PANACEA LIFE SCIENCES HOLDINGS, INC. - Annual Report: 2017 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 FORM 10-K

 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 For the fiscal year ended December 31, 2017

 Commission File Number: 333-183360

EXACTUS, INC.

(Exact name of registrant as specified in its charter)

Nevada (State or other jurisdiction of incorporation or organization)		27-1085858 (I.R.S. Employer Identification No.)
4870 Sadler Road, Suite 300 Glen Allen, Virginia (Address of principal executive offices)		23060 (Zip Code)

(804) 205-5036

(Registrant’s telephone number, including area code)

 

 Securities registered pursuant to Section 12(b) of the Act:

None

(Title of class)

 

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ☐ No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ☐ No ☒

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☑ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”, “accelerated filer,”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☒

Emerging growth company ☐

 

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 provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

As of June 30, 2017, the last business day of the registrant’s most recently completed second quarter, the aggregate market value of the shares of common stock held by non-affiliates of the registrant was $5,474,210 (1).

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.   36,790,537 shares of Common Stock as of March 30, 2018

DOCUMENTS INCORPORATED BY REFERENCE: None

 

 

TABLE OF CONTENTS

		Page Number
Part I
Item 1.	Business	1
Item 1A.	Risk Factors	7
Item 1B.	Unresolved Staff Comments	17
Item 2.	Properties	17
Item 3.	Legal Proceedings	17
Item 4.	Mine Safety Disclosures	17
Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	18
Item 6.	Selected Financial Data	18
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 8.	Financial Statements and Supplementary Data	23
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	24
Item 9A.	Controls and Procedures	24
Item 9B.	Other Information	25
Part III
Item 10.	Directors, Executive Officers and Corporate Governance	26
Item 11.	Executive Compensation	27
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	32
Item 13.	Certain Relationships and Related Transactions, and Director Independence	34
Item 14.	Principal Accounting Fees and Services	34
Part IV
Item 15.	Exhibits, Financial Statement Schedules	36

 

PART I

 

 

Company Overview

Exactus, Inc. (“Exactus”, “our”, “us”, “we” or the “Company” refer to Exactus, Inc. and its wholly-owned subsidiary, unless the context otherwise requires) was incorporated on January 18, 2008 as “Solid Solar Energy, Inc.” in the State of Nevada as a for-profit Company. On May 16, 2013, we filed a certificate of amendment to the Company’s amended and restated articles of incorporation to change our name to “Spiral Energy Tech., Inc.” from Solid Solar Energy, Inc.  On February 29, 2016, we acquired all of the issued and outstanding capital stock of Exactus BioSolutions, Inc. (“Exactus BioSolutions”) pursuant to a Share Exchange Agreement, dated February 29, 2016, with Exactus BioSolutions (the “Share Exchange”). The Company issued 30 million shares of newly-designated Series B-1 Preferred Stock to the shareholders of Exactus BioSolutions in the Share Exchange, representing approximately 87% of voting control of the Company upon consummation of the Share Exchange. As a result of the Share Exchange, Exactus BioSolutions became a wholly-owned subsidiary of Exactus, Inc. Effective March 22, 2016, we changed our corporate name to “Exactus, Inc.” via a merger with our wholly-owned subsidiary, Exactus Acquisition Corp.

 

Following the Share Exchange, we became a life science company based in Glen Allen, Virginia that plans to develop and commercialize Point-of-Care (POC) diagnostics for measuring proteolytic enzymes in the blood based on a novel detection platform developed by Dr. Krassen Dimitrov, PhD. Our products will employ a disposable assay test strip combined with a portable and easy to use hand held detection unit that provides a result in as little as 30 seconds.

 

The first product will be used to assay fibrinolysis, which is the process by which clots in the blood are dissolved. The rate of fibrinolysis is carefully regulated in circulation; too little fibrinolysis leads to the formation of clots (thrombosis) and too much fibrinolysis prevents normal coagulation and can lead to excessive bleeding (hemorrhage). An elevated level of fibrinolysis is associated with many pathological conditions including myocardial infarction, pulmonary embolisms/deep vein thrombosis (PE/DVT) and ischemic stroke. Further, complications associated with surgical procedures and trauma can induce a hyperfibrinolytic state, leading to hemorrhage. In all of these medical situations, time is of the essence, and we believe current coagulation diagnostic technologies cannot return an actionable result in the time frame necessary to provide timely therapeutic intervention.

 

The FibriLyzer is expected to provide a simple, rapid and affordable means to assess the fibrinolytic state of a patient in a broad range of applications including (i) the management of hyperfibrinolytic states associated with surgery and trauma, (ii) obstetrics, (iii) diagnosis of acute events such as myocardial infarction and ischemic stroke, (iv) diagnosis of pulmonary embolism and deep vein thrombosis, (v) chronic coronary disease management, and (vi) as a monitoring device to evaluate the effectiveness of coagulation therapy. We anticipate that the use of FibriLyzer will provide the basis for improving management of patients who are at-risk of hemorrhage, expediting treatment, potentially improving patient outcomes, and saving money.

 

We plan to follow up FibriLyzer with a similar technology to detect collagenase levels in the blood. This product, MatriLyzer, is intended to be used to detect the recurrence (or initial occurrence in high risk patients) of cancer and can be used as an at-home monitoring device or during routine office visits. The appearance of elevated levels of collagenase, the enzyme that degrades collagen, have been proven to be an early biomarker of recurrent cancer. For patients that have been previously treated for cancer, specifically, solid tumors, if and when the tumor recurs is of paramount importance. Once a tumor has begun to grow and spread, we believe that MatriLyzer can be used to detect this event at an early stage. If desired, our device will be designed to communicate directly with the attending oncologist via a smart phone application to ensure that the tests are being used properly and, when collagenase levels are elevated, both patient and physician will know the patient should have a more thorough examination.

 

 

 

Unmet Medical Need

The formation of a blood clot and its successive dissolution, known as the hemostatic balance, is required to arrest blood loss from an injured vessel; however, disruption of this balance leads to hemostatic disorders with either excessive bleeding (hemorrhage) or excessive clotting (thrombosis). During and after surgery or trauma, it is critical to monitor the hemostatic status of a patient because excessive bleeding (inadequate coagulation) is a common problem; however, proper peri- and post-operative patient management requires constant monitoring of hemostasis/fibrinolysis and current technologies are either too slow or too cumbersome to use efficiently, resulting in delayed, wasted or misapplied treatments and potentially poor patient outcomes.

 

The Euglobulin Lysis Test (ELT) test is the only regulatory-cleared test for measuring fibrinolysis; however, it requires several hours to conduct and is therefore impractical for use in diagnosing hyperfibrinolysis when treating trauma cases or surgery where treatment decisions have to be made within a few minutes of symptoms. D-dimer is another routine test for assessing fibrinolytic activity. The D-dimer is a proteolytic breakdown product of fibrin that is easily measured by latex agglutination assay and is considered to be a surrogate biomarker for fibrinolysis; however, while the D-dimer test is used broadly, the test still requires at least 20 minutes to return a result and the test has a very low specificity rate (high false positives) making the utility of the test less than optimal for identifying patients with hyperfibrinolysis. The D-dimer test is not cleared by the Food and Drug Administration (“FDA”), but is provided in clinical chemistry labs and a Laboratory Developed Test (LDT).

 

Physicians recognize the inadequacy of ELT and other Conventional Coagulation Tests (CCTs) such as Prothrombin Time, Partial Thromboplastin Time, Fibrinogen Levels and D-dimer, so they have turned to viscoelastometric methods to gather information on the coagulation process (da Luz et al 2013, Ramos et al 2013, Yeung et al 2014). Viscoelastometric methods require a bulky apparatus (ROTEM/TEG) and at least 10-30 minutes per test to return graphical output from which parameters can then be derived to indicate levels of fibrinolytic activity. However, patients’ hemostatic conditions can change significantly in just a few minutes. These methods are unable to provide rapid diagnosis of fibrinolytic status in the OR and ER, and viscoelastometric methods lack the ability to provide true real-time feedback to physicians for optimal, case-specific administration of critical treatments to counteract hyperfibrinolysis during surgery or trauma management. Further, viscoelastometric tests provide information on only severe forms of hyperfibrinolysis and lack the sensitivity to diagnosis the onset of hyperfibrinolysis (Franz 2009, Schöchl et al 2012). The use of viscoelastometric devices is complicated further by the (i) requirement for multiple daily calibrations, (ii) the requirement for highly trained technicians to conduct the assay, and (iii) the lack of standardization of viscoelastometric protocols (da Luz et al 2013). As a result, there have been calls for a faster and easier-to-use tool for providing feedback on this important physiological process.

 

Product Candidates

FibriLyzer

FibriLyzer is a device based on new technologies that are patented or pending patent and designed to address the shortcomings of the viscoelastometric devices, clinical tests such as D-dimer as well as ELT. FibriLyzer has two components. First, a portable, hand held analyzer about the size of blood glucose meters, measures the fibrinolytic activity in a drop of blood and returns a result in as little as 30 seconds. This unit is equipped with a bar-code scanner to record patient information. The unit can be connected via a USB port to ensure that the results of each test become part of the patient’s electronic record and are communicated to the appropriate hospital staff. Second, a disposable assay test strip or “biosensor” contains a synthetic protein matrix that simulates a clot. A proprietary electrochemically active polymer (“elactomer”) is embedded into the matrix and is released as the synthetic “clot” is dissolved, which generates electrical current in direct proportion to the amount of fibrinolysis.

 

 

 

 

In practice, a disposable assay test strip is inserted into the FibriLyzer device and a drop of blood is placed into anopening at the end of the strip. The blood sample is drawn into the strip by capillary action and the fibrinolysis assay begins immediately as the device measures the current across the test-end of the biosensor, which contains the synthetic fibrin matrix. At a specific time point (20 seconds), the end-point current is recorded and the results are displayed on an easy to read screen on the hand held unit. Based on a pre-defined threshold, the operator can immediately determine the fibrolytic state of the patient to inform patient management decisions in real time. Once the test is completed, the assay test strip is removed and discarded.

 

In May 2013, a clinical beta test was performed as an initial assessment of a prototype device in a clinical setting. The trial included 30 healthy volunteers and 62 patients from the cardiology ward at University Hospital “Queen Yoanna” in Sofia, Bulgaria and was managed by Prof. Assen Goudev, Departmental Chair of Cardiovascular Medicine.

 

The three goals of this beta test were accomplished: (i) medical personnel easily managed the administration of FibriLyzer; (ii) samples from the healthy volunteers produced fibrinolysis readings that demonstrated a grouping from which a “normal range” could be derived; and (iii) after only 20 seconds, the samples taken from the cardiac patients yielded a scattered distribution that was very different than the comparatively tight distribution for the healthy sample, demonstrating the cardiovascular patients’ varying degrees of elevated fibrinolysis.

 

This beta test showed that the technology performed as expected in a clinical setting and confirmed that it should move into formal clinical trials designed to garner marketing approval. We anticipate submitting a premarket notification to the FDA for FibriLyzer as Class II device pursuant to Section 510(k) of the FDAC.

 

In the European Union (the “EU”), we will seek to register FibriLyzer under Annex II List B of the European Directive 98/79/EC, which requires that the Company declare and ensure that FibriLyzer meets the requirements described in this annex.

 

It is anticipated that the clinical studies will include sites in both the U.S. and the EU and the protocol will be designed such that both the FDA as well as the EU’s IVD CE Mark requirements are met. We plan to use sufficient sites in the U.S. and EU to expedite the time needed to complete our clinical development. We will work closely with the FDA to ensure that our clinical development and analytical plans are sufficiently robust to satisfy the regulatory requirements and plan to seek marketing clearance with EU authorities concurrently with the Food, Drug, And Cosmetic Act (the “FDAC”) in mid-2018 and anticipate that we will be eligible to market and sell products by the end of 2018.

