UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

☒  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2017

 

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: 000-55596

 

MyDx, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada   99-0384160
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

6335 Ferris Square, Suite B

San Diego, CA 92121

(Address of principal executive offices) (Zip Code)

 

(800) 814-4550

(Registrant’s telephone number, including area code)

  

Securities registered under Section 12(b) of the Act:

 

Title of each class:   Name of each exchange on which registered:
None   None

 

Securities registered under Section 12(g) of the Act:

(Title of class)

Common Stock, par value $0.001

 

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

 

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

 

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

  

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

 

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

 

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

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging Growth Company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates (1,606,562,099) of the registrant at June 30, 2017 (the last business day of the registrant’s most recently completed second fiscal quarter) was $8,514,779, based upon the closing price ($0.0053) of the registrant’s common stock on that date as reported on the OTC Pink marketplace of the OTC Markets.

 

Number of shares of common stock outstanding as of April 16, 2018 was 1,894,397,541.

 

 

 

 

 

TABLE OF CONTENTS

 

FORWARD-LOOKING STATEMENTS  
   
PART I  
       
  Item 1. Business 1
  Item 1A. Risk Factors 10
  Item 1B. Unresolved Staff Comments 24
  Item 2. Properties 24
  Item 3. Legal Proceedings 24
       
PART II  
       
  Item 5. Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchase Equity Securities 25
  Item 6. Selected Financial Data 27
  Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations 27
  Item 8. Financial Statements and Supplementary Data 34
  Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 35
  Item 9A. Controls and Procedures 35
  Item 9B. Other Information 36
       
PART III  
       
  Item 10. Directors, Executive Officer and Corporate Governance 37
  Item 11. Executive Compensation 40
  Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders’ Matters 43
  Item 13. Certain Relationships and Related Transactions, and Director Independence 44
  Item 14. Principal Accountant Fees and Services 46
       
PART IV  
       
  Item 15. Exhibit and Financial Statements Schedules 47
     
SIGNATURES 49

 

 

 

 

FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K (“Report”) contains forward-looking statements within the meaning of Sections 21E and Section 27A of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). “Forward-looking statements,” which include information relating to future events, future financial performance, strategies, expectations, competitive environment, regulation and availability of financial resources. These forward-looking statements include, without limitation, statements regarding: proposed new programs; expectations that regulatory developments or other matters will not have a material adverse effect on our financial position, results of operations and our liquidity; statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; and statements of management’s goals and objectives and other similar expressions concerning matters that are not historical facts. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “foresee” “future,” “intends,” “plans,” “believes,” “estimates” and variations of these words and similar expressions, as well as statements in the future tense, identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially As used in this report, the terms “we”, “us”, “our”, and the “Company” means MyDx, Inc. a Nevada corporation and its subsidiaries.

 

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:

 

our ability to deploy our solutions and develop new products;
any contractual arrangements and relationships with third parties;
any possible financings;
the adequacy of our cash reserves and working capital
our ability to grow revenue, and in amounts greater than our operating and capital expenditures;
our ability to evaluate our current and future prospects;
access by us and our customers to financing;
our ability to keep pace with changes in technology;
our ability to protect our intellectual property;
competition and competitive factors;
the amount of capital expenditures required to grow our business;
our ability to comply with government regulation affecting our business;
the impact of worldwide economic conditions; and
the other factors discussed under the heading “Risk Factors” under Item 1a. of this Annual Report.

 

Because the factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, you should not place undue reliance on any such forward-looking statements. New factors emerge from time to time, and their emergence is impossible for us to predict. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

  

Forward-looking statements speak only as of the date the statements are made. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

 

This Annual Report should be read completely and with the understanding that actual future results may be materially different from what we expect. This Annual Report should be read in conjunction all reports Registrant has previously filed with the Securities and Exchange Commission. The forward looking statements included in this Annual Report are made as of the date of this Annual Report and should be evaluated with consideration of any changes occurring after the date of this Annual Report. We will not update forward-looking statements even though our situation may change in the future and we assume no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

 

 

 

 

PART I

 

ITEM 1. BUSINESS

 

Organization

 

MyDx, Inc. (the “Company”, “we”, “us” or “our”) (formally known as Brista Corp.) was incorporated under the laws of the State of Nevada on December 20, 2012 (date of inception). The Company’s wholly owned subsidiary, CDx, Inc., was incorporated under the laws of the State of Delaware on September 16, 2013.

 

On April 9, 2015, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with CDx Merger Inc., a Nevada corporation and wholly owned subsidiary of the Company (“Merger Sub”), and CDx, Inc. (“CDx”), a Delaware corporation. Pursuant to the Merger Agreement, Merger Sub was to merge with and into CDx with CDx surviving the merger as the Company’s wholly owned subsidiary (the “Merger”). The Merger is treated as a reverse acquisition of the Company, a public shell company, for financial accounting and reporting purposes. As such, CDx is treated as the acquirer for accounting and financial reporting purposes while the Company is treated as the acquired entity for accounting and financial reporting purposes. On April 24, 2015, in anticipation of closing the Merger, the Company changed its name to MyDx, Inc. On April 30, 2015, the Merger was consummated. The Merger was structured such that As a result of the Merger, each outstanding share of CDx common stock (other than shares owned by any stockholder of CDx who is entitled to and properly exercises dissenters’ rights under Delaware law) were converted into the right to receive one share of the Company’s common stock as set forth in the Merger Agreement. The Company received approximately 94% of CDx shares outstanding. None of the CDx shareholders who held shares representing the other 6% of CDx shares outstanding properly exercised dissenters’ rights under Delaware law. As a result, pursuant to the Merger Agreement, these 6% shares, although never exchanged, ceased to exist in 2015. The Company has 100% ownership of CDx and there is no indication of non-controlling interest that needs to be considered.

 

Pursuant to the Merger Agreement, upon consummation of the Merger, each share of CDx’s capital stock issued and outstanding immediately prior to the Merger was converted into the right to receive one (1) share of the Company’s common stock, par value $0.001 per share (the “Common Stock”). Additionally, pursuant to the Merger Agreement, upon consummation of the Merger, the Company assumed all of CDx’s options and warrants issued and outstanding immediately prior to the Merger, 6,069,960 and 7,571,395 shares of Common Stock, respectively. Prior to and as a condition to the closing of the Merger, each then-current Company stockholder agreed to sell certain shares of Common Stock held by such holder to the Company and the then-current Company stockholders retained an aggregate of 1,990,637 shares of Common Stock. Therefore, following the Merger, CDx’s former stockholders held 19,855,295 shares of the Common Stock which was approximately 91% of the Common Stock outstanding on April 30, 2015.

 

Business

 

MyDx is a science and technology company that develops and deploys products and services in the following focus areas:

 

  1) Consumer Products – smart devices and consumables

 

  2) Data Analytics – pre-clinical chemical analysis and patient feedback ecosystem

 

  3) Biopharmaceuticals – identifying ‘green Active Pharmaceutical IngredientsTM, (gAPITM) and corresponding formulations

 

  4) Software as a Service (SaaS) – Software services for prescribers, patient groups, cultivators, and regulators

 

 1 

 

 

We are committed to addressing areas of critical national need to promote public safety, transparency and regulation in the various markets we serve.

 

The Company’s first product, MyDx®, also known as “My Diagnostic”, is a multiuse hand-held chemical analyzer made for consumers and professional users which feeds our data analytics platform and SaaS business. MyDx is intended to allow consumers to Trust & Verify® what they put into their mind and body by using our science and technology to test for pesticides in food, chemicals in water, toxins in the air, and the safety and potency of cannabis samples, which is our initial focus.

 

The Company’s founder, sole officer and sole member of the Board of Directors, Daniel Yazbeck, is an experienced executive with over 15 years of product research, development and commercialization experience including at Fortune 500 companies. Mr. Yazbeck was a scientist for Pfizer Pharmaceuticals, specializing in Chemical R&D technologies that identify and manufacture Active Pharmaceutical Ingredients at scale using green chemistry and a strategic product and market developer for Panasonic, engineering new consumer electronic products and deploying them with strategic partners in the healthcare industry. Mr. Yazbeck is also a seasoned asset-backed investor at Yazbeck Investments and holds a master of science degree from McGill University.

 

The Company has received cash investment of approximately $8 million to date. The MyDx Analyzer was released in the third quarter of 2015 and the Company received an additional $250,000 loan from an entity affiliated with Mr. Yazbeck to help finance its operations in the fourth quarter. In 2016, we believe the Company continued to penetrate the market and increased brand recognition. In addition, in 2016, the Company launched additional products that tests for pesticides in food and chemicals in water and financed the company’s operations primarily through the issuance of convertible debt. In 2017, MyDx continued to expand the CannaDx community and capitalize on its consumer-generated database, which the Company believes is one of the largest pre-clinical data repositories of its kind in the world, which contains nearly 10 million data points correlating consumer feedback to cannabis chemical profiles. In addition, in order to position itself for long-term sustainable growth and profitability, MyDx diversified its revenue streams through the ECOSmartPenTM and MyDx360, improved CannaDx gross margins, initiated Formal Clinical Trials on select formulas to ascertain their efficacy in relieving various ailments, such as acute lower back pain, and strengthened its balance sheet by eliminating its toxic convertible debt.

 

Business Segments (Cannabis Industry Focus)

 

The company is currently focused on 4 key business segments to service the cannabis industry.

 

1. Consumer Products

 

Smart Devices & Consumables

 

  1) CannaDxTM

 

  The cannabis industry’s first hand-held cannabis sensor and analyzer with disposable single use inserts.
  Comes with a mobile app that acts as a ‘virtual budtender’.
  Analyzes cannabis sample and provides a Total Canna ProfileTM (TCP), a more complete chemical profile to include THC and the most prevalent cannabinoids and terpenes found in cannabis plants.
  Cannabinoids such as THC and CBD have been reported to bind the CB1 and CB2 receptors found throughout the human body and have been reported to provide relief to an array of symptoms, including pain, nausea, and inflammation to name a few. Terpenes, which have been reported to compound the effects of cannabinoids on the body via an “Entourage Effect”, are also important in determining the overall physiological effects various cannabis chemical profiles.
  Enables users to log their ailments and side effects and tie those back to the exact chemical profile
  Provides strain recommendations based on desired “relief” input based on crowdsourced community feedback.

 

 2 

 

 

  2) Eco Smart PenTM and Other Delivery Devices

 

  MyDx has developed additional smart hardware that gather user data, such as the Eco Smart Pen. MyDx plans to release the Eco Smart Pen in the third quarter of 2018.
  Integrated with Bluetooth as well as other technologies that will allow for mobile-app control, dose restrictions, safety controls, and usage statistics.
  We plan to OEM these product to third-party customers

 

  3) MyDx Tablet Edition

 

  MyDx plans to develop he first touchscreen kitchen tablet in the market with integrated MyDx sensor reading capability

  Sensor lineup to include OrganaDx, AquaDx, and AeroDx.

  Company plans to offer CannaDx data portal management ability in MyDx 2.

 

MyDx plans to evaluate 510K approval in the US and/or Clinical Device Designation in Canada to leverage its consumer products and the ability of insurance companies to support sales of its smart devices and generate HIPPA compliant crowdsourced data.

 

2. Data Analytics

 

Pre-Clinical Chemical Analysis and Patient Feedback Ecosystem

 

MyDx has four classes of data and algorithms:

 

  1) User Data

 

  When users download the CannaDx mobile app, we may ask them put in personal details such as gender, location, height, weight, age etc. that we maintain while complying with HIPAA.

 

  2) Chemical Composition Data

 

  This information is sourced from a number of inputs including the CannaDx Handheld’s Total Canna Profile (TCP), partner laboratories analyses, and branded pre-tested concentrates.

 

  3) User Feedback

 

  Provided by users in our CannaDx mobile app as they try various products and record their experiences with those products.

 

  4) Usage Statistics

 

  We will capture type, frequency, dosage, ailments relieved, and side effects.

 

MyDx is leveraging this data, which combined is referred to as the Total Canna ProfileTM (TCP), combined with our proprietary algorithms, to develop key insights into user behavior based on unique chemical profiles. Our goal is to track how a specific sample is expected to help relieve certain ailments and to validate the results.

 

 3 

 

 

3. Biopharmaceutical

 

Identifying ‘green Active Pharmaceutical IngredientsTM (gAPITM) and corresponding formulations

 

  1) Sale and License of Product Formulations

 

  MyDx plans to work with third party customers under the MyDx360 platform to license crowdsourced formulated chemical profiles that are expected to address a specific “relief” desired using its own proprietary formulas derived from our extensive dataset and algorithms.

 

  2) Sale of green Active Pharmaceutical Ingredients (gAPITM)

 

  This division will also look to provide an organic source of extracted green Active Pharmaceutical Ingredients (gAPITM), such as a predefined terpene formulation, for consumer and industrial use.

 

  Given that certain classes of gAPI’s such hemp derived CBD and terpenes might offer “relief” without the “high” THC provides, MyDx intends to partner with leaders in the industry to offer branded products without THC, akin to a “virgin” cocktail, if it finds that these formulations offer the benefits desired and the legal framework to sell them is viable.

 

4. SaaS (Software as a Service)

 

Software services for prescribers, patient groups, cultivators, and regulators

 

  1) MyDx App

 

  Available in iOS and Android and controls the MyDx Analyzer
  Tracks patient tested samples and physiological feedback
  Prints a Certificate of Analysis, which includes patient feedback
  Offers patients groups and their doctors with OEM software to track what the community is experiencing
  Centrally hosted in our secure cloud based server
  Will offer in App purchases for additional software subscription features

 

2)MYDX360

 

  MyDx360 is a Software As A Service (SAAS)-based community engagement platform designed to help entrepreneurs develop, launch and track the effects of new formulated products on consumers to help penetrate their target markets more effectively.
  As part of the service, companies will choose from among MyDx’s many chemical formulations that best align with the physiological response its target demographic is seeking. From there, MyDx will outsource the delivery of those formulations through licensed concentrate manufacturing facilities and provide customer-engagement support via its SAAS platform and MyDx smart devices such as the EcoSmartPen to acquire and analyze user feedback.
  Collectively, this suite of services will be called MyDx360.

 

  2) Software to Support Laboratory Marketing, Customer Service and Data Aggregation

 

  MyDx will offer what we believe will be the premier lead generator and outsourced services provider for cannabis testing labs
  Through certain assets MyDx expects to develop or acquire, as well as leads generated from our handheld analysis and smart devices, we believe MyDx will be positioned to become a world leader in cannabis laboratory marketing and services and as the largest “data holder” of tested cannabis and the associated chemical profiles tied to the ailment therapy.

 

 4 

 

 

Recent Highlights

 

The following are some of our 2017 achievements:

 

CannaDxTM was featured on HBO’s Daily Vice News (February 2017)
MyDx Introduced the EcoSmartPen™ (April 2017)
Introduced MyDx 360 Service (May 2017)
MyDx Released MyDx 2.0 (May 2017) 
MyDx Filed Patents and Started Accepting Preorders For The ECOSmartPen™ (November 2017)
MyDx Appointed Dr. Jessica Peatross, a Board Certified Internal Medicine Doctor to Lead MyDx Clinical Research Initiatives and Support MyDx360 Formulations Services as MyDx’s new Chief Medical Officer (January 2018)

 

Product Overview: MyDx

 

Our core technology is centered on a portable chemical sensing and analyzing method, represented by our first product, MyDx. MyDx is a portable chemical hand-held analyzer, combined with a sensor and associated mobile app, which together, act as an electronic nose by detecting and analyzing molecules present in a given sample. MyDx aims to complement chemical analysis in the lab by putting it into the palm of the user’s hand.

 

Each MyDx sensor has sensitivity that can reach parts per billion, which the Company believes is unique for a handheld chemical analyzer at our consumer price-point for MyDx. The MyDx device has a user-friendly interface and is designed to easily communicate via Bluetooth with our mobile app, which can be downloaded on any iOS, Android, or Windows smartphone. Given the sensitivity of the MyDx device, once the app is downloaded and the device is synced, a small sample can be placed in the sample chamber, which is then stimulated, releasing the chemicals of interest into a vapor for identification by the MyDx Analyzer. The process of analysis takes about three minutes, after which the user will be able to view the interpreted chemical composition of the sample on his or her mobile smart phone via our mobile app. In addition, the app will track and save the results of each analysis for future reference and comparison, and will aggregate reports on and analyses of various chemical compounds to help educate the consumer about the results. MyDx sensors can be switched by the user based on the type of the sample being tested, and the user will simply launch the associated app from their smartphone. The Company believes that, based on its portability, MyDx is the first portable multi-use chemical sensing and analyzing technology available for use by a broad range of consumers, especially in our target market applications.

 

Product Features/MyDx Service

 

The MyDx Analyzer comes with a variety of product features that is intended to provide consumers with a user-friendly experience. The Company has developed what we believe is a sleek and durable unit that, paired with one of our four sensors, has capabilities to analyze a variety of chemical compounds in the palm of the user’s hand. The MyDx Service connects the MyDx Analyzer to the MyDx App using BLE (Bluetooth Low Energy) connection. The MyDx App communicates with the secure MyDx Cloud via the Internet. 

 

The MyDx Analyzer comes with Bluetooth connectivity in order to engage the MyDx App, which provides the user with additional information to help them understand the chemicals found by the MyDx Analyzer. The MyDx Cloud compares what was sensed by the MyDx Analyzer with scientific data about that sample on the back-end, revealing cannabinoid and terpene levels found in the sample for the CannaDx application for example.  

