| Series A Preferred Stock and Stockholders' Equity (Deficit) | NOTE 4 - SERIES A PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
A. Common Stock The Company’s common stock confer
upon their holders the following rights:
■ The right to participate and vote in the Company’s stockholder meetings, whether annual or special. Each share will entitle its holder, when attending and participating in the voting in person or via agent or letter, to one vote;
■ The right to a share in the distribution of dividends, whether in cash or in the form of bonus shares, the distribution of assets or any other distribution pro rata to the par value of the shares held by them; and
■ The right to a share in the distribution of the Company’s excess assets upon liquidation pro rata to the par value of the shares held by them.
B. Series A Preferred Stock The terms of the Series A Preferred
Stock are governed by a Certificate of Designation (the “Series A Certificate of Designation”) filed by the Company
with the Delaware Secretary of State on April 30, 2018. Pursuant to the Series A Certificate of Designation, the Company designated
500 shares of the Company’s preferred stock as “Series A Preferred Stock”. As more fully described below, for
the six months ended June 30, 2018, the Company has issued a total of 500 shares of Series A Preferred Stock in connection with
the Share Purchase Agreement. Following is a summary of the material terms of the Series A Preferred Stock:
■
Dividends. Holders of the 500 shares of Series
A Preferred Stock (the “ Series A Preferred Shares”) are entitled to receive dividends on each share of the Series
A Preferred Stock, payable quarterly on March 31, June 30, September 30 and December 31, commencing June 30, 2018 (which will be
prorated) in an amount equal to 5% per annum of the stated value ($10,000 per share of the Series A Preferred Stock) and which
shall be cumulative. Such dividends are to be paid in cash or freely tradeable shares of our common stock at our sole discretion,
subject to certain conditions. If in the event the Company elects to pay a dividend in shares of our common stock to the holders
of the Series A Preferred Shares, the number of shares of our common stock will be determined in accordance with the terms of the
Series A Preferred Shares. The Company may only elect to pay cash dividends to the Series A Preferred Shares to the extent there
are amounts available for the payment of dividends in accordance with applicable Delaware law As of June 30, 2018, an amount of $45,574 in
connection to the aforesaid dividend has been accrued as part of the other account liabilities on the consolidated balance sheet
since such dividend was paid by the Company by issuance of 242,572 shares of common stock to the preferred shares holder on July
10, 2018 (see also Note 6A).
■ Liquidation
■ Voting Rights
■ Conversion
■ Redemption. The terms of the Preferred Shares contain both mandatory and conditional redemption provisions. Certain mandatory redemption provisions provide that, beginning January 30, 2019 and continuing for every thirty-day period thereafter (each a “Mandatory Redemption Date”), the Company is required to offer to redeem 1/12 th
C. Securities Purchase Agreement On April 30, 2018 (the “Initial
Date”), the Company consummated a private placement transaction (the “April 2018 PIPE”) by entering into a Securities
Purchase Agreement (the “Agreement”) with a non-US-based institutional investor (the “Purchaser”), pursuant
to which, the Company sold and the Purchaser bought, (i) 500 shares of Preferred Stock designated as Series A Preferred Stock (the
“Preferred Stock”), which are convertible into shares of common stock at a conversion price of $0.20 per share, subject
to adjustment pursuant to the anti-dilution provisions of the Preferred Shares, and (ii) Warrants (the “Warrants”)
representing the right to acquire 12,500,000 shares of common stock over a period of five years from the Initial Date at an exercise
price of $0.22 per share, which is subject to certain adjustments including anti-dilution provisions, for an aggregate purchase
price of $5,000,000. The Company engaged Newbridge Securities
Corporation, through LifeTech Capital (“Newbridge”), as exclusive placement agent for the aforesaid Agreement, pursuant
to which the Company was required to pay a cash fee to Newbridge and issued to them warrants to purchase 2.5 million shares of
common stock (or 10% of the aggregate number of fully diluted shares of common stock that have been purchased by an Purchaser)
over a period of three years from the Initial Date at an exercise price of $0.20 per share, which is subject to certain adjustments
including anti-dilution provisions. In addition, the Company is also obligated to pay Newbridge a warrants solicitation fee equal
to 4% of the gross proceeds received by the Company upon cash exercise of any Warrants purchased by the Purchasers in connection
with the Agreement. As defined in the Agreement, upon certain
changes in control events, the Purchaser may elect to receive cash equal to the Black-Scholes value of the outstanding Warrants.
