Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the
Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
pursuant to Section 13(a) of the Exchange Act. ☐
As of June 30, 2018 (the last business day of the registrant’s
most recently completed second fiscal quarter), the aggregate market value of the issued and outstanding common stock held by non-affiliates
of the registrant was $499,318. For purposes of the above statement only, all directors, executive officers and 10% shareholders
are assumed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other
purpose.
As of April 1, 2019, there were 81,272,408 shares of common
stock outstanding.
This report contains forward-looking statements. The forward-looking
statements are contained principally in the sections entitled “Description of Business,” “Risk Factors,”
and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements
involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements
to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,”
“seeks,” “could,” “estimates,” “expects,” “intends,” “may,”
“plans,” “potential,” “predicts,” “projects,” “should,” “would”
and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with
respect to future events and are based on assumptions and subject to risks and uncertainties. These risks and uncertainties include,
but are not limited to, the factors described in the section captioned “Risk Factors” below. Given these uncertainties,
you should not place undue reliance on these forward-looking statements. Such statements may include, but are not limited to, information
related to: anticipated operating results; licensing arrangements; relationships with our customers; consumer demand; financial
resources and condition; changes in revenues; changes in profitability; changes in accounting treatment; cost of sales; selling,
general and administrative expenses; interest expense; the ability to secure materials and subcontractors; the ability to produce
the liquidity or enter into agreements to acquire the capital necessary to continue our operations and take advantage of opportunities;
legal proceedings and claims.
Also, forward-looking statements represent our estimates and
assumptions only as of the date of this report. You should read this report and the documents that we reference and filed as exhibits
to this report completely and with the understanding that our actual future results may be materially different from what we expect.
Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons
actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes
available in the future.
Except as otherwise indicated by the context, references in
this report to “we,” “us,” “our,” “our Company,” or “the Company” is
of Reign Sapphire Corporation.
In addition, unless the context otherwise requires and for the
purposes of this report only:
PART II
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
(a) Market Information
Our stock is quoted on the OTCQB under
the symbol “RGNP.” We were listed on May 23, 2016. There are 81,272,408 shares outstanding as of March 29, 2019. The
below table provides the high and low bid prices of our common stock for each quarterly period during the last two years.
|
|
Year ended
December 31, 2018
|
|
|
|
High
|
|
|
Low
|
|
Fourth Quarter
|
|
$
|
0.0179
|
|
|
$
|
0.0071
|
|
Third Quarter
|
|
$
|
0.0239
|
|
|
$
|
0.01
|
|
Second Quarter
|
|
$
|
0.0976
|
|
|
$
|
0.0169
|
|
First Quarter
|
|
$
|
0.1699
|
|
|
$
|
0.0795
|
|
|
|
Year ended
December 31, 2017
|
|
|
|
High
|
|
|
Low
|
|
Fourth Quarter
|
|
$
|
0.31
|
|
|
$
|
0.11
|
|
Third Quarter
|
|
$
|
0.17
|
|
|
$
|
0.05
|
|
Second Quarter
|
|
$
|
0.16
|
|
|
$
|
0.06
|
|
First Quarter
|
|
$
|
0.16
|
|
|
$
|
0.03
|
|
(b) Transfer Agent
The transfer agent and registrar for our
common stock is VStock Transfer, LLC located at 18 Lafayette Place, Woodmere, New York.
(b) Shareholders of Record
The number of beneficial holders of record of our common stock
as of the close of business on December 31, 2018 was 89.
(c) Dividends
We do not expect to pay cash dividends
in the next term. We intend to retain future earnings, if any, to provide funds for operation of our business. We currently have
no restrictions affecting our ability to pay cash dividends.
(d) Equity Compensation Plans
As of December
31, 2018, our board of directors and shareholders previously authorized the adoption and implementation of the Company’s
2015 Equity Incentive Plan (the “2015 Plan”). The principal purpose of the 2015 Plan is to attract, retain and motivate
our employees, officers, directors, consultants, agents, advisors and independent contractors and our related companies by providing
them the opportunity to acquire a proprietary interest in us and to link their interests and efforts to the long-term interests
of our shareholders. Under the 2015 Plan, an aggregate of 20,000,000 shares of our common stock have initially been reserved for
issuance pursuant to a variety of stock-based compensation awards, including stock options, stock appreciation rights, stock awards,
restricted stock, restricted stock units and other stock and cash-based awards. The exercise price for each option may not be less
than fair market value of the common stock on the date of grant, and shall vest as determined by our board of directors but shall
not exceed a ten-year period.
As of December
31, 2018, we had previously granted to our CEO, options to purchase 10,000,000 shares of our common stock under the 2015 Plan,
valued at $2,500,000 (based on the Black Scholes valuation model on the date of grant). The Black-Scholes option-pricing model
used the following weighted average assumptions as of December 31, 2016: (i) no dividend yield for each year, (ii) volatility of
35.6 percent, (iii) risk-free interest rate of 1.87 percent, (iv) stock price of $0.25, (v) exercise price of $0.005, and (vi)
expected life of 6.0. The options vested 50% on the first anniversary of the grant date (“First Year Vest”) and the
remaining 50% of the shares vested in twelve (12) equal installments on the first day of each calendar month following the first
anniversary of the grant date beginning on June 1, 2016 and ending on June 1, 2017 (“Second Year Vest”).
In April 2018, the Company issued a total
of 98,000 restricted common shares to its employees, valued at $7,742 (based on our stock price on the date of grant) as compensation
pursuant to the Company’s 2015 Equity Incentive Plan.
In July 2018,
the Company issued a total of 100,000 restricted common shares, valued at $2,390 (based on our stock price on the date of grant),
to a member of its advisory committee (“Advisors”) as compensation pursuant to the Company’s 2015 Equity Incentive
Plan.
As of December
31, 2018, the Company previously issued a total of 100,000 restricted common shares to a member of its advisory committee (“Advisor”),
valued at $15,000 (based on the estimated fair value of the stock on the date of grant) for outside advisory and consulting services
pursuant to the Company’s 2015 Equity Incentive Plan. One-twelfth (1/12) of the shares will be earned each month. The Company
will revalue the shares at each vesting period and recognize expense for the portion of the shares earned. The Company recognized
compensation expense of $13,750 and $1,250 under general and administrative expenses in the accompanying consolidated Statements
of Operations for the years ended December 31, 2018 and 2017, respectively, with $0 remaining to be amortized. As of December 31,
2018, the Advisor had vested in 100,000 shares with 0 shares remaining to vest.
As of December 31, 2018, we issued a total
of 700,000 restricted common shares to members of our advisory committee (“Advisors”), valued at $135,000 (based on
the estimated fair value of the stock on the date of grant) for outside advisory and consulting services pursuant to our 2015 Plan.
One-twelfth (1/12) of the shares will be earned each month. We will revalue the shares at each vesting period and recognize expense
for the portion of the shares earned. We recognized compensation expense of $13,750 and $41,667 for the years ended December 31,
2018 and 2017 respectively, with $0 remaining to be amortized, under general and administrative expenses in the accompanying consolidated
Statements of Operations. As of December 31, 2018, the Advisors had vested in all 700,000 shares.
Recent Sales of Unregistered Securities
In November 2018, the Company issued 8,000,000 restricted common
shares for payment of accounts payable of $117,600.
In November 2018, we issued 2,500,000 restricted
common shares in consideration for the modification of the existing short term convertible notes.
Item 6. Selected Financial Data
Because we are a smaller reporting company, this Item 6 is not
applicable.
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
You should
read the following discussion and analysis of our financial condition and results of operations together with our consolidated
financial statements and related notes included elsewhere in this filing. This discussion and other parts of this filing contain
forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations, intentions,
and beliefs. Our actual results may differ materially from those discussed in these forward-looking statements as a result of various
factors, including those set forth under “Risk Factors” and in other parts of this filing, and you should not place
undue certain on these forward-looking statements, which apply only as of the date of this filing. See “Disclosure Regarding
Forward-Looking Statements”.
We are an emerging growth company as
defined in Section 2(a) (19) of the Securities Act. Pursuant to Section 107 of the Jumpstart Our Business Startups Act, we may
take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or
revised accounting standards, meaning that we can delay the adoption of certain accounting standards until those standards would
otherwise apply to private companies. We have chosen to take advantage of the extended transition period for complying with new
or revised accounting standards applicable to public companies to delay adoption of such standards until such standards are made
applicable to private companies. Accordingly, our consolidated financial statements may not be comparable to the financial statements
of public companies that comply with such new or revised accounting standards.
OVERVIEW:
Financial Presentation
On
December 1, 2016, substantially all of the operating assets of Coordinates Collection, Inc. (“CCI”) was acquired by
Reign Sapphire
Corporation
(
“
us
”,
“we, “Reign”)
.
We are
a Beverly
Hills-based, direct-to-consumer, branded and custom jewelry company.
As part of the Acquisition, we created a wholly owned
subsidiary, Reign Brands, Inc. (“Reign Brands”), which is a Delaware corporation, and acts as the operating entity
for the acquired CCI assets. The acquisition method of accounting was used to record assets acquired and liabilities assumed by
us. Such accounting generally results in increased amortization and depreciation reported in future periods. CCI’s fixed assets
and identifiable intangible assets acquired were recorded based upon their estimated fair values as of the closing date of the
Acquisition. The excess of purchase price over the value of the net assets acquired was recorded as goodwill.
Historical Development
Reign Sapphires - Continuing Operations
Reign
is a Beverly Hills-based, direct-to-consumer, branded and custom jewelry company with 4 niche brands: Reign Sapphires: ethically
produced, source-to-consumer sapphire jewelry targeting millennials, Le Bloc: classic customized jewelry, and athleisure jewelry brand ION
Collection.
Reign Sapphire Corporation was established
on December 15, 2014 in the State of Delaware as a vertically integrated “source to retail” model for sapphires –
rough sapphires to finished jewelry; a color gemstone brand; and a jewelry brand featuring Australian sapphires. We acquired our
Coordinates Collection and Le Bloc brands and the assets related to the production and sale of the brands on December 1, 2016.
The Company includes Reign Brands, Inc.
as a wholly owned subsidiary, formed under of laws of the State of Delaware.
The Company started as UWI Holdings Corporation
(previously known as Australian Sapphire Corporation) (“UWI”) and was established on May 31, 2013 in the Province of
New Brunswick, Canada. On December 31, 2014, UWI entered into an Agreement of Conveyance, Transfer and Assignment of Assets and
Assumption of Obligations with Reign Corporation, pursuant to which UWI transferred all of its net assets to Reign. The sole shareholder
of UWI along with his spouse retained 100% ownership of Reign and were issued 27,845,000 of Reign common shares in exchange for
the 16,000,250 outstanding shares of UWI. There was no significant tax consequence to this exchange. As a result, Reign is considered
to be the continuation of the predecessor UWI. All historical financial information prior to the reorganization is that of UWI.
On March 17, 2017, the shareholders of
the Company approved an amendment to the Company’s Certificate of Incorporation to designate 1 share of the Company’s
authorized 10,000,000 shares of Preferred Stock as Series A Preferred Stock (“Series A Preferred Stock”), which shall
vote with the Common Stock, and shall be entitled to fifty-one percent (51%) of the total votes of Common Stock on all such matters
voted on. On May 23, 2017, the Company issued the share of Series A Preferred Stock to Joseph Segelman.
Coordinates Collection - Discontinued Operations
On January 1, 2019, Reign Brands, Inc.,
a subsidiary of Reign Sapphire Corporation, entered into an Asset Purchase Agreement (the “Agreement”) with Co-Op Jewelers
LLC (“Co-Op”), whereby Reign Brands, Inc. sold operating assets of Reign Brands, Inc., consisting of substantially
all of the assets related to Coordinates Collection (“CC”). On January 1, 2019 (the “Closing Date”), the
parties executed the Asset Purchase Agreement and the final exhibits.
Upon the closing of the Agreement, Reign
Brands, Inc. sold substantially all of the operating assets of the CC business, consisting of fixed assets and intellectual property
in exchange for an aggregate of $100,000 in cash. The Agreement contained customary closing conditions.
We began our planned principal operations,
and accordingly, we have prepared our consolidated financial statements in accordance with accounting principles generally accepted
in the United States of America (“GAAP”).
Recent Developments
Financing Transactions
Convertible Note Payable
In
January and February 2018, the Company entered into Securities Purchase Agreements (the “Purchase Agreement”) with
respect to the sale and issuance to Crossover Capital Fund II, LLC (“Crossover”) totaling (i) 833,332 shares of the
Company’s Common Stock (the “Commitment Shares”); (ii) 3,000,000 redeemable shares (the “Redeemable Shares”),
(iii) $294,000 aggregate principal amount of a convertible promissory note (the “Convertible Notes”) and (iv) Common
Stock Purchase Warrants to purchase up to an aggregate of 1,960,000 shares of the Company’s common stock (the “Warrants”)
for a net aggregate consideration of $250,000 cash.
The
January and February 2018 Convertible Notes mature on March 31, 2019, as amended, and provide for interest to accrue at an interest
rate equal to 18% per annum or the maximum rate permitted under applicable law after the occurrence of any event of default as
provided in the Convertible Notes. At any time after 180 days from the Issue Date, the holder, at its option, may convert the outstanding
principal balance and accrued interest into shares of common stock of the Company. The initial conversion price for the principal
and interest in connection with voluntary conversions by a holder of a Convertible Notes is $0.08 per share, subject to adjustment
as provided therein
, such as stock splits and stock dividends
. There is also
a one-time interest charge of 10% due at maturity.
If
the Convertible Notes are prepaid on or prior to the maturity date, all of the Redeemable Shares shall be returned to the treasury
shares of the Company, without any payment by the Company for the Redeemable Shares. Further, if the Company prepays a portion
of the Convertible Notes, but not the entire Convertible Notes, on or before the maturity date, a pro rata portion of the Redeemable
Shares shall be returned to the Company’s treasury in proportion to the prepayment amount as it relates to the entire Convertible
Notes balance.
In October 2018, the January and February
2018 Crossover Purchase Agreement was amended to extend the maturity date to December 31, 2018 and to remove the right of the Company
to 3,000,000 of the Redeemable Shares and Crossover was issued the shares.
The
exercise price for the Warrants is $0.15, subject to adjustment, are exercisable for five years after the date of the Warrant and
are exercisable
in whole or in part, as either a cash exercise or as a “cashless” exercise.
Note Payable
On
June 30, 2017, we entered into a Loan Agreement, a Secured Promissory Note (“Note”) and a personal guarantee with respect
to the funding by certain institutional investors
Alpha Capital Anstalt and Brio Capital Master Fund Ltd.
of
up to $1,125,000 in debt. Until December 31, 2018, we had the ability to request quarterly advances of up to the lesser of (i)
$250,000 or (ii) one sixth (1/6) of the revenue reported in the Form 10-Q or 10-K for the previous calendar quarter or previous
fiscal year, whichever is most recent, provided that such revenue generated a profit of at least 10 percent (10%). The investors
may advance the funds in their absolute discretion. In June 2017, the Company was advanced $125,005. The Note shall become due
and payable 18 months from each advance date. We must make payments to the investors in an amount of $350, including interest at
10% per annum, every business day from the date of the first advance, which shall be increased proportionately upon each advance.
The Note is secured with our assets pursuant to a security agreement dated December 23, 2015. In addition, our CEO has personally
guaranteed the Note. As additional consideration for the loan, the investors received 1,500,000 shares of restricted common stock,
in aggregate, valued at $105,000
(based on our stock price on the date of grant) along with $2,500 in cash for reimbursement
of expenses incurred and recorded as debt issuance costs of $107,500
.
The
note payable balance net of debt discount of $27,750 at December 31, 2018 was $103,770 with an availability of $880,000 on the
Note.
In January 2018, we were advanced an additional
$60,010 under the Note with no additional shares issued. In March 2018, we were advanced an additional $60,010 under the Note with
600,000 additional shares to be issued. As of March 31, 2018, we had not issued the shares and recorded a common stock payable
and a debt discount of $55,500 (based on our stock price on the date of grant). The shares were issued in April 2018 and the shares
were reclassed from common stock payable to equity. The debt discount is accreted to interest expense over the term of the note.
The Agreement
and
Note are being entered into in accordance with the halachically accepted exemptions on the paying of interest payments in business
transactions known as “heter iska”.
We are
still accounting for the interest
in accordance with GAAP.
We borrow funds from third parties from
time to time for working capital purposes with an upfront fee of approximately $400, paying no interest, and with no length of
repayment. For the year ended December 31, 2018, we had borrowings of $35,000 and repayments of $35,171 for a balance of $0 at
December 31, 2018. Repayments are based on 30% of amounts processed through PayPal until the balance is paid.
Stock Transactions
Common Stock
In November 2018, the Company issued 8,000,000 restricted common
shares for payment of accounts payable of $117,600.
In November 2018, we issued 2,500,000 restricted
common shares in consideration for the modification of the existing short term convertible notes.
In October 2018, the Company issued 150,000
restricted common shares for services rendered, valued at $2,685 (based on our stock price on the date of grant).
During the year ended December 31, 2018,
the Company issued 4,750,000 restricted common shares for services rendered of $126,680 (based on our stock price on the measurement
date).
On September 1, 2018, the Company issued
5,000,000 restricted common shares for payment of accounts payable of $88,165.
On July 8, 2018, the Company issued 100,000
restricted common shares to an Advisor, valued at $2,390 (based on the estimated fair value of the stock on the measurement date)
for outside advisory and consulting services pursuant to the Company’s 2015 Equity Incentive Plan
In
January and February 2018, the Company entered into Securities Purchase Agreements with respect to the sale and issuance to Crossover
Capital Fund II, LLC totaling (i) 833,332 shares of the Company’s Common Stock; (ii) 3,000,000 redeemable shares, (iii) $294,000
aggregate principal amount of a convertible promissory note and (iv) Common Stock Purchase Warrants to purchase up to an aggregate
of 1,960,000 shares of the Company’s common stock for a net aggregate consideration of $250,000 cash.
In January 2018, we issued 2,395,650 restricted
common shares, valued at $263,522 (based on the Company’s stock price on the measurement date), in consideration for the
modification of the existing short term convertible notes and recorded as an extinguishment of debt.
During the year ended December 31, 2017,
the Company issued 6,861,768 restricted common shares for services rendered of $755,884 (based on our stock price on the measurement
date).
During the year ended December 31, 2017,
the Company issued a total of 175,200 restricted common shares to its employees, valued at $16,920 (based on our stock price on
the date of grant) as compensation pursuant to the Company’s 2015 Equity Incentive Plan.
During the year ended December 31, 2017,
the Company issued 200,000 restricted common shares to an Advisor, valued at $20,000 (based on the estimated fair value of the
stock on the measurement date) for outside advisory and consulting services pursuant to the Company’s 2015 Equity Incentive
Plan (see Note 11).
On
June 30, 2017, the Company entered into an Agreement and Note by certain institutional investors
Alpha Capital Anstalt and
Brio Capital Master Fund Ltd.
of up to $1,125,000 in debt. In March 2018, as additional consideration
for the loan, the investors received 600,000 shares of restricted common stock, in aggregate, valued at $55,500
(based on
our stock price on the date of grant)
.
On July 14, 2017, the Company entered into
a contract with a third party for consulting services. The consulting agreement provides for the consultant to receive 487,500
shares for entering into the agreement that were valued at $34,125 (based on our stock price on the date of grant) and 162,500
restricted common shares each month beginning month four through month twelve. During 2018, the consultant vested in 568,750 shares,
valued at $101,156 (based on our stock price on the date of each grant). The contract was terminated at January 26, 2018.
On January 22, 2017, the Company issued
150,000 restricted common shares for payment of accounts payable of $14,985.
Stock Based Compensation
In April 2018, the Company issued a total
of 98,000 restricted common shares to its employees, valued at $7,742 (based on our stock price on the date of grant) as compensation
pursuant to the Company’s 2015 Equity Incentive Plan.
In July 2018,
the Company issued a total of 100,000 restricted common shares, valued at $2,390 (based on our stock price on the date of grant),
to a member of its advisory committee (“Advisors”) as compensation pursuant to the Company’s 2015 Equity Incentive
Plan.
As of December 31, 2018, the Company previously
issued a total of 100,000 restricted common shares to a member of its advisory committee (“Advisor”), valued at $15,000
(based on the estimated fair value of the stock on the date of grant) for outside advisory and consulting services pursuant to
the Company’s 2015 Equity Incentive Plan. One-twelfth (1/12) of the shares will be earned each month. The Company will revalue
the shares at each vesting period and recognize expense for the portion of the shares earned. The Company recognized compensation
expense of $13,750 and $1,250 under general and administrative expenses in the accompanying consolidated Statements of Operations
for the years ended December 31, 2018 and 2017, respectively, with $0 remaining to be amortized. As of December 31, 2018, the Advisor
had vested in 100,000 shares with 0 shares remaining to vest.
As of December 31, 2018, the Company issued
a total of 700,000 restricted common shares to members of its advisory committee (“Advisors”), valued at $135,000 (based
on the estimated fair value of the stock on the date of grant) for outside advisory and consulting services pursuant8 to the Company’s
2015 Equity Incentive Plan. One-twelfth (1/12) of the shares will be earned each month. The Company will revalue the shares at
each vesting period and recognize expense for the portion of the shares earned. The Company recognized compensation expense of
$13,750 and $41,667 for the years ended December 31, 2018 and 2017 respectively, with $0 remaining to be amortized, under general
and administrative expenses in the accompanying consolidated Statements of Operations. As of December 31, 2018, the Advisors had
vested in all 700,000 shares.
Limited Operating History; Need for
Additional Capital
There is limited historical financial information
about us on which to base an evaluation of our performance. We cannot guarantee we will be successful in our business operations.
Our business is subject to risks inherent in the establishment of a new business enterprise, including limited capital resources,
and possible cost overruns due to increases in the cost of services. To become profitable and competitive, we must receive additional
capital. We have no assurance that future financing will materialize. If that financing is not available we may be unable to continue
operations.
Overview of Presentation
The following Management’s Discussion
and Analysis (“MD&A”) or Plan of Operations includes the following sections:
●
Results of Operations
|
|
●
Liquidity and Capital Resources
|
|
●
Capital Expenditures
|
|
●
Going Concern
|
|
●
Critical Accounting Policies
|
|
●
Off-Balance Sheet Arrangements
|
Plan of Operations
Our plan of operations consists of:
|
●
|
Launch of our B2B marketing and sales efforts through the use of distribution partners and a high-end fashion retailers.
|
|
●
|
Expansion of our D2C marketing and sales efforts through the use of social media, Internet marketing, print advertising, promotions, and signage
|
|
●
|
Raise capital, fund administrative infrastructure and ongoing operations until our operations generate positive cash flow.
|
How We Generate Revenue
On January 1, 2018, the Company adopted
Accounting Standards Codification ASC 606 (“ASC 606”),
Revenue from Contracts with Customers,
using the modified
retrospective approach for all contracts not completed as of the date of adoption. Results for the reporting periods beginning
on January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance
with accounting under ASC 605,
Revenue Recognition
. As a result of adopting ASC 606, amounts reported under ASC 606 were
not materially different from amounts that would have been reported under the previous revenue guidance of ASC 605, as such, no
cumulative adjustment to retained earnings.
The Company generates all of its revenue
from contracts with customers. The Company recognizes revenue when we satisfy a performance obligation by transferring control
of the promised services to a customer in an amount that reflects the consideration that we expect to receive in exchange for those
services. The Company determines revenue recognition through the following steps:
|
1.
|
Identification of the contract, or contracts, with a customer.
|
|
2.
|
Identification of the performance obligations in the contract.
|
|
3.
|
Determination of the transaction price.
|
|
4.
|
Allocation of the transaction price to the performance obligations in the contract
|
|
5.
|
Recognition of revenue when, or as, we satisfy a performance obligation.
|
At contract inception, the Company assesses
the services promised in our contracts with customers and identify a performance obligation for each promise to transfer to the
customer a service (or bundle of services) that is distinct. To identify the performance obligations, the Company considers all
of the services promised in the contract regardless of whether they are explicitly stated or are implied by customary business
practices. The Company allocates the entire transaction price to a single performance obligation.
A description of our principal revenue generating activities
are as follows:
Retail sales
– The
Company offers consumer products through its online websites. During the years ended December 31, 2018 and 2017, the Company
recorded retail sales of $623,514 ($28,348 from continuing operations and $595,166 from discontinued operations) and
$1,061,248 ($26,199 from continuing operations and $1,035,049 from discontinued operations), respectively.
Wholesale sales
– The
Company offers product sold in bulk to distributors. During the years ended December 31, 2018 and 2017, the Company recorded
wholesale sales of $63,976 ($0 from continuing operations and $63,976 from discontinued operations) and $222,930 ($12,235 from continuing operations and $210,695 from discontinued operations),
respectively.
Revenue is recognized from retail and wholesale
sales when the product is shipped to the customer, provided that collection of the resulting receivable is reasonably assured.
Credit is granted for wholesale sales generally for terms of 7 to 90 days, based on credit evaluations. No allowance has been provided
for uncollectible accounts. Management has evaluated the receivables and believes they are collectable based on the nature of the
receivables, historical experience of credit losses, and all other currently available evidence. Discounts are recorded as a reduction
of the transaction price. Revenue excludes any amounts collected on behalf of third parties, including sales taxes.
The Company evaluates whether it is appropriate
to record the gross amount of product sales and related costs or the net amount earned as commissions. Generally, when the Company
is primarily obligated in a transaction, are subject to inventory risk, have latitude in establishing prices and selecting suppliers,
or have several but not all of these indicators, revenue is recorded at the gross sale price. The Company generally records the
net amounts as commissions earned if we are not primarily obligated and do not have latitude in establishing prices. The Company
records all revenue transactions at the gross sale price.
There is a no return policy. The return
policy is currently being evaluated to be more in line with industry standards.
General and administrative expenses consist
of the cost of customer service, billing, cost of information systems and personnel required to support our operations and growth.
Costs associated with product shipping
and handling are expensed as incurred. Shipping and handling costs, which are included in selling, general and administrative expenses
on the statement of operations, were $23,784 and $745 for the years ended December 31, 2018 and 2017, respectively.
