible Preferred Stock | (14,720 | ) | (15 | ) | - | - | - | - | 294,400 | 294 | (279 | ) | - | - | - | - | ||||||||||||||||||||||||||||||||||||
| Conversion of Series B Convertible Preferred Stock | - | - | (0.03 | ) | - | - | - | 291,780 | 292 | (292 | ) | - | - | - | - | |||||||||||||||||||||||||||||||||||||
| Sale of Series C Convertible Preferred Stock | - | - | - | - | 3,087,500 | 3,088 | - | - | 1,231,912 | - | - | - | 1,235,000 | |||||||||||||||||||||||||||||||||||||||
| Stock issuance costs | - | - | - | - | - | - | - | - | (17,500 | ) | - | - | - | (17,500 | ) | |||||||||||||||||||||||||||||||||||||
| Deemed dividend distribution | - | - | - | - | - | - | (1,235,000 | ) | - | - | - | (1,235,000 | ) | |||||||||||||||||||||||||||||||||||||||
| Issuance of stock for services | - | - | - | - | - | - | 23,500 | 23 | 15,252 | - | - | - | 15,275 | |||||||||||||||||||||||||||||||||||||||
| Fair value of stock options | - | - | - | - | - | - | - | - | 335,828 | - | - | - | 335,828 | |||||||||||||||||||||||||||||||||||||||
| Decrease in fair value of restricted stock units | - | - | - | - | - | - | - | - | (82,125 | ) | - | 82,125 | - | - | ||||||||||||||||||||||||||||||||||||||
| Amortization of deferred compensation | - | - | - | - | - | - | - | - | - | 202,691 | - | 202,691 | ||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | - | - | (1,516,334 | ) | (1,516,334 | ) | ||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2016 (Unaudited) | 427,218 | $ | 427 | 0.97 | $ | - | 3,087,500 | $ | 3,088 | 6,586,710 | $ | 6,586 | $ | 40,027,210 | $ | (113,389 | ) | $ | (1,557,518 | ) | $ | (41,514,624 | ) | $ | (3,148,220 | ) | ||||||||||||||||||||||||||
| Nine Months | Nine Months | |||||||
| Ended | Ended | |||||||
| September 30, | September 30, | |||||||
| 2015 | 2014 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net loss | $ | (1,003,625 | ) | $ | (1,491,780 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
Gain on conversion of debt | (332,523 | ) | — | |||||
Fair value of options issued in exchange for services | 400,721 | 842,592 | ||||||
Accretion of discount on notes payable | 10,447 | — | ||||||
Change in fair value of warrant liability | (2,642,138 | ) | (2,012,289 | ) | ||||
Change in fair value of embedded derivative liability | — | (400,000 | ) | |||||
Fair value of stock in excess of converted notes payable and accrued interest | — | 82,000 | ||||||
Amortization and depreciation | 64,629 | 61,771 | ||||||
Stock and warrants issued in exchange for technology | — | 844,000 | ||||||
Amortization of deferred compensation | 202,908 | — | ||||||
(Increase) decrease in assets | ||||||||
Accounts receivable | (69,237 | ) | (22,936 | ) | ||||
Inventory | (1,221 | ) | (100,173 | ) | ||||
Prepaid expenses | 10,033 | 7,896 | ||||||
Increase (decrease) in liabilities | ||||||||
Accounts payable and accrued expenses | 2,155,173 | 256,551 | ||||||
Deferred revenue | (16,667 | ) | — | |||||
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Net cash used in operating activities | (1,221,500 | ) | (1,932,368 | ) | ||||
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CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchase of equipment | (2,432 | ) | — | |||||
Purchase of patents | (100 | ) | — | |||||
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Net cash used in investing activities | (2,532 | ) | — | |||||
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CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from issuance of notes payable | 159,542 | 650,000 | ||||||
Repayment of notes payable | (50,000 | ) | — | |||||
Proceeds from sale of Series A Convertible Preferred Stock | 1,278,501 | — | ||||||
Proceeds from sale of common stock | 50,000 | — | ||||||
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Net cash provided by financing activities | 1,438,043 | 650,000 | ||||||
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 214,011 | (1,282,368 | ) | |||||
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD | 63,956 | 1,285,973 | ||||||
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CASH AND CASH EQUIVALENTS - END OF PERIOD | $ | 277,967 | $ | 3,605 | ||||
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
Cash paid during the year for: | ||||||||
Interest | $ | 6,646 | $ | — | ||||
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Income taxes | $ | — | $ | — | ||||
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SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
Fair value of stock issued for conversion of notes payable and accrued interest | $ | 731,426 | $ | 506,588 | ||||
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Fair value of warrants issued as debt discount | $ | — | $ | 151,005 | ||||
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|
|
| |||||
Cashless exercise of warrants | $ | 2 | $ | — | ||||
|
|
|
| |||||
Series A Convertible Preferred Stock converted to common stock | $ | 633,333 | $ | — | ||||
|
|
|
| |||||
Issuance of Series A Convertible Preferred Stock for deferred compensation | $ | 35,000 | $ | — | ||||
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|
|
| |||||
Issuance of Series A Convertible Preferred Stock for notes payable and accrued interest | $ | 136,813 | $ | — | ||||
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|
|
| |||||
Issuance of Series B Convertible Preferred Stock for accrued expenses | $ | 6,500,000 | $ | — | ||||
|
|
|
| |||||
Conversion of warrants into Series B Convertible Preferred Stock | $ | 1,867,417 | $ | — | ||||
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|
|
| |||||
Conversion of warrants to common stock | $ | 37,000 | $ | — | ||||
|
|
|
| |||||
Conversion of accounts payable and accrued expenses into common stock | $ | 99,447 | $ | — | ||||
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|
|
| |||||
Common stock issued for deferred compensation | $ | 2,131,650 | $ | — | ||||
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|
| |||||
Forgiveness of stockholder compensation | $ | 175,287 | $ | — | ||||
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| |||||
| Three Months | Three Months | |||||||
| Ended | Ended | |||||||
| March 31, | March 31, | |||||||
| 2016 | 2015 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (1,516,334 | ) | $ | (263,636 | ) | ||
| Adjustments to reconcile net loss to net cash used in | ||||||||
| operating activities | ||||||||
| Fair value of options issued in exchange for services | 335,828 | (54,834 | ) | |||||
| Common stock issued for services | 15,275 | - | ||||||
| Accretion of discount on notes payable | - | 10,447 | ||||||
| Change in fair value of warrant liability | 36,643 | (169,476 | ) | |||||
| Change in fair value of embedded derivative liability | 463,000 | - | ||||||
| Amortization and depreciation | 7,644 | 21,426 | ||||||
| Amortization of deferred compensation | 202,691 | - | ||||||
| (Increase) decrease in assets | ||||||||
| Inventory | (20,120 | ) | (12,000 | ) | ||||
| Prepaid expenses | - | 2,632 | ||||||
| Increase (decrease) in liabilities | ||||||||
| Accounts payable and accrued expenses | (101,305 | ) | 346,205 | |||||
| Deferred revenue | - | (6,250 | ) | |||||
| Net cash used in operating activities | (576,678 | ) | (125,486 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Employee advances | (36,083 | ) | - | |||||
| Net cash used in investing activities | (36,083 | ) | - | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from issuance of notes payable | - | 136,102 | ||||||
| Proceeds from sale of Series C Convertible Preferred Stock | 1,235,000 | - | ||||||
| Stock issuance costs | (17,500 | ) | - | |||||
| Net cash provided by financing activities | 1,217,500 | 136,102 | ||||||
| NET INCREASE IN CASH AND | ||||||||
| CASH EQUIVALENTS | 604,739 | 10,616 | ||||||
| CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD | 4,152 | 63,956 | ||||||
| CASH AND CASH EQUIVALENTS - END OF PERIOD | $ | 608,891 | $ | 74,572 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid during the year for: | ||||||||
| Interest | $ | - | $ | - | ||||
| Income taxes | $ | - | $ | - | ||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Series A Convertible Preferred Stock converted to common stock | $ | 294 | $ | - | ||||
| Series B Convertible Preferred Stock converted to common stock | $ | 292 | $ | - | ||||
| Security deposit offset against accounts payable | $ | 37,197 | $ | - | ||||
| Accretion of discount on preferred stock as deemed dividend distribution | $ | 1,235,000 | $ | - | ||||
| Revaluation of restricted stock units between additional paid in capital and deferred | ||||||||
| compensation | $ | 82,125 | $ | - | ||||
in digital transactions. The Company investsdelivers security solutions for identification and authentication of people, products and packaging in developing new proprietary color shifting inks that it believes will allow it to penetrate broader marketsa variety of applications in the security field for both digital and result in increased revenues.physical transactions. The Company refines its technologies and their applications, and now has what it believes to be one of the most cost effective and efficient authentication technologies available. Its most recent technology takes advantage of the new ubiquitous energy efficient fluorescent lighting to change the color of ink, resulting in numerous potential new applications ranging from credit cards to drivers licenses, passports, stock certificates, clothing labels, currency, ID cards, and tax stamps. The technologiesproducts can also be used to protect DVDs, apparel, pharmaceuticals,manage and virtually any otherissue secure credentials, including national IDs, passports, driver licenses and access control credentials, as well as comprehensive authentication security software to secure physical product.
