NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016 AND 2015
NOTE
1 – NATURE OF BUSINESS, BASIS OF PRESENTATION AND GOING CONCERN
Nature
of Operations and Going Concern
HPIL
Holding (referred to in this report as “HPIL” or the “Company”) (formerly Trim Holding Group) was incorporated
on February 17, 2004 in the state of Delaware under the name TNT Designs, Inc. A substantial part of the Company’s activities
was involved in developing a business plan to market and distribute fashion products. On June 16, 2009, the majority interest
in the Company was purchased in a private agreement by Mr. Louis Bertoli, an individual, with the objective to acquire and/or
merge with other businesses. On October 7, 2009, the Company merged with and into Trim Nevada, Inc., which became the surviving
corporation. The merger did not result in any change in the Company’s management, assets, liabilities, net worth or location
of principal executive offices. However, this merger changed the legal domicile of the Company from Delaware to Nevada where Trim
Nevada, Inc. was incorporated. Each outstanding share of TNT Designs, Inc. was automatically converted into one share of the common
stock of Trim Nevada, Inc. Pursuant to the merger, the Company changed its name from TNT Designs, Inc. to Trim Holding Group and
announced the change in the Company’s business focus to health care and environmental quality sectors. Afterwards the Company
determined it no longer needed its inactive subsidiaries, and as such, all three subsidiaries were dissolved. On May 21, 2012,
the Company changed its name to HPIL Holding.
HPIL
Holding intends that its main activity will be in the business of providing consulting services and of investing in differing
business sectors. To begin the implementation of the business plan, on September 10, 2012, the Company organized six new subsidiary
companies. Each of these subsidiary companies was wholly (100%) owned by the Company. The names of the new subsidiary companies
were HPIL HEALTHCARE Inc., HPIL ENERGYTECH Inc., HPIL WORLDFOOD Inc., HPIL REAL ESTATE Inc., HPIL GLOBALCOM Inc. and HPIL ART&CULTURE
Inc. (collectively, the “Subsidiaries” and, each individually a “Subsidiary”). These companies were organized
to implement the various growth strategies of the Company.
On
May 27, 2015, the Company entered into a Plan of Merger (the “Plan of Merger”) with its Subsidiaries in an effort
to consolidate and simplify the Company’s operations and accounting practices. In accordance with the Plan of Merger, Articles
of Merger were completed, executed, and filed with the Nevada Secretary of State making the merger effective as of May 28, 2015
(the “Merger Effective Date”). Pursuant to the terms of the Plan of Merger, as of the Merger Effective Date, all shares
of each Subsidiary were canceled and each Subsidiary merged with and into the Company and ceased to exist, with the Company remaining
as the sole surviving entity. As a result of the merger, the Company is the successor to all rights and obligations of each of
the Subsidiaries. The Company does not expect the merger to materially affect the business plan or the Company’s continued
pursuit thereof.
The
concentration of the Company has become the consulting services and the development of products related to the Brand License Agreement
(see Note 6 for further discussion of the Brand License Agreement), after the disposition of the IFLOR Asset (see Note 3 for further
discussion of the disposition of the IFLOR Asset). As of December 31, 2016, the Company has yet to commence substantial operations. Expenses
incurred from February 17, 2004 (date of inception) through December 31, 2016, relate to the Company’s formation and general
administrative activities. In the course of its start-up activities, the Company has sustained operating losses and expects to
incur operating losses in 2017. The Company has generated a limited amount of revenue and has not achieved profitable operations
or positive cash flows from operations. These factors and uncertainties raise substantial doubt about the Company’s ability to
continue as a going concern. The consolidated financial statements do not include any adjustments related to the recoverability
and classification of the recorded asset amounts or the amounts and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. All adjustments, consisting only of normal recurring items, considered necessary
for fair presentation have been included in these consolidated financial statements.
The
Company will continue targeting sources of additional financing and opportunities to produce profitable revenue streams, whether
through sole or joint ventures, to provide for the continuation of its operations. The Company is also prepared to re-evaluate
its expense load, if necessary, to determine whether any efficiency can be achieved prior to the commencement of substantial operations
related to the Brand License Agreement (Note 6) or other potential operations identified by the Company. Additionally, the Company’s
Chief Financial Officer, who is also the Company’s Corporate Secretary and Treasurer and Director and stockholder, has indicated
his ability to provide financial support to the Company for the continuation of its operations, should it be necessary (Note 5).
HPIL
Holding
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2016 AND 2015
NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation and Basis of Presentation
These
consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States
(“GAAP”), and are expressed in United States dollars. These consolidated financial statements include the accounts
of HPIL Holding and HPIL HEALTHCARE Inc., HPIL ENERGYTECH Inc., HPIL WORLDFOOD Inc., HPIL REAL ESTATE Inc., HPIL GLOBALCOM Inc.,
and HPIL ART AND CULTURE Inc. (formerly wholly owned subsidiaries of the Company that have been merged with and into the Company
effective as of May 28, 2015). All inter-company balances and transactions have been eliminated on consolidation.
Investment
in Unconsolidated Affiliate
The
equity method of accounting, as prescribed by ASC Topic 323 “Investments – Equity Method and Joint Ventures”,
is used when a company is able to exercise significant influence over the entity’s operations, which generally occurs when
a company has an ownership interest of between 20% and 50% in an entity. The cost method of accounting is used when a company
does not exercise significant influence, generally when a company has an ownership interest of less than 20%.
As
of September 17, 2015, the Company’s 32% investment in Haesler Real Estate Management SA (“HREM”) was accounted
for under the equity method of accounting. As of September 17, 2015, the carrying amount of the investment was equal to the Company’s
equity interest of the carrying amount of the net assets of HREM. On September 17, 2015, the Company entered into an Amendment
Agreement (“Amendment Agreement”) with Daniel Haesler (“Haesler”), pursuant to which the Company agreed
to return 16% of the outstanding ownership in HREM. As a result of the closing of the Amendment Agreement, the Company’s
ownership in HREM was reduced from 32% of the outstanding ownership of HREM to 16% of the outstanding ownership of HREM. Starting
from September 17, 2015, the Company utilizes the cost method of accounting due to the fact that HREM is a private company and
it is therefore not practicable to estimate the fair value of the investment. On November 15, 2015, the Company entered into a
Second Amendment Agreement (“Second Amendment Agreement”) with Haesler, pursuant to which the Company agreed to return
16% of the outstanding ownership in HREM. As a result of the closing of the Second Amendment Agreement, the Company’s ownership
in HREM was reduced from 16% of the outstanding ownership of HREM to 0% of the outstanding ownership of HREM.