Depending on the extent of our future growth,
we may experience significant strain on our management, personnel, and information systems. We will need to implement and improve
operational, financial, and management information systems. In addition, we are implementing new information systems that will
provide better record-keeping, customer service and billing. However, there can be no assurance that our management resources or
information systems will be sufficient to manage any future growth in our business, and the failure to do so could have a material
adverse effect on our business, results of operations and financial condition
.
Results of Operations
Year
Ended December 31, 2018 Compared to Year Ended December 31, 2017
Reign
Sapphires – Continuing Operations
The
following discussion represents a comparison of our results of operations for the years ended December 31, 2018 and 2017.
The
results of operations for the periods shown in our audited consolidated financial statements are not necessarily indicative of
operating results for the entire period. In the opinion of management, the audited consolidated financial statements recognize
all adjustments of a normal recurring nature considered necessary to fairly state our financial position, results of operations
and cash flows for the periods presented.
|
|
Year Ended
December 31,
2018
|
|
|
Year Ended
December 31,
2017
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
28,348
|
|
|
$
|
38,434
|
|
Cost of sales
|
|
|
9,712
|
|
|
|
21,431
|
|
Gross Profit
|
|
|
18,636
|
|
|
|
17,003
|
|
Operating expenses
|
|
|
1,023,339
|
|
|
|
2,045,323
|
|
Other expense
|
|
|
1,299,774
|
|
|
|
1,816,177
|
|
Net loss before income taxes and discontinued operations
|
|
$
|
(2,304,477
|
)
|
|
$
|
(3,844,497
|
)
|
Net
Revenues
Net
revenues decreased by $10,086, or 26.2%, to $28,348 for the year ended December 31, 2018 from $38,434 for the year ended December
31, 2017. The decrease in revenue is primarily the result of a decrease in wholesale revenue of $12,235, or 100%, to $0 for the
year ended December 31, 2018 from $12,235 and an increase in retail revenue of $2,149 or 8.2%, to $28,348 for the year ended December
31, 2018 from $26,199 for the year ended December 31, 2017 primarily due to reduced customer purchases of our products, due primarily
to our reduction in marketing costs.
Cost
of Sales
Cost
of sales decreased by $11,719, or 54.7%, to $9,712 for the year ended December 31, 2018 from $21,431 for the year ended December
31, 2017. The decrease in cost of sales was primarily due to the decrease in revenue, offset partially by the reduced cost of
product. As a percentage of revenue, cost of sales was 34.2% and 55.8% resulting in a gross margin of 65.7% and 44.2% for the
years ended December 31, 2018 and 2017, respectively, primarily due to reduced cost of product.
Operating
expenses
Operating
expenses decreased by $1,021,984, or 50.0%, to $1,023,339 for the year ended December 31, 2018 from $2,045,323 for the year ended
December 31, 2017 primarily due to decreases in stock based compensation of $804,592, marketing costs of $28,585, compensation
costs of $158,291, rent of $58,434, consulting costs of $46,919, and general and administration costs of $5,022, offset primarily
by increases in depreciation and amortization costs of $11,594, travel expenses of $9,631, investor relations costs of $1,762,
professional fees of $56,872, as a result of reorganizing our administrative infrastructure, primarily marketing costs, and refocusing
our marketing initiatives to generate sales growth.
For
the year ended December 31, 2018, we had marketing expenses of $45,949, stock based compensation of $114,978, and general and
administrative expenses of $862,412 primarily due to compensation costs of $244,641, consulting costs of $13,030, travel expenses
of $53,918, rent of $33,245, professional fees of $158,524, depreciation and amortization costs of $247,386, investor relations
costs of $83,285, and general and administration costs of $28,383 as a result of reorganizing our administrative infrastructure
due to refocusing our marketing initiatives to generate anticipated sales growth.
For
the year ended December 31, 2017, we had marketing expenses of $74,534, stock based compensation of $919,570, and general and
administrative expenses of $1,051,219 primarily due to compensation costs of $402,932, consulting costs of $59,949, travel expenses
of $44,287, rent of $91,679, professional fees of $101,652, depreciation and amortization costs of $235,792, investor relations
costs of $81,523, and general and administration costs of $33,405 as a result of reorganizing our administrative infrastructure
due to refocusing our marketing initiatives to generate anticipated sales growth.
Other
(Income) Expense
Other
expense for the year ended December 31, 2018 totaled $1,299,774 primarily due to interest expense of $352,837 in conjunction with
debt discount, impairment of long-term assets of $942,736, and the extinguishment of debt of $535,039, offset partially by the
change in fair value of derivative liabilities of $530,838, compared to other expense of for the year ended December 31, 2017
totaled $1,816,177 primarily due to interest expense of $790,841 in conjunction with debt discount, the change in fair value of
warrant liabilities of $181,896, the modification of warrants and derivatives of $238,935, and the extinguishment of debt of $691,371,
offset partially by the change in fair value of derivative liabilities of $86,856.
Net
loss before income taxes and discontinued operations
Net
loss before income taxes and discontinued operations for the year ended December 31, 2018 totaled $2,304,477 primarily due to
revenue of $28,348 and (increases/decreases) in compensation costs, stock based compensation, professional fees, marketing costs,
investor relations costs, impairment charges, and general and administration costs compared to a loss of $3,845,297 for the year
ended December 31, 2017 primarily due to revenue of $38,434 and (increases/decreases) in compensation costs, stock based compensation,
professional fees, marketing costs, investor relations costs, and general and administration costs.
Assets
and Liabilities
Assets
were $862,049 as of December 31, 2018. Assets consisted primarily of cash of $7,497, current assets of discontinued operations
and assets held for sale of $2,096, inventory of $723,595 which includes samples inventory of $62,977, equipment of $15,530, intangible
assets of $113,331 (net of impairment of $942,736). Liabilities were $4,577,291 as of December 31, 2018. Liabilities consisted
primarily of accrued compensation-related party of $1,239,750, due to related party of $1,246,805, accounts payable of $22,710,
current liabilities of discontinued operations and assets held for sale $162,978, other current liabilities of $69,774, notes
payable of $103,770, net of $27,750 of unamortized debt discount, and convertible notes of $1,731,504, net of $0 of unamortized
debt discount. The reason for the impairment charges of $942,736 and $0 in years ended December 31, 2018 and 2017, respectively,
are the result of the Company’s determination that cash flows from CCI may not be realized.
Coordinates
Collection – Discontinued Operations
The
following discussion represents a comparison of our results of operations for the years ended December 31, 2018 and 2017.
The
results of operations for the periods shown in our audited consolidated financial statements are not necessarily indicative of
operating results for the entire period. In the opinion of management, the audited consolidated financial statements recognize
all adjustments of a normal recurring nature considered necessary to fairly state our financial position, results of operations
and cash flows for the periods presented.
|
|
Year Ended
December 31,
2018
|
|
|
Year Ended
December 31,
2017
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
659,142
|
|
|
$
|
1,245,744
|
|
Cost of sales
|
|
|
227,157
|
|
|
|
490,951
|
|
Gross Profit
|
|
|
431,985
|
|
|
|
754,793
|
|
Operating expenses
|
|
|
746,982
|
|
|
|
1,160,760
|
|
Net loss from discontinued operations
|
|
$
|
(314,997
|
)
|
|
$
|
(405,967
|
)
|
Net
Revenues
Net
revenues decreased by $586,602, or 47.1%, to $659,142 for the year ended December 31, 2018 from $1,245,744 for the year ended
December 31, 2017. The decrease in revenue is primarily the result of a decrease in retail revenue of $439,883 or 42.5%, to $595,166
for the year ended December 31, 2018 from $1,035,049 for the year ended December 31, 2017 and a reduction in wholesale revenue
of $146,719, or 69.6%, to $63,976 for the year ended December 31, 2018 from $210,695 for the year ended December 31, 2017 primarily
due to reduced customer purchases of our products, due primarily to our reduction in marketing costs, and increased purchase discounts
as we continue to focus on retail markets.
Cost
of Sales
Cost
of sales decreased by $263,794, or 53.7%, to $227,157 for the year ended December 31, 2018 from $490,951 for the year ended December
31, 2017. The decrease in cost of sales was primarily due to the decrease in revenue, offset partially by the reduced cost of
product. As a percentage of revenue, cost of sales was 34.5% and 39.4% resulting in a gross margin of 65.5% and 60.6% for the
years ended December 31, 2018 and 2017, respectively, primarily due to reduced cost of product.
Operating
expenses
Operating
expenses decreased by $413,778, or 35.6%, to $746,982 for the year ended December 31, 2018 from $1,160,760 for the year ended
December 31, 2017 primarily due to decreases in stock based compensation of $248,250, marketing costs of $141,248, compensation
costs of $9,246, rent of $1,000, travel expenses of $5,243, consulting costs of $28,729, and professional fees of $1,685, offset
partially by general and administration costs of $21,623 as a result of reorganizing our administrative infrastructure, primarily
marketing costs, and refocusing our marketing initiatives to generate sales growth.
For
the year ended December 31, 2018, we had marketing expenses of $317,666 and general and administrative expenses of $429,316 primarily
due to compensation costs of $320,995, consulting costs of $3,286, travel expenses of $7,963, rent of $7,000, professional fees
of $11,778, and general and administration costs of $78,294 as a result of reorganizing our administrative infrastructure due
to refocusing our marketing initiatives to generate anticipated sales growth.
For
the year ended December 31, 2017, we had marketing expenses of $458,914, stock based compensation of $248,250, and general and
administrative expenses of $453,596 primarily due to compensation costs of $330,241, consulting costs of $32,015, travel expenses
of $13,206, rent of $8,000, professional fees of $13,463, and general and administration costs of $56,671 as a result of reorganizing
our administrative infrastructure due to refocusing our marketing initiatives to generate anticipated sales growth.
Net
loss from discontinued operations
Net
loss from discontinued operations for the year ended December 31, 2018 totaled $314,997 primarily due to revenue of $659,142 and
(increases/decreases) in compensation costs, stock based compensation, professional fees, marketing costs, investor relations
costs, impairment charges, and general and administration costs compared to a loss from discontinued operations of $405,967 for
the year ended December 31, 2017 primarily due to revenue of $1,245,744 and (increases/decreases) in compensation costs, stock
based compensation, professional fees, marketing costs, investor relations costs, and general and administration costs.
Assets
and Liabilities
Current
assets of discontinued operations and assets held for sale were $2,096 as of December 31, 2018. Current assets of discontinued
operations and assets held for sale consisted primarily of accounts receivable of $2,096. Current liabilities of deferred revenue
of $21,977, estimated fair value of contingent payments of $137,007, and other current liabilities of $3,994.
Liquidity and Capital Resources
General
– Overall,
we had a decrease in cash flows for the year ended December 31, 2018 of $2,095 resulting from cash used in operating activities
of $286,112, and cash used in investing activities of $8,452, offset partially by cash provided by financing activities of $292,469.
The following is a summary of our cash
flows provided by (used in) operating, investing, and financing activities during the periods indicated:
|
|
Year Ended
December 31, 2018
|
|
|
Year Ended
December 31, 2017
|
|
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(286,112
|
)
|
|
$
|
(400,003
|
)
|
Investing activities
|
|
|
(8,452
|
)
|
|
|
(79,068
|
)
|
Financing activities
|
|
|
292,469
|
|
|
|
339,056
|
|
|
|
$
|
(2,095
|
)
|
|
$
|
(140,015
|
)
|
Year Ended December 31, 2018 Compared
to the Year Ended December 31, 2017
Cash Flows from Operating Activities
– For the year ended December 31, 2018, net cash used in operations was $286,112 compared to net cash used in operations
of $400,003 for the year ended December 31, 2017. Net cash used in operations was primarily due to a net loss of $2,620,274 for
year ended December 31, 2018, and the change in derivative liabilities of $530,838, offset primarily by stock based compensation
– related party of $2,390, stock based compensation issued to employees of $7,742, the estimated fair market value of stock
issued for services of $230,521, depreciation expense of $12,698, amortization expense of $234,688, accretion of debt discount
of $340,216, the loss on extinguishment of debt of $535,039, the amortization of stock issued for future services of $13,750, the
impairment of long-term assets of $942,736, and the changes in operating assets and liabilities of $545,220, primarily due to the
increase in accrued compensation - related party of $203,750, due to related party of $525,371, prepaid expenses of $1,336, accounts
receivable of $7,634, inventory of $2,545, and other current liabilities of $11,799, offset partially by the estimated fair value
of contingent payments, net of $8,932, accounts payable of $138,805, and deferred revenue of $59,478.
Net cash used in operations was primarily
due to a net loss of $4,251,264 for year ended December 31, 2017, and the change in warrant and derivative liabilities of $86,856,
offset primarily by stock based compensation – related party of $45,391, stock based compensation issued to employees of
$16,920, the estimated fair market value of stock issued for services of $811,301, depreciation expense of $13,712, amortization
expense of $222,081, accretion of debt discount of $415,237, the preferred share issued to CEO – related party of $270,000,
interest expense in conjunction with debt issuance of $368,778, the change in warrant liabilities of $181,896, the modification
of warrant and derivative liabilities of $238,935, the loss on extinguishment of debt of $691,361, and the changes in operating
assets and liabilities of $662,505, primarily due to the increase in accounts payable of $177,068, deferred revenue of $2,635,
accrued compensation - related party of $260,000, due to related party of $280,687, common stock payable of $79,625, and other
current liabilities of $26,398, offset partially by prepaid expenses of $15,086, accounts receivable of $9,730, inventory of $2,538,
and estimated fair value of contingent payments, net of $136,554.
Cash Flows from Investing Activities
– For the year ended December 31, 2018, net cash used in investing was $8,452 compared to net cash used in investing of $79,068
for the year ended December 31, 2017. Net cash used in investing activities was mainly due to purchases of equipment and the acquisition
of intangible assets.
Cash Flows from Financing Activities
– For the year ended December 31, 2018, net cash provided by financing was $292,469 compared to net cash provided by financing
of $339,056 for the year ended December 31, 2017. The net cash provided by financing activities in 2018 was primarily due to proceeds
from short-term convertible notes of $250,000, proceeds from short-term notes of $155,020, and repayments of short-term notes of
$112,551. The net cash provided by financing activities in 2017 was primarily due to proceeds from short-term convertible notes
of $250,005, proceeds from short-term notes of $149,504, and repayments of short-term notes of $60,453.
Financing
– We expect
that our current working capital position, together with our expected future cash flows from operations will be insufficient to
fund our operations in the ordinary course of business, anticipated capital expenditures, debt payment requirements and other contractual
obligations for at least the next twelve months. However, this belief is based upon many assumptions and is subject to numerous
risks, and there can be no assurance that we will not require additional funding in the future.
We have no present agreements or commitments
with respect to any material acquisitions of other businesses, products, product rights or technologies or any other material capital
expenditures. However, we will continue to evaluate acquisitions of and/or investments in products, technologies, capital equipment
or improvements or companies that complement our business and may make such acquisitions and/or investments in the future. Accordingly,
we may need to obtain additional sources of capital in the future to finance any such acquisitions and/or investments. We may not
be able to obtain such financing on commercially reasonable terms, if at all. Due to the ongoing global economic crisis, we believe
it may be difficult to obtain additional financing if needed. Even if we are able to obtain additional financing, it may contain
undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our shareholders, in the
case of equity financing.
Convertible Note Payable
In
January and February 2018, the Company entered into Securities Purchase Agreements (the “Purchase Agreement”) with
respect to the sale and issuance to Crossover Capital Fund II, LLC (“Crossover”) totaling (i) 833,332 shares of the
Company’s Common Stock (the “Commitment Shares”); (ii) 3,000,000 redeemable shares (the “Redeemable Shares”),
(iii) $294,000 aggregate principal amount of a convertible promissory note (the “Convertible Notes”) and (iv) Common
Stock Purchase Warrants to purchase up to an aggregate of 1,960,000 shares of the Company’s common stock (the “Warrants”)
for a net aggregate consideration of $250,000 cash.
The
January and February 2018 Convertible Notes mature on March 31, 2019, as amended, and provide for interest to accrue at an interest
rate equal to 18% per annum or the maximum rate permitted under applicable law after the occurrence of any event of default as
provided in the Convertible Notes. At any time after 180 days from the Issue Date, the holder, at its option, may convert the outstanding
principal balance and accrued interest into shares of common stock of the Company. The initial conversion price for the principal
and interest in connection with voluntary conversions by a holder of a Convertible Notes is $0.08 per share, subject to adjustment
as provided therein
, such as stock splits and stock dividends
. There is also
a one-time interest charge of 10% due at maturity.
If
the Convertible Notes are prepaid on or prior to the maturity date, all of the Redeemable Shares shall be returned to the treasury
shares of the Company, without any payment by the Company for the Redeemable Shares. Further, if the Company prepays a portion
of the Convertible Notes, but not the entire Convertible Notes, on or before the maturity date, a pro rata portion of the Redeemable
Shares shall be returned to the Company’s treasury in proportion to the prepayment amount as it relates to the entire Convertible
Notes balance.
In October 2018, the January 2018 Crossover
Purchase Agreement was amended to extend the maturity date to December 31, 2018 and to remove the right of the Company to 3,000,000
of the Redeemable Shares and Crossover was issued the shares.
The
exercise price for the Warrants is $0.15, subject to adjustment, are exercisable for five years after the date of the Warrant and
are exercisable
in whole or in part, as either a cash exercise or as a “cashless” exercise.
Note Payable
On
June 30, 2017, we entered into a Loan Agreement, a Secured Promissory Note (“Note”) and a personal guarantee with respect
to the funding by certain institutional investors
Alpha Capital Anstalt and Brio Capital Master Fund Ltd.
of
up to $1,125,000 in debt. Until December 31, 2018, we have the ability to request quarterly advances of up to the lesser of (i)
$250,000 or (ii) one sixth (1/6) of the revenue reported in the Form 10-Q or 10-K for the previous calendar quarter or previous
fiscal year, whichever is most recent, provided that such revenue generated a profit of at least 10 percent (10%). The investors
may advance the funds in their absolute discretion. In June 2017, the Company was advanced $125,005. The Note shall become due
and payable 18 months from each advance date. We must make payments to the investors in an amount of $350, including interest at
10% per annum, every business day from the date of the first advance, which shall be increased proportionately upon each advance.
The Note is secured with our assets pursuant to a security agreement dated December 23, 2015. In addition, our CEO has personally
guaranteed the Note. As additional consideration for the loan, the investors received 1,500,000 shares of restricted common stock,
in aggregate, valued at $105,000
(based on our stock price on the date of grant) along with $2,500 in cash for reimbursement
of expenses incurred and recorded as debt issuance costs with a balance at December 31, 2017 of $107,500
.
The
note payable balance net of debt discount of $27,750 at December 31, 2018 was $103,770 with an availability of $880,000 on the
Note.
In January 2018, we were advanced an additional
$60,010 under the Note with no additional shares issued. In March 2018, we were advanced an additional $60,000 under the Note with
600,000 additional shares to be issued. As of March 31, 2018, we had not issued the shares and recorded a common stock payable
and a debt discount of $55,500 (based on our stock price on the date of grant). The shares were issued in April 2018 and the shares
were reclassed from common stock payable to equity. The debt discount is accreted to interest expense over the term of the note.
The Agreement
and
Note are being entered into in accordance with the halachically accepted exemptions on the paying of interest payments in business
transactions known as “heter iska”.
We are
still accounting for the interest
in accordance with GAAP.
We borrow funds from third parties from
time to time for working capital purposes with an upfront fee of approximately $400, paying no interest, and with no length of
repayment. For the year ended December 31, 2018, we had borrowings of $35,000 and repayments of $35,171 for a balance of $0 at
December 31, 2018. Repayments are based on 30% of amounts processed through PayPal until the balance is paid.
Due to Related Party
During 2018, we received no advances from
our CEO/director incurred business expenses of $1,963,371 (comprised of operating expenses of $1,952,720, inventory purchases totaling
$2,200, website development costs of $5,502, and purchased equipment of $2,950) and had repayments of $1,438,000. We have a balance
owed to the related party of $1,246,805 and $721,434 at December 31, 2018 and 2017, respectively. During 2018, we incurred $123,750
of deferred compensation related to the CEO/director’s employment agreement and $80,000 of deferred compensation related
to the Secretary’s employment agreement. As of December 31, 2018 and 2017, accrued compensation – related party was
$1,239,750 and $1,036,000, respectively.
Stock Transactions
In November 2018, the Company issued 8,000,000 restricted common
shares for payment of accounts payable of $117,600.
In November 2018, we issued 2,500,000 restricted
common shares in consideration for the modification of the existing short term convertible notes.
In October 2018, the Company issued 150,000
restricted common shares for services rendered, valued at $2,685 (based on our stock price on the date of grant).
During the year ended December 31, 2018,
the Company issued 4,750,000 restricted common shares for services rendered of $126,680 (based on our stock price on the measurement
date).
On September 1, 2018, the Company issued
5,000,000 restricted common shares for payment of accounts payable of $88,165.
On July 8, 2018, the Company issued 100,000
restricted common shares to an Advisor, valued at $2,390 (based on the estimated fair value of the stock on the measurement date)
for outside advisory and consulting services pursuant to the Company’s 2015 Equity Incentive Plan
In
January and February 2018, the Company entered into Securities Purchase Agreements with respect to the sale and issuance to Crossover
Capital Fund II, LLC totaling (i) 833,332 shares of the Company’s Common Stock; (ii) 3,000,000 redeemable shares, (iii) $294,000
aggregate principal amount of a convertible promissory note and (iv) Common Stock Purchase Warrants to purchase up to an aggregate
of 1,960,000 shares of the Company’s common stock for a net aggregate consideration of $250,000 cash.
In January 2018, we issued 2,395,650 restricted
common shares, valued at $263,522 (based on the Company’s stock price on the measurement date), in consideration for the
modification of the existing short term convertible notes and recorded as an extinguishment of debt.
During the year ended December 31, 2017,
the Company issued 6,861,768 restricted common shares for services rendered of $755,884 (based on our stock price on the measurement
date).
During the year ended December 31, 2017,
the Company issued a total of 175,200 restricted common shares to its employees, valued at $16,920 (based on our stock price on
the date of grant) as compensation pursuant to the Company’s 2015 Equity Incentive Plan.
During the year ended December 31, 2017,
the Company issued 200,000 restricted common shares to an Advisor, valued at $20,000 (based on the estimated fair value of the
stock on the measurement date) for outside advisory and consulting services pursuant to the Company’s 2015 Equity Incentive
Plan (see Note 11).
On
June 30, 2017, the Company entered into an Agreement and Note by certain institutional investors
Alpha Capital Anstalt and
Brio Capital Master Fund Ltd.
of up to $1,125,000 in debt. In March 2018, as additional consideration
for the loan, the investors received 600,000 shares of restricted common stock, in aggregate, valued at $55,500
(based on
our stock price on the date of grant)
.
On July 14, 2017, the Company entered into
a contract with a third party for consulting services. The consulting agreement provides for the consultant to receive 487,500
shares for entering into the agreement that were valued at $34,125 (based on our stock price on the date of grant) and 162,500
restricted common shares each month beginning month four through month twelve. During 2018, the consultant vested in 568,750 shares,
valued at $101,156 (based on our stock price on the date of each grant). The contract was terminated at January 26, 2018.
On January 22, 2017, the Company issued
150,000 restricted common shares for payment of accounts payable of $14,985.
Stock Based Compensation
In April 2018, the Company issued a total
of 98,000 restricted common shares to its employees, valued at $7,742 (based on our stock price on the date of grant) as compensation
pursuant to the Company’s 2015 Equity Incentive Plan.
In July 2018,
the Company issued a total of 100,000 restricted common shares, valued at $2,390 (based on our stock price on the date of grant),
to a member of its advisory committee (“Advisors”) as compensation pursuant to the Company’s 2015 Equity Incentive
Plan.
As of December 31, 2018, the Company previously
issued a total of 100,000 restricted common shares to a member of its advisory committee (“Advisor”), valued at $15,000
(based on the estimated fair value of the stock on the date of grant) for outside advisory and consulting services pursuant to
the Company’s 2015 Equity Incentive Plan. One-twelfth (1/12) of the shares will be earned each month. The Company will revalue
the shares at each vesting period and recognize expense for the portion of the shares earned. The Company recognized compensation
expense of $13,750 and $1,250 under general and administrative expenses in the accompanying consolidated Statements of Operations
for the years ended December 31, 2018 and 2017, respectively, with $0 remaining to be amortized. As of December 31, 2018, the Advisor
had vested in 100,000 shares with 0 shares remaining to vest.
As of December
31, 2018, the Company issued a total of 700,000 restricted common shares to members of its advisory committee (“Advisors”),
valued at $135,000 (based on the estimated fair value of the stock on the date of grant) for outside advisory and consulting services
pursuant8 to the Company’s 2015 Equity Incentive Plan. One-twelfth (1/12) of the shares will be earned each month. The Company
will revalue the shares at each vesting period and recognize expense for the portion of the shares earned. The Company recognized
compensation expense of $13,750 and $41,667 for the years ended December 31, 2018 and 2017 respectively, with $0 remaining to be
amortized, under general and administrative expenses in the accompanying consolidated Statements of Operations. As of December
31, 2018, the Advisors had vested in all 700,000 shares.
As of December
31, 2017, our board of directors and shareholders previously authorized the adoption and implementation of the Company’s
2015 Equity Incentive Plan (the “2015 Plan”). The principal purpose of the 2015 Plan is to attract, retain and motivate
employees, officers, directors, consultants, agents, advisors and independent contractors to us and our related companies by providing
them the opportunity to acquire a proprietary interest in us and to link their interests and efforts to the long-term interests
of our shareholders. The material terms of the 2015 Plan are summarized in “Executive Compensation Plans and Other Benefit
Plans” in this filing. Under the 2015 Plan, an aggregate of 20,000,000 shares of our common stock have initially been reserved
for issuance pursuant to a variety of stock-based compensation awards, including stock options, stock appreciation rights, stock
awards, restricted stock, restricted stock units and other stock and cash-based awards.
During the year
ended December 31, 2017, we issued a total of 175,200 restricted common shares to employees, valued at $16,920 (based on our stock
price on the date of grant) as compensation pursuant to the Company’s 2015 Equity Incentive Plan.