Therefore, the Warrants are considered a freestanding instrument, as the Company believes it is legally detachable and separately
exercisable. Consequently, as of the Initial Date, the Warrants were accounted for and recognized as a non-current financial liability
on the consolidated balance sheet in total amount of $3,600,000 ($600,000 out of which related to warrants that were granted to
Newbridge) under the ASC 815-40-25 and were measured at fair value. Subsequently, the Warrants are marked to market in each reporting
period until they are exercised or expired, as earlier, with changes in the fair value of the Warrants charged into the statement
of comprehensive loss. For the six months ended June 30, 2018, the Company recorded income in total amount of $150,000 due to revaluation
of Warrants to purchase shares of Common Stock in the statement of operations and comprehensive loss as separate line. In addition, the Company identified
the contingent redemption feature of the Series A Preferred Stock in case of other than upon bankruptcy triggering event which
is not eligible for the scope exception from ASC 815. Thus, the bifurcated embedded derivative amounting to $1,027,700 and $2,595,466
was measured at fair value on the Initial Date and June 30, 2018, respectively. The change in the fair value of $1,567,766 is recognized
in the statement of operations and comprehensive loss as a separate line. At the Initial Date, the effective
conversion price of the Preferred Stock is less than the fair value of the share of Common Stock at the commitment date. As a result,
a BCF amounting to approximately $972,300 was measured assuming full conversion according to ASC 470-20 However, according to ASC
470-20-30-8, there is a limitation to the amount of the proceeds allocated to the convertible preferred shares if the intrinsic
value of the BCF is greater than the proceeds allocated to the convertible instrument. That is, the amount of the discount assigned
to the BCF shall be limited to the amount of the proceeds allocated to the convertible preferred share. Consequently, at the Initial
Date, a BCF was recognized in total amount of $773,575. Under ASC 480-10-S99 “Distinguishing
Liabilities from Equity”, since the Preferred Stock have conditional redemption provisions which are outside of the control
of the Company and also contain a deemed liquidation preference, the Preferred Stock were classified as mezzanine financing at
the initial measurement date at the residual amount, which is the difference between the total proceeds received, the fair value
of the Warrants, the fair value of the embedded derivative related to the contingent redemption of Series A Preferred Stock and
after consideration with the amount related to the BCF. Subsequently accrete changes in the redemption value over the period from
the date of issuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to the earliest
redemption date of the instrument using an appropriate methodology. Changes in the redemption value are considered to be changes
in accounting estimates. The below table outlines the change
in the mezzanine account during the six months ended June 30, 2018 -
June 30, 2018
Unaudited
Opening balance, December 31, 2017 $ -
Gross proceeds from April 2018 PIPE transaction 5,000,000
Recognition of liability related to Warrants to purchase Common Stock (3,000,000 )
Recognition of embedded derivative related to contingent redemption feature (1,027,700 )
Allocation of issuance costs to Preferred Stock (198,725 )
Recognition of BCF on Preferred Stock (773,575 )
Accretion of Preferred Stock to redemption value 532,540
Closing balance, June 30, 2018 $ 532,540 The total direct and incremental issuance
costs (including the cash and Warrants fees related to Newbridge) amounted to $1,021,933. Such amount was allocated based on the
relative fair value of the individual freestanding instruments identified (i.e. detachable warrants, embedded derivative related
to the contingent redemption feature of the Series A Preferred Stock and preferred stock). Issuance costs allocated to freestanding
instruments at fair value were immediately expensed as separate line to the statement of operations and comprehensive loss. Issuance
costs allocated to preferred stock have been deducted from mezzanine account. In addition, in connection with the
Agreement, the Company entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the
Purchaser, pursuant to which, among other things, the Company is required to use its commercially reasonable best efforts to (i)
prepare and file with the SEC within 60 calendar days of the offering a registration statement covering the shares of Common Stock
underlying the Preferred Stock and Warrants and (ii) have the registration statement and any amendment thereto to be declared effective
by the SEC within 90 calendar days from the date of the initial filing of such registration statement. On June 14, 2018, the Company
filed a registration statements in Form S-1 which was declared effective by July 2, 2018.