 

 5 

 

 

The MyDx App 

 

The MyDx App is available for iPhone and Android platforms. Once the MyDx App is installed on the consumer’s mobile device, the consumer can turn on the MyDx Analyzer using the small button on the side next to the power cable slot. Using the MyDx App, the consumer can initiate the testing process. The MyDx App then attempts to find and sync with the MyDx Analyzer via a wireless Bluetooth connection. The consumer can then load their sample into the Sample Chamber. They will take an empty disposable Sample Insert and place their sample into the Sample Insert. This is done by gently grinding the sample between their fingers and letting the contents fall into the chamber. They fill the sample up to just below the rim of the insert. Once the sample is loaded and the chamber is closed, they follow the onscreen instructions and click “Next”. The MyDx Analyzer is placed on a flat surface, and the consumer presses the “Start” button. Within approximately three minutes later the results are available. 

 

Target Audiences 

 

The Company believes the CannaDx sensor may have broad appeal to individuals who use medicinal cannabis for their health. In many cases, the chemical compounds consumers need to know about are not correctly identified at the point-of-sale, and the consumers may not be aware of how a strain will affect them. Using the CannaDx sensor, consumers will be able to identify certain chemical compounds in different strains of cannabis that are associated with the desired response to its use. This makes MyDx an important tool for both cannabis patients and recreational users who want to understand the product they are consuming, how it affects their body and allows them to track how certain chemical profiles are treating any symptoms they may have.  

 

In addition to the consumer audience for our CannaDx sensor, we expect businesses in the cannabis industry, including cultivators, processors, dispensaries, and retail distributors to use MyDx as an additional test for their own products or the products that they are buying for resale to consumers. However, MyDx is not a replacement for commercial lab testing using standard gas chromatography and other lab equipment. 

 

Distribution and Marketing Strategy 

 

The Company distributes its products through various channels, including e-commerce via the Company’s website, direct to retail, amazon.com, and sales through affiliate partners. The company also intends to expand into retail distribution. As part of our marketing strategy, the Company also works with bloggers, websites and social media channels with large audiences, to ensure that the potential market knows and understands the promise of the MyDx Analyzer. The Company plans to use industry conferences, media outreach, and social media channels such as Facebook, LinkedIn, Twitter, Instagram, Google+ and more to push its message to the right audiences. Public relations efforts through Tier 1 news media interviews and conference speaking engagements has been a critical cost effective source of marketing for the company to date.  

 

Competition

 

Chemical Analysis Smart Devices

 

Currently, the Company believes there are no portable, consumer-focused, reasonably-priced chemical analysis platforms on the market that compete directly with MyDx in the cannabis sector. The Company is aware of two hand-held analyzer devices in development which are being marketed to consumers. One is Scio, which plans to use spectrometer technology to externally scan food, medicine and plants. The other one is FOOD sniffer, which is being marketed as the world’s first electronic nose that helps consumers determine the quality of meat, poultry and fish before they eat it, thereby reducing the risk of food poisoning by testing food to confirm that it is safe to consume. In addition, larger gas chromatography units that range from $25,000 to well over $100,000, are available, but we believe these larger units ultimately will not compete for the consumer base to which that the Company plans to market MyDx.

 

In contrast, the Company has brought to market a consumer-focused, chemically sensitive device for under $700. The Company believes that the combination of a relatively low price point, chemical sensitivity, and patentable intellectual property provide barriers to competition. However, companies with far greater resources than the Company could develop competing technologies and products that could impact the market for the Company’s products.

 

Currently, the Company is not aware of any competitors that have crowdsourced cannabis TCP data based on a tested chemical profile in real time.

 

 6 

 

 

Research and Development

 

The Company incurred research and development expenses of approximately $170,000 and $686,000 during the years ended December 31, 2017 and 2016 related to the development of the MyDx Analyzer and the sensors. 

  

Manufacturing  

 

We do not intend to manufacture our products in our own facilities. Rather, we intend to outsource the manufacture of our products to one or more independent manufacturers that also manufacture electronic products for a number of other businesses. The manufacturer will be expected to test our products and conduct quality control in all aspects of manufacturing. During this testing, we expect to be making further adjustments to our formulations. While we believe that we may be able to contract or engage a manufacturer to perform these functions, we may not be able to do so.

 

We currently have an arrangement with All Quality & Services, Inc. a Silicon Valley based Electronics Manufacturing Services provider to manufacture and assemble our current MyDx analyzer.

 

Intellectual Property

 

MyDx owns the exclusive right to the following patents for our cannabis market field of use:

 

Patent #  Serial #  Title  Issue date
7,359,802  10/618,546  Methods for Remote Characterizations of an Odor  4/15/2008
7,189,353  11/054,055  Use of Spatiotemporal Response Behavior in Sensor Arrays to Detect Analytes in Fluids  3/13/2007
7,144,553  10/651,917  Use of An Array of Polymeric Sensors of Varying Thickness for Detecting Analytes in Fluids  12/5/2006
6,759,010  09/910,243  Use of An Array of Polymeric Sensors of Varying Thickness for Detecting Analytes in Fluids  7/6/2004
6,610,367  09/910,242  Use of An Array of Polymeric Sensors of Varying Thickness for Detecting Analytes in Fluids  8/26/2003
6,170,318  09/183,724  Methods of Use for Sensor Based Fluid Detection Devices  1/9/2001
6,093,308  09/258,713  Sensors for Detecting Analytes in Fluids  7/25/2000
6,013,229  09/095,376  Sensor Arrays for Detecting Analytes in Fluids  1/11/2000
6,010,616  08/986,500  Sensor Arrays for Detecting Analytes in Fluids  1/4/2000
5,959,191  09/006,279  Sensor Arrays for Detecting Analytes in Fluids  9/28/1999
5,951,846  09/006,142  Sensor Arrays for Detecting Analytes in Fluids  9/14/1999
5,911,872  08/949,730  Sensors for Detecting Analytes in Fluids  6/15/1999
5,891,398  09/154,604  Sensor Arrays for Detecting Analytes in Fluids  4/6/1999
5,788,833  08/696,128  Sensors for Detecting Analytes in Fluids  8/4/1998
5,698,089  08/689,227  Sensor Arrays for Detecting Analytes in Fluids  12/16/1997
5,571,401  08/410,809  Sensor Arrays for Detecting Analytes in Fluids  11/5/1996

 

 7 

 

 

Patent #  Serial #  Title  Issue date
DE 0820585  696 05 906.1-08  Sensor Arrays for Detecting Analytes in Fluids  12/29/1999
3,963,474  08-529590/96  Sensor Arrays for Detecting Analytes in Fluids  6/1/2007
1,151,272  99960357.4  Simultaneous Determination of Equilibrium and Kinetic Properties  9/30/2009
918986  97938223.1  Sensor Arrays for Detecting Analytes in Fluids  10/17/2007
820585  96910563.4  Sensor Arrays for Detecting Analytes in Fluids  12/29/1999
8,394,330  09/409,644  Conductive Organic Sensors, Arrays and Methods of Use  3/12/2013
7,966,132  12/082,972  Methods for Remote Characterizations of an Odor  6/21/2011
7,955,561  11/108,538  Colloidal Particles Used in Sensing Arrays  6/7/2011
7,595,023  11/490,732  Spatiotemporal and Geometric Optimization of Sensor Arrays for Detecting Analytes in Fluids  9/29/2009
7,175,885  09/770,089  Compositionally Different Polymer-Based Sensor Elements and Method for Preparing Same  2/13/2007
7,122,152  09/842,204  Spatiotemporal and Geometric Optimization of Sensor Arrays for Detecting Analytes in Fluids  10/17/2006
6,962,675  10/214,794  Use of Spatiotemporal Response Behavior in Sensor Arrays to Detect Analytes in Fluids  11/8/2005
6,773,926  09/963,788  Nanoparticle-Based Sensors for Detecting Analytes in Fluids  8/10/2004
6,631,333  09/596,758  Methods for Remote Characterizations of an Odor  10/7/2003
6,571,603  09/318,900  Method of Resolving Analytes In a Fluid  6/3/2003
6,455,319  09/568,784  Use of Spatiotemporal Response Behavior in Sensor Arrays to Detect Analytes in Fluids  9/24/2002
6,387,329  09/442,074  Use of An Array of Polymeric Sensors of Varying Thickness for Detecting Analytes in Fluids  5/14/2002
6,350,369  09/291,932  Method and System for Determining Analyte Activity  2/26/2002
6,290,911  09/106,791  Compositionally Different Polymer-Based Sensor Elements and Method for Preparing Same  9/18/2001
2,264,839  2264839  Sensors Arrays for Detecting Analytes in Fluids  5/9/2006
993,605  98931709.4  Compositionally Different Polymer-Based Sensor Elements and Method for Preparing Same  4/19/2000
334,530  334530  Sensor Arrays for Detecting Analytes in Fluids  7/6/2000
206,322  992497  Sensor Arrays for Detecting Analytes in Fluids  1/30/2002
193,532  977351  Sensor Arrays for Detecting Analytes in Fluids  9/27/1999
n/a  99930562.6  Polymer/Plasticizer Based Sensor  n/a
n/a  99931777.9  Colloidal Particles Used In Sensing Arrays  n/a
n/a  n/a  A Portable Electronic Nose  n/a
7,359,802  10/618,546  Methods for Remote Characterizations of an Odor  4/15/2008
7,189,353  11/054,055  Use of Spatiotemporal Response Behavior in Sensor Arrays to Detect Analytes in Fluids  3/13/2007
7,144,553  10/651,917  Use of An Array of Polymeric Sensors of Varying Thickness for Detecting Analytes in Fluids  12/5/2006
6,759,010  09/910,243  Use of An Array of Polymeric Sensors of Varying Thickness for Detecting Analytes in Fluids  7/6/2004
6,610,367  09/910,242  Use of An Array of Polymeric Sensors of Varying Thickness for Detecting Analytes in Fluids  8/26/2003
6,170,318  09/183,724  Methods of Use for Sensor Based Fluid Detection Devices  1/9/2001
6,093,308  09/258,713  Sensors for Detecting Analytes in Fluids  7/25/2000
6,013,229  09/095,376  Sensor Arrays for Detecting Analytes in Fluids  1/11/2000
6,010,616  08/986,500  Sensor Arrays for Detecting Analytes in Fluids  1/4/2000
5,959,191  09/006,279  Sensor Arrays for Detecting Analytes in Fluids  9/28/1999
5,951,846  09/006,142  Sensor Arrays for Detecting Analytes in Fluids  9/14/1999
5,911,872  08/949,730  Sensors for Detecting Analytes in Fluids  6/15/1999
5,891,398  09/154,604  Sensor Arrays for Detecting Analytes in Fluids  4/6/1999
5,788,833  08/696,128  Sensors for Detecting Analytes in Fluids  8/4/1998
5,698,089  08/689,227  Sensor Arrays for Detecting Analytes in Fluids  12/16/1997
5,571,401  08/410,809  Sensor Arrays for Detecting Analytes in Fluids  11/5/1996
7,966,132  12/082,972  Methods for Remote Characterizations of an Odor  6/21/2011
6,571,603  09/318,900  Method of Resolving Analytes In a Fluid  6/3/2003
6,350,369  09/291,932  Method and System for Determining Analyte Activity  2/26/2002

 

 8 

 

  

On July 2, 2014, the Company filed assignments of all right, title and interest for four United States provisional patent applications that were recorded with the United States Patent and Trademark Office on July 3, 2014. The United States provisional patent applications assigned to the Company were acquired for consideration that included cash and stock. The Company filed an international patent application with an international filing date of July 14, 2014 that cites priority to the four United States provisional patent applications. The international patent application is currently pending with a U.S. National Stage Filing App Ser. No: 14/905,780 entitled Apparatus for Detection and Delivery of Volatilized Compounds and Related Methods filed on January 15, 2016.

 

The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained. In most countries in which we file, the patent term is 20 years from the earliest date of filing a Patent Cooperation Treaty (“PCT”) application or a non-provisional patent application, subject to any disclaimers or extensions. The term of a patent in the United States can be adjusted and extended due to the failure of the United States Patent and Trademark Office following certain statutory and regulation deadlines for issuing a patent.

 

Although we believe that our portfolio of intellectual property rights provides us with a strong and defensible market position from which to commercialize our portable electronic nose and analyzing technology and to build our business by expanding our core technology across a variety of applications, there is no guarantee the patents or patent rights we own will be sufficient to adequately protect the technology owned or licensed by us. We strive to protect the proprietary technologies that we believe are important to our business, including seeking and maintaining patent protection intended to cover the device products, their methods of use, related technology and other inventions that are important to our business. We also rely on trade secrets and monitoring of our proprietary information to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection.

 

Government Regulations

 

Our products require CE Marking (European Conformity), Federal Communications Commission and other government safety approvals. We are working with various partners to secure all approvals. Inasmuch as we are a sensor technology company, except with respect to government regulations related to the cannabis industry described in more detail below, we do not foresee any other probable government regulations on our business outside of normal business practices.

 

With respect to our CannaDx sensor, there is a substantial amount of change occurring in the United States regarding both the medical and recreational use of cannabis, and a number of individual states have enacted state laws to enable distribution, possession, and use of cannabis for medical, and in some cases, recreational purposes. Despite the development of a legal medical or recreational cannabis industry under certain state laws, cannabis use and possession remains illegal under federal law, and such state laws are in conflict with the Federal Controlled Substances Act. The Obama Administration had effectively stated that it was not an efficient use of resources to direct federal law enforcement agencies to prosecute individuals lawfully abiding by state-designated laws allowing for use and distribution of medical and recreational cannabis. However, there is no guarantee that the Trump Administration will not change the previous Administration’s stated policy regarding enforcement of federal laws in states where cannabis has been legalized. Also, the possession, use, cultivation, or transfer of cannabis remains illegal under the Federal Controlled Substances Act. Our CannaDx sensor may be sold to customers that are engaged in the business of possession, use, cultivation, or transfer of cannabis. As a result, law enforcement authorities regulating the illegal use of cannabis may seek to bring an action or actions against us, including, but not limited, to a claim of aiding and abetting another’s criminal activities. The federal aiding and abetting statute provides that anyone who “commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.” 18 U.S.C. §2(a).

 

 9 

 

  

Subsidiary

 

We have one wholly -owned subsidiary, CDx, Inc., a Delaware Corporation which was incorporated on September 16, 2013. 

 

Employees

 

As of April 11, 2018, we had 1 full-time officer, 1 part-time officer, 1 full-time employee and 5 independent contractors and consultants. For the immediate future, we intend to use independent contractors and consultants to assist in many aspects of our business on an as needed basis pending financial resources being available. Even if we receive sufficient funding to hire additional employees, we may rely principally on independent contractors for substantially all of our technical and manufacturing needs.

 

We have one written employment agreement with Mr. Yazbeck. Currently, we are actively seeking additional employees or engaging any consultants through a formal written agreement or contract. Services are provided on an as-needed basis. This may change in the event that we are able to secure financing through equity or loans to the Company.

 

ITEM 1A. RISK FACTORS

 

Investing in our Common Stock involves risk. Before making an investment in our Common Stock, you should carefully consider the risks described below, together with the other information included in this Annual Report and all other reports the Registrant has filed with the SEC and the risks we have highlighted in other sections of this Annual Report. The risks described below are those which we believe are the material risks we face. Any of the risks described below could significantly and adversely affect our business, prospects, financial condition and results of operations. As a result, the trading price of our Common Stock could decline and you may lose part or all of your investment. Additional risks and uncertainties not presently known to us or not currently believed by us to be immaterial may also impact us. The risks discussed below include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.

 

Risks Related to our Business

 

We have a limited operating history and a history of operating losses, and we may not be able to achieve or sustain profitability. In addition, we may be unable to continue as a going concern.

 

MyDx was incorporated in December 2012 and has a limited operating history. We had not generated any revenues until July 2015. We are not profitable and have incurred losses since our inception. We continue to incur research and development and general and administrative expenses related to our operations.

 

We have experienced significant losses to date and may require additional capital to fund our operations. The current financial climate may make it more difficult to secure financing, if we need it. If our business model is not successful, or if we are unable to generate sufficient revenue to offset our expenditures, we may not become profitable, and the value of your investment may decline.

 

We incurred a net loss of approximately $5,234,000 for the year ended December 31, 2017 and a cumulative net loss of approximately $31,633,000, from September 16, 2013 (date of inception) to December 31, 2017.

 

We expect to continue to incur losses for the foreseeable future, and these losses will likely increase as we continue to commercialize our products. The amount of future losses and when, if ever, we will achieve profitability are uncertain. If our products do not achieve market acceptance, we may never become profitable. The initial cost of completing development of our products and penetrating our anticipated markets will be substantial, and there is no assurance that we will be successful in doing so. Although we shipped our first revenue units in the third quarter of 2015, if we are not successful in growing revenues and controlling costs, we will not achieve profitable operations or positive cash flow, and even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Absent of a significant increase in revenue or additional equity or debt financing, we may not be able to sustain our ability to continue as a going concern.

 

 10 

 

 

Furthermore, we are experiencing the costs and uncertainties of a young operating company, including unforeseen costs and difficulties. We cannot be sure that we will be successful in meeting these challenges and addressing these risks and uncertainties. If we are unable to do so, our business will not be successful.

 

Negative Operating Cash Flow

 

We reported negative cash flow from operations for the year ended December 31, 2017. It is anticipated that we will continue to report negative operating cash flow in future periods until we are able to increase our product sales volumes.