Use
of Estimates
The
preparation of consolidated financial statements, in conformity with US GAAP, requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, disclosures of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Management evaluates these
estimates and assumptions on a regular basis. Significant estimates and assumptions made by the Company are related to the impairment
assessment for long-lived assets and the fair value of the derivative liability. Actual results could differ from these estimates.
HPIL
Holding
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2016 AND 2015
NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Derivative
Financial Instruments
The
Company reviews the terms of convertible debt, equity instruments and other financing arrangements to determine whether there
are embedded derivative instruments, including embedded conversion options that are required to be bifurcated and accounted for
separately as a derivative financial instrument.
Derivative
financial instruments are initially measured at their fair value. For derivative financial instruments that are accounted for
as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date,
with changes in the fair value reported as charges or credits to income. To the extent that the initial fair values of the freestanding
and/or bifurcated derivative instrument liabilities exceed the total proceeds received an immediate charge to income is recognized
in order to initially record the derivative instrument liabilities at their fair value.
The
discount from the face value of the convertible debt or equity instruments resulting from allocating some or all of the proceeds
to the derivative instruments, together with the stated rate of interest on the instrument, is amortized over the life of the
instrument through periodic charges to income, using the effective interest method.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is
reassessed at the end of each reporting period. If reclassification is required, the fair value of the derivative instrument,
as of the determination date, is reclassified. Any previous charges or credits to income for changes in the fair value of the
derivative instrument are not reversed. Derivative instrument liabilities are classified in the consolidated balance sheets as
current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve
months of the balance sheet date.
Income
Taxes
The
Company accounts for income taxes whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. The Company accounts for uncertain tax positions in accordance
with ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes”. This guidance clarifies the accounting for income
taxes by prescribing the minimum recognition threshold an income tax position is required to meet before being recognized in the
consolidated financial statements and applies to all federal or state income tax positions. Each income tax position is assessed
using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position will
be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected
to meet the more likely than not criteria, the benefit recorded in the consolidated financial statements equals the largest amount
that is greater than 50% likely to be realized upon its ultimate settlement.
The
Company’s tax returns are not currently under examination by the Internal Revenue Service (“IRS”) or state authorities.
All of the Company’s tax returns from inception to December 31, 2014, have been filed to the Internal Revenue Service (“IRS”)
on June 3, 2015, and the Company’s tax return for the year ended December 31, 2015, has been filed to the IRS on September
15, 2016, and will be subject to examination by the IRS for up to three years after they are filed, and up to four years for the
respective states. As of December 31, 2016, and 2015, there were no amounts that are required to be accrued in respect to uncertain
tax positions.
Impairment
of Long-Lived Assets
The
Company follows the ASC 360, which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances
indicate that the assets’ carrying amount may not be recoverable. In performing the review for recoverability, if future
discounted cash flows (excluding interest charges) from the use of ultimate disposition of the assets are less than their carrying
values, an impairment loss represented by the difference between its fair value and carrying value, is recognized.
HPIL
Holding
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016 AND 2015
NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Research
and Development
The
Company is engaged in research and development in respect to the Company’s Brand License Agreement with World Traditional
Fudokan Shotokan Karate-Do Federation, a worldwide karate federation based in Switzerland (“WTFSKF”), and in respect
to the Company’s asset disposed, the IFLOR Asset (Note 3). Research and development costs are charged as an operating expense
as incurred.
Intangible
Assets
The
Company entered into a brand license agreement (the “Brand License Agreement”) with WTFSKF. Pursuant to the Brand
License Agreement, WTFSKF has granted to the Company an exclusive, worldwide, transferrable license (the “License”)
to use certain logos, names, and marks of WTFSKF (the “Marks”) and manufacture and sell certain products (clothing,
accessories and sporting goods) bearing the Marks (see Note 6 for further discussion of the Brand License Agreement). The Company
will amortize the License over the contractual life of the asset of 25 years. No amortization has been recognized as of December
31, 2016 and 2015, as the Brand License Agreement does not become effective until 2018.
Revenue
Recognition
Revenue
is recognized when persuasive evidence that an arrangement or contract exists, delivery has occurred, the fees are fixed and determinable,
and collectability is probable or certain. Revenue from consulting services is recognized upon delivery of consulting services
when persuasive evidence of an arrangement exists and collection of the related receivable is reasonably assured.
Net
Loss Per Share
Basic
loss per share is computed by dividing net loss available to common shareholders by the weighted average number of shares of common
stock outstanding for the year. Diluted loss per share is computed by dividing net loss by the weighted average number of shares
of common stock outstanding for the year and the number of shares of common stock issuable upon assumed exercise of preferred
stock provided the result is not anti-dilutive.
Recently
Issued Accounting Pronouncements
In
February 2015, the FASB issued ASU No. 2015-02, Consolidation: Amendments to the Consolidation Analysis. This new standard provided
guidance regarding the consolidation of certain legal entities. All legal entities are subject to revaluation under the revised
consolidation method. The standard is effective for fiscal periods beginning after December 15, 2015. The Company has adopted
this ASU No. 2015-02 as at and for the year ended December 31, 2016. There was no material effect on the consolidated financial
position or the consolidated statements of operations and comprehensive loss.
HPIL
Holding
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016 AND 2015
NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Recently
Issued Accounting Pronouncements - Continued
In
May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers.
This new standard provides guidance for the recognition, measurement and disclosure of revenue resulting from contracts with customers
and will supersede virtually all of the current revenue recognition guidance under GAAP. The standard is effective for the first
interim period within annual reporting periods beginning after December 15, 2017. Early adoption is permitted for annual periods
beginning after December 15, 2016. The Company is currently evaluating the impact of the new standard on its consolidated financial
statements.
In
August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties
about an Entity’s Ability to Continue as a Going Concern. This new standard provided guidance for the presentation of the
disclosure of uncertainties about an Entity’s Ability to Continue as a Going Concern. This standard is effective for annual
periods beginning after December 15, 2016. The Company is currently evaluating the impact of the new standard on its consolidated
financial statements.
In
November 2015, the FASB released ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU
2015-17”). ASU 2015-17 simplifies the presentation of deferred income taxes by deferred tax assets and liabilities be classified
as noncurrent on the balance sheet. ASU 2015-17 is effective for public companies for annual reporting periods beginning after
December 15, 2017, and interim periods within those fiscal years. The guidance may be adopted prospectively or retrospectively
and early adoption is permitted. Adoption of this guidance is not expected to have any effect on the Company’s consolidated
financial statements. The Company is currently evaluating the impact of the new standard on its consolidated financial statements.