 

MatriLyzer

Using technology similar to FibriLyzer, the Company intends to develop a diagnostic device to detect the recurrence of cancer. Each year, more than 700,000 people undergo cancer surgery in the United States. However, more than 40% of those patients develop recurrent disease and many have correspondingly poor outcomes. There remains an unmet need to diagnose cancer recurrence at its earliest stages in order to treat the patient swiftly.

 

Well-characterized proteases have been long recognized as major contributors to the proteolytic degradation of extracellular matrix during tumor invasion. In the recent years, other non-matrix proteins have also been identified as gelatinase substrates thus significantly broadening our understanding of these enzymes as proteolytic executors and regulators in tumor progression. As with fibrinolysis, MatriLyzer will detect the increase in collagenase activity in the blood using the same elactomer technology used in FibriLyzer. In MatriLyzer, the biosensor will contain a collagen-based matrix, but the principle of detection will remain the same. Our approach will be to validate the correlation of increased collagenase levels with cancer recurrence and then market the test for routine office use or at-home use.

 

 

 

Global Medical Diagnostics Device Market

The In Vitro diagnostics device industry is currently one of the most dynamic and innovative economic sectors today, driven by rapid advances in micro-technology and biomedical research. These advances have combined to enable the collection of biometric data of scope and accuracy much greater than just ten or fifteen years ago. The sector can be divided into various horizontal segments such as cardiovascular, oncology, hematology, and neurology. Diagnostic devices may be utilized independently to assess specific biomarkers; or they may act as “companion” devices, working in conjunction with therapeutics or other treatments to improve patient outcomes. Currently bringing in over $50 billion in revenue, the industry is expected to continue to expand as new technologies are introduced that directly address previously unmet needs of patients and clinicians.

 

Globally, the U.S. market is the largest, providing for roughly one third of all revenues. The regulatory pathway has been criticized for being overly cumbersome; however, recent efforts to streamline and clarify the processes have improved outcomes in the approval process. A recent survey (Parmar, 3.26.14) revealed that despite greater cost concerns, most hospital CEOs are open to new technologies if they can improve the quality of patient care, lower hospitals’ overall costs, or increase the efficiency of their clinical staffs. Despite increased scrutiny, the U.S. market for diagnostic devices is expected to show continued growth due to an increasing ability of researchers to address unmet needs, greater participation in preventive care, and the need to monitor and manage “lifestyle” diseases (cardiovascular, diabetes, etc.) of the growing elderly population.

 

The European market is currently the second largest and is generally viewed as being more accommodating to new devices and technologies. As in the U.S., serving unmet needs and managing lifestyle diseases are engines of growth. Emerging markets are recognized as providing the opportunity for fastest growth as higher middle-class incomes and increasing awareness of the benefits of a healthcare system drive new demand through higher participation rates. Also, new government policies encourage the introduction of advanced technologies to rural regions.

 

The Company plans to initially market FibriLyzer for (i) the identification of hyperfibrinolytic states associate with surgery and trauma, (ii) obstetrics, (iii) acute events such as myocardial infarction and ischemic stroke, (iv) pulmonary embolism and deep vein thrombosis, and (v) chronic coronary disease management. Together these markets have more than 10 million cases annually.

 

The market for MatriLyzer is quite large with over 4 million patients treated for cancer each year in the U.S. and EU who could be monitored for recurrence of cancer by observing collagenase levels. In addition to newly treated patients, a pool of 20 million potentially recurrent cancer survivors would be eligible for collagenase monitoring as well. Both patients and survivors will potentially benefit from regular and frequent monitoring for recurrence.

 

Licensing Agreement

 

 

 

 

Competition

We compete in the in vitro diagnostics device industry, subject to rapid changes in micro-technology and biomedical research, and significantly affected by new product introductions. We know of no other competitor developing hand-held Point-of-Care devices that detect fibrinolysis or collagenase. The FibriLyzer works by determining fibrinolytic activity by the rate at which a proprietary synthetic fibrin matrix is dissolved by enzymes in the blood. Competitors include companies that sell larger tabletop machines which may be used at the Point-of-Care for detection of various coagulation parameters through different methods, including thromboelastography (TEG) by Haemonetics Corporation, and rotation thromboelastometry (ROTEM) by Tem International.

 

Our product is unique because unlike TEG and ROTEM, it does not require a significant amount of blood, or technical expertise to operate. In addition, these products require 10-30 minutes to deliver any data. We believe that the absence of a hand-held Point-of-Care device for the detection of fibrinolysis or collagenase in real time creates a significant opportunity to penetrate the market.

 

Manufacturing, Distribution and Marketing

 

We are working with TaiDoc Technology Corporation (“TaiDoc”) in Taipei, Taiwan, a well-established medical device manufacturer with certifications from regulatory authorities worldwide, including the FDA, to manufacture the FibriLyzer and disposable assay test strips. TaiDoc and Digital Diagnostics have an existing contract manufacturer agreement pursuant to which TaiDoc will manufacture the FibriLyzer and Digital Diagnostics will be its exclusive distributor, and we currently are negotiating a formal agreement with TaiDoc to manufacture these products. As described in more detail under “—Government Regulation and Approval,” these third parties must comply with FDA and applicable foreign regulations regarding manufacturing our products. Failure to maintain compliance with such regulations could result in a sudden or unexpected interruption in our operations as we may not be able to quickly establish additional or replacement manufacturers of our products.

 

We do not have dedicated sales, marketing or distribution personnel yet, because none of our products have been approved for commercial sale. If and when our products are approved for commercial sale, we intend to develop an in-house team in the United States to market and distribute our products. We expect to collaborate with the medical community and to utilize online marketing to showcase and create awareness of our products. Our initial marketing efforts will target physicians, hospital administrators, hospital service providers, and group purchasing organizations.

 

Government Regulation and Approval

 

United States Product Development, Review and Approval Process

 

The FDA regulates all medical devices commercially distributed in the United States. Medical devices are defined by the FDAC and subject to the regulatory controls of the FDAC and other federal regulations. The FibriLyzer is considered a medical device pursuant to the FDAC, and is thereby subject to the FDAC’s pre-market requirements.

 

Prior to the commercial distribution of the FibriLyzer in the United States, a pre-market approval, pre-market clearance, or an exemption from the FDA must be secured. We are requesting clearance of the FibriLyzer as a Class II device pursuant to the FDAC 510(k) pre-market clearance process, which requires us to submit a 510(k) notification to the FDA demonstrating that the FibriLyzer is substantially equivalent to a device already on the market that does not require pre-market approval, known as a “predicate.” A device will be deemed to be substantially equivalent to a predicate if it has the same intended use and technological characteristics. Where a device’s technological characteristics are different from the predicate, the FDA may nonetheless conclude that it is substantially equivalent as long as it has the same intended use, and the information provided to the FDA does not raise new questions of safety or effectiveness and demonstrates that the device is as safe and effective as the predicate. A successful 510(k) approval results in an order from the FDA stating that the device is substantially equivalent to a predicate and that it can be marketed in the United States.

 

United States Post-Approval Processes

 

We are in the process of pursuing the regulatory approvals required to sell our products in the United States. Any products for which we receive FDA approvals will be subject to continuing regulation by the FDA, including, among other things, record-keeping requirements, reporting of adverse experiences with the product, providing the FDA with updated safety and efficacy information, product sampling and distribution requirements, complying with certain electronic records and signature requirements and complying with FDA promotion and advertising requirements. The FDA strictly regulates labeling, advertising, promotion and other types of information on products that are placed on the market. Products may be promoted only for the approved indications and in accordance with the provisions of the approved label. Furthermore, product manufacturers must continue to comply with good manufacturing practices requirements, which are extensive and require considerable time, resources and ongoing investment to ensure compliance. In addition, changes to the manufacturing process generally require prior FDA approval before being implemented and other types of changes to the approved product, such as adding new indications and additional labeling claims, are also subject to further FDA review and approval.

 

Manufacturers and other entities involved in the manufacturing and distribution of an approved biological or medical device product are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with good manufacturing practices and other laws. The good manufacturing practices requirements apply to all stages of the manufacturing process, including the production, processing, sterilization, packaging, labeling, storage and shipment of the product. Manufacturers must establish validated systems to ensure that products meet specifications and regulatory standards, and test each product batch or lot prior to its release.

 

Manufacturers of biological products must also report to the FDA any deviations from good manufacturing practice that may affect the safety, purity or potency of a distributed product; or any unexpected or unforeseeable event that may affect the safety, purity or potency of a distributed product. The regulations also require investigation and correction of any deviations from good manufacturing practice and impose documentation requirements.

 

We currently rely on third parties for the production of our products. Future FDA and state inspections may identify compliance issues at the facilities of contract manufacturers may disrupt production or distribution or may require substantial resources to correct.

 

 

The FDA may withdraw a product approval if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. Furthermore, the failure to maintain compliance with regulatory requirements may result in administrative or judicial actions, such as fines, warning letters, holds on clinical studies, product recalls or seizures, product detention or refusal to permit the import or export of products, refusal to approve pending applications or supplements, restrictions on marketing or manufacturing, injunctions or civil or criminal penalties.

 

In addition, from time to time, new legislation is enacted that can significantly change the statutory provisions governing the approval, manufacturing and marketing of products regulated by the FDA. In addition to new legislation, FDA regulations and policies are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether further legislative or FDA regulation or policy changes will be enacted or implemented and what the impact of such changes, if any, may be.

 

International Regulation

 

We may be subject to widely varying foreign regulations, which may be quite different from those of the FDA, governing clinical trials, manufacture, product registration and approval, and sales. Whether or not FDA approval has been obtained, we must obtain a separate approval for a product by the comparable regulatory authorities of foreign countries prior to the commencement of product marketing in these countries. In certain countries, regulatory authorities also establish pricing and reimbursement criteria. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. Therefore, we cannot assure that we will be able to satisfy the regulatory requirements to sell our products in any foreign country.

 

Employees

 

As of December 31, 2017, we have 4 employees, all of which are full time.

 

 

 

 

Risks Related to Our Company and Our Business

 

Our business is at an early stage of development and we may not develop products that can be commercialized.

 

In February 2016, we acquired Exactus BioSolutions and changed our primary business focus to developing, producing and commercializing blood diagnostic products, including FibriLyzer and MatriLyzer, utilizing certain intellectual property rights exclusively licensed by Exactus BioSolutions. Prior to that time, our primary business focus was developing and commercializing drone technology. As a result, our business is at an early stage of development. We are preparing to conduct clinical trials on our primary product, FibriLyzer, and we expect to be able to market and sell products by the end of 2018. Our ability to generate revenues from sales will depend, among other things, our successful completion of clinical trials, regulatory approvals, commercialization and market acceptance of our technologies and products, medical community awareness and changes in regulations.

 

Our products, including FibriLyzer, will require significant additional research and development, clinical testing and regulatory approval in the United States, Canada and Europe, and, even if our products are approved for sale, we may not be able to commercialize any of these products. Our products may not reach the market for a number of reasons, including:

 

disadvantages relative to other available diagnostic products;

 

If any of these potential problems occur, we may never successfully commercialize our product candidates, including FibriLyzer. If we are unable to develop commercially viable products, our business, results of operations and financial condition will be materially and adversely affected.

 

We have a history of operating losses, do not expect to be profitable in the near future and our independent registered public accounting firm has expressed doubt as to our ability to continue as a going concern.

 

We currently have no products available for sale, have not generated any revenues since our entry into the life sciences business and have incurred significant operating losses. We expect to incur additional operating losses for the foreseeable future. In addition, we expect that our current cash levels will not be sufficient to enable us to complete the development of any potential products, including FibriLyzer. See “We will need additional capital to conduct our operations and develop our products and our ability to obtain the necessary funding is uncertain.”