As of December 31, 2016, we previously
issued our CEO, options for 10,000,000 shares of our common stock under the 2015 Plan, valued at $2,500,000 (based on the Black
Scholes valuation model on the grant date). The Black-Scholes option-pricing model used the following weighted average assumptions
as of December 31, 2016: (i) no dividend yield for each year, (ii) volatility of 35.6 percent, (iii) risk-free interest rate of
1.87 percent, (iv) stock price of $0.25, (v) exercise price of $0.005, and (vi) expected life of 6.0 years. The options will vest
50% on the first anniversary of the grant date (“First Year Vest”) and the remaining 50% of the shares shall vest in
twelve (12) equal installments on the first day of each calendar month following the first anniversary of the grant date beginning
on June 1, 2016 and ending on June 1, 2017 (“Second Year Vest”), provided that CEO is continuously employed by the
Company from the grant date through such applicable vesting date. Notwithstanding the foregoing, 100% of the shares of the Company’s
common stock subject to the option shall fully vest if the Company shall successfully sell all of the shares of its common stock
included in the primary offering of such common stock by the Company pursuant to the registration statement on Form S-1 to be filed
with the Securities and Exchange Commission within ninety (90) days of the grant date. The First Year Vest options will amortize
to expense over a 12 month period beginning May 2015 through April 2016 and the Second Year Vest options will amortize to expense
over a 24 month period beginning May 2015 through April 2017.
We recognized expense of $2,390 and $45,391
for the year ended December 31, 2018 and 2017, respectively, within stock based compensation – related party in the accompanying
consolidated Statement of Operations with no amounts remaining to be recognized.
Capital Expenditures
Other Capital Expenditures
We expect to purchase approximately $30,000
of equipment in connection with the expansion of our business during the next twelve months.
Fiscal year end
Our fiscal year end is December 31.
Going Concern
Our independent registered accounting firm
has added an explanatory paragraph to their Report of Independent Registered Public Accounting Firm issued in connection with our
consolidated financial statements. We had an accumulated deficit of approximately $13,001,000 and $10,381,000 at December 31, 2018
and 2017, respectively, had a working capital deficit of $3,844,000 and $3,404,000 at December 31, 2018 and 2017, respectively,
had a net loss of approximately $2,620,000 and $4,251,000 for the years ended December 31, 2018 and 2017, respectively, and net
cash used in operating activities of approximately $286,000 and $400,000 for the years ended December 31, 2018 and 2017, respectively.
While we are attempting to expand operations
and increase revenues, our cash position may not be significant enough to support our daily operations. We intend to raise additional
funds by way of a public or private offering. We believe that the actions presently being taken to further implement our business
plan and generate revenues provide the opportunity for us to continue as a going concern. While we believe in the viability of
our strategy to generate revenues and in our ability to raise additional funds, there can be no assurances to that effect or on
terms acceptable to us. Our ability to continue as a going concern is dependent upon our ability to further implement our business
plan and generate revenues. Our current burn rate to maintain the minimal level of operations for us to be in a position to execute
our business plan upon funding is anticipated to be no greater than $25,000 per month in cash and Joseph Segelman, our President
and CEO, has agreed to underwrite these costs until the offering described in this filing is completed and we are then able to
begin execution of our business plan. In addition, until the offering described in this filing is completed we will continue to
defer and accrue salaries and thus will not require cash to make payments under employment agreements.
The consolidated financial statements do
not include any adjustments that might be necessary if we are unable to continue as a going concern.
Critical Accounting Policies
The Commission has defined a company’s
critical accounting policies as the ones that are most important to the portrayal of our financial condition and results of operations
and which require us to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters
that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed
below. We also have other key accounting policies that are significant to understanding our results.
The following are deemed to be the most
significant accounting policies affecting us.
Use of Estimates
The preparation of these consolidated financial
statements in accordance with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities
at the dates of the consolidated financial statements and the reported amounts of net sales and expenses during the reported periods.
Actual results may differ from those estimates and such differences may be material to the consolidated financial statements. The
more significant estimates and assumptions by management include among others: inventory valuation, and common stock and option
valuation. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.
Revenue Recognition
On
January 1, 2018, the Company adopted Accounting Standards Codification ASC 606 (“ASC 606”),
Revenue from Contracts
with Customers,
using the modified retrospective approach for all contracts not completed as of the date of adoption. Results
for the reporting periods beginning on January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted
and continue to be reported in accordance with accounting under ASC 605,
Revenue Recognition
. As a result of adopting ASC
606, amounts reported under ASC 606 were not materially different from amounts that would have been reported under the previous
revenue guidance of ASC 605, as such, no cumulative adjustment to retained earnings.
The
Company generates all of its revenue from contracts with customers. The Company recognizes revenue when we satisfy a performance
obligation by transferring control of the promised services to a customer in an amount that reflects the consideration that we
expect to receive in exchange for those services. The Company determines revenue recognition through the following steps:
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1.
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Identification
of the contract, or contracts, with a customer.
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2.
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Identification
of the performance obligations in the contract.
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3.
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Determination
of the transaction price.
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4.
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Allocation
of the transaction price to the performance obligations in the contract
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5.
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Recognition
of revenue when, or as, we satisfy a performance obligation.
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At
contract inception, the Company assesses the services promised in our contracts with customers and identify a performance obligation
for each promise to transfer to the customer a service (or bundle of services) that is distinct. To identify the performance obligations,
the Company considers all of the services promised in the contract regardless of whether they are explicitly stated or are implied
by customary business practices. The Company allocates the entire transaction price to a single performance obligation.
A
description of our principal revenue generating activities are as follows:
Retail
sales
– The Company offers consumer products through its online websites. During the years ended December 31, 2018 and
2017, the Company recorded retail sales of $623,514 and $1,061,248, respectively.
Wholesale
sales
– The Company offers product sold in bulk to distributors. During the years ended December 31, 2018 and 2017,
the Company recorded wholesale sales of $63,976 and $222,930, respectively.
Revenue
is recognized from retail and wholesale sales when the product is shipped to the customer, provided that collection of the resulting
receivable is reasonably assured. Credit is granted for wholesale sales generally for terms of 7 to 90 days, based on credit evaluations.
No allowance has been provided for uncollectible accounts. Management has evaluated the receivables and believes they are collectable
based on the nature of the receivables, historical experience of credit losses, and all other currently available evidence. Discounts
are recorded as a reduction of the transaction price. Revenue excludes any amounts collected on behalf of third parties, including
sales taxes.
The
Company evaluates whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned
as commissions. Generally, when the Company is primarily obligated in a transaction, are subject to inventory risk, have latitude
in establishing prices and selecting suppliers, or have several but not all of these indicators, revenue is recorded at the gross
sale price. The Company generally records the net amounts as commissions earned if we are not primarily obligated and do not have
latitude in establishing prices. The Company records all revenue transactions at the gross sale price.
There is a no return policy.
The return policy is currently being evaluated to be more in line with industry standards.
Accounts Receivable
We record trade receivables when revenue
is recognized. When appropriate, we will record an allowance for doubtful accounts, which is primarily determined by review of
specific trade receivables. Those accounts that are doubtful of collection are included in the allowance. These provisions are
reviewed to determine the adequacy of the allowance for doubtful accounts. Trade receivables are charged off when there is certainty
as to their being uncollectible. Trade receivables are considered delinquent when payment has not been made within contract terms.
At December 31, 2018 and 2017, we had no allowance for doubtful accounts. For the years ended December 31, 2018 and 2017, there
were no accounts written-off.
Inventories
Inventories are stated at the lower of
cost or market (net realizable value) on a lot basis each quarter. A lot is determined by the cut, clarity, size, and weight of
the sapphires. Our inventory consists of loose sapphire jewels that meet rigorous grading criteria and are of cuts and sizes most
commonly used in the jewelry industry. As of December 31, 2018, inventory consists of loose sapphire jewels, finished jewelry for
sale on our website, and jewelry held as samples. Samples are used to show potential customers what the jewelry would look like.
Promotional items given to customers that are not expected to be returned will be removed from inventory and expensed. We perform
our own in-house assessment based on gem guide and the current market price for metals to value its inventory on an annual basis
or if circumstances dictate sooner to determine if the estimated fair value is greater or less than cost. In addition, we review
the inventory each quarter against industry prices from gem-guide and if there is a potential impairment, we would appraise the
inventory. The estimated fair value is subject to significant change due to changes in popularity of cut, perceived grade of the
clarity of the sapphires, the number type and size of inclusions, the availability of other similar quality and size sapphires,
and other factors. As a result, the internal assessment of the sapphires could be significantly lower from the current estimated
fair value. Our loose sapphire jewels do not degrade in quality over time.
Business Combinations
Amounts paid for acquisitions are allocated
to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. The fair value
of identifiable intangible assets is based on detailed valuations that use information and assumptions provided by management,
including expected future cash flows. We allocate any excess purchase price over the fair value of the net assets and liabilities
acquired to goodwill. Identifiable intangible assets with finite lives are amortized over their useful lives. Acquisition-related
costs, including advisory, legal, accounting, valuation and other costs, are expensed in the periods in which the costs are incurred.
The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
Intangible Assets and Goodwill
Goodwill is the cost of an acquisition less the fair value of
the net assets of the acquired business.
Intangible assets consist primarily of
tradenames, proprietary designs, developed technology – website, and developed technology – Ipad application. Our intangible
assets are being amortized on a straight-line basis over a period of three to ten years.
Impairment of Long-lived Assets and Goodwill
We evaluate goodwill for impairment annually
in the fourth quarter, and whenever events or changes in circumstances indicate it is more likely than not that the fair value
of a reporting unit containing goodwill is less than its carrying amount. The goodwill impairment test consists of a two-step
process, if necessary. The first step is to compare the fair value of a reporting unit to its carrying value, including goodwill.
We typically use discounted cash flow models to determine the fair value of a reporting unit. The assumptions used in these models
are consistent with those we believe hypothetical marketplace participants would use. If the fair value of the reporting unit is
less than its carrying value, the second step of the impairment test must be performed in order to determine the amount of impairment
loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that
goodwill. If the carrying amount of the reporting unit’s goodwill exceeds its implied fair value, an impairment charge is recognized
in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of goodwill.
We periodically evaluate whether the carrying
value of property, equipment and intangible assets has been impaired when circumstances indicate the carrying value of those assets
may not be recoverable. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected
to result from the use and eventual disposition of the asset. If the carrying value is not recoverable, the impairment loss
is measured as the excess of the asset’s carrying value over its fair value.
Our impairment analyses require management
to apply judgment in estimating future cash flows as well as asset fair values, including forecasting useful lives of the assets,
assessing the probability of different outcomes, and selecting the discount rate that reflects the risk inherent in future cash
flows. If the carrying value is not recoverable, we assess the fair value of long-lived assets using commonly accepted techniques,
and may use more than one method, including, but not limited to, recent third party comparable sales and discounted cash flow models.
If actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new
information, we may be exposed to an impairment charge in the future.
Deferred Revenue
Deferred revenue consists of customer orders
paid in advance of the delivery of the order. The Company classifies deferred revenue as short-term as the typical order ships
within three weeks of placing the order. Deferred revenue is recognized as revenue when the product is shipped to the customer
and all other revenue recognition criteria have been met.
Income Taxes
We account for income taxes under an asset
and liability approach. This process involves calculating the temporary and permanent differences between the carrying amounts
of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The temporary differences
result in deferred tax assets and liabilities, which would be recorded on our balance sheets in accordance with ASC 740, which
established financial accounting and reporting standards for the effect of income taxes. We must assess the likelihood that its
deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we
must establish a valuation allowance. Changes in our valuation allowance in a period are recorded through the income tax provision
on the consolidated Statements of Operations.
From the date of our inception we adopted
ASC 740-10-30. ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements
and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or
expected to be taken on a tax return. Under ASC 740-10, the impact of an uncertain income tax position on the income tax return
must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority.
An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally,
ASC 740-10 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition. As a result of the implementation of ASC 740-10, we recognized no material adjustment in the liability for unrecognized
income tax benefits.
Stock Based Compensation
Issuances of our common stock or warrants
for acquiring goods or services are measured at the fair value of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable. The measurement date for the fair value of the equity instruments issued to consultants
or vendors is determined at the earlier of (i) the date at which a commitment for performance to earn the equity instruments is
reached (a “performance commitment” which would include a penalty considered to be of a magnitude that is a sufficiently
large disincentive for nonperformance) or (ii) the date at which performance is complete. However, situations may arise in which
counter performance may be required over a period of time but the equity award granted to the party performing the service is fully
vested and non-forfeitable on the date of the agreement. As a result, in this situation in which vesting periods do not exist as
the instruments fully vested on the date of agreement, we determine such date to be the measurement date and will record the estimated
fair market value of the instruments granted as a prepaid expense and amortize such amount to general and administrative expense
in the accompanying statement of operations over the contract period. When it is appropriate for us to recognize the cost of a
transaction during financial reporting periods prior to the measurement date, for purposes of recognition of costs during those
periods, the equity instrument is measured at the then-current fair values at each of those interim financial reporting dates.
For purposes of determining the variables
used in the calculation of stock compensation expense under the provisions of FASB ASC Topic 505, “
Equity
” and
FASB ASC Topic 718, “
Compensation — Stock Compensation,”
we perform an analysis of current market data
and historical Company data to calculate an estimate of implied volatility, the expected term of the option and the expected forfeiture
rate. With the exception of the expected forfeiture rate, which is not an input, we use these estimates as variables in the Black-Scholes
option pricing model. Depending upon the number of stock options granted, any fluctuations in these calculations could have a material
effect on the results presented in our statements of operations and comprehensive income. In addition, any differences between
estimated forfeitures and actual forfeitures could also have a material impact on our consolidated financial statements.
Non-Cash Equity Transactions
Shares of equity instruments issued for
non-cash consideration are recorded at the fair value of the consideration received based on the market value of services to be
rendered, or at the value of the stock given, considered in reference to contemporaneous cash sale of stock.
Fair Value of Financial Instruments
We apply the provisions of accounting guidance,
FASB Topic ASC 825 that requires all entities to disclose the fair value of financial instruments, both assets and liabilities
recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value, and defines fair value
of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.
As of December 31, 2018 and 2017, the fair value of inventory, accrued compensation - related party, and advance from shareholder
approximated carrying value due to the short maturity of the instruments, quoted market prices or interest rates which fluctuate
with market rates.
Debt
We issue debt that may have separate warrants,
conversion features, or no equity-linked attributes.
Debt with warrants
– When
we issue debt with warrants, we treat the warrants as a debt discount, record as a contra-liability against the debt, and amortize
the balance over the life of the underlying debt as amortization of debt discount expense in the consolidated statements of operations.
When the warrants require equity treatment under ASC 815, the offset to the contra-liability is recorded as additional paid
in capital in our consolidated balance sheet. When we issue debt with warrants that require liability treatment under ASC
815, such as a clause requiring repricing, the warrants are considered to be a derivative that is recorded as a liability at fair
value. If the initial value of the warrant derivative liability is higher than the fair value of the associated debt, the
excess is recognized immediately as interest expense. The warrant derivative liability is adjusted to its fair value at the
end of each reporting period, with the change being recorded as expense or gain. If the debt is retired early, the associated
debt discount is then recognized immediately as amortization of debt discount expense in the consolidated statement of operations.
The debt is treated as conventional debt.
Convertible debt – derivative
treatment
– When we issue debt with a conversion feature, we must first assess whether the conversion feature meets the
requirements to be treated as a derivative, as follows: a) one or more underlyings, typically the price of our common stock; b)
one or more notional amounts or payment provisions or both, generally the number of shares upon conversion; c) no initial net investment,
which typically excludes the amount borrowed; and d) net settlement provisions, which in the case of convertible debt generally
means the stock received upon conversion can be readily sold for cash. An embedded equity-linked component that meets the definition
of a derivative does not have to be separated from the host instrument if the component qualifies for the scope exception for certain
contracts involving an issuer’s own equity. The scope exception applies if the contract is both a) indexed to its own stock;
and b) classified in shareholders’ equity in its statement of financial position.
If the conversion feature within convertible
debt meets the requirements to be treated as a derivative, we estimate the fair value of the convertible debt derivative using
Monte Carlo Method upon the date of issuance. If the fair value of the convertible debt derivative is higher than the face value
of the convertible debt, the excess is immediately recognized as interest expense. Otherwise, the fair value of the convertible
debt derivative is recorded as a liability with an offsetting amount recorded as a debt discount, which offsets the carrying amount
of the debt. The convertible debt derivative is revalued at the end of each reporting period and any change in fair value is recorded
as a gain or loss in the statement of operations. The debt discount is amortized through interest expense over the life of the
debt.
Convertible debt – beneficial
conversion feature
– If the conversion feature is not treated as a derivative, we assess whether it is a beneficial conversion
feature (“BCF’). A BCF exists if the conversion price of the convertible debt instrument is less than the stock price
on the commitment date. This typically occurs when the conversion price is less than the fair value of the stock on the date the
instrument was issued. The value of a BCF is equal to the intrinsic value of the feature, the difference between the conversion
price and the common stock into which it is convertible, and is recorded as additional paid in capital and as a debt discount in
the consolidated balance sheet. We amortize the balance over the life of the underlying debt as amortization of debt discount expense
in the statement of operations. If the debt is retired early, the associated debt discount is then recognized immediately as amortization
of debt discount expense in the statement of operations.
If the conversion feature does not qualify
for either the derivative treatment or as a BCF, the convertible debt is treated as traditional debt.
Discontinued
Operations
Pursuant to ASC
205-20 Discontinued Operations, in determining whether a group of assets that is disposed (or to be disposed) should be presented
as a discontinued operation, we analyze whether the group of assets being disposed represents a component of the Company; that
is, whether it had historic operations and cash flows that were clearly distinguished, both operationally and for financial reporting
purposes. In addition, we consider whether the disposal represents a strategic shift that has or will have a major effect on our
operations and financial results. The results of discontinued operations, as well as any gain or loss on the disposal, if applicable,
are aggregated and separately presented in our consolidated statements of operations, net of income taxes. The historical financial
position of discontinued operations are aggregated and separately presented in our accompanying consolidated balance
sheets.
Recent Accounting Pronouncements
Refer to Note 3 in the accompanying notes
to the consolidated financial statements.
Future Contractual
Obligations and Commitments
Refer to Note
3 in the accompanying notes to the consolidated financial statements for future contractual obligations and commitments. Future
contractual obligations and commitments are based on the terms of the relevant agreements and appropriate classification of items
under U.S. GAAP as currently in effect. Future events could cause actual payments to differ from these amounts.
We incur contractual
obligations and financial commitments in the normal course of our operations and financing activities. Contractual obligations
include future cash payments required under existing contracts, such as debt and lease agreements. These obligations may result
from both general financing activities and from commercial arrangements that are directly supported by related operating activities.
Details on these obligations are set forth below.
Convertible Note Payable
January 2018 Securities Purchase Agreement
In
January and February 2018, the Company entered into Securities Purchase Agreements with respect to the sale and issuance to Crossover
Capital Fund II, LLC (“Crossover”) totaling (i) 833,332 shares of the Company’s Common Stock; (ii) 3,000,000
redeemable shares, (iii) $294,000 aggregate principal amount of a convertible promissory note and (iv) Common Stock Purchase Warrants
to purchase up to an aggregate of 1,960,000 shares of the Company’s common stock for aggregate consideration of $255,000
cash. The January and February 2018 Convertible Notes mature on March 31, 2019, as amended, respectively, and provides for
interest to accrue at an interest rate equal to 18% per annum or the maximum rate permitted under applicable law after the occurrence
of any event of default as provided in the Note. If the Note is prepaid on or prior to the maturity date, all of the Redeemable
Shares shall be returned to the treasury shares of the Company, without any payment by the Company for the Redeemable Shares. Further,
if the Company prepays a portion of the Note, but not the entire Note, on or before the maturity date, a pro rata portion of the
Redeemable Shares shall be returned to the Company’s treasury in proportion to the prepayment amount as it relates to the
entire Note balance. There is also a one-time interest charge of 10% due at maturity.
November 2017 Securities Purchase Agreement
We entered into a Securities Purchase Agreement
with respect to the sale and issuance to certain institutional investors Alpha and Brio of up to (i) 833,354 shares of our common
stock, (ii) $287,502 aggregate principal amount of secured convertible notes and (iii) common stock purchase warrants to purchase
up to an aggregate of 3,593,776 shares of our common stock as defined in the Securities Purchase Agreement. The aggregate
cash subscription amount received by us from the purchasers for the issuance of the incentive shares, notes and warrants was approximately
$250,005, which was issued at a $37,497 original issue discount from the face value of the note. The notes mature on March 31,
2019, as amended on January 2, 2019, and provide for interest to accrue at an interest rate equal to the lesser of 15% per annum
or the maximum rate permitted under applicable law after the occurrence of any event of default as provided in the notes.
November 2016 Securities Purchase Agreement
As of December 31, 2016, the Purchasers
of the December 2015 Securities Purchase Agreement previously exercised their right under Section 2.4 of the Purchase Agreement,
in order to enter into a Subsequent Closing, as that term is defined in the Purchase Agreement, under the same terms as are included
in the Purchase Agreement. The November 2016 Incentive Shares, November 2016 Notes and November 2016 Warrants were issued on November
10, 2016. November 2016 Purchasers received (i) November 2016 Incentive Shares at the rate of 2.8986 November 2016 Incentive Shares
for each $1.00 of November 2016 Note principal issued to such November 2016 Purchaser; (ii) a November 2016 Note with a principal
amount of $1.00 for each $0.86956 for each $1.00 paid by each purchaser for such purchaser’s November 2016 Note; and (iii)
November 2016 Warrants to purchase up to a number of shares of Common Stock equal to 100% of such purchaser’s November 2016
Note principal amount divided by $0.12 (“November 2016 Purchaser Conversion Price”), the conversion price in effect
on the November 2016 Initial Closing Date, as amended on May 30, 2017 to $0.08, with a per share exercise price equal to $0.15,
as amended on November 16, 2017, subject to adjustment. The aggregate cash subscription amount received by the Company from the
purchasers for the issuance of the November 2016 Incentive Shares, November 2016 Notes and November 2016 Warrants was approximately
$244,945 which was issued at a $42,557 original issue discount from the face value of the November 2016 Note.
December 2015 Securities Purchase Agreement
As of December 31, 2016, we entered into
a Securities Purchase Agreement (the “December 2015 Purchase Agreement”) with respect to the sale and issuance to certain
institutional investors Alpha and Brio (collectively “December 2015 Purchasers”) of up to (i) 2,500,000 shares of our
Common Stock (the “December 2015 Incentive Shares”); (ii) $862,500 aggregate principal amount of Secured Convertible
Notes (the “December 2015 Notes”) and (iii) Common Stock Purchase Warrants to purchase up to an aggregate of 10,781,250,
as amended, shares of our Common Stock (the “December 2015 Warrants”). The December 2015 Incentive Shares, December
2015 Notes and December 2015 Warrants were issued on December 23, 2015 (the “December 2015 Original Issue Date”). December
2015 Purchasers received (i) December 2015 Incentive Shares at the rate of 2.8986 December 2015 Incentive Shares for each $1.00
of December 2015 Note principal issued to such December 2015 Purchaser; (ii) a December 2015 Note with a principal amount of $1.00
for each $0.86956 for each $1.00 paid by each purchaser for such purchaser’s December 2015 Note; and (iii) December 2015
Warrants to purchase up to a number of shares of Common Stock equal to 100% of such purchaser’s December 2015 Note principal
amount divided by $0.12 (“December 2015 Purchaser Conversion Price”), the conversion price in effect on the December
2015 Initial Closing Date, as amended on May 30, 2017 to $0.08, with a per share exercise price equal to $0.30, subject to adjustment.
The aggregate cash subscription amount received by us from the purchasers for the issuance of the December 2015 Incentive Shares,
December 2015 Notes and December 2015 Warrants was approximately $724,500 (the “Subscription Amount”) which was issued
at a $138,000 original issue discount from the face value of the December 2015 Note.
In addition, the November 2016 Note and
the December 2015 Note provide that commencing six (6) months after the Original Issue Date, we will have the option of prepaying
the outstanding principal amount of the Notes (an “Optional Redemption”), in whole or in part, by paying to the holders
a sum of money in cash equal to one hundred percent (100%) of the principal amount to be redeemed, together with accrued but unpaid
interest thereon, if any, and any and all other sums due, accrued or payable to the holder arising under the Note through the Redemption
Payment Date and 2.8986 shares of our Common Stock for each $1.00 of Note principal amount being redeemed. A Notice of Redemption,
if given, may be given on the first Trading Day following twenty (20) consecutive Trading Days during which all of the “Equity
Conditions”, as defined, have been in effect.
As a result of the failure to timely file
our 2016 Form 10-K for the year ended December 31, 2016 and our Form 10-Q for the three month period ended March 31, 2017, the
November 2016 and December 2015 Notes were in default. On May 30, 2017, the Company entered into a Second Consent, Waiver and Modification
Agreement with certain purchasers of convertible promissory notes (the “Notes”) pursuant to securities purchase agreements
dated December 23, 2015 and November 10, 2016, which were amended pursuant to a Consent, Waiver and Modification Agreement dated
October 13, 2016. The waivers contained in the Agreement were related to a waiver of the right to participate in additional offerings
by the Company, allowing shares of the Company’s common stock to be issued pursuant to a private offering at a price of not
less than $0.08 per share as well as warrants exercisable for a period of five years at $0.15 per share, as amended on November
16, 2017, adjusting the conversion price of the Notes issued to the purchasers to $0.08 per share, extending the maturity date
of the December 23, 2015 convertible promissory notes to December 31, 2017 and waiving default provisions listed in the Notes related
to the Company’s failure to timely file its Form 10-K for the year ended December 31, 2016 and the Form 10-Q for the three
month period ended March 31, 2017. Based on ASC 470-50-40,
Extinguishments of Debt
, the Company recognized $691,371 as an
extinguishment of debt under Other (income) expense in the accompanying consolidated Statements of Operations for the year ended
December 31, 2017. The extinguishment of debt is comprised of changes in the fair value of warrant and derivative liabilities due
to the amendment of the notes that were measured immediately prior to and subsequent to the amendment that resulted in extinguishment
loss of $176,022 for the December 2015 Purchaser Warrants, $75,648 for the November 2016 Purchaser Warrants, $183,250 for the December
2015 Purchaser Conversion Shares, and $41,842 for the November 2016 Purchaser Conversion Shares, as well as $178,409 for the unamortized
debt discount associated with the November 2016 Notes and $36,200 for the unamortized debt discount associated with the December
2015 Notes.
Note Payable
On
June 30, 2017, we entered into a Loan Agreement, a Secured Promissory Note (“Note”) and a personal guarantee with respect
to the funding by certain institutional investors
Alpha Capital Anstalt and Brio Capital Master Fund Ltd.
of
up to $1,125,000 in debt. Until December 31, 2018, we have the ability to request quarterly advances of up to the lesser of (i)
$250,000 or (ii) one sixth (1/6) of the revenue reported in the Form 10-Q or 10-K for the previous calendar quarter or previous
fiscal year, whichever is most recent, provided that such revenue generated a profit of at least 10 percent (10%). The investors
may advance the funds in their absolute discretion. In June 2017, the Company was advanced $125,005. The Note shall become due
and payable 18 months from each advance date. We must make payments to the investors in an amount of $350, including interest at
10% per annum, every business day from the date of the first advance, which shall be increased proportionately upon each advance.