The Company’s digital solution is a multi-platform (iOS and Android) strong authentication solution that integrates biometricslogical access to facilities, computer networks, internet sites and geo-location tagging. The solution completely eliminates passwords and the inherently weak security they provide. The solution also removes the user complexity associated with having to manage many complex passwords. The solution can be delivered either as a high availability cloud service, managed by the Company, or as a licensed software product for operation on the client’s premises.
The solution integrates three independent authentication factors — something you have (for instance a smartphone), something you know (for instance a color gesture swipe) and something you are (for instance your facial geometry) into a simple, fast, intuitive solution. The system can also accurately determine the precise location of the individual using a variety of mechanisms including GPS, cell tower triangulation, IP or Wi-Fi address. Because the solution incorporates biometrics it completely eliminates the possibility that users might share their authentication credentials. The combination of biometrics and geolocation provides extremely strong transactional evidence, making it nearly impossible for an end-user to refute having been part of a transaction.
mobile applications.
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Reverse Stock Split and Changes to Company’s Preferred Stock
On May 26, 2015, the board of directors of2016.
On May 28, 2015, those stockholders of the Company holding a majority of the issued and outstanding shares of Common Stock and Series A Preferred Stock, acting by written consent in lieu of a special meeting, voted to approve the Reverse Stock Split.
On June 11, 2015, at a duly authorized special meeting of the Board, the Board (a) finalized, adopted and approved a resolution setting the Reverse Stock Split exchange ratio to a 1-for-85 split and (b) approved and adopted a new Certificate of Designation for Series B Preferred Stock, establishing the designations, preferences, powers and rights of the shares of the Company’s Series B convertible preferred stock, par value $0.001 per share (the “Series B Preferred Stock,” and together with the Series A Preferred Stock, the “Preferred Stock”).
On July 23, 2015, the Company completed the 1-for-85 Reverse Stock Split of all of its outstanding Common Stock and Preferred Stock. The total number of authorized capital stock of the Company remained unchanged at its current total of 750,000,000, with 675,000,000 designated as Common Stock and 75,000,000 designated as Preferred Stock. The accompanying financial statements and notes to the financial statements give retroactive effect to the Reverse Stock Split for all periods presented, unless otherwise specified.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP 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 (“FASB”) Accounting Standards CodificationUpdate (“FASB ASC”ASU”) 220, “Comprehensive Income,”2014-16, Derivatives and Hedging (Topic 815) Determining Whether the Host Contract 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 recognizedHybrid Financial Instrument Issued in the calculation of net income. Since the Company has no items of other comprehensive income (loss), comprehensive income (loss) is equal to net income (loss).
Fair Value of Financial Instruments
The Company’s financial instruments consist of accounts receivable, accounts payable and accrued expenses, warrant liability 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 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 prices 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
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The level in the fair value 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.
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.
Concentration of Credit Risk Involving Cash and Cash Equivalents
The Company’s cash and cash equivalents are held at one financial institution. At times, the Company’s deposits may exceed Federal Deposit Insurance Corporation (FDIC) coverage limits. The Company has not experienced any losses from maintaining cash accounts in excess of federally insured limits.
Inventory
Inventory principally consists of penlights and pigments and is stated at the lower of cost (determined by the first-in, first-out method) or market.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, principally five to seven years. 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.
Patents and Trademark
Currently the Company has twenty U.S. patents, four U.S. and seven applications pending for allowance. The Company has also purchased a trademark. 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 which were determined to be 17 to 20 years.
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” (“FASB ASC 470-50”).
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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.
Derivative Instruments
The Company evaluates its convertible debt, Preferred Stock, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with FASB ASC 480, “Distinguish by Liabilities from Equity” (FASB ASC 480), and FASB ASC 815, “Derivatives and Hedging” (“FASB ASC 815”). The result of this accounting treatment is that the fair value of the embedded derivative, if required to be bifurcated, is marked-to-market at each balance sheet date and recorded as a liability. The change in fair value is recorded in the Statement of Operations as a component of other income or expense. Upon conversion or exerciseForm of a derivative instrument, the instrumentShare is markedMore Akin to fair value at the conversion date and then that fair value is reclassifiedDebt or to equity.
In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified as liabilities at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.
Revenue Recognition
In accordance with FASB ASC 605, “Revenue Recognition,” the Company recognizes revenue when (i) persuasive evidence of a customer or distributor arrangement exists, (ii) a retailer, distributor or wholesaler receives the goods and acceptance occurs, (iii) the price is fixed or determinable, and (iv) collectability of the revenue is reasonably assured. Subject to these criteria, the Company recognizes revenue from product sales, consisting mainly of pigments and penlights, upon shipment to the customer. Royalty revenue is recognized upon receipt of notification from a customer that the Company’s product has been used in the customer’s production process.
Income Taxes
The Company follows FASB ASC 740, “Income Taxes,” 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 2011 through 2014 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.
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The Company accounts for stock-based compensation awards to non-employees in accordance with FASB ASC 505-50, “Equity-Based Payments to Non-Employees” (“FASB ASC 505-50”). 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 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 vesting or 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 completed.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs were approximately $200 and $458 for the three and nine months ended September 30, 2015 and $9,000 and $62,238 for the three and nine months ended September 30, 2014 and are included in sales and marketing expenses.
Research and Development Costs
In accordance with FASB ASC 730, “Research and Development,” research and development costs are expensed when incurred. Research and development costs were $58,062 and $2,194,448 for the three and nine months ended September 30, 2015 and $13,601 and $889,450 for the three and nine months ended September 30, 2014.
Basic and Diluted Net Income per Share of Common Stock
The Company follows FASB ASC 260, “Earnings Per Share,” when reporting Earnings Per Share resulting in the presentation of basic and diluted earnings per share. Basic net income per common share is based on the weighted average number of shares outstanding during the periods presented. Diluted net income per common share is computed using the weighted average number of common shares plus dilutive common share equivalents outstanding during the period. Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive, i.e., the exercise prices of the outstanding stock options were greater than the market price of the Common Stock. Anti-dilutive Common Stock equivalents, which were excluded from the calculation of number of dilutive common stock equivalents, amounted to 19,237,648 shares for the three months ended September 30, 2015.
Segment Information
The Company is organized and operates as one operating segment wherein the Company’s patented technologies are utilized to address counterfeiting issues. In accordance with FASB ASC 280, “Segment Reporting” (“FASB ASC 280”), 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. 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
As of September 30, 2015 and for the three and nine months then ended, there were no recently adopted accounting pronouncements that had a material effect on the Company’s financial statements.
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Equity.
Reclassifications
Certain amounts in the 2014 statement of operations have been reclassified in order for them to conform with the 2015 presentation.
Property and Equipment consists of the following:
| September 30, 2015 | December 31, 2014 | |||||||
Furniture and Fixtures | $ | 219,871 | $ | 219,871 | ||||
Equipment | 18,587 | 16,155 | ||||||
|
|
|
| |||||
| 238,458 | 236,026 | |||||||
Less: Accumulated depreciation | 213,226 | 161,205 | ||||||
|
|
|
| |||||
| $ | 25,232 | $ | 74,821 | |||||
|
|
|
| |||||
Depreciation of property and equipment was $17,394 and $52,021 for the three and nine months ended September 30, 2015 and $17,313 and $51,940 for the three and nine months ended September 30, 2014.