 

As a result of our history of operating losses, the audit report prepared by our independent registered public accounting firm relating to our financial statements for the year ended December 31, 2017 includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.   The inclusion of the going concern statement by our auditors may adversely affect our stock price and our ability to raise needed capital or enter into advantageous contractual relationships with third parties. If we were unable to continue as a going concern, the values we receive for our assets on liquidation or dissolution could be significantly lower than the values reflected in our financial statements.

 

 

 

We will need additional capital to conduct our operations and develop our products and our ability to obtain the necessary funding is uncertain.

 

As of December 31, 2017, we had $161,215 of cash. We expect that our current levels of cash will not be sufficient to enable us to complete the development and commercialization of any potential products, including FibriLyzer and related technology. Based on our current sources of cash, we believe that our current cash and cash equivalents will fund our business until the first quarter of 2018.

 

Changes in our business, whether or not initiated by us, could affect the rate at which we deplete our cash and cash equivalents, and we may be unsuccessful in managing our operations or timing our capital expenditures in a manner sufficient to sustain our operations in accordance with our expectations. The timing and degree of any future capital requirements will depend on many factors, including:

 

 

Accordingly, we will need to obtain further funding through public or private equity offerings, debt financing, collaboration arrangements or other sources. Adequate additional funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital, we will be forced to delay, reduce or eliminate our research and development programs and may not be able to continue as a going concern.

 

We are currently completely dependent upon the successful development of our lead product candidate, FibriLyzer. If we fail to successfully complete its development and commercialization, we will not generate operating revenues.

 

Almost all of our efforts are currently focused on the development of FibriLyzer. There also is no guarantee that we will succeed in developing FibriLyzer. If we are unable to consummate the production and commercialization of FibriLyzer, we will be unable to generate any revenues. There is no certainty as to our success, whether within a given time frame or at all.

 

At present, we are manufacturing the key component of our disposable assay test strip, which is our proprietary synthetic fibrin clot that contains an electro-active polymer (“elactomer”) that creates electrical current as the fibrin clot is dissolved by enzymes in the blood, and expect to begin to manufacturing FibriLyzer devices in the Third quarter of 2018. There is no guarantee that we will successfully develop products suitable for use in a clinical environment, and our failure to do so on a timely basis, or at all, may delay, prevent initiation or increase the costs of our planned clinical trials. Any delays in our schedule for clinical trials, regulatory approvals or other stages in the development of our technology are likely to cause us additional expense, and may even prevent the successful finalization of any or all of our product candidates, including our anticipated follow-up product, MatriLyzer. Delays in the timing for development of our technology may also have a material adverse effect on our business, financial condition and results of operations due to the possible absence of financing sources for our operations during such additional periods of time. Although we may pursue other technologies (either developed in-house or acquired), there is no assurance that any other technology will be successfully identified or exploited.

 

 

 

Our business is highly dependent upon maintaining licenses with respect to key technology.

 

Our business substantially depends on licenses from third parties, including the Licensing Agreement with Digital Diagnostics. These third party license agreements impose obligations on us, such as payment obligations and obligations to diligently pursue, and cooperate with third parties in, the development, regulatory approval, manufacture and commercialization of products under the licensed patents. If a licensor believes that we have failed to meet our obligations under a license agreement, the licensor could seek to limit or terminate our license rights, which could lead to costly and time consuming litigation and, potentially, a loss of the licensed rights. The loss of any of such licenses, or the conversion of such licenses to non-exclusive licenses, could harm our operations and/or enhance the prospects of our competitors.

 

In addition, certain of the technology that we license from Digital Diagnostics is sub-licensed from other third parties, including the University of Queensland. If Digital Diagnostics fails to perform its obligations under the licenses pursuant to which it has licensed the intellectual property that is licensed to us, our rights to key technology could be jeopardized. In addition, certain of these licenses are governed by the laws of foreign countries such as Australia. These foreign laws may differ significantly from laws in the United States and, as a result, our ability to assess or enforce our rights under such agreements may be limited compared with our ability to assess or enforce our rights under agreements governed by laws in the United States.

 

If we or our licensors fail to meet our respective obligations under a license agreement, or if the owner of the intellectual property otherwise seeks to terminate these agreements, costly and time consuming litigation could result. During the period of any such litigation, our ability to carry out the development and commercialization of potential products could be significantly and negatively affected. Further, if our license rights were restricted, ultimately lost, or became non-exclusive, our ability to continue our business based on FibriLyzer and the related technology could be severely affected adversely.

 

We may be unable to obtain or maintain patent or other intellectual property protection for any products or processes that we may develop.

 

We face risks and uncertainties related to intellectual property rights. We may be unable to obtain or maintain our patents or other intellectual property protection for any products or processes that we may have or may develop; third parties may obtain patents covering the manufacture, use or sale of these products or processes which may prevent us from commercializing our technology; or any patents that we have or may obtain may not prevent other companies from competing with us by designing their products or conducting their activities so as to avoid the coverage of our patents.

 

In addition, the growth of our business may depend in part on our ability to acquire or in-license additional proprietary rights. For example, our programs may involve additional product candidates that may require the use of additional proprietary rights held by third parties. We may be unable to acquire or in-license any relevant third-party intellectual property rights that we identify as necessary or important to our business operations. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all, which would harm our business. We may need to cease use of the compositions or methods covered by such third-party intellectual property rights, and may need to seek to develop alternative approaches that do not infringe on such intellectual property rights which may entail additional costs and development delays, even if we were able to develop such alternatives, which may not be feasible. Even if we are able to obtain a license under such intellectual property rights, any such license may be non-exclusive, which may allow our competitors access to the same technologies licensed to us.

 

The licensing and acquisition of third-party intellectual property rights is a competitive practice, and companies that may be more established, or have greater resources than we do, may also be pursuing strategies to license or acquire third-party intellectual property rights that we may consider necessary or attractive in order to commercialize our product candidates. More established companies may have a competitive advantage over us due to their larger size and cash resources or greater clinical development and commercialization capabilities. There can be no assurance that we will be able to successfully protect or acquire the rights to the intellectual property to commercialize our product candidates.

 

 

 

Clinical trials involve lengthy and expensive processes with uncertain outcomes, and if we are unable to satisfactorily complete such testing, or if such testing yields unsatisfactory results, we may be unable to commercially produce our proposed products.

 

We cannot predict whether we will encounter problems with any of our planned clinical trials, which would cause us or regulatory authorities to delay or suspend clinical trials, or delay the analysis of data from ongoing clinical trials. We anticipate submitting a premarket notification to the FDA for FibriLyzer as Class II device pursuant to Section 510(k) of the FDAC and anticipate that we will be eligible to market and sell products by the end of 2019; however, such trials may also take significantly longer to complete and may cost more money than we expect. Failure can occur at any stage of testing, and we may experience numerous unforeseen events during, or as a result of, the clinical trial process that could delay or prevent commercialization of the current, or a future, more advanced, version of our product candidates.

 

A number of companies in the medical device, biotechnology, and biopharmaceutical industries including those with greater resources and experience than us have suffered significant setbacks in advanced clinical trials, even after seeing promising results in earlier clinical trials. We do not know whether any clinical trials we or any future clinical partners may conduct will demonstrate adequate efficacy and safety to result in regulatory approval to market FibriLyzer or MatriLyzer. If our clinical trials do not produce favorable results, we may be required to perform additional clinical trials or our ability to obtain regulatory approval may be adversely impacted, either of which may have an adverse material effect on our business, financial condition and the results of our operations.

 

Even if we are successful in developing FibriLyzer and other products using our technologies, it is unclear whether these products can serve as the foundation for a commercially viable and profitable business.

 

Life sciences technology is developing and rapidly could undergo significant changes in the future. Such rapid technological developments could result in our technologies becoming obsolete. While we believe our product candidates appear promising, they may fail to be successfully commercialized for numerous reasons, including, but not limited to, competing technologies for the same applications. In addition, our ability to commercialize our products into a profitable business depends on our ability to develop and maintain marketing and sales personnel and distribution capabilities, which we currently do not have. Thus, even if we are able to develop successfully and commercially market FibriLyzer and other products using our technologies, there can be no assurance that we will be able to develop a commercially successful and profitable business based on these technologies.

 

Moreover, advances in other treatment methods or prevention techniques could significantly reduce or entirely eliminate the need for our technologies and planned products. As a result, technological or medical developments may materially alter the commercial viability of our technology or services, and require us to incur significant costs to replace or modify equipment in which we have a substantial investment. We are focused on Point-of-Care blood diagnostic products, and if this field is substantially unsuccessful, this outcome could jeopardize our success or future results. The occurrence of any of these factors may have a material adverse effect on our business, operating results and financial condition.

 

If competitors develop and market products that are more effective, safer, or less expensive than our product candidates or offer other advantages, our commercial prospects will be limited.

 

We currently are not aware of other companies developing a handheld Point-of-Care device to measure fibrinolysis; however, there are other companies that currently manufacture and sell diagnostic tools for measuring other components of blood and coagulation. Any of these companies could begin to develop a competing product.  We expect that our diagnostic products will face intense competition from biotechnology companies, as well as numerous academic and research institutions and governmental agencies engaged in medical device discovery activities or funding, both in the United States and abroad. Some of these competitors are pursuing the development of products or devices that target the same diseases and conditions that we are targeting with our product candidates.

 

 

As a general matter, we also face competition from many companies that are researching and developing blood diagnostic products. Many of these companies have financial and other resources substantially greater than ours. In addition, many of these competitors have significantly greater experience in testing products, obtaining regulatory approvals, and marketing and selling. If we ultimately obtain regulatory approval for any of our product candidates, we also will be competing with respect to manufacturing efficiency and marketing capabilities, areas in which we have limited or no commercial-scale experience. Competition may increase further as a result of advances made in the commercial applicability of our technologies and greater availability of capital for investment in these fields. Our competitors may develop more competitive or affordable products, or achieve earlier patent protection or product commercialization than we are able to achieve. Competitive products may render any products or product candidates that we develop uneconomic or obsolete. The occurrence of any of these factors may have a material adverse effect on our business, operating results and financial condition.

 

If we are unable to keep up with rapid technological changes in our field or compete effectively, we will be unable to operate profitably.

 

We are engaged in activities in the biotechnology field, which is characterized by extensive research efforts and rapid technological progress. If we fail to anticipate or respond adequately to technological developments, our ability to operate profitably could suffer. Research and discoveries by other biotechnology, agricultural, pharmaceutical or other companies may render our technologies or potential products or services uneconomical or result in products superior to those we develop. Similarly, any technologies, products or services we develop may not be preferred to any existing or newly developed technologies, products or services.

 

The development and commercialization of our product candidates is subject to extensive regulation by the FDA and other regulatory agencies in the United States and abroad, and the failure to receive regulatory approvals for our other product candidates would likely have a material and adverse effect on our business and prospects.

 

The process of obtaining FDA and other regulatory approvals is expensive and is subject to numerous risks and uncertainties. We intend to file to gain regulatory approval to sell our products in the United States, Canada and Europe. Changes in regulatory approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application or may make it easier for our competitors to gain regulatory approval to enter the marketplace. Ultimately, the FDA and other regulatory agencies have substantial discretion in the approval process and may refuse to accept any application or may decide that our product candidate data are insufficient for approval without the submission of additional pre-clinical, clinical or other studies. In addition, varying agency interpretations of the data obtained from pre-clinical and clinical testing could delay, limit or prevent regulatory approval of a product candidate. Any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.