 

We believe our cash balance, together with anticipated cash flows from operations, is insufficient to fund our operations for at least the next 12 months. We project that additional funding in the amount of $2,000,000 will be required to fund our operations for the next 12 months. Additionally, if we are unable to generate sufficient revenues to pay our expenses, we will need to raise additional funds to continue our operations. We have historically financed our operations through private equity and debt financings. The delays in our ability to ship products and generate revenues may have adversely affected our capital raising opportunities. We do not have any commitments for financing at this time, and financing may not be available to us on favorable terms, if at all. If we are unable to obtain debt or equity financing in amounts sufficient to fund our operations, if necessary, we will be forced to suspend or curtail our operations.

 

Changes in accounting guidance could have an adverse effect on our results of operations, as reported in our financial statements.

 

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, which is periodically revised and/or expanded.  Accordingly, from time to time we are required to adopt new or revised accounting guidance and related interpretations issued by recognized authoritative bodies, including the Financial Accounting Standards Board and the SEC. Market conditions have prompted these organizations to issue new guidance that further interprets or seeks to revise accounting pronouncements related to various transactions as well as to issue new guidance expanding disclosures.  The impact of accounting pronouncements that have been issued but not yet implemented is disclosed in our annual report on Form 10-K and our quarterly reports on Form 10-Q.  An assessment of proposed standards is not provided, as such proposals are subject to change through the exposure process and, therefore, their effects on our financial statements cannot be meaningfully assessed.  It is possible that future accounting guidance we are required to adopt could change the current accounting treatment that we apply to our consolidated financial statements and that such changes could have an adverse effect on our results of operations, as reported in our consolidated financial statements.

 

We are an early-stage company, and as such, we have no meaningful operating or financial history, we have a limited amount of products in the marketplace.

 

CDx commenced operations in January 2014. Therefore, there is limited historical financial information upon which to base an evaluation of our performance and future prospects. Due to our lack of operating history, our prospects must be considered in light of the uncertainties, risks, expenses, and difficulties frequently encountered by companies in the early-stage of operations, including, without limitation, the following:

 

absence of an operating history;
a limited amount of products in the marketplace;
insufficient capital;
expected continual losses for the foreseeable future;
no history on which to evaluate our ability to anticipate and adapt to a developing market;
uncertainty as to market acceptance of our initial and future products;
limited marketing experience and lack of sales organization; and
competitive and highly regulated environment.

 

 11 

 

 

Because we are subject to these risks, potential investors may have a difficult time evaluating our business and their investment in our Company. We may be unable to successfully overcome these risks, any of which could irreparably harm our business.

 

The likelihood of our success must be considered in light of the problems, expenses, difficulties, complications, and delays frequently encountered in connection with a new enterprise, the commercial launch of a new product which still requires testing, and the operation in a competitive industry. We expect to sustain losses in the future as we implement our business plan. There can be no assurance that we will ever operate profitably.

 

We will require substantial additional funding, which may not be available to us on acceptable terms, or at all.

  

Our cash balance as of December 31, 2017 was approximately $119,000. We do not have adequate funds to fully develop our business, and we need other capital investment to fully implement our business plans. Our current estimate of additional funds required for the next year is $2,000,000. We do not have any contracts or commitments for additional funding, and there can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all. The inability to obtain additional capital will restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will likely be required to curtail our development plans. In that event, current stockholders would likely experience a loss of most or all of their investment. Additional funding that we do obtain may be dilutive to the interests of existing stockholders.

 

While in 2017 we satisfied over $800,000 in convertible debt used to finance the Company’s critical obligations in 2016 and 2017, this same convertible debt used to finance our operations has resulted in heavy dilution and a sharp decline in share price.  The Company expects to continue to experience dilution in the near future.

 

We are dependent on our current management team. If we fail to attract and retain key management personnel, we may be unable to successfully develop or commercialize our products.

 

In the early stages of development, our business will be significantly dependent on our management team. Our success will be particularly dependent upon Mr. Yazbeck. The loss of his services could have a material adverse effect on us. We have not obtained key-man insurance on the life of Mr. Yazbeck. Moreover, in order to successfully implement and manage our business plan, we will be dependent upon, among other things, successfully recruiting qualified sales and marketing and management personnel. Competition for qualified individuals is intense. There can be no assurance that we will be able to find, attract and retain existing employees or that we will be able to find, attract and retain qualified personnel to join the Company on acceptable terms.

 

We may not be able to attract or retain qualified management and research personnel in the future due to the intense competition for qualified personnel in our industry. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will impede significantly the achievement of our research and development objectives, our ability to raise additional capital and our ability to implement our business strategy. In particular, if we lose Mr. Yazbeck, we may not be able to find a suitable replacement in a timely fashion or at all, and our business may be harmed as a result.

 

We have experienced recent management and director changes.

 

On July 10, 2015, at the request of the Company’s Board of Directors (the “Board”) and as part of management reorganization, Mr. Yazbeck resigned his position as Chief Executive Officer of the Company and the Company’s subsidiary, CDx, Inc. As part of the reorganization, Thomas Gruber was appointed as the Chief Executive Officer of the Company and CDx, Inc. On August 4, 2015, the Company terminated its President, Chief Technology Officer and Chief Marketing Officer. On August 6, 2015, Thomas Gruber resigned as the Chief Executive Officer, Chief Operating Officer and a director of the Company and CDx. Mr. Gruber continued as the Chief Financial Officer and Secretary of the Company and CDx. On August 6, 2015, Mr. Yazbeck was appointed as the Interim Chief Executive Officer of the Company and CDx. On September 1, 2015, Mr. Gruber resigned as Chief Financial Officer and Secretary of the Company and CDx. On September 9, 2015, Mr. Yazbeck resigned as the Interim Chief Executive Officer of the Company and CDx and Albert Hugo-Martinez was appointed as the Chief Executive Officer and Interim Chief Financial Officer of the Company and CDx. On September 23, 2015, Mr. Hugo-Martinez resigned as the Chief Executive Officer and Interim Chief Financial Officer of the Company and CDx. On September 24, 2015 Michael Harris resigned from the Board, and on September 29, 2015 Edward Roffman resigned from the Board. On September 29, 2015, Mr. Yazbeck was appointed as the Chief Executive Officer and Chief Financial Officer of the Company and CDx. On February 23, 2016, Federico Pier and George Jackoboice resigned from the Board and CDx. On February 26, 2016, Steven Katz resigned from the Board and CDx.

 

 12 

 

 

These changes have been disruptive to the management and operations of the company and could have an adverse effects on our business, operating results and financial conditions.

 

Our sole executive officer, director and insider stockholder beneficially owns or controls a majority of our outstanding voting stock, which may limit your ability and the ability of our other stockholders, whether acting alone or together, to propose or direct the management or overall direction of our Company.

 

On December 23, 2016, the Board designated 51 shares of Preferred Stock as Series A Preferred Stock (“Series A Preferred”). Among other provisions, each one (1) share of the Series A Preferred shall have voting rights equal to (x) 0.019607 multiplied by the total issued and outstanding shares of Common Stock eligible to vote at the time of the respective vote (the “Numerator”), divided by (y) 0.49, minus (z) the Numerator. For purposes of illustration only, if the total issued and outstanding shares of Common Stock eligible to vote at the time of the respective vote is 5,000,000, the voting rights of one share of the Series A Preferred Stock shall be equal to 102,036 (0.019607 x 5,000,000) / 0.49) – (0.019607 x 5,000,000) = 102,036). On December 23, the 51 shares were issued to Mr. Yazbeck, the Company’s sole officer and the sole member of the Board. Mr. Yazbeck, via his ownership of the 51 shares of the Series A Preferred, has control of the majority of the Company’s voting stock.

 

On December 23, 2016, the Company designated 300,000 shares of Preferred Stock as Series B Preferred Stock (“Series B Preferred”). The Series B Preferred is convertible into shares of Common Stock at a conversion price of $0.0001. Holders of the Series B Preferred are entitled to receive dividends annually equal to $0.10 for each share of Series B Preferred held. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of Series B Preferred then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders, before any payment shall be made to the holders of Common Stock. Until such time as there are fewer than 20,000 shares of Series B Preferred outstanding, the Company needs to obtain the majority votes of the holders of Series B Preferred with regard to certain actions. Holders of Series B Preferred shares are entitled to one vote for each share held, are entitled to elect up to two members to the Board, and, absent such election, are provided certain voting and veto rights with regard to any vote by the Board. On January 6, the 300,000 shares of the Series B Preferred were issued to Mr. Yazbeck. On June 30, 2017, Mr. Yazbeck sold 100,000 shares of Series B Preferred for net proceeds of $45,000. Mr. Yazbeck then lent the $45,000 to the Company. 

 

Accordingly, Mr. Yazbeck has the power to control the election of members of the Board and the approval of actions for which the approval of our stockholders is required, including amendments to our Articles of Incorporation, as amended (the “Articles”), mergers or other business combinations. If you acquire shares of Common Stock, you may have no effective voice in the management of our Company. Such concentrated control of our Company may adversely affect the price of our Common Stock. Such concentrated control may also make it difficult for our stockholders to receive a premium for their shares of our Common Stock in the event we merge with a third party or enter into different transactions which require stockholder approval. These provisions could also limit the price that investors might be willing to pay in the future for shares of our Common Stock. Additionally, this concentration of ownership could discourage or prevent a potential takeover of our Company that might otherwise result in an investor receiving a premium over the market price for his or her shares.

 

Additionally, Mr. Yazbeck may take action that could be a conflict of interest and not in the best interest of all stockholders. Such actions could adversely affect the price of our stock and discourage new stockholders from purchasing shares of our stock.

 

We have no Independent Board Members and only one person sitting on the Board.

 

Currently, the Company has only one Board member, Mr. Yazbeck, who is our sole officer and is thus not independent. Mr. Yazbeck beneficially owns or controls a majority of our outstanding voting stock. Therefore, the Company does not receive the benefit of independent oversight over actions being taken. Without independent oversight, actions may be taken that may not be in the best interest of all stockholders which could adversely affect the price of our stock and discourage new stockholders from purchasing our stock.

 

 13 

 

 

These changes have been disruptive to the management and operations of the Company and could have a material adverse effect on our business, operating results, and financial condition.

 

Initially we will be dependent on one product.

  

Our Aero, Aqua and Organa Sensors will not be commercialized until 2019. Therefore, the CannaDx sensor will account for a substantial portion of our revenues for the foreseeable future. As a result, our future operating results are dependent upon market acceptance of those products, neither of which has been commercially launched as of the date hereof. Factors adversely affecting the pricing of, demand for, or market acceptance of the sensors, such as regulatory complications, competition, or technological change, could have a material adverse effect on our business, operating results, and financial condition.

 

One of our initial products, the CannaDx sensor, relates to cannabis, which is a controlled substance under federal law.

 

Despite the development of a legal medical or recreational cannabis industry under certain state laws, cannabis use and possession remains illegal under federal law, and such state laws are in conflict with the Federal Controlled Substances Act. Since our initial product, the CannaDx sensor, relates to the use of cannabis, it may generate public controversy and be the subject of federal regulation or other action. Political and social pressures and negative publicity could limit or restrict the introduction and marketing of our initial or future product candidates. Adverse publicity from cannabis misuse, adverse side effects from cannabis or other cannabinoid products may harm the commercial success or market penetration achievable by our CannaDx sensor. The nature of our CannaDx sensor product attracts a high level of public and media interest, and in the event of any resultant negative publicity, our reputation may be harmed.

 

Laws and regulations affecting the cannabis industry are constantly changing, which could detrimentally affect our business, and we cannot predict the impact that future legislation or changes in enforcement practices may have on our company.

  

There is a substantial amount of change occurring in the United States regarding both the medical and recreational use of cannabis, and a number of individual states have enacted state laws to enable distribution, possession, and use of cannabis for medical, and in some cases, recreational purposes. The Obama Administration had effectively stated that it was not an efficient use of resources to direct federal law enforcement agencies to prosecute individuals lawfully abiding by state-designated laws allowing for use and distribution of medical and recreational cannabis. However, there is no guarantee that the Trump Administration will not change the previous Administration’s stated policy regarding enforcement of federal laws in states where cannabis has been legalized.

 

Future active enforcement of the current federal regulatory position on cannabis on a regional or national basis may directly and adversely affect the willingness of customers to invest in or buy our CannaDx sensor, which is used in connection with cannabis. In addition, federal or state legislation could be enacted in the future that could prohibit customers of our CannaDx sensor from distributing, possessing, or using cannabis. If such legislation were enacted, customers may discontinue use of our CannaDx sensor, our potential source of customers would be reduced, and our revenues may decline. Violation of any federal or state law, or allegations of such violations, could disrupt our business and result in a material adverse effect on our revenues, profitability, and financial condition.

 

As the possession and use of cannabis is illegal under the Federal Controlled Substances Act, we may be deemed to be aiding and abetting illegal activities through the services that we provide to users, and as such may be subject to enforcement actions which could materially and adversely affect our business

  

The possession, use, cultivation, or transfer of cannabis remains illegal under the Federal Controlled Substances Act. Our CannaDx sensor may be sold to customers that are engaged in the business of possession, use, cultivation, or transfer of cannabis. As a result, law enforcement authorities regulating the illegal use of cannabis may seek to bring an action or actions against us, including, but not limited, to a claim of aiding and abetting another’s criminal activities. The federal aiding and abetting statute provides that anyone who “commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.” 18 U.S.C. §2(a). As a result of such an action, we may be forced to cease operations and our investors could lose their entire investment. Such an action would have a material negative effect on our business and operations.

 

 14 

 

 

Due to the use of our first product, the CannaDx sensor, in the cannabis industry, we may have a difficult time obtaining the various insurances that are desired to operate our business, which may expose us to additional risk and financial liabilities.

 

Insurance that is generally readily available, such as workers compensation, general liability, and directors and officers insurance, may be more difficult for us to find, and more expensive, because our CannaDx sensor provides a service to companies and customers in the cannabis industry. There are no guarantees that we will be able to secure such insurances in the future, or that the cost will be affordable to us. If we are forced to go without such insurances, we may be prevented from entering into certain business sectors, our growth may be inhibited, and we may be exposed to additional risks and financial liabilities.

 

We expect to derive revenue from sales of our MyDx units and other products we may develop. If we fail to generate revenue from these sources, our results of operations and the value of our business will be materially and adversely affected.

 

We expect our revenue to be generated from our MyDx units and other products we may develop. Future sales of these products, if any, will be subject to, among other things, possible receipt of governmental approvals and commercial and market uncertainties that may be outside of our control. If we fail to generate our intended revenues from these products, our results of operations and the value of our business and securities would be materially affected.

 

We may not be able to compete effectively against products introduced into our market space.

 

The industry surrounding handheld consumer analyzers is rapidly evolving, and the market landscape is currently uncertain. However, we expect that as consumers begin to learn and adapt to having handheld analyzer capability, products that will compete with our offerings will rapidly proliferate. These competitive products could have similar applications, perhaps using superior technology, and may provide additional benefits that our sensors do not. We expect that the market could be occupied by larger competitors with greater financial and other resources, which could hinder our market share. We may be forced to modify or alter our business and regulatory strategy, as well as our sales and marketing plans, in response to, among other things, changes in the market, competition, and technological limitations. Such modifications may pose additional delays in achieving our goals.

 

We rely on third parties to manufacture and supply all of our initial products.

 

Our initial products are manufactured by third parties. If these manufacturing partners are unable to produce our products or component parts in the amounts or on the timeline that we require, the development and initial commercialization of our products may be delayed, depriving us of potential product revenue and resulting in other losses. Our ability to replace any then-existing manufacturer may be difficult because the number of potential manufacturers is limited. It may be difficult or impossible for us to identify and engage a replacement manufacturer on acceptable terms in a timely manner, or at all. If we need to engage a replacement manufacturer but are unable to do so, our business and results of operations could be severely impacted.

 

We depend on third-party suppliers for materials and components for our products.

  

We depend on a limited number of third-party suppliers for the materials and components required to manufacture our products. A delay or interruption by our suppliers may harm our business, results of operations, and financial condition, and could also adversely affect our future profit margins. In addition, the lead time needed to establish a relationship with a new supplier can be lengthy, and we may experience delays in meeting demand in the event we must change or add new suppliers. Our dependence on our suppliers exposes us to numerous risks, including but not limited to the following: our suppliers may cease or reduce production or deliveries, raise prices, or renegotiate terms; we may be unable to locate a suitable replacement supplier on acceptable terms or on a timely basis, or at all; and delays caused by supply issues may harm our reputation, frustrate our customers, and cause them to turn to our competitors for future needs.

 

 15 

 

 

We may be subject to product liability claims, and may not have sufficient product liability insurance to cover any such claims, which may expose us to substantial liabilities.

 

We may be exposed to product liability claims from consumers of our products. It is possible that any product liability insurance coverage we obtain will be insufficient to protect us from future claims. Further, we may not be able to obtain or maintain insurance on acceptable terms or such insurance may be insufficient to cover any potential product liability claim or recall. Failure to obtain or maintain sufficient insurance coverage could have a material adverse effect on our business, prospects, and results of operations if claims are made that exceed our coverage.

 

From time to time we may need to license patents, intellectual property, and proprietary technologies from third parties, which may be difficult or expensive to obtain.

 

We may need to obtain licenses to patents and other proprietary rights held by third parties to successfully develop, manufacture and market our products. As an example, it may be necessary to use a third party’s proprietary technology to reformulate a product in order to create a new type of sensor in response to market demand, or to improve the abilities of our current sensors. If we are unable to timely obtain these licenses on reasonable terms, our ability to commercially exploit our products may be inhibited or prevented.

 

If we are unable to adequately protect our technology or enforce our intellectual property rights, our business could suffer.

