Quarterly report pursuant to Section 13 or 15(d)

Shareholders' Deficit

v3.20.2
Shareholders' Deficit
9 Months Ended
Sep. 30, 2020
Equity [Abstract]  
Shareholders' Deficit

Note 7 - Shareholders’ Deficit

 

Preferred Stock

 

The Company has authorized 5,000,000 shares of preferred stock which have been designated as follows:

 

   

Number of Shares

Authorized

   

Number of Shares Outstanding

at September 30, 2020

   

Par

Value

   

Liquidation

Value

 
Series AA     1,000,000       25,000     $ 0.0010     $ -  
Preferred Series B     50,000       600     $ 0.0001     $ 100  
Preferred Series C     8,000       763     $ 0.0001     $ 1,000  
Preferred Series D     20,000       305     $ 0.0001     $ 1,000  
Undesignated     3,922,000       -       -       -  

 

Series AA Preferred Shares

 

On February 22, 2013, the Board of Directors of the Company authorized an amendment to the Company’s Articles of Incorporation, as amended (the “Articles of Incorporation”), in the form of a Certificate of Designation that authorized the issuance of up to one million (1,000,000) shares of a new series of preferred stock, par value $0.001 per share, designated “Series AA Super Voting Preferred Stock,” for which the board of directors established the rights, preferences and limitations thereof.

 

Each holder of outstanding shares of Series AA Super Voting Preferred Stock shall be entitled to one hundred thousand (100,000) votes for each share of Series AA Super Voting Preferred Stock held on the record date for the determination of stockholders entitled to vote at each meeting of stockholders of the Company. The Series AA Super Voting Preferred Stockholders will receive no dividends nor any value on liquidation. As of September 30, 2020, there were 25,000 shares of Series AA Preferred stock outstanding.

 

Series B Convertible Preferred Stock

 

On February 7, 2017, the Company filed a certificate of designation for 50,000 shares of Series B Convertible Preferred Stock designated as Series B (“Series B”) which are authorized and convertible, at the option of the holder, commencing six months from the date of issuance into common shares and warrants. For each share of Series B, the holder, on conversion, shall receive the stated value divided by 75% of the market price on the date of purchase of Series B and a three-year warrant exercisable into up to a like amount of common shares with an exercise price of 150% of the market price as defined in the Certificate of Designation. Dividends shall be paid only if dividends on the Company’s issued and outstanding Common Stock are paid and the amount paid to the Series B holder will be as though the conversion shares had been issued. The Series B holders have no voting rights. Upon liquidation, the holder of Series B, shall be entitled to receive an amount equal to the stated value, $100 per share, plus any accrued and unpaid dividends thereon before any distribution is made to Series C Secured Redeemable Preferred Stock or common stockholders. As of September 30, 2020, 600 shares of Series B are outstanding.

 

Series C Convertible Redeemable Preferred Stock

 

On December 22, 2017, the Company filed a certificate of designation for 8,000 shares of Series C Secured Redeemable Preferred Stock (“Series C”). Each share of the C Preferred is entitled to receive a $20.00 quarterly dividend commencing March 31, 2018 and each quarter thereafter and is to be redeemed for the stated value, $1,000 per share, plus accrued dividends in cash (i) at the Company’s option, commencing one year from issuance and (ii) mandatorily as of December 31, 2019. Management determined that the Series C should be classified as liability per the guidance in ASC 480 Distinguishing Liabilities from Equity as of December 31, 2019. On January 29, 2020, the Company filed the amended and restated certificate of designation fort its Series C Secured Redeemable Preferred Stock. The amendment changed the rights of the Series C by (a) removing the requirement to redeem the Series C, (b) removing the obligation to pay dividends on the Series C, (c) Allowing the holders of shares of Series C to convert the stated value of their shares into common stock of the Company at 75% of the closing price of such common stock on the day prior to the conversion. The C Preferred does not have any rights to vote with the common stock.