The Note is secured with our assets pursuant to a security agreement dated December 23, 2015. In addition, our CEO has personally
guaranteed the Note. As additional consideration for the loan, the investors received 1,500,000 shares of restricted common stock,
in aggregate, valued at $105,000
(based on our stock price on the date of grant) along with $2,500 in cash for reimbursement
of expenses incurred and recorded as debt issuance costs of $107,500
. The note payable balance
net of debt discount of $27,750 at December 31, 2018 was $103,770 with an availability of $880,000 on the Note.
In January 2018, the Company was advanced
an additional $60,010 under the Note with no additional shares issued. In March 2018, we were advanced an additional $60,000 under
the Note with 600,000 additional shares to be issued.
The Agreement
and
Note are being entered into in accordance with the halachically accepted exemptions on the paying of interest payments in business
transactions known as “heter iska”.
We are
still accounting for the interest
in accordance with GAAP.
We borrow funds from third parties from
time to time for working capital purposes with an upfront fee of approximately $400, paying no interest, and with no length of
repayment. For the year ended
December 31
, 2018, we had borrowings of $35,000 and
repayments of $35,171 for a balance of $0 at
December 31
, 2018. Repayments are based
on 30% of amounts processed through PayPal until the balance is paid.
During the year ended December 31, 2018,
we received no advances from our CEO/director and incurred business expenses that were paid by the CEO/director of $1,963,371 (comprised
of operating expenses of $1,952,720, inventory purchases totaling $2,200, website development costs of $5,502, and purchased equipment
of $2,950) and had repayments of $1,438,000. We have a balance owed to the related party of $1,246,805 and $721,434 at December
31, 2018 and 2017, respectively. During the year ended December 31, 2018, we incurred $123,750 of deferred compensation related
to the CEO/director’s employment agreement and $80,000 of deferred compensation related to the Secretary’s employment
agreement. As of December 31, 2018 and 2017, accrued compensation-related party was $1,239,750 and $1,036,000, respectively.
Contingent Payments
On December 1, 2016, we acquired substantially
all of the operating assets of CCI. As part of the purchase price of the operating assets of CCI, there is a cash payment of $500,000
contingent upon a future offering and earn out payments for all sales of CCI and RGNP products sold via CCI sales channels for
the 2017, 2018, 2019 and 2020 calendar years. The estimated fair value of the contingent payments totaled $424,511 and was recognized
as a liability in the accompanying consolidated balance sheets as of December 31, 2016. During the years ended December 31, 2018
and 2017, ASK Gold and CCI each earned $11,751 and $41,534, respectively, of earn out payments for a total of $106,570. In addition,
we paid $95,020 in reimbursement expenses (“Reimbursement Expenses”) that were the responsibility of CCI and will be
applied against current and future earn out payments to CCI. We applied $11,751 and $41,534 of earn out payments owed to CCI for
2018 and 2017 against the Reimbursement Expenses for a net balance of $41,735 owed by CCI to the Company as of December 31, 2018
that is recorded in estimated fair value of contingent payments, net in the accompanying consolidated balance sheets. In 2018,
we issued 8,000,000 common shares for settlement of amounts owed to ASK Gold of $139,199, As of December 31, 2018, estimated fair
value of contingent payments, net was $137,007.
Consulting Agreement
On October 10, 2017, we entered into a
marketing agreement with a third party. The agreement was to expire on October 9, 2018 (“Initial Term”), had a base
compensation of $100,000, payable $12,500 quarterly, and provided for royalties at ten percent (10%) of the Net Revenues from the
ION collection, as defined. If during the Initial Term, our net revenue from the sales of the ION collection exceeded the $100,000
base compensation, then the agreement would have automatically been extended for two years. In conjunction with the agreement,
we issued 1,000,000 restricted common shares to the consultant, valued at $180,000 (based on our stock price on the date of grant),
an additional 500,000 restricted common shares were to be issued at the end of the Initial Term, and if the agreement term was
extended, we were to issue an additional 1,350,000 restricted common shares. In addition, we agreed to donate five percent (5%)
of the Net Revenues from the ION collection to mutually agreeable disaster relief funds. We recorded marketing expense of $25,000
in the year ended December 31, 2018, with no amounts outstanding as of December 31, 2018. We terminated this agreement in April
2018.
Off-Balance Sheet Arrangements
As of December 31, 2018, we have not entered
into any transaction, agreement or other contractual arrangement with an entity unconsolidated under which it has:
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a retained or contingent interest in assets transferred to the
unconsolidated entity or similar arrangement that serves as credit;
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liquidity or market risk support to such entity for such assets;
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an obligation, including a contingent obligation, under a contract
that would be accounted for as a derivative instrument; or
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an obligation, including a contingent obligation, arising out
of a variable interest in an unconsolidated entity that is held by, and material to us, where such entity provides financing,
liquidity, market risk or credit risk support to or engages in leasing, hedging, or research and development services with us.
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Inflation
We do not believe that inflation has had a material effect on
our results of operations.
Item 7A. Quantitative and Qualitative Disclosure About Market
Risk
We are a smaller reporting company as defined by Rule 12b-2
of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary financial information
which are required to be filed under this item are presented under Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 10-K in this document, and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
On October 8,
2018, the Company dismissed Hall & Company (“Hall”) as its independent registered accounting firm and engaged Benjamin
& Young LLP CPA (“B&Y”) as its new independent registered accounting firm for the fiscal year ended December
31, 2018 to replace Hall. The decision to change auditors was approved by the Company’s board of directors.
Since Hall’s appointment as our independent
registered accounting firm on March 9, 2016 and through October 8, 2018, which included its audits of our financial statements
and reviews of Forms 10-K for the years ended December 31, 2017, 2016 and 2015, and reviews of the quarterly Forms 10-Q for the
years ended December 31, 2017 and 2016, as well as a review of the Form 10-Q for the periods ended June 30, 2018 and March 31,
2018, there were (i) no disagreements between the Company and Hall on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which disagreement, if not resolved to the satisfaction of Hall, would have
caused Hall to make reference thereto in their reports on the financial statements for such years, and (ii) no “reportable
events” as that term is defined in Item 304(a)(1)(v) of Regulation S-K. The report of Hall on the Company’s consolidated
financial statements for the years ended December 31, 2017 and 2016 did not contain an adverse opinion or a disclaimer of opinion
and was not qualified or modified as to uncertainty, audit scope, or accounting principles, except that the reports contained a
modification to the effect that there was substantial doubt as to the Company’s ability to continue as a going concern.
B&Y did not prepare or provide any
financial reports for any periods prior to the date of engagement, nor did it prepare or provide any financial reports for, or
prior to the year ended December 31, 2017. Neither the Company, nor any person on behalf of the Company, consulted with B&Y
during the Company’s two most recent fiscal years or the subsequent interim period prior to the engagement of B&Y and
the dismissal of Hall.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures
(as defined in Rule 13a-l5(e) under the Exchange Act) that are designed to ensure that information that would be required to be
disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s
rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, under the supervision and
with the participation of our CEO and Chief Financial Officer (“CFO”), has evaluated the effectiveness of our disclosure
controls and procedures as defined in SEC Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this report. Based
on such evaluation, management identified deficiencies that were determined to be a material weakness.
Management’s Report on Internal Controls over Financial
Reporting
The Company’s management is responsible
for establishing and maintaining effective internal control over financial reporting (as defined in Rule 13a-l5(f) of the Securities
Exchange Act). Management assessed the effectiveness of the Company’s internal control over financial reporting as of December
31, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) (2013). Based on that assessment, management believes that, as of December 31, 2018, the
Company’s internal control over financial reporting was ineffective based on the COSO criteria, due to the following material
weaknesses listed below.
The specific material weaknesses identified
by the company’s management as of end of the period covered by this report include the following:
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we have not performed a risk assessment and mapped our processes to control objectives;
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we have not implemented comprehensive entity-level internal controls;
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we have not implemented adequate system and manual controls; and
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we do not have sufficient segregation of duties. As such, the officers approve their own related business expense reimbursements
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Despite the material weaknesses reported
above, our management believes that our consolidated financial statements included in this report fairly present in all material
respects our financial condition, results of operations and cash flows for the periods presented and that this report does not
contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
This report does not include an attestation
report of our registered public accounting firm regarding internal control over financial reporting. Management’s report
was not subject to attestation by our registered public accounting firm pursuant to rules of the Commission that permit us to provide
only management’s report in this report.
Management’s Remediation Plan
The weaknesses and their related risks
are not uncommon in a company of our size because of the limitations in the size and number of staff. Due to our size and nature,
segregation of all conflicting duties has not always been possible and may not be economically feasible.
However,
we
plan to take steps to enhance and improve the design of our internal control over financial reporting. During the
period covered by this annual report on Form 10-K, we have not been able to remediate the material weaknesses identified above.
To remediate such weaknesses, we plan to implement the following changes in the current fiscal year as resources allow:
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appoint additional qualified personnel to address inadequate segregation of duties and implement
modifications to our financial controls to address such inadequacies;
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The remediation efforts set out herein
will be implemented in the current 2019 fiscal year. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues, if any, within our company have been detected. These
inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because
of simple error or mistake.
Management believes that despite our material
weaknesses set forth above, our consolidated financial statements for the year ended December 31, 2018 are fairly stated, in all
material respects, in accordance with U.S. GAAP.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal
control over financial reporting during the fiscal year ending December 31, 2018 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
There have been no events required to be reported under this
Item.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018
AND 2017
NOTE 1 –
ORGANIZATION
AND PRINCIPAL ACTIVITIES
Corporate History and Background
Reign Sapphires - Continuing Operations:
Reign Sapphire Corporation was established
on December 15, 2014 in the State of Delaware as a vertically integrated “source to retail” model for sapphires –
rough sapphires to finished jewelry; a color gemstone brand; and a jewelry brand featuring Australian sapphires. The Company acquired
its Coordinates Collection and Le Bloc brands and the assets related to the production and sale of it on December 1, 2016.
The Company is focusing its marketing initiatives
on: (1) Direct-to-Consumer (“D2C”) ecommerce marketing to attract customers to the reignsappires.com website, (2) Business-to-Business
(“B2B”) marketing and sales efforts, to establish distribution partners such as high-end fashion retailers.
The Company started as UWI Holdings Corporation
(previously known as Australian Sapphire Corporation) (“UWI”) and was established on May 31, 2013 in the Province of
New Brunswick, Canada. On December 31, 2014, UWI entered into an Agreement of Conveyance, Transfer and Assignment of Assets and
Assumption of Obligations with Reign Corporation, pursuant to which UWI transferred all of its net assets to Reign. The sole shareholder
of UWI along with his spouse retained 100% ownership of Reign and were issued 27,845,000 of Reign common shares in exchange for
the 16,000,250 outstanding shares of UWI. There was no significant tax consequence to this exchange. As a result, Reign is considered
to be the continuation of the predecessor UWI. All historical financial information prior to the reorganization is that of UWI.
On March 17, 2017, the shareholders of
the Company approved an amendment to the Company’s Certificate of Incorporation to designate 1 share of the Company’s
authorized 10,000,000 shares of Preferred Stock as Series A Preferred Stock (“Series A Preferred Stock”), which shall
vote with the Common Stock, and shall be entitled to fifty-one percent (51%) of the total votes of Common Stock on all such matters
voted on.
The Company has begun its planned principal
operations, and accordingly, the Company has prepared its consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America (“GAAP”).
Coordinates Collections -
Discontinued Operations:
On
December 1, 2016, substantially all of the operating assets of Coordinates Collection, Inc. (“CCI” or “Coordinates
Collection”) was acquired by
Reign Sapphire
Corporation
(
“
RGNP
”
or the “Company”),
(see “
Acquisition of Assets Related to the Coordinates
Collection Business”). RGNP
is a Beverly Hills-based, direct-to-consumer, branded and
custom jewelry company.
As part of the Acquisition, we created a wholly owned subsidiary, Reign Brands, Inc. (“Reign
Brands”), which is a Delaware corporation, and shall act as the operating entity for the acquired CCI assets. The acquisition
method of accounting was used to record assets acquired and liabilities assumed by successor. Such accounting generally results
in increased amortization and depreciation reported in future periods. CCI’s fixed assets and identifiable intangible assets acquired
were recorded based upon their estimated fair values as of the closing date of the Acquisition. The excess of purchase price
over the value of the net assets acquired was recorded as goodwill.
On January 1, 2019, Reign Brands, Inc.,
a subsidiary of Reign Sapphire Corporation, entered into an Asset Purchase Agreement (the “Agreement”) with Co-Op Jewelers
LLC (“Co-Op”), whereby Reign Brands, Inc. sold operating assets of Reign Brands, Inc., consisting of substantially
all of the assets related to Coordinates Collection (“CC”). On January 1, 2019 (the “Closing Date”), the
parties executed the Asset Purchase Agreement and the final exhibits.
Upon the closing of the Agreement, Reign
Brands, Inc. sold substantially all of the operating assets of the CC business, consisting of fixed assets and intellectual property
in exchange for an aggregate of $100,000 in cash. The Agreement contained customary closing conditions.
NOTE 2 – BASIS OF PRESENTATION
The accompanying consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include
all adjustments necessary for the fair presentation of the Company’s financial position for the periods presented.
The Company currently operates in one business
segment. The Company is not organized by market and is managed and operated as one business. A single management team reports to
the chief operating decision maker, the Chief Executive Officer, who comprehensively manages the entire business. The Company does
not currently operate any separate lines of businesses or separate business entities.
Going Concern
The accompanying consolidated financial
statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the
realization of assets and satisfaction of liabilities in the normal course of business. The Company had an accumulated deficit
of approximately $13,001,000 and $10,381,000 at December 31, 2018 and 2017, respectively, had a working capital deficit of $3,844,000
and $3,404,000 at December 31, 2018 and 2017, respectively, had a net losses of approximately $2,620,000 and $4,251,000 for the
years ended December 31, 2018 and 2017, and net cash used in operating activities of approximately $286,000 and $400,000 for the
years ended December 31, 2018 and 2017, respectively, with limited revenue earned since inception, and a lack of operational history.
These matters raise substantial doubt about the Company’s ability to continue as a going concern.
While the Company is attempting to expand
operations and increase revenues, the Company’s cash position may not be significant enough to support the Company’s
daily operations. Management intends to raise additional funds by way of a public or private offering. Management believes that
the actions presently being taken to further implement its business plan and generate revenues provide the opportunity for the
Company to continue as a going concern. While management believes in the viability of its strategy to generate revenues and in
its ability to raise additional funds, there can be no assurances to that effect or on terms acceptable to the Company. The ability
of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan
and generate revenues. Our current burn rate to maintain the minimal level of operations for us to be in a position to execute
our business plan upon funding is anticipated to be no greater than $25,000 per month in cash and Joseph Segelman, our President
and CEO, has agreed to underwrite these costs until we are then able to begin execution of our business plan. In addition, until
we begin execution of our business plan, we will continue to defer and accrue salaries and thus will not require cash to make payments
under employment agreements.
The consolidated financial statements do
not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
This summary of significant accounting
policies of the Company is presented to assist in understanding the Company’s consolidated financial statements. The consolidated
financial statements and notes are representations of the Company’s management, which is responsible for their integrity
and objectivity. These accounting policies conform to GAAP and have been consistently applied in the preparation of the consolidated
financial statements.
Consolidation
The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary, Reign Brands, Inc. All significant intercompany accounts and transactions
are eliminated in consolidation.
Use of Estimates
The preparation of these consolidated financial
statements in accordance with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities
at the dates of the consolidated financial statements and the reported amounts of net sales and expenses during the reported periods.
Actual results may differ from those estimates and such differences may be material to the consolidated financial statements. The
more significant estimates and assumptions by management include among others: inventory valuation, derivative liabilities, warrant
liabilities, common stock and option valuation, valuation of acquired intangible assets. and the recoverability of intangibles.
The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.
Cash
The Company’s cash is held in bank
accounts in the United States and is insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. The Company has
not experienced any cash losses.
Income Taxes
Income taxes are accounted for under an
asset and liability approach. This process involves calculating the temporary and permanent differences between the carrying amounts
of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The temporary differences
result in deferred tax assets and liabilities, which would be recorded on the Balance Sheets in accordance with ASC 740, which
established financial accounting and reporting standards for the effect of income taxes. The likelihood that its deferred tax assets
will be recovered from future taxable income must be assessed and, to the extent that recovery is not likely, a valuation allowance
is established. Changes in the valuation allowance in a period are recorded through the income tax provision in the consolidated
Statements of Operations.
ASC 740-10-30 was adopted from the date
of its inception. ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an entity’s consolidated
financial statements and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax
positions taken or expected to be taken on a tax return. Under ASC 740-10, the impact of an uncertain income tax position on the
income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant
taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.
Additionally, ASC 740-10 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. As a result of the implementation of ASC 740-10, the Company does not have a liability for unrecognized
income tax benefits.
Advertising and Marketing Costs
Advertising and marketing costs
are recorded as general and administrative expenses when they are incurred. Advertising and marketing expenses were recorded
of approximately $364,000 ($46,000 from continuing operations and $318,000 from discontinued operations) and $533,000
($75,000 from continuing operations and $458,000 from discontinued operations) for the years ended December 31, 2018 and
2017, respectively.
Comprehensive Income
Comprehensive income is reported in accordance
with FASB ASC Topic 220 “Comprehensive Income,” which established standards for reporting and displaying comprehensive
income and its components in a financial statement that is displayed with the same prominence as other financial statements.
Total comprehensive income is defined as
all changes in shareholders’ equity during a period, other than those resulting from investments by and distributions to shareholders
(i.e., issuance of equity securities and dividends). Generally, total comprehensive income (loss) equals net income (loss) plus
or minus adjustments for currency translation. There are no items other than net loss affecting comprehensive loss for the years
ended December 31, 2018 and 2017.
Revenue Recognition
On January 1, 2018, the Company adopted
Accounting Standards Codification ASC 606 (“ASC 606”),
Revenue from Contracts with Customers,
using the modified
retrospective approach for all contracts not completed as of the date of adoption. Results for the reporting periods beginning
on January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance
with accounting under ASC 605,
Revenue Recognition
. As a result of adopting ASC 606, amounts reported under ASC 606 were
not materially different from amounts that would have been reported under the previous revenue guidance of ASC 605, as such, no
cumulative adjustment to retained earnings.
The Company generates all of its revenue
from contracts with customers. The Company recognizes revenue when we satisfy a performance obligation by transferring control
of the promised services to a customer in an amount that reflects the consideration that we expect to receive in exchange for those
services. The Company determines revenue recognition through the following steps:
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Identification of the contract, or contracts, with a customer.
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Identification of the performance obligations in the contract.
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Determination of the transaction price.
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Allocation of the transaction price to the performance obligations in the contract
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Recognition of revenue when, or as, we satisfy a performance obligation.
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At contract inception, the Company assesses
the services promised in our contracts with customers and identify a performance obligation for each promise to transfer to the
customer a service (or bundle of services) that is distinct. To identify the performance obligations, the Company considers all
of the services promised in the contract regardless of whether they are explicitly stated or are implied by customary business
practices. The Company allocates the entire transaction price to a single performance obligation.
A description of our principal revenue generating activities
are as follows:
Retail sales
– The
Company offers consumer products through its online websites. During the years ended December 31, 2018 and 2017, the Company
recorded retail sales of $623,514 ($28,348 from continuing operations and $595,166 from discontinued operations) and
$1,061,248, ($26,199 from continuing operations and $1,035,049 from discontinued operations), respectively.
Wholesale sales
– The
Company offers product sold in bulk to distributors. During the years ended December 31, 2018 and 2017, the Company recorded
wholesale sales of $63,976 ($0 from continuing operations and $63,976 from discontinued operations) and $222,930 ($12,235 from continuing operations and $210,695 from discontinued operations),
respectively.
Revenue is recognized from retail and wholesale
sales when the product is shipped to the customer, provided that collection of the resulting receivable is reasonably assured.
Credit is granted for wholesale sales generally for terms of 7 to 90 days, based on credit evaluations. No allowance has been provided
for uncollectible accounts. Management has evaluated the receivables and believes they are collectable based on the nature of the
receivables, historical experience of credit losses, and all other currently available evidence. Discounts are recorded as a reduction
of the transaction price. Revenue excludes any amounts collected on behalf of third parties, including sales taxes.
The Company evaluates whether it is appropriate
to record the gross amount of product sales and related costs or the net amount earned as commissions. Generally, when the Company
is primarily obligated in a transaction, are subject to inventory risk, have latitude in establishing prices and selecting suppliers,
or have several but not all of these indicators, revenue is recorded at the gross sale price. The Company generally records the
net amounts as commissions earned if we are not primarily obligated and do not have latitude in establishing prices. The Company
records all revenue transactions at the gross sale price.
There is a no return policy. The return
policy is currently being evaluated to be more in line with industry standards.
Deferred revenue
Deferred revenue consists of customer orders
paid in advance of the delivery of the order. Deferred revenue is classified as short-term as the typical order ships within approximately
three weeks of placing the order. Deferred revenue is recognized as revenue when the product is shipped to the customer and all
other revenue recognition criteria have been met. Deferred revenue totaling $21,977 and $81,455 as of December 31, 2018 and December
31, 2017, respectively, is included in current liabilities in the accompanying consolidated Balance Sheets.
Inventories
Reign Sapphire
Inventories are stated at the lower of
cost or market (net realizable value) on a lot basis each quarter. A lot is determined by the cut, clarity, size, and weight of
the sapphires. Inventory consists of sapphire jewels that meet rigorous grading criteria and are of cuts and sizes most commonly
used in the jewelry industry. As of December 31, 2018 and 2017, the Company carried primarily loose sapphire jewels, jewelry for
sale on our website, and jewelry held as samples. Samples are used to show potential customers what the jewelry would look like.
Promotional items given to customers that are not expected to be returned will be removed from inventory and expensed. There have
been no promotional items given to customers as of December 31, 2018. The Company performs its own in-house assessment based on
gem guide and the current market price for metals to value its inventory on an annual basis or if circumstances dictate sooner
to determine if the estimated fair value is greater or less than cost. In addition, the inventory is reviewed each quarter by the
Company against industry prices from gem-guide and if there is a potential impairment, the Company would appraise the inventory.
The estimated fair value is subject to significant change due to changes in popularity of cut, perceived grade of the clarity of
the sapphires, the number, type and size of inclusions, the availability of other similar quality and size sapphires, and other
factors. As a result, the internal assessed value of the sapphires could be significantly lower from the current estimated fair
value. Loose sapphire jewels do not degrade in quality over time. The estimated fair value per management’s internal assessment
is greater than the cost, therefore, there is no indicator of impairment as of December 31, 2018.
CCI and Le Bloc
CCI and Le Bloc products are outsourced
to a third party for manufacture, made to order, and when completed are shipped to the customer. The inventory for CCI and Le Bloc
are considered immaterial as of December 31, 2018 and December 31, 2017.
Property and Equipment
Property and equipment are carried at cost
and are depreciated on a straight-line basis over the estimated useful lives of the assets, generally five years. The cost of repairs
and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed
of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income
in the year of disposition. Fixed assets are examined for the possibility of decreases in value when events or changes in circumstances
reflect the fact that their recorded value may not be recoverable.
Business Combinations
Amounts paid for acquisitions are allocated
to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. The fair value
of identifiable intangible assets is based on detailed valuations that use information and assumptions provided by management,
including expected future cash flows. We allocate any excess purchase price over the fair value of the net assets and liabilities
acquired to goodwill. Identifiable intangible assets with finite lives are amortized over their useful lives. Acquisition-related
costs, including advisory, legal, accounting, valuation and other costs, are expensed in the periods in which the costs are incurred.
The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
Intangible Assets and Goodwill
Goodwill is the cost of an acquisition less the fair value of
the net assets of the acquired business.
Intangible assets consist primarily of
tradenames, proprietary designs, developed technology – website, and developed technology – Ipad application. Our intangible
assets are being amortized on a straight-line basis over a period of three to ten years.
Impairment of Long-lived Assets and Goodwill
We evaluate goodwill for impairment annually
in the fourth quarter, and whenever events or changes in circumstances indicate it is more likely than not that the fair value
of a reporting unit containing goodwill is less than its carrying amount. The goodwill impairment test consists of a two-step
process, if necessary. The first step is to compare the fair value of a reporting unit to its carrying value, including goodwill.
We typically use discounted cash flow models to determine the fair value of a reporting unit. The assumptions used in these models
are consistent with those we believe hypothetical marketplace participants would use. If the fair value of the reporting unit is
less than its carrying value, the second step of the impairment test must be performed in order to determine the amount of impairment
loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that
goodwill. If the carrying amount of the reporting unit’s goodwill exceeds its implied fair value, an impairment charge is recognized
in an amount equal to that excess. There was an impairment charge of $481,947 and $0 for the years ended December 31, 2018 and
2017, respectively.