NOTE 4 – PATENTS AND TRADEMARK
Currently the Company has twenty U.S. patents, four U.S. and seven applications pending for allowance. Accordingly, costs associated with the registration and legal defense of these patents have been capitalized and are amortized on a straight-line basis over the estimated lives of the patents which were determined to be 17 to 20 years. The trademark is also being amortized on a straight-line basis over its estimated useful life of 20 years. During three and nine months ended September 30, 2015 and 2014, the Company
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capitalized $0 of patent costs and trademarks. Amortization expense for patents and trademarks was $4,203 and $12,608 for the three and nine months ended September 30, 2015 and $3,277 and $9,831 for the three and nine months ended September 30, 2014.
On March 30, 2015, the Company was advised by the United States Patent and Trademark Office (“USPTO”) that its petition for an unintentional delayed payment for an unpaid maintenance fee to reinstate its patent was granted by the USPTO. The patent, for a counterfeiting ink detection system, was granted on November 2, 2004.
NOTE 5 – INCOME TAXES
2015.
NOTE 6 – RECAPITALIZATION TRANSACTION
On or about June 12, 2015, the Company entered into definitive agreements to restructure the overall capitalization of the Company (the “Recapitalization Transaction”). To effectuate the Recapitalization Transaction, the Company entered into a Master Acquisition Agreement (the “Master Agreement”) with OPC Partners LLC, a Delaware limited liability company (“OPC”), VerifyMe Inc., a Texas corporation (“VFM”), Zaah Technologies, Inc., a Delaware corporation (“Zaah”), and an additional private investor (the “Private Investor”).
Pursuant to the Master Agreement, the Company entered into several other material definitive agreements (collectively, the “Transaction Documents”) required to consummate the Recapitalization Transaction. A brief summary of the Transaction Documents is included below. Each of the Transaction Documents was entered effective as of June 12, 2015, upon the closing of the Recapitalization Transaction.
Note Conversion Agreement. The Company entered into various Note Conversion Agreements with various holders of promissory notes executed by the Company (the “Noteholders”), pursuant to which the Noteholders converted $731,426 of outstanding notes and accrued interest (net of gain on conversion of $297,370) into 57,265,030 shares (pre Reverse Stock Split) of restricted non-trading Common Stock of the Company at a conversion rate of one (1) share of Common Stock per $0.018 of outstanding principal and interest.
Warrant Conversion Agreement. The Company entered into various Warrant Conversion Agreements with various holders of warrants for the Company’s Common Stock (the “Warrantholders”), pursuant to which the Warrantholders converted 3,700,000 outstanding Common Stock warrants into 3,700,000 shares (pre Reverse Stock Split) of restricted non-trading Common Stock of the Company at a conversion ratio 1:1.
Preferred Stock Conversion Agreement. The Company and VFM entered into a Preferred Stock Conversion Agreement, pursuant to which VFM converted 21,111,111 shares (pre Reverse Stock Split) of Series A Preferred Stock of the Company that it currently owns into shares of Common Stock of the Company on a 1:1 basis (pre Reverse Stock Split).
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Patent and Technology License Termination Agreement. Pursuant to a Patent and Technology License Termination Agreement, the Company and VFM terminated that certain Patent and Technology License Agreement, dated as of December 31, 2012, by and between the Company and VFM (the “License”), and VFM agreed to receive eighty five (85) shares (pre Reverse Stock Split) of Series B Preferred Stock in complete satisfaction of $4,500,000 in past due license payments and $2,000,000 exclusivity payments owed by the Company under the License.
Termination of Registration Rights. Pursuant to a Registration Rights Termination Agreement, the Company and VFM have terminated that certain Registration Rights Agreement, dated as of December 31, 2012, by and between the Company and VFM.
Termination of Technology and Services Agreement. Pursuant to a Technology and Services Agreement Termination Agreement, the Company and VFM terminated that certain Technology and Services Agreement, dated as of December 31, 2012, by and between the Company and VFM.
Termination of Investment Agreement. Pursuant to an Investment Agreement Termination Agreement, the Company and VFM terminated that certain Investment Agreement, dated as of December 31, 2012, by and between the Company and VFM.
Patent Purchase Agreement. The Company and VFM entered into and consummated a Patent Purchase Agreement, transferring and assigning over to the Company all of VFM’s rights, title and interest into certain U.S. patents and pending U.S. patent applications.
Termination of Zaah Technology and Services Agreement. Pursuant to a Technology and Services Agreement Termination Agreement, the Company and Zaah terminated that certain Technology and Services Agreement, dated as of December 31, 2012, by and between the Company and Zaah.
Series A Preferred Stock Subscription Agreement. The Company entered into a Subscription Agreement with OPC, pursuant to which the Company issued 37,564,767 shares (pre Reverse Stock Split) of Series A Preferred Stock to OPC for a cash investment $1,278,501, plus the conversion of deferred compensation, notes payable and accrued interest amounting to $171,813, into the Company by OPC.
Common Stock Subscription Agreement. The Company entered into a Subscription Agreement with the Private Investor, pursuant to which the Company issued 25,906,736 shares (pre Reverse Stock Split) of restricted non-trading Common Stock to the Private Investor for a cash investment of $50,000 into the Company by the Private Investor.
Series B Preferred Stock Subscription Agreement. In connection with the termination of the License with VFM, the Company entered into a Subscription Agreement with VFM, pursuant to which to the Company issued 85 shares (pre Reverse Stock Split) of Series B Preferred Stock to VFM.
The foregoing description of the Master Agreement and the related Transaction Documents is a summary, and does not purport to be a complete description of the Master Agreement and the related Transaction Documents, and is qualified in its entirety by reference to the Master Agreement and the related Transaction Documents, copies of which are filed as Exhibits 10.1, 10.2 and 10.3 to the Company’s Current Report on Form 8-K, filed with the SEC on June 18, 2015.
NOTE 7 – SENIOR SECURED CONVERTIBLE NOTES PAYABLE – RELATED PARTIES
During the second quarter of 2014, $216,249 of principal of the Company’s outstanding senior convertible notes held by a significant stockholder of the Company, plus accrued interest of $208,339, were converted into 8,448,519 shares of Common Stock. The excess of the fair value of the Common Stock over the value of the notes payable and accrued interest, $82,000, was recorded as loss on extinguishment of debt in accordance with FASB ASC 470-50.
On June 12, 2015, as part of the Recapitalization Transaction (see Note 6), the Company restructured the Senior Secured Convertible Notes Payable – Related Parties. As a result the principal balance of $114,000 and accrued interest of $118,775 was converted into 154,184 shares (13,105,662 shares pre Reverse Stock Split at $0.018 per share) of the Company’s Common Stock. This resulted in a
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gain of $103,456. Of this amount, $17,967 was related to a stockholder and recorded as additional paid in capital, with the remaining $85,489 being recorded as a gain on extinguishment of debt.
NOTE 8 – NOTES PAYABLE
Notes payable consists of the following at September 30, 2015 and December 31, 2014:
| September 30, 2015 | December 31, 2014 | |||||||
Unsecured notes payable due to related parties; interest at 10% per annum; principal and accrued interest due at maturity in September 2015 | — | $ | 114,000 | |||||
Series A notes payable; interest at 8% per annum; principal and accrued interest due at maturity in October 2011 (past due) | 50,000 | 50,000 | ||||||
Notes payable; interest at 8% per annum, principal and accrued interest due at December 1, 2014 (past due) | — | 650,000 | ||||||
Notes payable; interest at 5% and 8% per annum, principal and accrued interest due at April 2015 | — | 123,000 | ||||||
Notes payable; interest at 5% per annum, principal and accrued interest due at June 10, 2015 | — | — | ||||||
Notes payable; interest at 8% per annum, principal and accrued interest due at June 25, 2015 | — | — | ||||||
Less: Debt discount | — | (10,447 | ) | |||||
|
|
|
| |||||
| 50,000 | 926,553 | |||||||
Less: Current portion | 50,000 | 926,553 | ||||||
|
|
|
| |||||
| $ | — | $ | — | |||||
|
|
|
| |||||
The warrant liabilities in this section were valued using the Black-Scholes option pricing model, with the following assumptions: no dividend yield, expected volatility of 173.7% to 180.7%, risk free interest rate of 1.75% and expected lives of four to five years.