 

Any of the following factors, among others, could cause regulatory approval for our product candidates to be delayed, limited or denied:

 

 

 

 

   

 

We may be unsuccessful in our efforts to comply with applicable federal, state and international laws and regulations, which could result in loss of licensure, certification or accreditation or other government enforcement actions or impact our ability to secure regulatory approval of our product candidates.

 

Although we seek to conduct our business in compliance with applicable governmental healthcare laws and regulations, these laws and regulations are exceedingly complex and often subject to varying interpretations. As such, there can be no assurance that we will be able, or will have the resources, to maintain compliance with all such healthcare laws and regulations. Failure to comply with such healthcare laws and regulations, as well as the costs associated with such compliance or with enforcement of such healthcare laws and regulations, may have a material adverse effect on our operations or may require restructuring of our operations or impair our ability to operate profitably.

 

We will continue to be subject to extensive regulation by the FDA and other regulators abroad following any product approvals, and if we fail to comply with these regulations, we may suffer a significant setback in our business.

 

Even if we are successful in obtaining regulatory approval of our product candidates, we will continue to be subject to the requirements of and review by, the FDA and comparable regulatory authorities abroad in the areas of manufacturing processes, post-approval clinical data, adverse event reporting, labeling, advertising and promotional activities, among other things. In addition, any marketing approval we receive may be limited in terms of the approved product indication or require costly post-marketing testing and surveillance. Discovery after approval of previously unknown problems with a product, manufacturer or manufacturing process, or a failure to comply with regulatory requirements, may result in actions such as:

 

 

The occurrence of any of these actions would likely cause a material adverse effect on our business, financial condition and results of operations.

 

We depend on our collaborators to help us develop and test our proposed products, and our ability to develop and commercialize products may be impaired or delayed if collaborations are unsuccessful.

 

Our strategy for the development, clinical testing, manufacture and commercialization of our proposed products requires that we enter into collaborations with corporate partners, licensors, licensees and others. We are dependent upon the subsequent success of these other parties in performing their respective responsibilities and the continued cooperation of our partners. Our collaborators may not cooperate with us or perform their obligations under our agreements with them. We cannot control the amount and timing of our collaborators’ resources that will be devoted to our research and development activities related to our collaborative agreements with them. Our collaborators may choose to pursue existing or alternative technologies in preference to those being developed in collaboration with us.

 

The development, manufacture and commercialization of potential products will be delayed if collaborators fail to conduct these activities in a timely manner, or at all. In addition, our collaborators could terminate their agreements with us. If we do not achieve milestones set forth in the agreements, or if our collaborators breach or terminate their collaborative agreements with us, our business may be materially harmed.

 

 

 

Our products may be expensive to manufacture, and they may not be profitable if we are unable to control the costs to manufacture them.

 

We do not own or operate manufacturing facilities for production of our product candidates. As a result, we plan to outsource the manufacturing of our products, and have collaborated with a successful multi-national corporation in Taipei, Taiwan, to manufacture our products, including FibriLyzer. Manufacturers of medical device products often encounter difficulties in production, particularly in scaling up initial production. These problems include difficulties with production costs and yields and quality control, including stability of the product candidate. The occurrence of any of these problems could significantly delay our clinical trials or the commercial availability of our products.

 

Our reliance on a single source to manufacture our products entails risks, including:

 

 

The failure of any of our contract manufacturers to maintain high manufacturing standards could result in product liability claims, product recalls, product seizures or withdrawals, delays or failures in testing or delivery, cost overruns or other problems that could seriously harm our business or profitability.

  

Our contract manufacturers are required to adhere to FDA regulations. These regulations cover all aspects of the manufacturing, testing, quality control and recordkeeping relating to our product candidates and any products that we may commercialize. Our manufacturers may not be able to comply with applicable FDA regulations or similar regulatory requirements outside the United States. Our failure or the failure of our third party manufacturers, to comply with applicable regulations could significantly and adversely affect regulatory approval and supplies of our product candidates.

 

Our current and anticipated future dependence upon others for the manufacture of our product candidates may adversely affect our future profit margins and our ability to develop product candidates and commercialize any products that obtain regulatory approval on a timely and competitive basis. In addition, we may not be able to charge a high enough price for any product we develop, even if they are safe and effective, to make a profit. If we are unable to realize significant profits from our potential product candidates, our business would be materially harmed.

 

Contractual arrangements with licensors or collaborators may require us to pay royalties or make other payments related to the development of a product candidate, which would adversely affect the level of our future revenues and profits.

 

Even if we obtain all applicable regulatory approvals and successfully commercialize FibriLyzer and other products utilizing our technologies, contractual arrangements between us and a licensor, collaborator or other third party in connection with the respective product may require that we make royalty or other payments to the respective third party, and as a result we would not receive all of the revenue derived from commercial sales of such product.

 

Cybersecurity breaches could expose us to liability, damage our reputation, compromise our confidential information or otherwise adversely affect our business.

 

We maintain sensitive company data on our computer networks, including our intellectual property and proprietary business information. We face a number of threats to our networks from unauthorized access, security breaches and other system disruptions. Despite our security measures, our infrastructure may be vulnerable to attacks by hackers or other disruptive problems. Any such security breach may compromise information stored on our networks and may result in significant data losses or theft of our intellectual property or proprietary business information. A cybersecurity breach could hurt our reputation by adversely affecting the perception of customers and potential customers of the security of their orders and personal information. In addition, a cybersecurity attack could result in other negative consequences, including disruption of our internal operations, increased cyber security protection costs, lost revenues or litigation.

 

 

 

We depend on key personnel for our continued operations and future success, and a loss of certain key personnel could significantly hinder our ability to move forward with our business plan.

 

Because of the specialized nature of our business, we are highly dependent on our ability to identify, hire, train and retain highly qualified scientific and technical personnel for the research and development activities we conduct or sponsor. The loss of one or more key executive officers, or scientific officers, would be significantly detrimental to us. In addition, recruiting and retaining qualified scientific personnel to perform research and development work is critical to our success. Our anticipated growth and expansion into areas and activities requiring additional expertise, such as clinical testing, regulatory compliance, manufacturing, marketing and distribution, will require the addition of new management personnel and the development of additional expertise by existing management personnel. There is intense competition for qualified personnel in the areas of our present and planned activities. Accordingly, we may not be able to continue to attract and retain the qualified personnel, which would adversely affect the development of our business.

 

Our failure to maintain effective internal controls over financial reporting may adversely affect the accuracy and timeliness of our financial reporting.

 

As described in “Part II, Item 9A. Controls and Procedures” included in this annual report on Form 10-K for the year ended December 31, 2017, we disclosed material weaknesses in our disclosure controls and procedures and in our internal controls over financial reporting due to our small size and limited resources. While we are continuing to work to improve our internal controls, we cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to implement or maintain effective controls, or difficulties encountered in their implementation or improvement, could cause us to fail to meet our reporting obligations or could result in a material misstatement to our financial statements or other disclosures, either of which could have an adverse effect on our business, financial condition or results of operations.

 

We may be subject to litigation that will be costly to defend or pursue and uncertain in its outcome.

 

Our business may bring us into conflict with our licensors, collaborators or others with whom we have contractual or other business relationships, or with our competitors or others whose interests differ from ours. In addition, third parties could claim that our licensed technology or other technology relevant to or required by our expected products infringes on their intellectual property. If we are unable to resolve those conflicts on terms that are satisfactory to all parties, we may become involved in litigation brought by or against us. That litigation is likely to be expensive and may require a significant amount of management’s time and attention, at the expense of other aspects of our business. The outcome of litigation is always uncertain, and in some cases could include judgments against us that require us to pay damages, enjoin us from certain activities, or otherwise affect our legal or contractual rights, which could have a significant adverse effect on our business.

 

Risks Related to the Securities Markets and Our Capital Structure

 

An active trading market for our common stock has not developed, and the market price for our common stock has been and may continue to be particularly volatile given the lack of liquidity and our status as a relatively unknown company with a limited operating history and lack of profits.

 

Although our common stock is quoted on the OTC Markets Group’s OTCQB tier, an active trading market has not developed for our common stock, and we cannot assure you that an active, public trading market for our common stock will develop or be sustained. If an active public trading market does not develop or is not maintained, significant sale of our common stock, or the expectation of these sales, could materially and adversely affect the market price of our common stock. In addition, holders of our common stock may experience difficulty in reselling, or an inability to sell, their shares.

 

 

 

In addition, the market for our common stock may be characterized by significant price volatility when compared to seasoned issuers, and we expect that our stock price could continue to be more volatile than a seasoned issuer for the indefinite future. The potential volatility in our share price is attributable to a number of factors. First, as a consequence of the lack of liquidity in our common stock, any future trading of shares by our stockholders may disproportionately influence the price of those shares in either direction. Second, we are a speculative or “risky” investment due to our limited operating history and lack of profits to date, and uncertainty of future market acceptance for our potential products. As a consequence of this enhanced risk, more risk averse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer.

 

Many of these factors will be beyond our control and may decrease the market price of our common stock, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common stock will be at any time or as to what effect that the sale of shares or the availability of shares for sale at any time will have on the prevailing market price. This market volatility, as well as general domestic or international economic, market and political conditions, could materially and adversely affect the market price of our Securities.

 

The rights of holders of our common stock are subordinate to significant rights, preferences and privileges of our existing series of preferred stock, and to any additional series of preferred stock created in the future.

 

Under the authority granted by our Articles of Incorporation, our Board of Directors has established four separate series of outstanding preferred stock, including Series A, Series B-1, Series B-2 and Series C Preferred Stock, which have various rights and preferences senior to the shares of common stock. As a result of the liquidation preferences, in the event that we voluntarily or involuntary liquidate, dissolve or windup our affairs (including as a result of a merger), the holders of our preferred stock would be entitled to receive stated amounts per share, including any accrued and unpaid dividends, before any distribution of assets or merger consideration is made to holders of our common stock. Additionally, subject to the consent of the holders of our existing preferred stock, our Board of Directors has the power to issue additional series of preferred stock and to designate, as it deems appropriate (subject to the rights of the holders of the current series of preferred stock), the special dividend, liquidation or voting rights of the shares of those additional series. The creation and designation of any new series of preferred stock could adversely affect the voting power, dividend, liquidation and other rights of holders of our common stock and, possibly, any other class or series of stock that is then in existence.

 

Shares eligible for future sale may adversely affect the market.

 

From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended, subject to certain limitations. In general, pursuant to Rule 144, a stockholder (or stockholders whose shares are aggregated) who is not an affiliate of our company and who has satisfied a six month holding period may, as long as we are current in our required filings with the SEC, sell securities without further limitation. Rule 144 also permits, under certain circumstances, the sale of securities, without any limitations, by a non-affiliate of our company who has satisfied a one year holding period. Affiliates of our company who have satisfied a six month holding period may sell securities subject to limitations. Any substantial sale of our common stock pursuant to Rule 144 or pursuant to any resale prospectus may have an adverse effect on the market price of our securities. Currently, a substantial majority of our securities are either free trading or subject to the release of trading restrictions under the six month or one year holding periods of Rule 144.

 

 

 

The sale or issuance of a substantial number of shares may adversely affect the market price for our common stock.

 

The future sale of a substantial number of shares of our common stock in the public market, or the perception that such sales could occur, could significantly and negatively affect the market price for our common stock. Our Amended and Restated Articles of Incorporation authorize us to issue 200,000,000 shares of common stock and, as of December 31, 2017, there were 35,071,862 shares of our common stock outstanding, and we have reserved 52,804,001 shares of our common stock for the potential issuance of shares upon the conversion of outstanding preferred stock, conversion of convertible loan notes, or the exercise of warrants. We expect that we will likely issue a substantial number of shares of our capital stock in financing transactions in order to fund our operations and the growth of our business. Under these arrangements, we may agree to register the shares for resale soon after their issuance. We may also continue to pay for certain goods and services with equity, which would dilute our current stockholders. Also, sales of the shares issued in this manner could negatively affect the market price of our stock.