We periodically evaluate whether the carrying
value of property, equipment and intangible assets has been impaired when circumstances indicate the carrying value of those assets
may not be recoverable. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected
to result from the use and eventual disposition of the asset. If the carrying value is not recoverable, the impairment loss
is measured as the excess of the asset’s carrying value over its fair value. There was an impairment charge of $460,789 and
$0 for the years ended December 31, 2018 and 2017, respectively.
Our impairment analyses require management
to apply judgment in estimating future cash flows as well as asset fair values, including forecasting useful lives of the assets,
assessing the probability of different outcomes, and selecting the discount rate that reflects the risk inherent in future cash
flows. If the carrying value is not recoverable, we assess the fair value of long-lived assets using commonly accepted techniques,
and may use more than one method, including, but not limited to, recent third party comparable sales and discounted cash flow models.
If actual results are not consistent with our assumptions and estimates, or our assumptions and estimates change due to new
information, we may be exposed to an impairment charge in the future.
Fair Value of Financial Instruments
The provisions of accounting guidance,
FASB Topic ASC 825 requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized
and not recognized on the balance sheet, for which it is practicable to estimate fair value, and defines fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of December
31, 2018 and 2017, the fair value of cash, accounts receivable, accounts payable, accrued expenses, notes payable, and convertible
debt approximated carrying value due to the short maturity of the instruments, quoted market prices or interest rates which fluctuate
with market rates.
Fair Value Measurements
Fair value is defined as the exchange price
that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market
for the asset or liability, in an orderly transaction between market participants on the measurement date. Valuation techniques
used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value
hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:
|
●
|
Level 1 – Quoted prices in active markets for identical assets or liabilities.
|
|
●
|
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such
as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable
or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
●
|
Level 3 – Unobservable inputs that are supported
by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities
|
The carrying value of financial assets
and liabilities recorded at fair value is measured on a recurring or nonrecurring basis. Financial assets and liabilities measured
on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. There were no financial assets
or liabilities carried and measured on a nonrecurring basis during the reporting periods. Financial assets and liabilities measured
on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. The warrant and the
embedded derivative liabilities are recognized at fair value on a recurring basis at December 31, 2018 and are Level 3 measurements
(see Note 8). There have been no transfers between levels.
The derivatives are evaluated under the
hierarchy of ASC 480-10, ASC Paragraph 815-25-1 and ASC Subparagraph 815-10-15-74 addressing embedded derivatives. The fair value
of the Level 3 financial instruments was performed internally by the Company using Monte Carlo valuation method.
The following table summarize the Company’s
fair value measurements by level at December 31, 2018 for the assets measured at fair value on a recurring basis:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liability
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
The following table summarize the Company’s
fair value measurements by level at December 31, 2017 for the assets measured at fair value on a recurring basis:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liability
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
470,839
|
|
The carrying values of the Company’s
financial instruments, including cash, other current assets, accounts payable, accruals, and other current liabilities approximate
their fair values due to the short period of time to maturity or repayment.
Debt
The Company issues debt that may have separate
warrants, conversion features, or no equity-linked attributes.
Debt with warrants
– When
the Company issues debt with warrants, the Company treats the warrants as a debt discount, record as a contra-liability against
the debt, and amortize the balance over the life of the underlying debt as amortization of debt discount expense in the consolidated
statements of operations. When the warrants require equity treatment under ASC 815, the offset to the contra-liability is
recorded as additional paid in capital in our consolidated balance sheet. When the Company issues debt with warrants that
require liability treatment under ASC 815, such as a clause requiring repricing, the warrants are considered to be a derivative
that is recorded as a liability at fair value. If the initial value of the warrant derivative liability is higher than the
fair value of the associated debt, the excess is recognized immediately as interest expense. The warrant derivative liability
is adjusted to its fair value at the end of each reporting period, with the change being recorded as expense or gain to Other (income)
expense in the consolidated Statements of Operations. If the debt is retired early, the associated debt discount is then
recognized immediately as amortization of debt discount expense in the consolidated statement of operations. The debt is
treated as conventional debt.
Convertible debt – derivative
treatment
– When the Company issues debt with a conversion feature, we must first assess whether the conversion feature
meets the requirements to be treated as a derivative, as follows: a) one or more underlyings, typically the price of our common
stock; b) one or more notional amounts or payment provisions or both, generally the number of shares upon conversion; c) no initial
net investment, which typically excludes the amount borrowed; and d) net settlement provisions, which in the case of convertible
debt generally means the stock received upon conversion can be readily sold for cash. An embedded equity-linked component that
meets the definition of a derivative does not have to be separated from the host instrument if the component qualifies for the
scope exception for certain contracts involving an issuer’s own equity. The scope exception applies if the contract is both
a) indexed to its own stock; and b) classified in shareholders’ equity in its statement of financial position.
If the conversion feature within convertible
debt meets the requirements to be treated as a derivative, we estimate the fair value of the convertible debt derivative using
Monte Carlo Method upon the date of issuance. If the fair value of the convertible debt derivative is higher than the face value
of the convertible debt, the excess is immediately recognized as interest expense. Otherwise, the fair value of the convertible
debt derivative is recorded as a liability with an offsetting amount recorded as a debt discount, which offsets the carrying amount
of the debt. The convertible debt derivative is revalued at the end of each reporting period and any change in fair value is recorded
as a gain or loss in the statement of operations. The debt discount is amortized through interest expense over the life of the
debt.
Convertible debt – beneficial
conversion feature
– If the conversion feature is not treated as a derivative, we assess whether it is a beneficial conversion
feature (“BCF”). A BCF exists if the conversion price of the convertible debt instrument is less than the stock price
on the commitment date. This typically occurs when the conversion price is less than the fair value of the stock on the date the
instrument was issued. The value of a BCF is equal to the intrinsic value of the feature, the difference between the conversion
price and the common stock into which it is convertible, and is recorded as additional paid in capital and as a debt discount in
the consolidated balance sheet. The Company amortizes the balance over the life of the underlying debt as amortization of debt
discount expense in the statement of operations. If the debt is retired early, the associated debt discount is then recognized
immediately as amortization of debt discount expense in the consolidated Statement of Operations.
If the conversion feature does not qualify
for either the derivative treatment or as a BCF, the convertible debt is treated as traditional debt.
Employee Stock Based Compensation
Stock based compensation issued to employees
and members of our board of directors is measured at the date of grant based on the estimated fair value of the award, net of estimated
forfeitures. The grant date fair value of a stock based award is recognized as an expense over the requisite service period of
the award on a straight-line basis.
For purposes of determining the variables
used in the calculation of stock based compensation issued to employees
,
the Company performs an analysis of current market
data and historical data to calculate an estimate of implied volatility, the expected term of the option and the expected forfeiture
rate. With the exception of the expected forfeiture rate, which is not an input, we use these estimates as variables in the Black-Scholes
option pricing model. Depending upon the number of stock options granted any fluctuations in these calculations could have a material
effect on the results presented in our consolidated statements of operations. In addition, any differences between estimated forfeitures
and actual forfeitures could also have a material impact on our consolidated financial statements.
Non-Employee Stock Based Compensation
Issuances of the Company’s common stock
or warrants for acquiring goods or services are measured at the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable. The measurement date for the fair value of the equity instruments
issued to consultants or vendors is determined at the earlier of (i) the date at which a commitment for performance to earn the
equity instruments is reached (a “performance commitment” which would include a penalty considered to be of a magnitude
that is a sufficiently large disincentive for nonperformance) or (ii) the date at which performance is complete. Although situations
may arise in which counter performance may be required over a period of time, the equity award granted to the party performing
the service is fully vested and non-forfeitable on the date of the agreement. As a result, in this situation in which vesting periods
do not exist as the instruments fully vested on the date of agreement, the Company determines such date to be the measurement date
and will record the estimated fair market value of the instruments granted as a prepaid expense and amortize such amount to general
and administrative expense in the accompanying statement of operations over the contract period. When it is appropriate for the
Company to recognize the cost of a transaction during financial reporting periods prior to the measurement date, for purposes of
recognition of costs during those periods, the equity instrument is measured at the then-current fair values at each of those interim
financial reporting dates.
Non-Cash Equity Transactions
Shares of equity instruments issued for
non-cash consideration are recorded at the fair value of the consideration received based on the market value of services to be
rendered, or at the value of the stock given, considered in reference to contemporaneous cash sale of stock.
Earnings per Share
Diluted earnings (loss) per share are computed
on the basis of the weighted average number of common shares (including common stock subject to redemption) plus dilutive potential
common shares outstanding for the reporting period. In periods where losses are reported, the weighted-average number of common
stock outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
The total number of potential additional
dilutive securities outstanding for the years ended December 31, 2018 and 2017, was none since the Company had net losses and any
additional potential common shares would have an anti-dilutive effect.
Related Parties
Related parties are any entities or individuals
that, through employment, ownership or other means, possess the ability to direct or cause the direction of the management and
policies of the Company. Australian Sapphire Corporation (“ASC”), a shareholder of the Company which is wholly-owned
by Joseph Segelman,
t
h
e Comp
a
n
y’s
Chief Executive Officer (“
CEO”), is inactive and we have no transactions with ASC.
Segment Reporting
Accounting Standards Codification (“ASC”) 280, “Segment
Reporting,” requires public companies to report financial and descriptive information about their reportable operating segments.
The Company identifies operating segments based on how our chief operating decision maker internally evaluates separate financial
information, business activities and management responsibility. Accordingly, the Company has one reportable segment.
Reclassifications
Certain amounts
in previously issued financial statements have been reclassified to conform to the presentation following the January 2019 sale
of CCI, which includes the reclassification of the combined financial position as assets and liabilities held for sale (see Note
16) for all periods presented.
Discontinued
Operations
Pursuant to ASC 205-20 Discontinued Operations, in determining whether a group of assets that is disposed
(or to be disposed) should be presented as a discontinued operation, we analyze whether the group of assets being disposed represents
a component of the Company; that is, whether it had historic operations and cash flows that were clearly distinguished, both operationally
and for financial reporting purposes. In addition, we consider whether the disposal represents a strategic shift that has or will
have a major effect on our operations and financial results. The results of discontinued operations, as well as any gain or loss
on the disposal, if applicable, are aggregated and separately presented in our consolidated statements of operations, net of income
taxes. The historical financial position of discontinued operations are aggregated and separately presented in our accompanying consolidated balance sheets.
Concentrations, Risks, and Uncertainties
Business Risk
Substantial business risks and uncertainties
are inherent to an entity, including the potential risk of business failure.
The Company is headquartered and operates
in the United States. To date, the Company has generated limited revenues from operations. There can be no assurance that the Company
will be able to successfully continue to produce its products and failure to do so would have a material adverse effect on the
Company’s financial position, results of operations and cash flows. Also, the success of the Company’s operations is
subject to numerous contingencies, some of which are beyond management’s control. These contingencies include general economic
conditions, price of raw material, competition, governmental and political conditions, and changes in regulations. Among other
risks, the Company’s operations will be subject to risk of restrictions on transfer of funds, domestic and international
customs, changing taxation policies, foreign exchange restrictions, and political and governmental regulations.
Interest rate risk
Financial assets and liabilities do not
have material interest rate risk.
Credit risk
The Company is exposed to credit risk from
its cash in banks and accounts receivable. The credit risk on cash in banks is limited because the counterparties are recognized
financial institutions.
The Company had no customers that accounted
for 10% or more of total revenues for the year ended December 31, 2018. There was one customer that accounted for 12% of total
revenue for the year ended December 31, 2017. The Company had no customers that accounted for 10% or more of total accounts receivable
at December 31, 2018 and 2017, respectively.
Seasonality
The business is subject to substantial
seasonal fluctuations. Historically, a significant portion of net sales and net earnings have been realized during the
period from October through December.
Major Suppliers
The Company does not manufacture its own
products and currently depends primarily upon third parties to manufacture its products.
In the event that the manufacturing provided
by our current supplier were discontinued, it is believed that alternate suppliers could be identified which would be able to provide
it with sufficient levels of products at terms similar to those of our current supplier.
Recent Accounting Pronouncements
FASB ASU 2017-11 “
Earnings Per
Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815)
” - In July
2017, the FASB issued 2017-11. The guidance eliminates the requirement to consider “down round” features when determining
whether certain equity-linked financial instruments or embedded features are indexed to an entity’s own stock. Our warrants issued
with our convertible notes are treated as derivative instruments, because they include a “down round” feature. The ASU
is effective for annual periods beginning after December 15, 2018, and for interim periods within those years, with early adoption
permitted. We do not expect this ASU to have a significant impact on our consolidated financial statements and related disclosures.
FASB ASU 2017-09 “
Scope of Modification
Accounting (Topic 718)
” - In May 2017, the FASB issued 2017-09. The guidance clarifies the accounting for when the terms
of a share-based award are modified. The ASU is effective for annual reporting periods beginning after December 15, 2017, and for
interim periods within those years, with early adoption permitted. This new guidance would only impact our consolidated financial
statements if, in the future, we modified the terms of any of our employee and non-employee share-based awards.
FASB ASU 2017-04
“Simplifying
the Test for Goodwill Impairment (Topic 350)”
– In January 2017, the FASB issued 2017-04. The guidance removes
“Step Two” of the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment
will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount
of goodwill. The ASU is effective for annual reporting periods beginning after December 15, 2019, and for interim periods within
those years, with early adoption permitted. We do not expect this ASU to have a significant impact on our consolidated financial
statements and related disclosures unless we experience an impairment on goodwill.
FASB ASU 2017-01
“Clarifying the
Definition of a Business (Topic 805)”
– In January 2017, the FASB issued 2017-1. The new guidance that changes
the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business.
The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated
in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is
not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of
outputs by more closely aligning it with how outputs are described in ASC 606. The ASU is effective for annual reporting
periods beginning after December 15, 2017, and for interim periods within those years. Adoption of this ASU did not have a significant
impact on our consolidated financial statements and related disclosures.
FASB ASU 2016-15
“Statement of
Cash Flows (Topic 230)” –
In August 2016, the FASB issued 2016-15. Stakeholders indicated that there is a diversity
in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15
addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This ASU is
effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Early
adoption is permitted. Adoption of this ASU did not have a significant impact on our statement of cash flows.
FASB ASU 2016-12
“Revenue from
Contracts with Customers (Topic 606)”
– In May 2016, the FASB issued 2016-12. The core principle of the guidance
is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2016-12
provides clarification on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts
and contract modifications. This ASU is effective for annual reporting periods beginning after December 15, 2017, with the
option to adopt as early as December 15, 2016. Adoption of this ASU did not have a significant impact on our financial statements.
FASB ASU 2016-11
“Revenue Recognition
(Topic 605) and Derivatives and Hedging (Topic 815)”
– In May 2016, the FASB issued 2016-11, which clarifies guidance
on assessing whether an entity is a principal or an agent in a revenue transaction. This conclusion impacts whether an entity
reports revenue on a gross or net basis. This ASU is effective for annual reporting periods beginning after December 15,
2017, with the option to adopt as early as December 15, 2016. Adoption of this ASU did not have a significant impact on our financial
statements.
FASB ASU 2016-10
“Revenue from
Contracts with Customers (Topic 606)”
– In April 2016, the FASB issued ASU 2016-10, clarify identifying performance
obligations and the licensing implementation guidance, while retaining the related principles for those areas. This ASU is
effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016.
Adoption of this ASU did not have a significant impact on our financial statements.
FASB ASU 2016-02
“Leases (Topic
842)” –
In February 2016, the FASB issued ASU 2016-02, which will require lessees to recognize almost all leases
on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a
dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that
are largely similar to those applied in current lease accounting, but without explicit bright lines. Lessor accounting is
similar to the current model but updated to align with certain changes to the lessee model and the new revenue recognition standard.
This ASU is effective for fiscal years beginning after December 18, 2018, including interim periods within those fiscal years.
We are currently evaluating the potential impact this standard will have on our consolidated financial statements and related
disclosures.
FASB ASU 2015-17
“Income Taxes
(Topic 740)” –
In November 2015, the FASB issued ASU 2015-17, which simplifies the presentation of deferred tax
assets and liabilities on the balance sheet. Previous GAAP required an entity to separate deferred income tax liabilities
and assets into current and noncurrent amounts on the balance sheet. The amendment requires that deferred tax liabilities
and assets be classified as noncurrent in a classified balance sheet. This ASU is effective for annual periods beginning
after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Adoption of this ASU
did not have a significant impact on our consolidated financial statements and related disclosures.
NOTE 4 – INVENTORY
Inventories consisted of the following
as of:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Loose stones
|
|
$
|
526,473
|
|
|
$
|
529,018
|
|
Finished goods
|
|
|
134,145
|
|
|
|
134,145
|
|
Samples
|
|
|
62,977
|
|
|
|
62,977
|
|
|
|
$
|
723,595
|
|
|
$
|
726,140
|
|
NOTE 5 –
Equipment
Equipment consisted of the following as
of:
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Estimated Life
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Office equipment
|
|
5 years
|
|
$
|
5,481
|
|
|
$
|
3,391
|
|
Computer equipment
|
|
3 years
|
|
|
40,171
|
|
|
|
39,311
|
|
Accumulated depreciation
|
|
|
|
|
(30,122
|
)
|
|
|
(17,424
|
)
|
|
|
|
|
$
|
15,530
|
|
|
$
|
25,278
|
|
Depreciation expense was $12,698 and $13,712
for the years ended December 31, 2018 and 2017, and is classified in general and administrative expenses in the consolidated Statements
of Operations.
NOTE 6 –
INTANGIBLE
ASSETS AND GOODWILL
Intangible assets, net consisted of the
following as of:
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Estimated Life
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
3.3 – 4.5 years
|
|
$
|
260,000
|
|
|
$
|
260,000
|
|
Website
|
|
3 years
|
|
|
118,755
|
|
|
|
113,253
|
|
Acquired tradename
|
|
10 years
|
|
|
365,000
|
|
|
|
365,000
|
|
Acquired proprietary design
|
|
5 years
|
|
|
80,000
|
|
|
|
80,000
|
|
Acquired developed technology - website
|
|
3 years
|
|
|
117,500
|
|
|
|
117,500
|
|
Acquired developed technology – Ipad application
|
|
3 years
|
|
|
117,500
|
|
|
|
117,500
|
|
Accumulated amortization
|
|
|
|
|
(484,635
|
)
|
|
|
(249,947
|
)
|
Impairment
|
|
|
|
|
(460,789
|
)
|
|
|
—
|
|
|
|
|
|
$
|
133,331
|
|
|
$
|
803,306
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Estimated Life
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
indefinite
|
|
$
|
481,947
|
|
|
$
|
481,947
|
|
Impairment
|
|
|
|
|
(481,947
|
)
|
|
|
—
|
|
|
|
|
|
$
|
—
|
|
|
$
|
481,947
|
|
Future amortization expense related to intangible assets are
approximately as follows:
|
|
|
Total
|
|
|
2019
|
|
|
$
|
62,907
|
|
|
2020
|
|
|
|
37,818
|
|
|
2021
|
|
|
|
12,606
|
|
|
|
|
|
$
|
113,331
|
|
Amortization expense was $234,688 and $222,081
for the years ended December 31, 2018 and 2017 and is classified in general and administrative expenses in the accompanying consolidated
Statements of Operations. The reason for the impairment charges of $942,736 and $0 in years ended December 31, 2018 and 2017, respectively,
are the result of the Company’s determination that cash flows from CCI may not be realized.
NOTE 7 –
DUE
TO RELATED PARTY
During 2018, the Company received no advances
from our CEO/director and incurred business expenses of $1,963,371 (comprised of operating expenses of $1,952,720, inventory purchases
totaling $2,200, website development costs of $5,502, and purchased equipment of $2,950) and had repayments of $1,438,000. We have
a balance owed to the related party of $1,246,805 and $721,434 at December 31, 2018 and 2017, respectively. During 2018, the Company
incurred $123,750 of deferred compensation related to the CEO/director’s employment agreement and $80,000 of deferred compensation
related to the Secretary’s employment agreement. At December 31, 2018 and 2017, accrued compensation – related party
was $1,239,750 and $1,036,000, respectively.
NOTE 8 –
CONVERTIBLE
NOTES PAYABLE
Convertible notes payable consists of the
following:
|
|
2018
|
|
|
2017
|
|
January and February 2018 Notes, issued January 3, 2018 and February 16, 2018,
respectively, with a maturity date of March 31, 2019, as amended, with an interest rate of 10%.
|
|
$
|
294,000
|
|
|
$
|
—
|
|
November 2017 Notes, issued November 10, 2017, with a maturity date of March 31, 2019, as amended, bearing no interest, and secured by substantially all of the Company’s assets and guarantees of payment by the Company’s CEO, and Australian Sapphire Corporation (“ASC”), a shareholder of the Company which is wholly-owned by the Company’s CEO.
|
|
|
287,502
|
|
|
|
287,502
|
|
November 2016 Notes, issued November 10, 2016, with a maturity date of March 31, 2019, as amended, bearing no interest, and secured by substantially all of the Company’s assets and guarantees of payment by the Company’s CEO, and ASC.
|
|
|
287,502
|
|
|
|
287,502
|
|
December 2015 Notes, issued December 23, 2015, with a maturity date of March 31, 2019, as amended, bearing no interest, and secured by substantially all of the Company’s assets and guarantees of payment by the Company’s CEO, and ASC.
|
|
|
862,500
|
|
|
|
862,500
|
|
Total convertible notes payable
|
|
|
1,731,504
|
|
|
|
1,437,504
|
|
Debt discount
|
|
|
—
|
|
|
|
224,904
|
|
Convertible notes payable, net of unamortized debt discount
|
|
$
|
1,731,504
|
|
|
$
|
1,212,600
|
|
The following represents a summary of the
convertible debt terms at December 31, 2018:
|
|
|
Amount of
Notes
|
|
|
Debt Discount
|
|
|
Maturity
Dates thru
|
|
|
Conversion
Price
|
|
|
Number of
Warrants
|
|
|
Exercise
Price
|
|
|
Warrants
Exercisable
thru
|
January and February 2018 Notes
|
|
|
$
|
294,000
|
|
|
$
|
—
|
|
|
3/31/2019
|
|
|
$
|
0.08
|
|
|
|
1,960,000
|
|
|
$
|
0.15
|
|
|
2/16/2023
|
November 2017 Notes
|
|
|
|
287,502
|
|
|
|
—
|
|
|
3/31/2019
|
|
|
$
|
0.08
|
|
|
|
3,593,776
|
|
|
$
|
0.15
|
|
|
11/10/2022
|
November 2016 Notes
|
|
|
|
287,502
|
|
|
|
—
|
|
|
3/31/2019
|
|
|
$
|
0.08
|
|
|
|
3,593,776
|
|
|
$
|
0.15
|
|
|
11/10/2022
|
December 2015 Notes
|
|
|
|
862,500
|
|
|
|
—
|
|
|
3/31/2019
|
|
|
$
|
0.08
|
|
|
|
10,781,250
|
|
|
$
|
0.15
|
|
|
11/10/2022
|
Total
|
|
|
$
|
1,731,504
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
19,928,802
|
|
|
|
|
|
|
|
January and February 2018
In
January and February 2018, the Company entered into Securities Purchase Agreements (the “Purchase Agreement”) with
respect to the sale and issuance to Crossover Capital Fund II, LLC (“Crossover”) totaling (i) 833,332 shares of the
Company’s Common Stock (the “Commitment Shares”); (ii) 3,000,000 redeemable shares (the “Redeemable Shares”),
(iii) $294,000 aggregate principal amount of a convertible promissory notes (the “Convertible Notes”) and (iv) Common
Stock Purchase Warrants to purchase up to an aggregate of 1,960,000 shares of the Company’s common stock (the “Warrants”)
for aggregate consideration of $250,000 cash
which was issued at a $44,000 original issue discount from the face value of
the Note
.
The
January and February 2018 Convertible Notes mature on
March 31, 2019, as amended
,
and provide for interest to accrue at an interest rate equal to 10% per annum or the maximum rate permitted under applicable law
after the occurrence of any event of default as provided in the Convertible Notes. At any time after 180 days from the issue date,
the holder, at its option, may convert the outstanding principal balance and accrued interest into shares of common stock of the
Company. The initial conversion price for the principal and interest in connection with voluntary conversions by a holder of the
Convertible Notes is $0.08 per share, subject to adjustment as provided therein
, such as stock splits and stock dividends
.
There is also a one-time interest charge of 10% due at maturity.
If
the Convertible Notes are prepaid on or prior to the maturity dates, all of the Redeemable Shares shall be returned to the treasury
shares of the Company, without any payment by the Company for the Redeemable Shares. Further, if the Company prepays a portion
of the Convertible Notes, but not the entire Convertible Notes, on or before the maturity dates, a pro rata portion of the Redeemable
Shares shall be returned to the Company’s treasury in proportion to the prepayment amount as it relates to the entire Convertible
Notes balance.
On the 180
th
day, the conversion feature will be a derivative and recorded as interest expense.
The
exercise price for the Warrants is $0.15, subject to adjustment, are exercisable for five years after the date of the Warrants
and are exercisable
in whole or in part, as either a cash exercise or as a “cashless” exercise.
Purchaser Conversion
The
January
and February 2018 Convertible Notes
purchaser has the right at any time after 180 days after the issue date until the outstanding
balance of the Note has been paid in full, to
convert the outstanding principal balance and
accrued interest into shares of common stock of the Company
divided by the
January
and February 2018 Convertible Notes
purchaser conversion price of $0.08, subject to potential future adjustments, such as
stock splits and stock dividends. If the total outstanding balance of the November 2017 Note were convertible as of December 31,
2018, the November 2017 Note would have been convertible into 3,675,000 shares of our common stock. No derivative liability has
been recorded as of September 30, 2018, as conversion was contingent. On the 180
th
day, the conversion feature will
be a derivative and recorded as interest expense. Subsequent to September 30, 2018, the 180 day period has expired and the Company
has determined the fair value of the derivative to be immaterial.
Interest
The
January
and February 2018 Convertible Notes
provide
a one-time interest charge of 10% due
at maturity totaling $29,400 that has been accrued within other current liabilities in the accompanying consolidated balance sheets.
The interest was recorded as a debt discount to be accreted over the term of the convertible notes to interest expense in the accompanying
consolidated Statements of Operations.
