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)
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
(1) Based on a closing sale price of $0.65 per share on June 30,
2017. Excludes 25.2 million shares of the registrant’s common
stock held by executive officers, directors and stockholders that
the registrant has concluded were affiliates at June 30,
2017.
TABLE O
F
CONTENTS
|
|
|
Page Number
|
|
|
|
|
|
|
|
|
|
1
|
||
|
7
|
||
|
17
|
||
|
17
|
||
|
17
|
||
|
17
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
||
|
18
|
||
|
19
|
||
|
22
|
||
|
23
|
||
|
24
|
||
|
24
|
||
|
25
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
||
|
27
|
||
|
32
|
||
|
34
|
||
|
34
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
||
|
|
|
|
|
|
|
|
PA
R
T I
Item
1.
Business.
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
Our
business substantially depends on our licensed technology. We have
entered into an exclusive licensing agreement, the “Licensing
Agreement” with Digital Diagnostics Inc. (“Digital
Diagnostics”)to develop, produce and commercialize certain
diagnostic products, including FibriLyzer and MatriLyzer, which
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, commercialization
and manufacture 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 FibriLyzer and MatriLyzer, and various sales
thresholds, and royalty payments based on the net sales of the
products, calculated on a product-by-product basis. The initial
signing payment is due within seven days of the effective date of
the agreement, with the remaining amount due upon closing of
certain of our financing transactions. 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 on a product-by-product and
country-by-country basis until such time as neither Digital
Diagnostics nor Exactus Biosolutions has any obligation to the
other under the License Agreement in such country with respect to
such product. The License Agreement may be terminated by Exactus
BioSolutions as a whole or on a country-by-country and/or
product-by-product basis, effective upon at least six (6) months
written notice if regulatory approval has been obtained in the U.S.
or in the EU, or upon at least three (3) months written notice if
regulatory approval has not been obtained in the U.S. or in the EU.
Either party may terminate the License Agreement in the event the
other party materially breaches the License Agreement, or becomes
insolvent.
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.
Item
1A.
Ris
k
Factors.
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:
●
failure
to obtain approvals for clinical trials or unsuccessful clinical
trials;
●
lack
of familiarity of health care providers and patients;
●
low
market acceptance as a result of lower demonstrated safety or
efficacy or other
disadvantages
relative to other available diagnostic products;
●
insufficient
or unfavorable coverage determinations or reimbursements from
health plans, governments or third party payers;
●
alleged
infringement on proprietary rights of others related to our
licenses;
●
ineffective
marketing and distribution support;
●
lack
of cost-effectiveness; or
●
timing
of market introduction of competitive 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:
●
the accuracy of the
assumptions underlying our estimates for capital needs in 2018 and
beyond;
●
scientific progress
in our research and development programs;
●
the magnitude and
scope of our research and development programs and our ability to
establish, enforce and maintain strategic arrangements for
research, development, clinical testing, manufacturing and
marketing;
●
our progress with
pre-clinical development and clinical trials;
●
the time and costs
involved in obtaining regulatory approvals; and
●
the number and type
of product candidates that we pursue.
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:
●
the product
candidates require significant clinical testing to demonstrate
safety and effectiveness before applications for marketing approval
can be filed with the FDA and other regulatory
authorities;
●
data obtained from
pre-clinical and clinical trials can be interpreted in different
ways, and regulatory authorities may not agree with our respective
interpretations or may require us to conduct additional
testing;
●
negative or
inconclusive results or the occurrence of serious or unexpected
adverse events during a clinical trial could cause us to delay or
terminate development efforts for a product candidate;
and/or
●
FDA and other
regulatory authorities may require expansion of the size and scope
of the clinical trials.
Any
difficulties or failures that we encounter in securing regulatory
approval for our product candidates would likely have a substantial
adverse impact on our ability to generate product sales, and could
make any search for a collaborative partner more
difficult.
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:
●
warning letters or
other actions requiring changes in product manufacturing processes
or restrictions on product marketing or distribution;
●
product recalls or
seizures or the temporary or permanent withdrawal of a product from
the market; and
●
federal and state
investigations, fines, restitution or disgorgement of profits or
revenue, the imposition of civil penalties or criminal
prosecution.
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:
●
reliance on the
third party for regulatory compliance and quality
assurance;
●
limitations on
supply availability resulting from capacity and scheduling
constraints of the third parties;
●
impact on our
reputation in the marketplace if manufacturers of our products,
once commercialized, fail to meet the demands of our customers;
and
●
impact of a
catastrophic event at the third party manufacturing facility on our
ability to meet the demands of our customers.
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.
Item
1B.
Unresol
v
ed Staff Comments.
Not
applicable.
Item
2.
Pro
p
erties.
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.
Item
3.
Legal
Procee
d
ings.
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.
Item
4.
Min
e
Safety Disclosures.
Not
applicable.
PA
R
T II
Item
5.
Market
for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchasers of Equity Securities.
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
Item
6.
Selected
Fina
n
cial
Data.
Not
applicable.
Item
7.
Management’s
Discussio
n
and
Analysis of Financial Condition and Results of
Operations.
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:
●
our
history of operating losses and lack of revenues to
date;
●
our
limited cash resources and our ability to obtain additional funding
necessary to develop our products and maintain
liquidity;
●
the
success of our clinical trials through all phases of clinical
development;
●
the
need to obtain regulatory approval of our products and any delays
in regulatory reviews or product testing;
●
market
acceptance of, and our ability to commercialize, our
products;
●
competition
from existing products or new products that may
emerge;
●
changes
in technology;
●
our
dependence on the development and commercialization of our primary
product, the FibriLyzer, to generate revenues in the
future;
●
our
dependence on and our ability to maintain our licensing
agreement;
●
our
ability and third parties’ abilities to protect intellectual
property rights;
●
potential
product liability claims;
●
our
ability to maintain liquidity and adequately support future
growth;
●
changes
in, and our ability to comply with, laws or regulations applicable
to the life sciences or healthcare industries;
●
our
ability to attract and retain key personnel to manage our business
effectively; and
●
other
risks and uncertainties described from time to time, in our filings
made with the SEC.
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.
Item
7A.
Quantitative
a
n
d Qualitative
Disclosures About Market Risk.
Not
applicable.
Item
8.
Financi
a
l Statements and Supplementary
Data.
|
CONTENTS
|
|
|
|
|
|
|
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
F-1
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
|
|
|
F-5
|
|
|
|
|
|
|
|
|
REPORT OF INDEP
E
NDENT
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
|
|
|
|
|
|
|
|
Exa
c
tus, Inc.
(formerly known as Spiral Energy Tech, Inc.)
|
|
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
|
The accompanying notes are an integral part of these consolidated
financial statements.
Exact
u
s, Inc.
(formerly known as Spiral Energy Tech, Inc.)
|
|
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
|
The accompanying notes are an integral part of these consolidated
financial statements.
Exactus, Inc.
(formerly known as Spiral Energy Tech, Inc.)
Consolidated Statements of St
o
ckholders' 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
)
|
The accompanying notes are an integral part of these consolidated
financial statements.
Exact
u
s, Inc.
(formerly known as Spiral Energy Tech, Inc.)
|
|
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
|
$
-
|
The accompanying notes are an integral part of these consolidated
financial statements.
Ex
a
ctus, Inc.
(formerly known as Spiral Energy Tech, Inc.)
Notes to the Audited Financial Statements
December 31, 2017 and 2016
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”). T
he 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”).
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.
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:
●
Level 1—Valuations
based on unadjusted quoted prices in active markets for identical
assets or liabilities that the Company has the ability to
access.
●
Level 2—Valuations
based on quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or
liabilities in markets that are not active and models for which all
significant inputs are observable, either directly or
indirectly.
●
Level 3—Valuations
based on inputs that are unobservable and significant to the
overall fair value measurement.
Liabilities
are classified based on the lowest level of input that is
significant to the fair value measurements. The Company has not
transferred any liabilities between the classification
levels.
Cash and Cash
Equivalents
.
We consider all highly
liquid investments purchased with an original maturity of three
months or less to be cash equivalents. The carrying value of those
investments approximates their fair market value due to their short
maturity and liquidity. Cash and cash equivalents include cash on
hand and amounts on deposit with financial institutions, which
amounts may at times exceed federally insured limits.
As of December 31, 2017, we
had
cash and cash
equivalents of $161,215, and as of December 31, 2016, we had cash
and cash equivalents of $1,055,336.
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.
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.
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
180
th
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 180
th
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.
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:
●
Level 1—Valuations based on unadjusted quoted prices in
active markets for identical assets or liabilities that the Company
has the ability to access.
●
Level 2—Valuations based on quoted prices for similar
assets or liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are not
active and models for which all significant inputs are observable,
either directly or indirectly.
●
Level 3—Valuations based on inputs that are unobservable
and significant to the overall fair value measurement.
Liabilities are classified based on the lowest level of input that
is significant to the fair value measurements. The Company has not
transferred any liabilities between the classification
levels.
The Company estimates fair values of derivative liabilities
utilizing Level 3 inputs. The Company uses the Monte Carlo
valuation model for derivatives which embodies all of the requisite
assumptions (including trading volatility, remaining term to
maturity, market price, strike price, risk-free rates) necessary to
determine fair value of these instruments. The Company’s
derivative liabilities are marked-to-market with the changes in
fair value recorded as a component of change in fair value of
derivative liabilities in the Company’s condensed
consolidated statements of operations. Estimating fair values of
derivative liabilities requires the use of significant and
subjective inputs that may, and are likely to, change over the
duration of the instrument with related changes in internal and
external market factors.
The Company identified financial instruments, the conversion
options embedded in the Notes discussed in Note 6, which require
liability presentation at fair value. Each of these instruments
provide the holder with the right to convert into common stock at a
fixed discount market, subject to a cap on the conversion price.
These clauses cause uncertainty as to the number of shares issuable
upon conversion of convertible debt and accordingly require
liability presentation on the balance sheet in accordance with US
GAAP.
The
fair value of the Initial Note on the date of issuance and on
December 31, 2017 was estimated using the Monte Carlo valuation
model. This method of valuation involves using inputs such as the
fair value of the Company’s common stock, stock price
volatility, and risk–free interest rates. Due to the nature
of these inputs, the valuation of the Initial Note is considered a
Level 3 measurement. The following assumptions were used on August
14, 2017 (issuance date) and December 31, 2017:
|
|
August 14, 2017
|
December 31, 2017
|
|
Volatility
|
303.93
%
|
333.89
%
|
|
Risk-free
interest rate
|
1.23
%
|
1.31
%
|
|
Common
stock closing price
|
$
0.20
|
$
0.20
|
Based on these assumptions, the Company recorded a
$240,000 derivative liability on the issuance date of the Initial
Note.
