EQUITY | 4. EQUITY Preferred Stock On February 15, 2019, the Company established a series of redeemable participating convertible preferred stock, par value $0.0001 per share, pursuant to a Certificate of Designation of Series A Redeemable Participating Convertible Preferred Stock dated February 15, 2019. Pursuant to the Certificate of Designation, the Company authorized 10,000 shares of the Series A Preferred Stock ("preferred stock"), which shall be convertible into shares of common stock of the Company at the option of the holders thereof at any time after the issuance of the preferred stock, at a conversion price equal to $0.10 subject to certain anti-dilution adjustments. So long as 50% of the preferred stock that has been issued remains outstanding, the holders thereof will have the right to participate ratably in any offering of common stock of the Company or any other securities of the Company that would entitle the holder thereof to acquire common stock of the Company. The holders of preferred stock shall be entitled to receive dividends when and as declared by the Board of Directors. No dividends (other than those payable solely in common stock) shall be paid on the common stock or any class or series of capital stock ranking junior, as to dividends, to the preferred stock during any fiscal year of the Company until there shall have been paid or declared and set apart during that fiscal year for the holders of the preferred stock a dividend in an amount per share equal to (i) the number of shares of common stock issuable upon conversion of the preferred stock times (ii) the amount per share of the dividend to be paid on the common stock. No dividends were declared for the nine months ended September 30, 2019. Upon the occurrence of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary (a "Liquidating Event"), each holder of preferred stock then outstanding shall be entitled to receive, out of the assets of the Company available for distribution to its stockholders, before any payment shall be made in respect of the common stock, an amount per share of preferred stock equal to three (3) times the price such holder paid to purchase such preferred stock plus, accrued and unpaid dividends (the "Preferred Liquidation Preference"). Such Preferred Liquidation Preference shall be secured by a first priority security interest on all of the Company's assets. The following events shall be deemed a Liquidating Event: (i) a sale, lease, exchange, exclusive license which has the same effect as a sale of all or substantially all of the Company's assets or other disposition of all or substantially all of the Company's assets in one transaction or a series of related transactions and (ii) a merger, tender offer, reorganization, business combination or other transaction as a result of which (a) holders of the Company's issued and outstanding voting securities immediately before such transaction own or control less than a majority of the voting securities of the continuing or surviving entity immediately after such transaction or (b) any of the preferred stock is converted into any other property or security. It was determined the preferred stock has a deemed liquidation redemption feature that triggers temporary equity classification under ASC 480. The holders of shares of preferred stock shall vote together with the holders of common stock as a single class. The holder of each share of preferred stock (i) shall be entitled to the number of votes with respect to such share equal to the number of shares of common Stock into which such share of preferred stock could be converted on the record date for the subject vote or written consent ( or, if there is no such record date, then on the date that such vote is taken or consent is effective) and (ii) shall be entitled to notice of any stockholders' meeting in accordance with the Bylaws of the Company. Fractional votes shall not be permitted, and any fractional voting rights resulting from the above formula (after aggregating all shares of common stock into which shares of preferred stock held by each holder could be converted) shall be reduced to the nearest whole number. During the nine months ended September 30, 2019, the Company issued an aggregate of 4,859 shares of its preferred stock related to the conversion of $4,716,075 of debt and $123,366 of interest expense. See convertible debt discussion in Note 3 for more details. Common Stock During the nine months ended September 30, 2019, the Company issued 47,398,925 shares of the Company's common stock pursuant to certain debt agreements, related to the maturity of various convertible notes totaling $9,479,785. See the convertible debt section in Note 3 for more details. During the nine months ended September 30, 2019, the Company issued 480,000 shares of the Company's common stock to certain note holders in exchange for accrued interest of $48,000. The fair value of the common stock was determined to be $27,216 and resulted in a gain on settlement of accrued interest of $20,784. During the nine months ended September 30, 2019, the Company entered into a two modification agreements with an investor pursuant to which the investor agreed to extend the maturity date of a convertible note in exchange for the issuance of one million shares of the Company's common stock on March 1, 2019, and the first day of each month through November 1, 2019.. The Company will fair value the shares on the issuance date and record it as loss on extinguishment of debt. During the nine months ended September 30, 2019, the Company issued a total of 7,000,500 shares of common stock and recorded a loss of $598,000. During the nine months ended September 30, 2019, the Company repaid a $100,000 advance to an investor and issued 100,000 shares of the Company's common stock. The Company fair valued the stock and recorded $8,500 as loss on extinguishment of debt. During the nine months ended September 30, 2019, the Company issued an aggregate of 540,000 shares of its common stock related to the conversion of $50,000 of principal and $4,000 accrued interest expense on convertible notes. During the nine months ended September 30, 2019, an aggregate of 3,300,000 warrants were exercised cashlessly resulting in the issuance of 2,200,000 common shares. During the nine months ended September 30, 2019, an