 

Our common stock may be subject to the “penny stock” rules of the SEC, and the trading market in our common stock is limited, which makes transactions cumbersome and may reduce the value of an investment in the stock.

 

Rule 15g-9 under the Exchange Act establishes the definition of a “penny stock” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (i) that a broker or dealer approve a person’s account for transactions in penny stocks in accordance with the provisions of Rule 15g-9 under the Exchange Act; and (ii) the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased, provided that any such purchase shall not be effected less than two business days after the broker or dealer sends such written agreement to the investor.

 

In order to approve a person’s account for transactions in penny stocks, the broker or dealer must: (i) obtain financial information, investment experience and investment objectives of the person; and (ii) make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be reasonably expected to be capable of evaluating the risks of transactions in penny stocks.

 

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which: (i) sets forth the basis on which the broker or dealer made the suitability determination; and (ii) in highlight form, confirms that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our common stock.

 

These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the shares of common stock. Consequently, it may be more difficult to execute trades of our common stock which may have an adverse effect on the liquidity of our common stock.

 

The conversion of preferred stock or exercise of outstanding warrants to acquire shares of our common stock would cause additional dilution which could cause the price of our common stock to decline.

 

Each of our Series B-1, Series B-2 and Series C Preferred Stock is convertible into shares of our common stock. In addition, we issued warrants, pursuant to which shares of our common stock may be acquired. At December 31, 2017, there were 37,920,000 shares of our common stock reserved for convertible loan notes, 13,217,334 shares of our common stock underlying shares of preferred stock, and 1,666,667 shares of common stock underlying the warrants, for which we have reserve an aggregate of 52,804,001 shares of our common stock for future issuance. In addition, we have agreed to grant stock options to certain of our officers as described under “Management—Employment Agreements.” To the extent the preferred stock is converted or warrants or stock options are exercised, existing common stockholders would experience additional dilution which may cause the price of our common stock to decline.

 

 

 

We do not expect to pay cash dividends in the foreseeable future on our common stock.

 

We have not historically paid cash dividends on our common stock, and we do not plan to pay cash dividends on our common stock in the foreseeable future.

 

 

Not applicable.

 

 

We currently lease a mailbox address and shared office space in Glen Allen, Virginia. Our lease expires in March 2018. Almost all of our business is conducted virtually. We believe that this arrangement is adequate to meet our current needs. If additional or alternative space is needed in the future, we believe such space will be available on commercially reasonable terms as necessary.

 

 

 On January 20, 2017, Robert F. Parker (the “petitioner”) filed a petition in the Supreme Court of the State of New York, County of New York (the “Court”), naming, among others, the Company and Ezra Green, a former shareholder, director and officer of the Company, as respondents. The petition was received by the Company on February 7, 2017. The petitioner previously had a judgment entered in his favor and against Clear Skies Solar, Inc. and its wholly owned subsidiary Clear Skies Group, Inc. (together, “Clear Skies”), in the amount of $331,132.45, with interest accruing at a rate of 9% per year from November 21, 2014 (the “Judgment”). The Judgment remains outstanding. The petition alleged, among other things, that through a series of allegedly fraudulent conveyances occurring before the Judgment was entered against Clear Skies, the major assets of Clear Skies, which were comprised of various patents, were transferred from Clear Skies to Carbon 612 Corporation (“Carbon”), and from Clear Skies and Carbon to the Company. The petition further alleged, among other things, that the transfers were without fair consideration and rendered Clear Skies, the judgment-debtor, insolvent. The petitioner sought the entry of a judgment against the Company and the other respondents in the amount of the outstanding Judgment, with all accrued interest, reasonable attorneys’ fees and costs and disbursements.

 

The parties reached an agreement on settlement and the Court entered the parties’ joint stipulation of discontinuance with prejudice on September 6, 2017. The settlement agreement requires co-defendant Ezra Green to make an initial payment with subsequent, additional payments over time. The Company has agreed, in exchange for the dismissal of all claims with prejudice, to pay up to $20,000, at $1,000 per month beginning in January 2018 at the earliest, if co-defendant Ezra Green defaults on his subsequent payment obligations under the terms of the settlement agreement. The Company’s liability is capped at $20,000 in total, memorialized in a confession of judgment note, plus statutory interest if the plaintiff must file suit against the Company to collect on the confession of judgment note.

 

 

Not applicable.

 

 

PART II

 

 

Market Information

 

In 2016 and 2017, our common stock is quoted on the Over-The-Counter QB Venture Marketplace (OTCQB) under the symbol “EXDI” and is not listed on any exchange. The following table sets forth the range of high and low bid prices as reported for each period indicated. 

  

	High	Low
Fiscal year ended December 31, 2016
March 31, 2016	$3.05	$3.00
June 30, 2016	3.05	0.55
September 30, 2016	2.50	0.56
December 31, 2016	1.50	0.40

 

	High	Low
Fiscal year ended December 31, 2017
March 31, 2017	$1.00	$0.26
June 30, 2017	0.65	0.20
September 30, 2017	0.65	0.10
December 31, 2017	0.20	0.08

 

The foregoing quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. 

 

Holders

 

As of March 30, 2018, the Company had 46 common stock holders of record. In addition, as of such date, there were 7 holders of record of our Series B-1 preferred stock, 13 holders of our Series B-2 preferred stock, and one holder of our Series C preferred stock, convertible into an aggregate of 13,217,334 shares of our common stock based on conversion ratio equal to one common share for each share of preferred stock. In addition, the Company has 7 Series D preferred stock holders whose shares are convertible to 9,000,000 shares of our common stock based on a conversion ratio of 200,000 shares of common stock for each share of Series D preferred stock.

 

Dividends

 

We have never paid cash dividends on our capital stock. There are no restrictions that would limit us from paying dividends; however, we do not anticipate paying any cash dividends for the foreseeable future.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

None

 

 

Not applicable.

 

 

 

 

The following discussion and analysis of our financial condition and results of operations contains information that management believes is relevant to an assessment and understanding of our results of operations. You should read this discussion in conjunction with the Consolidated Financial Statements included elsewhere in this report. References to “Exactus,” the “Company,” “we,” “us” and “our” refer to Exactus, Inc. and its subsidiary unless the context otherwise requires.

 

Cautionary Language Regarding Forward-Looking Statements

 

Certain statements set forth in this report constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements regarding future events and financial results, including our ability to complete development of the FibriLyzer, future clinical trials and regulatory approvals, and liquidity, as well as other statements that are not historical facts, are forward-looking statements. These forward-looking statements are generally identified by such words or phrases as “we expect,” “we believe,” “would be,” “will allow,” “expects to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions. While we provide forward-looking statements to assist in the understanding of our anticipated future financial performance, we caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date that we make them. Forward-looking statements are based on current expectations and assumptions that are subject to significant risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Except as otherwise required by law, we undertake no obligation to publicly release any updates to forward-looking statements to reflect events after the date of this yearly report on Form 10-K, including unforeseen events.

 

Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on our operations and results of our business include, but are not limited to:

 

 

General

 

On February 29, 2016, the Company consummated a share exchange, which resulted in a change in control of the Company. As part of this transaction, the Company acquired Exactus BioSolutions and its Licensing Agreement with Digital Diagnostics to develop, produce and commercialize blood diagnostic products that utilize certain intellectual property rights owned or licensed by Digital Diagnostics. The Licensing Agreement provides for Exactus BioSolutions and Digital Diagnostics to collaborate through the various steps of the product and device development process, including the development, regulatory approval and commercialization stages.

 

 

 

As a result of this transaction, Exactus became a life science company that plans to develop and commercialize pursuant to the Licensing Agreement Point-of-Care (“POC”) diagnostics for measuring proteolytic enzymes in the blood based on a proprietary detection platform (the “New Business”). Our primary product, the FibriLyzer, will employ a disposable test “biosensor” strip combined with a portable and easy to use hand held detection unit that provides a result in less than 30 seconds. The initial markets we intend to pursue for the FibriLyzer are (i) the management of hyperfibrinolytic states associate with surgery and trauma, (ii) obstetrics, (iii) acute events such as myocardial infarction and ischemic stroke, (iv) pulmonary embolism and deep vein thrombosis and (v) chronic coronary disease management. We expect to follow up the FibriLyzer with similar technology, the MatriLyzer to detect collagenase levels in the blood for the detection of the recurrence of cancer. We intend to file to gain regulatory approval to sell our products in the United States, Canada and Europe.  Management intends to primarily focus on the development and commercialization of the FibriLyzer and related technology exclusively licensed pursuant to the Licensing Agreement.

 

Prior to our acquisition of Exactus BioSolutions on February 29, 2016, our primary business focus was on developing and commercializing drone technology (the “Former Business”). Because we have changed our primary business focus, we do not believe a comparison of the Company’s financial results for the year ended December 31, 2016 to the Company’s financial results for the year ended December 31, 2015 is meaningful.

 

On June 30, 2016, we entered into a Master Services Agreement with Integrium, LLC and PoC Capital, LLC to conduct clinical studies for us, including a clinical trial for the FibriLyzer that was scheduled to begin in the second half of 2017, now the second half of 2018.

 

Results of Operations

 

Year Ended December 31, 2017 Compared to Year Ended December 31, 2016:

 

	Year Ended
	December 31,
	2017	2016	change
Revenue	$-	$-	-
Operating expenses	3,124,907	1,601,486	$1,523,421
Net loss from operations	(3,124,907)	(1,601,486)	(1,523,421)
Total other loss	(735,768)	(1,453)	(734,315)
Loss from continuing operations	$(3,860,675)	$(1,602,939)	$(2,257,736)

 

Operating expenses increased by $1,523,421, from $1,601,486 for the year ended December 31, 2016 to $3,124,907 for the year ended December 31, 2017. The difference primarily is attributable to: impairment of prepaid clinical trial of $1,000,000 due to cash constraints to manufacture materials needed for trial, an increase in professional expense of $130,605 due to increased legal and accounting expenses as the Company works to raise funds, a decrease in R&D expense of $13,268; decrease in stock based compensation of $100,000; and an increase in general and administration expenses of $460,164 resulting from a rise in management fees due to an increase in full time staff, $41,685 of advertising and promotion expenses converted to stock for a debt settlement loss of $78,315, and travel expense. The Company also recognized settlement expense of $20,000 for the legal matter described in Note 9.

 

 

 

 As a result of the foregoing, we generated a loss from operations of $3,124,907 for the year ended December 31, 2017 as compared to an operating loss of $1,601,486 for the year ended December 31, 2016, a change of $1,523,421.

 

The Company had other loss of $735,768 for the year ended December 31, 2017, as compared to other loss of $1,453 due to loss on disposal of equipment from the former business focus for the year ended December 31, 2016. The difference is primarily due to four convertible loan note agreements the Company entered during 2017 which resulted in derivative expense of $667,200. The company recognized interest expense of $68,568 for the convertible loan notes and promissory notes entered in 2017 as well as interest on outstanding license fee.

 

 As a result of the foregoing, we generated a net loss from continuing operations of $3,860,675 for the year ended December 31, 2017 as compared to a net loss from continuing operations of $1,602,939 for the year ended December 31, 2016, a change of $2,257,736.

 

Liquidity and Capital Resources

 

Since our inception in 2008, we have generated losses from operations. As of December 31, 2017, our accumulated deficit was $5,200,573 of which $736,959 was related to the Former Business.  Our net loss for the years ended December 31, 2017 and 2016 was $3,860,675 and $1,602,939, respectively.