In
March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718,
Compensation – Stock Compensation. The ASU simplifies several aspects of the accounting for employee share-based payment
transaction. This standard is effective for annual reporting periods beginning after December 15, 2016, and interim periods within
that that reporting period. The Company is currently evaluating the impact of the new standard on its consolidated financial statements.
In
March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting
Revenue Gross vs. Net). ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations. In April 2016,
the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing. ASU
2016-10 clarified the implementation guidance on identifying performance obligations. These ASUs apple to all companies that enter
into contracts with customers to transfer goods or services. There ASUs are effective for public entities for interim and annual
reporting periods beginning after December 15, 2017. Early adoption is permitted, but not before interim and annual periods beginning
after December 16, 2016. Entities have the choice to apply these ASUs either retrospectively to each reporting period presented
or by recognizing the cumulative effect or applying these standards at the date of initial application and not adjusting comparative
information. The Company is currently evaluating the impact of the new standard on its consolidated financial statements.
In
April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligation and Licensing,
to clarify the identification of performance obligation as well as the licensing implementation guidance.
In
May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers: Narrow Scope Improvements and Practical Expedients,
which clarifies certain core recognition principles including collectability, sales tax presentation, and contract modification,
as well as identifies disclosures no longer required if the full retrospective transition method is adopted.
In August 2016, the FASB
issued ASU 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments”. This ASU
provides eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows.
ASU 2016-15 is effective for the fiscal year commencing after December 15, 2017. The Company is still assessing the impact that
the adoption of ASU 2016-15 will have on the consolidated statement of cash flows.
None of the other recently issued accounting
pronouncements are expected to significantly affect the Company.
HPIL
Holding
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016 AND 2015
NOTE
3 – CAPITAL STOCK
The
Company entered into a Quota Purchase Agreement with Haesler on October 26, 2012, pursuant to which the Company acquired from
Haesler 32 quotas of HREM representing 32% of the outstanding ownership in HREM, in exchange for 350,000 shares of common stock
of the Company, which was valued at $297,500 at the time of the Quota Purchase Agreement. The Company and Haesler entered into
an Amendment Agreement dated September 17, 2015, pursuant to which the Company agreed to return to Haesler 16 quotas of HREM,
representing 16% of the outstanding ownership in HREM. In exchange for the 16 quotas of HREM, Haesler agreed to return to the
Company 175,000 shares of common stock of the Company, which was valued at $175,000 at the time of the Amendment Agreement, based
on the trading price of the Company’s stock on September 17, 2015. The Company returned the quotas to Haesler on September
17, 2015, and Haesler returned the common stock of the Company to the treasury of the Company on September 22, 2015. As a result
of the closing of the Amendment Agreement, the Company’s ownership in HREM was reduced from 32% of the outstanding ownership
of HREM to 16% of the outstanding ownership of HREM. The Company recorded a gain of $169,547 on the disposition of its 16% ownership
in HREM included in profit or loss. The Company and Haesler then entered into a Second Amendment Agreement dated November 15,
2015, pursuant to which the Company agreed to return to Haesler 16 quotas of HREM, representing 16% of the outstanding ownership
in HREM. In exchange for the 16 quotas of HREM, Haesler agreed to return to the Company 175,000 shares of common stock of the
Company, which was valued at $183,750 at the time of the Second Amendment Agreement, based on the trading price of the Company’s
stock on November 15, 2015. On December 2, 2015, the Company returned the quotas to Haesler, and on December 8, 2015, Haesler
returned the common stock of the Company to the treasury of the Company. As a result of the closing of the Amendment Agreement,
the Company’s ownership in HREM was reduced from 16% of the outstanding ownership of HREM to 0% of the outstanding ownership
of HREM.
The
Company entered into an Asset Purchase and Sale Agreement (the “Asset Agreement”) with GIOTOS Limited, a private limited
company organized in the United Kingdom (“GIOTOS”) on December 9, 2015. Pursuant to the Asset Agreement, the Company
sold, assigned, conveyed and delivered certain patent rights and other related business processes and know-how related to the
IFLOR Device (collectively, the “IFLOR Business”) and the patents, inventory and equipment related to the IFLOR Business
(collectively, the “Additional IFLOR Business”; the Additional IFLOR Business together with the IFLOR Business and
Intellectual Property, the “IFLOR Asset”) to GIOTOS, in consideration for 10,040,000 shares of the Company common
stock (the “Purchase Price”) transferred from GIOTOS to the Company. The portion of the Purchase Price allocated as
consideration for the IFLOR Business was 9,615,500 shares, and the portion of the Purchase Price allocated as consideration for
the Additional IFLOR Business was 424,500 shares. The Asset Agreement was closed on December 9, 2015, at which time, pursuant
to the Asset Agreement, the Company executed and delivered an assignment of the IFLOR Asset to GIOTOS, and GIOTOS transferred
the full amount of the Purchase Price to the Company and completed the cancellation of the shares composing the Purchase Price
on December 16, 2015. Immediately prior to the transaction consummated by the Asset Agreement, GIOTOS owned 50,000,000 shares
of the Company common stock. Additionally, GIOTOS is majority owned and operated by Louis Bertoli, who is the Company’s
Chairman of the Board and the President and Chief Executive Officer. As Louis Bertoli is majority owner of GIOTOS the transfer
of the IFLOR Business and the Additional IFLOR Business represents a common control transaction and therefore the 10,040,000 shares
received as consideration have been valued at $527,851, based on the carrying value of the equipment, inventory and patents given
up.
The
Company filed an amendment with the Secretary of State of Nevada on April 19, 2016, amending its Articles of Incorporation, Article
IV - Capital Stock. The effect of the amendment was to cancel all 100,000,000 shares of the Company’s authorized preferred
stock (“Preferred Stock”), consisting of 25,000,000 shares of Preferred Stock, par value $8.75 per share; and 75,000,000
shares of Preferred Stock, par value $7 per share. The amendment was effective as of April 18, 2016, at which time there were
no shares of Preferred Stock issued and outstanding. Following the amendment, the Company has 400,000,000 shares of stock authorized
for issuance (reduced from 500,000,000 shares authorized prior to the effect of the amendment), consisting solely of shares of
the Company’s common stock, par value $0.0001 per share.