The initial fair values of the embedded debt
derivative $87,000 was allocated as a debt discount with the
remainder $153,000 was charged to current period operations as
derivative expenses
. The derivative
liability for the Initial Note was adjusted to fair market value of
$264,000 as of December 31, 2017.
The
fair value of the Additional Note on the date of issuance and on
December 31, 2017 was also estimated using the Monte Carlo
valuation model. The following assumptions were used on September
27, 2017 (issuance date) and December 31, 2017:
|
|
September 27, 2017
|
December 31, 2017
|
|
Volatility
|
319.5
%
|
326.65
%
|
|
Risk-free
interest rate
|
1.33
%
|
1.31
%
|
|
Common
stock closing price
|
$
0.12
|
$
0.20
|
Based on these assumptions, the Company recorded a
$46,000 derivative liability on the issuance date of the Additional
Note.
The initial fair values of the embedded debt
derivative $21,750 was allocated as a debt discount with the
remainder $24,250 was charged to current period operations as
derivative expenses
. The derivative
liability for the Additional Note was adjusted to fair market value
of $63,000 as of December 31, 2017.
The
fair value of the EMA note on the date of issuance and on December
31, 2017 was also estimated using the Monte Carlo valuation model.
The following assumptions were used on December 21, 2017 (issuance
date) and December 31, 2017:
|
|
December 21, 2017
|
December 31, 2017
|
|
Volatility
|
300.94
%
|
303.97
%
|
|
Risk-free
interest rate
|
1.73
%
|
1.76
%
|
|
Common
stock closing price
|
$
0.20
|
$
0.20
|
Based on these assumptions, the Company recorded a
$163,000 derivative liability on the issuance date of the EMA
Note.
The initial fair values of the embedded debt
derivative $56,800 was allocated as a debt discount with the
remainder $106,200 was charged to current period operations as
derivative expenses
. The derivative
liability for the EMA Note was adjusted to fair market value of
$169,000 as of December 31, 2017.
The
fair value of the Auctus Note on the date of issuance and on
December 31, 2017 was also estimated using the Monte Carlo
valuation model. The following assumptions were used on December
26, 2017 (issuance date) and December 31, 2017:
|
|
December 26, 2017
|
December 31, 2017
|
|
Volatility
|
320.69
%
|
326.65
%
|
|
Risk-free
interest rate
|
1.19
%
|
1.53
%
|
|
Common
stock closing price
|
$
0.20
|
$
0.20
|
Based on these assumptions, the Company recorded a
$427,000 derivative liability on the issuance date of the Auctus
Note.
The initial fair values of the embedded debt
derivative $102,250 was allocated as a debt discount with the
remainder $324,750 was charged to current period operations as
derivative expenses
. The derivative
liability for the Auctus Note was adjusted to fair market value of
$434,000 as of December 31, 2017.
The
Company recorded change in fair value of the derivative liability
on debt to market resulting in non-cash, non-operating loss of
$54,000 and $0 for the years ended December 31, 2017 and 2016,
respectively, under derivative expenses.
During
the year ended December 31, 2017, the Company accrued $4,495 as
interest expenses on the above convertible notes.
The
following table provides a summary of changes in fair value of the
Company’s Level 3 financial liabilities as of December 31,
2016 and December 31, 2017:
|
|
Derivative
|
|
|
Liability
(convertible
|
|
|
notes)
|
|
Balance, December
31, 2016
|
$
-
|
|
Initial fair value
at note issuances
|
876,000
|
|
Extinguishment of
derivative liability
|
-
|
|
Mark-to-market at
December 31, 2017
|
54,000
|
|
|
|
|
Balance, December
31, 2017
|
$
930,000
|
|
Net loss for the
year included in earnings relating to the liabilities held at
December 31, 2017
|
$
54,000
|
As
of December 31, 2017, the Company has a deferred tax asset,
resulting from benefits of net operating loss carry forward
generated from inception, which expire in varying amounts between
2028 and 2037.
The tax
reform bill that Congress voted to approve Dec. 20, 2017, also
known as the “Tax Cuts and Jobs Act”, made sweeping
modifications to the Internal Revenue Code, including a much lower
corporate tax rate, changes to credits and deductions, and a move
to a territorial system for corporations that have overseas
earnings.
The act
replaced the prior-law graduated corporate tax rate, which taxed
income over $10 million at 35%, with a flat rate of
21%.
The
Company has not reviewed the all of the changes the “Tax Cuts
and Jobs Act” will apply to the Company, but is reviewing
such changes. Due to the continuing loss position of the Company,
such changes should not be material.
The
carry-forwards may be further subject to the application of Section
382 of the Internal Revenue Code of 1986. The Company’s past
sales and issuances of common and preferred stock have likely
resulted in ownership changes as defined by Section 382 of the
Code. The Company has not conducted a Section 382 study to date. It
is possible that a future analysis may result in the conclusion
that a substantial portion, or perhaps substantially all, of the
NOLs and credits will expire due to the limitations of Sections 382
and 383 of the Code. As a result, the utilization of the NOLs and
tax credits may be limited and a portion of the carry-forwards may
expire unused. The Company has provided a valuation allowance to
offset the deferred tax assets due to the uncertainty of realizing
the benefits of the net deferred tax asset.
The
provision for income taxes differs from the amounts which would be
provided by applying the statutory federal income tax rate of 21%
to the net income (loss) before provision for income taxes. As of
December 31, 2017, there was approximately $810,000 in deferred tax
assets, which were off-set by an equal valuation
allowance.
The
Company has not taken positions contrary to the Internal Revenue
Code, however, the tax years of 2013 through 2017 remain subject to
audit by the Internal Revenue Service.
The
tax effects of temporary differences that give rise to the
Company’s net deferred tax asset as of December 31, 2017 and
2016 are as follows:
|
|
December
31,
|
December
31,
|
|
|
2017
|
2016
|
|
Current tax
benefit
|
$
(810,000
)
|
$
(544,000
)
|
|
Valuation
allowance
|
810,000
|
544,000
|
|
Total tax
expense
|
$
-
|
$
-
|
|
|
December
31,
|
December
31,
|
|
|
2017
|
2016
|
|
Balance
forward
|
$
794,500
|
$
250,500
|
|
Change in deferred
tax asset
|
490,500
|
544,000
|
|
Total deferred tax
asset
|
1,285,000
|
794,500
|
|
Valuation
allowance
|
(1,285,000
)
|
(794,500
)
|
|
Total tax
expense
|
$
-
|
$
-
|
Recapitalization
and Change in Control
On
February 29, 2016, the Company consummated the Share Exchange,
which resulted in a change in control of the Company. As part of
this transaction, the Company acquired a $50,000 license agreement
and $1,292 in cash and assumed liabilities of $51,000. The Company
initially reported an issuance of 32 million shares of newly
designated Series B-1 Preferred Stock to the shareholders of
Exactus BioSolutions in the Share Exchange. Due to an anticipated
pre-acquisition investment in Exactus BioSolutions that was not
made, the final total issued shares of Series B-1 Preferred Stock
was 30 million.
The
Company has considered the guidance pursuant to Rule 11-01(d) of
Regulation S-X and related interpretations and has concluded the
acquisition of Exactus BioSolutions pursuant to the Share
Exchange is the acquisition of an asset and not of a
business. The license agreement and shareholder loans
have been accounted for and recorded at historical
cost.
Concurrently
with the closing of the Share Exchange, the Company closed a
private offering of Series B-2 Preferred Stock. The
Company sold a total of 2,084,000 shares of Series B-2 Preferred
Stock at an offering price of $0.25 per share, for an aggregate
subscription price of $521,000. The Company originally reported a
total of 2,884,000 shares of Series B-2 preferred stock being
issued in the offering. Due to: (i) an anticipated investment for
1,000,000 shares which was not made, and (ii) an additional
subscription for 200,000 shares for which documentation had not
been completed at that time, however, the final total issued shares
of Series B-2 Preferred Stock was 2,084,000. The shares sold in the
offering included 400,000 shares of Series B-2 preferred stock
issued to extinguish a $100,000 loan and 204,000 shares of Series
B-2 preferred stock issued to former creditors of Exactus
BioSolutions in exchange for their release of $51,000 in debt owed
by Exactus. After accounting for these issuances, net
cash proceeds from the offering were $370,000. No
underwriting discounts or commissions have been or will be paid in
connection with the sale of Series B-2 Preferred
Stock.
Also
on February 29, 2016, the Company entered into Exchange Agreements
with certain holders of common stock holding an aggregate of
393,314 post-split (11,636,170 pre-split) shares of common
stock. Under the Exchange Agreements, these shareholders
exchanged their common stock for a total of 4,558,042 shares of
Series A Preferred Stock. These exchanges consisted of: (i)
thirteen common stock holders holding 10,894,070 (pre-split) shares
of common stock who exchanged their common stock for 3,458,042
shares Series A Preferred Stock, resulting in a (pre-split)
exchange ratio of approximately 1 for 3.15, and (ii) one
shareholder who, under a separately negotiated agreement, exchanged
742,100 (pre-split) shares common stock for 1,100,000 shares of
Series A Preferred Stock, resulting at a (pre-split) exchange ratio
of approximately 1.48 for 1. Immediately following such
share exchanges, the Company repurchased 50,000 shares of Series A
Preferred Stock from a shareholder for a total price of
$50,000.
Reverse Stock Split
Effective
March 22, 2016, the Company performed a reverse split of common
stock on a 1 for 29.5849 basis, pursuant to the prior approval by
the Board of Directors and a majority of
shareholders. On March 22, 2016, the effective date of
the reverse split, the Company had approximately 3,608,715 shares
of common stock issued and outstanding, which were split into
121,978 shares of common stock. The par value of the common stock
was unchanged at $0.0001 per share, post-split. All per share
information in the condensed financial statements gives retroactive
effect to the 1 for 29.5849 reverse stock split that was effected
on March 22, 2016.
Preferred Stock
The
Company’s authorized preferred stock consists of 50,000,000
shares with a par value of $0.0001. On February 17,
2016, the Board of Directors voted to designate a class of
preferred stock entitled Series A Preferred Stock, consisting of up
to five million (5,000,000) shares, par value
$0.0001. The shares of Series A Preferred Stock were
automatically converted to 4,508,042 shares of common stock on
March 30, 2016, thirty (30) days after the closing of the Share
Exchange and offering of Series B-2 Preferred Stock. As
a result, there are 4,558,042 Series A preferred stock issued and
zero outstanding as of December 31, 2016.
Also
on February 17, 2016, the Company’s Board of Directors voted
to designate a class of preferred stock entitled Series B-2
Convertible Preferred Stock (“Series B-2 Preferred
Stock”), consisting of up to six million (6,000,000) shares,
par value $0.0001, with a stated value of $0.25 per
share. With respect to rights on liquidation, winding up
and dissolution, holders of Series B-2 Preferred Stock will be paid
in cash in full, before any distribution is made to any holder of
common or other classes of capital stock, an amount of $0.25 per
share. Shares of Series B-2 Preferred Stock have no dividend rights
except as may be declared by the Board in its sole and absolute
discretion, out of funds legally available for that purpose. Shares
of Series B-2 Preferred Stock are convertible, at the option of the
holder, into shares of common stock on a one (1) for one (1)
basis. Holders of Series B-2 Preferred Stock have the
right to vote as-if-converted to common stock on all matters
submitted to a vote of the holders of the Company’s common
stock.
For so long as any shares of Series B-2 Preferred Stock are
issued and outstanding, the Corporation shall not issue any notes,
bonds, debentures, shares of preferred stock, or any other
securities that are convertible to common stock unless such
conversion rights are at a fixed ratio or a fixed monetary price
(Note 9).
On February 29, 2016, the Company issued 2,084,000
shares of Series B-2 Preferred Stock.
On August 1, 2016, the Company closed a
private offering of Series B-2 Preferred Stock. The
Company sold a total of 500,000 shares of Series B-2 Preferred
Stock to accredited investors at an offering price of $0.25 per
share, for an aggregate subscription price of
$125,000. No underwriting discounts or commissions have
been paid in connection with the sale of the Series B-2 Preferred
Stock
.
Effective
October 13, 2016, the Company amended the Certificate of
Designation for its Series B-2 Preferred Stock to increase the
number of shares of the Series B-2 Preferred Stock from 6,000,000
to 10,000,000 shares. There were no other changes to the terms of
the Company’s Series B-2 Preferred Stock.
On
October 27, 2016, the Company closed a private offering of Series
B-2 Preferred Stock. The Company sold a total of
6,000,000 shares of Series B-2 Preferred Stock to accredited
investors at an offering price of $0.25 per share, for an aggregate
subscription price of $1,500,000. No underwriting
discounts or commissions have been or will be paid in connection
with the sale of the Series B-2 Preferred Stock.
On
January 26, 2017, the Company closed a private offering of Series
B-2 Preferred Stock. The Company sold a total of 100,000
shares of Series B-2 Preferred Stock to accredited investors at an
offering price of $0.25 per share, for an aggregate subscription
price of $25,000. No underwriting discounts or
commissions have been or will be paid in connection with the sale
of the Series B-2 Preferred Stock.
As
of December 31, 2017 and 2016, 8,684,000 and 8,584,000 shares,
respectively, of Series B-2 Preferred Stock are issued and
outstanding.
On
February 29, 2016, the Company’s Board of Directors voted to
designate a class of preferred stock entitled Series B-1
Convertible Preferred Stock (“Series B-1 Preferred
Stock”), consisting of up to thirty-two million (32,000,000)
shares, par value $0.0001. With respect to rights on
liquidation, winding up and dissolution, the Series B-1 Preferred
Stock ranks pari passu to the class of common stock.
Shares of Series B-1 Preferred Stock have no dividend rights except
as may be declared by the Board in its sole and absolute
discretion, out of funds legally available for that purpose. Shares
of Series B-1 Preferred Stock are convertible, at the option of the
holder, into shares of common stock on a one (1) for one (1) basis.
Holders of Series B-1 Preferred Stock have the right to vote
as-if-converted to common stock on all matters submitted to a vote
of holders of the Company’s common stock. On February 29,
2016, the Company issued 30,000,000 shares of Series B-1 Preferred
Stock, of which 2,800,000 remain outstanding as of December 31,
2017 and 2016.
On
June 30, 2016, pursuant to the MSA summarized in Note 4, the
Company’s Board of Directors approved a Certificate of
Designation authorizing 1,733,334 shares of new Series C Preferred
Stock, par value $0.0001. The Series C Preferred Stock
ranks equally with our common stock with respect to liquidation
rights and is convertible to common stock on a 1 for 1
basis. The conversion rights of holders of the Series C
Preferred Stock are limited such that no holder may convert any
shares of preferred stock to the extent that such holder,
immediately following the conversion, would own in excess of 4.99%
of our issued and outstanding shares of common
stock. This limitation may be increased to 9.99% upon 61
days written notice by a holder of the Series C Preferred Stock to
the Company. On June 30, 2016, the Company issued
1,733,334 shares of Series C Preferred Stock to PoC Capital valued
at $511,334 as prepaid expenses on the balance sheet. As of
December 31, 2017 and 2016, 1,733,334 shares of Series C Preferred
Stock are issued and outstanding
Common Stock
The
Company’s authorized common stock consists of 200,000,000
shares with a par value of $0.0001.
The
Company automatically converted all outstanding shares of Series A
Preferred Stock to common stock on March 30, 2016. As a
result, 4,508,042 shares of common stock were issued in exchange of
4,508,042 shares of Series A Preferred Stock.
Certain
shareholders converted their shares of Series B-1 Preferred Stock
to common stock on June 15, 2016. As a result,
27,200,000 shares of common stock were issued in exchange of
27,200,000 shares of Series B-1 Preferred Stock.
On
June 30, 2016, pursuant to the MSA summarized in Note 4, the
Company issued 1,600,000 shares of common stock to PoC Capital
valued at $480,000 as prepaid expenses on the balance
sheet.
P
ursuant to a services
agreement with IRTH Communications, LLC (“IRTH”) in
which IRTH agreed to perform certain investor relations, financial
communications, and strategic consulting services, the Company
issued $100,000 of our common stock, or 141,844 shares, to IRTH on
November 18, 2016 in partial consideration for those services. On
December 13, 2016, the Company issued an additional 500,000 shares
of common stock to IRTH pursuant to an addendum to the services
agreement and in consideration of certain additional services,
including telemarketing and investor outreach services, to be
provided by IRTH.
On
February 22, 2017, the Company and IRTH agreed that IRTH would not
provide the additional services
pursuant to an addendum
to a services agreement
and the
500,000 shares of common stock issued on December 13, 2016 were
returned to the Company and retired.
On October 19, 2017, the Company issued 1,500,000 shares of its
common stock to IRTH to settle $41,685 of outstanding advertising
and promotion expenses and accounted for a debt settlement loss of
$78,315.
There
were 35,071,862 and 34,071,862 common shares issued and outstanding
at December 31, 2017 and 2016, respectively.
Warrants and Options
On
June 30, 2016, pursuant to the MSA summarized in Note 4, the
Company issued warrants to purchase 1,666,667 common stock shares
for a price of $0.60 per share exercisable for three years to PoC
Capital.
These
warrants have a grant date fair value of $0.0052 per warrant,
determined using the Black-Scholes method based on the following
assumptions: (1) risk free interest rate of 0.71%; (2) dividend
yield of 0%; (3) volatility factor of the expected market price of
our common stock of 27.2%; and (4) an expected life of the warrants
of 3 years.
The
Company has recorded a prepaid expense on these warrants of $8,667
as of June 30, 2016.
There
were 1,666,667 warrants outstanding at December 31, 2017 and
2016.
In
the ordinary course of business, we enter into agreements with
third parties that include indemnification provisions which, in our
judgment, are normal and customary for companies in our industry
sector. These agreements are typically with business partners,
clinical sites, and suppliers. Pursuant to these agreements, we
generally agree to indemnify, hold harmless, and reimburse
indemnified parties for losses suffered or incurred by the
indemnified parties with respect to our product candidates, use of
such product candidates, or other actions taken or omitted by us.
The maximum potential amount of future payments we could be
required to make under these indemnification provisions is
unlimited. We have not incurred material costs to defend lawsuits
or settle claims related to these indemnification provisions. As a
result, the estimated fair value of liabilities relating to these
provisions is minimal. Accordingly, we have no liabilities recorded
for these provisions as of December 31, 2017, and
2016.
Per clause
7,
No
Variable Rate Convertible Securities, in the subscription
agreements of Series B-2 Preferred Stock
,
for so long
as any shares of Series B-2 Preferred Stock are issued and
outstanding, the Corporation shall not issue any notes, bonds,
debentures, shares of preferred stock, or any other securities that
are convertible to common stock unless such conversion rights are
at a fixed ratio or a fixed monetary price. The Company issued
variable convertible notes during the yearwhich is in violation of
this clause (Note 5). The Company kept the Series B-2 holders
informed of the Company’s cash needs though out the year and
Series B-2 holders had the opportunity to participate in
convertible loan notes. Subsequently, the Company's largest
Series B holder participated into two note purchase agreements on
March 22, 2018 (Note 11).
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 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.
In management’s opinion, we have incurred a
probable loss as set forth by accounting principles generally
accepted in the United States, estimated the loss to be $20,000,
and recorded the appropriate accounting entries which are reflected
in our financial statements.
Some
of the officers and directors of the Company are involved in other
business activities and may, in the future, become involved in
other business opportunities that become available. They may face a
conflict in selecting between the Company and other business
interests. We have not formulated a policy for the resolution of
such conflicts.
On November 20, 2017, Dr. Dimitrov provided a
notice dated November 21, 2017 to the Company stating that he was
resigning from the Board, effective immediately. Dr. Dimitrov
indicated that his resignation from the Board was based on the
deteriorating relationship between the Company and Digital
Diagnostics over the non-payment of fees owed by the Company
pursuant to the licensing agreement between the Company and Digital
Diagnostics. Dr. Dimitrov currently serves as the President of
Digital Diagnostics, and the Company has licensed the right to
develop, produce and commercialize certain diagnostic products,
including the FibriLyzer and MatriLyzer, utilizing certain
intellectual property rights owned or licensed by Digital
Diagnostics. Dr. Dimitrov believes that, in light of these
concerns, his role as both a Director of the Company and the
President of Digital Diagnostics creates a conflict of interest and
has decided to focus his time and energy on doing what is best for
the shareholders of Digital Diagnostics. For the year ended
December 31, 2017 and 2016, the Company accrued $30,000 and
$171,033, respectively, in licensing fees expenses to Digital
Diagnostics. As of December 31, 2017 and 2016, $126,032 and
$171,032, respectively, are shown as accrual under accounts
payable.
The
Company has also accrued interest at 3% over the prime rate, per
the Licensing Agreement, of $9,802 for the remaining balance due as
of December 31, 2017
.
The Company paid $75,000 and $50,000
during the years ended December 31, 2017 and 2016.
In the first quarter of 2018, the
Company paid the entire balance due to Digital
Diagnostics.
For
the years ended December 31, 2017 and 2016, $300,000 and $251,096,
respectively, was recognized in Research and Development expenses
for consulting provided by Dr. Dimitrov. As of December 31, 2017
and 2016, $275,000 and $101,095, respectively, are shown as accrual
under accounts payable. During the year ended December 31, 2017 and
2016, $125,000 and $150,000, respectively was paid.
On
June 28, 2017, the Company issued to two of the Company’s
executive officers a promissory note in the principal amount up to
$100,000, which amount may be drawn upon by the Company as bridge
financing for general working capital purposes. The promissory note
accrues interest at a rate of 8.0% per annum and matures on the
earlier of (i) one (1) year from the date of the promissory note,
and (ii) the closing the sale of the Company’s securities in
a single transaction or a series of related transactions from which
at least $500,000 of gross proceeds are raised. As of December 31,
2017, the Company has drawn $48,000 on the promissory note and
recorded as a note payable. During the year ended December 31,
2017, the Company accrued $1,967 as interest expenses on the above
notes payable.
In accordance with authoritative guidance, we have evaluated any
events or transactions occurring after December 31, 2017, the
balance sheet date, through the date of filing of this report and
note that there have been no such events or transactions that would
require recognition or disclosure in the consolidated financial
statements as of and for the year ended December 31, 2017, except
as disclosed below.
Common Stock
On February 9, 2018, the Company issued 1,718,675 shares of its
common stock to settle $91,306 of outstanding legal expenses and
accounted for a debt settlement loss of $252,429.
Series D Preferred Stock
The Company has filed the Series D Certificate of Designation with
the Nevada Secretary of State to designate and offer for sale 200
shares of the Company’s preferred stock as the Series D
Preferred Stock (the “Series D”) to certain accredited
investors, including affiliates of the Company (collectively the
“Investors”), with a maximum offering amount
of $2,200,000 (the “Offering”).
Up to 200 shares of Series D are being offered at a purchase price
of $10,000 per share. The Company is offering 70 shares of the 200
authorized Series D shares as re-payment for outstanding
obligations of the Company at an effective re-payment price of
$12,500 per share. To date the Company has received $550,000 in
connection with the Offering including $50,000 in cash for 5 shares
of Series D Preferred Stock and $500,000 in debt re-payment for 40
shares of Series D Preferred Stock. The Company intends to use the
proceeds from the Offering immediately for general corporate
purposes, including working capital.
Pursuant to the terms of the Series D Subscription Agreement,
immediately following the consummation of an offering of the
Company’s Common Stock for which the gross proceeds of the
offering exceed $5,000,000 (a “Qualified Offering”),
each share of Series D automatically converts into 200,000 shares
of Common Stock (the “Conversion Shares”). The Company
agreed that within 45 days of a Qualified Offering the Company
shall file a registration statement with the SEC registering the
Conversion Shares for resale by the Investors.
Series B-2 Preferred Stock Warrants
On March 14, 2018 (the “Warrant Date”), the Board of
Directors of the Company approved the issuance of up to 5,045,404
two-year Warrants to purchase shares of the Company’s Common
Stock to the holders of the Company’s Series B 2 Preferred
Stock (each a “B-2 Holder”). The Warrants are
exercisable at of $0.05 per share. Each B-2 Holder shall be issued
Warrants to purchase 0.581 shares of Common Stock for each share of
Series B-2 Preferred Stock (the “Series B-2”) held by
the B-2 Holder.
On March 20, 2018, the Company issued Warrants to purchase up to
3,486,000 shares of the Company’s Common Stock, to MS, who is
a B-2 Holder. The Company intends to issue an additional 1,559,404
Warrants to the B-2 Holders.
MagnaSci Fund, L.P., Promissory Notes
On March 22, 2018, the Company entered into two note purchase
agreements (together “NPA”), under which the Company
issued MagnaSci Fund, L.P. (“MS”) two convertible
promissory notes (collectively the “Notes”) with a
total principal amount of $100,000. The Notes bear interest at a
rate of 5% per annum and will mature on February 1, 2023 (the
“Maturity Date”).
If a Qualified Financing occurs prior to the Maturity Date, then
the outstanding principal balance of the Notes, together with all
accrued and unpaid interest thereon, shall be automatically
converted into a number of shares of the Company’s common
stock at $0.05 per Share. The Notes offers MS registration rights
wherein the Company agrees that within 45 days of a Qualified
Offering, prior to the Maturity Date, the Company shall file a
registration statement with the SEC registering for resale the
shares of Company’s common stock into which the Notes are
convertible.
Convertible Loan Note
On March 22, 2018, The Company entered into a securities purchase
agreement, effective March 16, 2018, with an investor pursuant to
which the Company issued and sold a convertible promissory note
(the “Note”) to the investor in the aggregate principal
amount of $58,500 original issue discount of 10%, and received
gross proceeds of $48,000. The Note matures on the earlier of (i)
December 16, 2018, or (ii) the date in which a registration
statement for the shares underlying the Note is declared effective
(either the “Maturity Date”). The Note bears interest
at 9% per annum. Beginning June 16, 2018, the investor may elect to
convert the Note into shares of common stock of the Company at the
lower of (i) $0.25 per share or (ii) 51% of the lowest trading
price of the Company’s common stock during the 25 day period
prior to the conversion, subject to adjustment (the
“Conversion Price”).
Item 9.
Changes
in and Disa
g
reements
With Accountants on Accounting and Financial
Disclosure.
None.
Item
9A.
Contro
l
s and Procedures.
(a) Disclosure Controls and Procedures
Our
principal executive officer and principal financial officer have
evaluated the effectiveness of our disclosure controls and
procedures, as defined in Rules 13a – 15(e) and 15d –
15(e) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), as of the end of the period covered by
this annual report. We have concluded that, based on such
evaluation, our disclosure controls and procedures were not
effective due to the material weaknesses in our internal control
over financial reporting as of December 31, 2017, as further
described below.
(b) Management’s Annual Report on Internal Control over
Financial Reporting
Overview
Internal
control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) refers to the process designed by, or under the
supervision of, our principal executive officer and principal
financial officer, and effected by our Board of Directors,
management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
Management is responsible for establishing and maintaining adequate
internal control over financial reporting.
Internal
control over financial reporting cannot provide absolute assurance
of achieving financial reporting objectives because of its inherent
limitations. Internal control over financial reporting is a process
that involves human diligence and compliance and is subject to
lapses in judgment and breakdowns resulting from human failures.
Internal control over financial reporting also can be circumvented
by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be
prevented or detected on a timely basis by internal control over
financial reporting. However, these inherent limitations are known
features of the financial reporting process. Therefore, it is
possible to design into the process safeguards to reduce, though
not eliminate, this risk.
Management
has used the framework set forth in the report entitled
“Internal Control — Integrated Framework”
published by the Committee of Sponsoring Organizations
(“COSO”) of the Treadway Commission to evaluate the
effectiveness of our internal control over financial reporting. As
a result of the material weaknesses described below, management has
concluded that the Company’s internal control over financial
reporting was not effective as of December 31, 2016.
Management’s Assessment
Management
has determined that, as of the December 31, 2017 measurement date,
there were material weaknesses in both the design and effectiveness
of our internal control over financial reporting. Management has
assessed these deficiencies and has determined that there were four
general categories of material weaknesses in internal control over
financial reporting. As a result of our assessment that material
weaknesses in our internal control over financial reporting existed
as of December 31, 2017, management has concluded that our internal
control over financial reporting was not effective as of December
31, 2017. A material weakness in internal controls is a deficiency
in internal control, or combination of control deficiencies, that
adversely affects the our ability to initiate, authorize, record,
process, or report external financial data reliably in accordance
with accounting principles generally accepted in the United States
of America such that there is more than a remote likelihood that a
material misstatement of our annual or interim financial statements
that is more than inconsequential will not be prevented or
detected. In the course of making our assessment of the
effectiveness of internal controls over financial reporting, we
identified at least two material weaknesses in our internal control
over financial reporting. Specifically, (1) we lack a
sufficient number of employees to properly segregate duties and
provide adequate review of the preparation of the financial
statements and (2) we lack sufficient independent directors on our
Board of Directors to maintain Audit and other committees
consistent with proper corporate governance standards. We have
limited financial resources and only four employees. The lack of
personnel is a weakness because it could lead to improper
classification of items and other failures to make the entries and
adjustments necessary to comply with U.S. GAAP. Accordingly,
management’s assessment is that the Company’s internal
controls over financial reporting were not effective as of December
31, 2017.
This
Annual Report does not include an attestation report of the
Company’s registered accounting firm regarding internal
control over financial reporting. Management’s report was not
subject to attestation by the Company’s registered public
accounting firm pursuant to rules of the Securities and Exchange
Commission.
Changes in Internal Control Over Financial Reporting
No
changes in the Company’s internal control over financial
reporting have come to management’s attention during the
Company’s last fiscal quarter that have materially affected,
or are likely to materially affect, the Company’s internal
control over financial reporting.
Item
9B.
Other
I
nformation.
None.
P
ART III
Item
10.
Directors,
Executive Officers and Corporate Governance.
Director
Information
The
Board of Directors of the Company is currently comprised of two
members. The following biographical information discloses each
director’s age, business experience and other directorships
held during the past five years. It also includes the experiences,
qualifications, attributes and skills that led to the conclusion
that the individual should serve as a director for the
Company.
Philip J. Young
, age
60, was appointed as our President, Chief Executive Officer, and
Chairman of the Board in March 2016. He was previously appointed as
a member of the Board of Directors on February 29, 2016. Mr. Young
was a Founder of Exactus BioSolutions and served as its Chairman,
President and Chief Executive Officer. He has served as a Director
and Executive Officer for public and private companies for the past
20 years where he has created significant shareholder value, built
integrated commercial operations and directed successful M&A
transactions. From October 2011 through December 2014, he served as
President, Chief Executive Officer and Director for AmpliPhi
Biosciences, a global biopharmaceutical company, where he completed
a transformational restructuring, collaborations and financings. He
was the President, Chief Executive Officer and Director of
Osteologix, Inc. from April 2007 – March 2011, where he
established corporate offices in Ireland after successfully
completing a global divestiture of its lead program. Prior to
joining Osteologix, Mr. Young served as an Executive Vice President
and Chief Business Officer for Insmed Inc., a publicly traded
biotechnology company where he directed all financing, commercial
and corporate communications activities. Prior to Insmed Inc., Mr.
Young held executive positions at Élan, Neurex, and Pharmacia
Corporations. Mr. Young started his management career in the
biopharmaceutical industry at Genentech Inc. where he was
responsible for their cardiovascular and endocrine product launches
sales and marketing.
Timothy Ryan
, age 57, was appointed as our Executive Vice
President in March 2016. He was appointed as a member of our Board
of Directors on February 29, 2016. Mr. Ryan was a Founder and
Executive Vice President of Exactus BioSolutions. He was the
Founder, and for the past seven years, Managing Director, of The
Shoreham Group, a Life Sciences Advisory and Investor Relations
firm. In 2012, Mr. Ryan led the successful leveraged buy-out of
Merrill Industries, a manufacturer and distributor of packaging
products. He currently serves on its board of directors. For the
five years preceding Shoreham’s formation in 2008, he was a
Senior Vice President of the Trout Group, a Life Sciences Advisory
and Investor Relations firm. Prior to that, he was the Chairman of
the Board of Stracq, Inc., an acquisition vehicle where he led the
successful buyout of a healthcare ingredient company, Stryka
Botanics, from Chapter 11 bankruptcy. On Wall Street, he has been
an Investment Banker and Head of Capital Markets where he managed
both public offerings and private placements. He also ran a
syndicate department and managed Institutional and Retail sales
teams. Mr. Ryan was a Senior Vice President of Lehman Brothers and
a Principal of the Hambrecht & Quist Group. He is a graduate of
Boston College.
Executive Officers Who Are Not Directors
The
following provides certain biographical information with respect to
each executive officer of the Company who is not a
director.
James R. Erickson,
Ph.D.
, age 55, was appointed as our Chief Business Officer
on December 1, 2016, effective December 5, 2016. Prior to joining
Exactus, Dr. Erickson served as a Senior Transaction Advisor at
Ferghana Partners, a healthcare investment bank focusing on
financings, M&A and corporate partnering in the diagnostic and
therapeutic sectors, a position he held since October 2013.
Previously, Dr. Erickson served as Chief Executive Officer of
BayPoint Biosystems, Inc., a proteomic company focused on
commercializing diagnostics/research tools-oriented technology from
the M.D. Anderson Cancer Center, from December 2005 to August
2013.
Kelley A. Wendt
, age
44, was appointed as our Chief Financial Officer and Treasurer in
January 2016. From December 2011 through September 2014, Ms. Wendt
served as the Chief Financial Officer and consultant for Ampliphi
BioSciences Corporation, a global biopharmaceutical company. Prior
to joining AmpliPhi, she served as the Chief Financial Officer for
Osteologix, Inc. Prior to joining Osteologix, Ms. Wendt served as
the Chief Financial Officer for Crop Life America, a global
chemical industry trade organization, from 2006 to 2008. She is the
former Controller for Sheltering Arms Hospitals, a rehabilitation
hospital company with nine facilities across the Richmond, Virginia
region. Her pre-executive experience consists of several regional
and national public accounting firms, primarily in audit and
consulting roles. Ms. Wendt received a B.S. in business and
accounting from Wright State University.
No Family Relationships
There
are no family relationships between any directors and executive
officers.
Code of Ethics
Due to
change of control and business focus, we currently do not have a
Code of Ethics. Our Board is reviewing a Code of Ethics that
applies to our Chief Executive Officer and our Chief Financial
Officer as well as to our other senior management. This Code of
Ethics will comply with the requirements imposed by the
Sarbanes-Oxley Act of 2002, as amended, and the rules and
regulations issued thereunder for codes of ethics applicable to
such officers. When the Code of Ethics is final, it will be
available on our website, located
at http://www.exactusinc.com
Audit Committee
Due to
the limited size of our Board of Directors, the entire Board acts
as the audit committee.
Audit Committee Financial Expert
Due to
the limited size of our Board of Directors, we do not have a
financial expert on the audit committee. We will be expanding our
Board in the near future to include a financial
expert.
Item
11.
Exec
u
tive Compensation.
The
following table sets forth certain information about the
compensation paid or accrued to the persons who served as our Chief
Executive Officer and our two highest-paid executive officers
during the last two completed fiscal years whose total compensation
exceeded $100,000 for that year (the “named executive
officers”).
Summary Compensation Table
|
|
Year
|
Salary
|
Bonus
|
Non-Equity Incentive Plan
Compensation
(1)
|
All Other
Compensation
|
Total
|
|
|
|
|
|
|
|
|
|
Philip
J. Young
|
2017
|
$
325,000
|
$
--
|
$
--
|
$
--
|
$
325,000
|
|
President and
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Philip
J. Young
|
2016
|
$
297,917
|
$
--
|
$
--
|
$
--
|
$
297,917
|
|
President and
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
R. Erickson, Ph.D.
|
2017
|
$
125,000
|
$
--
|
$
--
|
$
--
|
$
125,000
|
|
Chief Business Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timothy
Ryan
|
2017
|
$
120,000
|
$
--
|
$
--
|
$
--
|
$
120,000
|
|
Executive Vice President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timothy
Ryan
|
2016
|
$
110,000
|
$
--
|
$
--
|
$
--
|
$
110,000
|
|
Executive Vice President
|
|
|
|
|
|
|
(1)
Pursuant to our employment agreements with Mr. Young, Mr. Erickson,
and Mr. Ryan, we have agreed to grant stock options to these
officers as described under “—Employment
Agreements” below. We anticipate that our Board of Directors
will determine the amount of these awards and grant these stock
options following adoption of our Stock Option Plan in the second
quarter of 2018.
Employment Agreements and Change in Control
Arrangements
Employment Agreement with Philip J.
Young
. Effective December 15, 2015, we entered into an
employment agreement with Mr. Young pursuant to which he will serve
as our President and Chief Executive Officer. Under the terms of
the employment agreement, Mr. Young will receive a base salary at
an initial rate of $390,000 per year. For a limited period until we
have raised at least $5 million of capital, he will receive a
reduced salary of $325,000 per year. Within 30 days after we raise
at least $5 million of capital, Mr. Young will receive, as a lump
sum bonus payable in cash or stock at our discretion, the amount
equal to the difference between the amount he would have been paid
at his initial rate of $390,000 and the amount he was paid at the
reduced salary level. In addition, Mr. Young will have the
opportunity to earn an annual performance bonus of up to 75% of his
base salary based on performance criteria set by our Board of
Directors. Also, pursuant to the employment agreement, we agreed to
grant stock options to Mr. Young to purchase shares of our common
stock at an exercise price equal to the fair market value of our
common stock on the date of grant as reasonably determined by our
Board of Directors in good faith. Pursuant to the agreement, 50% of
the options were to vest on December 31, 2016 and the other 50%
will vest ratably over a thirty-six month period beginning in
January 2017. Mr. Young also is entitled to an automobile allowance
of $1,500 per month, disability insurance coverage equal to his
base salary, life insurance with a $2 million death benefit,
reimbursement of certain expenses, health, dental and vision
coverage in accordance with our usual practices and participation
in all other benefit plans maintained by the Company.
Mr.
Young’s employment agreement may be terminated by us at any
time for “Cause” (as defined in his employment
agreement) and by Mr. Young upon 14 days’ prior written
notice, or upon Mr. Young’s death or disability. The
employment agreement also provides for termination of Mr.
Young’s employment by us without Cause or by Mr. Young for
“Changed Circumstances” (as defined in his employment
agreement).
If Mr.
Young’s employment is terminated by us without Cause or by
him for Changed Circumstances, and provided that Mr. Young releases
and waives his claims against the Company as provided in the
employment agreement, he is entitled to receive (i) monthly
severance payments and continuation of benefits for a period equal
to the greater of (A) 6 months or (B) the number of months between
December 15, 2015 and his termination, up to a maximum of twelve
months, (ii) accelerated vesting of equity awards as if his
employment had continued during such period and (iii) a pro rata
portion of any eligible bonus compensation. If Mr. Young’s
employment is terminated by us (with or without Cause) or by him
for Changed Circumstances in connection with or following a
“Change in Control” (as defined in his employment
agreement), he will be entitled to receive the benefits in the
preceding sentence as if his employment were terminated more than
twelve months after December 15, 2015, plus the pro rata portion of
any eligible bonus compensation.
Mr.
Young’s employment agreement also contains restrictive
covenants relating to the protection of confidential information,
non-competition and non-solicitation. The non-solicitation and
non-competition covenants apply during the term of his employment
and continue generally for a period of 12 months following the
termination of his employment. Mr. Young will not be entitled to
any severance or change in control benefits under his employment
agreement if he breaches any of these covenants.
Employment Agreement with Timothy Ryan
.
Effective December 15, 2015, we entered into an employment
agreement with Mr. Ryan pursuant to which he will serve as our
Executive Vice President. Under the terms of the employment
agreement, Mr. Ryan will receive a base salary at an initial rate
of $240,000 per year. For a limited period until we have raised at
least $5 million of capital, he will receive a reduced salary of
$120,000 per year. Within 30 days after we raise at least $5
million of capital, Mr. Ryan will receive, as a lump sum bonus
payable in cash or stock at our discretion, the amount equal to the
difference between the amount he would have been paid at his
initial rate of $240,000 and the amount he was paid at the reduced
salary level. In addition, Mr. Ryan will have the opportunity to
earn an annual performance bonus of up to 50% of his base salary
based on performance criteria set by our President and Chief
Executive Officer. Also pursuant to the employment agreement, we
agreed to grant stock options to Mr. Ryan to purchase shares of our
common stock at an exercise price equal to the fair market value of
our common stock on the date of grant as reasonably determined by
our Board of Directors in good faith. Pursuant to the agreement,
50% of the options were to vest on December 31, 2016 and the other
50% will vest ratably over a thirty-six month period beginning in
January 2017. Mr. Ryan also is entitled to an automobile allowance
of $1,250 per month, disability insurance coverage equal to his
base salary, life insurance with a $1 million death benefit,
reimbursement of certain expenses, health, dental and vision
coverage in accordance with our usual practices and participation
in all other benefit plans maintained by the Company.
Mr.
Ryan’s employment agreement may be terminated by us at any
time for “Cause” (as defined in his employment
agreement) and by Mr. Ryan upon 14 days’ prior written
notice, or upon Mr. Ryan’s death or disability. The
employment agreement also provides for termination of Mr.
Ryan’s employment by us without Cause or by Mr. Ryan for
“Changed Circumstances” (as defined in his employment
agreement).
If Mr.
Ryan’s employment is terminated by us without Cause or by him
for Changed Circumstances, and provided that Mr. Ryan releases and
waives his claims against the Company as provided in the employment
agreement, he is entitled to receive (i) monthly severance payments
and continuation of benefits for a period equal to the greater of
(A) 6 months or (B) the number of months between December 15, 2015
and his termination, up to a maximum of twelve months, (ii)
accelerated vesting of equity awards as if his employment had
continued during such period and (iii) a pro rata portion of any
eligible bonus compensation. If Mr. Ryan’s employment is
terminated by us (with or without Cause) or by him for Changed
Circumstances in connection with or following a “Change in
Control” (as defined in his employment agreement), he will be
entitled to receive the benefits in the preceding sentence as if
his employment were terminated more than twelve months after
December 15, 2015, plus the pro rata portion of any eligible bonus
compensation.
Mr.
Ryan’s employment agreement also contains restrictive
covenants relating to the protection of confidential information,
non-competition and non-solicitation. The non-solicitation and
non-competition covenants apply during the term of his employment
and continue generally for a period of 12 months following the
termination of his employment. Mr. Ryan will not be entitled to any
severance or change in control benefits under his employment
agreement if he breaches any of these covenants.
Employment Agreement with James R. Erickson,
Ph.D
. On December 1, 2016, we entered into an employment
agreement with Dr. Erickson, dated December 1, 2016 (the
“Employment Agreement”), which provides for his service
as Chief Business Officer of the Company. Dr. Erickson’s
employment will continue until it is otherwise terminated by either
party pursuant to the terms of the Employment Agreement. The
Employment Agreement may be terminated by us without
“Cause” upon three months’ advance written
notice, or for “Cause”, and by Dr. Erickson without
“Good Reason” or for “Good Reason” (as
those terms are defined in the Employment Agreement).
Dr.
Erickson will receive an initial limited annual base salary of
$125,000 (the “Limited Salary”) from December 5, 2016
until we have brought in an aggregate of $5 million in financing,
whether through the sale of securities or otherwise (the
“Limited Salary Period”). At the conclusion of the
Limited Salary Period, Dr. Erickson will receive an annual base
salary of $250,000 (the “Base Salary”). Dr. Erickson is
eligible to earn an annual performance bonus equal to up to 55% of
his Limited Salary or Base Salary, based upon performance criteria
set by the Board of Directors in its sole discretion on an annual
basis. The agreement provides for the grant of stock options for
1,000,000 shares of our common stock, half of which will vest on
December 31, 2017, or immediately upon the establishment of a stock
option plan in 2017. The other half will vest monthly on the first
day of each subsequent month, commencing January 1, 2018, at a rate
of 1/36 of the total number of remaining shares per month. Pursuant
to the terms of the Employment Agreement, vesting will be
accelerated following a termination or Change in Control (as
defined in the Employment Agreement). Dr. Erickson will be entitled
to participate in all employee benefit plans for which he is
eligible, including health and dental insurance, life and
disability insurance, and all other employee benefit plans effected
for our employees generally pursuant to the Employment
Agreement.
If we
terminate Dr. Erickson’s employment for Cause, as provided by
the Employment Agreement, he will be entitled to receive the
Initial Salary or Base Salary or bonus earned and unpaid through
the date of termination. In the event we terminate Dr.
Erickson’s employment without Cause or Dr. Erickson
terminates his employment for Good Reason, as provided in the
Employment Agreement, Dr. Erickson will be entitled to receive (i)
a payment in the amount of his Base Salary or Limited Salary
(whichever is applicable) for the greater of six months or the
number of full months between December 5, 2016 and date of
termination up to a maximum of twelve months (the “Severance
Period”), (ii) continuation of his benefits (to the extent
authorized by COBRA) on a monthly basis for the Severance Period;
and (iii) accelerated vesting of any stock options subject to
vesting with respect to the number of shares that would have vested
during the Severance Period if Dr. Erickson had remained employed
by us during such time. In the event that we terminate Dr.
Erickson’s employment without Cause, or by the Executive for
Good Reason, within six months following a Change in Control of the
Company, pursuant to the terms of the Employment Agreement, Dr.
Erickson will be entitled to receive (i) payment in the amount of
his Base Salary or Limited Salary (whichever is applicable) for
twelve months, (ii) continuation of his benefits for twelve months
(to the extent authorized by and consistent with COBRA), (iii)
accelerated vesting of any stock options subject to vesting with
respect to the number of shares that would have vested during the
Severance Period if Dr. Erickson had remained employed by us during
such time, and (iv) any pro-rated bonus portions which the Board of
Directors, at its sole discretion, determines had been earned by
Dr. Erickson, which will be in lieu of any benefits to which Dr.
Erickson is otherwise entitled.
Dr.
Erickson’s agreement also includes covenants relating to
non-disclosure of confidential information and non-competition,
non-solicitation, non-interference with customers, and non-hiring
of employees for a period of one year following termination of
employment.
Employment Agreement with Kelley Wendt.
Effective March 16, 2017, we entered into an employment agreement
with Kelley Wendt which provides for her continued services as the
Chief Financial Officer of the Company. The initial term of the
employment agreement will end on February 1, 2019 and will
automatically renew for successive one (1) year terms, unless
either we provide to Ms. Wendt, or Ms. Wendt provides to us,
written notice of nonrenewal at least thirty (30) days prior to the
expiration of the then current term. The employment agreement may
be immediately terminated by us for “Cause” (as defined
in her employment agreement) or by us or Ms. Wendt upon two (2)
months’ advance written notice.
Ms.
Wendt will receive an initial annual gross base salary of $90,000
(the “Annual Base Salary”) and is eligible to earn an
annual performance bonus equal to up to 60% of her Annual Base
Salary (the “Performance Bonus”) based upon performance
criteria established by the Company from time to time. She also is
eligible to participate in the Company’s stock incentive
plan. Ms. Wendt will be entitled to receive up to twenty-five (25)
days paid vacation each year and to participate in all employee
health and welfare benefits plans for which she is
eligible.
The
employment agreement also includes covenants relating to
non-disclosure of confidential information and non-competition,
non-solicitation of customers, and non-solicitation and non-hiring
of employees for a period of one year following termination of
employment.
Stock Option Plan
We
anticipate adopting a Stock Option Plan in the second quarter of
2018, pursuant to which our Board of Directors may grant stock
options to employees, directors and consultants from time to time.
Pursuant to
our employment agreements
with Mr. Young and Mr. Ryan, we have agreed to grant stock options
to these officers as described under “—Employment
Agreements” above. We anticipate that our Board of Directors
will determine the amount of these awards and grant these stock
options following adoption of our Stock Option
Plan.
As
of December 31, 2017, we did not have any compensation plans under
which shares of our common stock were authorized for issuance, nor
did we have any stock options outstanding.
Director Compensation
Our
directors currently do not receive any compensation for their
service as members of our Board of Directors.
Item
12.
Secu
r
ity Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.
The
following table sets forth information as of December 31, 2017,
regarding the number of shares of our common stock beneficially
owned by each director, each executive officer and by all directors
and executive officers as a group. Beneficial ownership includes
shares, if any, held in the name of the spouse, minor children or
other relatives of the director or executive officer living in such
person’s home, as well as shares, if any, held in the name of
another person under an arrangement whereby the director or
executive officer can vest title in himself at once or at some
future time. Unless otherwise noted, each shareholder’s
address is 4870 Sadler Road, Suite 300, Glen Allen, VA 23060, and
each shareholder has sole voting power and investment power with
respect to securities shown in the table below.
|
Title of Class
|
Name of Beneficial Owner
|
Amount and Nature of Beneficial Ownership
|
Percent of Class (1)
|
|
|
|
|
|
|
Common
Stock
|
Philip
J. Young
|
8,668,000
(2)
|
24.6
%
|
|
Common
Stock
|
Kelley
A. Wendt
|
600,000
(3)
|
1.7
%
|
|
Common
Stock
|
Timothy
Ryan
|
8,618,000
(4)
|
24.5
%
|
|
Common
Stock
|
James
R. Erickson
|
1,600,000
|
4.6
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and executive officers as a group
(4 individuals)
|
19,486,000
|
55.4
%
|
_________________
(1)
Based on 35,071,862 shares of our common stock outstanding as of
December 31, 2017.
(2)
Includes 168,000 shares of common stock issuable upon the
conversion of shares of Series B-2 Preferred Stock at a rate of one
share of common stock for each share of Series B-2 Preferred
Stock.
(3)
Includes 600,000 shares of common stock issuable upon the
conversion of shares of Series B-1 Preferred Stock at a rate of one
share of common stock for each share of Series B-1 Preferred
Stock.
(4)
Includes (i) 2,950,000 shares of common stock held by Willets
Capital over which Mr. Ryan has sole voting power and investment
power, (ii) 2,850,000 shares of common stock held by Tonset
Capital, over which Mr. Ryan has sole voting power and investment
power, (iii) 400,000 shares of common stock held by NYTX LLC, over
which Mr. Ryan has sole voting power and investment power, (iv)
300,000 shares of common stock held by Brosis LLC, over which Mr.
Ryan has sole voting power and investment power and (v) 168,000
shares of common stock issuable upon the conversion of shares of
Series B-2 Preferred Stock at a rate of one share of common stock
for each share of Series B-2 Preferred Stock held directly by Mr.
Ryan.
The
following table sets forth information, as of December 31, 2017,
regarding the number of shares of our common stock beneficially
owned by all persons known by us, other than those set forth in the
table above, who own five percent or more of our outstanding shares
of common stock.
|
|
Name and Address of Beneficial Owner
|
Amount
and Nature of Beneficial Ownership
|
Percent of
Class (1)
|
|
|
|
|
|
|
Common
Stock
|
MagniSciFund,
LP
123
N Post Oak Lane, Suite 400
Houston,
TX 77024
|
6,000,000
(2)
|
14.6
%
|
|
Common
Stock
|
Digital
Diagnostics, PTY
606
Sherwood Road
Sherwood,
QLD, 4075 Australia
|
3,600,000
(3)
|
9.3
%
|
|
Common
Stock
|
PoC
Capital LLC
2995
Woodside Avenue, Suite 400-121
Woodside,
CA 94062
|
3,400,001
(4)
|
8.8
%
|
|
Common
Stock
|
Sandor
Capital Master Fund
2828
Routh Street, Suite 500
Dallas,
TX 75201-1438
|
2,300,000
(5)
|
6.3
%
|
|
Common
Stock
|
Velocity
Health Capital
95
White Bridge Road, Suite 509
Nashville,
TN 37205
|
2,068,000
(6)
|
5.9
%
|
|
|
|
|
|
_________________
(1)
Based on 35,071,862 shares of our common stock outstanding as of
December 31, 2017.
(2)
Includes 6,000,000 shares of common stock issuable upon the
conversion of shares of Series B-2 Preferred Stock at a rate of one
share of common stock for each share of Series B-2 Preferred
Stock.
(3)
Includes 3,600,000 shares of common stock held by Digital
Diagnostics, Inc., of which Dr. Dimitrov is President and 78%
owner.
(4)
Includes 1,733,334 shares of common stock issuable upon the
conversion of shares of Series C Preferred Stock at a rate of one
share of common stock for each share of Series C Preferred Stock
and 1,666,667 shares of common stock issuable upon exercise of
outstanding warrants.
(5)
Includes 300,000 shares of common stock issuable upon the
conversion of shares of Series B-1 Preferred Stock at a rate of one
share of common stock for each share of Series B-1 Preferred Stock
and 900,000 shares of common stock issuable upon the conversion of
shares of Series B-2 Preferred Stock at a rate of one share of
common stock for each share of Series B-2 Preferred
Stock.
(6)
Includes 168,000 shares of common stock issuable upon the
conversion of shares of Series B-2 Preferred Stock at a rate of one
share of common stock for each share of Series B-2 Preferred
Stock.
Item
13.
Certain
Re
l
ationships and
Related Transactions, and Director Independence.
We
currently have a consulting arrangement with Dr. Krassen Dimitrov,
a shareholder of the Company. In February 2016, we entered into a
consulting agreement with Dr. Dimitrov pursuant to which we
retained KD Innovations Ltd., a company fully owned by him
(“KD Innovations”), for a fee of $25,000 per month
during the term of the arrangement, to manage the design and
production of our lead device, FibriLyzer, and provide scientific
expertise. For the year 2017 and 2016, we recognized $300,000 and
$250,000, respectively, in research and development expenses in
connection with these consulting services. The consulting agreement
does not have a fixed term; however, it may be terminated with
immediate effect at any time upon mutual agreement between us and
KD Innovations, or by either party with 90-days written notice to
the other party.
In
addition, Dr. Dimitrov is President and a 78% owner of Digital
Diagnostics, Inc., with whom we have entered into the Licensing
Agreement. 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 FibriLyzer and MatriLyzer, and various sales
thresholds, and royalty payments based on the net sales of the
products, calculated on a product-by-product basis. The initial
signing payment is due within seven days of the effective date of
the agreement, with the remaining amount due upon closing of
certain of our financing transactions.
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. No milestones have been met and no
milestone fees have been paid or accrued through December 31,
2017.
Director Independence
Our
Board of Directors currently consists of three directors: Philip J.
Young, and Timothy Ryan, neither of whom would be considered
“independent” within the meaning of NASDAQ listing
standards.
Item
14.
Princi
p
al Accounting Fees and
Services.
Audit Fees
The
aggregate fees billed by our principal accountant for the audit of
our annual financial statements, review of financial statements
included in the quarterly reports and other fees that are normally
provided by the accountant in connection with statutory and
regulatory filings or engagements for the year ended December 31,
2017 and 2016 was $62,500 and $58,000,
respectively.
Audit-Related Fees
The
aggregate fees billed by our principal accountant for assurance and
advisory services that were related to the performance of the audit
or review of our financial statements for the year ended December
31, 2017 and 2016 was $0 each year.
Tax Fees
The
aggregate fees billed for professional services rendered by our
principal accountant for tax compliance, tax advice and tax
planning for the years ended December 31, 2017 and 2016 was $5,200
and $0 each year. These fees related to the preparation of
federal income and state franchise tax returns.
All Other Fees
The
aggregate fees billed for products and services provided by someone
other than our principal accountant for the fiscal year ended
December 31, 2017 and 2016 was $0 each year.
Policy on Audit
We
do not currently have an Audit Committee. The policy of
our Board of Directors, which acts as our Audit Committee, is to
pre-approve all audit and permissible non-audit services provided
by the independent auditors. These services may include audit
services, audit-related services, tax services and other services.
Pre-approval is generally provided for up to one year and any
pre-approval is detailed as to the particular service or category
of services and is generally subject to a specific budget. The
independent auditors and management are required to periodically
report to our Board of Directors regarding the extent of services
provided by the independent auditors in accordance with this
pre-approval, and the fees for the services performed to date. The
Board of Directors may also pre-approve particular services on a
case-by-case basis.
P
A
RT IV
Item
15.
Exhibits,
Financial Statement Schedules.
1.
Documents filed
as part of this report
:
1.
Financial
Statements. Reference is made to the Index to the Consolidated
Financial Statements set forth under Part II, Item 8, on page 23 of
this Form 10-K.
2.
Financial
Statement Schedules. All schedules for which provision is made in
the applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions, are not applicable, or the information is included in
the Consolidated Financial Statements, and therefore have been
omitted.
3.
Exhibits.
The following exhibits, are filed as part of, or incorporated by
reference into, this report
|
Share
Exchange Agreement, dated February 29, 2016, by and among Spiral
Energy Tech, Inc., Exactus BioSolutions, Inc. and the stockholders
of Exactus BioSolutions, Inc. signatories thereto (attached as
Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed March 4, 2016 and incorporated herein by
reference)
|
|
|
Amended
and Restated Articles of Incorporation (attached as Exhibit 3.2 to
the Company’s Registration Statement on Form S-1
(Registration No. 333-183360), filed August 16, 2012 and
incorporated herein by reference)
|
|
|
Certificate
of Amendment to Amended and Restated Articles of Incorporation
(attached as Exhibit 3.1 to Amendment No. 2 to the Registration
Statement on Form S-1 (Registration No. 333-183360, filed December
19, 2013 and incorporated herein by reference)
|
|
|
Articles
of Merger, dated March 10, 2016, between Exactus Acquisition Corp.
and Spiral Energy Tech, Inc. (attached as Exhibit 3.1 to the
Company’s Current Report on Form 8-K filed March 28, 2016 and
incorporated herein by reference)
|
|
|
Certificate
of Designation for Series A Preferred Stock (attached as Exhibit
3.1 to the Company’s Amendment to the Current Report on Form
8-K/A filed February 17, 2016 and incorporated herein by
reference)
|
|
|
Certificate
of Designation for Series B-1 Preferred Stock (attached as Exhibit
3.1 to the Company’s Current Report on Form 8-K filed March
4, 2016 and incorporated herein by reference)
|
|
|
Certificate
of Designation for Series B-2 Preferred Stock (attached as Exhibit
3.2 to the Company’s Amendment to the Current Report on Form
8-K/A filed February 17, 2016 and incorporated herein by
reference)
|
|
|
Amendment
to Certificate of Designation After Issuance of Class or Series
(attached as Exhibit 3.1 to the Company’s Current Report on
Form 8-K filed November 1, 2016 and incorporated herein by
reference).
|
|
|
Certificate
of Designation for Series C Preferred Stock (attached as Exhibit
3.1 to the Company’s Current Report on Form 8-K filed July 7,
2016 and incorporated herein by reference)
|
|
|
Bylaws
(attached as Exhibit 3.3 to the Company’s Registration
Statement on Form S-1 (Registration No. 333-183360), filed August
16, 2012 and incorporated herein by reference)
|
|
|
Form of
Leak Out Agreement by and between Spiral Energy Tech, Inc. and the
holders signatory thereto (attached as Exhibit 4.1 to the
Company’s Quarterly Report on Form 10-Q for the period ended
June 30, 2016 and incorporated herein by reference)
|
|
Stock
and Warrant Subscription Agreement, between Exactus, Inc. and POC
Capital, LLC (attached as Exhibit 10.2 to the Company’s
Current Report on Form 8-K filed July 7, 2016 and incorporated
herein by reference)
|
|
|
Warrant
to Purchase Common Stock of Exactus, Inc., dated June 30, 2016
(attached as Exhibit 10.3 to the Company’s Current Report on
Form 8-K filed July 7, 2016 and incorporated herein by
reference)
|
|
|
Form of
Exchange Agreement for Series A Preferred Stock (attached as
Exhibit 10.1 to the Company’s Amendment to the Current Report
on Form 8-K/A filed February 17, 2016 and incorporated herein by
reference)
|
|
|
Form of
Subscription Agreement for Series B-2 Preferred Stock (attached as
Exhibit 10.2 to the Company’s Amendment to the Current Report
on Form 8-K/A filed February 17, 2016 and incorporated herein by
reference)
|
|
|
Leak-Out
Agreement dated October 13, 2016 between Exactus, Inc. and MagnaSci
Fund LP (attached as Exhibit 4.1 to the Company’s Current
Report on Form 8-K filed November 1, 2016 and incorporated herein
by reference).
|
|
|
Master
Services Agreement, dated June 30, 2016, between Exactus, Inc. and
Integrium, LLC (attached as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed July 7, 2016 and incorporated
herein by reference)
|
|
|
Amended
and Restated Collaboration and License Agreement dated August 18,
2016 between Digital Diagnostics Inc. and Exactus BioSolutions,
Inc. (attached as Exhibit 10.2 to the Company’s Quarterly
Report on Form 10-Q for the period ended June 30, 2016 and
incorporated herein by reference)**
|
|
|
Consulting
Agreement, dated January 20, 2016, between Exactus BioSolutions,
Inc. and KD Innovation Ltd. (attached as Exhibit 10.3 to the
Company’s Quarterly Report on Form 10-Q for the period ended
June 30, 2016 and incorporated herein by reference)
(+)
|
|
|
Employment
Agreement, dated December 15, 2015, between Exactus BioSolutions,
Inc. and Philip J. Young (attached as Exhibit 10.4 to the
Company’s Quarterly Report on Form 10-Q for the period ended
June 30, 2016 and incorporated herein by reference)
(+)
|
|
|
Employment
Agreement, dated December 15, 2015, between Exactus BioSolutions,
Inc. and Timothy J. Ryan (attached as Exhibit 10.5 to the
Company’s Quarterly Report on Form 10-Q for the period ended
June 30, 2016 and incorporated herein by reference)
(+)
|
|
|
Employment
Agreement, dated March 16, 2017, between Exactus, Inc. and Kelley
Wendt (attached as Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed March 22, 2017 and incorporated herein by
reference). (+)
|
|
|
Employment
Agreement, dated December 1, 2016, between Exactus, Inc. and James
R. Erickson (attached as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed December 8, 2016 and incorporated
herein by reference) (+)
|
|
|
Subsidiary
List (attached as Exhibit 21.1 to the Company’s Quarterly
Report on Form 10-Q for the period ended June 30, 2016 and
incorporated herein by reference)
|
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
and 15d-14(a) as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
|
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
and 15d-14(a) as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
|
|
|
Certification of Chief Executive Officer pursuant to Rule 18 U.S.C
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley act of 2002 (filed herewith)
|
|
|
Certification of Chief Financial Officer pursuant to Rule 18 U.S.C
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley act of 2002 (filed herewith)
|
|
|
101
|
Interactive
Data Files
|
+
Indicates m
anagement compensatory
plan, contract or arrangement.
**Certain portions of this exhibit have been omitted pursuant to a
confidential treatment request granted on September 23, 2016,
pursuant to Rule 24b-2 of the Securities Exchange Act of 1934.
Omitted information has been filed separately with the Securities
and Exchange Commission.
SI
G
NATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly
authorized.
|
|
|
|
|
|
|
|
|
EXACTUS, INC.
|
||
|
|
|
|
|
|
|
Date:
April 2, 2018
|
|
By:
|
/s/ Philip J.
Young
|
|
|
|
|
|
Philip
J. Young
President,
Chief Executive Officer and Chairman of the Board
(Principal
Executive Officer)
|
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated on
March 31, 2017.
|
|
|
|
|
|
Date:
April 2, 2018
|
|
By:
|
/s/ Philip J.
Young
|
|
|
|
|
Philip
J. Young
President,
Chief Executive Officer and Chairman of the Board
(Principal
Executive Officer)
|
|
|
|
|
|
|
Date:
April 2, 2018
|
|
By:
|
/s/ Kelley A.
Wendt
|
|
|
|
|
Kelley
A. Wendt
Chief
Financial Officer
(Principal
Financial and Principal Accounting Officer)
|
|
|
|
|
|
|
Date:
April 2, 2018
|
|
By:
|
/s/ Timothy
Ryan
|
|
|
|
|
Timothy
Ryan
Executive
Vice President and Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXHI
B
IT INDEX
|
Exhibit No.
|
Description
|
|
Share
Exchange Agreement, dated February 29, 2016, by and among Spiral
Energy Tech, Inc., Exactus BioSolutions, Inc. and the stockholders
of Exactus BioSolutions, Inc. signatories thereto (attached as
Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed March 4, 2016 and incorporated herein by
reference)
|
|
|
Amended
and Restated Articles of Incorporation (attached as Exhibit 3.2 to
the Company’s Registration Statement on Form S-1
(Registration No. 333-183360), filed August 16, 2012 and
incorporated herein by reference)
|
|
|
Certificate
of Amendment to Amended and Restated Articles of Incorporation
(attached as Exhibit 3.1 to Amendment No. 2 to the Registration
Statement on Form S-1 (Registration No. 333-183360, filed December
19, 2013 and incorporated herein by reference)
|
|
|
Articles
of Merger, dated March 10, 2016, between Exactus Acquisition Corp.
and Spiral Energy Tech, Inc. (attached as Exhibit 3.1 to the
Company’s Current Report on Form 8-K filed March 28, 2016 and
incorporated herein by reference)
|
|
|
Certificate
of Designation for Series A Preferred Stock (attached as Exhibit
3.1 to the Company’s Amendment to the Current Report on Form
8-K/A filed February 17, 2016 and incorporated herein by
reference)
|
|
|
Certificate
of Designation for Series B-1 Preferred Stock (attached as Exhibit
3.1 to the Company’s Current Report on Form 8-K filed March
4, 2016 and incorporated herein by reference)
|
|
|
Certificate
of Designation for Series B-2 Preferred Stock (attached as Exhibit
3.2 to the Company’s Amendment to the Current Report on Form
8-K/A filed February 17, 2016 and incorporated herein by
reference)
|
|
|
Amendment
to Certificate of Designation After Issuance of Class or Series
(attached as Exhibit 3.1 to the Company’s Current Report on
Form 8-K filed November 1, 2016 and incorporated herein by
reference).
|
|
|
Certificate
of Designation for Series C Preferred Stock (attached as Exhibit
3.1 to the Company’s Current Report on Form 8-K filed July 7,
2016 and incorporated herein by reference)
|
|
|
Bylaws
(attached as Exhibit 3.3 to the Company’s Registration
Statement on Form S-1 (Registration No. 333-183360), filed August
16, 2012 and incorporated herein by reference)
|
|
|
Form
of Leak Out Agreement by and between Spiral Energy Tech, Inc. and
the holders signatory thereto (attached as Exhibit 4.1 to the
Company’s Quarterly Report on Form 10-Q for the period ended
June 30, 2016 and incorporated herein by reference)
|
|
|
Stock
and Warrant Subscription Agreement, between Exactus, Inc. and POC
Capital, LLC (attached as Exhibit 10.2 to the Company’s
Current Report on Form 8-K filed July 7, 2016 and incorporated
herein by reference)
|
|
|
Warrant
to Purchase Common Stock of Exactus, Inc., dated June 30, 2016
(attached as Exhibit 10.3 to the Company’s Current Report on
Form 8-K filed July 7, 2016 and incorporated herein by
reference)
|
|
|
Form of
Exchange Agreement for Series A Preferred Stock (attached as
Exhibit 10.1 to the Company’s Amendment to the Current Report
on Form 8-K/A filed February 17, 2016 and incorporated herein by
reference)
|
|
|
Form of
Subscription Agreement for Series B-2 Preferred Stock (attached as
Exhibit 10.2 to the Company’s Amendment to the Current Report
on Form 8-K/A filed February 17, 2016 and incorporated herein by
reference)
|
|
|
Leak-Out
Agreement dated October 13, 2016 between Exactus, Inc. and MagnaSci
Fund LP (attached as Exhibit 4.1 to the Company’s Current
Report on Form 8-K filed November 1, 2016 and incorporated herein
by reference).
|
|
|
Master
Services Agreement, dated June 30, 2016, between Exactus, Inc. and
Integrium, LLC (attached as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed July 7, 2016 and incorporated
herein by reference)
|
|
|
Amended
and Restated Collaboration and License Agreement dated August 18,
2016 between Digital Diagnostics Inc. and Exactus BioSolutions,
Inc. (attached as Exhibit 10.2 to the Company’s Quarterly
Report on Form 10-Q for the period ended June 30, 2016 and
incorporated herein by reference)**
|
|
|
Consulting
Agreement, dated January 20, 2016, between Exactus BioSolutions,
Inc. and KD Innovation Ltd. (attached as Exhibit 10.3 to the
Company’s Quarterly Report on Form 10-Q for the period ended
June 30, 2016 and incorporated herein by reference)
(+)
|
|
Employment
Agreement, dated December 15, 2015, between Exactus BioSolutions,
Inc. and Philip J. Young (attached as Exhibit 10.4 to the
Company’s Quarterly Report on Form 10-Q for the period ended
June 30, 2016 and incorporated herein by reference)
(+)
|
|
|
Employment
Agreement, dated December 15, 2015, between Exactus BioSolutions,
Inc. and Timothy J. Ryan (attached as Exhibit 10.5 to the
Company’s Quarterly Report on Form 10-Q for the period ended
June 30, 2016 and incorporated herein by reference)
(+)
|
|
|
Employment
Agreement, dated March 16, 2017, between Exactus, Inc. and Kelley
Wendt (attached as Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed March 22, 2017 and incorporated herein by
reference). (+)
|
|
|
Employment
Agreement, dated December 1, 2016, between Exactus, Inc. and James
R. Erickson (attached as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed December 8, 2016 and incorporated
herein by reference) (+)
|
|
|
Subsidiary
List (attached as Exhibit 21.1 to the Company’s Quarterly
Report on Form 10-Q for the period ended June 30, 2016 and
incorporated herein by reference)
|
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
and 15d-14(a) as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
|
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
and 15d-14(a) as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
|
|
|
Certification of Chief Executive Officer pursuant to Rule 18 U.S.C
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley act of 2002 (filed herewith)
|
|
|
Certification of Chief Financial Officer pursuant to Rule 18 U.S.C
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley act of 2002 (filed herewith)
|
|
|
101 INS
|
XBRL
Instance Document
|
|
101 SCH
|
XBRL Taxonomy Extension Schema Document
|
|
101 CAL
|
XBRL Taxonomy Calculation Linkbase Document
|
|
101 LAB
|
XBRL Taxonomy Labels Linkbase Document
|
|
101 PRE
|
XBRL Taxonomy Presentation Linkbase Document
|
|
101 DEF
|
XBRL Taxonomy Extension Definition Linkbase Document
|
+
Indicates m
anagement compensatory
plan, contract or arrangement.
**Certain portions of this exhibit have been omitted pursuant to a
confidential treatment request granted on September 23, 2016,
pursuant to Rule 24b-2 of the Securities Exchange Act of 1934.
Omitted information has been filed separately with the Securities
and Exchange Commission.
-40-
TABLE OF CONTENTS
Item 1. BusinessItem 1A. Ris K FactorsItem 1B. Unresol V Ed Staff CommentsItem 2. Pro P ErtiesItem 3. Legal Procee D IngsItem 4. Min E Safety DisclosuresItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchasers Of Equity SecuritiesItem 6. Selected Fina N Cial DataItem 7. Management S Discussio N and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative A N D Qualitative Disclosures About Market RiskItem 8. Financi A L Statements and Supplementary DataNote 1. Business DescriptionNote 2. Going ConcernNote 3. Significant Accounting PoliciesNote 4. AgreementsNote 5. Convertible Loan NotesNote 6. Fair Value MeasurementNote 7. Income TaxesNote 8. Equity TransactionsNote 9. Commitments and ContingenciesNote 10. Related Party ConsiderationsNote 11. Subsequent EventsItem 9. Changes in and Disa G Reements with Accountants on Accounting and Financial DisclosureItem 9A. Contro L S and ProceduresItem 9B. Other I NformationItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Exec U Tive CompensationItem 12. Secu R Ity Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Re L Ationships and Related Transactions, and Director IndependenceItem 14. Princi P Al Accounting Fees and ServicesItem 15. Exhibits, Financial Statement Schedules