On June 10, 2014, the Company issued a note payable for $250,000, which included fully vested warrants to purchase 1,000,000 shares pre Reverse Stock Split of Common Stock at an exercise price of $0.10 per share, expiring in five years. The warrants were valued at $39,650 using 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 248.2%, risk free interest rate of 1.67% and expected life of five years. The relative fair value of the warrants was $34,222 and was recorded as a discount to the notes payable in accordance with FASB ASC 835-30-25, “Recognition” (“FASB 835-30-25”) and is being accreted over the term of the note payable for financial statement purposes. For the year ended December 31, 2014, $34,222 was accreted through interest expense. The note and accrued interest at 8% per annum was originally due on December 11, 2014, but the Company received approval to extend the maturity until December 31, 2014. The warrants are subject to anti-dilutive adjustments and are therefore classified as a liability in accordance with Financial Accounting Standards Board FASB Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging and ASU 2014-16, and was valued in accordance with ASC 815. The warrant470 as a beneficial conversion feature at a combined fair market value of $1,235,000 as of February 2016. This was classified as an embedded derivative liability is re-valuedand a discount to Series C. Because the Series C can be converted at eachany time, the full amount was accreted and classified as a reduction to the discount on Series C and a deemed distribution in the full amount of $1,235,000.
As a result of the Recapitalization Transaction, the note’s principal balance of $250,000 and accrued interest of $20,263 was converted into 176,471 shares (15,000,000 shares pre Reverse Stock Split at $0.018) of Common Stock. This resulted in a gain of $120,117, and because this individual is a stockholder was recorded as additional paid in capital.
On August 5, 2014, the Company issued notes payable for $100,000, which included fully vested warrants to purchase 600,000 shares (pre Reverse Stock Split) of Common Stock at an exercise price of $0.05 per share, expiring in five years. The warrants were valued at $29,725 using 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 233.8%, risk free interest rate of 1.67% and expected life of five years. The relative fair value of the warrants was $22,914 and was recorded as a discount to the notes payable in accordance with FASB ASC 835-30-25, and is being accreted over the term of the note payable for financial statement purposes. For the year ended December 31, 2014, $22,914 was accreted through interest expense. The note and accrued interest at 8% per annum were due in full on December 1, 2014. The warrants are subject to anti-dilutive adjustments and are therefore
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classified as a liability in accordance with FASB ASC 815. The warrant liability is re-valued at each reporting period with the change in fair value recorded through earnings. As of June 12, 2015, the date of conversion in conjunction with the Recapitalization Transaction (see Note 6), the fair value of the warrant liability was $5,151.
As a result of the Recapitalization Transaction, the principal balance of $50,000 and accrued interest of $3,414 was converted into 34,898 shares (2,966,210 shares pre Reverse Stock Split at $0.018) of the Common Stock. This resulted in a gain of $23,740, which was recorded as a gain on the extinguishment of debt. The remaining $50,000 was paid in full, plus accrued interest in September 2015. The 3,529 warrants (300,000 warrants pre Reverse Stock Split) to purchase shares of Common Stock associated with the $50,000 note payable remain outstanding and must be re-valued at each reporting period with the change in fair value recorded through earnings. As of September 30, 2015, the warrants were valued at $7,899.
On August 12, 2014, the Company issued a notes payable for $50,000, which included fully vested warrants to purchase 300,000 shares (pre Reverse Stock Split) of Common Stock at an exercise price of $0.05 per share, expiring in five years. The warrants were valued at $26,817 using 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 233.8%, risk free interest rate of 1.67% and expected life of five years. The relative fair value of the warrants was $17,455 and was recorded as a discount to the notes payable in accordance with FASB ASC 835-30-25, and is being accreted over the term of the note payable for financial statement purposes. For the year ended December 31, 2014, $17,455 was accreted through interest expense.
The note and accrued interest at 8% per annum were due in full on December 1, 2014. The warrants are subject to anti-dilutive adjustments and are therefore classified as a liability in accordance with FASB ASC 815. The warrant liability is re-valued at each reporting period with the change in fair value recorded through earnings. As of June 12, 2015, the date of conversion in conjunction with the Recapitalization Transaction (see Note 6), the fair value of the warrant liability was $2,575.
As a result of the Recapitalization Transaction, the principal balance of $50,000 and accrued interest of $3,370 was converted into 34,843 shares (2,961,644 shares pre Reverse Stock Split at $0.018) of Common Stock. This resulted in a gain of $23,720, which was recorded as a gain on the extinguishment of debt.
On August 14, 2014, the Company issued a note payable for $100,000, which included fully vested warrants to purchase 600,000 shares pre Reverse Stock Split of Common Stock at an exercise price of $0.05 per share, expiring in five years. The warrants were valued at $47,676 using 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 233.8%, risk free interest rate of 1.67% and expected life of five years. The relative fair value of the warrants was $32,274 and was recorded as a discount to the notes payable in accordance with FASB ASC 835-30-25 and is being accreted over the term of the note payable for financial statement purposes. For the year ended December 31, 2014, $32,274 was accreted through interest expense. The note and accrued interest at 8% per annum were due in full on December 1, 2014. The warrants are subject to anti-dilutive adjustments and are therefore classified as a liability in accordance with FASB ASC 815. The warrant liability is re-valued at each reporting period with the change in fair value recorded through earnings. As of June 12, 2015, the date of conversion in conjunction with the Recapitalization Transaction (see Note 6), the fair value of the warrant liability was $5,153.
As a result of the Recapitalization Transaction, the principal balance of $100,000 and accrued interest of $6,697 was converted into 69,657 shares (5,920,852 shares pre Reverse Stock Split at $0.018) of Common Stock. This resulted in a gain of $47,421, which was recorded as a gain on the extinguishment of debt.
On September 8, 2014, the Company issued notes payable for $150,000, which included fully vested warrants to purchase 900,000 shares (pre Reverse Stock Split) of Common Stock at an exercise price of $0.05 per share, expiring in five years. The warrants were valued at $62,544 using 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 233.8%, risk free interest rate of 1.67% and expected life of five years. The relative fair value of the warrants was $44,140 and was recorded as a discount to the notes payable in accordance with FASB ASC 835-30-25 and is being accreted over the term of the note payable for financial statement purposes. For the year
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ended December 31, 2014, $44,140 was accreted through interest expense. The note and accrued interest at 8% per annum were due in full on December 1, 2014. The warrants are subject to anti-dilutive adjustments and are therefore classified as a liability in accordance with FASB ASC 815. The warrant liability is re-valued at each reporting period with the change in fair value recorded through earnings. As of June 12, 2015, the date of conversion in conjunction with the Recapitalization Transaction (see Note 6), the fair value of the warrant liability was $7,725.
As a result of the Recapitalization Transaction, the principal balance of $150,000 and accrued interest of $9,222 was converted into 103,991 shares (8,839,269 shares pre Reverse Stock Split at $0.018) of Common Stock. This resulted in a gain of $70,766, which was recorded as a gain on the extinguishment of debt.
On December 5, 2014, the Company issued a note payable for $23,000 to a stockholder, which bears interest at 5.0% and was due on April 5, 2015. As a result of the Recapitalization Transaction (see Note 6), the principal balance of $23,000 and accrued interest of $609 was converted into 15,418 shares (1,310,510 shares pre Reverse Stock Split at $0.018) of Common Stock. This resulted in a gain of $10,493 and because this entity is a stockholder was recorded as additional paid in capital.
On December 31, 2014, the Company issued a note payable for $100,000, which include fully vested warrants to purchase 600,000 shares (pre Reverse Stock Split) of Common Stock at an exercise price of $0.05 per share expiring in five years. The warrants were valued at $11,812 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 229.0%, risk free interest rate of 1.68% and expected life of five years. The relative fair value of the warrants was $10,563 and was recorded as a discount to the notes payable in accordance with FASB ASC 835-30-25 and is being accreted over the term of the note payable for financial statement purposes. For the three months ended March 31, 2015, the final $10,447 was accreted through interest expense. The note and accrued interest at 8% per annum were due in full on April 1, 2015. The warrants are subject to anti-dilution adjustments and are therefore classified as a liability in accordance with FASB ASC 815. The warrant liability is revalued at each reporting period with the change in fair value recorded through earnings. As of June 12, 2015, the date of conversion in conjunction with the Recapitalization Transaction (see Note 6), the fair value of the warrant liability was $5,226.