Redeemable Shares
The
January
and February 2018 Convertible Notes
provide for a total of 3,000,000 redeemable common shares, valued totaling $450,000
and $103,560 based on the fair value and the relative fair value of each issuance, respectively. The relative fair value of the
redeemable shares was recorded as a debt discount to be accreted over the term of the convertible notes to interest expense in
the accompanying consolidated Statements of Operations. In October 2018, the January and February 2018 Crossover Purchase Agreement
was amended to extend the maturity date to December 31, 2018 and to remove the right of the Company to 3,000,000 of the Redeemable
Shares and Crossover was issued the shares.
Common Stock
The
January
and February 2018 Convertible Notes purchasers
were issued a total of 833,332 shares of the Company’s common stock,
valued at $250,000 and $28,767 based on the fair value and relative fair value of the stock on the date of grant, respectively.
Warrants
The Company calculates
the fair value of the Warrants at $95,324 and $65,292 at January 3, 2018 and February 16, 2018, respectively, using the Black-Scholes
option-pricing method. The Black-Scholes option-pricing method requires the use of subjective assumptions, including stock price
volatility, the expected life of stock options, risk free interest rate and the fair value of the underlying common stock on the
date of grant. The assumptions used in the Black-Scholes option-pricing method is set forth below:
|
|
January 3, 2018
|
|
|
February 16, 2018
|
|
Common stock price
|
|
$
|
0.17
|
|
|
$
|
0.13
|
|
Term
|
|
|
5 years
|
|
|
|
5 years
|
|
Strike price
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
Dividend yield
|
|
|
0
|
|
|
|
0
|
|
Risk free rate
|
|
|
2.25
|
%
|
|
|
2.63
|
%
|
Volatility
|
|
|
62.5
|
%
|
|
|
62.5
|
%
|
Dividend yield
. The Company
bases the expected dividend yield assumption on the fact that the Company has never paid cash dividends and has no present intention
to pay cash dividends on the Company’s common stock.
Volatility
. The expected
stock-price volatility assumption is based on volatilities of the guideline public companies that are comparable to Reign Sapphire.
Risk-free interest rate
.
We based the risk-free interest rate assumption on the observed Daily Treasury Yield Curve Rate for a five-year obligation.
Expected
term of options
. The contractual life of warrants represents the period of time that warrants are expected to be outstanding.
Because the Company does not have historic exercise behavior, the Company determines the expected life assumption using the simplified
method, which is an average of the contractual term of the warrant and its ordinary vesting period.
Debt Discount
The Company issued the
January
and February 2018 Convertible Notes
with warrants that require equity treatment under ASC 815. As such, the proceeds of
the notes were allocated, based on relative fair values, as follows: original issue discount of $44,000, interest of $29,400, $28,767
to the common shares issued, $36,739 to the warrants granted, and $103,560 to the redeemable shares, resulting in a debt discount
to such notes of $242,466. The debt discount is accreted to interest expense over the term of the note.
|
|
January 3, 2018
|
|
|
February 16, 2018
|
|
|
|
Fair value
|
|
|
Relative fair value
|
|
|
Fair value
|
|
|
Relative fair value
|
|
Warrant
|
|
$
|
95,324
|
|
|
$
|
19,784
|
|
|
$
|
65,292
|
|
|
$
|
16,955
|
|
Common sock
|
|
$
|
70,833
|
|
|
$
|
14,701
|
|
|
$
|
54,167
|
|
|
$
|
14,066
|
|
Redeemable shares
|
|
$
|
255,000
|
|
|
$
|
52,923
|
|
|
$
|
195,000
|
|
|
$
|
50,637
|
|
Remaining note value
|
|
$
|
110,300
|
|
|
$
|
22,892
|
|
|
$
|
110,300
|
|
|
$
|
28,642
|
|
Total
|
|
$
|
531,457
|
|
|
$
|
110,300
|
|
|
$
|
424,759
|
|
|
$
|
110,300
|
|
Additional discount (interest)
|
|
$
|
—
|
|
|
$
|
13,808
|
|
|
$
|
—
|
|
|
$
|
8,058
|
|
The Company recorded debt discount accretion
of $242,466 to interest expense in the consolidated Statements of Operations during the year ended December 31, 2018 and has $0
of unamortized debt discount remaining as of December 31, 2018.
November 2017
On November 10, 2017, the Company entered
into a Securities Purchase Agreement (the “November 2017 Purchase Agreement”) with respect to the sale and issuance
to certain institutional investors Alpha Capital Anstalt and Brio Capital Master Fund Ltd. (collectively “November 2017 Purchasers”)
of up to (i) 833,354 shares of the Company’s Common Stock (the “November 2017 Incentive Shares”); (ii) $287,502
aggregate principal amount of Secured Convertible Notes (the “November 2017 Notes”) and (iii) Common Stock Purchase
Warrants to purchase up to an aggregate of 3,593,776, shares of the Company’s Common Stock (the “November 2017 Warrants”).
The November 2017 Incentive Shares, November 2017 Notes and November 2017 Warrants were issued on November 10, 2017 (the “November
2017 Original Issue Date”). November 2017 Purchasers received (i) November 2017 Incentive Shares at the rate of 2.8986 November
2017 Incentive Shares for each $1.00 of November 2017 Note principal issued to such November 2017 Purchaser; (ii) a November 2017
Note with a principal amount of $1.00 for each $0.86956 for each $1.00 paid by each purchaser for such purchaser’s November
2017 Note; and (iii) November 2017 Warrants to purchase up to a number of shares of Common Stock equal to 100% of such purchaser’s
November 2017 Note principal amount divided by $0.08 (“Purchaser Conversion Price”), the conversion price in effect
on the Initial Closing Date, with a per share exercise price equal to $0.15, as amended on November 16, 2017, subject to adjustment.
The aggregate cash subscription amount received by the Company from the purchasers for the issuance of the November 2017 Incentive
Shares, November 2017 Notes and November 2017 Warrants was approximately $250,002 (the “Subscription Amount”) which
was issued at a $37,500 original issue discount from the face value of the Note.
The November 2017 Notes mature on March
31, 2019, as amended on January 2, 2019, and provide for interest to accrue at an interest rate equal to the lesser of 15% per
annum or the maximum rate permitted under applicable law after the occurrence of any event of default as provided in the November
2017 Notes. At any time after the November 2017 Original Issue Date, the holders, at their option, may convert the outstanding
principal balance and accrued interest into shares of our Common Stock. The initial conversion price for the principal and interest
in connection with voluntary conversions by a holder of a Note is $0.08 per share, subject to adjustment as provided therein. Each
November 2017 Note, for example, is subject to adjustment upon certain events such as stock splits and has full ratchet anti-dilution
protections for issuance of securities by us at a price that is lower than the conversion price. Each November 2017 Note also contains
certain negative covenants, including prohibitions on incurrence of indebtedness, liens, charter amendments, dividends, redemption.
None of the holders of the November 2017 Note have the right to convert any portion of their November 2017 Note if it (together
with its affiliates) would beneficially own in excess of 9.99% of the number of shares of Common Stock outstanding immediately
after giving effect to the exercise. The November 2017 Notes include customary events of default, including, among other things,
payment defaults, covenant breaches, certain representations and warranties, certain events of bankruptcy, liquidation and suspension
of the Company’s Common Stock from trading. If such an event of default occurs, the holders of the November 2017 Notes
may be entitled to take various actions, which may include the acceleration of amounts due under the November 2017 Notes and accrual
of interest as described above. The November 2017 Notes are collectively collateralized by substantially all of the Company’s
assets and guarantees of payment of the November 2017 Notes have also been delivered by Joseph Segelman, the Chief Executive Officer
and President of the Company, and Australian Sapphire Corporation (“ASC”), a shareholder of the Company which is wholly-owned
by Joseph Segelman, guaranteed payment of all amounts owed under the November 2017 Notes, subject to the terms of such guaranty
agreements.
The November 2017 Purchase Agreement
is
being entered into in accordance with the halachically accepted exemptions on the paying of interest payments in business transactions
known as “heter iska”.
The Company
is still accounting for the interest
in accordance with GAAP.
Optional Redemption
The November 2017 Notes provide that commencing
six (6) months after the November 2017 Original Issue Date, the Company will have the option of prepaying the outstanding principal
amount of the November 2017 Notes (an “November 2017 Optional Redemption”), in whole or in part, by paying to the holders
a sum of money in cash equal to one hundred percent (100%) of the principal amount to be redeemed, together with accrued but unpaid
interest thereon, if any, and any and all other sums due, accrued or payable to the holder arising under the November 2017 Note
through the November 2017 Redemption Payment Date and 2.8986 shares of the Company’s Common Stock for each $1.00 of November
2017 Note principal amount being redeemed. A Notice of Redemption, if given, may be given on the first Trading Day following twenty
(20) consecutive Trading Days during which all of the “Equity Conditions”, as defined, have been in effect.
The Company evaluated the Optional Redemption
in ASC 815, and concluded that the Optional Redemption meets the criteria in ASC 815, and therefore, is accounted for as a liability.
As of December 31, 2018 and 2017, the Optional
Redemption was recorded as a derivative liability on the consolidated Balance Sheets using the “Black Scholes Merton Method”
and “Monte Carlo Method” modeling, respectively, and at each subsequent reporting date, the fair value of the Optional
Redemption liability will be re-measured and changes in the fair value will be recorded in the consolidated Statements of Operations.
The Optional Redemption liability fair value was originally valued at $6,375 and was re-measured at fair value to be $0 at December
31, 2018. During the years ended December 31, 2018 and 2017, the Company recorded a gain of $6,375 and $0, respectively, on Optional
Redemption valuation.
The fair value of the embedded derivative
liability is measured in accordance with ASC 820 “Fair Value Measurement”, incorporating the following inputs:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
47.5
|
%
|
Risk-free interest rate
|
|
|
2.45
|
%
|
|
|
1.53
|
%
|
Expected term of options (years)
|
|
|
0.3
|
|
|
|
0.5
|
|
Stock price
|
|
$
|
0.01
|
|
|
$
|
0.12
|
|
Conversion price
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
Purchaser Conversion
The November 2017 Purchaser has the right
at any time after the November 2017 Original Issue Date until the outstanding balance of the Note has been paid in full, to convert
all or any part of the outstanding balance into shares (“November 2017 Purchaser Conversion Shares”) of the Company’s
common stock, of the portion of the outstanding balance being converted (the “November 2017 Conversion Amount”) divided
by the November 2017 Purchaser Conversion Price of $0.08, subject to potential future adjustments described below. If the total
outstanding balance of the November 2017 Note were convertible as of December 31, 2018, the November 2017 Note would have been
convertible into 3,593,776 shares of our common stock.
The Company evaluated the note under the
requirements of ASC 480 “Distinguishing Liabilities From Equity” and concluded that the Note does not fall within the
scope of ASC 480. The Company next evaluated the November 2017 Note under the requirements of ASC 815 “Derivatives and Hedging”.
Due to the existence of the anti-dilution provision which reduces the November 2017 Purchaser Conversion Price in the event of
subsequent dilutive issuances by the Company below the November 2017 Purchaser Conversion Price as described above, the November
2017 Purchaser Conversion feature is not indexed to our common stock. The Company also evaluated the embedded derivative criteria
in ASC 815, and concluded that the Purchaser Conversion feature meets all of the embedded derivative criteria in ASC 815, and therefore,
the November 2017 Purchaser Conversion feature meets the definition of an embedded derivative that should be separated from the
note and accounted for as a derivative liability.
The embedded derivative was recorded as
a derivative liability on the consolidated Balance Sheet at its fair value of $165,000 at the date of issuance. At each subsequent
reporting date, the fair value of the embedded derivative liability will be remeasured and changes in the fair value will be recorded
in the consolidated Statements of Operations. At December 31, 2018, the embedded derivative was re-measured at fair value that
was determined to be $0. During the years ended December 31, 2018 and 2017, the Company recorded a gain of $75,000 and $97,000
on embedded derivative re-valuation.
On November 16, 2017, the November 2017
Notes were modified in accordance with ASC 470-50-40 and ASC 815 and the Company re-measured the embedded derivative at fair value,
which was determined to be $155,000 and recorded a modification of derivative liability charge of $5,000.
On January 25, 2018, the November 2017
Notes, November 2016 Notes, and December 2015 Notes were again modified in accordance with ASC 470-50-40 and ASC 815 in which the
Company issued a total of 2,395,650 restricted common shares, valued at $263,522 (based on the Company’s stock price on the
measurement date) in consideration of the maturity date of the outstanding November 2017, November 2016, and December 2015 convertible
notes being extended to December 31, 2018. The Company re-measured the embedded derivative at fair value just prior to and subsequent
to the modification and recorded an extinguishment of debt of $12,000 in the year ended December 31, 2018. In addition, the value
of the restricted common shares of $263,522 was recorded as an extinguishment of debt in the year ended December 31, 2018.
The fair value of the embedded derivative
liability is measured in accordance with ASC 820 “Fair Value Measurement”, using “Black Scholes Merton Method”
and “Monte Carlo Method” modeling as of December 31, 2018 and 2017, respectively, incorporating the following inputs:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
47.5
|
%
|
Risk-free interest rate
|
|
|
2.45
|
%
|
|
|
1.53
|
%
|
Expected term of options (years)
|
|
|
0.3
|
|
|
|
0.5
|
|
Stock price
|
|
$
|
0.01
|
|
|
$
|
0.12
|
|
Conversion price
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
November 2017 Purchaser Warrants
The November 2017 Purchaser Warrants allow
the November 2017 Purchaser to purchase up to a number of shares of common stock equal to 100% of such purchaser’s Note principal
amount divided by $0.08, with a per share exercise price equal to $0.15, subject to adjustment.
The term of the Purchaser Warrants is at
any time on or after the six (6) month anniversary of the November 2017 Original Issue Date and on or prior to the five (5) year
anniversary of the November 2017 Initial Trading Date of our common stock on a Trading Market.
The exercise price of the November 2017
Purchaser Warrants is $0.15 per share of our common stock, as may be adjusted from time to time pursuant to the antidilution provisions
of the November 2017 Purchaser Warrants.
The November 2017 Purchaser Warrants are
exercisable by the November 2017 Purchaser in whole or in part, as either a cash exercise or as a “cashless” exercise.
The Company evaluated the November 2017
Warrants under ASC 480 “Distinguishing Liabilities From Equity” and ASC 815 “Derivatives and Hedging”.
Due to the existence of the antidilution provision, which reduces the November 2017 Exercise Price and November 2017 Conversion
Price in the event of subsequent November 2017 Dilutive Issuances, the November 2017 Purchaser Warrants are not indexed to our
common stock, and the Company has determined that the November 2017 Purchaser Warrants meet the definition of a derivative under
ASC 815. Accordingly, the November 2017 Purchaser Warrants were recorded as derivative liabilities in the consolidated Balance
Sheet at their fair value of $290,612 at the date of issuance. At each subsequent reporting date, the fair value of the Purchaser
Warrants will be remeasured and changes in the fair value will be reported in the consolidated Statements of Operations. On November
16, 2017, the November 2017 Warrants were modified in accordance with ASC 470-50-40 and ASC 815 which eliminated the antidilution
provision of the exercise price, fixed the exercise price at $0.15 per share, and fixed the number of shares the warrants can be
exercised into; thereby eliminating the requirement for derivative accounting and liability classification. As a result, immediately
prior to the modification, the Company recognized a loss of $181,896 to change in fair value of warrant liabilities under Other
(income) expense in the accompanying consolidated Statements of Operations comprised of:
|
|
|
2017 Change in Fair Value
of Warrant Liability
|
|
|
|
|
|
|
|
November 2017 Note
|
|
|
$
|
(19,938
|
)
|
November 2016 Note
|
|
|
|
74,514
|
|
December 2015 Note
|
|
|
|
127,320
|
|
Total
|
|
|
$
|
181,896
|
|
Subsequent to the modification, the Company
recognized a loss of $238,935 to modification of warrants and derivatives in the accompanying consolidated Statements of Operations
comprised of:
|
|
|
2017 Modification of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant Liability
|
|
|
Derivative Liability
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 2017 Note
|
|
|
$
|
13,819
|
|
|
$
|
(5,000
|
)
|
|
$
|
8,819
|
|
November 2016 Note
|
|
|
|
28,993
|
|
|
|
15,301
|
|
|
|
44,294
|
|
December 2015 Note
|
|
|
|
182,173
|
|
|
|
3,649
|
|
|
|
185,822
|
|
Total
|
|
|
$
|
224,985
|
|
|
$
|
13,950
|
|
|
$
|
238,935
|
|
In addition, the warrant re-valuation was
reclassified to additional paid-in-capital resulting in a warrant liability of $0 as of November 16, 2017. The reclassification
to additional paid-in-capital is comprised of:
|
|
|
|
|
|
|
|
2017 Reclassification of
Warrant liability to Equity
|
|
|
|
|
|
|
|
November 2017 Note
|
|
|
$
|
284,493
|
|
November 2016 Note
|
|
|
|
284,493
|
|
December 2015 Note
|
|
|
|
853,473
|
|
Total
|
|
|
$
|
1,422,459
|
|
The fair value of the November 2017 Purchaser
Warrants is measured in accordance with ASC 820 “Fair Value Measurement”, using “Monte Carlo simulation”
modeling, incorporating the following inputs:
|
|
December 31, 2017
|
|
|
November 10, 2017
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
55.0
|
%
|
Risk-free interest rate
|
|
|
2.07
|
%
|
|
|
2.06
|
%
|
Expected term of options (years)
|
|
|
0.5
|
|
|
|
1.5
|
|
Stock price
|
|
$
|
0.12
|
|
|
$
|
0.20
|
|
Exercise price
|
|
$
|
0.15
|
|
|
$
|
0.08
|
|
November 2017 Purchaser Common Stock
The November 2017 Purchasers were issued
a total of 833,354 shares of the Company’s common stock, valued at $163,171 (based on the stock price on the date of issuance).
Debt Discount
The Company issued the November 2017 Notes
with warrants and conversion features that require liability treatment under ASC 815. As such, the proceeds of the notes were allocated,
based on fair values, as follows: original issue discount of $37,497, $163,171 to the common shares issued; $290,612 to the warrants
granted; and $165,000 to the embedded derivative, resulting in a debt discount to such notes of $287,502 with the remaining amount
of approximately $369,000 expensed at inception of the note. The debt discount is accreted over the term of the convertible notes
to interest expense in the accompanying consolidated Statements of Operations.
On January 25, 2018, the November 2017
Notes were modified in accordance with ASC 470-50-40 and ASC 815. As a result, the Company recorded the elimination of debt discount
of $224,904 to extinguishment of debt in the consolidated Statements of Operations during the year ended December 31, 2018 with
a debt discount of $0 as of December 31, 2018.
November 2016
As of December 31, 2016, the Company previously
entered into a Securities Purchase Agreement (the “November 2016 Purchase Agreement”) with respect to the sale and
issuance to certain institutional investors Alpha Capital Anstalt and Brio Capital Master Fund Ltd. (collectively “November
2016 Purchasers”) of up to (i) 833,354 shares of the Company’s Common Stock (the “November 2016 Incentive Shares”);
(ii) $287,502 aggregate principal amount of Secured Convertible Notes (the “November 2016 Notes”) and (iii) Common
Stock Purchase Warrants to purchase up to an aggregate of 3,593,775, as amended, shares of the Company’s Common Stock (the
“November 2016 Warrants”). The November 2016 Incentive Shares, November 2016 Notes and November 2016 Warrants were
issued on November 10, 2016 (the “November 2016 Original Issue Date”). November 2016 Purchasers received (i) November
2016 Incentive Shares at the rate of 2.8986 November 2016 Incentive Shares for each $1.00 of November 2016 Note principal issued
to such November 2016 Purchaser; (ii) a November 2016 Note with a principal amount of $1.00 for each $0.86956 for each $1.00 paid
by each purchaser for such purchaser’s November 2016 Note; and (iii) November 2016 Warrants to purchase up to a number of
shares of Common Stock equal to 100% of such purchaser’s November 2016 Note principal amount divided by $0.12 (“Purchaser
Conversion Price”), the conversion price in effect on the Initial Closing Date, as amended on May 30, 2017 to $0.08, with
a per share exercise price equal to $0.30, subject to adjustment. The aggregate cash subscription amount received by the Company
from the purchasers for the issuance of the November 2016 Incentive Shares, November 2016 Notes and November 2016 Warrants was
approximately $244,945 (the “Subscription Amount”) which was issued at a $42,557 original issue discount from the face
value of the Note.
The November 2016 Notes mature on March
31, 2019, as amended on January 2, 2019, and provide for interest to accrue at an interest rate equal to the lesser of 15% per
annum or the maximum rate permitted under applicable law after the occurrence of any event of default as provided in the November
2016 Notes. At any time after the November 2016 Original Issue Date, the holders, at their option, may convert the outstanding
principal balance and accrued interest into shares of our Common Stock. The initial conversion price for the principal and interest
in connection with voluntary conversions by a holder of a Note was $0.12 per share, as amended on May 30, 2017 to $0.08, subject
to adjustment as provided therein. Each November 2016 Note, for example, is subject to adjustment upon certain events such as stock
splits and has full ratchet anti-dilution protections for issuance of securities by us at a price that is lower than the conversion
price. Each November 2016 Note also contains certain negative covenants, including prohibitions on incurrence of indebtedness,
liens, charter amendments, dividends, redemption. None of the holders of the November 2016 Note have the right to convert any portion
of their November 2016 Note if it (together with its affiliates) would beneficially own in excess of 9.99% of the number of shares
of Common Stock outstanding immediately after giving effect to the exercise. The November 2016 Notes include customary events of
default, including, among other things, payment defaults, covenant breaches, certain representations and warranties, certain events
of bankruptcy, liquidation and suspension of the Company’s Common Stock from trading. If such an event of default occurs,
the holders of the November 2016 Notes may be entitled to take various actions, which may include the acceleration of amounts due
under the November 2016 Notes and accrual of interest as described above. The November 2016 Notes are collectively collateralized
by substantially all of the Company’s assets and guarantees of payment of the November 2016 Notes have also been delivered
by Joseph Segelman, the Chief Executive Officer and President of the Company, and Australian Sapphire Corporation (“ASC”),
a shareholder of the Company which is wholly-owned by Joseph Segelman, guaranteed payment of all amounts owed under the November
2016 Notes, subject to the terms of such guaranty agreements.
The November 2016 Purchase Agreement
is
being entered into in accordance with the halachically accepted exemptions on the paying of interest payments in business transactions
known as “heter iska”.
The Company
is still accounting for the interest
in accordance with GAAP.
As a result of the failure to timely file
our 2016 Form 10-K for the year ended December 31, 2016 and our Form 10-Q for the three month period ended March 31, 2017, the
November 2016 and December 2015 Notes were in default. On May 30, 2017, the Company entered into a Second Consent, Waiver and Modification
Agreement (the “Agreement”) with certain purchasers of convertible promissory notes (the “Notes”) pursuant
to securities purchase agreements dated December 23, 2015 and November 10, 2016, which were amended pursuant to a Consent, Waiver
and Modification Agreement dated October 13, 2016. The waivers contained in the Agreement were related to a waiver of the right
to participate in additional offerings by the Company, allowing shares of the Company’s common stock to be issued pursuant
to a private offering at a price of not less than $0.08 per share as well as warrants exercisable for a period of five years at
$0.15 per share, as amended on November 16, 2017, adjusting the conversion price of the Notes issued to the purchasers to $0.08
per share, extending the maturity date of the December 23, 2015 convertible promissory notes to December 31, 2018 and waiving default
provisions listed in the Notes related to the Company’s failure to timely file its Form 10-K for the year ended December
31, 2016 and the Form 10-Q for the three month period ended March 31, 2017. Based on ASC 470-50-40,
Extinguishments of Debt
,
the Company recognized $691,371 as an extinguishment of debt under Other (income) expense in the accompanying consolidated Statements
of Operations for the year ended December 31, 2017. The extinguishment of debt is comprised of changes in the fair value of warrant
and derivative liabilities due to the amendment of the notes that were measured immediately prior to and subsequent to the amendment
that resulted in extinguishment loss of $176,022 for the December 2015 Purchaser Warrants, $75,648 for the November 2016 Purchaser
Warrants, $183,250 for the December 2015 Purchaser Conversion Shares, and $41,842 for the November 2016 Purchaser Conversion Shares,
as well as $178,409 for the unamortized debt discount associated with the November 2016 Notes and $36,200 for the unamortized debt
discount associated with the December 2015 Notes.
Optional Redemption
The November 2016 Notes provide that commencing
six (6) months after the November 2016 Original Issue Date, the Company will have the option of prepaying the outstanding principal
amount of the November 2016 Notes (an “November 2016 Optional Redemption”), in whole or in part, by paying to the holders
a sum of money in cash equal to one hundred percent (100%) of the principal amount to be redeemed, together with accrued but unpaid
interest thereon, if any, and any and all other sums due, accrued or payable to the holder arising under the November 2016 Note
through the November 2016 Redemption Payment Date and 2.8986 shares of the Company’s Common Stock for each $1.00 of November
2016 Note principal amount being redeemed. A Notice of Redemption, if given, may be given on the first Trading Day following twenty
(20) consecutive Trading Days during which all of the “Equity Conditions”, as defined, have been in effect.
The Company evaluated the Optional Redemption
in ASC 815, and concluded that the Optional Redemption meets the criteria in ASC 815, and therefore, is accounted for as a liability.
As of December 31, 2018 and 2017, the Optional
Redemption was recorded as a derivative liability on the consolidated Balance Sheet using the “Black Scholes Merton Method”
and “Monte Carlo Method” modeling, respectively, and at each subsequent reporting date, the fair value of the Optional
Redemption liability will be re-measured and changes in the fair value will be recorded in the consolidated Statements of Operations.
The Optional Redemption liability fair value was originally valued at $35,015 and was re-measured at fair value to be $0 at December
31, 2018. During the years ended December 31, 2018 and 2017, the Company recorded a gain of $38,960 and a loss of $34,643, respectively,
on Optional Redemption valuation in the change in fair value of derivative liabilities in the accompanying consolidated Statements
of Operations.