 

Our success with the products we will develop will depend, in part, on our ability to obtain and maintain patent protection for these products. The coverage claimed in a patent application can be significantly reduced before the patent is issued, and the patent’s scope can be modified after issuance. Furthermore, if patent applications that we file or license are not approved or, if approved, are not upheld in a court of law, our ability to competitively exploit our products would be substantially harmed. Additionally, such patents may or may not provide competitive advantages for their respective products or they may be challenged or circumvented by our competitors, in which case our ability to commercially exploit any related products may be diminished.

  

We also will rely on trade secret and contractual protections for our unpatented, confidential, and proprietary technology. Trade secrets are difficult to protect. While we will enter into proprietary information agreements with certain of our employees, consultants, and others, these agreements may not successfully protect our trade secrets or other confidential and proprietary information. It is possible that these agreements will be breached, or that they will not be enforceable in every instance, and that we will not have adequate remedies in the case of any such breach. It is also possible that our trade secrets will become known or independently developed by our competitors. If we are unable to adequately protect our technology, trade secrets, or proprietary know-how, or enforce our patents, our business, financial condition, and prospects could suffer.

 

In addition to patents, we expect to rely on a combination of trade secrets, copyright and trademark laws, nondisclosure agreements and other contractual provisions and technical security measures to protect our intellectual property rights. These measures may not be adequate to safeguard our technology. If they do not protect our rights adequately, third parties could use our technology, and our ability to compete in the market would be reduced. Although we are attempting to obtain patent coverage for our technology where available and where we believe appropriate, there are aspects of the technology for which patent coverage may never be sought or received. We may not possess the resources to or may not choose to pursue patent protection outside the United States or any or every country other than the United States where we may eventually decide to sell our future products. Our ability to prevent others from making or selling duplicate or similar technologies will be impaired in those countries in which we have no patent protection. Although we have in excess of 30 licensed issued patents as well as pending patent applications on file in the United States protecting aspects of our technology under development, our patents may not issue as a result of those applications drawing priority or otherwise based on those patent applications, may issue only with limited coverage or may issue and be subsequently successfully challenged by others and held invalid or unenforceable.

 

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Similarly, even if patents do issue based on our applications or future applications, any issued patents may not provide us with any competitive advantages. Competitors may be able to design around our patents or develop products that provide outcomes comparable or superior to ours. Our patents may be held invalid or unenforceable as a result of legal challenges by third parties, and others may challenge the inventorship or ownership of our patents and pending patent applications. In addition, if we choose to and are able to secure protection in countries outside the United States, the laws of some foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States. In the event a competitor infringes upon our patent or other intellectual property rights, enforcing those rights may be difficult and time consuming. Even if successful, litigation to enforce our intellectual property rights or to defend our patents against challenge could be expensive and time consuming and could divert our management’s attention. We may not have sufficient resources to enforce our intellectual property rights or to defend our patents against a challenge.

 

Our strategy is to deploy our technology into the market, license patent and other proprietary rights to aspects of our technology to third parties and customers. Disputes with our licensors may arise regarding the scope and content of these licenses. Further, our ability to expand into additional fields with our technologies may be restricted by existing licenses or licenses we may grant to third parties in the future.

 

The policies we use to protect our trade secrets may not be effective in preventing misappropriation of our trade secrets by others. In addition, confidentiality agreements executed by our employees, consultants and advisors may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure. Litigating a trade secret claim is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge methods and know-how. If we are unable to protect our intellectual property rights, we may be unable to prevent competitors from using our own inventions and intellectual property to compete against us, and our business may be harmed.

 

We may be subject to patent infringement or other intellectual property lawsuits that could be costly to defend.

 

Because our industry is characterized by competing intellectual property, we may become involved in litigation based on claims that we have violated the intellectual property rights of others. Determining whether a product infringes a patent involves complex legal and factual issues, and the outcome of patent litigation actions is often uncertain. No assurance can be given that third party patents containing claims covering our products, parts of our products, technology or methods do not exist, have not been filed, or could not be filed or issued. Because of the number of patents issued and patent applications filed in our technical areas or fields (including some pertaining specifically to wireless charging technologies), our competitors or other third parties may assert that our products and technology and the methods we employ in the use of our products and technology are covered by United States or foreign patents held by them. In addition, because patent applications can take many years to issue and because publication schedules for pending applications vary by jurisdiction, there may be applications now pending which may result in issued patents that our technology under development or other future products would infringe. Also, because the claims of published patent applications can change between publication and patent grant, there may be published patent applications that may ultimately issue with claims that we infringe. There could also be existing patents that one or more of our technologies, products or parts may infringe and of which we are unaware. As the number of competitors in the market for wire-free power and alternative recharging solutions increases, and as the number of patents issued in this area grows, the possibility of patent infringement claims against us increases. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations.

 

Intellectual property litigation is increasingly common and increasingly expensive, and may result in restrictions on our business and substantial costs, even if we prevail.

 

Patent and other intellectual property litigation is becoming more common, and such litigation may be necessary to defend against or assert claims of infringement, to protect trade secrets, to determine the scope and validity of proprietary rights of third parties, or to enforce our patent rights, including those we may license from others. Currently, no third party is asserting that we are infringing upon their patent or other intellectual property rights, nor are we aware or believe that we are infringing or will infringe upon any third party’s patent or other intellectual property rights. We may, however, currently be infringing or infringe in the future upon a third party’s patent or other intellectual property rights. In that event, litigation asserting such claims might be initiated in which we may not prevail, or may not be able to obtain the necessary licenses on reasonable terms, if at all. All such litigation, whether meritorious or not, as well as litigation initiated by us against third parties, is time-consuming and very expensive to defend or prosecute and to resolve. In addition, if we infringe the intellectual property rights of others, we could lose our right to develop, manufacture, or sell our products or could be required to pay monetary damages or royalties to license proprietary rights from third parties. An adverse determination in a judicial or administrative proceeding or a failure to obtain necessary licenses could prevent us from manufacturing or selling our products, which could harm our business, financial condition, and prospects.

 

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If our competitors prepare and file patent applications in the United States that claim technology we also claim, we may have to participate in interference or derivation proceedings required by the United States Patent and Trademark Office to determine priority of invention, which could result in substantial costs, even if we ultimately prevail. Results of these proceedings are highly unpredictable and may result in us having to try to obtain licenses in order to continue to develop or market our product candidate.

  

If our competitors file administrative challenges of our patent applications after grant, we may have to participate in post-grant challenge proceedings, such as oppositions, inter-partes review, post grant review or a derivation proceeding, that challenge our entitlement to an invention or the patentability of one or more claims in our patent applications or issued patents. Such proceedings could result in substantial costs, even if we ultimately prevail. Results of these proceedings are highly unpredictable and may result in us losing proprietary intellectual property rights as claimed in the challenged patents.

 

We may encounter unanticipated obstacles to execution of our business plan which may cause us to change or abandon our current business plan.

 

Our business plan may change significantly based on our encountering unanticipated obstacles. Many of our potential business endeavors are capital intensive, and may be subject to statutory or regulatory requirements and other factors that we cannot control, and which could be detrimental to our business plan. We believe that our chosen undertakings and strategies make our plans achievable in light of current economic and legal conditions and with the skills, background, and knowledge of our management team and advisors. We reserve the right to make significant modifications to our stated strategies depending on future events.

 

We depend on contract manufacturers to manufacture substantially all of our products, and any delay or interruption in manufacturing by these contract manufacturers would result in delayed or reduced shipments to our customers and may harm our business.

 

We have various manufacturers for the components of our products, including Next Dimension Technologies, Inc. We do not have long-term purchase agreements with our contract manufacturers and we depend on a concentrated group of contract manufacturers for a substantial portion of manufacturing our products. There can be no assurance that our contract manufacturers will be able or willing to reliably manufacture our products, in volumes, on a cost-effective basis or in a timely manner. If we cannot compete effectively for the business of these contract manufacturers, or if any of the contract manufacturers experience financial or other difficulties in their businesses, our revenue and our business could be adversely affected. In particular, if Next Dimension Technologies decides to cease doing business with us or becomes subject to bankruptcy proceedings, we may not be able to obtain the sensors for our products, which could be detrimental to our business.

 

Risks Related to Our Common Stock

 

There is currently a limited public trading market for our Common Stock and one may never develop.

  

There currently is a limited public trading market for our securities, and it is not assured that any such public market will develop in the foreseeable future. While this is true of any small cap company, the fact that one of our initial products is a device that will be associated with the use of cannabis, the legal status of which has not been completely resolved at the state level in many states or on the federal level, may make the path to a listing on an exchange or actively traded in the over-the-counter market more problematic. Moreover, there can be no assurance that even if our Common Stock is approved for listing on an exchange or is quoted in the over-the-counter market in the future, that an active trading market will develop or be sustained. Therefore, we cannot predict the prices at which our Common Stock will trade in the future, if at all. As a result, our investors may have limited or no ability to liquidate their investments.

 

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Trading in the Common Stock is conducted on the OTC Pink marketplace owned by OTC Markets Group Inc., as we currently do not meet the initial listing criteria for any registered securities exchange.  The OTC Pink is a less recognized marketplace than the registered securities exchanges and is often characterized by low trading volume and significant price fluctuations.  These and other factors may further impair our stockholders’ ability to sell their shares when they want to and/or could depress our stock price. As a result, stockholders could find it difficult to dispose of, or obtain accurate quotations of the price of our securities because smaller quantities of shares could be bought and sold, transactions could be delayed and security analyst and news coverage of our Company may be limited.  If a public market for our Common Stock does develop, these factors could result in lower prices and larger spreads in the bid and ask prices for our shares of Common Stock.

 

The market price of our Common Stock may be highly volatile and such volatility could cause you to lose some or all of your investment.

 

The market price of our Common Stock may fluctuate significantly in response to numerous factors, some of which are beyond our control, such as:

 

the announcement of new products or product enhancements by us or our competitors;
developments concerning intellectual property rights;
changes in legal, regulatory, and enforcement frameworks impacting our products;
variations in our and our competitors’ results of operations;
fluctuations in earnings estimates or recommendations by securities analysts, if our Common Stock is covered by analysts;
the results of product liability or intellectual property lawsuits;
future issuances of Common Stock or other securities;
the addition or departure of key personnel;
announcements by us or our competitors of acquisitions, investments or strategic alliances; and
general market conditions and other factors, including factors unrelated to our operating performance.

  

Further, the stock market has recently experienced extreme price and volume fluctuations. The volatility of our Common Stock could be further exacerbated due to low trading volume. Continued market fluctuations could result in extreme volatility in the price of our Common Stock, which could cause a decline in the value of our Common Stock and the loss of some or all of our investors’ investment.

 

Some or all of the “restricted” shares of our Common Stock held by our stockholders, may be offered from time to time in the open market pursuant to an effective registration statement under the Securities Act, or without registration pursuant to Rule 144 promulgated thereunder, and these sales may have a depressive effect on the market price of our Common Stock.

 

A significant numbers of shares of our Common Stock held by our officer and director and our employees may become tradable in the near future based on meeting the restrictions pursuant to Rule 144. Such future transactions may have an adverse effect on the market price of our Common Stock.

 

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Because our Common Stock is a “penny stock,” it may be more difficult for investors to sell shares of our Common Stock, and the market price of our Common Stock may be adversely affected.

 

Our Common Stock is a “penny stock” because, among other things, the stock price is below $5.00 per share, it is not listed on a national securities exchange, and the Company has not met certain net tangible asset or average revenue requirements. Broker-dealers who sell penny stocks must provide purchasers of these stocks with a standardized risk-disclosure document prepared by the SEC. This risk-disclosure document provides information about penny stocks and the nature and level of risks involved in investing in the penny-stock market. A broker must also give a purchaser, orally or in writing, bid and offer quotations and information regarding broker and salesperson compensation, make a written determination that the penny stock is a suitable investment for the purchaser and obtain the purchaser’s written agreement to the purchase. Broker-dealers must also provide customers that hold penny stock in their accounts with such broker-dealer a monthly statement containing price and market information relating to the penny stock. If a penny stock is sold to an investor in violation of the penny stock rules, the investor may be able to cancel its purchase and get their money back.

 

The penny stock rules may make it difficult for stockholders to sell their shares of our Common Stock. Because of the rules and restrictions applicable to a penny stock, there is less trading in penny stocks and the market price of our Common Stock may be adversely affected. Also, many brokers choose not to participate in penny stock transactions. Accordingly, stockholders may not always be able to resell their shares of our Common Stock publicly at times and prices that they feel are appropriate.

 

Financial Industry Regulatory Authority, Inc. (“FINRA”) sales practice requirements may limit a shareholder’s ability to buy and sell our common shares.

 

In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a client, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that client. Prior to recommending speculative low priced securities to their non-institutional clients, broker-dealers must make reasonable efforts to obtain information about the client’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some clients. FINRA requirements make it more difficult for broker-dealers to recommend that their clients buy our common shares, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

 

We may be the subject of securities class action litigation due to future stock price volatility.

 

In the past, when the market price of a stock has been volatile, holders of that stock have often instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. The lawsuit could also divert the time and attention of our management.

 

We have never paid dividends on our Common Stock, and we do not anticipate paying any dividends in the foreseeable future.

 

We have paid no cash dividends on our Common Stock to date. We currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of any future debt or credit facility, if any, may preclude us from paying dividends. As a result, capital appreciation, if any, of our Common Stock will be our stockholders’ sole source of gain for the foreseeable future.

 

Our Common Stock is quoted on the OTC Pink, which may be detrimental to investors.

 

Our Common Stock is currently quoted on the OTC Pink. Stocks quoted on the OTC Pink generally have limited trading volume and exhibit a wide spread between the bid/ask quotation. Accordingly, you may not be able to sell your shares quickly or at the market price if trading in our stock is not active.

 

Because we became public by means of a reverse merger, we may not be able to attract the attention of brokerage firms.

 

Additional risks may exist because we became public through a “reverse merger.” Securities analysts of brokerage firms may not provide coverage of our Company since there is little incentive for brokerage firms to recommend the purchase of our Common Stock. No assurance can be given that brokerage firms will want to conduct secondary offerings on our behalf in the future.

 

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Compliance with the reporting requirements of federal securities laws can be expensive.

 

We are a public reporting company in the United States, and accordingly, subject to the information and reporting requirements of the Exchange Act and other federal securities laws, and the compliance obligations of the Sarbanes-Oxley Act of 2002.  The costs of preparing and filing annual and quarterly reports and other information with the SEC and furnishing audited reports to stockholders are substantial. If we do not provide current information about our Company to market makers, they will not be able to trade our stock. Failure to comply with the applicable securities laws could result in private or governmental legal action against us or our officers and directors, which could have a detrimental impact on our business and financials, the value of our stock, and the ability of stockholders to resell their stock.

 

There are limitations in connection with the availability of quotes and order information on the OTC Pink.

 

Trades and quotations on the OTC Pink involve a manual process and the market information for such securities cannot be guaranteed. In addition, quote information, or even firm quotes, may not be available.  The manual execution process may delay order processing and intervening price fluctuations may result in the failure of a limit order to execute or the execution of a market order at a significantly different price.  Execution of trades, execution reporting and the delivery of legal trade confirmation may be delayed significantly.  Consequently, one may not be able to sell shares of our Common Stock at the optimum trading prices.

 

There are delays in order communication on the OTC Pink. 

 

Electronic processing of orders is not available for securities traded on the OTC Pink and high order volume and communication risks may prevent or delay the execution of one’s OTC Pink trading orders.  This lack of automated order processing may affect the timeliness of order execution reporting and the availability of firm quotes for shares of our Common Stock.  Heavy market volume may lead to a delay in the processing of OTC Pink security orders for shares of our Common Stock, due to the manual nature of the market.  Consequently, one may not able to sell shares of our Common Stock at the optimum trading prices.

 

There is a risk of market fraud on the OTC Pink.

 

OTC Pink securities are frequent targets of fraud or market manipulation.  Not only because of their generally low price, but also because the OTC Pink reporting requirements for these securities are less stringent than for securities on a national securities exchange, and no exchange requirements are imposed.  Dealers may dominate the market and set prices that are not based on competitive forces.  Individuals or groups may create fraudulent markets and control the sudden, sharp increase of price and trading volume and the equally sudden collapse of the market price for shares of our Common Stock.

 

There is a limitation in connection with the editing and canceling of orders on the OTC Pink.

 

Orders for OTC Pink securities may be canceled or edited like orders for other securities.  All requests to change or cancel an order must be submitted to, received and processed by the OTC Markets.  Due to the manual order processing involved in handling OTC Pink trades, order processing and reporting may be delayed, and one may not be able to cancel or edit one’s order.  Consequently, one may not be able to sell its shares of our Common Stock at the optimum trading prices.

 

Increased dealer compensation could adversely affect our stock price.

 

The dealer’s spread (the difference between the bid and ask prices) may be large and may result in substantial losses to the seller of shares of our Common Stock on the OTC Pink if the stock must be sold immediately.  Further, purchasers of shares of our Common Stock may incur an immediate “paper” loss due to the price spread.  Moreover, dealers trading on the OTC Pink may not have a bid price for shares of our Common Stock on the OTC Pink.  Due to the foregoing, demand for shares of our Common Stock on the OTC Pink may be decreased or eliminated.

 

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The Board has the right to issue additional shares of Common Stock or preferred stock, without stockholder consent, which could have the effect of creating substantial dilution or impeding or discouraging a takeover transaction.

 

Pursuant to our certificate of incorporation, the Board may issue additional shares of common or preferred stock. Any additional issuance of Common Stock or the issuance of preferred stock could have the effect of impeding or discouraging the acquisition of control of us by means of a merger, tender offer, proxy contest or otherwise, including a transaction in which our stockholders would receive a premium over the market price for their shares, thereby protecting the continuity of our management. Specifically, if in the due exercise of its fiduciary obligations, the Board was to determine that a takeover proposal was not in the best interest of the Company or our stockholders, shares could be issued by the Board without stockholder approval in one or more transactions that might prevent or render more difficult or costly the completion of the takeover by:

 

diluting the voting or other rights of the proposed acquirer or insurgent stockholder group;
putting a substantial voting block in institutional or other hands that might undertake to support the incumbent board of directors; or
effecting an acquisition that might complicate or preclude the takeover

 

Our investors’ ownership in the Company may be diluted in the future.

 

In the future, we may issue additional authorized but previously unissued equity securities, resulting in the dilution of ownership interests of our present stockholders. We expect to need to issue a substantial number of shares of Common Stock or other securities convertible into or exercisable for Common Stock in connection with hiring or retaining employees, future acquisitions, raising additional capital in the future to fund our operations, and other business purposes. On December 25, 2016, Mr. Yazbeck, in his separate capacities as sole Board member and as the holder of a majority of the Company’s voting shares, voted to ratify the MyDx, Inc. 2017 Stock Incentive Plan (the “Plan”). There were 150,000,000 million shares available to be issued pursuant to the Plan. In the year ended December 31, 2017, 143,500,000 shares were issued under the Plan.

 

Mr. Yazbeck controls a majority of our voting stock, and he may make decisions that our stockholders do not consider to be in their best interests.

 

As of the date of this Report, Mr. Yazbeck, our sole officer and sole member of our Board, and affiliated entities beneficially controls, in the aggregate, approximately 52.01% of our outstanding voting stock. Mr. Yazbeck owns 2.06% of the shares of Common Stock outstanding, however, via his control of the “super-voting” shares of Series A Preferred Stock, Mr. Yazbeck controls a majority of our voting stock. Mr. Yazbeck also owns 200,000 shares of Series B Preferred Stock (67.4% of the Series B Preferred Stock outstanding) with each share having one vote per share. As a result, Mr. Yazbeck has the ability to exert substantial influence over the election of the Board and the outcome of issues requiring approval by our stockholders. This concentration of ownership may also have the effect of delaying or preventing a change in control of our Company that may be favored by other stockholders. This could prevent transactions in which stockholders might otherwise recover a premium for their shares over current market prices. This concentration of ownership and influence in management and the Board’s decision-making could also harm the price of our capital stock by, among other things, discouraging a potential acquirer from seeking to acquire shares of our capital stock (whether by making a tender offer or otherwise) or otherwise attempting to obtain control of our Company.

 

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or detect fraud. Consequently, investors could lose confidence in our financial reporting and this may decrease the trading price of our stock.

 

We must maintain effective internal controls to provide reliable financial reports and to detect and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as would be possible with an effective control system in place. We have not performed an in-depth analysis to determine if historical undiscovered failures of internal controls exist, and may in the future discover areas of our internal control that need improvement.

 

We have been assessing our internal controls to identify areas that need improvement. We are in the process of implementing changes to internal controls, but have not yet completed implementing these changes. Failure to implement these changes to our internal controls or any others that it identifies as necessary to maintain an effective system of internal controls could harm our operating results and cause investors to lose confidence in our reported financial information. Any such loss of confidence would have a negative effect on the trading price of our Common Stock.

 

For the years ended December 31, 2017 and 2016, we and our auditors identified a material weakness in our internal control over financial reporting due to the Company not maintaining a sufficient complement of personnel with an appropriate level of accounting knowledge and experience in the application of accounting for warrants to purchase common and preferred stock issued in connection with convertible notes payable and convertible preferred stock and accounting for non-employee stock options. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. If the Company does not address the material weaknesses, we may not be able to manage our business as effectively as would be possible with an effective control system in place.

 

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Our future operating results may vary substantially from period to period and may be difficult to predict.

 

On an annual and a quarterly basis, there are a number of factors that may affect our operating results, many of which are outside our control. These include, but are not limited to:

 

changes in market demand;
customer cancellations;
competitive market conditions;
new product introductions by us or our competitors;
market acceptance of new or existing products;
cost and availability of components;
timing and level of expenditures associated with new product development activities;
mix of our customer base and sales channels;
mix of products sold;
continued compliance with industry standards and regulatory requirements; and
general economic conditions.

 

These factors are difficult to forecast and may contribute to substantial fluctuations in our quarterly revenues and substantial variation from our projections. Any failure to meet investor expectations regarding our operating results may cause our stock price to decline.

  

We may experience delays in introducing products or services to the market and our products or services may contain defects which could seriously harm our results of operations.

 

We may experience delays in introducing new or enhanced products or services to the market. Such delays, whether caused by factors such as unforeseen technology issues or otherwise, could negatively impact our sales revenue in the relevant period. In addition, we may terminate new product, service or enhancement development efforts prior to any introduction of a new product, service or enhancement. Any delays for new offerings currently under development or any product defect issues or product recalls could adversely affect the market acceptance of our products or services, our ability to compete effectively in the market, and our reputation, and therefore, could lead to decreased sales and could seriously harm our results of operations.

 

Our success also depends on third parties in our distribution channels.

 

Our plan is to sell our products both directly to customers and through distribution channels. We may not be successful in developing additional distribution. In addition, distributors and resellers may not dedicate sufficient resources or give sufficient priority to selling our products. Our failure to develop new distribution channels, the loss of a distribution relationship or a decline in the efforts of a reseller or distributor could adversely affect our business.

 

Risks Related to Our Financial Condition

 

The impact of the current economic climate and tight financing markets may impact consumer demand for our products and services.

 

Our customers often have limited discretionary funds, which they may choose to spend on items other than our products and services. If our customers experience economic hardship, it could negatively affect the overall demand for our products and services, could cause delay and lengthen sales cycles and could cause our revenue to decline.

 

Although we maintain allowances for returns and doubtful accounts for estimated losses resulting from product returns and the inability of our customers to make required payments, and such losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same return and bad debt rates that we have in the past, especially given the current economic conditions. Additionally, challenging economic conditions could have a negative impact on the results of our operations.

 

We have experienced significant losses to date and may require additional capital to fund our operations. The current financial climate may make it more difficult to secure financing, if we need it. If our business model is not successful, or if we are unable to generate sufficient revenue to offset our expenditures, we may not become profitable, and the value of your investment may decline.

 

We incurred a net loss of approximately $5,234,000 for the year ended December 31, 2017 and a cumulative net loss of approximately $31,633,000 from September 16, 2013 (date of inception) to December 31, 2017.

 

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ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. DESCRIPTION OF PROPERTIES

 

The Company owns no properties. As of September 1, 2017, the Company subleases 1,000 square feet of office and space at 6335 Ferris Square, Suite B, San Diego, California. The sublease is a month-to-month arrangement and there is a net rent of $0 per month due to the Company’s sublessor leasing furniture from the Company for $1,000 per month (the same amount as the monthly rental cost to the Company).

 

The Company believes its leased office and laboratory space are adequate for its current needs.

 

ITEM 3. LEGAL PROCEEDINGS

 

In the ordinary course of business, we are subject to claims and litigation, including claims that we infringe third party patents, trademarks and other intellectual property rights. Although we believe it is unlikely that any current claims or actions will have a material adverse impact on our operating results or our financial position, given the uncertainty of litigation, we cannot be certain of this. Moreover, the defense of claims or actions against us, even if not meritorious, could result in the expenditure of significant financial and managerial resources.

 

Our involvement in any patent dispute, other intellectual property dispute or action to protect trade secrets and know-how could result in a material adverse effect on our business. Adverse determinations in current litigation or any other litigation in which we may become involved and regulatory non-compliance, including with respect to export regulations, could subject us to significant liabilities to third parties or government agencies, require us to grant licenses to or seek licenses from third parties and prevent us from manufacturing and selling our products. Any of these situations could have a material adverse effect on our business. 

 

Lawsuit Against Jerome Dewald and Skip Sanzeri

 

On July 14, 2017, the Company and its Chief Executive Officer, Daniel Yazbeck, filed a complaint in Superior Court of California against Jerome Dewald, Skip Sanzeri and twenty-five (25) persons or entities whose true identities are currently unknown to the Company (collectively, the “Defendants”). Mr. Sanzeri was the Chief Operating Officer of the Company in 2014 and 2015. The Defendants allegedly made false statements about the Company, its products, and Mr. Yazbeck on online investor platforms and at investor events. In addition, the Defendants allegedly, by sending a demand letter for $205,000, attempted to extort money from the Company. Based on these alleged actions, the causes of action in the lawsuit are: (i) trade libel; (ii) defamation; (iii) false light; (iv) intentional interference with prospective business relations; (v) negligent interference with prospective business relations; (vi) intentional interference with contract; (vii) unfair competition pursuant to a California statute; (viii) civil extortion; and (viii) breach of fiduciary duty. The Company is seeking general damages of $29 million, special damages, punitive damages, an injunction to prevent the Defendants from engaging in the unlawful and unfair business practices alleged in the complaint, and reasonable attorneys’ fees and court costs. On September 21, 2017, Dewald filed a Demurrer as to the Plaintiff’s complaint. On November 21, 2017, the Plaintiffs filed a First Amended Complaint in which none of the causes of action were changed, but more facts were alleged. On December 20, 2017, Dewald noticed a demurrer as to the First Amended Complaint. This demurrer was heard on February 2, 2018 and was overruled and CDx was victorious. Simultaneous to the demurrer, discovery had been propounded on Dewald as to acquire evidence to support the factual allegations of the First Amended Complaint. Regarding Defendant Sanzeri, a tentative settlement had been reached, but not signed, with Sanzeri. The parties have agreed to attempt to resolve this litigation through a mediation proceeding and have signed a stipulation re: mediation and related extensions on March 13, 2018 to that effect.

 

Lawsuit Against Bright Light Marketing, Inc.

 

On March 10, 2017, the Company and Bright Light Marketing, Inc. (“BLM”) entered into a Settlement Agreement (the “BLM Settlement”). Pursuant to the BLM Settlement, BLM was to pay the Company a total of $217,500 over the twelve (12) months following March 13, 2017. BLM’s first payment of $100,000 was due within thirty (30) business days of the signing of the BLM Settlement. BLM was then to pay the Company $10,000 per month on the first day of the next eleven (11) months and the final payment of $7,500 was due on March 1, 2018.

 

As of January 22, 2018, BLM had not made any payments to the Company pursuant to the BLM Settlement. On that date, the Company filed a complaint in Superior Court of California against BLM to enforce the BLM Settlement amount of $217,500 and to collect interest at the default rate of $47.67 per day. In addition, the Company is seeking court costs and attorney’s fees. BLM answered the complaint on March 12, 2018. The initial case management conference is in May.

  

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PART II

 

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market for our Common Stock

 

PRICE RANGE OF OUR COMMON STOCK AND DIVIDEND INFORMATION

 

Our Common Stock trades publicly on the OTC Pink under the symbol “MYDX”. The closing price of our common stock on the OTC Pink on April 16, 2018, was $0.0039 per share.

 

Our common stock commenced trading on April 16, 2015 under the symbol of MYDX. The following table sets forth the high and low bid prices per share of our common stock by the OTC Pink for the periods indicated as reported on the OTC Pink.

 

2018  Low   High 
For the period of January 1, 2018 to April 18, 2018  $0.0029   $0.0105 
           

 

2017  Low   High 
For the period of October 1, 2017 to December 31, 2017  $0.0030   $0.0074 
For the period of July 1, 2017 to September 30, 2017  $0.0035   $0.0062 
For the period of April 1, 2017 to June 30, 2017  $0.0045   $0.0217 
For the period of January 1, 2017 to March 30, 2017  $0.0010   $0.0226 

  

2016  Low   High 
For the period of October 1, 2016 to December 31, 2016  $0.0016    0.0850 
For the period of July 1, 2016 to September 30, 2016  $0.0081    0.2000 
For the period of April 1, 2016 to June 30, 2016  $0.1000    0.7360 
For the period of January 1, 2016 to March 31, 2016  $0.3500    0.8500 

 

The trading volume of our securities fluctuates and may be limited during certain periods. As a result of these volume fluctuations, the liquidity of an investment in our securities may be adversely affected.

 

Shareholders of Record

 

As of April 16, 2018, an aggregate of 1,893,272,792 shares of our Common Stock were issued and outstanding and owned by approximately 132 shareholders of record. Due to shares of our Common Stock being held by depositaries, brokers and other nominees, the number of beneficial holders of our shares is substantially larger than the number of stockholders of record.

 

On September 30, 2016, the Company amended its Articles to increase the Company’s authorized shares of common stock from three hundred and seventy-five million (375,000,000) to ten billion (10,000,000,000), par value $0.001 per share and to authorize for issuance up ten million (10,000,000) shares of blank check preferred stock par value $0.001 per share. The Board is authorized to designate the rights and preferences of each series of preferred stock.

 

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On December 23, 2016, the Board designated 51 shares of Series A Preferred Stock. Among other provisions, each one (1) share of the Series A Preferred shall have voting rights equal to (x) 0.019607 multiplied by the total issued and outstanding shares of common stock of the Company eligible to vote at the time of the respective vote (the “Numerator”), divided by (y) 0.49, minus (z) the Numerator. For purposes of illustration only, if the total issued and outstanding shares of common stock of the Company eligible to vote at the time of the respective vote is 5,000,000, the voting rights of one share of the Series A Preferred Stock shall be equal to 102,036 (0.019607 x 5,000,000) / 0.49) – (0.019607 x 5,000,000) = 102,036). The 51 shares were issued to Daniel Yazbeck, the Company’s Chief Executive officer and the sole member of the Board. Mr. Yazbeck, via his ownership of the 51 shares of the Series A Preferred, has control of the majority of the Company’s voting stock.

 

On December 23, 2016, the Company designated 300,000 shares of Preferred Stock as Series B Preferred Stock. The Series B Preferred is convertible into shares of Common Stock at a conversion price of $0.0001. Holders of the Series B Preferred are entitled to receive dividends annually equal to $0.10 for each share of Series B Preferred held. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of Series B Preferred then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders, before any payment shall be made to the holders of Common Stock. Until such time as there are fewer than 20,000 shares of Series B Preferred outstanding, the Company needs to obtain the majority votes of the holders of Series B Preferred with regard to certain actions. Holders of Series B Preferred shares are entitled to one vote for each share held, are entitled to elect up to two members to the Board, and, absent such election, are provided certain voting and veto rights with regard to any vote by the Board. On January 6, the 300,000 shares of the Series B Preferred were issued to Mr. Yazbeck. On June 30, 2017, Mr. Yazbeck sold 100,000 shares of Series B Preferred for net proceeds of $45,000. Mr. Yazbeck then lent the $45,000 to the Company. 

 

Recent Sales of Unregistered Securities

 

During the year ended December 31, 2017, we issued shares of our common stock that were not registered under the Securities Act, and were not previously disclosed in a Current Report on Form 8-K or on a Quarterly Report on Form 10-Q as follows:

 

On November 9, 2017, the Company issued 82,500,000 shares of common stock at a price per share of $0.0023 pursuant to conversion notices of convertible promissory notes outstanding totaling approximately $189,750.

 

On December 14, 2017, the Company issued 17,391,304 shares of common stock at a price per share of $0.0023 pursuant to conversion notices of convertible promissory notes outstanding totaling approximately $40,000.

 

On December 14, 2017, the Company issued 33,000,000 shares of common stock pursuant to a conversion of 3,300 shares of Series B Preferred stock at a conversion price of $0.0001.

 

The shares identified in this Part II, Item 5 were not registered under the Securities Act. The shares qualified for exemption under Section 4(a)(2) of the Securities Act since the issuance of the shares by us did not involve a public offering. The offering was not a “public offering” as defined in Section 4(a)(2) due to the insubstantial number of persons involved in the deal, size of the offering, manner of the offering and number of securities offered. We did not undertake an offering in which we sold a high number of securities to a high number of investors. Based on an analysis of the above factors, we have met the requirements to qualify for exemption under Section 4(a)(2) of the Securities Act. 

 

Repurchase of Equity Securities

 

We have no plans, programs or other arrangements in regards to repurchases of our common stock.

 

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Dividends

 

We have not since December 12, 2012 (date of inception) declared or paid any cash dividends on shares of our Common Stock and currently do not anticipate paying such cash dividends on shares of our Common Stock. Any determination to pay dividends in the future on shares of our Common Stock will be at the discretion of the Board and will depend upon our results of operations, financial condition, tax laws and other factors as the Board, in its discretion, deems relevant.

 

Holders of the Series B Preferred are entitled to receive dividends annually equal to $0.10 for each share of Series B Preferred held.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Selected financial data to our financial statements located elsewhere in this Annual Report on Form 10-K is not required for smaller reporting companies under Article 8 Regulation S-X.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with, and is qualified in its entirety by, MyDx’s audited annual financial statements and the related notes thereto as filed with the Securities and Exchange Commission (“SEC”) on April 20, 2017, as amended on April 26, 2017. This discussion contains certain forward-looking statements that involve risks and uncertainties, as described under the heading “Forward-Looking Statements” in this quarterly report. Actual results could differ materially from those projected in the forward-looking statements. For additional information regarding these risks and uncertainties, please see the disclosure under the heading “Risk Factors” elsewhere in this quarterly report.

 

The Management Discussion and Analysis of Financial Condition and Results of Operations below is based upon only the financial performance of MyDx. MyDx’s financial statements for the year ended December 31, 2017 and the audited results of operations of MyDx for the Period ended December 31, 2016. 

 

We believe that our assumptions are based upon reasonable data derived from and known about our business and operations and the business and operations of the Company. No assurances are made that actual results of operations or the results of our future activities will not differ materially from its assumptions. Factors that could cause differences include, but are not limited to, expected market demand for the Company’s products and services and competition.

 

The Merger between MyDx, Inc. and CDx, Inc. (“CDx”), consummated on April 30, 2015, was treated as a reverse acquisition for financial accounting and reporting purposes. As such, CDx is treated as the acquirer for accounting and financial reporting purposes while MyDx, Inc. was treated as the acquired entity for accounting and financial reporting purposes. Further, as a result, the historical financial statements that will be reflected in the Company’s future financial statements filed with the SEC will be those of CDx, and the Company’s assets, liabilities and results of operations will be consolidated with the assets, liabilities and results of operations of CDx. Accordingly, for clarity and continuity, we are presenting the historical financial statements for CDx, Inc. for the periods presented.

 

Overview

 

MyDx is a science and technology company that develops and deploys products and services in the following focus areas:

 

  1) Consumer Products – smart devices and consumables

 

  2) Data Analytics – pre-clinical chemical analysis and patient feedback ecosystem

 

  3) Biopharmaceuticals – identifying ‘green Active Pharmaceutical IngredientsTM, (gAPITM) and corresponding formulations

 

  4) Software as a Service (SaaS) – Software services for prescribers, patient groups, cultivators, and regulators

 

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We are committed to addressing areas of critical national need to promote public safety, transparency and regulation in the various markets we serve.

 

The Company’s first product, MyDx®, also known as “My Diagnostic”, is a multiuse hand-held chemical analyzer made for consumers and professional users which feeds our data analytics platform and SaaS business. MyDx is intended to allow consumers to Trust & Verify® what they put into their mind and body by using our science and technology to test for pesticides in food, chemicals in water, toxins in the air, and the safety and potency of cannabis samples, which is our initial focus.

 

The Company’s founder, sole officer and sole member of the Board of Directors, Daniel Yazbeck, is an experienced executive with over 15 years of product research, development and commercialization experience including at Fortune 500 companies. Mr. Yazbeck was a scientist for Pfizer Pharmaceuticals, specializing in Chemical R&D technologies that identify and manufacture Active Pharmaceutical Ingredients at scale using green chemistry and a strategic product and market developer for Panasonic, engineering new consumer electronic products and deploying them with strategic partners in the healthcare industry. Mr. Yazbeck is also a seasoned asset-backed investor at Yazbeck Investments and holds a master of science degree from McGill University. 

 

MyDx, and its majority owned subsidiary, CDx, has successfully executed on a four-year business plan. The Company has received cash investments of approximately $8 million to date. In 2013, CDx was established with $210,000 in seed funding and resource support from an entity affiliated with Mr. Yazbeck to secure strategic development partners and establish a market, product and initial IP portfolio. In 2014, CDx developed, protected, manufactured and marketed the beta version of its first product, the MyDx Analyzer, through a crowdfunding campaign that launched in January 2014 as well as a financing round where $600,000 of shares of CDx, Inc. Series A Preferred Stock was sold through April 2014 and $2 million in convertible notes were issued through September 2014. The Beta product was released in the first quarter of 2015, at which point $4,800,000 of shares of Series B Preferred Stock in CDx, Inc. was sold followed by the completion of the Merger with MyDx, Inc., whose shares of common started to trade on the OTCQB marketplace. The official product was released in the third quarter of 2015 and the Company received an additional $250,000 loan from the same entity affiliated with Mr. Yazbeck to help finance its operations in the fourth quarter. In 2016, we believe the Company continued to penetrate its market and increased brand recognition. Since the MyDx Analyzer’s launch in 2015 it has generated close to $1.5M in revenues. In addition, in 2016, the Company launched additional products that tests for pesticides in food and chemicals in water and financed the company’s operations primarily through the issuance of convertible debt, the majority of which had been satisfied as of December 31, 2017.

 

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Business Plan

 

The Company is currently focused on 4 key business segments to service the cannabis industry.

 

1. Consumer Products

 

Smart Devices & Consumables

 

  1) CannaDxTM

 

  The cannabis industry’s first hand-held cannabis sensor and analyzer with disposable single use inserts.
  Comes with a mobile app that acts as a ‘virtual budtender’.
  Analyzes cannabis sample and provides a Total Canna ProfileTM (TCP), a more complete chemical profile to include THC and the most prevalent cannabinoids and terpenes found in cannabis plants.
  Cannabinoids such as THC and CBD have been reported to bind the CB1 and CB2 receptors found throughout the human body and have been reported to provide relief to an array of symptoms, including pain, nausea, and inflammation to name a few. Terpenes, which have been reported to compound the effects of cannabinoids on the body via an “Entourage Effect”, are also important in determining the overall physiological effects various cannabis chemical profiles.
  Enables users to log their ailments and side effects and tie those back to the exact chemical profile
  Provides strain recommendations based on desired “relief” input based on crowdsourced community feedback.

 

  2) Eco Smart PenTM and Other Delivery Devices

 

  MyDx plans to develop additional smart hardware that gather user data, such as the Eco Smart Pen. MyDx plans to release the Eco Smart Pen in the third quarter of 2018.
  Integrated with Bluetooth as well as other technologies that will allow for mobile-app control, dose restrictions, safety controls, and usage statistics.
  We plan to OEM these product to third-party customers

 

  3) MyDx Tablet Edition

 

  MyDx plans to develop he first touchscreen kitchen tablet in the market with integrated MyDx sensor reading capability
  Sensor lineup to include OrganaDx, AquaDx, and AeroDx.
  Company plans to offer CannaDx data portal management ability in MyDx Tablet Edition .

 

MyDx plans to evaluate the 510K FDA device approval process to leverage its consumer products and the ability of insurance companies to support sales of its smart devices and generate HIPPA compliant crowdsourced data. 

 

2. Data Analytics

 

Pre-Clinical Chemical Analysis and Patient Feedback Ecosystem

 

MyDx has four classes of data and algorithms:

 

  1) User Data

 

  When users download the CannaDx mobile app, we may ask them put in personal details such as gender, location, height, weight, age etc. that we maintain while complying with HIPAA.

 

  2) Chemical Composition Data

 

  This information is sourced from a number of inputs including the CannaDx Handheld’s Total Canna Profile (TCP), partner laboratories analyses, and branded pre-tested concentrates.

 

  3) User Feedback

 

  Provided by users in our CannaDx mobile app as they try various products and record their experiences with those products.

 

  4) Usage Statistics

 

  We will capture type, frequency, dosage, ailments relieved, and side effects.

 

MyDx plans to leverage this data, which combined is referred to as the Total Canna ProfileTM (TCP), combined with our proprietary algorithms, to develop key insights into user behavior based on unique chemical profiles. Our goal is to track how a specific sample is expected to help relieve certain ailments and to validate the results.

 

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3. Biopharmaceutical

 

Identifying ‘green Active Pharmaceutical IngredientsTM’ (gAPITM) and corresponding formulations

 

  1) Sale and License of Product Formulations

 

  MyDx plans to work with third party customers to license crowdsourced formulated chemical profiles that are expected to address a specific “relief” desired using its own proprietary formulas derived from our extensive dataset and algorithms.

 

  2) Sale of green Active Pharmaceutical Ingredients (gAPITM)

 

  This division will also look to provide an organic source of extracted green Active Pharmaceutical Ingredients (gAPITM), such as a predefined terpene formulation, for consumer and industrial use.
  Given that certain classes of gAPI’s such hemp derived CBD and terpenes might offer “relief” without the “high” THC provides, MyDx intends to partner with leaders in the industry to offer branded products without THC, akin to a “virgin” cocktail, if it finds that these formulations offer the benefits desired and the legal framework to sell them is viable.

 

4. SaaS (Software as a Service)

 

Software services for prescribers, patient groups, cultivators, and regulators

 

  1) MyDx App

 

  Available in iOS and Android and controls the MyDx Analyzer
  Tracks patient tested samples and physiological feedback
  Prints a Certificate of Analysis, which includes patient feedback
  Offers patients groups and their doctors with OEM software to track what the community is experiencing
  Centrally hosted in our secure cloud based server
  Will offer in App purchases for additional software subscription features

 

2)MYDX360

 

MyDx360 is a Software As A Service (SAAS)-based community engagement platform designed to help entrepreneurs develop, launch and track the effects of new formulated products on consumers to help penetrate their target markets more effectively.
As part of the service, companies will choose from among MyDx’s many chemical formulations that best align with the physiological response its target demographic is seeking. From there, MyDx will outsource the delivery of those formulations through licensed concentrate manufacturing facilities and provide customer-engagement support via its SAAS platform and MyDx smart devices such as the EcoSmartPen to acquire and analyze user feedback.
Collectively, this suite of services will be called MyDx360.

 

  3) Software to Support Laboratory Marketing, Customer Service and Data Aggregation

 

  MyDx will offer what we believe will be the premier lead generator and outsourced services provider for cannabis testing labs
  Through certain assets MyDx expects to develop or acquire, as well as leads generated from our handheld analysis and smart devices, we believe MyDx will be positioned to become a world leader in cannabis laboratory marketing and services and as the largest “data holder” of tested cannabis and the associated chemical profiles tied to the ailment therapy.

 

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Recent Developments

 

MYDX360 SAAS Ecosystem License and Services Agreements

 

In April 2018 the Company verbally agreed to enter into a separate MYDX360 SAAS Ecosystem License and Services Agreements with Q’NCH, LLC, a Delaware limited liability company and HotNife, LLC, a California limited liability company. (the “SAAS Agreements”). Under the terms of the SAAS Agreements, the Company granted the counterparties a non-exclusive limited license to: (i) access the Company’s Database (as defined in the SAAS Agreements) (the “Access License”), and (ii) use the Company’s “Powered by MyDx” trademark and the MyDx logo on the counterparties’ products (the “Brand License”, and together with the Access License, the “MyDx License”). Additionally, the SAAS Agreement provides the counterparties with (i) market research regarding the packaging of the counterparties’ products in coordination with the counterparties’ objectives (the “Brand Services”) and (ii) delivery of certain quantities of the Company’s smart devices, cartridges, batteries, and other hardware to the counterparties (the “Product Services” and, together with the Brand Services, the “MyDx Services”). The total consideration to the Company from each of the counterparties in exchange for the grant of the MyDx License and the MyDx Services will be $15,000 per year and the costs of the Eco Smart Pens’ hardware. The payments will not begin until the Company releases the Eco Smart Pen. The Company expects to release the Eco Smart Pen in the third quarter of 2018.

Appointment of Dr. Heiner Dreismann to Business Advisory Board

 

On April 1, 2018, the Company verbally agreed to enter into an agreement to appoint Dr. Heiner Dreismann to its business advisory board to assist the Company’s management with evaluating potential merger and acquisition opportunities, developing a plan to secure a medical device designation from Health Canada for CannaDx, and other advice related to the Company’s business.

 

Heiner Dreismann, Ph.D. is an international executive with more than 24 years of experience in the biotech and healthcare industries. From 2000 to 2006, Dr. Dreismann served as the President and CEO of Roche Molecular Systems, Inc. leading a staff of more than 1,600 and growing the RMS molecular IVD business from $640M to $1.2B in annual sales. Prior to serving as a senior executive at Roche Molecular Systems, Dr. Dreismann served as the Head of Global Business Development at Roche Diagnostics, responsible for business development for the Roche Diagnostics $7B IVD business. Dr. Dreismann served in a number of other leadership capacities at Roche Diagnostics and Roehm GmbH, dating back to 1983. Dr. Dreismann’s post-doctoral fellowship was earned at the French Center for Nuclear Research in Saclay. He earned a Ph.D. in Microbiology/Molecular Biology from Westfaelische Wilhelms University, Muenster (summa cum laude).

 

License and Services Agreement

 

On April 9, 2018, the Company verbally agreed to enter into a License and Services Agreement with Humanity Holdings Inc. and Humanity Products, Inc. (collectively “Humanity Holdings”). Humanity Holdings currently operates a manufacturing and distribution facility, licensed by the state of California, through which it engages in the sale and distribution of various cannabis related products. The Company granted Humanity Holdings a non-exclusive license to manufacture, sell, and distribute products within California using proprietary product formulations owned or licensed by the Company. The Company agreed to issue Humanity Holdings shares of Common Stock worth $25,000 on the 45th day following the effective date of the agreement. This is in exchange for Humanity Holdings not contracting with a competitor of the Company who provides formulation services, smart vape device hardware and related software applications to its network, product branding or access to reporting from its data set that ties a user’s experience to a chemical profile of the product they are consuming. Humanity Holdings will pay 20% of net sales to the Company as a support services fee and 30% of net sales to the Company as a royalty.

 

Results of Operations

 

As shown in the accompanying consolidated financial statements, the Company incurred net losses of $5,233,519 and $16,501,089, respectively, for the years ended December 31, 2017 and 2016, and had an accumulated deficit of $ $31,632,972 as of December 31, 2017.

 

Comparison of Years Ended December 31, 2017 and 2016

 

Revenue

 

For the years ended December 31, 2017 and 2016, the Company had licensing revenue of $8,829 and $138,000, respectively. For the years ended December 31, 2017 and 2016, the Company had product service revenue of $13,384 and $18,758, respectively. For the years ended December 31, 2017 and 2016, the Company had product revenue of $398,401 and $651,418, respectively. The decrease in revenue for the year ended December 31, 2017 compared to 2016 was a result of the decision to discontinue the use of distributors in an effort to improve gross profit margins.

 

Cost of Goods Sold and Gross Profit

 

Gross profit as a percentage of net revenues for the year ended December 31, 2017 and 2016 were 76% and 50%, respectively. The gross margin was positively affected by a decrease in accrued royalties, as well as the increase in the amount of Grower’s Packages sold as well as more direct to consumer sales compared to sales via distributors.

 

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Research and Development Expenses

 

Research and development expenses primarily consist of engineering and product development, incurred in the design, development, testing and enhancement of our products. For the year ended December 31, 2017, the Company expended $170,385 for various research and development projects for hardware, database, software and sensor development as compared to $686,095 for the year ended December 31, 2016. The decrease of $515,710, or 75%, resulted primarily from the Company taking a more economical and streamlined outsourcing approach to developing new products (such as the Eco Smart PenTM) as well as improving existing products, including CannaDxTM, AquaDxTM and OrganaDxTM.

 

Sales and Marketing Expenses

 

Sales and marketing expenses consist primarily of consulting fees for third-party services and general marketing expenses. For year ended December 31, 2017, the Company expended $968,687 as compared to $1,967,786 for the year ended December 31, 2016. The decrease of $999.099, or 51%, resulted primarily from the Company expanding brand awareness surrounding its new product lines using more economical PR and social media marketing channels targeting Canada as compared to the costlier product expansion collaboration models entered into in 2016.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of salaries, wages and benefits, consulting fees, legal fees, accounting fees and general administrative expenses.

 

For the year ended December 31, 2017, the Company expended $1,589,485 as compared to $1,888,155 for the year ended December 31, 2016. The decrease of $298,670, or 16%, resulted primarily from decreases in accounting fees, investor relation fees, legal fees, and miscellaneous general administrative expenses.

  

Other income (expense)

 

Other expenses decreased $9,474,920, resulted primarily from the decrease of loss on settlement of debt, interest expense related to the notes payable, and loss on fair value of derivative liability. These were offset by an increase in a loss on extinguishment of debt.

  

Liquidity and Capital Resources

 

Since its inception, capital raised by the Company has been used primarily for the Company’s research and development efforts and to support its operations. As of December 31, 2017, the Company had remaining cash of $119,028 with a net working capital deficit of $4,406,195. As a result of the Company’s significant operating expenditures and the lack of significant product sales revenue, we expect to incur losses from operations for the near future and will be required to seek additional capital to sustain our operations.

 

It is anticipated that we will continue to report negative operating cash flow in future periods, likely until one or more of our products generate sufficient revenue to cover our operating expenses. If any of the warrants are exercised, all net proceeds of the warrant exercise will be used for working capital to fund negative operating cash flow.

 

Our cash balance of $119,028 will not be sufficient to fund our operations for at least the next 12 months. Additionally, if we are unable to generate sufficient revenues to pay our expenses, we will need to raise additional funds to continue our operations. We have historically financed our operations through private equity and debt financings. Recent economic turmoil and severe lack of liquidity in the debt capital markets together with volatility and rapidly falling prices in the equity capital markets have severely and adversely affected capital raising opportunities. We do not have any commitments for financing at this time, and financing may not be available to us on favorable terms, if at all. If we are unable to obtain debt or equity financing in amounts sufficient to fund our operations, if necessary, we will be forced to suspend or curtail our operations. In that event, current stockholders would likely experience a loss of most or all of their investment. Additional funding that we do obtain may be dilutive to the interests of existing stockholders.

 

To the extent, we raise additional capital by issuing equity securities or obtaining borrowings convertible into equity, ownership dilution to existing stockholders will result and future investors may be granted rights superior to those of existing stockholders. The incurrence of indebtedness or debt financing would result in increased fixed obligations and could also result in covenants that would restrict our operations. Our ability to obtain additional capital may depend on prevailing economic conditions and financial, business and other factors beyond our control. Economic crisis and disruptions in the U.S. and global financial markets may adversely impact the availability and cost of credit, as well as our ability to raise money in the capital markets. Instability in these market conditions may limit our ability to access the capital necessary to fund and grow our business. The Company cannot provide any assurances that it will be able to raise the additional capital needed to fund its operations, or if the Company is able to raise such additional capital, that any such financing will be on terms which are beneficial to the existing shareholders.