As a result of the Recapitalization Transaction, the principal balance of $100,000 and accrued interest of $3,689 was converted into 67,637 shares (5,749,163 shares pre Reverse Stock Split at $0.018) of Common Stock. This resulted in a gain of $46,084, which was recorded as a gain on the extinguishment of debt.
On February 10, 2015, the Company issued a note payable for $25,000, bearing interest at 5.0% to an accredited investor and director of the Company. As a result of the recapitalization transaction (see Note 6), the principal balance of $25,000 and accrued interest of $417 was converted into 16,608 shares (1,411,720 shares pre Reverse Stock Split at $0.018) of Common Stock. This resulted in a gain of $11,296 and because this entity is a stockholder was recorded as additional paid in capital.
The conversion of the notes above on June 12, 2015 will be treated as an extinguishment of debt. In accordance with FASB ASC 470-50, the difference between the cash acquisition price of the debt and its net carrying amount shall be recognized currently in income in the period of extinguishment as losses or gains. Similar transactions between stockholders will be recognized as additional paid in capital.
On March 27, 2015, the Company issued a note payable for $111,102, bearing interest at 8.0% to an accredited investor.
On April 30, 2015, the Company issued a note payable for $4,887, bearing interest at 8.0% to an accredited investor.
On May 15, 2015, the Company issued a note payable for $4,480, bearing interest at 8.0% to an accredited investor.
On May 21, 2015, the Company issued a note payable for $14,074, bearing interest at 8.0% to an accredited investor.
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As a result of the Recapitalization Transaction (see Note 6), the principal balance of the above four notes of $134,542 and accrued interest of $2,271 was converted into 41,603 shares (3,536,254 shares pre Reverse Stock Split at $0.0386) of the Company’s Series A Preferred stock as part of the $1,450,000 cash investment.
On June 12, 2015, the conversion of the four notes issued from March 27, 2015 to May 21, 2015, was treated as a troubled debt restructuring in accordance with FASB ASC 470-60-15, “Debt – Troubled Debt Restructurings by Debtors.”
A debtor that issues or otherwise grants an equity interest to a creditor to settle fully a payable shall account for the equity interest at its fair value. The difference between the fair value of the equity interest granted and the carrying amount of the payable settled shall be recognized as a gain on restructuring payables.
common stock.
The Company made the payment of warrants
As of June 12, 2015, the Company concluded that the technology received from VFM is patentable and licensable, and that the Company was required to make, on January 1, 2015, an additional payment pursuant to Patent and Technology Agreement in the amount of $4,500,000, to be paid by issuing (i) a number ofpurchase 3,529 shares of Common Stock equal to (x) $4,500,000 divided by (y) a price which equals a 10% discount to the market price at the time of issuance and (ii) warrants to purchase an equal number of shares of Common Stock exercisable at a price of $0.10 per share. Based upon the share price of $0.04 per share, this would result in the issuance of approximately an additional 125 million shares of Common Stock and warrants to purchase an additional 125 million shares. The $4,500,000 was accrued at December 31, 2014. The number of warrants to be issued based on acommon stock price of $0.02 at December 31, 2014 was 250 million warrants. The warrants were valued at $4,892,089 using the Black-Scholes pricing model to calculate the grant-date fair value of the warrants with the following assumptions: no dividend yield, expected volatility of 229.1%, risk free interest rate of 1.65% and expected life of five years.
In conjunction with the Recapitalization Transaction (see Note 6), the Company agreed that an additional $2,000,000 in exclusivity licensing fees was required to be paid and converted the $6,500,000 into shares of Series B Preferred Stock. In addition, the fair value of the associated warrants was $1,867,417 as of June 12, 2015 and was recorded as additional paid in capital on conversion.
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The warrants associated with the notes payable (see Note 6)incurred on August 5, 2014, were revalued and at June 12,March 31, 2016 and December 31, 2015, based on the cashless conversion modification. The total fair value of those warrants was $37,000$1,539 and $7,902.
At any time before January 31, 2015, VerifyMe had the right, but not the obligation, to require the Company to repurchase all, but not less than all, of the capital stock of the Company and warrants exercisable for capital stock of the Company held by VerifyMe in exchange for the price originally paid by VerifyMe therefore upon the occurrence of any of the following events: (i) the consummation of any bona fide business acquisition, (ii) the incurrence of any indebtedness by the Company in an amount in excess of $2 million, (iii) the issuance or sale of any security having a preference on liquidation senior to Common Stock, or (iv) the sale by the Company of capital stock or warrants exercisable for its capital stock at a price below $0.03 per share. This right had not been exercised.
In accordance with FASB ASC 480 and FASB ASC 815, the
The conversion feature of the 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, “Debt,” as a beneficial conversion feature at a fair value of $0 at June 12, 2015 and December 31, 2014. This was classified as an embedded derivative liability and a discount to the Series A Preferred Stock. Because the Series A Preferred Stock can be converted at any time, the full amount of the original fair value was accreted and classified as a reduction to the discount on Series A Preferred Stock and a deemed dividend distribution in the full amount of $1 million, in 2013.
The Company has determined that the Series A Preferred Stock issuance in the Recapitalization Transaction does not meet the requirements of FASB ASC 480-10 for liability treatment and therefore has been classified as permanent equity. Additionally, it was determined that the economic characteristics of the beneficial conversion feature are clearly and closely related to the host, and are based on a fixed conversion rate into shares of Common Stock and therefore do not require bifurcation.
The Company’s common stock.
The 392,157 warrants (33,333,333 warrants pre Reverse Stock Split) associated with the Series A Preferred Stock were also classified as a liability since they are subject to anti-dilutive adjustments outlined in the warrant agreement and valued at a fair market value of $2,995,791 at January 31, 2013. In addition, the warrants must be valued every reporting period and adjusted to market with the increase or decrease being adjusted through earnings. As of September 30, 2015 and December 31, 2014, the fair value of the warrants was $631,678 and $494,939.
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Additionally, on May 26, 2015, the Company amended its Amended and Restated Articles of Incorporation, dated December 19, 2003, to establish the Series B Preferred Stock, authorizing the issuance of up to 85March 17, 2016, 0.03 shares of Series B Preferred Stock. The Series B Preferred Stock are convertible currently at 8,496,732:1. 85 shares (pre Reverse Stock Split) of Series BConvertible Preferred Stock were converted into 291,780 shares of the Company’s common stock.
On June 12, 2015,February 29, 2016, the Company issued 389,668500,000 shares (33,121,777 pre Reverse Stock Split) of Series A Preferred sharesC, at a purchase price of $0.40 per share with gross proceeds to an investor for $1,278,501 as partthe Company of the total $1,450,813 transaction$200,000. In connection with the investor. In addition, an officer of the Company and a stockholder received a total of 10,667 shares (906,736 pre Reverse Stock Split) of Series A Preferred Stock for the forgiveness of previously accrued but unpaid compensation valued at $35,000 and notes payable and accrued interest were converted into 41,603 shares (3,536,254 pre Reverse Stock Split) of Series A Preferred Stock also as part of the $1,450,813 transaction with the investor. As of September 30, 2015, the 10,667 shares (906,736 pre Reverse Stock Split) of Series A Preferred Stock had not been distributed to the officer of the Company and the stockholder.
Eachsale of the Series A Preferred Stock andC, the Series B Preferred Stock have a preferenceCompany issued to the purchasers warrants to purchase in liquidation that the holdersaggregate 500,000 shares of the Company’s common stock at an exercise price of $0.40 per share. Each share of Series A Preferred Stock and theC is convertible into one share of common stock. The Series B Preferred Stock are toC provides for certain adjustments that may be paid out of assets available for distribution prior to holders of Common Stock. The holders Series A Preferred Stock and the Series B Preferred Stock may cast the number of votes equalmade to the number of whole shares of Common Stock into which the shares of Series A Preferred Stockexercise price and the Series B Preferred Stock can be converted. In addition, the holders of Series A Preferred Stock and the Series B Preferred Stock are to be paid dividends, based on the number of shares issuable upon exercise due to future corporate events or otherwise, including, for a proscribed period of time, upon the issuance of securities at a price that is less than the exercise price of the Series C.