 

Upon liquidation, the holder of Series C, shall be entitled to receive an amount equal to the stated value, $1,000 per share, plus any accrued and unpaid dividends thereon before any distribution is made to common stockholders but after distributions are made to holders of Series B.

 

Management reviewed the guidance in ASC 470-60 Troubled Debt Restructurings and ASC 470-50 Debt-Modifications and Extinguishments and concluded that the changes to the terms of the Series C qualified for debt extinguishment and recorded a loss on debt extinguishment totaling approximately $604,000 for the nine months ended September 30, 2020.

 

Management determined the fair value of the new instrument based on the guidance in ASC 820 Fair Value Measurement. Management concluded that the preferred stock should not be classified as a liability per the guidance in ASC 480 Distinguishing Liabilities from Equity even though the conversion would require the issuance of variable number of shares since such obligation is not unconditional. Management classified the Series C in permanent equity as of September 30, 2020.

 

During the nine months ended September 30, 2020, the Company converted 1,051 shares of Series C into 2,754,822 shares of common stock. As of September 30, 2020, there are 763 shares of Series C outstanding.

 

Series D Convertible Preferred Stock

 

On November 11, 2019, the Company filed a certificate of designation for 20,000 shares of Series D Convertible Preferred Stock designated as Series D (“Series D”), which are authorized and convertible, at the option of the holder, at any time from the date of issuance, into shares of common shares. On or prior to August 1, 2020, for each share of Series D, the holder, on conversion, shall receive a number of common shares equal to 0.01% of the Company’s issued and outstanding shares on conversion date and for conversion on or after August 2, 2020, the holder shall receive conversion shares as though the conversion date was August 1, 2020, with no further adjustments for issuances by the Company of common stock after August 1, 2020, except for stock split or reverse stock splits of the common stock. Management classified the Series D in permanent equity as of September 30, 2020.

 

The Series D holders have no voting rights. Upon liquidation, the holder of Series D, shall be entitled to receive an amount equal to the stated value, $1,000 per share, plus any accrued and unpaid dividends thereon before any distribution is made to common stockholders. During the nine months ended September 30, 2020, 50 shares of Series D have been issued. As of September 30, 2020, there are 305 shares of Series D outstanding.

 

Common Stock

 

On December 31, 2018, we entered into a non-transferrable investment agreement whereby the investor committed to purchase up to $10,000,000 of our common stock, over the course of 36 months. The aggregate number of shares issuable by us and purchasable by the investor under the investment agreement is 81,250. A registration statement for the sale of our common stock related to the investment agreement went effective on February 11, 2019.

 

We may draw on the facility from time to time, as and when we determine appropriate in accordance with the terms and conditions of the investment agreement. The maximum amount that we are entitled to put in any one notice is the greater of: (i) 200% of the average daily volume (U.S. market only) of the common stock for the three (3) trading days prior to the date of delivery of the applicable put notice, multiplied by the average of the closing prices for such trading days or (ii) $100,000. The purchase price shall be set at ninety-four percent (94%) of the lowest daily VWAP (“Volume Weighted Average Price”) of our common stock during the pricing period. However, if, on any trading day during a pricing period, the daily VWAP of the common stock is lower than the floor price specified by us in the put notice, then we will withdraw that portion of the put amount for each such trading day during the pricing period, with only the balance of such put amount above the minimum acceptable price being put to the investor. There are put restrictions applied on days between the put notice date and the closing date with respect to that particular put. During such time, we are not entitled to deliver another put notice.

 

There are circumstances under which we will not be entitled to put shares to the investor, including the following:

 

● we will not be entitled to put shares to the investor unless there is an effective registration statement under the Securities Act to cover the resale of the shares by the investor.

 

● we will not be entitled to put shares to the investor unless our common stock continues to be quoted on the OTCQB market or becomes listed on a national securities exchange.

 

● we will not be entitled to put shares to the investor to the extent that such shares would cause the investor’s beneficial ownership to exceed 4.99% of our outstanding shares; and

 

● we will not be entitled to put shares to the investor prior to the closing date of the preceding put.