 

Net cash used in operating activities for the year ended December 31, 2017 was $1,234,921. We recorded a net loss of $3,860,675 for the period. Other items in uses of funds from operations included non-cash charges related to convertible loan notes derivative expense of $667,200 and interest expense of $52,795, $78,315 for a debt settlement loss and impairment of assets of $1,050,000. Changes in assets and liabilities totaled a gain of $777,444, which primarily consisted of an increase in accrued expenses of $523,757 and increase in account payable of $210,241. 

 

Net cash used in operating activities for the year ended December 31, 2016 was $890,956. We recorded a net loss for the year of $1,602,939. Other items in uses of funds from operations included non-cash charges related stock compensation for $100,000 and charges for bad debt, loss on disposal of equipment, and equipment impairment, which collectively totaled $11,371. Increases in accounts payable and accrued liabilities increased net cash from operating activities by $547,941.

  

Net cash provided by investing activity for the year ended December 31, 2017 was $0. Net cash provided by investing activities for the year ended December 31, 2016 was $1,292 due to the acquisition of Exactus BioSolutions.

 

Net cash provided by financing activities for the year ended December 31, 2017 was $340,800 due to $267,800 in proceeds from convertible loan notes, $48,000 in proceeds from the issuance of a note payables, and $25,000 proceeds from sale of Series B-2 Preferred Stock. Net cash provided by financing activities for the year ended December 31, 2016 was $1,945,000 largely due to proceeds from our issuance of shares of Series B-2 Preferred Stock and offset by our payment for Series A Preferred Stock.  

 

As of December 31, 2017, we had $161,215 of cash. While we expect the existing cash will fund operations through Q1 2018, these funds will not be sufficient to enable us to complete the development of any potential products, including the FibriLyzer and related technology. Accordingly, we will need to obtain further funding through public or private equity offerings, debt financing, collaboration arrangements or other sources. The issuance of any additional shares of common stock, preferred stock or convertible securities could be substantially dilutive to our shareholders. In addition, adequate additional funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital, we will be forced to delay, reduce or eliminate our research and development programs and may not be able to continue as a going concern.

 

 

 

Going Concern

  

The audit report prepared by our independent registered public accounting firm relating to our financial statements for the year ended December 31, 2017 includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.

 

 Off-Balance Sheet Arrangements

 

As of December 31, 2017, we had no material off-balance sheet arrangements.

 

In the normal course of business, we may be confronted with issues or events that may result in a contingent liability. These generally relate to lawsuits, claims or the actions of various regulatory agencies. We consult with counsel and other appropriate experts to assess the claim. If, in our opinion, we have incurred a probable loss as set forth by accounting principles generally accepted in the United States, an estimate is made of the loss and the appropriate accounting entries are reflected in our financial statements. After consultation with legal counsel, we do not anticipate that liabilities arising out of currently pending or threatened lawsuits and claims will have a material adverse effect on our financial position, results of operations or cash flows.

 

Critical Accounting Estimates and New Accounting Pronouncements

 

Critical Accounting Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts and related disclosures in the financial statements. Management considers an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made, and changes in the estimate or different estimates that could have been selected could have a material impact on our results of operations or financial condition.

 

Application of Significant Accounting Policies

 

Section 107 of the JOBS Act provides that an emerging growth company can 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. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may, therefore, not be comparable to those of companies that comply with such new or revised accounting standards.

  

Recent Accounting Pronouncements

 

We have reviewed the FASB issued Accounting Standards Update (“ASU”) accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. The Company has carefully considered the new pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have a material impact on the corporation’s reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration.

 

Not applicable.

 

 

 

 

 

CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm		F-1
Balance Sheets as of December 31, 2017 and 2016		F-2
Statements of Operations for the year ended December 31, 2017 and 2016		F-3
Statements of Stockholders' Equity (Deficit) for the year ended December 31, 2017 and 2016		F-4
Statements of Cash Flows for the year ended December 31, 2017 and 2016		F-5
Notes to the Consolidated Financial Statements

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Board of Directors of

Exactus, Inc.

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Exactus, Inc. (the “Company”) (formerly known as Spiral Energy Tech, Inc.), as of December 31, 2017 and 2016, and the related consolidated statements of operations, stockholders’ (deficit) equity and cash flows for each of the two years in the period ended December 31, 2017 and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

The Company's Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the accompanying consolidated financial statements, the Company has suffered recurring losses from operations, generated negative cash flows from operating activities, has an accumulated deficit and has stated that substantial doubt exists about Company’s ability to continue as a going concern. Management's evaluation of the events and conditions and management’s plans in regarding these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of the Company’s internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

We have served as the Company’s auditor since 2014   New York, New York April 2, 2018

 

 

 

 

 

 Exactus, Inc.

(formerly known as Spiral Energy Tech, Inc.)

Consolidated Balance Sheets

 

	December 31,	December 31,
	2017	2016
ASSETS
Current Assets
Cash and cash equivalents	$161,215	$1,055,336
Prepaid expenses	11,458	19,721
Total current assets	172,673	1,075,057
Non Current Assets
Prepaid clinical trial	-	1,000,000
Intangible asset- license agreement	-	50,000
Total non current assets	-	1,050,000
TOTAL ASSETS	$172,673	$2,125,057
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current Liabilities
Accounts payable	735,051	566,495
Accrued expenses	582,236	58,479
Note payable	48,000	-
Convertible loan notes, net	57,796	-
Derivative liability	930,000	-
Settlement payable	20,000	-
Interest payable	15,232	-
Total Current Liabilities	2,388,315	624,974
TOTAL LIABILITIES	2,388,315	624,974
Commitments and contingencies (see note 7)
Stockholders' (Deficit) Equity
Preferred stock: 50,000,000 authorized; $0.0001 par value 0 shares issued and outstanding	-	-
Preferred stock Series A: 5,000,000 authorized; $0.0001 par value 4,558,042 shares issued and 0 shares outstanding	-	-
Preferred stock Series B-1: 32,000,000 authorized; $0.0001 par value 2,800,000 issued and outstanding	280	280
Preferred stock Series B-2: 10,000,000 authorized; $0.0001 par value 8,684,000 and 8,584,000 shares issued and outstanding, respectively	868	858
Preferred stock Series C: 1,733,334 authorized; $0.0001 par value 1,733,334 shares issued and outstanding	173	173
Common stock: 200,000,000 shares authorized; $0.0001 par value 35,071,862 and 34,071,862 shares issued and outstanding, respectively	3,507	3,407
Additional paid-in capital	3,980,103	3,835,263
Accumulated deficit	(6,200,573)	(2,339,898)
Total Stockholders' (Deficit) Equity	(2,215,642)	1,500,083
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY	$172,673	$2,125,057

 

 

 

 

Exactus, Inc.

(formerly known as Spiral Energy Tech, Inc.)

Consolidated Statements of Operations

 

	Year Ended December 31,
	2017	2016
Revenues	$-	$-
Operating Expenses
General and administration	1,219,309	759,145
Professional	499,522	368,917
Research and development	356,076	369,344
Stock-based compensation	-	100,000
Impairment loss	1,050,000	4,080
Total operating expenses	3,124,907	1,601,486
Net loss from operations	(3,124,907)	(1,601,486)
Other Income (loss)
Derivative expense	(667,200)	-
Interest expense	(68,568)	-
Loss on disposal of equipment	-	(1,453)
Total other (loss) income	(735,768)	(1,453)
Net loss before income taxes	(3,860,675)	(1,602,939)
Provision for income tax	-	-
Net Loss	$(3,860,675)	$(1,602,939)
Basic and Diluted Loss per Common Share	$(0.11)	$(0.08)
Weighted Average Number of Common Shares Outstanding	33,947,162	19,220,686

 

 

Exactus, Inc.

(formerly known as Spiral Energy Tech, Inc.)

Consolidated Statements of Stockholders' Equity (Deficit)

 

												Accumulated
	Preferred Stock - Series A		Preferred Stock- Series B-1		Preferred Stock- Series B-2		Preferred Stock- Series C		Common Stock		Additional Paid in	Other Comprehensive	Accumulated
	Shares	Amount	Shares	Amount	Shares	Amount	Shares	Amount	Shares	Amount	Capital	(Loss)	Deficit	Total
Balance, December 31, 2015	-	$-	-	$-	-	$-	-	$-	515,290	$52	$643,587	$-	$(736,959)	$(93,320)
Common Stock Exchanged for Preferred Stock Series A	4,558,042	455	-	-	-	-	-	-	(393,314)	(39)	(416)	-	-	-
Preferred Series A Stock purchased and cancelled, February 29, 2016	(50,000)	(5)	-	-	-	-	-	-	-	-	(49,995)	-	-	(50,000)
Preferred Series B-1 stock issued for acquisition of Excatus Bioslution, Inc., February 29, 2016	-	-	30,000,000	3,000	-	-	-	-	-	-	(2,708)	-	-	292
Preferred Series B-2 stock issued for cash, note payable and liability, February 29, 2016	-	-	-	-	2,084,000	208	-	-	-	-	520,792	-	-	521,000
Preferred Series A conversion to common stock, March 28, 2016 and March 30, 2016	(4,508,042)	(450)	-	-	-	-	-	-	4,508,042	450	-	-	-	-
Preferred Series B-1 conversion to common stock, June 15, 2016	-	-	(27,200,000)	(2,720)	-	-	-	-	27,200,000	2,720	-	-	-	-
Common stock, Preferred Series C stock, and warrants issued for prepaid services, June 30, 2016	-	-	-	-	-	-	1,733,334	173	1,600,000	160	999,667	-	-	1,000,000
Preferred Series B-2 stock issued for cash, July 15, 2016	-	-	-	-	500,000	50	-	-	-	-	124,950	-	-	125,000
Preferred Series B-2 stock issued for cash, October 27, 2016	-	-	-	-	6,000,000	600	-	-	-	-	1,499,400	-	-	1,500,000
Common Stock issued, Share based Payment, November 11, 2016	-	-	-	-	-	-	-	-	141,844	14	99,986	-	-	100,000
Common Stock Issued, Share based Payment, December 13, 2016	-	-	-	-	-	-	-	-	500,000	50	-	-	-	50
Net Loss	-	-	-	-	-	-	-	-	-	-	-	-	(1,602,939)	(1,602,939)
Balance, December 31, 2016	-	$-	2,800,000	$280	8,584,000	$858	1,733,334	$173	34,071,862	$3,407	$3,835,263	$-	$(2,339,898)	$1,500,083
Preferred Series B-2 stock issued for cash, January 26, 2017	-	-	-	-	100,000	10	-	-	-	-	24,990	-	-	25,000
Cancellation of Share based Payment on February 22, 2017 of Common Stock issued December 13, 2016	-	-	-	-	-	-	-	-	(500,000)	(50)	-	-	-	(50)
Common Stock issued, debt settlement, October 19, 2017									1,500,000	150	119,850			120,000
Net Loss	-	-	-	-	-	-	-	-	-	-	-	-	(3,860,675)	(3,860,675)
Balance, December 31, 2017	-	$-	2,800,000	$280	8,684,000	$868	1,733,334	$173	35,071,862	$3,507	$3,980,103	$-	$(6,200,573)	$(2,215,642)

 

 

 

Exactus, Inc.

(formerly known as Spiral Energy Tech, Inc.)