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Derivative liability related to fair value of warrants | $ | — | $ | — | $ | 1,829,757 | $ | 1,829,757 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | — | $ | — | $ | 1,829,757 | $ | 1,829,757 | ||||||||
|
|
|
|
|
|
|
| |||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Embedded derivative liability related to beneficial conversion option | $ | - | $ | - | $ | 1,698,000 | $ | 1,698,000 | ||||||||
| Derivative liability related to fair value of warrants | - | - | 1,839,018 | 1,839,018 | ||||||||||||
| Total | $ | - | $ | - | $ | 3,537,018 | $ | 3,537,018 | ||||||||
| Total | ||||
Balance at January 1, 2015 | $ | 6,370,709 | ||
Conversion of notes payable, net of interest expense | (31,397 | ) | ||
Conversion of warrants related to licensing fees | (1,867,417 | ) | ||
Change in fair value of derivative liabilities | (2,642,138 | ) | ||
|
| |||
Balance at September 30, 2015 | $ | 1,829,757 | ||
|
| |||
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| Total | ||||
| Balance at January 1, 2016 | $ | 1,802,375 | ||
| Series C embedded derivative fair value, February, 2016 | 1,235,000 | |||
| Series C warrant liability fair value, February, 2016 | 1,767,576 | |||
| Change in fair value of derivative liabilities | (1,267,933 | ) | ||
| Balance at March, 31, 2016 | $ | 3,537,018 | ||
March 31, 2016.
| Closing trade price of common stock | $ | 0.55 | ||
| Effective Series A Preferred Stock Conversion price | - | |||
| Intrinsic value of conversion option per share | $ | 0.55 |
Annual Dividend Yield | 0.0 | % | ||
Expected Life (Years) | 2.0 - | |||
Risk-Free Interest Rate | 0.73% - | % | ||
Expected Volatility | 183.4% - | % | ||
On June 2, 2015, the Company issued 682,353 shares (post Reverse Stock Split) of Common Stock to two vendors to settle outstanding payable balances of $58,000.
On June 12, 2015, the Company issued 304,785 shares (25,906,735 pre Reverse Stock Split) of Common Stock and raised $50,000.
During the three months ended June 30, 2015, one stockholder received 2,353 shares (post Reverse Stock Split) of Common Stock in a cashless exercise.
On June 11, 2015, the Company issued 525,000 Restricted Stock Units (“RSUs”) (44,625,000 pre Reverse Stock Split) to two officers of the Company. The RSUs were valued at the closing stock price of $0.01 on June 11, 2015, at $446,250, fair value. These RSUs are being expensed over the vesting terms. For the three and nine months ended September 30, 2015, the Company expensed $37,188 and $43,386 related to the RSUs.
On June 30, 2015, the Company issued 48,761 shares (post Reverse Stock Split) of Common Stock to a vendor to settle an outstanding payable balance of $41,447, net of gain on conversion of $35,153.
On July 9, 2015, the Company hired a Chief Operating Officer (“COO”). The COO will receive 225,000 RSUs (19,125,000 pre Reverse Stock Split), vesting over a three-year period, with one-third vesting the first year and one-twelfth vesting ratably on a quarterly basis thereafter. The RSUs were valued at fair value of $918,00015,275 based on the closing stock price on February 8, 2016 of $4.08 on July 9, 2015. For the three and nine months ended September 30, 2015, the Company expensed $76,500 related to the RSUs.
$0.65 per share.
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On August 10, 2015, the Company agreed to issue the Chief Financial Officer (“CFO”) 20,000 RSUs vesting over six months and 100,000 RSUs vesting annually over three years.to a consultant for services. Of the 100,000 RSUs, 60,000 were issued upon execution of the agreement, 20,000 shares were to be issued on January 1, 2016 and 20,000 shares were to be issued on April 1, 2016. The RSUs were originally valued at a fair value of $692,400 based on the closing stock price of $5.77 per share on August 10, 2015. For$195,000. The Company expensed $34,750 for the three and nine months ended September 30, 2015, the Company expensed $70,522 relatedMarch 31, 2016 relative to thethese RSUs.
effect; however no commissions were earned during the three months ended March 31, 2016.
$82,125.
As of March 31, 2016, options to purchase 298,530 shares of common stock have been issued and are unexercised, and 4,067,631 shares are available for grants under the 2008 Plan.
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 September 30, 2015, there are 2,397,953March 31, 2016, under the 2013 Plan grants of restricted stock and options (post Reverse Stock Split) thatto purchase 700,000 shares of common stock have been issued and are unvested or unexercised, and 19,300,000 shares of common stock remain available for grants under the Plans, and 36,027,929 options that are available to be issued under the Plans. There are an additional 425,882 options that are have been issued that are not included in the Plans.
2013 Plan.
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On AugustMarch 10, 2015, the Company hired a CFO who received 200,000 options (17,000,000 pre Reverse Stock Split) to purchase shares of Common Stock vesting annually over three years. The options were valued at fair value of $1,107,857, using the Black-Scholes option pricing model with the following assumptions: no dividend yield, expected volatility of 182.2%, risk free rate interest rate of 1.62% and expected life of five years. The options are being expensed over the vesting terms.
On September 25, 2015,2016, the Company issued options to purchase an aggregate150,000 shares of 75,000 shares (6,375,000 pre Reverse Stock Split) of Common Stockthe Company’s common stock at an exercise price of $2.15$0.56 per share, with a term of five years, to a member of the Board.an employee. The fair value of options issued was $155,003.$82,113. These options were valued using the Black-Scholes option pricing model to calculate the grant-date fair value of the options, with the following assumptions: no dividend yield, expected volatility of 183.5%202.9%, risk-free interest rate of 1.48%1.45% and expected option life of five years. The options are being expensed over the servicevesting terms for the employee.
Black-Scholes option pricing model to calculate the grant-date fair value of the options, with the following assumptions: no dividend yield, expected volatility of 203.1%, risk-free interest rate of 1.39% and expected option life of five years. The options were expensed immediately.
| Options Outstanding | ||||||||||||||||
| Weighted - | ||||||||||||||||
| Average | ||||||||||||||||
| Remaining | Aggregate | |||||||||||||||
| Weighted- | Contractual | Intrinsic | ||||||||||||||
| Number of | Average | Term | Value | |||||||||||||
| Shares | Exercise Price | in years) | (in 000's) (1) | |||||||||||||
| Balance December 31, 2015 | 2,157,353 | $ | 1.80 | 5.0 | ||||||||||||
| Granted | 300,000 | $ | 0.55 | 5.0 | ||||||||||||
| Balance March 31, 2016 | 2,457,353 | $ | 1.64 | 4.8 | $ | 6 | ||||||||||
| Exercisable at March 31, 2016 | 867,770 | $ | 2.14 | 5.5 | $ | 6 | ||||||||||
| Exercisable at March 31, 2016 and expected to | ||||||||||||||||
| vest thereafter | 2,457,353 | $ | 1.64 | 4.8 | $ | 6 | ||||||||||
| (1) | The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing stock price of $0.55 for our common stock on March 31, 2016. |
| Option/Warrant Shares | Exercise Price | Weighted Average Exercise Price | ||||||||
Outstanding, December 31, 2014 | 1,425,481 | $0.85 to $17.00 | $ | 8.50 | ||||||
Granted | — | — | — | |||||||
Exercised | (45,882 | ) | 0.85 - 4.25 | — | ||||||
Expired | — | — | — | |||||||
|
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| ||||||
Outstanding, September 30, 2015 | 1,379,599 | $0.85 to $12.75 | $ | 9.11 | ||||||
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| ||||||
Exercisable, September 30, 2015 | 1,379,599 | $0.85 to $12.75 | $ | 9.11 | ||||||
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|
| ||||||
Weighted Average Remaining Life, Exercisable, September 30, 2015 (years) | 5.0 | |||||||||
|
| |||||||||
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A summary of incentiverelated stock option transactionsagreements.