HPIL
Holding
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016 AND 2015
NOTE
3 – CAPITAL STOCK - CONTINUED
The
Company entered into an Equity Purchase Agreement (the “Original Equity Purchase Agreement”) with Kodiak Capital Group,
LLC (“KCG”) on August 12, 2016. The Company and KCG executed an Amended and Restated Equity Purchase Agreement dated
December 27, 2016 (the “Amended Equity Purchase Agreement”; together with the Original Equity Purchase Agreement,
the “Equity Purchase Agreement”), which completely restates and makes minor revisions to the Original Equity Purchase
Agreement, such as correcting the stated capitalization of the Company and extending the period of the Original Equity Purchase
Agreement. The Company and KCG also entered into a Registration Rights Agreement dated August 12, 2016 (the “Registration
Agreement”, and together with the Equity Purchase Agreement, the “Agreements”). Pursuant to the Equity Purchase
Agreement, the Company, at its sole and exclusive option, may issue and sell to KCG, from time to time as provided therein, and
KCG would purchase from the Company shares of the Company’s common stock (“Shares”) equal to a value of up to
$5,000,000. Pursuant to the Registration Agreement, the Company has agreed to provide certain registration rights under the Equity
Act of 1933, as amended, and applicable state laws with respect to all Shares issued in connection with the Equity Purchase Agreement.
Subject to the terms and conditions of the Equity Purchase Agreement, the Company, at its sole and exclusive option, may issue
and sell to KCG, and KCG shall purchase from the Company, the Shares upon the Company’s delivery of written notices to KCG.
In exchange of KCG signing the Securities Purchase Agreements, the Company issued to KCG a Convertible Promissory Note (Note 9)
in the principal amount of $215,000 as payment of a commitment fee to induce KCG to enter into the Agreements.
The
aggregate maximum amount of all purchases that KCG shall be obligated to make under the Equity Purchase Agreement shall not exceed
$5,000,000. Once a written notice is received by KCG, it shall not be terminated, withdrawn or otherwise revoked by the Company.
The purchase price per share for each purchase of Shares to be paid by KCG shall be 70% of the lowest trading price (or if there
are no recorded trades, the lowest closing price) during the Valuation Period (as defined and calculated pursuant to the Equity
Purchase Agreement). KCG is not obligated to purchase any Shares unless and until the Company has registered the Shares pursuant
to a registration statement on Form S-1 (or on such other form as is available to the Company).
On
November 9, 2016, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with
GPL Ventures, LLC (“GPL”). The Company and GPL also entered into a Registration Rights Agreement dated November 9,
2016 (the “Registration Agreement”, and together with the Securities Purchase Agreement, the “Agreements”).
Pursuant to the Securities Purchase Agreement, the Company, at its sole and exclusive option, may issue and sell to GPL, from
time to time as provided therein, and GPL would purchase from the Company shares of the Company’s common stock (“Shares”)
equal to a value of up to $5,600,000. Pursuant to the Registration Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and applicable state laws with respect to all Shares issued in connection
with the Securities Purchase Agreement. Subject to the terms and conditions of the Securities Purchase Agreement, the Company,
at its sole and exclusive option, may issue and sell to GPL, and GPL shall purchase from the Company, the Shares upon the Company’s
delivery of written notices to GPL. The aggregate maximum amount of all purchases that GPL shall be obligated to make under the
Securities Purchase Agreement shall not exceed $5,600,000. Once a written notice is received by GPL, it shall not be terminated,
withdrawn or otherwise revoked by the Company. GPL is not obligated to purchase any Shares unless and until the Company has registered
the Shares pursuant to a registration statement on Form S-1 (or on such other form as is available to the Company), which is required
to be effective within 11 months of the execution of the Agreements. Pursuant to the Securities Purchase Agreement, each purchase
of Shares must be in an amount equal to at least $100,000 and is capped at the lesser of (i) $175,000 or (ii) 200% of the average
daily trading volume as calculated pursuant to the Securities Purchase Agreement. The purchase price per share for each purchase
of Shares to be paid by GPL shall be 80% of the lowest trading price (or if there are no recorded trades, the lowest closing price)
during the Valuation Period (as defined and calculated pursuant to the Securities Purchase Agreement). In exchange of GPL signing
the Securities Purchase Agreements, the Company issued to GPL a Convertible Promissory Note (Note 9) in the principal amount of
$250,000 as payment of a commitment fee to induce GPL to enter into the Agreements.
HPIL
Holding
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016 AND 2015
NOTE
4 – REVENUE
On
June 10, 2014, HPIL ENERGYTECH Inc. (formerly a wholly owned subsidiary of the Company that has been merged with and into the
Company effective as of May 28, 2015) entered into a Service and Consulting Agreement (the “O.R.C. Consulting Agreement”)
with O.R.C. SRL, a private company focused on investing in the energy sector. Pursuant to the O.R.C. Consulting Agreement, HPIL
ENERGYTECH Inc. began providing to O.R.C. SRL certain consulting and other services on June 10, 2014, for a monthly fee in the
amount of $30,000 per month. The term of the O.R.C. Consulting Agreement was two (2) years unless terminated earlier by either
party pursuant to the terms and conditions of the O.R.C. Consulting Agreement. HPIL ENERGYTECH Inc. and O.R.C. SRL terminated
the O.R.C. Consulting Agreement, effective March 10, 2015. The O.R.C. Consulting Agreement was terminated because the parties
determined that O.R.C. SRL no longer required the services to be delivered thereunder, and no services were provided in the month
of February 2015. The termination was mutual and without recourse or the incurrence of penalty by either party thereto.
On
December 5, 2014, HPIL GLOBALCOM Inc. (formerly a wholly owned subsidiary of the Company that has been merged with and into the
Company effective as of May 28, 2015) entered into a Service and Consulting Agreement (the “ET Consulting Agreement”)
with ECOLOGY TRANSPORT SRL, a private company focused on investing in the communication and ecology sectors. Pursuant to the ET
Consulting Agreement, HPIL GLOBALCOM Inc. began providing to ECOLOGY TRANSPORT SRL certain consulting and other services on December
5, 2014, for a monthly fee in the amount of $5,000 per month. The term of the ET Consulting Agreement was two (2) years unless
terminated earlier by either party pursuant to the terms and conditions of the ET Consulting Agreement. HPIL GLOBALCOM Inc. and
ECOLOGY TRANSPORT SRL terminated the ET Consulting Agreement, effective March 4, 2015. The ET Consulting Agreement was terminated
because the parties determined that ECOLOGY TRANSPORT SRL no longer required the services to be delivered thereunder and no services
were provided in the month of February 2015. The termination was mutual and without recourse or the incurrence of penalty by either
party thereto.