D. Stock-based compensation
1. In 2016, the Company approved the 2016 Employee Incentive Plan (the “2016 Plan”) which provides for the issuance of common stock, stock options and other stock-based awards to employees, officers, directors, consultants, and advisors. The number of shares reserved for issuance under the 2016 Plan is 36,000,000 shares of common stock.
2. On February 12, 2018, the Company granted options exercisable into 150,000 shares to its Chairperson of the Audit Committee under the 2016 Plan at an exercise price of $0.05 per share. The options become vested over a three-year period from the date of grant. The options shall vest 1/3 one year from the grant date and the remaining 2/3 on a quarterly basis (8.33% per quarter). The Company used the Black-Scholes-Merton pricing model to estimate the fair value. The Black-Sholes-Merton pricing model assumptions used for stock options granted during the six months ended June 30, 2018are as follows: expected dividend yield of 0%; risk-free interest rate of 1.8%-2.07%; expected volatility of 242%, and expected term of 5 years. The fair value of the options at the grant date was $63,615. During the three and six month period ended June 30, 2018, as result of such grant, the Company recognized compensation expense of $10,688 and $16,208 respectively, and there was $47,407 of unrecognized compensation expense related to non-vested option grants.
3. The following tables present a summary of the status of the grants to employees, officers and directors as of June 30, 2018.
Shares Weighted average exercise price Weighted average remaining contractual term (years) Aggregate intrinsic value (*)
Options outstanding at December 31, 2017 27,300,000 $ 0.05 4.6 $ 11,015,580
Granted 150,000 $ 0.05
Exercised - $ 0.00
Lapsed 50,000 $ 0.10
Options outstanding at June 30, 2018 27,400,000 $ 0.05 4.2 $ 5,002,550
Options exercisable at June 30, 2018 20,725,000 $ 0.05 3.6 $ 3,786,700
(*) The aggregate intrinsic value represents the total intrinsic value (the difference between the fair value of the Company’s Ordinary Shares on the last traded day of second quarter of 2018 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2018. This amount is impacted by the changes in the fair value of the Company’s shares.
4. The following table summarizes information about stock options outstanding at June 30, 2018:
Options Outstanding Options Exercisable
Range of exercise prices Shares weighted average exercise price Weighted average remaining life (years) Shares weighted average exercise price
$0.05 27,300,000 $ 0.05 4.1 20,625,000 $ 0.05
$ 0.10-$ 0.30 100,000 $ 0.20 3.3 100,000 $ 0.20
Total Shares 27,400,000 $ 0.05 4.1 20,725,000 $ 0.05
5. As of June 30, 2018, there was $423,010 of total unrecognized compensation cost related to non-vested stock options granted under the 2016 Plan. This cost is expected to be recognized over a weighted-average period of 0.97 years.
6. The total equity-based compensation expense related to all of the Company’s equity-based awards, recognized for the three and six months periods ended June 30, 2018 amounting to $240,074 and $585,555, respectively. These expenses have been recorded as general and administrative expenses as part of the statement of comprehensive loss.
7. On December 12, 2017, the Company entered into a new agreement with a service provider, Lyons Capital LLC, pursuant to which the service provider rendered services in February 2018 relating to the 2018 Wall Street Conference at the Deerfield Beach Florida Hilton and sponsorship in the conference for consideration of 150,000 fully vested restricted shares of Common Stock of the Company. The grant was accounted for under ASC 505-50 “share-based payment arrangement with nonemployees”, when the fair value of the grant amounting to $72,000 was recorded as part of general and administrative expenses for the six months ended June 30, 2018. As of June 30, 2018, the aforesaid shares have not been issued by the Company.
E. Common stock subscriptions receivable
In January 2018, the Company received a cash payment of $105,282 for common stock subscriptions receivable from a former employee. |