 

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Working Capital

 

   December 31,
2017
   December 31,
2016
 
Current assets  $300,352   $301,252 
Current liabilities   4,708,549    3,648,520 
Working Capital Deficit  $(4,408,197)  $(3,347,268)

 

Current assets for December 31, 2017 increased compared to December 31, 2016 primarily due to an increase in cash due to the sale of our products and the proceeds from the issuance of common stock and an increase of inventory.

 

Current liabilities for December 31, 2017 increased compared to December 31, 2016 primarily due to an increase in accounts payable, customer deposits convertible notes, and derivative liability.

 

Cash Flows

 

   Years Ended
December 31,
 
   2017   2016 
Net Cash (Used in) Operating Activities  $(401,214)  $(819,087)
           
Net Cash Provided by Financing Activities   482,039    713,610 

Net Change

  $80,825   $(105,477)

 

Net Cash Provided by (Used in) Operating Activities

 

Our primary uses of cash from operating activities include payments to consultants for research and development, compensation and related costs, legal and professional fees and other general corporate expenditures.

 

Cash used in operating activities consist of net loss adjusted for certain non-cash items, primarily equity-based compensation expense, common stock issued in exchange for services, accretion of debt discount and debt issuance costs on convertible notes and the change in fair value of derivative liabilities due primarily to the mark to market of the Company’s derivatives embedded in the convertible notes, and a gain of settlement of liabilities during the year ended December 31, 2017, as well as the effect of changes in working capital and other activities.

 

In addition, the net decrease in cash from changes in working capital activities from the year ended December 31, 2017 to the year ended December 31, 2016 primarily consisted of a decrease in inventory, a decrease in prepaid expenses and other current assets, an increase in accounts payable and accrued expenses, and an increase in customer deposits.

 

Net Cash Provided by Financing Activities

 

For the years ended December 31, 2017, financing activities provided cash of $482,039 which resulted from an increase of $245,500 in net proceeds from the issuance of common stock, $263,500 in proceeds from note payable. For the year ended December 31, 2016, financing activities provided $713,610 which resulted from an increase of $521,622 in proceeds from the issuance of convertible notes payable, and $300,000 in proceeds from issuance of asset based loans.

 

Going Concern

 

At December 31, 2017, we had an accumulated deficit of $31,632,972 and incurred a net loss of $5,233,519 for the year ended December 31, 2017. We expect to incur further losses in the development of our business, all of which casts substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to generate future profitable operations and/or to obtain the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

 

 33 

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

TABLE OF CONTENTS

 

    Page
Item 1. Consolidated Financial Statements  
  Reports of Independent Registered Public Accounting Firm F-1 - F-2
  Consolidated Balance Sheets as of December 31, 2017 and 2016 F-3
  Consolidated Statements of Operations for the Years ended December 31, 2017 and 2016 F-4
  Consolidated Statements of Stockholders’ Deficit for the Years ended December 31, 2017 and 2016 F-5
  Consolidated Statements of Cash Flows for the Years ended December 31, 2017 and 2016 F-6
  Notes to Consolidated Financial Statements F-7

 

 34 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of MyDx, Inc.:

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of MyDx, Inc. (“the Company”) as of December 31, 2017, the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year ended December 31, 2017 and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of its operations and its cash flows for the year ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

Explanatory Paragraph Regarding Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered recurring losses from operations, has a net capital deficiency and negative cash flows from operations, which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

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

 

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

 

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

 

We also have audited the re-classification to the 2016 consolidated financial statements of Series B preferred shares to temporary equity, as described in Note 4. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2016 consolidated financial statements of the Company other than with respect to this re-classification and, accordingly, we do not express an opinion or any other form of assurance on the 2016 consolidated financial statements taken as a whole.

 

/s/ Sadler, Gibb & Associates, LLC

 

We have served as the Company’s auditor since 2018. Salt Lake

City, UT

April 17, 2018

 

 

 

 F-1 

 

 

 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors

MyDx, Inc.

6335 Ferris Square, Suite B

San Diego, CA 92121

 

We have audited the accompanying consolidated balance sheet of MyDx, Inc. (the "Company") as of December 31, 2016 and their related consolidated statements of operations, changes in stockholders' deficit and cash flows for the for year then ended December 31, 2016. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company was not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2016, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3, the Company has recurring losses from operations and accumulated deficit for both years. These conditions, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Management's plans concerning these matters are also described in Note 3 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Anton & Chia, LLP

Newport Beach, CA

April 17, 2017

 

F-2
 

 

MyDx, Inc.

Consolidated Balance Sheets

 

   December 31,
2017
   December 31,
2016
 
ASSETS        
         
Current assets:        
Cash  $119,028   $38,203 
Accounts receivable, net   -    27,851 
Inventory   180,503    155,233 
Prepaid expenses and other current assets   821    79,965 
Total current assets   300,352    301,252 
           
Property and equipment, net   66,832    138,883 
           
Other assets   32,580    49,845 
Total assets  $399,764   $489,980 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
           
Current liabilities:          
Asset based loans  $-   $120,460 
Accounts payable   1,293,443    1,082,384 
Customer deposits   20,107    16,767 
Accrued liabilities   454,413    131,563 
Current portion of leases payable   2,756    3,480 
Due to related party   46,075    1,075 
Convertible notes payable, current, net of debt discount   295,750    233,147 
Derivative liability   2,596,005    1,812,441 
Warrant liability   -    247,203 
Total current liabilities   4,708,549    3,648,520 
           
Convertible note payable - related party   -    200,000 
Customer deposits   8,954    - 
Total liabilities   4,717,503    3,848,520 
           
Redeemable Series B Preferred stock, $0.001 par value; 10,000,000 shares authorized 296,700 and 300,000 shares issued and outstanding as of December 31, 2017 and 2016, respectively   5,637,300    5,700,000 
           
Commitments and contingencies          
           
Stockholders’ deficit:          
Series A Preferred stock, $0.001 par value; 51 and 51 shares issued and outstanding as of December 31, 2017 and 2016, respectively   -    - 
Common stock, $0.001 par value, 10,000,000,000 shares authorized; 1,859,397,541 and 645,060,704 shares issued and outstanding as of          
December 31, 2017 and 2016, respectively   1,859,397    645,061 
Additional paid-in capital   19,818,536    16,695,852 
Accumulated deficit   (31,632,972)   (26,399,453)
Total stockholders’ deficit   (9,955,039)   (9,058,540)
Total liabilities and stockholders’ deficit  $399,764   $489,980 

 

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

 

 F-3 

 

 

MYDX INC.

Consolidated Statements of Operations

 

 

   For the Year Ended
December 31,
 
   2017   2016 
Sales        
Product revenue  $398,401   $651,418 
Product service revenue   13,384    18,758 
Licensing revenue   8,829    138,000 
Total sales   420,614    808,176 
           
Cost of goods sold          
Product costs   114,616    481,349 
Total cost of sales   114,616    481,349 
           
Gross profit   305,998    326,827 
           
Operating Expenses          
Research and development   170,385    686,095 
Sales and marketing   968,687    1,967,786 
General and administrative   1,589,485    1,888,155 
Total operating expenses   2,728,557    4,542,036 
           
Loss from operations   (2,422,559)   (4,215,209)
           
Other income (expense)          
Interest expense, net   (341,068)   (2,723,187)
Change in fair value of derivative liability   (196,545)   (1,013,901)
Derivative expense   (1,987,888)   (2,464,439)
Gain (loss) on settlement of debt   179,276    (6,084,353)
Gain on forfeiture of technology transfer deposit   135,000    - 
Loss on extinguishment of debt   (599,735)   - 
           
Income (loss) before provision for income taxes   (5,233,519)   (16,501,089)
           
Provision for income taxes   -    800 
Net income (loss)   (5,233,519)   (16,501,889)
           
Dividends   (119,670)   - 
           
Net loss attributable to common shareholders  $(5,353,189)  $(16,501,889)
           
Income (loss) per share          
Basic  and diluted  $(0.00)  $(0.19)
           
Weighted average common shares outstanding - basic and diluted

1,539,192,898

    85,506,211 

 

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

 

 F-4 

 

 

MyDx, INC.

Consolidated Statements of Stockholders’ Deficit

For the Years Ended December 31, 2017 and 2016

 

   Convertible Preferred Stock Series A   Common Stock   Additional Paid-in   Accumulated   Stockholders’ 
   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
                             
Balances as of December 31, 2015   -    -    22,081,928    22,081    9,528,072    (9,897,564)   (347,411)
                                    
Common stock issued upon conversion of convertible notes   -    -    535,116,594    535,117    1,301,010         1,836,127 
                                    
Derivative cease to exist upon conversion of notes   -    -    -    -    4,321,381    -    4,321,381 
                                    
Issuance of common stock for services rendered   -    -    10,459,000    10,459    355,691    -    366,150 
                                    
Common stock issued to settle vendor liabilities             46,497,244    46,497    879,244    -    925,741 
                                    
Common and preferred stock issued to settle payroll liabilities   51    -    30,905,938    30,907    77,883    -    108,790 
                                    
Stock based compensation   -    -    -    -    232,271    -    232,271 
                                    
Net loss for year ended December 31, 2016   -    -    -    -    -    (16,501,889)   (16,501,889)
                                    
Balances as of December 31, 2016   51   $-    645,060,704   $645,061   $16,695,552   $(26,399,453)  $(9,058,840)
                                    
Proceeds from the issuance of common stock   -    -    50,000,000    50,000    195,500    -    245,500 
                                    
Conversion of series B preferred stock into common stock   -    -   33,000,000    33,000    29,700    -    62,700 
                                    
Common stock issued upon conversion of convertible notes   -    -    976,896,487    976,896    (19,873)   -    957,023 
                                    
Derivative cease to exist upon conversion of notes   -    -    -    -    1,845,677    -    1,845,677 
                                    
Issuance of common stock for services rendered   -    -    143,977,273    143,977    524,718    -    668,695 
                                    
Common stock issued to settle vendor liabilities   -    -    3,500,000    3,500    64,050    -    67,550 
                                    
Common issued to settle payroll liabilities   -    -    6,963,077    6,963    9,142    -    16,105 
                                    
Stock based compensation   -    -    -    -    473,770    -    473,770 
                                    
Net loss for year ended December 31, 2017   -    -    -    -    -    (5,233,519)   (5,254,938)
                                    
Balances as of December 31, 2017   51   $-    1,859,397,541   $1,859,397  $

19,818,536

   $(31,632,972)  $(9,955,039)

 

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

 

 F-5 

 

  

MyDx, INC.

Consolidated Statements of Cash Flows

  

   For the Year Ended
December 31,
 
   2017   2016 
Cash flows from operating activities:        
Net loss  $(5,233,519)  $(16,501,889)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   72,051    81,055 
Impairment of assets   -    13,126 
Common stock issued in exchange for services   668,695    366,150 
Change in fair value of derivative liability   196,545    1,013,901 
Derivative expense   1,987,888    2,464,439 
Loss on settlement of accrued payroll   -    5,691,993 
Loss on settlement of debt   (179,276)   - 
(Gain)/loss on settlement of vendor liabilities   473,770   392,360 
Stock based compensation   599,735    232,271 
Loss on extinguishment of debt   27,851    - 
Bad debt expense        - 
Interest expense related to amortization of debt issuance costs and debt discount   280,841    1,602,635 
Changes in assets and liabilities:          
Accounts receivable   -    (17,149)
Inventory   (25,270)   296,740 
Prepaid expenses and other assets   96,409    26,533 
Accounts payable and accrued liabilities   621,496    3,513,462 
Customer deposits   -    7,300 
Long term obligations   12,294    - 
Current portion leases payable   (724)   (2,014)
Net cash used in operating activities   (401,214)   (819,087)
           
Cash flows from financing activities          
Proceeds from the issuance of common stock   245,500    - 
Proceeds from related party loan   165,000    160,000 
Repayment of related party loans   (120,000)   (135,000)
Proceeds from note payable, net of debt discount and issuance costs   263,500    - 
Proceeds from the issuance of convertible notes payable, net of issuance costs   48,500    521,622 
Proceeds from issuance of asset based loans, net of issuance costs   -    300,000 
Repayments on asset based loans   (120,461)   (133,012)
Net cash provided by financing activities   482,039    713,610 
           
Net increase   80,825    (105,477)
           
Cash, beginning of period   38,203    143,680 
Cash, end of period  $119,028   $38,203 
           
Supplemental cash flow information:          
Interest paid  $13,755   $44,200 
Taxes paid  $-   $- 
           
Supplemental disclosure of non-cash investing and financing activities:          
Conversion of debt  $908,828   $1,836,127 
Derivative cease to exist upon conversion of notes  $1,845,677   $4,321,381 
Convertible notes issues through extinguishment of debt  $465,295   $- 
Debt discount recorded on convertible debt  $-   $2,207,842 

  

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

 

 F-6 

 

 

MyDx, INC.

Notes to Consolidated Financial Statements

  

1. Organization

 

MyDx, Inc. (the “Company”, “we”, “us” or “our”) (formally known as Brista Corp.) was incorporated under the laws of the State of Nevada on December 20, 2012. The Company’s wholly owned subsidiary, CDx, Inc., was incorporated under the laws of the State of Delaware on September 16, 2013.

 

2. Nature of Business

 

MyDx is a science and technology company that develops and deploys products and services in the following focus areas:

 

  1) Consumer Products – smart devices and consumables

 

  2) Data Analytics – pre-clinical chemical analysis and patient feedback ecosystem

 

  3) Biopharmaceuticals – identifying ‘green Active Pharmaceutical IngredientsTM, (gAPITM) and corresponding formulations

 

  4) Software as a Service (SaaS) – Software services for prescribers, patient groups, cultivators, and regulators

 

We are committed to addressing areas of critical national need to promote public safety, transparency and regulation in the various markets we serve.

 

The Company’s first product, MyDx®, also known as “My Diagnostic”, is a patented multiuse hand-held chemical analyzer made for consumers and professional users which feeds our data analytics platform and SaaS business. MyDx is intended to allow consumers to Trust & Verify® what they put into their mind and body by using our science and technology to test for pesticides in food, chemicals in water, toxins in the air, and the safety and potency of cannabis samples, which is our initial focus.

 

3. Going Concern

 

The Company has adopted ASU No. 2014-15, “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).

 

The Company’s consolidated financial statements have been prepared assuming it will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.

 

As reflected in the consolidated Financial Statements, the Company had an accumulated deficit at December 31, 2017, and a net loss for the year ended December 31, 2017. These factors raise substantial doubt about the Company’s ability to continue as a going concern. 

 

The Company is attempting to further implement its business plan and generate sufficient revenues; however, its cash position may not be sufficient to support its daily operations. The Company has a limited operating history and its prospects are subject to risks, expenses and uncertainties frequently encountered by early-stage companies. These risks include, but are not limited to, the uncertainty of availability of financing and the uncertainty of achieving future profitability. Management anticipates that the Company will be dependent, for the near future, on investment capital to fund operating expenses. The Company intends to position itself so that it may be able to raise funds through the capital markets. There can be no assurance that such financing will be available at terms acceptable to the Company, if at all. Failure to generate sufficient cash flows from operations, raise capital or reduce certain discretionary spending could have a material adverse effect on the Company’s ability to achieve its intended business objectives. We reported negative cash flow from operations for the year ended December 31, 2017 and 2016. It is anticipated that we will continue to report negative operating cash flow in future periods, likely until one or more of our products generates sufficient revenue to cover our operating expenses. If any of the warrants are exercised, all net proceeds of the warrant exercise will be used for working capital to fund negative operating cash flow.  

 

 F-7 

 

 

Our cash balance of $119,028 at December 31, 2017 will not be sufficient to fund our operations for the next 12 months. Additionally, if we are unable to generate sufficient revenues to pay our expenses, we will need to raise additional funds to continue our operations. We have historically financed our operations through private equity and debt financings. We do not have any commitments for financing at this time, and financing may not be available to us on favorable terms, if at all. If we are unable to obtain debt or equity financing in amounts sufficient to fund our operations, if necessary, we will be forced to suspend or curtail our operations. In that event, current stockholders would likely experience a loss of most or all of their investment. Additional funding that we do obtain may be dilutive to the interests of existing stockholders.

 

The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

4. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and include the accounts of the Company and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of the consolidated finance statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Such management estimates include allowance for doubtful accounts, estimates of product returns, warranty expense, inventory valuation, valuation allowances of deferred taxes, stock-based compensation expenses and fair value of warrants  and derivatives. The Company bases its estimates on historical experience and on assumptions that it believes are reasonable. The Company assesses these estimates on a regular basis; however, actual results could materially differ from those estimates. 

 

Concentration of Risk Related to Third-party Suppliers

 

We depend on a limited number of third-party suppliers for the materials and components required to manufacture our products. A delay or interruption by our suppliers may harm our business, results of operations, and financial condition, and could also adversely affect our future profit margins. In addition, the lead time needed to establish a relationship with a new supplier can be lengthy, and we may experience delays in meeting demand in the event we must change or add new suppliers. Our dependence on our suppliers exposes us to numerous risks, including but not limited to the following: our suppliers may cease or reduce production or deliveries, raise prices, or renegotiate terms; we may be unable to locate a suitable replacement supplier on acceptable terms or on a timely basis, or at all; and delays caused by supply issues may harm our reputation, frustrate our customers, and cause them to turn to our competitors for future needs.

 

 F-8 

 

 

Fair Value of Financial Instruments

 

The Company recognizes and discloses the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). Each level of input has different levels of subjectivity and difficulty involved in determining fair value.

 

  Level 1 Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurable date.
     