HPIL
Holding
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016 AND 2015
NOTE
5 – RELATED PARTY TRANSACTIONS AND BALANCES
The
Company has advances payable to its current majority shareholder totaling $34,932 as of December 31, 2016, and $Nil as of December
31, 2015. These advances were made to be used for working capital. These advances are unsecured, non-interest bearing and due
on demand.
The
Company has advances payable to its current Chief Financial Officer, who is also the Company’s Corporate Secretary, Treasurer,
Director and stockholder, totaling $3,500 as of December 31, 2016, and $Nil as of December 31, 2015. These advances were made
to be used for working capital. These advances are unsecured, non-interest bearing and due on demand.
The
Company used MB Ingenia SRL (“MB Ingenia”) for various corporate business services, including technical support and
engineering services, and use of office space by Mr. Bertoli, until November 4, 2015. For fiscal years ended December 31, 2016,
and 2015, the Company incurred expenses of $Nil and $36,357, respectively, in relation to these services. For the fiscal years
ended December 31, 2016, and 2015, the Company incurred reimbursements for handling and storage expense of $Nil and $8,158, respectively,
in relation to these services provided by MB Ingenia to HPIL HEALHCARE Inc. (formerly a wholly owned subsidiary of the Company
that has been merged with and into the Company effective as of May 28, 2015), which are included in general and administrative
expense. For the fiscal years ended December 31, 2016, and 2015, the Company incurred research and developments costs of $Nil
and $23,576, respectively, in relation to these services provided by MB Ingenia to HPIL HEALHCARE Inc, which are included in general
and administrative expense. Mr. Bertoli was the President and CEO of MB Ingenia until November 28, 2013, at which time Mr. Bertoli’s
brother became President and CEO of MB Ingenia SRL. Mr. Bertoli also serves as an executive officer and director of the Company.
The
Company entered into a two-year consulting agreement on July 20, 2009, with Amersey Investments LLC (“Amersey Investments”),
a company controlled by a director and the CFO of the Company, Mr. Nitin Amersey. Although the consulting agreement expired, Amersey
Investments continued to provide office space, office identity and assist the Company with corporate, financial, administrative
and management records on the same terms until July 31, 2015. Mr. Amersey, as a director and officer, continues to provide and
offer corporate office and records, at no cost. For the fiscal year ended December 31, 2016, and 2015, the Company incurred expenses
of $Nil and $35,000, respectively, in relation to these services, which are included in general and administrative expense.
The
Company used Bay City Transfer Agency & Registrar Inc. (“BCTAR”) to facilitate its stock transfers, corporate
services and Edgar filings until November 9, 2016. Mr. Amersey is listed with the Securities and Exchange Commission as a control
person of BCTAR. For the fiscal years ended December 31, 2016, and 2015, the Company incurred expenses of $2,710 and $9,682, respectively,
in relation to these services, which are included in general and administrative expense.
The
Company used the services of Freeland Venture Resources LLC, for Edgar filings and consulting services until April 14, 2016. Mr.
Amersey is a controlling shareholder in Freeland Venture Resources LLC. For the fiscal years ended December 31, 2016, and 2015,
the Company incurred expenses of $Nil and $8,040, respectively, in relation to these services which are included in general and
administrative expense.
The
Company used the services of Cheerful Services International Inc. (“Cheerful”) for corporate press releases and consulting
services until April 14, 2016. Cheerful is owned by Mr. Amersey’s children. For the fiscal years ended December 31, 2016,
and 2015, the Company incurred expenses of $Nil and $9,749, respectively, in relation to these services, which are included in
general and administrative expense.
HPIL
Holding
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016 AND 2015
NOTE
6 – BRAND LICENSE
The
Company, entered into a Brand License Agreement (the “Brand License Agreement”), dated December 29, 2014, with the
World Traditional Fudokan Karate Do Federation (the “WTFSKF”). Under the Agreement: The “Licensed Brand and
Trademarks” shall mean the brand, marks, logos, names, service marks, trademarks, trade names, unexpired patents, utility
models, and applications identified below in this Note 6, and any other United States and foreign patents, utility models, and
applications hereafter developed by the Licensor. The “Licensed Product(s)” shall mean the Licensor’s clothing,
accessories and sporting goods, including basic sporting equipment and additional sporting merchandise, which are products covered,
in whole or in part, by the Licensed Brand and Trademarks identified below
in this Note 6
, and all modified, improved
and derivative versions thereof manufactured by the Licensee after the Effective Date, and which are added to Exhibit B by agreement
of the Parties. Pursuant to the Brand License Agreement, WTFSKF has granted to the Company the License to use the Marks of WTFSKF
and manufacture and sell the Products bearing the Marks. Pursuant to the Brand License Agreement, in consideration for the License,
beginning in 2018, the Company will pay to WTFSKF an ongoing License Fee. Additionally, the Company issued to WTFSKF 752,000 shares
of treasury common stock (the “Shares”) of the Company in accordance with the Brand License Agreement. WTFSKF has
agreed to provide to the Company annual projected sales forecasts based on its membership and their expected needs for Products
(the “Projected Sales”). The Brand License Agreement requires the License Consideration to be subject to renegotiation
by the parties in the event that Projected Sales exceed actual sales of the Products by more than an agreed upon deviation percentage.
Additionally, pursuant to the Brand License Agreement, the Company may require WTFSKF to either return the Shares or pay to the
Company the market value of the Shares at the time of the execution of the Brand License Agreement (approximately $6,805,600),
if the Company terminates the Brand License Agreement as a result of such deviations within the first 52 months after the execution
of the Brand License Agreement. The initial term of the Brand License Agreement lasts until December 31, 2042, at which time the
Brand License Agreement will automatically renew for successive 25 year terms unless and until either party provides notice of
non-renewal or terminates the Brand License Agreement.
Impairment
of Brand License Agreement
The
Brand License of $6,805,600 was measured based on the fair value of the stock issued (on December 29, 2014, 752,000 common shares
of HPIL Holding issued at $9.05 per share). Currently, based on the market value of the common shares, 752,000 shares would be
equal to the value of $7,520 (752,000 common shares of HPIL Holding at $0.01 per share). In terms of measuring the Brand License
on the value of the stock issued, the Company would have to write the value down to $7,520. Based on a qualitative assessment,
the Company is uncertain of how its relationship with the WTFSKF will proceed in the future and thus based on this uncertainty,
the Company deems it prudent to value the asset at the current market value of the stock held by the WTFSKF. The Company is simply
recognizing the potential of it losing the Brand License due to factors beyond its control and based on this risk is reassessing
the value of the Brand License to be the recoverable amount of the potential return of shares. Based on the Company assessment
of the value of the Brand License, the Company has determined the fair value of the Brand License to be $7,520 (752,000 common
shares of HPIL Holding at $0.01 per share). No amortization has been recognized as of December 31, 2016, as the Brand License
Agreement is not effective until 2018. As a result, an impairment loss of $6,798,080 is included in the consolidated statements
of loss and comprehensive loss. In the event of the Company losing the Brand License, the Company would seek to reacquire this
stock and is thereby assessing the value of the Brand License at the value of the stock as determined by the market. The impairment
loss does not necessarily impact on the future expected cash flow associated with the Brand License or with the Company’s
intent or ability to renew or extend the Brand License Agreement. It simply recognizes the risk that the Company believes is extant.