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
47.5
|
%
|
Risk-free interest rate
|
|
|
2.45
|
%
|
|
|
1.53
|
%
|
Expected term of options (years)
|
|
|
0.3
|
|
|
|
0.5
|
|
Stock price
|
|
$
|
0.01
|
|
|
$
|
0.12
|
|
Conversion price
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
Purchaser Conversion
The November 2016 Purchaser has the right
at any time after the November 2016 Original Issue Date until the outstanding balance of the Note has been paid in full, to convert
all or any part of the outstanding balance into shares (“November 2016 Purchaser Conversion Shares”) of the Company’s
common stock, of the portion of the outstanding balance being converted (the “November 2016 Conversion Amount”) divided
by the November 2016 Purchaser Conversion Price of $0.08, as amended on May 30, 2017, subject to potential future adjustments described
below. If the total outstanding balance of the November 2016 Note were convertible as of December 31, 2017, the November 2016 Note
would have been convertible into 3,593,775 shares of our common stock.
The Company evaluated the note under the
requirements of ASC 480 “Distinguishing Liabilities From Equity” and concluded that the Note does not fall within the
scope of ASC 480. The Company next evaluated the November 2016 Note under the requirements of ASC 815 “Derivatives and Hedging”.
Due to the existence of the anti-dilution provision which reduces the November 2016 Purchaser Conversion Price in the event of
subsequent dilutive issuances by the Company below the November 2016 Purchaser Conversion Price as described above, the November
2016 Purchaser Conversion feature is not indexed to our common stock. The Company has concluded that the Purchaser Conversion feature
meets all of the embedded derivative criteria in ASC 815, and therefore, the November 2016 Purchaser Conversion feature meets the
definition of an embedded derivative that should be separated from the note and accounted for as a derivative liability.
The embedded derivative was recorded as
a derivative liability on the consolidated Balance Sheet at its fair value of $32,016 at the date of issuance. At each subsequent
reporting date, the fair value of the embedded derivative liability will be remeasured and changes in the fair value will be recorded
in the consolidated Statements of Operations. At December 31, 2018, the embedded derivative was re-measured at fair value that
was determined to be $0. During the years ended December 31, 2018 and 2017, the Company recorded a gain of $75,000 and $14,088,
respectively, on embedded derivative re-valuation.
On January 25, 2018, the November 2017
Notes, November 2016 Notes, and December 2015 Notes were again modified in accordance with ASC 470-50-40 and ASC 815 in which the
Company issued a total of 2,395,650 restricted common shares, valued at $263,522 (based on the Company’s stock price on the
measurement date) in consideration of the maturity date of the outstanding November 2017, November 2016, and December 2015 convertible
notes being extended to December 31, 2018. The Company re-measured the embedded derivative at fair value just prior to and subsequent
to the modification and recorded an extinguishment of debt of $12,000 in the year ended December 31, 2018. In addition, the value
of the restricted common shares of $263,522 was recorded as an extinguishment of debt in the year ended December 31, 2018.
The fair value of the embedded derivative
liability is measured in accordance with ASC 820 “Fair Value Measurement”, using “Monte Carlo Method” modeling
incorporating the following inputs:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
47.5
|
%
|
Risk-free interest rate
|
|
|
2.45
|
%
|
|
|
1.53
|
%
|
Expected term of options (years)
|
|
|
0.3
|
|
|
|
0.5
|
|
Stock price
|
|
$
|
0.01
|
|
|
$
|
0.12
|
|
Conversion price
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
November 2016 Purchaser Warrants
The November 2016 Purchaser Warrants allow
the November 2016 Purchaser to purchase up to a number of shares of common stock equal to 100% of such purchaser’s Note principal
amount divided by $0.08, as amended on May 30, 2017, with a per share exercise price equal to $0.15, as amended on November 16,
2017, subject to adjustment.
The term of the Purchaser Warrants is at
any time on or after the six (6) month anniversary of the November 2016 Original Issue Date and on or prior to the five (5) year
anniversary of the November 2016 Initial Trading Date of our common stock on a Trading Market.
The exercise price of the November 2016
Purchaser Warrants is $0.15, as amended on November 16, 2017, per share of our common stock, as may be adjusted from time to time
pursuant to the antidilution provisions of the November 2016 Purchaser Warrants.
The November 2016 Purchaser Warrants are
exercisable by the November 2016 Purchaser in whole or in part, as either a cash exercise or as a “cashless” exercise.
The Company evaluated the November 2016
Warrants under ASC 480 “Distinguishing Liabilities From Equity” and ASC 815 “Derivatives and Hedging”.
Due to the existence of the antidilution provision, which reduces the November 2016 Exercise Price and November 2016 Conversion
Price in the event of subsequent November 2016 Dilutive Issuances, the November 2016 Purchaser Warrants are not indexed to our
common stock, and the Company has determined that the November 2016 Purchaser Warrants meet the definition of a derivative under
ASC 815. Accordingly, the November 2016 Purchaser Warrants were recorded as derivative liabilities in the consolidated Balance
Sheet at their fair value of $108,597 at the date of issuance. At each subsequent reporting date, the fair value of the Purchaser
Warrants will be remeasured and changes in the fair value will be reported in the consolidated Statements of Operations. On November
16, 2017, the November 2016 Warrants were modified in accordance with ASC 470-50-40 and ASC 815 which eliminated the antidilution
provision of the exercise price, fixed the exercise price at $0.15 per share, and fixed the number of shares the warrants can be
exercised into; thereby eliminating the requirement for derivative accounting and liability classification. As a result, immediately
prior to the modification, the Company recognized a loss of $181,896 to change in fair value of warrant liabilities under Other
(income) expense in the accompanying consolidated Statements of Operations comprised of:
|
|
|
2017 Change in Fair Value
of Warrant Liability
|
|
|
|
|
|
|
|
November 2017 Note
|
|
|
$
|
(19,938
|
)
|
November 2016 Note
|
|
|
|
74,514
|
|
December 2015 Note
|
|
|
|
127,320
|
|
Total
|
|
|
$
|
181,896
|
|
Subsequent to the modification, the Company
recognized a loss of $238,935 to modification of warrants and derivatives in the accompanying consolidated Statements of Operations
comprised of:
|
|
|
2017 Modification of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant Liability
|
|
|
Derivative Liability
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 2017 Note
|
|
|
$
|
13,819
|
|
|
$
|
(5,000
|
)
|
|
$
|
8,819
|
|
November 2016 Note
|
|
|
|
28,993
|
|
|
|
15,301
|
|
|
|
44,294
|
|
December 2015 Note
|
|
|
|
182,173
|
|
|
|
3,649
|
|
|
|
185,822
|
|
Total
|
|
|
$
|
224,985
|
|
|
$
|
13,950
|
|
|
$
|
238,935
|
|
In addition, the warrant re-valuation was
reclassified to additional paid-in-capital resulting in a warrant liability of $0 as of November 16, 2017. The reclassification
to additional paid-in-capital is comprised of:
|
|
|
2017 Reclassification of
Warrant liability to Equity
|
|
|
|
|
|
|
|
November 2017 Note
|
|
|
$
|
284,493
|
|
November 2016 Note
|
|
|
|
284,493
|
|
December 2015 Note
|
|
|
|
853,473
|
|
Total
|
|
|
$
|
1,422,459
|
|
The fair value of the November 2016 Purchaser
Warrants is measured in accordance with ASC 820 “Fair Value Measurement”, using “Monte Carlo simulation”
modeling, incorporating the following inputs:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
55.0
|
%
|
Risk-free interest rate
|
|
|
2.07
|
%
|
|
|
1.93
|
%
|
Expected term of options (years)
|
|
|
0.5
|
|
|
|
1.5 - 5
|
|
Stock price
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
Exercise price
|
|
$
|
0.15
|
|
|
$
|
0.30
|
|
November 2016 Purchaser Common Stock
The November 2016 Purchasers were issued
a total of 833,354 shares of the Company’s common stock, valued at $100,002 (based on the stock price on the date of issuance).
As of December 31, 2016, the total proceeds
of $244,945 previously received by the Company for the November 2016 Note, November 2016 Purchaser Common Stock, and November 2016
Purchaser Warrants, was allocated first to the November 2016 Purchaser Common Stock, November 2016 Purchaser Warrants, and embedded
derivative liabilities at their initial fair values determined at the issuance date. Since the difference between the full fair
value of November 2016 Purchaser Common Stock, November 2016 Purchaser Warrants, and embedded derivative liabilities of $240,615
was less than the proceeds of $244,945, no additional amounts were recorded.
Debt Discount
The Company issued the November 2016 Notes
with warrants and conversion features that require liability treatment under ASC 815. As such, the proceeds of the notes were allocated,
based on fair values, as follows: $100,002 to the common shares issued; $108,567 to the warrants granted; $42,557 to the original
issue discount; and $32,016 to the embedded derivative, resulting in a debt discount to such notes of $283,172. The debt discount
is accreted over the term of the convertible notes to interest expense in the accompanying consolidated Statements of Operations.
The Company recorded debt discount accretion
of $0 and $78,313 to interest expense in the consolidated Statements of Operations during the years ended December 31, 2018 and
2017, respectively, and has an unamortized debt discount of $0 as of December 31, 2018.
December 2015
As of December 31, 2016, the Company previously
entered into a Securities Purchase Agreement (the “Purchase Agreement”) with respect to the sale and issuance to certain
institutional investors Alpha Capital Anstalt and Brio Capital Master Fund Ltd. (collectively “Purchasers”) of up to
(i) 2,500,000 shares of the Company’s Common Stock (the “December 2015 Incentive Shares”); (ii) $862,500 aggregate
principal amount of Secured Convertible Notes (the “December 2015 Notes”) and (iii) December 2015 Common Stock Purchase
Warrants to purchase up to an aggregate of 10,781,250, as amended, shares of the Company’s Common Stock (the “December
2015 Warrants”). The December 2015 Incentive Shares, December 2015 Notes and December 2015 Warrants were issued on December
23, 2015 (the “Original Issue Date”). December 2015 Purchasers received (i) December 2015 Incentive Shares at the rate
of 2.8986 December 2015 Incentive Shares for each $1.00 of December 2015 Note principal issued to such December 2015 Purchaser;
(ii) a December 2015 Note with a principal amount of $1.00 for each $0.86956 for each $1.00 paid by each purchaser for such purchaser’s
December 2015 Note; and (iii) December 2015 Warrants to purchase up to a number of shares of Common Stock equal to 100% of such
purchaser’s December 2015 Note principal amount divided by $0.12 (“December 2015 Purchaser Conversion Price”),
the conversion price in effect on the Initial Closing Date, as amended on May 30, 2017 to $0.08, with a per share exercise price
equal to $0.15, as amended on November 16, 2017, subject to adjustment. The aggregate cash subscription amount received by the
Company from the purchasers for the issuance of the December 2015 Incentive Shares, December 2015 Notes and December 2015 Warrants
was approximately $724,500 (the “December 2015 Subscription Amount”) which was issued at a $138,000 original issue
discount from the face value of the December 2015 Note.
The December 2015 Notes mature on March
31, 2019, as amended on January 2, 2019, and provide for interest to accrue at an interest rate equal to the lesser of 15% per
annum or the maximum rate permitted under applicable law after the occurrence of any event of default as provided in the December
2015 Notes. At any time after the December 2015 Original Issue Date, the holders, at their option, may convert the outstanding
principal balance and accrued interest into shares of the Company’s Common Stock. The initial conversion price for the principal
and interest in connection with voluntary conversions by a holder of a December 2015 Note was $0.12 per share, as amended on May
30, 2017 to $0.08, subject to adjustment as provided therein. Each December 2015 Note, for example, is subject to adjustment upon
certain events such as stock splits and has full ratchet anti-dilution protections for issuance of securities by us at a price
that is lower than the conversion price. Each December 2015 Note also contains certain negative covenants, including prohibitions
on incurrence of indebtedness, liens, charter amendments, dividends, redemption. None of the holders of the December 2015 Note
have the right to convert any portion of their December 2015 Note if it (together with its affiliates) would beneficially own in
excess of 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to the exercise. The December
2015 Notes include customary events of default, including, among other things, payment defaults, covenant breaches, certain representations
and warranties, certain events of bankruptcy, liquidation and suspension of the Company’s Common Stock from trading. If
such an event of default occurs, the holders of the December 2015 Notes may be entitled to take various actions, which may include
the acceleration of amounts due under the December 2015 Notes and accrual of interest as described above. The December 2015 Notes
are collectively collateralized by substantially all of our assets and guarantees of payment of the December 2015 Notes have also
been delivered by Joseph Segelman, the Chief Executive Officer and President of the Company, and Australian Sapphire Corporation
(“ASC”), a shareholder of the Company which is wholly-owned by Joseph Segelman, guaranteed payment of all amounts owed
under the December 2015 Notes, subject to the terms of such guaranty agreements.
In addition, until one year after the initial
trading date of a Registration Statement which registers all then outstanding or issuable underlying shares, the December 2015
Purchasers shall have the right to participate in an amount of subsequent financing equal to 100% of the December 2015 Purchase
Agreement. As of December 31, 2016, this requirement was waived pursuant to the terms of the Consent, Waiver and Modification Agreement
with certain Purchasers of Purchase Agreement dated December 23, 2015.
The Purchase Agreement
is
being entered into in accordance with the halachically accepted exemptions on the paying of interest payments in business transactions
known as “heter iska”.
The Company
is still accounting for the interest
in accordance with GAAP.
As a result of the failure to timely file
our 2016 Form 10-K for the year ended December 31, 2016 and our Form 10-Q for the three month period ended March 31, 2017, the
November 2016 and December 2015 Notes were in default. On May 30, 2017, the Company entered into a Second Consent, Waiver and Modification
Agreement with certain purchasers of convertible promissory notes (the “Notes”) pursuant to securities purchase agreements
dated December 23, 2015 and November 10, 2016, which were amended pursuant to a Consent, Waiver and Modification Agreement dated
October 13, 2016. The waivers contained in the Agreement were related to a waiver of the right to participate in additional offerings
by the Company, allowing shares of the Company’s common stock to be issued pursuant to a private offering at a price of not
less than $0.08 per share as well as warrants exercisable for a period of five years at $0.15 per share, as amended on November
16, 2017, adjusting the conversion price of the Notes issued to the purchasers to $0.08 per share, extending the maturity date
of the December 23, 2015 convertible promissory notes to December 31, 2018, as amended on November 16, 2017, and waiving default
provisions listed in the Notes related to the Company’s failure to timely file its Form 10-K for the year ended December
31, 2016 and the Form 10-Q for the three month period ended March 31, 2017. Based on ASC 470-50-40,
Extinguishments of Debt
,
the Company recognized $691,371 as an extinguishment of debt under Other (income) expense in the accompanying consolidated Statements
of Operations for the year ended December 31, 2017. The extinguishment of debt is comprised of changes in the fair value of warrant
and derivative liabilities due to the amendment of the notes that were measured immediately prior to and subsequent to the amendment
that resulted in extinguishment loss of $176,022 for the December 2015 Purchaser Warrants, $75,648 for the November 2016 Purchaser
Warrants, $183,250 for the December 2015 Purchaser Conversion Shares, and $41,842 for the November 2016 Purchaser Conversion Shares,
as well as $178,409 for the unamortized debt discount associated with the November 2016 Notes and $36,200 for the unamortized debt
discount associated with the December 2015 Notes.
December 2015 Optional Redemption
The December 2015 Notes provide that commencing
six (6) months after the December 2015 Original Issue Date, the Company will have the option of prepaying the outstanding principal
amount of the December 2015 Notes (an “December 2015 Optional Redemption”), in whole or in part, by paying to the holders
a sum of money in cash equal to one hundred percent (100%) of the principal amount to be redeemed, together with accrued but unpaid
interest thereon, if any, and any and all other sums due, accrued or payable to the holder arising under the December 2015 Note
through the December 2015 Redemption Payment Date and 2.8986 shares of the Company’s Common Stock for each $1.00 of December
2015 Note principal amount being redeemed. A Notice of Redemption, if given, may be given on the first Trading Day following twenty
(20) consecutive Trading Days during which all of the “Equity Conditions”, as defined, have been in effect.
The Company evaluated the Optional Redemption
in ASC 815, and concluded that the Optional Redemption meets the criteria in ASC 815, and therefore, is accounted for as a liability.
As of December 31, 2016, the Optional Redemption
was recorded as a derivative liability on the consolidated Balance Sheet using “Monte Carlo Method” modeling and at
each subsequent reporting date, the fair value of the Optional Redemption liability will be re-measured and changes in the fair
value will be recorded in the consolidated Statements of Operations. The Optional Redemption liability fair value was originally
valued at $199,150 and was re-measured at fair value to be $19,125 at December 31, 2018. During the years ended December 31, 2018
and 2017, the Company recorded a gain of $116,880 and a loss of $19,909 on Optional Redemption valuation, respectively, in the
change in fair value of derivative liabilities in the accompanying consolidated Statements of Operations.
The fair value of the embedded derivative
liability is measured in accordance with ASC 820 “Fair Value Measurement”, using “Black Scholes Merton Method”
and “Monte Carlo Method” modeling as of December 31, 2018 and 2017, respectively, incorporating the following inputs:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
47.5
|
%
|
Risk-free interest rate
|
|
|
2.45
|
%
|
|
|
1.53
|
%
|
Expected term of options (years)
|
|
|
0.3
|
|
|
|
0.5
|
|
Stock price
|
|
$
|
0.01
|
|
|
$
|
0.12
|
|
Conversion price
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
December 2015 Purchaser Conversion
The December 2015 Purchaser has the right
at any time after the December 2015 Original Issue Date until the outstanding balance of the December 2015 Note has been paid in
full, to convert all or any part of the outstanding balance into shares (“December 2015 Purchaser Conversion Shares”)
of the Company’s common stock, of the portion of the outstanding balance being converted (the “December 2015 Conversion
Amount”) divided by the December 2015 Purchaser Conversion Price of $0.08, as amended on May 30, 2017, subject to potential
future adjustments described below. If the total outstanding balance of the Note were convertible as of December 31, 2017, the
December 2015 Note would have been convertible into 10,781,250 shares of our common stock.
The Company evaluated the note under the
requirements of ASC 480 “Distinguishing Liabilities From Equity” and concluded that the December 2015 Note does not
fall within the scope of ASC 480. The Company next evaluated the December 2015 Note under the requirements of ASC 815 “Derivatives
and Hedging”. Due to the existence of the anti-dilution provision which reduces the December 2015 Purchaser Conversion Price
in the event of subsequent dilutive issuances by the Company below the December 2015 Purchaser Conversion Price as described above,
the December 2015 Purchaser Conversion feature is not indexed to our common stock. The Company also evaluated the embedded derivative
criteria in ASC 815, and concluded that the December 2015 Purchaser Conversion feature meets all of the embedded derivative criteria
in ASC 815, and therefore, the December 2015 Purchaser Conversion feature meets the definition of an embedded derivative that should
be separated from the note and accounted for as a derivative liability.
The embedded derivative was recorded as
a derivative liability on the consolidated Balance Sheet using “Monte Carlo Method” modeling and at each subsequent
reporting date, the fair value of the embedded derivative liability will be remeasured and changes in the fair value will be recorded
in the consolidated Statements of Operations. The original fair value of the derivative was $88,983 and at December 31, 2018, the
embedded derivative was re-measured at fair value that was determined to be $0. During the years ended December 31, 2018 and 2017,
the Company recorded a gain of $224,998 and a loss of $320,000 on embedded derivative re-valuation, respectively.
On January 25, 2018, the November 2017
Notes, November 2016 Notes, and December 2015 Notes were again modified in accordance with ASC 470-50-40 and ASC 815 in which the
Company issued a total of 2,395,650 restricted common shares, valued at $263,522 (based on the Company’s stock price on the
measurement date) in consideration of the maturity date of the outstanding November 2017, November 2016, and December 2015 convertible
notes being extended to December 31, 2018. The Company re-measured the embedded derivative at fair value just prior to and subsequent
to the modification and recorded an extinguishment of debt of $35,999 in the year ended December 31, 2018. In addition, the value
of the restricted common shares of $263,522 was recorded as an extinguishment of debt in the year ended December 31, 2018.
The fair value of the embedded derivative
liability is measured in accordance with ASC 820 “Fair Value Measurement”, using “Black Scholes Merton Method”
and “Monte Carlo Method” modeling as of December 31, 2018 and 2017, respectively, incorporating the following inputs:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
47.5
|
%
|
Risk-free interest rate
|
|
|
2.45
|
%
|
|
|
1.53
|
%
|
Expected term of options (years)
|
|
|
0.3
|
|
|
|
0.5
|
|
Stock price
|
|
$
|
0.01
|
|
|
$
|
0.12
|
|
Conversion price
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
December 2015 Purchaser Warrants
The December 2015 Purchaser Warrants allow
the December 2015 Purchaser to purchase up to a number of shares of Common Stock equal to 100% of such purchaser’s Note principal
amount divided by $0.08, as amended on May 30, 2017, with a per share exercise price equal to $0.15, as amended on November 16,
2017, subject to adjustment.
The term of the December 2015 Purchaser
Warrants is at any time on or after the six (6) month anniversary of the December 2015 Original Issue Date and on or prior to the
five (5) year anniversary of the December 2015 Initial Trading Date of the Company’s common stock on a Trading Market.
The exercise price of the December 2015
Purchaser Warrants is $0.15, as amended on November 16, 2017, per share of the Company’s common stock, as may be adjusted
from time to time pursuant to the antidilution provisions of the December 2015 Purchaser Warrants.
The December 2015 Purchaser Warrants are
exercisable by the Purchaser in whole or in part, as either a cash exercise or as a “cashless” exercise.
The Company evaluated the Warrants under
ASC 480 “Distinguishing Liabilities From Equity” and ASC 815 “Derivatives and Hedging”. Due to the existence
of the antidilution provision, which reduces the Exercise Price and Conversion Price in the event of subsequent Dilutive Issuances,
the December 2015 Purchaser Warrants are not indexed to the Company’s common stock, and the Company determined that the December
2015 Purchaser Warrants meet the definition of a derivative under ASC 815.
At each subsequent reporting date, the
fair value of the Purchaser Warrants will be remeasured and changes in the fair value will be reported in the consolidated Statements
of Operations. The original fair value of the warrants were $439,107. On November 16, 2017, the December 2015 Purchaser Warrants
were modified in accordance with ASC 470-50-40 and ASC 815 which eliminated the antidilution provision of the exercise price, fixed
the exercise price at $0.15 per share, and fixed the number of shares the warrants can be exercised into; thereby eliminating the
requirement for derivative accounting and liability classification. As a result, immediately prior to the modification, the Company
recognized a loss of $181,896 to change in fair value of warrant liabilities under Other (income) expense in the accompanying consolidated
Statements of Operations comprised of:
|
|
|
2017 Change in Fair Value
of Warrant Liability
|
|
|
|
|
|
|
|
November 2017 Note
|
|
|
$
|
(19,938
|
)
|
November 2016 Note
|
|
|
|
74,514
|
|
December 2015 Note
|
|
|
|
127,320
|
|
Total
|
|
|
$
|
181,896
|
|
Subsequent to the modification, the Company
recognized a loss of $238,935 to modification of warrants and derivatives in the accompanying consolidated Statements of Operations
comprised of:
|
|
|
2017 Modification of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant Liability
|
|
|
Derivative Liability
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 2017 Note
|
|
|
$
|
13,819
|
|
|
$
|
(5,000
|
)
|
|
$
|
8,819
|
|
November 2016 Note
|
|
|
|
28,993
|
|
|
|
15,301
|
|
|
|
44,294
|
|
December 2015 Note
|
|
|
|
182,173
|
|
|
|
3,649
|
|
|
|
185,822
|
|
Total
|
|
|
$
|
224,985
|
|
|
$
|
13,950
|
|
|
$
|
238,935
|
|
In addition, the warrant re-valuation was
reclassified to additional paid-in-capital resulting in a warrant liability of $0 as of November 16, 2017. The reclassification
to additional paid-in-capital is comprised of:
|
|
|
2017 Reclassification of
Warrant liability to Equity
|
|
|
|
|
|
|
|
November 2017 Note
|
|
|
$
|
284,493
|
|
November 2016 Note
|
|
|
|
284,493
|
|
December 2015 Note
|
|
|
|
853,473
|
|
Total
|
|
|
$
|
1,422,459
|
|
The fair value of the November 2015 Purchaser
Warrants is measured in accordance with ASC 820 “Fair Value Measurement”, using “Monte Carlo simulation”
modeling, incorporating the following inputs:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
47.5
|
%
|
|
|
50.0
|
%
|
Risk-free interest rate
|
|
|
2.07
|
%
|
|
|
1.70
|
%
|
Expected term of options (years)
|
|
|
0.5
|
|
|
|
0.5
|
|
Stock price
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
Exercise price
|
|
$
|
0.15
|
|
|
$
|
0.30
|
|
December 2015 Purchaser Common Stock
The December 2015 Purchasers were issued
a total of 2,500,000 shares of the Company’s common stock, valued at $625,000 (based on the estimated fair value of the stock
on the date of grant).
Debt Discount
The Company issued the December 2015 Notes
with warrants that require liability treatment under ASC 815. As such, the proceeds of the notes were allocated, based on fair
values, as follows: original issue discount of $138,000, $625,000 to the common shares issued, $439,107 to the warrants granted,
and $88,983 to the embedded derivative, resulting in a debt discount to such notes of $862,500 with the remaining amount of approximately
$429,000 expensed at inception of the note. The debt discount is accreted to interest expense over the term of the note.
The Company recorded debt discount accretion
of $0 and $237,660 to interest expense in the consolidated Statements of Operations during the years ended December 31, 2018 and
2017, respectively, and has no unamortized debt discount remaining as of December 31, 2018.
Changes in the derivative liabilities were as follows:
Derivative liabilities:
|
|
|
|
December 31, 2017
|
|
$
|
470,839
|
|
Decrease in fair value
|
|
|
(530,838
|
)
|
Change due to extinguishment of debt
|
|
|
59,999
|
|
December 31, 2018
|
|
$
|
—
|
|
|
|
|
|
|
NOTE 9 – SHORT TERM
NOTES
PAYABLE
On
June 30, 2017, the Company entered into a Loan Agreement, a Secured Promissory Note (“Note”) and a personal guarantee
with respect to the funding by certain institutional investors
Alpha Capital Anstalt and Brio Capital Master Fund Ltd.
of
up to $1,125,000 in debt. The Company, until December 31, 2018, has the ability to request quarterly advances of up to the lesser
of (i) $250,000 or (ii) one sixth (1/6) of the revenue reported in the Form 10-Q or 10-K for the previous calendar quarter or previous
fiscal year, whichever is most recent, provided that such revenue generated a profit of at least 10 percent (10%). The investors
may advance the funds in their absolute discretion. In June 2017, the Company was advanced $125,005. The Note shall become due
and payable 18 months from each advance date. The Company must make payments to the investors in an amount of $350, including interest
at 10% per annum, every business day from the date of the first advance, which shall be increased proportionately upon each advance.