 

In connection with the preparation of the investment agreement and the registration rights agreement, we incurred fees of $20,000.

 

In no event will we be obligated to register for resale more than $10,000,000 in value of shares of common stock, or 81,250 shares.

 

On May 29, 2020, the Company filed a post-effective amendment on Form RW removing from registration all of the remaining unsold securities with respect to Amendment Number 1 to Registration Statement on Form S-1 filed January 8, 2019 Registration No. 333- 229146 and ordered Effective February 11, 2019. The shares removed from registration include all remaining shares under the Equity Line Purchase Agreement.

 

On May 18, 2020, the Company and Cavalry Fund I LP (the “investor”) entered into an Equity Line Purchase Agreement (“ELPA”) pursuant to which the investor committed to purchase, subject to certain restrictions and conditions, up to $10,000,000 (the “Commitment”) worth of the Company’s common stock, over a period of 24 months from the effectiveness of the registration statement registering the resale of shares purchased by the investor pursuant to the ELPA.

 

The Company agreed to issue shares of its common stock (the “commitment shares”) to the investor having a market value of 5% of the commitment ($500,000 and 3,859,630 shares) based on the market price of the shares at the execution of the ELPA to be delivered in three tranches of 385,963 shares on: (i) the execution of the ELPA; (ii) thirty days after the effectiveness of the registration statement to be filed under the RRA (the “registration right agreement” or the “registration statement”), and (iii) 90 trading days after the effectiveness of the registration statement with the balance of the commitment shares to be issued pro-rata over the first $3,000,000 of puts in accordance with a formula set forth in the ELPA.

 

The ELPA provides that at any time after the effective date of the registration statement and provided the closing sale price of the common shares on the OTCQB is not below $0.01, from time to time on any business day selected by the Company (the “Purchase Date”), the Company shall have the right, but not the obligation, to direct the investor to buy up to 300,000 shares of the common stock (the “regular purchase amount”) at a purchase price equal to the lower of: (i) the lowest applicable sales price on the date of the put and (ii) 85% of the arithmetic average of the 3 lowest closing prices for the common stock during the 10 consecutive trading days ending on the trading day immediately preceding such put date. The regular purchase amount may be increased as follows: to up to 400,000 shares of common stock if the closing price of the common shares is not below $0.25 per share and up to 500,000 shares if the closing price is not below $0.40 per share.

 

Under the ELPA the Company has the right to submit a regular purchase notice to the investor as often as every business day. The payment for the shares covered by each put notice will generally occur on the day following the put notice. The ELPA contains provisions which allow for the Company to make additional puts beyond the regular purchase amount at greater discounts to the market price of the common stock as forth in the ELPA.

 

The ELPA requires the Company to apply at least 50% of the proceeds of puts to the payment of certain variable rate convertible notes issued by the Company.

 

During the nine months ended September 30, 2020, pursuant to the execution of the ELPA, the Company issued 771,926 shares of common stock with a value of $97,918.

 

During the nine months ended September 30, 2020, the Company issued 8,501,004 shares of common stock for the conversion of notes and accrued interest in the amount of $1,381,650.

 

During the nine months ended September 30, 2020, the Company issued 2,754,822 shares of common stock with a value of $1,400,934, related to the conversion of Series C.

 

During the nine months ended September 30, 2020, the Company issued 58,428 shares of common stock to Series C with a value of $8,152 to induce the holders to convert into shares of common stock.

 

During the nine months ended September 30, 2020, the Company issued 385,000 shares of common stock with a value of $39,500 related to services.

 

During the nine months ended September 30, 2020, the Company issued 409,000 shares with a value of $58,855 to one investor to exchange one variable convertible note with remaining principal of $283,000 past maturity for a fixed rate convertible note with principal of $525,000 and maturing one year from issuance. The Company recorded a loss on debt extinguishment of $151,496 for the fair value of the shares issued in accordance with guidance in ASC 470-50 Debt-Modifications and Extinguishments.