HPIL
Holding
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016 AND 2015
NOTE
6 – BRAND LICENSE - CONTINUED
Addendum
to Brand License Agreement to Acquire Broadcast Rights
On
May 19, 2017, the Company entered into an addendum to the Brand License Agreement (the “Addendum”) with the WTFSKF
whereby the Company acquired the television, radio and internet rights to the WTFSKF World Karate Championship and the International
Karate Gasshuku. The term of the agreement is for the life of the Brand License Agreement. The Addendum further enhances the ability
of the Company to develop the market under the Brand License Agreement and the Addendum. However, the Company has chosen to follow
a prudent and vigilant course of action in writing down the value of the Brand License. The Company has considered and taken note
of Section 350-30-35, the Subsequent Measurement Section that provides guidance on an entity’s subsequent measurement and
subsequent recognition of an item. Situations that may result in subsequent changes to the carrying amount include impairment,
credit losses, fair value adjustments, depreciation and amortization, and so forth. The Company has also taken note of Section
350-30-50, the Disclosure Section that provides guidance regarding the disclosure in the notes to the financial statements. In
some cases, disclosure may relate to disclosure on the face of the financial statements.
The
Licensed Products
The
Basic Licensed Products for Licensor’s affiliates (i.e. athletes, masters and leaders) shall mean: Kimono Karate, Complete
Suit, Protection Woman/Man, Official Complete Suit, Hakama Complete Judge Suit, Embroidered Badge, Karate Belts Kyu / Dan, Official
Complete Suit (all together “Basic Equipment”).
The
Additional Licensed Products for Licensor’s affiliates (i.e. athletes, masters and leaders) and available for fans and amateurs,
and for general costumers shall mean: Sport Suit, Running Top, Running Shorts, T-Shirts, Sport Shoes, Sport bag, Sport Cap, Cap,
Gloves, Scarf, Socks, Karate Slippers, other products need to be approved by the Parties (all together “Additional Sporting
Merchandise”).
HPIL
Holding
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016 AND 2015
NOTE
7 – INCOME TAXES
The
Company’s effective income tax rate of 0.0% differs from the federal statutory rate of 34% for the reason set forth below
for the years ended December 31:
|
|
2016
|
|
|
2015
|
|
Income Taxes at the Statutory Rate
|
|
$
|
(2,567,800
|
)
|
|
$
|
(31,500
|
)
|
State and City Income Taxes
|
|
|
(302,100
|
)
|
|
|
(3,700
|
)
|
Change in Valuation Allowance
|
|
|
2,869,900
|
|
|
|
35,200
|
|
Total Income Tax
|
|
$
|
-
|
|
|
$
|
-
|
|
The
following presents the components of the Company total income tax provision:
|
|
2016
|
|
|
2015
|
|
Current Expense
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred Benefit
|
|
|
(2,869,900
|
)
|
|
|
(35,200
|
)
|
Change in Valuation Allowance
|
|
|
2,869,900
|
|
|
|
35,200
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
tax assets and liabilities reflect the net effect of temporary differences between the carrying amount of assets and liabilities
for financial reporting purposes and amounts used for income tax purposes. The tax effect of primary temporary differences giving
rise to the Company’s deferred tax assets for the years ended December 31, 2016 and 2015 are as follows:
|
|
2016
|
|
|
2015
|
|
Net Operating Losses
|
|
$
|
1,193,700
|
|
|
$
|
974,800
|
|
Brand License
|
|
|
2,583,300
|
|
|
|
-
|
|
Convertible Debt
|
|
|
67,600
|
|
|
|
-
|
|
Valuation Allowance
|
|
|
(3,844,600
|
)
|
|
|
(974,800
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company has recorded a valuation allowance to fully offset the net deferred assets based on the fact that the Company has not
recognized taxable income since its inception. At December 31, 2016, the Company has deferred operating loss carry forwards totaling
$3,141,450 that may be used to reduce future taxable income. The start-up expenses will begin to be amortized when the Company
commences operations, and written off over a fifteen-year period.
NOTE
8 – PRODUCT RESELLER AGREEMENT
On
December 5, 2015, the Company entered into a Mutual Termination Agreement (the “Mutual Termination Agreement”) with
WTFSKF. Pursuant to the Mutual Termination Agreement, the parties terminated a certain Product Reseller Agreement (the “Product
Reseller Agreement”) entered into between HPIL HEALTHCARE Inc. and WTSKF on October 9, 2014, pursuant to which, beginning
in 2017, the HPIL HEALTHCARE Inc. was to supply its IFLOR Stimulating Massage Device - Standard Version to WTFSKF for resale exclusively
at WTFSKF-sanctioned events and through the WTFSKF members and their official affiliates. The termination of the Product Reseller
Agreement was mutual, without recourse or the incurrence of penalty by either party thereto, and effective on December 5, 2015.
HPIL HEALTHCARE Inc., formerly a wholly owned subsidiary of the Company, was merged with and into the Company effective as of
May 28, 2015, as a result of which the Company succeeded to and assumed all rights and obligations of HPIL HEALTHCARE Inc., including
those arising from the Product Reseller Agreement.
HPIL
Holding
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016 AND 2015
NOTE
9 – CONVERTIBLE PROMISSORY NOTES
On
November 9, 2016, the Company issued to GPL a Convertible Promissory Note (the “Note”) in the principal amount of
$250,000 as payment of a commitment fee to induce GPL to enter into the Agreements. The Note accrues interest at the rate of 5%
per annum and is due in full on or before July 30, 2017. The Note also prohibits prepayment of the principal. GPL has the right
to convert all or any portion of the note balance at any time at a conversion price per share of 75% of the lowest Trading Price
during the Valuation Period (as defined and calculated pursuant to the Note), which is adjustable in accordance with the Note
terms in the event certain capital reorganization, merger, or liquidity events of the Company as further described in the Note.