The Note is secured with the assets of the Company pursuant to a security agreement dated December 23, 2015. In addition, the Company’s
CEO has personally guaranteed the Note. As additional consideration for the loan, the investors received 1,500,000 shares of restricted
common stock, in aggregate, valued at $105,000
(based on our stock price on the date of grant) along with $2,500 in cash
for reimbursement of expenses incurred and recorded as debt issuance costs with a balance at June 30, 2017 of $107,500
.
The note payable balance net of debt discount of $27,750 at December 31, 2018 was $103,770 with an availability of $880,000 on
the Note.
In January 2018, the Company was advanced
an additional $60,010 under the Note with no additional shares issued. In March 2018, the Company was advanced an additional $60,000
under the Note with 600,000 additional shares to be issued. As of March 31, 2018, the Company had not issued the shares and recorded
a common stock payable and a debt discount of $55,500 (based on our stock price on the date of grant). The shares were issued in
April 2018 and the shares were reclassed from common stock payable to equity. The debt discount is accreted to interest expense
over the term of the note.
The Agreement
and
Note are being entered into in accordance with the halachically accepted exemptions on the paying of interest payments in business
transactions known as “heter iska”.
The Company
is still accounting for
the interest in accordance with GAAP.
The Company borrows funds from third parties
from time to time for working capital purposes with an upfront fee of approximately $400, paying no interest, and with no length
of repayment. For the year ended December 31, 2018, the Company had borrowings of $35,000 and repayments of $35,171 for a balance
due of $0 at December 31, 2018. Repayments are based on 30% of amounts processed through PayPal until the balance is paid.
NOTE 10 –
stock
transactionS
Preferred Stock
On March 17, 2017, the Company held an
annual meeting of its shareholders. At the annual meeting, the majority shareholders of the Company approved an amendment to the
articles of incorporation, authorizing one share of Series A Preferred stock, which would be issued to Joseph Segelman. The share
of Series A Preferred stock shall vote together as a single class with the holders of the Company’s common stock, and the
holders of any other class or series of shares entitled to vote with the common stock, with the holder of the Series A Preferred
stock being entitled to fifty-one percent (51%) of the total votes on all such matters regardless of the actual number of shares
of Series A Preferred stock then outstanding, and the holders of the common stock and any other shares entitled to vote shall be
entitled to their proportional share of the remaining forty-nine percent (49%) of the total votes based on their respective voting
power. The share of Series A Preferred stock shall not be entitled to receive any distributions in the event of any liquidation,
dissolution or winding up of the Company, either voluntary or involuntary. The share of Series A Preferred stock shall not be eligible
to receive dividends. The class of Series A Preferred stock shall be automatically cancelled ten (10) years after the initial issue
date of such Series A Preferred stock.
On May 19, 2017, the Company received the
file stamped certificate of amendment from the state of Delaware, which lists an effective date of March 20, 2017. On May 23, 2017,
the Company issued the share of Series A Preferred stock to Joseph Segelman,
valued at $270,000
(based on the estimated fair value of the stock and control premium on the date of grant), which will allow Mr. Segelman
to maintain fifty-one percent (51%) voting control of the Company regardless of how many shares of common stock are issued and
outstanding. Therefore, the Company considers the Series A Preferred stock to be issued on May 23, 2017.
Common Stock
In November 2018, the Company issued 8,000,000 restricted common
shares for payment of accounts payable of $117,600.
In November 2018, we issued 2,500,000 restricted
common shares in consideration for the modification of the existing short term convertible notes.
In October 2018, the Company issued 150,000
restricted common shares for services rendered, valued at $2,685 (based on our stock price on the date of grant).
During the year ended December 31, 2018,
the Company issued 4,750,000 restricted common shares for services rendered of $126,680 (based on our stock price on the measurement
date).
On September 1, 2018, the Company issued
5,000,000 restricted common shares for payment of accounts payable of $88,165.
On July 8, 2018, the Company issued 100,000
restricted common shares to an Advisor, valued at $2,390 (based on the estimated fair value of the stock on the measurement date)
for outside advisory and consulting services pursuant to the Company’s 2015 Equity Incentive Plan
In
January and February 2018, the Company entered into Securities Purchase Agreements with respect to the sale and issuance to Crossover
Capital Fund II, LLC totaling (i) 833,332 shares of the Company’s Common Stock; (ii) 3,000,000 redeemable shares, (iii) $294,000
aggregate principal amount of a convertible promissory note and (iv) Common Stock Purchase Warrants to purchase up to an aggregate
of 1,960,000 shares of the Company’s common stock for a net aggregate consideration of $250,000 cash.
In January 2018, we issued 2,395,650 restricted
common shares, valued at $263,522 (based on the Company’s stock price on the measurement date), in consideration for the
modification of the existing short term convertible notes and recorded as an extinguishment of debt.
On
June 30, 2017, the Company entered into an Agreement and Note by certain institutional investors
Alpha Capital Anstalt and
Brio Capital Master Fund Ltd.
of up to $1,125,000 in debt. As additional consideration for
the loan, the investors received 1,500,000 shares of restricted common stock, in aggregate, valued at $105,000
(based on
our stock price on the date of grant) (see Note 9)
.
During the year ended December 31, 2017,
the Company issued 6,861,768 restricted common shares for services rendered of $755,884 (based on our stock price on the measurement
date).
During the year ended December 31, 2017,
the Company issued a total of 175,200 restricted common shares to its employees, valued at $16,920 (based on our stock price on
the date of grant) as compensation pursuant to the Company’s 2015 Equity Incentive Plan.
During the year ended December 31, 2017,
the Company issued 200,000 restricted common shares to an Advisor, valued at $20,000 (based on the estimated fair value of the
stock on the measurement date) for outside advisory and consulting services pursuant to the Company’s 2015 Equity Incentive
Plan (see Note 11).
On July 14, 2017, the Company entered into
a contract with a third party for consulting services. The consulting agreement provides for the consultant to receive 487,500
shares for entering into the agreement that were valued at $34,125 (based on our stock price on the date of grant) and 162,500
restricted common shares each month beginning month four through month twelve. During 2018, the consultant vested in 568,750 shares,
valued at $101,156 (based on our stock price on the date of each grant). The contract was terminated at January 26, 2018.
On January 22, 2017, the Company issued
150,000 restricted common shares for payment of accounts payable of $14,985.
NOTE 11 –
STOCK
BASED COMPENSATION
2015 Equity
Incentive Plan
As of December
31, 2018, the board of directors and shareholders of the Company previously authorized the adoption and implementation of the Company’s
2015 Equity Incentive Plan (the “2015 Plan”). The principal purpose of the 2015 Plan is to attract, retain and motivate
employees, officers, directors, consultants, agents, advisors and independent contractors of the Company and its related companies
by providing them the opportunity to acquire a proprietary interest in the Company and to link their interests and efforts to the
long-term interests of the Company’s shareholders. Under the 2015 Plan, an aggregate of 20,000,000 shares of the Company’s common
stock have initially been reserved for issuance pursuant to a variety of stock-based compensation awards, including stock options,
stock appreciation rights, stock awards, restricted stock, restricted stock units and other stock and cash-based awards. The exercise
price for each option may not be less than fair market value of the common stock on the date of grant, and shall vest as determined
by the Company’s board of directors but shall not exceed a ten-year period.
In April 2018, the Company issued a total
of 98,000 restricted common shares to its employees, valued at $7,742 (based on our stock price on the date of grant) as compensation
pursuant to the Company’s 2015 Equity Incentive Plan.
In July 2018,
the Company issued a total of 100,000 restricted common shares, valued at $2,390 (based on our stock price on the date of grant),
to a member of its advisory committee (“Advisors”) as compensation pursuant to the Company’s 2015 Equity Incentive
Plan.
As of December
31, 2018, the Company previously issued a total of 100,000 restricted common shares to a member of its advisory committee (“Advisor”),
valued at $15,000 (based on the estimated fair value of the stock on the date of grant) for outside advisory and consulting services
pursuant to the Company’s 2015 Equity Incentive Plan. One-twelfth (1/12) of the shares will be earned each month. The Company
will revalue the shares at each vesting period and recognize expense for the portion of the shares earned. The Company recognized
compensation expense of $13,750 and $1,250 under general and administrative expenses in the accompanying consolidated Statements
of Operations for the years ended December 31, 2018 and 2017, respectively, with $0 remaining to be amortized. As of December 31,
2018, the Advisor had vested in 100,000 shares with 0 shares remaining to vest.
As of December
31, 2018, the Company issued a total of 700,000 restricted common shares to members of its advisory committee (“Advisors”),
valued at $135,000 (based on the estimated fair value of the stock on the date of grant) for outside advisory and consulting services
pursuant8 to the Company’s 2015 Equity Incentive Plan. One-twelfth (1/12) of the shares will be earned each month. The Company
will revalue the shares at each vesting period and recognize expense for the portion of the shares earned. The Company recognized
compensation expense of $13,750 and $41,667 for the years ended December 31, 2018 and 2017 respectively, with $0 remaining to be
amortized, under general and administrative expenses in the accompanying consolidated Statements of Operations. As of December
31, 2018, the Advisors had vested in all 700,000 shares.
As of December
31, 2017, the Company previously granted to its CEO, options to purchase 10,000,000 shares of our common stock under the 2015 Plan,
valued at $2,500,000 (based on the Black Scholes valuation model on the date of grant). The Black-Scholes option-pricing model
used the following weighted average assumptions as of December 31, 2016: (i) no dividend yield for each year, (ii) volatility of
35.6 percent, (iii) risk-free interest rate of 1.87 percent, (iv) stock price of $0.25, (v) exercise price of $0.005, and (vi)
expected life of 6.0 years. The options will vest 50% on the first anniversary of the grant date (“First Year Vest”)
and the remaining 50% of the shares shall vest in twelve (12) equal installments on the first day of each calendar month following
the first anniversary of the Grant Date beginning on June 1, 2016 and ending on June 1, 2017 (“Second Year Vest”),
provided that CEO is continuously employed by the Company from the grant date through such applicable vesting date. Notwithstanding
the foregoing, 100% of the shares of the Company’s common stock subject to the Option shall fully vest if the Company shall
successfully sell all of the shares of its common stock included in the primary offering of such common stock by the Company pursuant
to the registration statement on Form S-1 to be filed with the Securities and Exchange Commission within ninety (90) days of the
Grant Date. The First Year Vest options will amortize to expense over a 12 month period beginning May 2015 through April 2016 and
the Second Year Vest options will amortize to expense over a 24 month period beginning May 2015 through April 2017. The Company
recognized expense of $2,390 and $45,391 for the year ended December 31, 2018 and 2017, respectively, within stock based compensation
– related party in the accompanying consolidated Statement of Operations with no amounts remaining to be recognized.
The following represents a summary of the
Options outstanding at
December 31, 2018
and changes during the period then ended:
|
|
Options
|
|
|
Weighted Average
Exercise Price
|
|
|
Aggregate
Intrinsic Value *
|
|
Outstanding at December 1, 2017
|
|
|
10,000,000
|
|
|
$
|
0.005
|
|
|
$
|
1,100,000
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired/Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at December 31, 2017
|
|
|
10,000,000
|
|
|
$
|
0.005
|
|
|
$
|
1,200,000
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired/Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at December 31, 2018
|
|
|
10,000,000
|
|
|
$
|
0.005
|
|
|
$
|
120,000
|
|
Exercisable at December 31, 2018
|
|
|
10,000,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Expected to be vested
|
|
|
10,000,000
|
|
|
$
|
0.005
|
|
|
$
|
—
|
|
* Based on the Company’s stock price on December
1, 2017, December 31, 2018 and 2017, respectively
NOTE 12 –
Related
Party Transactions
Other than as set forth below, and as disclosed
in Notes 7, 10, 11, and 15, there have not been any transaction entered into or been a participant in which a related person had
or will have a direct or indirect material interest.
Sublease
The Company’s customer service and
distribution facility is subleased at $7,834 per month through CCI for a period of eighteen months. On March 1, 2017, the Company
gave ninety day written notice to terminate the sublease with no costs to terminate the lease. Beginning June 1, 2017, the Company
leases its customer service and distribution facility on a month-to-month basis for $4,000 per month from a third party.
Employment Agreements
The Company previously had a consulting
agreement with its CEO under which he was compensated $120,000 per annum. Beginning June 20, 2013, this contract was to continue
unless and until terminated at any time by either the Company or CEO giving two month notice in writing. Such consulting agreement
was terminated by mutual agreement as of May 1, 2015 and superseded by the employment agreement effective May 1, 2015. The initial
term of employment agreement expired on December 31, 2018. The agreement provides for automatic one-year renewals, unless either
party gives notice of their intention not to extend at least 90 days prior to the expiration of any term. Under this employment
agreement, the CEO receives a minimum annual base salary of $180,000, is eligible to receive an annual performance bonus each year,
if performance goals established by the Company’s board of directors are met, and is entitled to participate in customary
benefit plans. There have been no performance goals established. If the Company terminates the CEO’s employment without cause,
he will be entitled to the following: (i) payment of (x) accrued compensation and unpaid base salary through the date of such termination,
(y) any amounts previously deferred by CEO and (z) the payment or reimbursement for expenses incurred prior to the date of such
termination; (ii) an amount equal to 200% of the base salary and (iii) continued participation, at the Company’s expense,
in the Company’s health and welfare programs for a period of two years after the date of termination. The Company incurred
compensation expense of $180,000 and $180,000 for the years ended December 31, 2018 and 2017, respectively. Deferred compensation
totaling $832,750 as of December 31, 2018, is included in Accrued Compensation in the accompanying consolidated Balance Sheet.
Deferred compensation includes $618,750 related to the employment agreement and $214,000 related to the consulting agreement. In
addition, we incurred employee benefits on behalf of the CEO totaling approximately $9,862 and $16,738 for the years ended December
31, 2018 and 2017, respectively. Employee benefits include health and dental coverage, use of a car, car insurance, and a gym membership.
The Company previously
had a consulting agreement with its secretary and director (“Secretary”) under which she was compensated $60,000 per
annum. Beginning June 20, 2013, this contract was to continue unless and until terminated at any time by either the Company or
Secretary giving two month notice in writing. Such consulting agreement was terminated by mutual agreement as of May 1, 2015 and
superseded by the employment agreement effective May 1, 2015. The initial term of employment agreement expired on December 31,
2018. The agreement provides for automatic one-year renewals, unless either party gives notice of their intention not to extend
at least 90 days prior to the expiration of any term. Under this employment agreement, the Secretary receives a minimum annual
base salary of $80,000. If the Company terminates the Secretary’s employment without cause, she will be entitled to the following:
(i) payment of (x) accrued compensation and unpaid base salary through the date of such termination, (y) any amounts previously
deferred by Secretary and (z) the payment or reimbursement for expenses incurred prior to the date of such termination; (ii) an
amount equal to 50% of the base salary and (iii) continued participation, at the Company’s expense, in the Company’s
health and welfare programs for a period of two years after the date of termination. The Company incurred compensation expense
of $80,000 and $80,000 for the years ended December 31, 2018 and 2017, respectively. Deferred compensation totaling $407,000 as
of December 31, 2018, is included in Accrued Compensation in the accompanying consolidated Balance Sheet. Deferred compensation
includes $293,333 related to the employment agreement and $113,667 related to the consulting agreement. In addition, we incurred
employee benefits on behalf of the Secretary totaling approximately $7,870 and $7,179 for the years ended December 31, 2018 and
2017, respectively. Employee benefits include use of a car and car insurance.
Loan and Advances
During 2018, the Company received no advances
from our CEO/director and incurred business expenses of $1,963,371 (comprised of operating expenses of $1,952,720, inventory purchases
totaling $2,200, website development costs of $5,502, and purchased equipment of $2,950) and had repayments of $1,438,000. We have
a balance owed to the related party of $1,246,805 and $721,434 at December 31, 2018 and 2017, respectively. During 2018, the Company
incurred $123,750 of deferred compensation related to the CEO/director’s employment agreement and $80,000 of deferred compensation
related to the Secretary’s employment agreement. As of December 31, 2018 and 2017, accrued compensation – related party
was $1,239,750 and $1,036,000, respectively.
NOTE 13 – INCOME TAXES
At December 31, 2018, net operating loss
carry forwards for Federal and state income tax purposes totaling approximately $8,215,000 available to reduce future income which,
if not utilized, will begin to expire in the year 2032. There is no income tax affect due to the recognition of a full valuation
allowance on the expected tax benefits of future loss carry forwards based on uncertainty surrounding realization of such assets.
A reconciliation of the statutory income
tax rates and the effective tax rate is as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Statutory U.S. federal rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
State income tax, net of federal benefit
|
|
|
7.0
|
%
|
|
|
7.0
|
%
|
Permanent differences
|
|
|
2.0
|
%
|
|
|
(1.8
|
)%
|
Valuation allowance
|
|
|
(30.0
|
)%
|
|
|
(26.2
|
)%
|
Provision for income taxes
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The tax effects of the temporary differences
and carry forwards that give rise to deferred tax assets consist of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
2,302,880
|
|
|
$
|
1,548,763
|
|
Stock based compensation
|
|
|
1,149,301
|
|
|
|
1,117,072
|
|
Valuation allowance
|
|
|
(3,452,181
|
)
|
|
|
(2,665,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Major tax jurisdictions are the United
States and California. All of the tax years will remain open three and four years for examination by the Federal and state tax
authorities, respectively, from the date of utilization of the net operating loss. There are no tax audits pending.
NOTE 14 – EARNINGS PER SHARE
FASB ASC Topic 260,
Earnings Per Share
,
requires a reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share (EPS) computations.
Basic earnings (loss) per share are computed
by dividing net earnings available to common shareholders by the weighted-average number of common shares outstanding during the
period. Diluted earnings (loss) per share is computed similar to basic earnings per share except that the denominator is increased
to include the number of additional common shares that would have been outstanding if the potential common shares had been issued
and if the additional common shares were dilutive. In periods where losses are reported, the weighted-average number of common
stock outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
Basic and diluted earnings (loss) per share
are the same since net losses for all periods presented and including the additional potential common shares would have an anti-dilutive
effect.
The following table sets forth the computation of basic and
diluted net income per share:
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(2,305,277
|
)
|
|
$
|
(3,845,297
|
)
|
Discontinued operations
|
|
|
(314,997
|
)
|
|
|
(405,967
|
)
|
Net loss attributable to the common stockholders
|
|
$
|
(2,620,274
|
)
|
|
$
|
(4,251,264
|
)
|
|
|
|
|
|
|
|
|
|
Basic weighted average outstanding shares of common stock
|
|
|
65,069,763
|
|
|
|
47,093,401
|
|
Dilutive effect of options and warrants
|
|
|
—
|
|
|
|
—
|
|
Diluted weighted average common stock and common stock equivalents
|
|
|
65,069,763
|
|
|
|
47,093,401
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Net loss per share from continuing operations, basic and diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.08
|
)
|
Net loss per share from discontinued operations, basic and diluted
|
|
|
(0.00
|
)
|
|
|
(0.01
|
)
|
Net loss per share total, basic and diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.09
|
)
|
NOTE 15 – COMMITMENTS AND CONTINGENCIES
Contingent Payments
On December 1, 2016, we acquired substantially
all of the operating assets of CCI. As part of the purchase price of the operating assets of CCI, there is a cash payment of $500,000
contingent upon a future offering and earn out payments for all sales of CCI and RGNP products sold via CCI sales channels for
the 2017, 2018, 2019 and 2020 calendar years. The estimated fair value of the contingent payments totaled $424,511 and was recognized
as a liability in the accompanying consolidated balance sheets as of December 31, 2016. During the years ended December 31, 2018
and 2017, ASK Gold and CCI each earned $11,751 and $41,534, respectively, of earn out payments for a total of $106,570. In addition,
the Company paid $95,020 in reimbursement expenses (“Reimbursement Expenses”) that were the responsibility of CCI and
will be applied against current and future earn out payments to CCI. The Company applied $11,751 and $41,534 of earn out payments
owed to CCI for 2018 and 2017 against the Reimbursement Expenses for a net balance of $41,735 owed by CCI to the Company as of
December 31, 2018 that is recorded in estimated fair value of contingent payments, net in the accompanying consolidated balance
sheets. In 2018, the Company issued 8,000,000 common shares for settlement of amounts owed to ASK Gold of $139,199, As of December
31, 2018, estimated fair value of contingent payments, net was $137,007.
Operating Leases
The Company has month-to month leases for
its headquarters and its sales and marketing, and customer service operations, and its distribution facility. The total rent is
approximately $1,955 per month.
The customer service and distribution facility
was previously located at 1933 S. Broadway. Los Angeles, California. Through June 2018, the Company leased its customer service
and distribution facility on a month-to-month basis for $4,000 per month from a third party.
Rent expense was approximately $40,245
and $99,679 for the years ended December 31, 2018 and 2017, respectively.
Legal
From time to time, various lawsuits and
legal proceedings may arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an
adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of
any legal proceedings or claims that it believes will have a material adverse effect on its business, financial condition or operating
results.
Guarantees
T
he Co
mpa
ny
’
s
Co
n
v
e
rti
b
l
e
N
ote
s
P
a
yab
l
e
are co
ll
at
er
a
li
ze
d
b
y
s
u
b
s
ta
n
t
i
a
ll
y
all
of
th
e
Com
p
a
n
y
’
s
a
s
se
t
s
a
nd
are pe
r
so
na
l
l
y
g
ua
ra
nte
e
d
b
y
th
e Co
m
pan
y
’
s
CE
O an
d
A
u
s
t
r
a
li
an
Sapphire Corpora
t
i
o
n
,
a
s
ha
re
ho
l
der
o
f
t
h
e
Company w
hic
h is wholly
-
o
w
ned
by t
h
e Comp
a
n
y’s
CEO.
NOTE 16 – DISCONTINUED OPERATIONS
AND ASSETS HELD FOR SALE
On January 1, 2019, Reign Brands, Inc.,
a subsidiary of Reign Sapphire Corporation, entered into an Asset Purchase Agreement (the “Agreement”) with Co-Op Jewelers
LLC (“Co-Op”), whereby Reign Brands, Inc. sold operating assets of Reign Brands, Inc., consisting of substantially
all of the assets related to Coordinates Collection (“CCI”). On January 1, 2019 (the “Closing Date”), the
parties executed the Asset Purchase Agreement and the final exhibits.
Upon the closing of the Agreement, Reign
Brands, Inc. sold substantially all of the operating assets of the CCI business, consisting of fixed assets and intellectual property
in exchange for an aggregate of $100,000 in cash. The Agreement contained customary closing conditions.
As a result of the pending sale, the Company
has reclassified CCI as assets and liabilities held for sale as of December 31, 2018 and 2017 and restated December 31, 2017 financial
information for comparable purposes. Discontinued operations during the years ended December 31, 2018 and 2017 consist of the operations
from CCI.
The following tables lists the assets of
discontinued operations and held for sale and liabilities of discontinued operations and held for sale as of December 31, 2018
and 2017 and the discontinued operations for CCI for the years ended December 31, 2018 and 2017:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
$
|
2,096
|
|
|
$
|
9,730
|
|
Total Current Assets of Discontinued Operations
|
|
|
2,096
|
|
|
|
9,730
|
|
Property, Plant and Equipment, net
|
|
|
—
|
|
|
|
1,106,736
|
|
TOTAL ASSETS OF DISCONTINUED OPERATIONS AND HELD FOR SALE
|
|
$
|
2,096
|
|
|
$
|
1,116,466
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
—
|
|
|
$
|
121,442
|
|
Estimated fair value of contingent payments, net
|
|
|
137,007
|
|
|
|
287,957
|
|
Deferred revenue
|
|
|
21,977
|
|
|
|
81,455
|
|
Other current liabilities
|
|
|
3,994
|
|
|
|
7,781
|
|
Total Current Liabilities of Discontinued Operations
|
|
|
162,978
|
|
|
|
498,635
|
|
TOTAL LIABILITIES OF DISCONTINUED OPERATIONS AND HELD FOR SALE
|
|
$
|
162,978
|
|
|
$
|
498,635
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
659,142
|
|
|
$
|
1,245,744
|
|
Cost of sales
|
|
|
227,157
|
|
|
|
490,951
|
|
Gross profit
|
|
|
431,985
|
|
|
|
754,793
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Advertising and marketing expenses
|
|
|
317,666
|
|
|
|
458,915
|
|
Stock based compensation - related party
|
|
|
—
|
|
|
|
248,250
|
|
General and administrative
|
|
|
429,316
|
|
|
|
453,595
|
|
Total operating expenses
|
|
|
746,982
|
|
|
|
1,160,760
|
|
|
|
|
|
|
|
|
|
|
Net loss of discontinued operations and held for sale
|
|
$
|
(314,997
|
)
|
|
$
|
(405,967
|
)
|
NOTE 17 – SUBSEQUENT EVENTS
On January 1, 2019, Reign Brands, Inc.,
a subsidiary of Reign Sapphire Corporation, entered into an Asset Purchase Agreement (the “Agreement”) with Co-Op Jewelers
LLC (“Co-Op”), whereby Reign Brands, Inc. sold operating assets of Reign Brands, Inc., consisting of substantially
all of the assets related to Coordinates Collection (“CC”). On January 1, 2019 (the “Closing Date”), the
parties executed the Asset Purchase Agreement and the final exhibits.
Upon the closing of the Agreement, Reign
Brands, Inc. sold substantially all of the operating assets of the CC business, consisting of fixed assets and intellectual property
in exchange for an aggregate of $100,000 in cash. The Agreement contained customary closing conditions.
There were no other events subsequent to
December 31, 2018, and up to the date of this filing that would require disclosure.