| Option/Warrant Shares | Exercise Price | Weighted Average Exercise Price | ||||||||
Outstanding, December 31, 2014 | 633,725 | $4.25 - $12.75 | $ | 4.25 | ||||||
Granted | 1,875,000 | 0.85 - 5.95 | 1.25 | |||||||
Exercised | — | — | — | |||||||
Expired/Returned | (308,235 | ) | 4.25 - 12.75 | — | ||||||
|
|
|
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| ||||||
Outstanding, September 30, 2015 | 2,200,490 | $0.85 to $12.75 | $ | 1.97 | ||||||
|
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| ||||||
Exercisable, September 30, 2015 | 506,740 | $0.85 to $12.75 | $ | 3.62 | ||||||
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|
|
| ||||||
Weighted Average Remaining Life, Exercisable, September 30, 2015 (years) | 7.1 | |||||||||
|
| |||||||||
| Warrants Outstanding | ||||||||||||||||
| Weighted - | ||||||||||||||||
| Average | ||||||||||||||||
| Remaining | Aggregate | |||||||||||||||
| Weighted- | Contractual | Intrinsic | ||||||||||||||
| Number of | Average | Term | Value | |||||||||||||
| Shares | Exercise Price | in years) | (in 000's) (1) | |||||||||||||
| Balance December 31, 2015 | 1,414,893 | $ | 9.67 | 4.8 | ||||||||||||
| Expired | (2,941 | ) | $ | 0.85 | ||||||||||||
| Granted | 3,087,500 | $ | 0.40 | 3.0 | ||||||||||||
| Balance March 31, 2016 | 4,499,452 | $ | 3.31 | 3.4 | $ | 463 | ||||||||||
| Exercisable at March 31, 2016 | 4,499,452 | $ | 3.31 | 3.4 | $ | 463 | ||||||||||
| Exercisable at March 31, 2016 and expected to | ||||||||||||||||
| vest thereafter | 4,499,452 | $ | 3.31 | 3.4 | $ | 463 | ||||||||||
| (1) | The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying warrants and the closing stock price of $0.55 for our common stock on March 31, 2016. |
2015 | 18,963 | |||
2016 | 31,605 | |||
|
| |||
| $ | 50,568 | |||
|
| |||
NOTE 15 – RELATED PARTY TRANSACTIONS
At June 12, 2015, three stockholders of the Company held $317,000 of the senior secured convertible notes payable and were owed accrued interest of $42,713. The notes and accrued interest were converted into 234,735 shares (19,952,489 pre Reverse Stock Split) of Common Stock as further described in Note 7 and 8.
As of the date of this filing, the 10,667Company’s Common Stock at $0.01 per share. The warrants expire in five years.
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Company’s Common Stock.
We were incorporated in Nevada in November 1999. We are a technology development company that delivers product and document authentication and security. We plan to develop and market technologies in a variety of applications in the security fields.
The Company
Our products can be used to manage and issue secure credentials, including national identifications, passports, driver licenses and access control credentials, as well as comprehensive authentication security software to secure physical and logical access to facilities, computer networks, internet sites and mobile applications.
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Currentlytechnology.
Strategic Outlook
laser. Based upon our experience, we believe that the ink technologies may be incorporated into existing manufacturing processes. We believe that some of our patents may have non-security applications, and we are attempting to commercialize these opportunities.
Sustained spending on technology, our ability to raise additional financing, and the continued growth of the securitysolutions. Our solutions allow the assessment and quantification of risk using a sophisticated heuristic scoring mechanism. We have specialized systems that perform ‘liveness’ detection to insure the subject of authentication markets are all external conditionsis in fact a live human being. We have systems that may affectintroduce learning capabilities into our abilitysolutions to execute our business plan. In addition, certain potential customers may view our small sizeimprove the ease of use and limited financial resources negatively, even if they prefer our products to those of our competitors.
Our primary strategic objective over the next 12 to 24 months is to successfully market our productsflexibility.
We believe that our near-term success will depend particularly on our ability to develop customer awareness and confidence in our products. Since we have limited capital resources, we will need to closely manage our expenses and conserve our cash by continually monitoring any increase in expenses and reducing or eliminating unnecessary expenditures. Our prospects must be considered in lightPresident of the risks, expensesCompany as well as his position as a director on the Board of Directors of the Company. On May 1, 2016, the Company appointed Tom Nicolette as Chief Executive Officer and difficulties encountered by companies in the development stage, particularly givenPresident pursuant to a consulting agreement that we operate in rapidly evolving markets, have limited financial resources,began May 1, 2016 and face an uncertain economic environment. We may not be successful in addressing such risks and difficulties.
ends December 31, 2017.
Cost of Sales
Cost of sales$117,758 for the three months ended September 30, 2015 and 2014 was $28,689 and $50,160. Cost of sales is significantly lowerMarch 31, 2016 from $83,901 for the three months ended September 30, 2015 since we receive a commission on the number of units producedMarch 31, 2015. The increase resulted from options issued to consultants.
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General and Administrative Expenses
General and administrative expenses increased $35,161 to $215,787$115,345 for the three months ended September 30, 2015March 31, 2016 from $180,626$11,113 for the three months ended September 30, 2014. The increase resulted from the write off of receivables of $62,125.
Legal and Accounting
Legal and accounting fees increased $119,792 to $170,506 for the three months ended September 30, 2015 from $50,714 for the three months ended September 30, 2014.March 31, 2015. The increase in legal and accounting fees between the periods was primarily a result of the Recapitalization Transaction.
costs associated with filing the S-1 registration statement.
well as incurred expense from deferred compensation from the issuance restricted stock units issued in October 2015.
Gain (Loss) on Extinguishmentcompany’s 1-for-85 reverse stock split effectuated in July 2015.
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decreased.
Comparison of the Nine Months Ended September 30, 2015 and 2014
The following discussion analyzes our results of operations for the nine months ended September 30, 2015 and 2014. The following information should be considered together with our condensed financial statements for such period and the accompanying notes thereto.
Net Revenue/Net Loss
We have not generated significant revenue since our inception. For the nine months ended September 30, 2015 and 2014, we generated revenue of $217,267 and $118,408. For the nine months ended September 30, 2015 and 2014, we had a net loss of $1,003,625 and $1,491,780. These amounts primarily result from the valuation adjustment of warrant liability and embedded derivative liability associated with the Investment Agreement entered into on December 31, 2012 and the Subscription Agreement entered into on January 31, 2013, the Recapitalization Transaction, as well as the measures implemented to conserve funds.
Cost of Sales
Cost of sales for the nine months ended September 30, 2015 and 2014 was $64,768 and $104,600. Cost of sales is significantly lower for the nine months ended September 30, 2015 since we receive a commission on the number of units produced and our customer has been able to produce more with less of our product.
General and Administrative Expenses
General and administrative expenses decreased $41,120 to $379,817 for the nine months ended September 30, 2015 from $420,937 for the nine months ended September 30, 2014. The Company is attempting to reduce general and administrative expenses while generating revenue in order to develop profitability. However, during the nine months ended September 30, 2015, the Company incurred additional expense relative to the write off $62,125 of receivables and increases in public company filing fees and website expenses.
Legal and Accounting
Legal and accounting fees increased $57,029 to $398,941 for the nine months ended September 30, 2015 from $341,912 for the nine months ended September 30, 2014. The increase in legal and accounting fees between the periods was a result of fees associated with the Recapitalization Transaction.
Payroll Expenses
Payroll expenses were $1,037,472 for the nine months ended September 30, 2015, a decrease of $706,100 from $1,743,572 for the nine months ended September 30, 2014. The decrease is the result of a reduction in the number of employees and reductions in salaries in order to conserve costs.
Research and Development
Research and development expenses were $2,194,801 and $1,055,290 for the nine months ended September 30, 2015 and 2014, an increase of $1,139,511. The increase is related to the additional licensing fees resulting from the Recapitalization Transaction.
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Sales and Marketing
Sales and marketing expenses for the nine months ended September 30, 2015 were $60,316 as compared to $166,475 for the nine months ended September 30, 2014, a decrease of $106,159. The Company has scaled back expenditures such as sales-related travel and certain advertising programs that it has concluded were not generating revenue.
Interest Expense
During the nine months ended September 30, 2015, the Company incurred interest expense of $59,438 as compared to $107,691 for the nine months ended September 30, 2014, a decrease of $48,253. The decrease in interest expense was a result of the conversion of notes payable to stock pursuant to the Recapitalization Transaction.