Consolidated Statements of Cash Flows

 

	Year Ended December 31,
	2017	2016
Cash Flows From Operating Activities:
Net loss	$(3,860,675)	$(1,602,939)
Adjustments to reconcile net loss to cash used in operations:
Derivative expense	667,200	-
Amortization of discount and debt issuance costs for convertible notes	52,795	-
Bad debt	-	7,010
Loss on disposal of property and equipment	-	1,453
Impairment	1,050,000	4,080
Stock-based compensation	-	100,000
Loss on debt settlement in stock	78,315	-
Bank overdraft write-off	-	(1,172)
Changes in operating assets and liabilities:
(Increase) decrease in operating assets:
Prepaid expenses	8,214	(19,671)
Restricted cash	-	72,342
Increase (decrease) in operating liabilities:
Accounts payable	210,241	491,012
Accrued expenses	523,757	56,929
Settlement payable	20,000	-
Interest payable	15,232	-
Net Cash Used In Operating Activities	(1,234,921)	(890,956)
Cash Flows From Investing Activities:
Acquisition of cash balance from Exactus BioSolutions Inc.	-	1,292
Net Cash Provided by Investing Activities	-	1,292
Cash Flows From Financing Activities:
Proceeds from sale of Series B-2 Preferred Stock	25,000	1,995,000
Proceeds from issuance of notes payable	48,000	-
Proceeds from convertible loan notes	267,800	-
Payment for Series A Preferred Stock	-	(50,000)
Net Cash Provided By Financing Activities	340,800	1,945,000
Net (decrease) increase in cash and cash equivalents	(894,121)	1,055,336
Cash and cash equivalents at beginning of period	1,055,336	-
Cash and cash equivalents at end of period	$161,215	$1,055,336
Supplemental Cash Flow Information:
Cash paid for interest	$-	$-
Cash paid for taxes	$-	$-
Non-Cash transactions investing and financing activity:
Acquisition of license agreement from Exactus BioSolutions Inc	$-	50,000
Preferred Stock Series B-2 issued as payment for Note payable	$-	$100,000
Preferred Stock Series B-2 issued as payment for Exactus shareholder loans	$-	$51,000
Preferred Stock Series C, common stock, and warrants issued as part of Master Service Agreement and Stock Subscription Agreement as prepaid expense	$-	$1,000,000
Initial beneficial conversion feature and debt discount on convertible notes	$374,700	$-
Initial derivative liability on convertible notes	$876,000	$-
Accounts payable settled on issuance of stock	$41,685	$-

 

 

 

 

Exactus, Inc.

(formerly known as Spiral Energy Tech, Inc.)  

Notes to the Audited Financial Statements

December 31, 2017 and 2016

 

NOTE 1. BUSINESS DESCRIPTION

 

 Exactus was incorporated on January 18, 2008 as “Solid Solar Energy, Inc.” in the State of Nevada as a for-profit Company. On May 16, 2013, we filed a certificate of amendment to the Company’s amended and restated articles of incorporation to change our name to “Spiral Energy Tech., Inc.” from Solid Solar Energy, Inc.  On February 29, 2016, we acquired all of the issued and outstanding capital stock of Exactus BioSolutions, Inc. (“Exactus BioSolutions”) pursuant to a Share Exchange Agreement, dated February 29, 2016, with Exactus BioSolutions (the “Share Exchange”). The Company issued 30 million shares of newly-designated Series B-1 Preferred Stock to the shareholders of Exactus BioSolutions in the Share Exchange, representing approximately 87% of voting control of the Company upon consummation of the Share Exchange. As a result of the Share Exchange, Exactus BioSolutions became a wholly-owned subsidiary of Exactus, Inc. Effective March 22, 2016, we changed our corporate name to “Exactus, Inc.” via a merger with our wholly-owned subsidiary, Exactus Acquisition Corp.   

 

Following the Share Exchange, we became a life science company that plans to develop and commercialize Point-of-Care (“POC”) diagnostics for measuring proteolytic enzymes in the blood based on a proprietary detection platform (the “New Business”). Our primary product, the FibriLyzer, will employ a disposable test “biosensor” strip combined with a portable and easy to use hand held detection unit that provides a result in less than 30 seconds.  The initial markets we intend to pursue for the FibriLyzer are (i) the management of hyperfibrinolytic states associate with surgery and trauma, (ii) obstetrics, (iii) acute events such as myocardial infarction and ischemic stroke, (iv) pulmonary embolism and deep vein thrombosis and (v) chronic coronary disease management. We expect to follow up the FibriLyzer with similar technology, the MatriLyzer, to detect collagenase levels in the blood for the detection of the recurrence of cancer. We intend to file to gain regulatory approval to sell our products in the United States, Canada and Europe.  Management intends to primarily focus on the development and commercialization of the FibriLyzer and related technology exclusively licensed by Exactus.  

 

Prior to our acquisition of Exactus BioSolutions pursuant to the Share Exchange, our primary business focus was on developing and commercializing drone technology (the “Former Business”).

 

NOTE 2. GOING CONCERN

 

These financial statements are presented on the basis that we will continue as a going concern. The going concern concept contemplates the realization of assets and satisfaction of liabilities in the normal course of business. No adjustment has been made to the carrying amount and classification of our assets and the carrying amount of our liabilities based on the going concern uncertainty. We have considered ASU 2014-15 in consideration of reporting requirements of the going concern financial statements.

 

Since our inception in 2008, we have generated losses from operations and we anticipate that we will continue to generate significant losses from operations for the foreseeable future. As of December 31, 2017, our accumulated deficit was $5,200,573 of which $736,959 was related to the Former Business.  These conditions raise substantial doubt about the ability of the Company to continue as a going concern. As of December 31, 2017, we had $161,215 of cash. We expect that these funds will not be sufficient to enable us to complete the development of any potential products, including the FibriLyzer and related technology. Accordingly, we will need to obtain further funding through public or private equity offerings, debt financing, collaboration arrangements or other sources. The issuance of any additional shares of common stock, preferred stock or convertible securities could be substantially dilutive to our shareholders. In addition, adequate additional funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital, we will be forced to delay, reduce or eliminate our research and development programs and may not be able to continue as a going concern.

 

NOTE 3. SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation. The Financial Statements and related disclosures have been prepared pursuant to the rules and regulations of the SEC.  The Financial Statements have been prepared using the accrual basis of accounting in accordance with Generally Accepted Accounting Principles (“GAAP”) of the United States.

 

 

 

Use of Estimates. The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  Significant estimates during the year ended December 31, 2017 includes realization of prepaid expenses and derivative liability.

 

Stock-Based Compensation. We recognize compensation expense for stock-based compensation in accordance with ASC Topic 718. For employee stock-based awards, we calculate the fair value of the award on the date of grant using the Black-Scholes method for stock options and the quoted price of our common stock for unrestricted shares; the expense is recognized over the service period for awards expected to vest. For non-employee stock-based awards, we calculate the fair value of the award on the date of grant in the same manner as employee awards, however, the awards are revalued at the end of each reporting period and the pro rata compensation expense is adjusted accordingly until such time the nonemployee award is fully vested, at which time the total compensation recognized to date equals the fair value of the stock-based award as calculated on the measurement date, which is the date at which the award recipient’s performance is complete. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.

 

We may issue restricted stock to consultants for various services. Cost for these transactions are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is measurable more reliably measurable. The value of the common stock is measured at the earlier of (i) the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterparty's performance is complete.

 

Share-based expense totaled $0 and $100,000 for the year ended December 31, 2017 and 2016, respectively.

 

Research and Development Expenses. We follow ASC 730-10, “Research and Development,” and expense research and development costs when incurred.  Accordingly, third-party research and development costs, including designing, prototyping and testing of product, are expensed when the contracted work has been performed or milestone results have been achieved. Indirect costs are allocated based on percentage usage related to the research and development. Research and development costs of $499,522 and $369,344 were incurred for the year ended December 31, 2017 and 2016, respectively.

 

Revenue Recognition. We recognize revenue when it is realized or realizable and estimable in accordance with ASC 605, “Revenue Recognition”. All revenue is recognized when (i) persuasive evidence of an arrangement exists; (ii) the service or sale is completed; (iii) the price is fixed or determinable; and (iv) the ability to collect is reasonably assured.  

 

Derivatives and Hedging- Contracts in Entity’s Own Equity. In accordance with the provisions of ASC 815 “Derivatives and Hedging” the embedded beneficial conversion features in the Convertible Loan Notes (Note 5) are not considered to be indexed to our stock. As a result, these are required to be accounted for as a derivative financial liability and have been recognized as a liability on the balance sheets. The fair value of the derivative financial liability is determined using the Monte Carlo valuation model and is affected by changes in inputs to that model including the Company’s stock price, expected stock price volatility, the contractual term, and the risk-free interest rate. The derivative financial liability is subject to re-measurement at each balance sheet date and any changes in fair value is recognized as a component in other income (expenses) (Note 6).

 

Fair Value Measurements. We adopted the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”, which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value, and expands disclosure of fair value measurements. The guidance prioritizes the inputs used in measuring fair value and establishes a three-tier value hierarchy that distinguishes among the following:

 

 

 

 

 

 

   

Restricted Cash. The carrying amounts of cash and cash equivalent items which are restricted as to withdrawal or usage. Restrictions may include legally restricted deposits held as compensating balances against borrowing arrangements, contracts entered into with others, or entity statements of intention with regard to particular deposits; however, time deposits and short-term certificates of deposit are not generally included in legally restricted deposits. At December 31, 2017 and 2016, the Company had no restrictions on cash.

 

Long-Lived Assets Including Other Acquired Intangible Assets. Property and equipment is stated at cost.  Depreciation is computed by the straight-line method over estimated useful lives, which is between 3 years for computer equipment and 5-20 years for production equipment.   The carrying amount of all long-lived assets is evaluated periodically to determine if adjustment to the depreciation and amortization period or the unamortized balance is warranted.

 

Long-lived assets such as property, equipment and identifiable intangibles are reviewed for impairment whenever facts and circumstances indicate that the carrying value may not be recoverable.  When required impairment losses on assets to be held and used are recognized based on the fair value of the asset.  The fair value is determined based on estimates of future cash flows, market value of similar assets, if available, or independent appraisals, if required.  If the carrying amount of the long-lived asset is not recoverable from its undiscounted cash flows, an impairment loss is recognized for the difference between the carrying amount and fair value of the asset.  When fair values are not available, we estimate fair value by using the expected future cash flows discounted at a rate commensurate with the risk associated with the recovery of the assets.  We recognized impairment losses of $1,050,000 and $4,080 for the year ended December 31, 2017 and 2016, respectively.

 

Related Parties. We follow ASC 850,” Related Party Disclosures,” for the identification of related parties and disclosure of related party transactions.  

 

Income Taxes.  We account for income taxes under ASC 740 “Income Taxes.”  Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax basis.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs.  A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations. Deferred tax assets totaled $0 as of December 31, 2017 and 2016.

 

Earnings per Share. We compute basic and diluted earnings per share amounts in accordance with ASC Topic 260, “Earnings per Share.” Basic earnings per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if stock options and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company. As of December 31, 2017 and 2016, the Company had 17,863,168 and 14,784,001 dilutive potential common shares, respectively.

 

Comprehensive Income (Loss). Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. The Company is required to record all components of comprehensive income (loss) in the financial statements in the period in which they are recognized. Net income (loss) and other comprehensive income (loss), net of their related tax effect, arrived at a comprehensive income (loss).  Other comprehensive loss was $0 for the year ended December 31, 2017 and 2016.

 

 

 

Recently Adopted Accounting Pronouncements

 

In November 2015, the FASB issued (ASU) 2015-17, “Balance Sheet Classification of Deferred Taxes.” Currently deferred taxes for each tax jurisdiction are presented as a net current asset or liability and net noncurrent asset or liability on the balance sheet. To simplify the presentation, the new guidance requires that deferred tax liabilities and assets for all jurisdictions along with any related valuation allowances be classified as noncurrent in a classified statement of financial position. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption is permitted. The Company has adopted this guidance in the fourth quarter of the year ended December 31, 2015 on a retrospective basis. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations or cash flows, and did not have any effect on prior periods due to the full valuation allowance against the Company’s net deferred tax assets.