 

During the nine months ended September 30, 2020, the Company issued 1,234,568 shares of common stock in exchange for $100,000 cash pursuant to the Securities Purchase Agreement.

 

During the nine months ended September 30, 2020, the Company issued 1,500,000 shares of common stock for total value of $165,000 in exchange for 34,690 stock options regarding the ambiguity of price adjustment in the event of a reverse split that the Company completed on December 20, 2019.

 

During the nine months ended September 30, 2020, the Company modified the terms of its promissory note with one investor, which extended the maturity date of its promissory note and the issuance of 500,000 restricted stock with a fair value of $55,000. The recording of this transaction resulted in a loss on debt extinguishment of $55,000 per ASC 470-60 Troubled Debt Restructurings.

 

The Variable Debentures issued by the Company each have a provision requiring the Company to reserve a variable amount of shares of common stock for when the holder of the Variable Debenture converts.

 

During the nine months ended September 30, 2019, we issued 4,400 shares of common stock in exchange for $61,106 cash pursuant to the Investment Agreement.

 

During the nine months ended September 30, 2019, we issued 1,000 shares of common stock in exchange for $10,000 cash pursuant to the Securities Purchase Agreement.

 

During the nine months ended September 30, 2019, the Company issued 385,636 shares of common stock for the conversion of notes and accrued interest in the amount of $3,018,066.

 

During the nine months ended September 30, 2019, the Company issued 443 shares of common stock valued at $8,333 related to the extension of outstanding notes.

 

During the nine months ended September 30, 2019, the Company issued 10,340 shares of common stock with a value of $159,850, related to services.

 

During the nine months ended September 30, 2019, the Company issued 1,091 shares of common stock with a value of $26,545 as additional consideration for the issuance of two promissory notes totaling $336,000.

 

Stock Options

 

The balance of all stock options outstanding as of September 30, 2020, is as follows:

 

         

Weighted

Average

   

Weighted

Average

Remaining

    Aggregate  
          Exercise Price     Contractual     Intrinsic  
    Options     Per Share     Term (years)     Value  
Outstanding at January 1, 2020     99,833     $ 27.81       2.02             -  
Granted     3,000,000     $ 0.15       1.90       -  
Cancelled     (80,232 )   $ 21.86       0.17       -  
Exercised     -     $ -       -       -  
Outstanding at September 30, 2020     3,019,601     $ 0.50       3.23     $ -  
                                 
Exercisable at September 30, 2020     269,601                

 

The total unrecognized compensation expense amounts to approximately $225,400 and should be recognized evenly over a 32-month period. The weighted average grant date fair value for the nine months ended September 30, 2020 was $0.08.

 

On June 11, 2020, the Board of Directors approved the issuance of 74,668,000 non-incentive stock options to officers, directors, and key consultants. The key terms and conditions of the award have not been mutually understood and agreed upon, and as a result, the Company has not recognized stock compensation for such award for the nine months ended September 30, 2020.

 

Warrants

 

A summary of the status of the warrants granted under these agreements at September 30, 2020, and changes during the nine months then ended is presented below:

 

    Outstanding Warrants        
    Shares    

Weighted

Average

Exercise Price

Per Share

   

Weighted Average Remaining Contractual

Term (years)

 
Outstanding at January 1, 2020     73,486     $ 306.28       1.37  
Granted     -     $ -       -  
Cancelled     (16,572 )   $ 406.21       -  
Exercised     -     $ -          
Outstanding at September 30, 2020     56,914     $ 277.20       0.84  
                         
Exercisable at September 30, 2020     56,914     $ 277.20       0.84  

 

The Company measures the fair value of stock options and warrants issued using the Black Scholes option pricing model using the following assumptions:

 

    Nine months ended September 30,  
    2020     2019  
             
Expected term     1 year       2 years  
Exercise price     $0.15       $14.50-$27.90  
Expected volatility     231%       199%-242%  
Expected dividends     None       None  
Risk-free interest rate     0.14%       1.80% to 2.60%  
Forfeitures     None       None