aggregate of 1,996,843 warrants were modified to reduce the exercise price to $0.10 per share pursuant to a debt modification and exercised resulting in a total issuance of 1,996,843 common shares. Rather than receiving cash proceeds of $199,684, the Company netted this amount against convertible note payoffs totaling $246,500. The remaining $46,816 owed to two noteholders was paid by the issuance of 47 shares of Preferred Stock. Stock Options A summary of stock option activity during the nine months ended September 30, 2019 is as follows: Weighted Weighted Average Average Remaining Number of Exercise Contractual Shares Price Life (years) Outstanding at December 31, 2018 300,000 $ 0.52 9.0 Granted - Exercised - Forfeited - Outstanding at September 30, 2019 300,000 $ 0.52 8.2 Exercisable at September 30, 2019 133,000 $ 0.53 7.6 Stock option awards are expensed on a straight-line basis over the requisite service period. During the nine months ended September 30, 2019, the Company recognized expense of $31,360, associated with stock option awards. At September 30, 2019, future stock compensation expense (net of estimated forfeitures) not yet recognized was $54,830 and will be recognized over a weighted average remaining vesting period of 2.1 years. The intrinsic value of the Company's stock options outstanding was $0 as of September 30, 2019. Warrants Employee Warrants On May 18, 2017, the Company entered into an Employment Agreement (the "Employment Agreement") with Ron DaVella in his capacity as the Company's Chief Financial Officer. Pursuant to the Employment Agreement, on May 18, 2017 the Company issued Mr. DaVella warrants to purchase 1,800,000 shares of the Company's common stock at $0.50 per share (the "Warrant Shares"). The fair value of the warrants was determined to be $743,416 using the Black-Scholes option pricing model. 450,000 Warrant Shares vested on May 18, 2017 and 450,000 additional warrant shares vested on May 18, 2018. An additional 450,000 warrant shares will vest on the second anniversary date of the Employment Agreement, and, an additional 450,000 warrant shares will vest on the third anniversary date of the Employment Agreement. On November 28, 2018, the exercise price was reduced to $0.10 pursuant to the Board of Director's consent. This resulted in a difference in fair value of $117,440 of which $58,720 was expensed on November 28, 2018 for the vested warrants and the remaining $58,720 will be expensed equally over the remaining term. On March 31, 2019, Mr. DaVella terminated his employment with the Company. The remaining two tranches totaling 900,000 warrants were forfeited upon termination of the Employment Agreement on March 31, 2019. Warrant expense of $248,486 was recaptured during the nine months ended September 30, 2019. On February 5, 2019, the Company issued warrants to purchase an aggregate of 2,500,000 shares of its Common Stock to three of its employees as a bonus in exchange for services to be provided to the Company. The warrants have a 10-year term, a $0.10 exercise price and will vest 25% annually for 4 years beginning on the first anniversary date. The aggregate fair value of the warrants was determined to be $129,906 using the Black-Scholes option pricing model. Warrant expense of $45,107 was recognized during the nine months ended September 30, 2019. Total expense recaptured for employee warrants for the nine months ended September 30, 2019 was $203,379. Non-Employee Service Warrants On October 23, 2018, the Company issued warrants to purchase 2,000,000 shares of the Company's common stock pursuant to a letter agreement in exchange for services. The warrants have an exercise price of $0.50 and a 10-year term. 20% of the warrants vested immediately and an additional 20% will vest each anniversary for four years. The fair value of the warrants was determined to be $155,397 using the Black-Scholes option pricing model. Warrant expense of $48,562 was expensed during the nine months ended September 30, 2019, respectively. On June 1, 2019, the Company issued warrants to purchase 25,000 shares of the Company's common stock pursuant to a letter agreement in exchange for services. The warrants have an exercise price of $0.50 and a 5-year term. The warrants vest equally over six months beginning June 1, 2019. The fair value of the warrants was determined to be $1,924 using the Black-Scholes option pricing model. Warrant expense of $1,282 was expensed during the nine months ended September 30, 2019. Total expense for non-employee warrants for the nine months ended September 30, 2019 was $49,844. Warrant Exercises and Reduction of Exercise Prices During the nine months ended September 30, 2019, an aggregate of 1,996,843 warrants were modified to reduce the exercise price to $0.10 per share pursuant to a debt modification and exercised resulting in a total issuance of 1,996,843 common shares. Rather than receiving cash proceeds of $199,684, the Company netted this amount against convertible note payoffs totaling $246,500. The remaining $46,816 owed to two noteholders was paid by the issuance of 47 shares of Preferred Stock. During the nine months ended September 30, 2019, an aggregate of 814,848 warrants were modified to reduce the exercise price to $0.10 per share pursuant to a debt modification but not exercised. The change in fair value of these warrants from the modification is immaterial. During the nine months ended September 30, 2019, an aggregate of 3,300,000 warrants were exercised cashlessly resulting in the issuance of 2,200,000 common shares. The following summarizes the warrant activity for the nine months ended September 30, 2019: Weighted Average Weighted Remaining Average Contractual Aggregate Number of Exercise Price Term Intrinsic Outstanding as of December 31, 2018 90,258,828 $ 0.41 5.2 $ - Granted 2,525,000 0.10 Expired (10,469,500 ) 0.05 Exercised (5,296,843 ) 0.10 Outstanding as of September 30, 2019 77,017,485 $ 0.44 5.4 $ - Exercisable as of September 30, 2019 71,091,295 $ 0.45 5.4 $ - These warrants were valued based on the grant date fair value of the instruments using a Black-Scholes option pricing model with the following assumptions: Nine Months Ended September 30, 2019 2018 Volatility 213.95% - 217.10% 138.93% - 186.70% Risk-free interest rate 1.93% - 2.72% 2.12% - 2.88% Expected term 5-10 years 3-10 years |