   

In August 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements – Going Concern (Subtopic 205-40), effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. This standard provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The guidance is effective for annual reporting periods ending after December 15, 2016, and early adoption is permitted. The Company adopted this guidance on January 1, 2017. The Company does not expect the adoption of this guidance to have any impact on its financial position, results of operations or cash flows.

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends Accounting Standards Codification (“ASC”) Topic 718, Compensation – Stock Compensation. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, Cash Flow Statements, Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow classification issues with the objective of reducing diversity in practice. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

 

Recent Accounting Pronouncements Issued But Not Adopted as of December 31, 2017

 

Recent Accounting Pronouncements Not Yet Adopted

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU creates a single source of revenue guidance for companies in all industries. The new standard provides guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers, unless the contracts are within the scope of other accounting standards. It also provides a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets. This guidance, as amended, must be adopted using either a full retrospective approach for all periods presented or a modified retrospective approach and will be effective for fiscal years beginning after December 15, 2017 with early adoption permitted. The Company will adopt this ASU effective January 1, 2018 using the modified retrospective method.

 

In February 2015, the FASB issued ASU No. 2016-02, Leases (Topic 842), which amends the FASB Accounting Standards Codification and creates Topic 842, "Leases." The new topic supersedes Topic 840, "Leases," and increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosures of key information about leasing arrangements. The guidance is effective for reporting periods beginning after December 15, 2018. ASU 2016-02 mandates a modified retrospective transition method. The Company plans to adopt this ASU on January 1, 2019 and is in the process of evaluating the impact of adopting the guidance on its consolidated financial statements.

 

 

 

In August 2016, the FASB issued ASU No. 2016-15, Cash Flow Statements, Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow classification issues with the objective of reducing diversity in practice. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other, Simplifying the Accounting for Goodwill Impairment. ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires 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. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. This new guidance will be applied prospectively and is effective for calendar year end companies in 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. Adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

 

In July 2017, the FASB issued ASU No. 2017-11, which amends the FASB Accounting Standards Codification. Part I of ASU No. 2017-11, Accounting for Certain Financial Instruments with Down Round Features, changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. The guidance is effective for reporting periods beginning after December 15, 2019 and interim periods within those fiscal years. The Company is in the process of evaluating the impact of adopting the guidance on its consolidated financial statements.

 

NOTE 4. AGREEMENTS

 

Through the Share Exchange, the Company acquired an exclusive license agreement (the “Licensing Agreement”) between Exactus BioSolutions and Digital Diagnostics Inc. (“Digital Diagnostics”) that the Company recognized as an intangible asset.   Pursuant to the Licensing Agreement, Digital Diagnostics granted to Exactus BioSolutions an exclusive license to develop, produce and commercialize certain diagnostic products, including the FibriLyzer and MatriLyzer, that utilize certain intellectual property rights owned or licensed by Digital Diagnostics. The Licensing Agreement provides for Exactus BioSolutions and Digital Diagnostics to collaborate through the various steps of the product and device development process, including the development, regulatory approval and commercialization stages. Exactus BioSolutions is required to pay Digital Diagnostics, in cash and/or stock, an initial signing payment, milestone fees triggered by the first regulatory clearance or approval of each of the FibriLyzer and the MatriLyzer, and various sales thresholds, and royalty payments based on the net sales of the products, calculated on a product-by-product basis. In 2016, the Company paid $50,000 to Digital Diagnostics as part of the initial signing payment under the Licensing Agreement and $21,659 in legal expenses. As of December 31, 2016, the Company accrued an additional $171,033 in licensing fees due to closing a financing transaction in the fourth quarter of 2016, of which $75,000 was paid during the first quarter of 2017. The Company accrued the remaining $30,000 due for the initial signing fee during the third quarter of 2017. The Company has also accrued interest, per the Licensing Agreement, of $9,802 for the remaining balance due as of December 31, 2017. As of December 31, 2017, $134,802 remained due to Digital Diagnostics.  In the first quarter of 2018, the Company paid the entire balance due to Digital Diagnostics. No milestones have been met and no milestone fees have been paid or accrued through December 31, 2017.

 

The License Agreement is effective until such time as neither Digital Diagnostics nor Exactus Biosolutions has any obligation to the other under the Licensing Agreement in any country with respect to any product. The Licensing Agreement may be terminated by the Company effective upon at least six (6) months written notice if regulatory approval has been obtained in the U.S. or in the European Union, or upon at least three (3) months written notice if regulatory approval has not been obtained in the U.S. or in the European Union. Either party may terminate the Licensing Agreement in the event the other party materially breaches the Licensing Agreement, or becomes insolvent.

 

On June 30, 2016, in order to conduct a clinical trial for the FibriLyzer and other studies, the Company entered into a Master Services Agreement (the “MSA”) with Integrium LLC (“Integrium”) and PoC Capital, LLC (“PoC Capital”). Under the MSA, Integrium has agreed to perform clinical research services in support of the development of POC diagnostics devices.  Integrium is to conduct one or more studies in compliance with FDA regulations and pursuant to the Company’s specific service orders.   PoC Capital has agreed to fund up to the first $1,000,000 in study costs and fees due to Integrium, with all fees in costs in excess of that amount being the Company’s sole responsibility, in exchange for 1,600,000 shares of the Company’s common stock, 1,733,334 shares of newly designated Series C Preferred Stock, and 1,666,667 warrants to purchase the Company’s common stock at a price of $0.60 per share exercisable for three years. For the year ended December 31, 2016 the Company had accounted $1,000,000 as prepaid expenses on the balance sheet which was impaired during the year ended December 31, 2017 due to cash constraints to manufacture materials needed for trial. See Note 8 below for additional information regarding the Company’s common stock, Series C Preferred Stock and warrants.

 

  

 

 

 NOTE 5. CONVERTIBLE LOAN NOTES

 

 On August 14, 2017, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) under which it agreed to sell an 8% convertible promissory note in an aggregate principal amount of $110,000.00 (the “Initial Note”) to Morningview Financial, LLC (“Morningview”). The net proceeds of the sale of this Initial Note, after deducting the Morningview’s discount and the expenses payable by the Company, were $87,000. The Note will mature on August 14, 2018.

 

At any time on or after the earlier of (i) the date on which the Registration Statement (defined below) has become effective or (ii) 170th calendar day after the issue date of the Initial Note, Morningview has the option to convert all or any part of the outstanding and unpaid principal amount and accrued and unpaid interest of the Initial Note into shares of the Company’s common stock at the Conversion Price. The “Conversion Price” will be the lesser of (i) $0.25 and (ii) 60% of the average of the three lowest trading prices of the Company’s common stock during the twenty-day trading period prior to the conversion. The Conversion Price is subject to further reduction upon certain events specified in the Initial Note.

 

On December 18, 2017, the Company further amended the Initial Note to (i) increase the aggregate principal amount of the Initial Note to $115,000 and (ii) extend the date by which the Company is required to cause the Registration Statement to become effective to January 4, 2018. On January 4, 2018, the Company further amended the Initial Note to (i) increase the aggregate principal amount of the Initial Note to $125,000 and (ii) extend the date by which the Company is required to cause the Registration Statement to become effective to February 1, 2018.

 

On September 27, 2017, pursuant to Securities Purchase Agreement, the Company issued an 8% convertible promissory note (the “Additional Note,” and together with the Initial Note, the “Notes”) in an aggregate principal amount of $27,500 to Morningview, with terms and conditions identical to the initial Note. The net proceeds of this sale of the Initial Note, after deducting Morningview’s discount and the expenses payable by the Company, were $21,750.

 

The terms of the Notes require the Company to have a registration statement permitting Morningview to resell the shares of the Company’s common stock into which the Notes may be converted (the “Registration Statement”) declared effective by the SEC within 120 days of the issue date of the Initial Note. On December 18, 2017, the Company further amended the Initial Note (the "Second Amendment to Initial Note") to (i) increase the aggregate principal amount of the Initial Note to $115,000 and (ii) extend the date by which the Company is required to cause the Registration Statement to become effective to January 4, 2018. On January 4, 2018, the Company further amended the Initial Note (the “Third Amendment to Initial Note”) to (i) increase the aggregate principal amount of the Initial Note to $125,000 and (ii) extend the date by which the Company is required to cause the Registration Statement to become effective to February 1, 2018. Starting in March 2018, the Company is repaying the Note $25,000 a month.

 

On December 29, 2017, the Company entered into a Securities Purchase Agreement, dated as of December 21, 2017 (the "EMA Securities Purchase Agreement"), under which it agreed to sell a 12% convertible promissory note in an aggregate principal amount of $65,000 (the "EMA Note") to EMA Financial, LLC ("EMA"). The net proceeds of the sale of the EMA Note, after deducting the expenses payable by the Company, were $62,400

 

The EMA Note and the shares of the Company's common stock issuable upon conversion of the EMA Note have not been, and will not be, registered under the Securities Act. The Company offered and sold the EMA Note to EMA in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.

 

The EMA Note is dated December 21, 2017 and provides the terms and conditions of the Company's obligations to EMA.  The EMA Note will bear interest at a rate of 12% per annum and will mature on December 21, 2018.

 

At any time after the 180th calendar day after the issue date of the EMA Note, EMA has the option to convert all or any part of the outstanding and unpaid principal amount and accrued and unpaid interest of the EMA Note into shares of the Company's common stock at the EMA Conversion Price.  The "EMA Conversion Price" will be the lesser of (i) the closing sale price of the Company's common stock on the trading day immediately preceding the date of conversion and (ii) 60% of either the lowest sale price of the Company's common stock during the twenty-day trading period prior to the conversion, or the closing bid price, whichever is lower. The EMA Conversion Price is subject to further reduction upon certain events specified in the EMA Note.

 

 

 

On December 29, 2017, the Company entered into a Securities Purchase Agreement, dated as of December 26, 2017 (the "Auctus Securities Purchase Agreement"), under which it agreed to sell a 12% convertible promissory note in an aggregate principal amount of $125,000 (the "Auctus Note") to Auctus Fund, LLC ("Auctus"). The net proceeds of the sale of the Auctus Note, after deducting the expenses payable by the Company, are expected to be $112,250.

 

The Auctus Note and the shares of the Company's common stock issuable upon conversion of the Auctus Note have not been, and will not be, registered under the Securities Act. The Company offered and sold the Auctus Note to Auctus in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.

 

The Auctus Note is dated December 26, 2017 and provides the terms and conditions of the Company's obligations to Auctus.  The Auctus Note will bear interest at a rate of 12% per annum and will mature on September 26, 2018.

 

At any time after the 180th calendar day after the issue date of the Auctus Note, Auctus has the option to convert all or any part of the outstanding and unpaid principal amount and accrued and unpaid interest of the Auctus Note into shares of the Company's common stock at the Auctus Conversion Price.  The "Auctus Conversion Price" will be the lesser of (i) the lowest trading price of the Company's common stock during the twenty-five-day trading period prior to the issue date of the Auctus Note and (ii) 50% of the lowest trading price of the Company's common stock during the twenty-five-day trading period prior to the conversion. The Auctus Conversion Price is subject to further reduction upon certain events specified in the Auctus Note.

 

 

	December 31,	December 31,
	2017	2016
Convertible Loan Notes
Principal Amount	$332,500	$-
Less unamortized debt discount and debt issuance costs	(274,704)	-
Current debt less unamortized debt discount and debt issuance costs	$57,796	$-

 

During the year ended December 31, 2017, the Company recognized $41,991 in interest expense for the amortization of debt discounts and $10,804 for amortization of deferred issuance costs for the Notes issued on August 14, 2017, September 27, 2017, December 21, 2017, and December 26, 2017.

NOTE 6. FAIR VALUE MEASUREMENT

 

 The guidance regarding fair value measurements prioritizes the inputs used in measuring fair value and establishes a three-tier value hierarchy that distinguishes among the following: