UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended June 30, 2018

 

or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from _________ to _________

 

Commission file number: 000-55120

 

ARIAS INTEL CORP.

(Exact name of registrant as specified in its charter)

 

Nevada		46-2143018
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

442 W. Kennedy Blvd., Suite 200

Tampa, Florida 33606

(Address of principal executive offices) (zip code)

 

(877) 749-5909

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

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 [X] 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 [X] No [  ]

 

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 [X]
(Do not check if a 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 [X].

 

As of August 23, 2018 there were 50,707,248 shares of registrant’s common stock outstanding.

 

 

 

ARIAS INTEL CORP.

 

INDEX

 

PART I.	FINANCIAL INFORMATION
	ITEM 1.	Consolidated Financial Statements	3
		Condensed consolidated balance sheets as of June 30, 2018 (unaudited) and March 31, 2018	3
		Condensed consolidated statements of operations for the three months ended June 30, 2018 and 2017 (unaudited)	4
		Condensed consolidated statements of cash flows for the three months ended June 30, 2018 and 2017 (unaudited)	5
		Notes to condensed consolidated financial statements (unaudited)	6
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	30
	ITEM 4.	Controls and Procedures	30
PART II.	OTHER INFORMATION
	ITEM 1.	Legal Proceedings	32
	ITEM 1A.	Risk Factors	32
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
	ITEM 3.	Defaults Upon Senior Securities	33
	ITEM 4.	Mine Safety Disclosures	33
	ITEM 5.	Other Information	33
	ITEM 6.	Exhibits	33
	SIGNATURES		34

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

ARIAS INTEL CORP.

Condensed Consolidated Balance Sheets

 

		June 30, 2018				March 31, 2018
ASSETS
CURRENT ASSETS
Cash		$	8,708			$	-
Prepaid expenses			25,508				28,323
Total current assets			34,216				28,323
OTHER ASSETS
Intellectual property, net			688,977				772,909
Total other assets			688,977				801,232
TOTAL ASSETS		$	723,193			$	801,232
LIABILITIES AND STOCKHOLDERS’ (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses		$	514,469			$	339,420
Bank overdraft			-				969
Derivative liability			3,788,884				1,588,342
Warrant liability			12,830				29,854
Convertible notes payable, net of debt discount of $13,285 and $46,527, respectively			1,529,562				1,591,165
Notes payable, net of debt discount of $0, respectively			600,000				600,000
Dividend payable			3,302				-
Total current liabilities			6,449,047				4,149,750
TOTAL LIABILITIES		$	6,449,047			$	4,149,750
COMMITMENTS AND CONTINGENCIES
Redeemable preferred stock, $0.001 par value, 10,000,000 shares authorized, 103,000 shares issued and outstanding as of 6/30/2018 and 3/31/2018, respectively, net of preferred stock discount of $76,192 and $101,871, respectively		$	26,808			$	1,129
STOCKHOLDERS’ (DEFICIT)
Common stock, $0.001 par value, 500,000,000 shares authorized, 50,707,248 and 34,198,917 shares issued and outstanding as of 6/30/2018 and 03/31/2018, respectively			50,707				34,199
Preferred stock receivable, net			-				(95,000	)
Common stock payable			151,600				248,379
Additional paid-in capital			14,335,875				13,745,080
Accumulated deficit			(20,290,844	)			(17,282,305	)
Total stockholders’ (deficit)			(5,752,662	)			(3,349,647	)
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT)		$	723,193			$	801,232

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

ARIAS INTEL CORP.

Condensed Consolidated Statements of Operations

(Unaudited)

 

		For The Three Months Ended				For The Three Months Ended
		June 30, 2018				June 30, 2017
REVENUES		$	-			$	-
OPERATING EXPENSES
General and administrative			468,379				1,334,724
General and administrative – Related Party			65,546				202,173
Research and development – Related Party			-				164,000
Total Operating Expenses			533,925				1,700,897
LOSS FROM OPERATIONS			(533,925	)			(1,700,897	)
OTHER INCOME/(EXPENSE)
Interest income, related party			-				1,500
Interest expense			(221,040	)			(2,301,015	)
Loss on change in derivative and warrant liability			(2,250,272	)			(113,978	)
Total other income/(expense)			(2,471,312	)			(2,413,493	)
NET LOSS ATTRIBUTABLE TO COMPANY		$	(3,005,237	)		$	(4,114,390	)
Preferred stock dividend			(3,302	)			-
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS		$	(3,008,539	)		$	(4,114,390	)
BASIC AND DILUTED LOSS PER COMMON SHARE		$	(0.07	)		$	(0.16	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC AND DILUTED			45,260,013				25,785,906

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

ARIAS INTEL CORP.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		For The Three Months Ended				For The Three Months Ended
		June 30, 2018				June 30, 2017
OPERATING ACTIVITIES
Net loss		$	(3,008,539	)		$	(4,114,390	)
Adjustments to reconcile net loss to net cash used by operating activities:
Amortization			83,932				-
Stock issued for services and expenses			169,097				1,067,477
Amortization of debt discount			81,069				(370,092	)
Non-cash interest expense			114,091				-
Preferred stock discount			25,679				-
Increase in accrued dividend			3,302				-
Expenses incurred on the issuance of convertible notes payable			-				35,000
Increase in derivative and warrant liability			2,250,272				2,747,476
Changes in operating assets and liabilities:
Increase/(Decrease) in interest receivable, related party			-				(1,500	)
Increase/(Decrease) in accounts payable and accrued expenses			60,959				(28,892	)
Decrease in related party payable			-				(20,725	)
Decrease in prepaid expenses			2,815				-
Decrease in other receivable			-				1,667
Net cash used in operating activities			(217,323	)			(683,979	)
INVESTING ACTIVITIES
Net cash used in investing activities			-				-
FINANCING ACTIVITIES
Bank overdraft			(969	)			(771	)
Proceeds from convertible notes payable			100,000				585,500
Repayments of convertible notes payable			(4,000	)			(137,500	)
Proceeds from sale of common stock			36,000				288,000
Proceeds from sale of preferred stock			95,000				-
Net cash provided by financing activities			226,031				735,229
NET INCREASE/(DECREASE) IN CASH			8,708				51,250
CASH AT BEGINNING OF PERIOD			-				-
CASH AT END OF PERIOD		$	8,708			$	51,250
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest		$	-			$	32,495
NON CASH INVESTING AND FINANCING ACTIVITIES
Common stock payable for services		$	115,600			$	-
Stock issued for settlement of notes and interest		$	190,846			$	224,094
Common stock payable issued during the year		$	248,379			$	-
Recapitalization		$	-				(69,331	)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

ARIAS INTEL CORP.

Notes to condensed consolidated financial statements (unaudited)

 

1.	NATURE OF BUSINESS

 

Arias Intel Corp. (the “Company”) is a software publisher that creates, develops and publishes applications on multiple platforms including mobile, desktop, set-top box (Roku, Amazon Prime, etc.), and other devices, for social themed and casino games. The Company is an early stage company and has not generated any revenue as of June 30, 2018. The Company plans to generate revenue primarily through in-app purchases and cross-channel advertising.

 

The Company was incorporated under the laws of the State of Nevada on February 27, 2013 as “American Riding Tours, Inc.” Effective July 22, 2016, the Company changed its name from “American Riding Tours, Inc.” to “First Harvest Corp.” Effective December 1, 2017, the Company changed its name from “First Harvest Corp.” to “Arias Intel Corp.” Prior to the reverse acquisition described below, the Company did not have any significant assets or operations.

 

Financial Statements Presented

 

On February 10, 2017 (the “Closing Date”), the Company entered into and closed an agreement and plan of merger and reorganization (the “Merger Agreement”), with CV Acquisition Corp., a wholly-owned subsidiary of the Company (“Acquisition Corp.”), and Cannavoices, Inc. (“Cannavoices”). Pursuant to the Merger Agreement, effective on the Closing Date (i) Acquisition Corp. merged with and into Cannavoices, such that Cannavoices, the surviving corporation, became a wholly-owned subsidiary of the Company, and (ii) the Company issued an aggregate of 23,267,231 shares of common stock to the shareholders of Cannavoices, representing approximately 97.7% of the Company’s then outstanding shares of common stock, following the Closing Date, in exchange for the cancellation of all of the issued and outstanding shares of common stock of Cannavoices.

 

Cannavoices was incorporated on June 5, 2015 as a Florida corporation. On the Closing Date, pursuant to the Merger Agreement, Cannavoices became a wholly-owned subsidiary of the Company. The acquisition of Cannavoices is treated as a reverse acquisition, and the business of Cannavoices became the business of the Company. Cannavoices was deemed the accounting acquirer, while the Company was deemed the legal acquirer. At the time of the reverse recapitalization, the Company was not engaged in any active business.

 

The consolidated financial statements of the Company are those of the Company and its consolidated subsidiaries from the Closing Date and subsequent periods.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the condensed consolidated financial statements of the Company as of June 30, 2018 and for the three months ended June 30, 2018 and 2017, respectively. The results of operations for the three months ended June 30, 2018 are not necessarily indicative of the operating results for the full year ending March 31, 2019, or any other period. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related disclosures of the Company as of March 31, 2018 and for the year then ended, which were filed with the Securities and Exchange Commission on Form 10-K on July 13, 2018.

 

2. GOING CONCERN AND MANAGEMENT’S PLAN

 

These condensed consolidated financial statements have been prepared on a going concern basis, which implies that the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company has not generated revenue and during the three months ended June 30, 2018 incurred a net loss of $3,008,539. The Company has an accumulated deficit of $20,290,844 as of June 30, 2018. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability to raise equity or debt financing, and the attainment of profitable operations from the Company’s future business. Additionally, the Company is actively seeking strategic alliances in order to accelerate its growth in the industry or seeking opportunities for the sale of its assets. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern for one year from the date these financial statements are issued. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its subsidiaries, including Cannavoices and FH Acquisition Corp. (“FHA”). All significant intercompany balances and transactions have been eliminated in consolidation

 

Certain reclassifications have been made to amounts in prior periods to conform to the current period presentation. All reclassifications have been applied consistently to the periods presented. The reclassifications had no impact on net loss or total assets and liabilities.

 

Consolidated Variable Interest Entity (“VIE”)

 

On September 1, 2016, Cannavoices entered into a share exchange agreement with FHA, whereby all the issued and outstanding capital stock of FHA was exchanged for an aggregate of 1,334,262 shares of Cannavoices’ common stock. FHA shares were exchanged on a one-for-one basis with the shares of the Cannavoices’ common stock. Effective on the date of the share exchange agreement, FHA became a wholly-owned subsidiary of the Company.

 

The Company previously determined FHA was a VIE and Cannavoices was the primary beneficiary. This was concluded as FHA collected capital raised from investors and funded invoices of Cannavoices as directed by the Cannavoices’ Board of Directors. The Company has presented the financial statements on a consolidated basis since FHA’s inception (November 23, 2015). Accordingly, intercompany activity between the Company and FHA are eliminated in consolidation.

 

Use of Estimates

 

The financial statements and accompanying notes are prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates and assumptions include the fair value of the Company’s stock, derivative and warrant liability and the valuation allowance relating to the Company’s deferred tax assets.

 

Revenue Recognition

 

We have analyzed our revenue transactions in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 2014-09 “Revenues from Contracts with Customers” (Topic 606), including amendments thereto, and there was no material impact due to the transition from ASC 605 to ASU 2014-09. Our revenues are recognized when control of the promised services is transferred to a customer, in an amount that reflects the consideration that we expect to receive in exchange for those services. In discussion with management, we apply the following five steps to determine the appropriate amount of revenue to be recognized as we fulfill our obligations under each of our agreements: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to performance obligations in the contract; and (v) recognize revenue as the performance obligation is satisfied. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as advances from customers on the balance sheet. For the period from February 27, 2013 (inception) to June 30, 2018, the Company did not recognize any revenue.

 

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation in accordance with the FASB ASC 718 “Compensation – Stock Compensation” using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued.

 

The Company accounts for stock-based compensation to consultants and other third parties in accordance with ASC 505-50 “Equity-Based Payments to Non-Employees.” Compensation expense is determined at the “measurement date.” Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company initially records compensation expense based on the fair value of the award at the reporting date.

 

Dividends

 

The Company has not adopted any policy regarding payment of dividends. No dividends have been paid or accounted for until the three months ended June 30, 2018, when the Company began accounting for the annual 12% cumulative Series A Preferred Stock dividend, compounded daily, which is payable solely upon redemption, liquidation or conversion. At June 30, 2018 and 2017, the Company had accrued preferred stock dividend of $3,302 and $0, respectively. See Note 10. – Preferred Stock.

 

Advertising Costs

 

The Company’s policy regarding advertising is to expense advertising when incurred. The Company did not incur any advertising expense for the three months ended June 30, 2018 and 2017, respectively.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid instruments purchased with an original maturity of three months or less when purchased to be cash equivalents, to the extent the funds are not being held for investment purposes. At June 30, 2018 and 2017, the Company had no cash equivalents.

 

Fair Value of Financial Instruments

 

The carrying amounts (if any) of cash, accounts payable, and accrued liabilities approximate fair value due to the short-term nature of these instruments.

 

The Company measures the fair value of financial assets and liabilities based on the guidance of the FASB ASC in accordance with U.S. GAAP, ASC 820 “Fair Value Measurements and Disclosures”, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

ASC 820 describes three levels of inputs that may be used to measure fair value:

 

Level 1 — quoted prices in active markets for identical assets or liabilities

Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3 — inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)

 

Convertible Instruments

 

U.S. GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional, as that term is described under applicable ASC 480-10.

 

 

When the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.

 

Derivative Financial Instruments

 

The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provide the Company with a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company’s own stock. The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). The Company assesses classification of its common stock purchase warrants and other free-standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required.

 

The Company’s free-standing derivatives consisted of warrants to purchase common stock that were issued in connection with the issuance of debt and of embedded conversion options with convertible debentures. The Company evaluated these derivatives to assess their proper classification in the balance sheet as of June 30, 2018 using the applicable classification criteria enumerated under ASC 815-Derivatives and Hedging. The Company determined that certain embedded conversion and/or exercise features do not contain fixed settlement provisions. The convertible debentures contain a conversion feature such that the Company could not ensure it would have adequate authorized shares to meet all possible conversion demands.

 

As such, the Company was required to record the derivatives which do not have fixed settlement provisions as liabilities and mark to market all such derivatives to fair value at the end of each reporting period.

 

Net Loss per Common Share

 

Basic loss per share is calculated by dividing the Company’s net loss applicable to common shareholders by the weighted average number of common shares during the period. Diluted earnings per share is calculated by dividing the Company’s net loss available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. Although there were common stock equivalents as of the three months ended June 30, 2018 and 2017, they were anti-dilutive.

 

		For the Three Months Ended June 30, 2018				For the Three Months Ended June 30, 2017
Net Loss		$	(3,008,539	)		$	(4,114,390	)
Weighted Average Shares			45,260,013				25,785,906
Net Loss Per share		$	(0.07	)		$	(0.16	)

 

 

The following financial instruments to account for potential dilutive common shares, were not included in the diluted loss per share calculation as of June 30, 2018 and 2017 because their effect was anti-dilutive:

 

		As of June 30
		2018				2017
Warrants to purchase Common Stock			578,668				541,667
Convertible notes			4,279,702				489,833
Preferred stock			10,223,325				-
Settlement Agreements (1)			176,391,064				-
Total			191,472,759				1,031,500

  

(1)

Settlement Agreements – Potential dilutive common shares based on conversion discounts to market price for shares held in reserve as required per the EMA Financial LLC and Auctus Fund LLC settlement agreements. See Note 7. - Convertible Notes Payable.

 

Income Taxes

 

The Company provides for income taxes under ASC 740 “Accounting for Income Taxes” (“ASC 740”). ASC 740 requires the use of an asset and liability approach in accounting for income taxes. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these differences are expected to reverse.

 

The Company classifies interest expense and any related penalties related to income tax uncertainties as a component of income tax expense. No interest or penalties have been recognized as of and for the three months ended June 30, 2018 and 2017, respectively.

 

ASC 740 requires the reduction of deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

 

Impairment of Long-Lived Assets

 

The Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. When such events or changes in circumstances are present, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell.

 

Recent Accounting Pronouncements

 

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging, Targeted Improvements to Accounting for Hedging Activities. The amendments in ASU 2017-12 provided guidance to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in the financial statements. The amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. For public business entities, the amendments in ASU 2017-12 are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. While the Company does not expect the adoption of ASU 2017-12 to have a material effect on its business, the Company is still evaluating any potential impact that adoption of ASU 2017-12 may have on its financial position, results of operations or cash flows.

 

 

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments in Part I of this update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (“EPS”) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, which would be the Company’s fiscal year ending March 31, 2020. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. While the Company does not expect the adoption of ASU 2017-11 to have a material effect on its business, the Company is still evaluating any potential impact that adoption of ASU 2017-11 may have on its financial position, results of operations or cash flows.

 

In May 2017, FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which amends the scope of modification accounting surrounding share-based payment arrangements as issued in ASU 2016-09 by providing guidance on the various types of changes which would trigger modification accounting for share-based payment awards. ASU 2017-09 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, which would be the Company’s fiscal year ending March 31, 2019. The adoption of this ASU did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, to improve and simplify the accounting for the income tax consequences of intra-entity transfers of assets other than inventory, requiring companies to recognize income tax consequences upon the transfer of the asset to a third party. ASU 2016-16 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, which would be the Company’s fiscal year ending March 31, 2019. The adoption of this ASU did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments, which will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, which would be the Company’s fiscal year ending March 31, 2019. The adoption of this ASU did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation – Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies the accounting for 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 annual periods beginning after December 15, 2016, and interim periods within those annual periods, which would be the Company’s fiscal year ending March 31, 2018. The adoption of this ASU did not have a material impact on the Company’s financial position results of operations or cash flows.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Topic 842 affects any entity that enters into a lease, with some specified scope exemptions. The guidance in this update supersedes Topic 840, Leases. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For public companies, the amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, which would be the Company’s fiscal year ending March 31, 2020. The Company does not expect the adoption of ASU 2016-09 to have a material effect on its business, its financial position, results of operations or cash flows.

 

 

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The updated guidance enhances the reporting model for financial instruments and requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, and the separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. The guidance is effective for annual and interim reporting periods beginning after December 15, 2017, which would be the Company’s fiscal year ending March 31, 2019. The adoption of this ASU did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes,” which requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. The ASU simplifies the current guidance in ASC 740, which requires entities to separately present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods, which would be the Company’s fiscal year ending March 31, 2018. The adoption of this ASU did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) which amended the existing accounting standards for revenue recognition. ASU 2014-09 establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. In July 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods), which would be the Company’s fiscal year ending March 31, 2019. The adoption of this ASU did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

4. ASSET PURCHASE AGREEMENT – INTELLECTUAL PROPERTY

 

On July 17, 2017, the Company entered into an asset purchase agreement (the “Agreement”) with Interactive Systems Worldwide, Inc. (“ISWI”). Pursuant to the Agreement, the Company purchased proprietary intellectual property assets from ISWI, which include software designed, developed and patented by ISWI for the purposes of wagering on sporting events called SportXction^® and other related intellectual property rights (the “IP Assets”). SportXction^® enables users to wager at fixed prices during the course of a sporting event, such as soccer, football, baseball, basketball, golf, tennis, rugby, cricket and snooker, among many others. The Company did not assume any of ISWI’s liabilities.

 

As consideration for the IP Assets, the Company issued ISWI an aggregate of 2,000,000 shares of Company’s restricted common stock. The Company determined the valuation of the 2,000,000 shares should be at the most recent arms-length transaction price of $1.00 per share or $2,000,000 to reflect the fair value of the consideration purchased based on future earnings assumptions utilizing the IP Assets. The Company considers stock sales to independent investors to be a better indicator of the true fair value of the Company’s restricted common stock based on its limited trading market and lack of liquidity. The asset purchase was an arms-length transaction from an independent third party. The Company recorded the intangible IP Assets at the fair value of the consideration transferred of $2,000,000. The Company has determined to amortize the IP Assets over three years on a straight-line basis. For the three months ended June 30, 2018, the Company incurred $83,932 in amortization expense.

 

 

The Company accounts for and reports acquired goodwill under ASC subtopic 350-10, Intangibles-Goodwill and Other (“ASC 350-10”). In accordance with ASC 350-10, at least annually, the Company tests its IP Assets for impairment or more often if events and circumstances warrant. Any write-downs will be included in results from operations. As this software requires further development and has not been monetized by the Company, the value of the IP Assets was deemed partially impaired and written-down $757,685 as of March 31, 2018 based on the present value calculation of estimated future cash flows to account for the delays in development. The resulting loss was charged to Impairment Intellectual Property contained within Operating Expense on the income statement. The Company has determined to record the estimated fair value of the IP Assets as of March 31, 2018 at $772,909 and amortize it over the remaining useful life of twenty-five months based on the initial three-year straight-line amortization period. The Company estimates the IP Assets hold value for sale in-part or in-whole to a third party and is pursuing opportunities for development or licensing.

 

5. NOTE PAYABLE

 

On April 27, 2016, the Company issued a promissory note in the principle amount of $600,000, net of associated discount of $20,000. The note bears interest at a rate of 15% per annum and interest payments were to be paid monthly beginning June 1, 2016. The Company has the right to prepay the note at any time without penalty. The promissory note is secured by a security interest in all of the assets of the Company. The principal and accrued interest of the note became due and payable by the Company on the one-year anniversary date of the note, or April 27, 2017. Although the Company reached an agreement with the holder of the promissory note to extend the maturity date until July 1, 2017, the promissory note is currently in default and a lawsuit has been commenced against the Company by the holder thereof. See Note 13. – Commitments and Contingencies.

 

The outstanding principal of the promissory note at June 30, 2018 and March 31, 2018 was $600,000 and $600,000, respectively. For the three months ended June 30, 2018 and 2017, the Company recognized $22,500 and $22,500 in interest expense and amortization of debt discount of $0 and $1,667, respectively, included in interest expense in the accompanying statement of operations. As of June 30, 2018 and March 31, 2018, the Company recorded $105,000 and $82,500 in accrued interest expense, respectively.

 

6. CONVERTIBLE PROMISSORY NOTES PAYABLE

 

On September 29, 2017, the Company issued a convertible short-term promissory note (the “September 29^th Short-Term Note”) to a lender which advanced the Company $10,000. Interest on such note accrues at a rate of 10% per annum and was due at maturity. Unless earlier converted into the Company’s common stock, the principal and accrued interest on the September 29^th Short-Term Note was due and payable by the Company on the 180-day anniversary date of such note, or March 28, 2018. The lender has elected to have the September 29^th Short-Term Note repaid. Although the note is in default, management is in discussion with the holder of the September 29^th Short-Term Note to extend the maturity date or modify the terms thereof. For the three months ended June 30, 2018, the Company recognized $250 in interest expense and recorded $250 in accrued interest expense. The principal balance outstanding as of June 30, 2018 was $10,000 and the Company recorded $751 in accrued interest.

 

On October 11, 2017, the Company issued a convertible short-term promissory note (the “October 11^th Short-Term Note”) to a lender which advanced the Company $4,000. Interest on such note accrues at a rate of 10% per annum and was due at maturity. Unless earlier converted into the Company’s common stock, the principal and accrued interest on the October 11^th Short-Term Note was due and payable by the Company on the 180-day anniversary date of such note, or April 9, 2018. On April 30, 2018 the Company repaid the October 11^th Short-Term Note principal balance of $4,000 plus accrued interest of $200. For the three months ended June 30, 2018, the Company recognized $13 in interest expense.

 

On October 11, 2017, the Company issued a convertible short-term promissory note (the “October Short-Term Note”) to a lender which advanced the Company $31,000. Interest on such note accrues at a rate of 10% per annum and is due at maturity. Unless earlier converted into the Company’s common stock, the principal and accrued interest on the October Short-Term Note was due and payable by the Company on the ninety-day anniversary date of such note, or January 9, 2018. The Company has the option to extend the maturity date of the October Short-Term Note to the 240-day anniversary date of such note, or June 8, 2018, if the lender elected to have this note repaid. The lender elected to have the October Short-Term Note repaid. Although the note is in default, management is in discussion with the holder of the October Short-Term Note to extend the maturity date or modify the terms thereof. For the three months ended June 30, 2018, the Company recognized $773 in interest expense and recorded $773 in accrued interest expense. The principal balance outstanding as of June 30, 2018 was $31,000 and the Company recorded $2,225 in accrued interest.

 

 

On December 13, 2017, the Company issued a series of convertible short-term promissory notes (the “December 13^th Short-Term Notes”) to lenders which advanced the Company an aggregate of $77,000. Interest on such notes accrues at a rate of 10% per annum and is due at maturity. Unless earlier converted into the Company’s common stock, the principal and accrued interest on the December 13^th Short-Term Notes was due and payable by the Company on the ninety-day anniversary date of such notes, or March 13, 2018. The Company has the option to extend the maturity date of the December 13^th Short-Term Notes to the 240-day anniversary date of such notes, or August 10, 2018, if the lenders elected to have these notes repaid. The lenders have elected to have the December 13^th Short-Term Notes repaid. For the three months ended June 30, 2018, the Company recognized $1,921 in interest expense and recorded $1,921 in accrued interest expense. The aggregate principal balance outstanding as of June 30, 2018 was $77,000 and the Company recorded $4,177 in accrued interest. See Note 14. – Subsequent Events.

 

On February 27, 2018, the Company issued a convertible short-term promissory note (the “February 27^th Short-Term Note”) to the former president of the Company who advanced the Company $120,000. The February 27^th Short-Term Note was a non-interest bearing note, convertible into common stock of the Company at the closing stock price per share on the date of the conversion. Unless earlier converted into the Company’s common stock, the principal of the February 27^th Short-Term Note was due and payable by the Company on the 120-day anniversary date of such note, or June 27, 2018. On May 4, 2018, the holder of the February 27^th Short-Term Note elected to convert the principal balance of $120,000 into 6,000,000 shares of the Company’s common stock at the closing stock price on that date of $0.02 per share. The principal balance outstanding as of June 30, 2018 was $0 and the Company recorded $0 in accrued interest.

 

On April 26, 2018, the Company issued a convertible short-term promissory note (the “April 26^th Short-Term Note”) to a lender which advanced the Company $100,000. Interest on such note accrues at a rate of 10% per annum and is due at maturity. Unless earlier converted into the Company’s common stock, the principal of the April 26^th Short-Term Note is due and payable by the Company on the 90-day anniversary date of such note, or July 25, 2018. The April 26^th Short-Term Note can be converted by the holder at the 10-day average closing stock price per share on the date of the conversion. For the three months ended June 30, 2018, the Company recognized $1,781 in interest expense and recorded $1,718 in accrued interest expense. The principal balance outstanding as of June 30, 2018 was $100,000 and the Company recorded $1,781 in accrued interest. See Note 14. – Subsequent Events.

 

Due to the nature of the issued convertible notes payable notes described above, the Company determined that the conversion feature requires classification as an embedded derivative. The accounting treatment requires that the Company record at fair value at inception as a liability and to fair value as of each subsequent reporting date which at June 30, 2018 was $33,893.

 

The fair values of the embedded derivatives at issuance of the convertible notes payable were determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 247.58% to 248.51%, (3) weighted average risk-free interest rate of 1.77% to 2.11%, (4) expected lives of 0.14 to 0.25 years, and (5) estimated fair value of the Company’s common stock from $0.0264 to $0.04 per share.

 

7. CONVERTIBLE NOTES PAYABLE

 

Convertible notes payable to Auctus Fund LLC and EMA Financial LLC were comprised of the following as of June 30, 2018 and March 31, 2018:

 

		June 30, 2018				March 31, 2018
Auctus Fund LLC		$	646,024			$	661,700
EMA Financial LLC			721,007				722,593
Total notes payable			1,367,031				1,384,293
Less current portion			(1,367,031	)			(1,384,293	)
Long term portion		$	-			$	-

 

 

Auctus Fund LLC

 

During the year ended March 31, 2018, the Company entered into Securities Purchase Agreements with Auctus Fund LLC (“Auctus”) for the sale of 12% convertible promissory notes in aggregate principal amount of $259,500. On April 7, 2017, the Company issued Auctus a convertible promissory note in the principal amount of $175,000 (the “Auctus April Note”) and on May 15, 2017, the Company issued Auctus a convertible promissory note in the principal amount of $84,500 (the “Auctus May Note” and together with the Auctus April Note, the “Auctus Notes”). In connection with the issuance of the Auctus Notes, the Company issued five-year warrants (the “Auctus Warrants”) to purchase up to 125,000 shares of the Company’s common stock at an exercise price of $2.00 per share, subject to adjustment.

 

The Auctus Notes bear interest at the rate of 12% per annum. Any amount of principal or interest on the Auctus Notes which is not paid when due shall bear interest at the rate of 24% per annum from the due date thereof until the same is paid (the “Auctus Default Interest”). All interest and principal must be repaid one year from the issuance date. The Auctus May Note was due on May 15, 2018 and the Auctus April Note was due on April 7, 2018. The Company has identified the embedded derivatives related to the Auctus Notes and Auctus Warrants. These embedded derivatives included certain conversion features and reset provisions.

 

The Auctus May Note is convertible into shares of the Company’s common stock at any time at a conversion price equal to the lesser of (i) a 50% discount to the lesser of the lowest traded price and closing bid price of the common stock during the 25 trading days prior to May 15, 2017 and (ii) 50% of the lesser of the lowest traded price and closing bid price of the common stock during the 25 trading day period prior to conversion. The Auctus April Note is convertible into shares of the Company’s common stock at any time at a conversion price equal to the lesser of (i) a 60% discount to the lesser of the lowest traded price and closing bid price of the common stock during the 25 trading days prior to April 7, 2017 and (ii) 60% of the lesser of the lowest traded price and closing bid price of the common stock during the 25 trading day period prior to conversion.

 

If, at any time while the Auctus Notes are issued and outstanding, the Company issues or sells, or is deemed to have issued or sold shares of common stock, except for shares of common stock issued directly to vendors or suppliers of the Company in satisfaction of amounts owed to such vendors or suppliers (provided, however, that such vendors or suppliers shall not have an arrangement to transfer, sell or assign such shares of common stock prior to the issuance of such shares), for no consideration or for a consideration per share (before deduction of reasonable expenses or commissions or underwriting discounts or allowances in connection therewith) less than the conversion price of the Auctus Notes that is then in effect on the date of such issuance of such shares of common stock (a “Auctus Dilutive Issuance”), then immediately upon the Auctus Dilutive Issuance, the conversion price of the Auctus Notes will be reduced to the amount of the consideration per share received by the Company in such Auctus Dilutive Issuance.

 

Auctus does not have the right to convert the Auctus Notes into shares of the Company’s common stock if such conversion would result in Auctus’ beneficial ownership exceeding 4.99% of our outstanding common stock at such time.

 

All amounts due under the Auctus Note become immediately due and payable by us upon the occurrence of an event of default, including but not limited to, (i) our sale of all or substantially all of our assets, (ii) our failure to pay the amounts due at maturity, (iii) our failure to issue shares of common stock upon any conversion of the Auctus Notes, (iv) our breach of the covenants, representations or warranties pursuant to the Auctus Notes, (v) our appointment of a trustee, (vi) a judgment against us in excess of $100,000 (subject to a 20 day cure period), (vii) our liquidation, (viii) the filing of a bankruptcy petition by us or against us, (ix) our failure to comply with the reporting requirements of the Securities Exchange Act of 1934 (“Exchange Act”), (x) the delisting of our common stock from the OTC Pink or equivalent exchange, (xi) a restatement of our financial statements for any period from two years prior to the issuance date of the Auctus Notes until such notes have been paid in full, or (xi) our effectuation of a reverse stock split without 20 days prior written notice to Auctus. We are required to pay an amount equal to 150% times the sum of the then outstanding principal amount of the Auctus Notes together with accrued interest thereon with Auctus Default Interest (collectively, the “Default Sum”) for failure to pay the principal amount of the Auctus Notes together with interest accrued thereon when due at the maturity date. In addition, we shall be required to pay Auctus $2,000 per day, for each day beyond the date that we are required to deliver shares of common stock to Auctus upon conversion of the Auctus notes.

 

 

Pursuant to the Auctus May Note, at any time the Company consummates a financing transaction, the Company is required to apply at least 60% of the proceeds from such sales towards the payment of the Auctus May Note. In addition, the Auctus May Note contains a prohibition with respect to the consummation of a transaction involving capital raising or financing from any party through the sale of debt and/or equity securities for a period of at least 90 days after the issuance date of the Auctus May Note, or until August 13, 2017, without the consent of Auctus. Finally, the Auctus Notes have a cross-default provision whereby a default of the Auctus May Note constitutes a default of the Auctus April Note.

 

The Company agreed to reserve an aggregate of 2,445,000 shares of common stock for conversions of the Auctus Notes (the “Auctus Reserve”), and also agreed to adjust the Auctus Reserve to ensure that such reserve always equals at least ten times the total number of shares of common stock that is issuable upon conversion of the Auctus Notes.

 

The Auctus Warrants are immediately exercisable and may be exercised on a cashless basis in the event that the shares of common stock underlying the Auctus Warrants are not registered for resale with the SEC on an effective registration statement. The exercise price of the Auctus Warrants is subject to adjustment for stock dividends and splits, and also subject to dilution protection in the event that the Company issues shares of common stock or securities convertible into common stock at an effective price per share that is less than the original exercise price of the Auctus Warrants.

 

On November 9, 2017, the Company received a notice of default from Auctus with respect to the Auctus Notes, and Auctus commenced a lawsuit against the Company on November 27, 2017. Auctus alleged the Company failed to apply at least 60% of the proceeds from financing transactions consummated during its second quarter ended September 30, 2017 towards the repayment of the Auctus May Note and the Company also failed to adhere to the prohibition of the Auctus May Note, which prohibited financing transactions by the Company for at least 90 days following the issuance of such note, without prior written consent of Auctus, giving rise to an event of default. In addition, Auctus alleged a breach of the Auctus May Note resulted in a breach of the Auctus April Note by virtue of the cross-default provision contained in the Auctus April Note.

 

On January 24, 2018, the Company and Auctus entered into a Settlement Agreement and Mutual General Release (the “Settlement Agreement”). Pursuant to the terms of the Settlement Agreement, among other things, the Company acknowledged an outstanding liability of $800,000 and agreed to (i) initially register for resale on a registration statement to be filed with the SEC 1,500,000 shares (the “Registrable Securities”) of the Company’s common stock issuable upon conversion of the Auctus Notes and (ii) upon sale of all of the Registrable Securities, register for resale on a registration statement to be filed with the SEC such additional shares of the Company’s common stock to be issued to Auctus pursuant to the terms of the Settlement Agreement. In addition, if the Company files a registration statement with the SEC, Auctus shall have the right to request that the Company register shares of common stock underlying warrants issued to Auctus. The parties have agreed to release the other party together with its predecessors, parents, affiliates, subsidiaries, divisions, successors and assigns and the respective trustees, officers, directors, agents, representatives, employees, principals, shareholder, heirs, executors, administrators, attorneys and assigns from any and all liability actions, claims, damages, expenses or costs of whatever nature related to or arising out of the April 7, 2017 and May 15, 2017 Securities Purchase Agreement and the Auctus Notes. In addition, the parties have agreed to cause a Stipulation of Dismissal with Prejudice to be filed with respect to the action commenced by Auctus in the United States District Court for the District of Massachusetts (Dkt. No. 1:17-CV-12329-LTS).

 

In connection with the settlement, the Company recognized loss on settlement of debt of $1,361,991 comprised of the increase in face value of the outstanding debt, accumulated interest and penalties of $540,500 and $821,491 in fair value of the conversion option.

 

During the three months ended June 30, 2018, the Company issued an aggregate of 4,871,400 shares of its common stock in settlement of $15,676 outstanding principle amount of the Auctus Notes. At June 30, 2018 and March 31, 2018, the outstanding balance of the Auctus Notes was $646,024 and $661,700, respectively.

 

The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of Auctus Notes and to fair value as of each subsequent reporting date which at June 30, 2018 was $1,668,115 and $6,414 for the debt derivative and warrant liability, respectively. At the inception of the Auctus Notes, the Company determined the aggregate fair value of $811,555 and $423,011 of the embedded debt derivatives and warrant liability, respectively.

 

 

EMA Financial LLC

 

During the year ended March 31, 2018, the Company entered into Securities Purchase Agreements with EMA Financial LLC (“EMA”) for the sale of 12% convertible promissory notes in aggregate principal amount of $259,500. On April 10, 2017, the Company issued EMA a convertible promissory note in the principal amount of $175,000 (the “EMA April Note”) and on May 15, 2017, the Company issued EMA a convertible promissory note in the principal amount of $84,500 (the “EMA May Note” and together with the EMA April Note, the “EMA Notes”). In connection with the issuance of the EMA Notes, the Company issued five-year warrants (the “EMA Warrants”) to purchase up to 125,000 shares of the Company’s common stock at an exercise price of $2.00 per share, subject to adjustment.

 

The EMA Notes bear interest at the rate of 12% per annum. Any amount of principal or interest on the EMA Notes which is not paid when due shall bear interest at the rate of 24% per annum from the due date thereof until the same is paid (the “EMA Default Interest”). All interest and principal must be repaid one year from the issuance date. The EMA May Note was due on May 15, 2018 and the EMA April Note was due on April 7, 2018. The Company has identified the embedded derivatives related to the EMA Notes and EMA Warrants. These embedded derivatives included certain conversion features and reset provisions.

 

The EMA May Note is convertible into shares of the Company’s common stock at any time on or after 180 days following May 15, 2017 at the lower of (i) the closing sale price of the common stock on the principal market on the trading day immediately preceding the closing date and (ii) 50% of the lowest sale price for the common stock on the principal market during the 25 consecutive trading days immediately preceding the date of conversion. If the Company fails to register the shares of common stock underlying the EMA May Note within 180 days of the closing date, the conversion price will be permanently reduced to: (i) the closing sale price of the common stock on the principal market on the trading day immediately preceding the closing date and (ii) 50% of the lowest sale price for the common stock on the principal market during the 25 consecutive trading days immediately preceding the conversion date. As of December 31, 2017, the Company had not registered the shares of common stock underlying the EMA May Note.

 

The EMA April Note is convertible into shares of the Company’s common stock at any time on or after 180 days following April 10, 2017 at the lower of (i) the closing sale price of the common stock on the principal market on the trading day immediately preceding the closing date and (ii) 60% of the lowest sale price for the common stock on the principal market during the 25 consecutive trading days immediately preceding the date of conversion. If the Company fails to register the shares of common stock underlying the EMA May Note within 180 days of the issue date, the conversion price will be permanently reduced to: (i) the closing sale price of the common stock on the principal market on the trading day immediately preceding the closing date and (ii) 40% of the lowest sale price for the common stock on the principal market during the 25 consecutive trading days immediately preceding the conversion date. As of March 31, 2018, the Company had not registered the shares of common stock underlying the EMA April Note.

 

EMA does not have the right to convert the EMA Notes into shares of the Company’s common stock if such conversion would result in EMA’s beneficial ownership exceeding 4.99% of our outstanding common stock at such time.

 

All amounts due under the EMA Notes become immediately due and payable by the Company upon the occurrence of an event of default, including but not limited to, (i) our sale of all or substantially all of our assets, (ii) our failure to pay the amounts due at maturity, (iii) our failure to issue shares of common stock upon any conversion of the EMA Notes, (iv) our breach of the covenants, representations or warranties pursuant to the EMA Notes, (v) our appointment of a trustee, (vi) a judgment against us in excess of $50,000 (subject to a 20 day cure period), (vii) our liquidation, (viii) the filing of a bankruptcy petition by us or against us, (ix) our failure to comply with the reporting requirements of the Exchange Act, (x) the delisting of our Common Stock from the OTC Pink or equivalent exchange, (xi) a restatement of our financial statements for any period from two years prior to the issuance date of the EMA Notes until the EMA Notes have been paid in full, or (xi) our effectuation of a reverse stock split without ten days prior written notice to EMA. We are required to pay an amount equal to 150% times the sum of the then outstanding principal amount of the EMA Notes together with accrued interest thereon with EMA Default Interest (collectively, the “EMA Default Sum”) for failure to pay the principal amount of the EMA Notes together with interest accrued thereon when due at the maturity date. In addition, we shall be required to pay EMA $1,000 per day, for each day beyond the date that we are required to deliver shares of common stock to EMA upon conversion of the EMA notes. If at any time the Company enters into any capital raising transaction, including without limitation an equity line transaction, a loan transaction or the sale of shares of common stock or securities convertible into or exercisable or exchangeable for common stock, then five trading days following the closing of such subsequent financing, at least 60% of the gross proceeds therefrom shall be paid to EMA to redeem a portion of the EMA Notes pursuant to the terms thereof.

 

 

The Company agreed to reserve an aggregate of 2,445,000 shares of common stock for conversions of the EMA Notes (the “EMA Reserve”), and also agreed to adjust the EMA Reserve to ensure that such reserve always equals at least ten times the total number of common stock that is issuable upon conversion of the EMA Notes.

 

The EMA Warrants are immediately exercisable and may be exercised on a cashless basis in the event that the shares of common stock underlying the EMA Warrants are not registered for resale with the SEC on an effective registration statement. The exercise price of the EMA Warrants is subject to adjustment for stock dividends and splits, and also subject to dilution protection in the event that the Company issues shares of common stock or securities convertible into common stock at an effective price per share that is less than the original exercise price of the EMA Warrants.

 

Pursuant to the EMA Securities Purchase Agreements, in the event that at any time on or prior to the date which is six months following the issuance date, the Company desires to borrow funds, raise additional capital and/or issue additional promissory notes, whether convertible into shares of securities of the Company or otherwise (a “Prospective Financing”), EMA shall have the right of first refusal to participate in the Prospective Financing, and the Company shall provide written notice containing the terms of such Prospective Financing to EMA prior to effectuating any such transaction, provided that this right shall not apply to (a) any transaction in which the Company receives more than $250,000 of net proceeds in a single transaction or (b) any transaction that does not involve the issuance of any securities which are directly or indirectly convertible, exercisable or exchangeable into or for capital stock of the Company.

 

On September 1, 2017, the Company received a notice of default from EMA with respect to the EMA Notes, and EMA commenced a lawsuit against the Company on October 19, 2017. EMA alleges that the Company failed to file a registration statement covering the resale of the shares of common stock underlying the EMA Notes thus giving rise to an event of default.

 

On March 15, 2018, the Company entered into a settlement agreement with EMA pursuant to which the Company agreed to accept a settlement amount sufficient to enable EMA to realize $800,000 in total principal due from the net sale proceeds of the Company’s common stock (the “EMA Settlement Amount”). EMA shall have the right to convert the EMA Settlement Amount pursuant to the terms of the EMA Notes; provided, however, until such time that the EMA Settlement Amount has been realized in full, EMA may only sell the greater of (i) 18% of the average daily trading volume of the Company’s common stock or (ii) $2,500 in net daily transaction value on a daily basis. In the event EMA does not realize at least $500,000 in net sale proceeds by July 11, 2018, the settlement amount will increase by $35,000 for each month EMA does not realize $500,000. EMA must realize the entire EMA Settlement Amount by December 13, 2018 or the Company will be considered in default of the terms of the settlement agreement. In the event that EMA realizes an amount in excess of the EMA Settlement Amount, EMA shall be entitled to retain such excess amount.

 

During the year ended June 30, 2018, the Company issued an aggregate of 2,200,000 shares of its common stock in settlement of $1,586 outstanding principle amount of the EMA Notes. At June 30, 2018, the outstanding balance of the EMA Notes was $721,007.

 

The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of EMA Notes and to fair value as of each subsequent reporting date which at June 30, 2018 was $1,861,730 and $6,415 for the debt derivative and warrant liability, respectively. At the inception of the EMA Notes, the Company determined the aggregate fair value of $979,651 and $419,280 of the embedded debt derivatives and warrant liability, respectively.

 

 

Summary:

 

The Company has identified the embedded derivatives and warrant liability related to the Auctus Notes and EMA Notes and related issued warrants. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of these notes and to fair value as of each subsequent reporting date which at June 30, 2018 was $3,529,845 and $12,830 for the debt derivative and warrant liability, respectively.

 

The fair value of the embedded derivatives and warrant liability at issuance of the Auctus Notes and EMA Notes, were determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 237.66% to 249.19%, (3) weighted average risk-free interest rate of 1.77% to 2.60%, (4) expected lives of 0.25 to 3.78 years, and (5) estimated fair value of the Company’s common stock from $0.0231 to $0.21 per share.

 

The initial fair value of the embedded debt derivative and warrant liability in aggregate of $2,633,498 was allocated as a debt discount up to the proceeds of the EMA Notes ($470,500) with the remainder ($2,162,998) charged to current period operations as interest expense. For the three months ended June 30, 2018, the Company amortized an aggregate of $87,053 of debt discounts to current period operations as interest expense.

 

8. DERIVATIVE LIABILITIES

 

Warrant liability

 

In fiscal 2017, in connection with the issuance of the Auctus Notes and EMA Notes, as discussed in Note 7, the Company issued five-year warrants to purchase an aggregate of 250,000 shares of the Company’s common stock at an exercise price of $2.00 per share with anti-dilutive (reset) provisions.

 

The Company has identified embedded derivatives related to the issued warrants. These embedded derivatives included certain anti-dilutive (reset) provisions. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date and to fair value as of each subsequent reporting date.

 

At June 30, 2018, the fair value of the reset provision related to the embedded warrant liability of $12,830 was determined using the Binomial Option Pricing model with the following assumptions: dividend yield: 0%; volatility: 248.15%; risk free rate: 2.60%; and expected life: 3.77 to 3.88 years. The Company recorded a gain on change in warrant liabilities of $17,025 during the three months ended June 30, 2018.

 

Convertible notes

 

During the year ended March 31, 2018 and three months ended June 30, 2018, the Company issued convertible promissory notes.

 

These promissory notes are convertible into common stock, at the holders’ option, at a discount to the market price of the Company’s common stock. The Company has identified the embedded derivatives related to these promissory notes relating to certain anti-dilutive (reset) provisions. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of these notes and to fair value as of each subsequent reporting date.

 

The fair value of the embedded derivatives at June 30, 2018, in the amount of $3,788,884, was determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 248.15%, (3) weighted average risk-free interest rate of 1.77% to 2.11%, (4) expected lives of 0.14 to 0.25 years, and (5) estimated fair value of the Company’s common stock of $0.0264 per share. The Company recorded a loss on change in derivative liabilities of $2,267,296 during the three months ended June 30, 2018.

 

Based upon ASC 840-15-25 (Emerging Issues Task Force, or EITF, Issue 00-19, paragraph 11), the Company has adopted a sequencing approach regarding the application of ASC 815-40 to its outstanding convertible promissory notes. Pursuant to the sequencing approach, the Company evaluates its contracts based upon earliest issuance date.

 

 

9. FAIR VALUE MEASUREMENT

 

The Company adopted the provisions of ASC subtopic 825-10, Financial Instruments (“ASC 825-10”). ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

 

All items required to be recorded or measured on a recurring basis are based upon level 3 inputs.

 

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.

 

The carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable, short-term borrowings (including convertible notes payable), and other current assets and liabilities approximate fair value because of their short-term maturity.

 

As of June 30, 2018 and March 31, 2018, the Company did not have any items that would be classified as level 1 or 2 disclosures.

 

The Company recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed in Notes 7 and 8. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed in Notes 8 and 9 are that of volatility and market price of the underlying common stock of the Company.

 

As of June 30, 2018 and March 31, 2018, the Company did not have any derivative instruments that were designated as hedges.

 

The derivative and warranty liabilities as of June 30, 2018, in the amount of $3,801,714 have a level 3 classification.

 

The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of June 30, 2018:

 

		Warrant Liability				Debt Derivative
Balance, March 31, 2018		$	29,854			$	1,588,342
Total (gains) losses
Initial fair value of debt derivative at note or warrant issuance			-				47,827
Reclassify to equity upon payoff or conversion of note			-				(114,581	)
Mark-to-market at June 30, 2018:			(17,024	)			2,267,296
Balance, June 30, 2018			12,830				3,788,884
Net gain for the period included in earnings relating to the liabilities held at June 30, 2018		$	17,024			$	(2,267,296	)

 

 

Fluctuations in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period. The Company’s stock price decreased approximately 56% from April 1, 2018 to June 30, 2018. As the stock price decreases for each of the related derivative instruments, the value to the holder of the instrument generally decreases. Additionally, stock price volatility is one of the significant unobservable inputs used in the fair value measurement of each of the Company’s derivative instruments.

 

The estimated fair value of these liabilities is sensitive to changes in the Company’s expected volatility. Increases in expected volatility would generally result in a higher fair value measurement.

 

10. PREFERRED STOCK

 

On March 27, 2018, the Company entered into a Series A Preferred Stock Purchase Agreement (the “Purchase Agreement”) pursuant to which it issued an investor 103,000 shares of its newly designated Series A Convertible Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”) in consideration for $103,000.

 

The terms of the shares of the Series A Preferred Stock are set forth in the Series A Convertible Preferred Stock Certificate of Designations, Preferences, Rights and Limitations (the “Series A COD”) filed with the Nevada Secretary of State on March 28, 2018.

 

The Series A Preferred Stock, with respect to dividend rights and rights on liquidation, winding-up and dissolution, in each case ranks senior with respect to the Company’s common stock and junior with respect to all existing and future indebtedness of the Company. The Series A Preferred Stock have a liquidation preference of $1.00 per share, subject to adjustment (the “Stated Value”). Each share of Series A Preferred Stock shall receive an annual 12% cumulative dividend, compounded daily, payable solely upon redemption, liquidation or conversion; provided, however, upon the occurrence of an Event of Default (as defined in the Series A COD), the dividend rate shall increase to 22%. Except as set forth in the Series A COD, the Series A Preferred Stock have no voting rights with respect to any matters requiring shareholder approval. So long as any shares of Series A Preferred Stock are outstanding, the Company will not, without the affirmative approval of the holders of a majority of the shares of Series A Preferred Stock then outstanding voting together as a class: (i) alter or change adversely the powers, preferences or rights given to the Series A Preferred Stock or alter or amend the Series A COD, (ii) authorize or create any class of stock ranking as to distribution of dividends senior to the Series A Preferred Stock, (iii) amend its Articles of Incorporation, as amended, or other charter documents in breach of any of the provisions of the Series A COD, (iv) increase the authorized number of shares of Series A Preferred Stock, (v) liquidate, dissolve or wind-up the business and affairs of the Company, or effect any Deemed Liquidation Event (as defined in the Series A COD), or (vi) enter into any agreement with respect to any of the foregoing.

 

The Company shall have the right at any time from the period beginning on the date of issuance of the Series A Preferred Stock (the “Issuance Date”) until 180 days from the Issuance Date to redeem all or any portion of the Series A Preferred Stock at the Redemption Percentage (as defined in the Series A COD) provided that an Event of Default has not occurred. On the date which is twelve months following the Issuance Date or upon the occurrence of an Event of Default (the “Mandatory Redemption Date”), the Company shall redeem all of the shares of Series A Preferred Stock which have not been previously redeemed or converted. Within five days of the Mandatory Redemption Date, the Company shall pay each holder of an amount in cash equal to the total number of shares of Series A Preferred Stock held by such holder multiplied by the Stated Value.

 

The holders of Series A Preferred Stock shall have the right to convert the Series A Preferred Stock preferred stock into shares of the Company’s common stock at the Variable Conversion Price (as defined in the Series A COD) at any time during the period beginning on the date which is six months after the Issuance Date; provided, however, the Company is prohibited from effecting a conversion of the Series A Preferred Stock to the extent that, as a result of such conversion, such holder would beneficially own more than 4.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the Series A Preferred Stock.

 

 

The Company has identified the embedded derivatives related to the preferred stocks. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of the issuance and to fair value as of each subsequent reporting date which at June 30, 2018 was $225,146.

 

The fair value of the embedded derivatives at issuance of the preferred stock was determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 248.15%, (3) weighted average risk-free interest rate of 2.11%, (4) expected life of .74 years, and (5) estimated fair value of the Company’s common stock of $0.01 per share.

 

11. STOCKHOLDERS’ EQUITY AND CONTRIBUTED CAPITAL

 

Recent Sale of Securities

 

The Company is authorized to issue up to 10,000,000 shares of preferred stock, $0.001 par value per share. As of June 30, 2018 and March 31, 2018, 103,000 shares of Series A Preferred Stock were issued and outstanding, respectively.

 

The Company is authorized to issue up to 500,000,000 shares of common stock, $0.001 par value per share. As of June 30, 2018 and March 31, 2018, 50,707,248 shares and 34,198,917 shares of common stock were issued and outstanding, respectively.

 

During the year ended March 31, 2018, the Company did not issue common shares for the following transactions: (i) the Company sold an aggregate of 375,000 shares of common stock, at an average price of $0.29 per share for gross proceeds of $108,000, (ii) an aggregate of 206,098 shares of common stock issuable upon the conversion of convertible notes payable and accrued interest in the amount of $79,379 at an average conversion price of $0.39 per share, (iii) an aggregate of 181,000 shares of common stock issuable to various individuals for services valued at $61,000 or an average price of $0.34 per share. These shares of common stock were previously listed under Common Stock Payable and were issued during the three months ended June 30, 2018.

 

In April 2018, the Company issued an aggregate of 1,500,000 shares of common stock at an average price of $0.020 per share, upon the conversion of convertible notes and accrued interest thereon of $30,000.

 

In May 2018, the Company issued an aggregate of 375,000 shares of common stock previously recorded as Common Stock Payable as of March 31, 2018.

 

In May 2018, the Company issued an aggregate of 9,200,000 shares of common stock at an average price of $0.016 per share, upon the conversion of convertible notes and accrued interest thereon of $149,748.

 

In May 2018, the Company issued an aggregate of 2,250,000 shares of common stock at an average price of $0.020 to various individuals for services valued at $45,000 at $0.02 per share.

 

In June 2018, the Company issued an aggregate of 387,098 shares of common stock previously recorded as Common Stock Payable as of March 31, 2018.

 

In June 2018, the Company issued an aggregate of 2,371,400 shares of common stock at an average price of $0.005 per share, upon the conversion of convertible notes and accrued interest thereon of $11,098.

 

In June 2018, the Company issued an aggregate of 424,833 shares of common stock at an average price of $0.020 to various individuals for services valued at $8,497.

 

 

As of June 30, 2018, the Company had $151,600 in Common Stock Payable for an aggregate of 5,610,000 shares of common stock to be issued. During the three months ended June 30, 2018, the Company did not issue shares of common stock for the following transactions: (i) the Company sold an aggregate of 690,000 shares of common stock, resulting in gross proceeds of $36,000 at an average price of $0.052 per share, and (ii) an aggregate of 4,920,000 shares of common stock issuable to various individuals for services valued at $115,600 at an average price of $0.023 per share. These shares of common stock have not been issued as of the date of this filing.

 

For the three months ended June 30, 2018, there were no stock options granted or warrants issued. As of June 30, 2018, there are no stock options outstanding. As of June 30, 2018, the Company has granted warrants to purchase up to (i) 250,000 shares of the Company’s common stock outstanding as granted in the convertible notes financing, and (ii) warrants to purchase up to 328,668 shares of the Company’s common stock outstanding issued together with the 164,334 shares of common stock sold at $1.50 per share during the year ended March 31, 2018. For each share of common stock sold, the investors received one warrant to purchase one share of common stock exercisable at $2.50 per share for one year from the date of sale and one warrant to purchase one share of common stock exercisable at $5.00 per share for three years from the date of sale.

 

In connection with the foregoing, the Company relied upon the exemption from securities registration provided by Section 4(a)(2) under the Securities Act of 1933, as amended and Regulation D thereunder for transactions not involving a public offering.

 

12. RELATED PARTY TRANSACTIONS

 

The Company’s related parties are First Harvest Financial, Inc. (“FHF”) and The Great American Rolling Paper Company (“GARP”) and HKA Digital Limited (“HKA”) by common ownership and management.

 

The related parties have provided certain management services and incurred expenses on behalf of the Company for the three months ended June 30, 2018 and 2017, including accounting, administration, management, marketing, IT support, rent, due diligence and evaluation of acquisition candidates.

 

For the three months ended June 30, 2018 and 2017, the related parties have been reimbursed or (credited) the following for management and subcontractor fees, respectively: (a) FHF - $0 and $31,600, and (b) GARP – ($500) and $38,500.

 

The Company incurred rent expense to FHF of $0 and $22,600 for the three months ended June 30, 2018 and 2017, respectively. The Company had no formal lease with FHF.

 

The majority shareholder of the related parties described above was the former Chief Executive Officer, President, Chairman of the Board and largest shareholder of the Company. He was paid $66,046 and $109,473 by the Company as a subcontractor for the three months ended June 30, 2018 and 2017, respectively. He had no formal compensation agreement with the Company. The Company’s Board of Directors accepted his resignation from his positions as Chief Executive Officer, President and Chairman of the Board on August 9, 2018.

 

The Company entered into a game development and licensing agreement with HKA on October 2, 2015 (the “Development Agreement”). HKA is majority owned by the Company’s current interim Chief Executive Officer and the sole member of the Board of Directors of the Company. The Company paid HKA $0 and $164,000 for the three months ended June 30, 2018 and 2017, respectively. As of June 30, 2018, the Company has paid HKA an aggregate of $1,394,400 under the Development Agreement. The total value of the Development Agreement is $2,000,000 based on certain development parameters and ongoing scope of work.

 

13. COMMITMENTS AND CONTINGENCIES

 

Litigations, Claims and Assessments

 

In the normal course of business, the Company may be involved in legal proceedings, claims and assessments arising in the ordinary course of business. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. There were no such matters that were deemed material to the financial statements as of June 30, 2018, except the following:

 

 

On August 21, 2017, Hit Sum to Me, LLC (“HSTM”) filed a complaint with the Circuit Court of the First Judicial Circuit in and for Okaloosa County, Florida (Filing #61355697) against Cannavoices and Kevin Gillespie, the Company’s former Chief Executive Officer, President, Chairman of the Board. In the complaint HSTM indicates that on or about April 27, 2016, Cannavoices entered into a Loan Agreement with HSTM and Cannavoices issued a promissory note (the “HSTM Note”) in the principal amount of $600,000, which note is guaranteed by Kevin Gillespie and secured by the Security Agreement for Tangible Personal Property whereby Cannavoices and Kevin Gillespie granted HSTM a first priority security interest in all of the shares of common stock of Cannavoices (the “Cannavoices Stock”). The complaint alleges that Cannavoices breached the terms of the HSTM Note by failing to repay the principal balance of such note by July 1, 2017 and that as of July 1, 2017, Cannavoices is indebted to HSTM in the amount of $600,000 plus accrued and accruing interest, late changes and costs of collection, including attorney’s fees. Pursuant to the complaint, HSTM requests (i) that a judgment be entered against Cannavoices for all amounts owed under the HSTM Note, including damages for principal and interest due under the HSTM Note, late fees and advances, (ii) that a judgment be entered against Kevin Gillespie for all amounts owed under the HSTM Note, including damages for principal and interest due under the HSTM Note, late fees and advances, (iii) that a judgment be entered against Kevin Gillespie for possession of the Cannavoices Stock and (iv) for reasonable attorneys’ fees. The Company filed an answer to the complaint on September 6, 2017. The Company cannot determine at this time whether the court will agree with the Company’s position, but the Company intends to litigate such allegations if a resolution cannot be agreed upon by the Company and HSTM. The action is still pending. See Note 5. – Note Payable.

 

14. SUBSEQUENT EVENTS

 

Convertible Promissory Notes Payables

 

On July 25, 2018, the April 26^th Short-Term Note matured. Although the note is in default, management is in discussion with the holder of the April 26^th Short-Term Note to extend the maturity date or modify the terms thereof.

 

On August 10, 2018, the December 13^th Short-Term Notes matured. Although the notes are in default, management is in discussion with the holders of the December 13^th Short-Term Notes to extend the maturity date or modify the terms thereof.

 

Preferred Stock

 

On August 17, 2018, the Company received the proceeds of $58,000 from a Series A Preferred Stock financing. The terms of the financing are the same as the preferred stock issued on March 27, 2018. See Note 10. – Preferred Stock.

 

Common Stock

 

During the period from July 1, 2018 through the date of these financial statements, the Company approved the issuance of an aggregate of 185,000 shares of common stock for services valued at $7,400 at $0.04 per share. The shares of common stock have not been issued as of August 23, 2018.

 

During the period from July 1, 2018 through the date of these financial statements, the Company sold 52,500 shares of common stock, resulting in gross proceeds of $2,100 at $0.04 per share. The shares of common stock have not been issued as of August 23, 2018.

 

Corporate Action

 

On June 21, 2018, the Company filed a Definitive Information Statement (the “Information Statement”) with the SEC to notify the holders of shares of common stock of a corporate action to amended and restate the Company’s Articles of Incorporation to, among other things: (i) increase the authorized number of shares of common stock to 2,000,000,000 shares from 500,000,000 shares; (ii) increase the authorized number of shares of blank check preferred stock to 50,000,000 shares from 10,000,000 shares; (iii) specify the terms and restrictions of the issuance and designations of the authorized blank check preferred stock; and (iv) include provisions with respect to the indemnification of officers and directors of the Company. Pursuant to Rule 14c-2 under the Exchange Act, the proposals will not be adopted until a date at least 20 days after the date on which this Information Statement has been mailed to the Company’s stockholders as of May 15, 2018. As of June 30, 2018, none of the foregoing proposals have been adopted.

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect management’s current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of our management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.

 

Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. Important factors currently known to management could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions. Factors that could cause differences include, but are not limited to, expected market demand for our services, fluctuations in pricing for materials, and competition.

 

Business Overview

 

Arias Intel Corp. (the “Company”) is a software publisher that creates, develops and publishes applications on multiple platforms including mobile, desktop, set-top box (Roku, Amazon Prime, etc.), and other devices, for social themed and casino games. The software is developed and produced in partnership with Unity, Unreal and in-house source code using state-of-the-art technology with a themed-focus to generate social awareness and discussion of relevant, contemporary issues. The games serve as a sales platform that use a viral marketing strategy to leverage media to build a user base and lower acquisition costs, while generating a revenue stream from in-app purchases and cross-channel advertising.

 

The Company is an early stage company and has not generated any revenue as of June 30, 2018. The Company plans to generate revenue primarily through in-app purchases and cross-channel advertising. We intend to use our platform to build our subscriber base and boost users’ engagement within our applications to gather analytics and target advertising directly to users based on their preferences. We are also exploring opportunities to expand a suite of mobile games and apps that target similar audience demographics. We may explore other opportunities through the acquisition of operating companies, asset purchases or internal development. Additional information on the Company may be found on our website: https://ariasintel.com.

 

We were originally incorporated on February 27, 2013 as “American Riding Tours, Inc.”, a Nevada corporation. Our initial business plan related to providing motorcycle tours. Effective July 22, 2016, we changed our name to “First Harvest Corp.” Effective December 1, 2017, we changed our name to “Arias Intel Corp.” Prior to the reverse acquisition described below, we did not have any significant assets or operations.

 

On February 10, 2017 (the “Closing Date”), the Company entered into and closed an agreement and plan of merger and reorganization (the “Merger Agreement”), with CV Acquisition Corp., a wholly-owned subsidiary of the Company (“Acquisition Corp.”), and Cannavoices, Inc. (“Cannavoices”). Pursuant to the Merger Agreement, effective on the Closing Date (i) Acquisition Corp. merged with and into Cannavoices, such that Cannavoices, the surviving corporation, became a wholly-owned subsidiary of the Company, and (ii) the Company issued an aggregate of 23,267,231 shares of common stock to the shareholders of Cannavoices, representing approximately 97.7% of the Company’s outstanding shares of common stock, following the closing of the Merger Agreement, in exchange for the cancellation of all of the issued and outstanding shares of common stock of Cannavoices.

 

 

Cannavoices was incorporated on June 5, 2015 as a Florida corporation. Effective on the Closing Date, pursuant to the Merger Agreement, Cannavoices became a wholly-owned subsidiary of the Company. The acquisition of Cannavoices is treated as a reverse acquisition, and the business of Cannavoices became the business of the Company. At the time of the reverse recapitalization, the Company was not engaged in any active business.

 

The consolidated financial statements of the Company are those of the Company and its consolidated subsidiaries from the Closing Date and subsequent periods.

 

Results of Operations

 

For the Three Months Ended June 30, 2018 Compared to the Three Months Ended June 30, 2017

 

Revenues and Cost of Goods Sold. We had no revenues or cost of goods sold during the three months ended June 30, 2018 and 2017.

 

Total Operating Expenses. Total operating expenses for the three months ended June 30, 2018 were $533,925, as compared to $1,700,897 for the three months ended June 30, 2017, a decrease of $1,166,972, or 68.6%. This decrease was primarily due to the decrease in subcontractor fees and general operating expenses paid under general and administrative expenses.

 

General and administrative expenses for the three months ended June 30, 2018 were $468,379, a decrease of $866,345 or 64.9%, from $1,334,724 for the three months ended June 30, 2017. This decrease was primarily due to a decrease in subcontractor fees and lower operating costs for the three months ended June 30, 2018 as we scaled back operations due to insufficient of cash flow.

 

During the three months ended June 30, 2018, we incurred non-cash compensation expense to subcontractors of $169,097 as part of general and administrative expenses, referenced above, by issuing shares of common stock to various individuals as an incentive for participating in our operations and development, a decrease of $898,380 or 84.2%, from $1,067,477 for the three months ended June 30, 2017. The decrease was primarily due to the Company’s low stock price and avoiding additional dilution by issuing shares at the low valuation. We also scaled back operations during the three months ended June 30, 2018 and did not utilize project management services as used for the three months ended June 30, 2017.

 

General and administrative expenses to related parties for the three months ended June 30, 2018 were $65,546, a decrease of $136,627 or 67.6%, from $202,173 for the three months ended June 30, 2017. The decrease was primarily due to insufficient cash flow, not renting office space from the related party and paying lower management fees to the related party.

 

Research and development expenses to related parties for the three months ended June 30, 2018 were $0, a decrease from $164,000 for the three months ended June 30, 2017. The decrease was primarily due to insufficient cash flow to incur new development expenses. Our research and development expenses to related parties are for our outside mobile gaming application development costs for Hemp Inc performed by HKA.

 

Total Other Income/(Expense). Total other expenses for the three months ended June 30, 2018 were $2,471,312, as compared to $2,413,493 for the three months ended June 30, 2017, an increase of $57,819, or 2.4%. This increase was primarily due to the increase in non-cash loss on change in derivative and warrant liability net with a decrease in interest expense related to the accounting treatment for the convertible notes payable to two institutions and their subsequent settlement in the aggregate amount of $1,600,000 (collectively, the “Convertible Notes Payable”), as further explained in the notes to the financial statements.

 

Interest income for the three months ended June 30, 2018 was $0 compared to $1,500 for the three months ended June 30, 2017. The decrease was due to the write-off of the $100,000 convertible note receivable as of March 31, 2018 based on our review for collectability.

 

 

Total interest expense for the three months ended June 30, 2018 was $221,040, a decrease of $2,079,975 or 90.4%, from $2,301,015 for the three months ended June 30, 2017. This decrease was primarily due to non-cash interest expenses related to the accounting treatment for embedded debt derivative and warrant liability charges for the Convertible Notes Payable for the inception of these notes during the three months ended June 30, 2017.

 

The Company incurred a loss on the change in the derivative and warrant liability for the three months ended June 30, 2018 of $2,250,272, an increase of $2,136,294 or 1,874.3%, compared to $113,978 for the three months ended June 30, 2017. The increase in the loss on the change in the derivative and warrant liability was primarily due to the decrease in the stock price and between the periods. For the three months ended June 30, 2018, the stock price was declining, which increased the derivative liability and the correspondingly increases the loss on the change in derivative liability.

 

Net Loss Attributable to Company. As a result of the foregoing, the net loss attributable to Company for the three months ended June 30, 2018 was $3,005,237, a decrease of $1,109,153 or 27.0%, compared to $4,114,390 for the three months ended June 30, 2017.

 

Net Loss Attributable to Common Shareholders. For the three months ended June 30, 2018, the Company accounted $3,302 for the annual 12% cumulative Series A Preferred Stock dividend, compounded daily, which is payable solely upon redemption, liquidation or conversion, compared to $0 for the three months ended June 30, 2017. As a result of the foregoing, the net loss attributable to common shareholders for the three months ended June 30, 2018 was $3,008,539 or $0.07 per common share, basic and diluted, a decrease of $1,105,851 or 26.9%, compared to $4,114,390 or $0.16 per share, basic and diluted, for the three months ended June 30, 2017.

 

Reconciliation of GAAP to non-GAAP Financial Measures

 

The following table contains financial measures that are not calculated in accordance with U.S. generally accepted accounting principles (“GAAP”). Such measures, which are unaudited and should only be read in conjunction with our financial statements and related notes included elsewhere in this report, are intended to serve as a supplement to the GAAP results. The unaudited non-GAAP information reflects the adjustment to GAAP net income attributable to common shareholders on a non-GAAP basis, whereby the effect of non-cash adjustments for each period presented for stock-based compensation and the interest expense related to the accounting treatment for embedded debt derivative and warrant liability charges and the change in the fair value of derivatives associated with the Convertible Notes Financing added back to the GAAP net income attributable to common shareholders. This non-GAAP adjustment has been used to calculate the non-GAAP earnings per share. The non-GAAP operating results for the quarters presented are not necessarily indicative of results for any future periods, but management believes these non-GAAP financial measures provide useful information to investors for a more accurate picture of the Company’s operations on an ongoing basis.

 

Arias Intel Corp.

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

 

		For the Three Months Ended June 30, 2018				For the Three Months Ended June 30, 2017
GAAP NET LOSS		$	(3,008,539	)		$	(4,114,390	)
Non-GAAP adjustments:
Add Non-Cash Charges:
Non-cash amortization expense		$	83,932			$	-
Non-cash stock-based compensation and expenses			169,097				1,067,477
Non-cash interest expenses			114,091				-
Non-cash amortization of debt discount			81,069				(370,092	)
Non-cash preferred stock discount			25,679				-
Non-cash expense on the issuance of convertible notes payable			-				35,000
Increase in accrued dividend			3,302				-
Non-cash loss for change in the fair value of derivative			2,250,272				2,747,476
Total Non-Cash Charges		$	2,727,442			$	3,479,861
Non-GAAP Net Loss		$	(281,097	)		$	(634,529	)
Non-GAAP Earnings (Loss) Per Share		$	(0.01	)		$	(0.02	)

 

 

Going Concern

 

Our independent registered public accounting firm stated that our financial statements for the three months ended June 30, 2018 and 2017 were prepared assuming that we would continue as a going concern. Our ability to continue as a going concern is an issue raised as we have not generated revenue and incurred a net loss of $3,008,539 for the three months ended June 30, 2018. We had an accumulated deficit of $20,290,844 as of June 30, 2018, expect to generate net losses for the near future, and require additional financing to fund future operations. Our financial statements contain additional note disclosures describing the circumstances that led to this disclosure.

 

Our operations have not yet resulted in revenue generation and we have financed our activities using equity and debt financings. Our ability to continue as a going concern is subject to our ability to achieve and maintain profitable operations or obtain necessary funding from outside sources, including obtaining additional funding from the sale of our securities or obtaining loans from various financial institutions or private sources. Our lack of revenue and continued net operating losses increases the difficulty in meeting such goals and there can be no assurances that such methods will prove successful. While we continually look for additional financing sources, the procurement of outside funding is difficult and there can be no assurance that such financing will be available on terms acceptable to us, if at all.

 

These conditions raise substantial doubt about our ability to continue as a going concern.

 

Liquidity and Capital Resources

 

The following table summarizes total current assets, liabilities and working capital at June 30, 2018 compared to March 31, 2018:

 

		June 30, 2018				March 31, 2018				Change
Current Assets		$	34,216			$	28,323			$	5,893
Current Liabilities		$	6,449,047			$	4,149,750			$	2,299,297
Working Capital Deficiency		$	(6,414,831	)		$	(4,121,427	)		$	(2,293,404	)

 

As of June 30, 2018 and March 31, 2018, we had a working capital deficiency of $6,414,831 and $4,121,427, respectively, an increase of $2,293,404 or 55.6%. The increase in working capital deficiency was primarily due to the accounting treatment related to the Convertible Notes Financing for the embedded debt derivative and warrant liability of $3,801,714 at June 30, 2018 compared to $1,618,196 at March 31, 2018. The derivative financial instruments require that the Company record fair value of the derivatives as of the inception date of the Convertible Notes Financing and to fair value as of each subsequent reporting date which at June 30, 2018 were $3,788,884 and $12,830, and at March 31, 2018 were $1,588,342 and $29,854 for the debt derivative and warrant liability, respectively.

 

For the three months ended June 30, 2018 and 2017 we recorded no revenue, respectively. As a result, we do not have any capital resources to meet our projected cash flow requirements to conduct our proposed operations. We presently do not have any available credit, bank financing or other external sources of liquidity. Therefore, we will require additional financing in order to develop our business. We cannot predict whether this additional financing will be in the form of equity, debt or be in another form. We may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In any of these events, we may be unable to implement our current plans for operations and these circumstances would have a material adverse effect on our business prospects, financial condition and results of operations.

 

During the three months ended June 30, 2018, we used net cash of $217,323, in operations and generated $226,031 net cash from financing activities, including common stock sales and issuance of notes payable.

 

Off-Balance Sheet Arrangements

 

None.

 

 

Critical Accounting Policies and Estimates

 

Revenue Recognition: We recognize revenues when control of the promised services is transferred to a customer, in an amount that reflects the consideration that we expect to receive in exchange for those services. In discussion with management, we apply the following five steps to determine the appropriate amount of revenue to be recognized as we fulfill our obligations under each of our agreements: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to performance obligations in the contract; and (v) recognize revenue as the performance obligation is satisfied. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as advances from customers on the balance sheet. For the period from February 27, 2013 (inception) to June 30, 2018, we did not recognize any revenue.

 

Stock-Based Compensation: We account for stock-based compensation in accordance with Accounting Standards Committee (“ASC”) 718 “Compensation – Stock Compensation” using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued. We account for stock-based compensation to consultants and other third parties in accordance with ASC 505-50 “Equity-Based Payments to Non-Employees.” Compensation expense is determined at the “measurement date.” The expense is recognized over the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company initially records compensation expense based on the fair value of the award at the reporting date.

 

Convertible Instruments: GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free-standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional, as that term is described under applicable ASC 480-10.

 

When the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.

 

Derivative Financial Instruments: The Company classifies, as equity, any contracts that (i) require physical settlement or net-share settlement or (ii) provide the Company with a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company’s own stock. The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). The Company assesses classification of its common stock purchase warrants and other free-standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required.

 

The Company’s free-standing derivatives consisted of warrants to purchase common stock that were issued in connection with the issuance of debt and of embedded conversion options with convertible debentures. The Company evaluated these derivatives to assess their proper classification in the balance sheet as of December 31, 2017 using the applicable classification criteria enumerated under ASC 815-Derivatives and Hedging. The Company determined that certain embedded conversion and/or exercise features do not contain fixed settlement provisions. The convertible debentures contain a conversion feature such that the Company could not ensure it would have adequate authorized shares to meet all possible conversion demands.

 

 

As such, the Company was required to record the derivatives which do not have fixed settlement provisions as liabilities and mark to market all such derivatives to fair value at the end of each reporting period.

 

Recent Pronouncements

 

We have evaluated all the recently issued accounting pronouncements through the filing date of these financial statements and do not believe that any of these pronouncements will have a material impact on our financial position and results of operations.

 

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required under Regulation S-K for smaller reporting companies.

 

ITEM 4 - CONTROLS AND PROCEDURES

 

Evaluation of disclosure controls and procedures.

 

Pursuant to Rules 13a-15(b) and 15-d-15(b) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. The term “disclosure controls and procedures”, as defined under Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based upon such evaluation, the CEO and CFO concluded that our disclosure controls and procedures as of June 30, 2018 were not effective, for the same reasons as previously disclosed under Item 9A. “Controls and Procedures” in our Annual Report on Form 10-K for our fiscal year ended March 31, 2018 filed with the Securities and Exchange Commission (“SEC”) on July 13, 2018. Specifically, management concluded that we had material weaknesses in our control environment and financial reporting process consisting of the following:

 

1) Lack of a functioning audit committee due to a lack of independent board members, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; and

 

 

2) We did not have sufficient personnel in our accounting and financial reporting functions. As a result, we were not able to achieve adequate segregation of duties and were not able to provide for adequate review of the financial statements. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the financial statements will not be prevented or detected on a timely basis.

 

We do not believe the material weaknesses described above caused any meaningful or significant misreporting of our financial condition and results of operations for the three months ended June 30, 2018. However, management believes that the lack of a functioning audit committee and no outside directors on our board of directors, results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future periods.

 

Management plan to remediate material weaknesses

 

Management is pursuing the implementation of corrective measures to address the material weaknesses described above. In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we plan to initiate, the following series of measures:

 

We plan to appoint one or more outside directors to our Board of Directors who shall be appointed to an audit committee resulting in a fully functioning audit committee which will undertake the oversight in the establishment and monitoring of required internal controls and procedures such as reviewing and approving estimates and assumptions made by management when funds are available to us. Additionally, we will create written policies and procedures for accounting and financial reporting with respect to the requirements and application of GAAP and SEC disclosure requirements.

 

In addition, when funds are available, we will hire knowledgeable personnel with technical accounting expertise to further support our current accounting personnel. As our operations are relatively small and we continue to have net cash losses each quarter, we do not anticipate being able to hire additional internal personnel until such time as our operations are profitable on a cash basis or until our operations are large enough to justify the hiring of additional accounting personnel. As necessary, we will engage consultants in the future in order to ensure proper accounting for our consolidated financial statements.

 

Due to the fact that our internal accounting staff consists solely of a principal financial officer, additional personnel will also ensure the proper segregation of duties and provide more checks and balances within the department. Additional personnel will also provide the cross training needed to support us if personnel turnover issues within the department occur. We believe this will greatly decrease any control and procedure issues we may encounter in the future.

 

We believe the remediation measures described above will remediate the material weaknesses we have identified and strengthen our internal control over financial reporting. We are committed to continuing to improve our internal control processes and will continue to diligently and vigorously review our financial reporting controls and procedures. As we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to address control deficiencies or determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures described above.

 

Changes in internal control over financial reporting.

 

There have been no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-(f) of the Exchange Act) that occurred during the last fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on Internal Controls

 

Disclosure controls and procedures are designed to provide reasonable assurance of achieving the objectives specified above. However, disclosure controls and procedures will not prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

Not required under Regulation S-K for smaller reporting companies.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

During the year ended March 31, 2018, the Company did not issue common shares for the following transactions: (i) the Company sold an aggregate of 375,000 shares of common stock, at an average price of $0.29 per share for gross proceeds of $108,000, (ii) an aggregate of 206,098 shares of common stock issuable upon the conversion of convertible notes payable and accrued interest in the amount of $79,379 at an average conversion price of $0.39 per share, (iii) an aggregate of 181,000 shares of common stock issuable to various individuals for services valued at $61,000 or an average price of $0.34 per share. These shares of common stock were previously listed under Common Stock Payable and were issued during the three months ended June 30, 2018.

 

In April 2018, the Company issued an aggregate of 1,500,000 shares of common stock at an average price of $0.020 per share, upon the conversion of convertible notes and accrued interest thereon of $30,000.

 

In May 2018, the Company issued an aggregate of 375,000 shares of common stock previously recorded as Common Stock Payable as of March 31, 2018.

 

In May 2018, the Company issued an aggregate of 9,200,000 shares of common stock at an average price of $0.016 per share, upon the conversion of convertible notes and accrued interest thereon of $149,748.

 

In May 2018, the Company issued an aggregate of 2,250,000 shares of common stock at an average price of $0.020 to various individuals for services valued at $45,000 at $0.02 per share.

 

 

In June 2018, the Company issued an aggregate of 387,098 shares of common stock previously recorded as Common Stock Payable as of March 31, 2018.

 

In June 2018, the Company issued an aggregate of 2,371,400 shares of common stock at an average price of $0.005 per share, upon the conversion of convertible notes and accrued interest thereon of $11,098.

 

In June 2018, the Company issued an aggregate of 424,833 shares of common stock at an average price of $0.020 to various individuals for services valued at $8,497.

 

As of June 30, 2018, the Company had $151,600 in Common Stock Payable for an aggregate of 5,610,000 shares of common stock to be issued. During the three months ended June 30, 2018, the Company did not issue shares of common stock for the following transactions: (i) the Company sold an aggregate of 690,000 shares of common stock, resulting in gross proceeds of $36,000 at an average price of $0.052 per share, and (ii) an aggregate of 4,920,000 shares of common stock issuable to various individuals for services valued at $115,600 at an average price of $0.023 per share. These shares of common stock have not been issued as of the date of this filing.

 

In connection with the foregoing issuances of common stock, the Company relied upon the exemption from securities registration provided by Section 4(a)(2) under the Securities Act of 1933, as amended and Regulation D thereunder for transactions not involving a public offering.

 

Item 3. Defaults Upon Senior Securities

 

On August 21, 2017, HSTM filed a complaint against Cannavoices and Kevin Gillespie which indicates that on or about April 27, 2016, Cannavoices entered into a Loan Agreement with HSTM and Cannavoices issued a promissory note in the principal amount of $600,000, which note is guaranteed by Kevin Gillespie and secured by the Security Agreement for Tangible Personal Property whereby Kevin Gillespie granted HSTM a first priority security interest in all of his shares of common stock of Cannavoices. The complaint alleges that Cannavoices breached the terms of the note by failing to repay the principal balance of such note by the maturity date, or July 1, 2017 and that as of July 1, 2017, Cannavoices is indebted to HSTM in the amount of $600,000 plus accrued and accruing interest, late charges and costs of collection, including attorney’s fees. The Company filed an answer to the complaint on September 6, 2017. As of the date of this report, the action is still pending.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

31.1*		Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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

 

* Filed herewith.

** Furnished herewith.

 

 

SIGNATURES

 

Pursuant to the requirements 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.

 

	ARIAS INTEL CORP.
Date: August 24, 2018	By:	/s/ DANIEL HAMMETT
		Daniel Hammett
		Chief Executive Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)