On
December 9, 2016, the Company issued to GPL a Convertible Promissory Note (the “Note”) in the principal amount of
$5,000 in exchange for $5,000 in cash (the “5K Note”). The 5K Note accrues interest at the rate of 5% per annum and
is due in full on or before June 9, 2017. The Note also prohibits prepayment of the principal. GPL has the right to convert all
or any portion of the note balance at any time at a conversion price per share of 75% of the lowest Trading Price during the Valuation
Period (as defined and calculated pursuant to the Note), which is adjustable in accordance with the 5K Note terms in the event
certain capital reorganization, merger, or liquidity events of the Company as further described in the 5K Note.
On
June 28, 2016, upon the signing of the Term Sheet (“Term Sheet”) related to the Equity Purchase Agreement, the Company
issued to KCG a Convertible Promissory Note (the “Note”) in the principal amount of $215,000 as payment of a commitment
fee to induce KCG to enter into the Agreements. The Note is due in full on or before January 28, 2017. The Company may prepay
this Note in whole or in part at any time following at least 15 and no more than 60 days’ advance written notice to the
Holder, provided that the Holder shall retain all rights of conversion until the date of repayment, notwithstanding the pendency
of any prepayment notice. KCG has the right to convert all or any portion of the note balance at any time at a conversion price
per share of 50% of the Current Market Price (as defined and calculated pursuant to the Note), which is adjustable in accordance
with the Note terms in the event certain capital reorganization, merger, or liquidity events of the Company as further described
in the Note. Upon an Event of Default (as defined in the Note), the principal amount increases to $250,000 and the conversion
price shall decrease to 25% of the Current Market Price (as defined and calculated pursuant to the Note).
On
December 27, 2016, the Company and KCG entered an Amendment and Waiver (the “Amendment and Waiver”), pursuant to which
KCG waived certain defaults of the Company under the Note and amended the Note to delete a default provision requiring the Company
to file a registration statement by a certain date, amend a default provision to reflect the Company’s listing on the OTCPink
market, and extend the maturity date to July 28, 2017. The Original Equity Purchase Agreement, Amended Equity Purchase Agreement,
Registration Agreement, Term Sheet, Note, and Amendment and Waiver contain other provisions customary to transactions of this
nature.
On
December 27, 2016, the Company and KCG entered into a Securities Purchase Agreement to which the Company sold to KCG a convertible
promissory note in the amount of $60,000 for a purchase price of $50,000. The Company issued to KCG a 15% Convertible Note (the
“December Note”) in the principal amount of $60,000. The December Note accrues interest at the rate of 15% per year
and is due in full on or before December 27, 2017. The Company may prepay this Note in whole at any time prior to 6 months from
the issue date on at least 5 Trading Days (as defined in the December Note) but not more than 10 Trading Days notice, provided
that the Holder shall retain all rights of conversion until the date of repayment, notwithstanding the pendency of any prepayment
notice. KCG has the right to convert all or any portion of the note balance at any time at a conversion price per share of forty
percent (40%) lowest sale price for the Company’s Common Stock during the thirty (30) consecutive Trading Days immediately
preceding the Conversion Date (as defined and calculated pursuant to the Note), which is adjustable in accordance with the Note
terms in the event certain capital reorganization, merger, or liquidity events of the Company as further described in the Note.
On
June 28, 2016, November 9, 2016, December 9, 2016 and December 27, 2016, the Company recorded a discount on the Notes. This discount
is amortized using the effective interest rate method at an interest rate of 58.70%, 100.04%, 132.66% and 48.38% for the June
28, 2016, November 9, 2016, December 9, 2016 and December 27, 2016 Notes, respectively, over the term of the Notes.
HPIL
Holding
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016 AND 2015
NOTE
9 – CONVERTIBLE PROMISSORY NOTES - CONTINUED
|
|
Year ended
|
|
|
|
December 31, 2016
|
|
Face value of June 28, 2016 promissory note payable
|
|
$
|
215,000
|
|
Face value of November 9, 2016 promissory note payable
|
|
|
250,000
|
|
Face value of December 9, 2016 promissory note payable
|
|
|
5,000
|
|
Face value of December 27, 2016 promissory note payable
|
|
|
60,000
|
|
Total face value of promissory notes payable
|
|
|
530,000
|
|
Discount on promissory notes payable
|
|
|
(436,938
|
)
|
Accretion of discount on promissory notes payable
|
|
|
109,234
|
|
Balance December 31, 2016
|
|
$
|
202,296
|
|
During
the year ended December 31, 2016, accretion of discount of the Notes amounted to $109,234 (December 31, 2015 - $Nil).
During
the year ended December 31, 2016, interest expense on the Notes amounted to $1,916 (December 31, 2015 - $Nil).
NOTE
10 – CONVERSION OPTION DERIVATIVE LIABILITY
The
Company accounted for the conversion option of the Notes in accordance with ASC Topic 815 (“Derivatives and Hedging”),
under which the conversion option meets the definition of a derivative instrument.
This
conversion option derivative liability was measured at fair value on the dates of issue and at December 31, 2016 using a binomial
lattice model, with changes in the fair value charged or credited, as applicable, to the consolidated statements of operations
and comprehensive loss.
The
inputs into the binomial lattice model for each issuance and at year end are as follows:
|
|
June
28,
|
|
|
November
9,
|
|
|
December
9,
|
|
|
December
27,
|
|
|
December
31,
|
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
Closing
share price
|
|
$
|
2.50
|
|
|
$
|
1.60
|
|
|
$
|
1.60
|
|
|
$
|
1.60
|
|
|
$
|
1.60
|
|
Conversion price
|
|
$
|
1.25
|
|
|
$
|
1.20
|
|
|
$
|
0.80
|
|
|
$
|
0.64
|
|
|
$
|
0.64-$1.20
|
|
Risk
free rate
|
|
|
0.45
|
%
|
|
|
0.72
|
%
|
|
|
0.85
|
%
|
|
|
0.89
|
%
|
|
|
0.85
|
%
|
Expected
volatility
|
|
|
118
|
%
|
|
|
118
|
%
|
|
|
118
|
%
|
|
|
118
|
%
|
|
|
118
|
%
|
Dividend
yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected
life
|
|
|
0.59
year
|
|
|
|
0.72
year
|
|
|
|
0.50
year
|
|
|
|
1
year
|
|
|
|
0.08 - 0.99 year
|
|
The
fair value of the conversion option derivative liability, as determined using the binomial lattice model, was $438,854 at December
31, 2016. The change in the fair value of the conversion option derivative liability of $68,814 was primarily due to a decrease
in the price of the Company’s common stock, and was recorded as a loss in the consolidated statement of operations and comprehensive
loss for the year ended December 31, 2016.