Gain (Loss) on Extinguishment of Debt
During the nine months ended September 30, 2015 and 2014, the Company incurred a gain on extinguishment of debt of $332,523 and a loss of $82,000 on extinguishment of debt. These resulted from the restructuring of debt in the respective periods.
Change in Fair Value of Warrants
During the nine months ended September 30, 2015, the Company incurred an unrealized gain on the market value of warrants of $2,642,138 as compared to $2,012,289 for the nine months ended September 30, 2014, an increase of $629,849. The change resulted from the valuation of warrants associated with the Investment Agreement entered into on December 31, 2012 and the Subscription Agreement entered into on January 31, 2013. The values of the warrants have decreased during the nine months ended September 30, 2015 because the price of Common Stock has decreased and the difference between the warrant exercise price and the price of the Common Stock has increased, more thancommon stock exceeding the conversion price for the Series C Preferred.
Change in Fair Value of Embedded Derivative Liability
During the nine months ended September 30, 2015, the Company incurred $0 for the change in the fair value of the embedded derivative liability as compared to a gain of $400,000 for the nine months ended September 30, 2014. The change is derived from the Common Stock price decreasing below the value of the conversion option associated with the Subscription Agreement entered into on January 31, 2013 for the nine months ended September 30, 2014. Because the Series AC Preferred Stockby $1,767,575 and was converted into shares of Common Stock in connection with the Recapitalization Transaction, the embedded derivative liability no longer exists and no valuation or adjustment will be needed in the future.
expensed.
$376,000.
net loss from operations as explained previously.
was a result of employee advances that will be included in payroll for the second quarter of 2016 with the associated reductions of the employees’ net pay for taxes.
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During the ninethree months ended September 30, 2015 and 2014, the Company’s operational resources were used primarily to fund general and administrative expenses, pay employees and continue the research and development projects.
As we have not realized significant revenues sinceMarch 31, 2016, consisted of our inception, we have financed our operations through public and private offerings of debt and equity securities. We do not currently maintain a line of credit or term loan with any commercial bank or other financial institution.
Series C Preferred offering which raised $1,217,500, net in February 2016.
Our existing cash resources will not be sufficient to sustain our operations during the next twelve months, and we may need to raise additional funds.funds in the future. We intend to raise such financing through private placements and/or the sale of debt and equity securities.securities, of which there is no assurance. The issuance of additional equity couldwould result in dilution to our existing stockholders.shareholders. If we are unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms favorable to us, we may be unable to execute upon our business plan or pay our costs and expenses as they are incurred, which could have a material, adverse effect on our business, financial condition and results of operations.
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securities.June 2, 2015,February 8, 2016, the Company issued 23,500 shares of common stock to a consultant for assistance in raising capital. These shares of common stock were not registered under the Securities Act in reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act as such transactions did not involve a public offering of securities.two vendors anthe purchasers warrants to purchase in the aggregate of 682,3532,587,500 shares of Common Stock to settle outstanding payable balancesthe Company’s common stock at an exercise price of $58,000.On June 12, 2015, the Company entered into various Note Conversion Agreements with the Noteholders, pursuant to which the Noteholders converted $731,426 of outstanding notes and accrued interest (net of gain on conversion of $297,370) into 57,265,030 shares (pre Reverse Stock Split) of restricted Common Stock$0.40 per share. Further, as a part of the Company at a conversion rate of one share of Common Stock per $0.018 of outstanding principal and interest.On June 12, 2015, the Company entered into various Warrant Conversion Agreements with the Warrantholders, pursuant to which the Warrantholders converted 3,700,000 outstanding Common Stock warrants into 3,700,000 shares (pre Reverse Stock Split) of restricted Common Stock of the Company at a conversion ratio 1:1.On June 12, 2015, the Company and VFM entered into a Preferred Stock Conversion Agreement, pursuant to which VFM converted 21,111,111 shares (pre Reverse Stock Split) of Series A Preferred Stock of the Company that it currently owns into shares of Common Stock of the Companysame offering, on a 1:1 basis (pre Reverse Stock Split).On June 12, 2015, pursuant to a Patent and Technology License Termination Agreement, the Company and VFM terminated that certain License, and VFM agreed to receive 85 shares (pre Reverse Stock Split) of Series B Preferred Stock in complete satisfaction of $4,500,000 in past due license payments and $2,000,000 exclusivity payments owed by the Company under the License.On June 12, 2015,February 29, 2016, the Company issued 304,785500,000 shares of Common Stock and raised $50,000.DuringSeries C Preferred at a purchase price of $0.40 per share with gross proceed s to the three months ended June 30, 2015, one stockholder received 2,353 sharesCompany of Common Stock in a cashless exercise of a warrant.On June 30, 2015,$200,000. In connection with the February 29, 2016 sale, the Company issued 48,761to the purchasers warrants to purchase in the aggregate 500,000 shares (post Reverse Stock Split) of Common Stock tothe Company’s common stock at an exercise price of $0.40 per share. The offer and sale of these private placement shares was not registered under the Securities Act in reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act as such transactions did not involve a vendor to settle an outstanding payable balancepublic offering of $41,447, net of gain on conversion of $35,153.October 1, 2015,February 26, 2016, the Company agreedissued options to issuepurchase 100,000 RSUsshares of the Company’s common stock at an exercise price of $0.57 per share to the Chairman of the Board of Directors under our 2013 Plan. The option becomes exercisable in two equal installments. The first installment became exercisable on February 26, 2016, and the second installment will become exercisable on February 26, 2017. These options were not registered under the Securities Act in reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act as such transactions did not involve a public offering of securities.for services. Ofwhich vest immediately. These options were not registered under the 100,000 RSUs, 60,000 were issuedSecurities Act in reliance upon executionthe exemption from registration under Section 4(a)(2) of the agreement, 20,000 shares are to be issued on January 1, 2016 and 20,000 shares are to be issued on April 1, 2016.Securities Act as such transaction did not involve a public offering of securities.
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Exhibit No. | Description | |
| 3.1 | Amended and Restated Articles of Incorporation of LaserLock Technologies, Inc., as amended (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 19, 2015). | |
3.2† | Amended and Restated Bylaws of LaserLock Technologies, Inc., as | |
| 3.3 | Certificate of Designation for 0% Series C Convertible Preferred Stock, filed with the Nevada Secretary of State on January 27, 2016 (filed as an Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 10, 2016 and incorporated herein by reference). | |
| 4.1 | Form of Warrant for Purchase of Common Stock (filed as an Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 10, 2016 and incorporated herein by reference). | |
| 4.2 | Form of Share Certificate for 0% Series C Convertible Preferred Stock (filed as an Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 10, 2016 and incorporated herein by reference). | |
| 4.3 | Certificate of Designation for 0% Series C Convertible Preferred Stock, filed with the Nevada Secretary of State on January 27, 2016(filed as an Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 10, 2016 and incorporated herein by reference). | |
10.1 | Form of Securities Purchase Agreement (incorporated herein by reference to Exhibit |
| 10.2 | Form of Registration of Rights Agreement by and between the Registrant and each of the Investors (filed as an Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 10, 2016 and incorporated herein by reference). | |
| | ||
| 10.4@ | Amendment No. 1 to Stock Option Agreement dated as of April 29, 2016 by and between the Registrant and Paul Donfried(filed as an Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on April 29, 2016 and incorporated herein by reference). | |
| 10.5@ | Amendment No. 1 to Restricted Stock Unit Agreement dated as of April 29, 2016 by and between the Registrant and Paul Donfried(filed as an Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the SEC on April 29, 2016 and incorporated herein by reference). | |
| 10.6@ | Consulting Services Agreement dated as of May 1, 2016 by and between the Registrant and Nicolette Consulting Group Limited (filed as an Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on May 2, 2016 and incorporated herein by reference). |
31.1† | Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| | Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1†† | Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2†† | Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101 | Interactive Data Files.* | |
| * | The documents formatted in XBRL (Extensible Business Reporting Language) and attached as Exhibit 101 to this report are deemed not filed as part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act, are deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise are not subject to liability under these sections. |
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| † | filed herewith |
†† | furnished herewith |
| @ | Denotes Management compensation plan on contract |
VERIFYME, INC. | |||
| |||
| By: | /s/ Scott McPherson | ||
Chief (Principal | |||
Date: November 12, 2015
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EXHIBIT INDEX
Date: May 18, 2016 | ||
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