Conversion option derivative liability, beginning balance
|
|
$
|
-
|
|
Origination of conversion option derivative liability on June 28, 2016
|
|
|
215,000
|
|
Origination of conversion option derivative liability on November 9, 2016
|
|
|
158,854
|
|
Origination of conversion option derivative liability on December 9, 2016
|
|
|
5,000
|
|
Origination of conversion option derivative liability on December 31, 2016
|
|
|
60,000
|
|
Loss on change in fair value of conversion option derivative liability, December 31, 2016
|
|
|
68,814
|
|
Balance, December 31, 2016
|
|
$
|
507,668
|
|
HPIL
Holding
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2016 AND 2015
NOTE
11 – SUBSEQUENT EVENTS
On
February 17, 2017, the Company and Power Up Lending Group, Ltd. (“Power Up”) entered into a Securities Purchase Agreement
(the “Power Up Securities Purchase Agreement”), pursuant to which the Company sold to Power Up a convertible promissory
note in the amount of $33,000 for a purchase price of $30,000. Pursuant to the Power Up Securities Purchase Agreement, the Company
issued to Power Up a 12% Convertible Note (the “Power Up Note”) in the principal amount of $33,000. The Power Up Note
accrues interest at the rate of 12% per year and is due in full on or before September 12, 2017. The Company may prepay this Note
in whole at any time prior to 6 months from the issue date on at least 3 Trading Days’ notice, subject to a variable prepayment
penalty. Power Up has the right to convert all or any portion of the note balance at any time at a conversion price per share
of sixty-one percent (61%) of the average of the three (3) lowest sale price for the Company’s Common Stock during the fifteen
(15) consecutive Trading Days immediately preceding the Conversion Date (as defined and calculated pursuant to the Power Up Note),
which is adjustable in accordance with the Note terms in the event certain capital reorganization, merger, or liquidity events
of the Company as further described in the Note.
On
March 27, 2017, Kodiak Capital Group, LLC, (“KCG”) has claimed an event of default under a convertible promissory
note in the principal amount of $215,000 issued by the company pursuant to the Company’s failure to deliver shares of the
Company’s common stock pursuant to a conversion notice served on the company. KCG has also alleged various defaults with
reference to a convertible promissory note in the principal amount of $60,000. As a result of these various alleged defaults KCG
has sent the Company a claim in the sum of $2,608,572 as of March 27, 2017. KCG claims that the claim amount continues to increase
in accordance to the terms of the notes. The Company is disputing the payment of the $215,000 note with Kodiak and is considering
initiating an action against KCG for obtaining the note by fraudulent means and may claim damages as well. Management believes
that this claim has no merit. There is no litigation currently pending. The Company issued 3,661,150 shares of treasury common
stock of the Company (the “Shares”) related to the conversion of convertible notes held by KCG amounting to $40,800
in the first quarter of 2017.
On
April 11, 2017, the Company and GPL Ventures, LLC (“GPL”) entered into a Securities Purchase Agreement (the “GPL
Securities Purchase Agreement”), pursuant to which the Company sold to GPL a convertible promissory note in the amount of
$10,000 for a purchase price of $10,000. Pursuant to the GPL Securities Purchase Agreement, the Company issued to GPL a 12% Convertible
Note (the “GPL Note”) in the principal amount of $10,000. The GPL Note accrues interest at the rate of 12% per year
and is due in full on or before October 11, 2017. The Company may prepay this Note in whole at any time prior to 30 days from
the issue date on at least 3 Trading Days’ notice, upon payment of 125% of the outstanding balance of the GPL Note. GPL
has the right to convert all or any portion of the note balance at any time at a conversion price per share of fifty percent (50%)
lowest sale price for the Company’s Common Stock during the twenty (20) consecutive Trading Days immediately following the
clearing of the converted shares (as defined and calculated in the GPL Note), which is adjustable in accordance with the Note
terms in the event certain capital reorganization, merger, or liquidity events of the Company as further described in the Note.
On
May 10, 2017, the Company and Auctus Funds, LLC (“Auctus”) entered into a Securities Purchase Agreement (the “Auctus
Securities Purchase Agreement”), pursuant to which the Company sold to Auctus a convertible promissory note in the amount
of $72,000 for a purchase price of $72,000. Pursuant to the Auctus Securities Purchase Agreement, the Company issued to Auctus
a 12% Convertible Note (the “Auctus Note”) in the principal amount of $72,000. The Auctus Note accrues interest at
the rate of 12% per year and is due in full on or before February 10, 2018. The Company may prepay this Note in whole at any time
prior to 60 days from the issue date on at least 5 Trading Days’ notice, upon payment of (i) 125% of the outstanding balance
of the Auctus Note within 30 days of the issue date, or (ii) 130% of the outstanding balance of the Auctus Note if between 30
and 60 days after the issue date. The Company shall have no prepayment right after 60 days. Auctus has the right to convert all
or any portion of the note balance at any time at a conversion price per share of thirty percent (30%) lowest sale price for the
Company’s Common Stock during the twenty-five (25) consecutive Trading Days immediately preceding the Conversion Date (as
defined and calculated pursuant to the Auctus Note), which is adjustable in accordance with the Note terms in the event certain
capital reorganization, merger, or liquidity events of the Company as further described in the Note.
On
May 19, 2017, the Company entered into an addendum to the Brand License Agreement (the “Addendum”) with the WTFSKF
whereby the Company acquired the television, radio and internet rights to the WTFSKF World Karate Championship and the International
Karate Gasshuku. The term of the agreement is for the life of the Brand License Agreement. The Addendum further enhances the ability
of the Company to develop the market under the Brand License Agreement and the Addendum. However, the Company has chosen to follow
a prudent and vigilant course of action in writing down the value of the Brand License. The Company has considered and taken note
of Section 350-30-35, the Subsequent Measurement Section that provides guidance on an entity’s subsequent measurement and
subsequent recognition of an item. Situations that may result in subsequent changes to the carrying amount include impairment,
credit losses, fair value adjustments, depreciation and amortization, and so forth. The Company has also taken note of Section
350-30-50, the Disclosure Section that provides guidance regarding the disclosure in the notes to the financial statements. In
some cases, disclosure may relate to disclosure on the face of the financial statements. The Brand License Agreement, including
the Addendum, has been impaired on the books of the Company as discussed in Note 6 above.