  Level 2 Inputs, other than quoted prices included in Level 1, that are observable for the asset or liability through corroboration with market data at the measurement date.
     
  Level 3 Unobservable inputs that reflect management’s best estimate of what participants would use in pricing the asset or liability at the measurement date.

 

The carrying amounts of the Company’s financial assets and liabilities, including cash, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the short maturity of these instruments. The carrying value of the Company’s loan payable and convertible notes payable approximates fair value based upon borrowing rates currently available to the Company for loans with similar terms.

 

Business Segments

 

ASC 280 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performances. Currently, ASC 280 has no effect on the Company’s consolidated financial statements as substantially all of the Company’s operations are conducted in one industry segment.

 

Cash

 

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. As of December 31, 2017 and 2016, the Company held no cash equivalents.

 

The Company’s policy is to place its cash with high credit quality financial instruments and institutions and limit the amounts invested with any one financial institution or in any type of instrument. Deposits held with banks may exceed the amount of insurance provided on such deposits. The Company has not experienced any losses on its deposits of cash.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are recorded at the invoiced amount and are not interest bearing. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company makes ongoing assumptions relating to the collectability of its accounts receivable in its calculation of the allowance for doubtful accounts. In determining the amount of the allowance, the Company makes judgments about the creditworthiness of customers based on ongoing credit evaluations and assesses current economic trends affecting its customers that might impact the level of credit losses in the future and result in different rates of bad debts than previously seen. The Company also considers its historical level of credit losses. As of December 31, 2017 and 2016, there was an allowance for doubtful accounts of $27,851 and $0 respectively.

 

During the year ended December 31, 2017 the company recorded a bad debt expense of $27,851.

 

Inventory

 

Inventory is stated at the lower of cost or market value. Inventory is determined to be salable based on demand forecast within a specific time horizon, generally eighteen months or less. Inventory in excess of salable amounts and inventory which is considered obsolete based upon changes in existing technology is written off. At the point of recognition, a new lower cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in the restoration or increase in that new cost basis. 

 

Property and Equipment

 

Property and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the useful life as follows:

 

Internal-use software  3 years
Equipment  3 to 5 years
Computer equipment  3 to 7 years
Furniture and fixtures  5 to 7 years
Leasehold improvements  Shorter of life of asset or lease

 

 F-9 

 

 

Accounting for Website Development Costs

 

The Company capitalizes certain external and internal costs, including internal payroll costs, incurred in connection with the development of its website. These costs are capitalized beginning when the Company has entered the application development stage and cease when the project is substantially complete and is ready for its intended use. The website development costs are amortized using the straight-line method over the estimated useful life of three years.

 

Impairment of Long-Lived Assets

 

Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheets and reported at the lower of the carrying amount or fair value less costs to sell, and no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheets.

 

Debt Discount and Debt Issuance Costs

 

Debt discounts and debt issuance costs incurred in connection with the issuance of debt are capitalized and amortized to interest expense based on the related debt agreements using the straight-line method. Unamortized discounts are netted against long-term debt.

 

Derivative Liability

 

In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Paragraph 815-15-25-1 the conversion feature and certain other features are considered embedded derivative instruments, such as a conversion reset provision, a penalty provision and redemption option, which are to be recorded at their fair value as its fair value can be separated from the convertible note and its conversion is independent of the underlying note value. The Company records the resulting discount on debt related to the conversion features at initial transaction and amortizes the discount using the effective interest rate method over the life of the debt instruments. The conversion liability is then marked to market each reporting period with the resulting gains or losses shown in the statements of operations.

 

In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. 

 

The Company follows ASC Section 815-40-15 (“Section 815-40-15”) to determine whether an instrument (or an embedded feature) is indexed to the Company’s own stock. Section 815-40-15 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. The adoption of Section 815-40-15 has affected the accounting for (i) certain freestanding warrants that contain exercise price adjustment features and (ii) convertible bonds issued by foreign subsidiaries with a strike price denominated in a foreign currency.

 

The Company evaluates its convertible debt, options, warrants or other contracts, if any, to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with paragraph 810-10-05-4 and Section 815-40-25 of the FASB Accounting Standards Codification. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statement of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then that the related fair value is reclassified to equity.

 

 F-10 

 

 

The Company utilizes the binomial option pricing model to compute the fair value of the derivative and to mark to market the fair value of the derivative at each balance sheet date. The binomial option pricing model includes subjective input assumptions that can materially affect the fair value estimates. The expected volatility is estimated based on the most recent historical period of time equal to the remaining contractual term of the instrument granted.

 

Income Taxes

 

Income taxes are provided in accordance with ASC No. 740, “Accounting for Income Taxes”. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carry forwards. Deferred tax expense (benefit) results from the net change during the period of deferred tax assets and liabilities.

 

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

The Company is no longer subject to tax examinations by tax authorities for years prior to 2013.

 

Product revenue

 

The Company recognizes revenue when four revenue recognition criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred, or services have been rendered; the seller’s price to the buyer is fixed or determinable; and collectability is reasonably assured. In accordance with ASC 605-20 revenue from multiple-element arrangements is allocated among separate elements based on their estimated sales prices, provided the elements have value on a stand-alone basis.

 

Licensing revenue

 

Revenue is generally recognized when:

 

Evidence of an arrangement exists;
   
Delivery has occurred;
   
Fees are fixed or determinable; and
   
Collection is considered probable.

 

Some of the Company’s revenues are generated from software-as-a-service (“SaaS”) subscription offerings and related product support and maintenance. SaaS revenues stem mainly from annual subscriptions and are recorded evenly over the term of the subscription. Any customer payments received in advance are deferred until they are earned. Consulting and training revenues are recognized as work is performed.

 

Product Returns

 

For any product in its original, undamaged and unmarked condition, with its included accessories and packaging along with the original receipt (or gift receipt) within 30 days of the date the customer receives the product, the Company will exchange it or offer a refund based upon the original payment method.

 

Customer Deposits

 

The Company accounts for funds received from crowdfunding campaigns and pre-sales as a liability on the consolidated balance sheets as the investments made entitle the investor to apply these funds towards future shipments once the product has been developed and available for commercial use. 

 

Research and Development Costs

 

Research and development costs are charged to expense as incurred. These costs consist primarily of salaries and direct payroll-related costs. It also includes purchased materials and services provided by independent contractors, software developed by other companies and incorporated into or used in the development of our final products. Research and development expenses for the year ended December 31, 2017 and 2016 were $170,385 and $686,095, respectively.

 

Advertising Costs

 

Advertising costs are charged to sales and marketing expenses and general and administrative expenses as incurred. Advertising expenses, which are recorded in sales and marketing and general and administrative expenses, totaled $968,687 and $98,219 for the year ended December 31, 2017 and 2016, respectively.

 

 F-11 

 

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation in accordance with ASC Topic 718, “Compensation – Stock Compensation” (“ASC 718”) which establishes financial accounting and reporting standards for stock-based employee compensation. It defines a fair value based method of accounting for an employee stock option or similar equity instrument. Accordingly, stock-based compensation is recognized in the consolidated statements of operations as an operating expense over the requisite service period. The Company uses the Black-Scholes option pricing model adjusted for the estimated forfeiture rate for the respective grant to determine the estimated fair value of stock-based compensation arrangements on the date of grant and expenses this value ratably over the requisite service period of the stock option. The Black-Scholes option pricing model requires the input of highly subjective assumptions. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models may not provide a reliable single measure of the fair value of the Company’s stock options. In addition, management will continue to assess the assumptions and methodologies used to calculate estimated fair value of stock-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies for future grants, and which could materially impact the Company’s fair value determination.

 

The Company accounts for share-based payments to non-employees in accordance with ASC 505-50 “Equity Based Payments to Non-Employees”. If the equity instrument is a stock option, the Company uses the Black-Scholes option pricing model to determine the fair value. Assumptions used to value the equity instruments are consistent with equity instruments issued to employees as the terms of the awards are similar. The Company recognizes the fair value of the equity instruments as expense over the term of the service agreement and revalues that fair value at each reporting period over the vesting periods of the equity instruments.

 

Warranty

 

The Company provides a limited warranty for its analyzers and sensors for a period of 1 year from the date of shipment that such goods will be free from material defects in material and workmanship. The Company has assessed the historical claims and, to date, warranty claims have not been significant. The Company will continue to assess the need to record a warranty accrual at the time of sale going forward.

 

Collaborative Arrangements

 

The Company and its collaborative partners are active participants in the collaborative arrangements and both parties are exposed to significant risks and rewards depending on the commercial success of the activity. The Company records all expenses related to collaborative arrangements as research and development expense in the consolidated statements of operations as incurred. 

 

Net Loss per Share

 

Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, which is the case for the year ended December 31, 2017 and 2016 presented in these consolidated financial statements, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. 

 

The Company had the following common stock equivalents at December 31, 2017 and 2016:

  

   December 31, 2017   December 31, 2016 
Series A Preferred stock   51    51 
Series B Preferred stock   2,967,000,000    3,000,000,000 
Convertible notes payable   66,584,538    357,384,725 
Convertible accounts payable   312,821,828    284,210,526 
Options   1,496,250    1,490,026 
Warrants  261,837,676    7,571,395 
Totals  3,609,740,343   3,650,656,723 

  

 F-12 

 

 

Subsequent events

 

The Company has evaluated events that occurred subsequent to December 31, 2017 and through the date the financial statements were issued.

 

Revised Prior Period Amounts 

 

Certain prior year amounts in the consolidated financial statements and the notes thereto have been reclassified where necessary to conform to the current year presentation. The Company identified and recorded an out-of-period adjustment related to redeemable series B preferred stock that should have been recorded in temporary equity during year ended December 31, 2016. The adjustment was reflected as a $5,699,700 increase in redeemable series B preferred stock and corresponding decrease in Additional paid-in capital. See Note 10.

 

Recently Adopted Accounting Guidance

 

In May 2014, the FASB issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The standard’s core principle (issued as ASU 2014-09 by the FASB), is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The new guidance must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU 2014-09 by one year, and would allow entities the option to early adopt the new revenue standard as of the original effective date. This ASU is effective for public reporting companies for interim and annual periods beginning after December 15, 2016. The standard permits the use of either the retrospective or cumulative effect transition method. The adoption of ASU 2014-15 will not materially impact our consolidated financial position, results of operations or cash flows.

 

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” ASU 2014-15 provides guidance on management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. The amendments in ASU 2014-15 are effective for annual reporting periods ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. The Company has elected to adopt the methodologies prescribed by ASU 2014-15. The adoption of ASU 2014-15 had no material effect on its financial position or results of operations.

 

In March 2015, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the amendments is permitted for financial statements that have not been previously issued. The amendments should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. These disclosures include the nature of and reason for the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on the financial statement line items (i.e., debt issuance cost asset and the debt liability). The Company adopted ASU 2015-03 during the year ended December 31, 2016. The adoption of ASU 2015-03 had no material effect on its financial position or results of operations or cash flows. 

 

 F-13 

 

 

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”, which modifies existing requirements regarding measuring inventory at the lower of cost or market. Under current inventory standards, the market value requires consideration of replacement cost, net realizable value and net realizable value less an approximately normal profit margin. The new guidance replaces market with net realizable value defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This eliminates the need to determine and consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory. The standard is required to be adopted for annual periods beginning after December 15, 2016, including interim periods within that annual period, which is our fiscal year 2018. The amendment is to be applied prospectively with early adoption permitted. The adoption of ASU 2015-11 will not have a material effect on its financial position or results of operations or cash flows.

 

In April 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation” (topic 718). The FASB issued this update to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The updated guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption of the update is permitted. The adoption of ASU 2016-09 will not have a material effect on its financial position or results of operations or cash flows.

 

In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing” (topic 606). In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross verses Net)” (topic 606). These amendments provide additional clarification and implementation guidance on the previously issued ASU 2014-09, “Revenue from Contracts with Customers”. The amendments in ASU 2016-10 provide clarifying guidance on materiality of performance obligations; evaluating distinct performance obligations; treatment of shipping and handling costs; and determining whether an entity’s promise to grant a license provides a customer with either a right to use an entity’s intellectual property or a right to access an entity’s intellectual property. The amendments in ASU 2016-08 clarify how an entity should identify the specified good or service for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. The adoption of ASU 2016-10 and ASU 2016-08 is to coincide with an entity’s adoption of ASU 2014-09, which we intend to adopt for interim and annual reporting periods beginning after December 15, 2017. The adoption of ASU 2016-10 will not have a material effect on its financial position or results of operations or cash flows.

 

In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”, which narrowly amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition and is effective during the same period as ASU 2014-09. The adoption of ASU 2016-12 won’t have a material effect on its financial position or 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” (“ASU 2016-15”). ASU 2016-15 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 fiscal years beginning after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The adoption of ASU 2016-15 won’t have a material effect on its financial position or results of operations or cash flows. 

 

Recent Accounting Guidance Not Yet Adopted

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” Under ASU 2016-02, lessees will be required to recognize, for all leases of 12 months or more, a liability to make lease payments and a right-of-use asset representing the right to use the underlying asset for the lease term. Additionally, the guidance requires improved disclosures to help users of financial statements better understand the nature of an entity’s leasing activities. This ASU is effective for public reporting companies for interim and annual periods beginning after December 15, 2018, with early adoption permitted, and must be adopted using a modified retrospective approach. The Company is in the process of evaluating the effect of the new guidance on its consolidated financial statements and disclosures.

 

 F-14 

 

 

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory”, which eliminates the exception that prohibits the recognition of current and deferred income tax effects for intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. The updated guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the impact of the new standard.

 

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230)”, requiring that the statement of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach which requires application of the guidance for all periods presented. The Company is currently evaluating the impact of the new standard.

 

 In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting,” which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This standard is required to be adopted in the first quarter of 2018. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.

 

In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception”. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.

 

Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying consolidated financial statements.

 

5. Inventory

 

Inventory as of December 31, 2017 and 2016 is as follows:

 

   December 31,   December 31, 
   2017   2016 
Finished goods  $49,889   $3,033 
Raw materials   130,614    152,200 
   $180,503   $155,233 

 

 F-15 

 

 

6. Property and Equipment, net

 

   December 31,   December 31, 
   2017   2016 
Computer and test equipment  $198,684   $198,684 
Website development costs   39,870    39,870 
Furniture and fixtures   26,948    26,948 
Software   10,791    10,791 
Leasehold improvements   18,288    18,288 
    294,581    294,581 
Accumulated depreciation and amortization   (227,749)   (155,698)
   $66,832   $138,883 

 

Depreciation expense was $72,051 and $80,469 for the year ended December 31, 2017 and 2016, respectively.

 

For the year ended December 31, 2016 the Company recorded an impairment of assets totaling $13,127 for assets that the Company no longer uses.

 

7.Accrued Liabilities

 

Accrued liabilities consisted of the following as of December 31, 2017 and 2016.

 

   December 31,   December 31, 
   2017   2016 
Accrued compensation for employees  $333,048   $71,351 
Deferred compensation to non-employee   11,673    45,086 
Accrued interest on notes payable   50,853    9,727 
Other payables   58,839    5,399 
   $454,410   $131,563 

 

8. Debt

 

Asset Based Loans

 

On September 16, 2016, CDx, Inc. (the Company’s wholly owned subsidiary) entered into a Business Loan Agreement (the “Agreement”) with WebBank providing for the granting of a security interest in properties, assets and rights (the “Collateral”) as defined in the agreement. CDx, Inc. received net proceeds of $150,000. There were no loan origination or administrative fees related to the funding. The agreement has a maturity date that is 432 days after the effective date of the Agreement and requires equal weekly payments of $599 which includes a total finance fee of $34,500 over the life of the Agreement. The Agreement is personally guaranteed by an officer and majority shareholder of the Company. The outstanding balance at December 31, 2017 and 2016 was $0 and $89,304 respectively.

 

On May 31, 2016, CDx, Inc. (the Company’s wholly owned subsidiary) entered into a Promissory Note and Security Agreement (the “Note”) with Windset Capital Corporation, whereby CDx, Inc. gives, grants and assigns a continuing security interest in all of CDx, Inc.’s business equipment, accounts receivable, intellectual property, rights, licenses, claims, assets and properties of any kind whatsoever, whether now owned or hereafter acquired, real, personal, tangible, intangible or of any nature or value, wherever located, together with all proceeds including insurance proceeds as defined in the Note. There was an origination fee of $200 related to the financing. CDx, Inc. received net proceeds of $74,800 from the funding. The Note has a maturity date that is 252 business days from the date of the Note and requires payments of $360 each business day, as defined in the Note, which includes a total finance fee of $15,750 over the life of the Note. The Note is personally guaranteed by an officer and majority shareholder of the Company. The outstanding balance at December 31, 2017 and 2016 was $0 and $0 respectively.

  

 F-16 

 

 

On May 31, 2016, CDx, Inc. (the Company’s wholly owned subsidiary) entered into a Future Receivables Sale Agreement (the “Agreement”) with Swift Financial Corporation granting a security interest, as defined in the Agreement, in CDx, Inc.’s present and future accounts, receivables, chattel paper, deposit accounts, personal property, goods, assets and fixtures, general intangibles, instruments, equipment and inventory. There was an origination fee of $1,875 related to the financing. CDx, Inc. received net proceeds of $73,125 from the funding. The Agreement requires 48 equal weekly payments of $1,842 resulting in total repayment of $88,425 which includes a finance fee of $13,425. The total repayment amount can be reduced to $85,425 solely in the event CDx, Inc. pays this amount on or before October 3, 2016. The Agreement is personally guaranteed by an officer and majority shareholder of the Company. The outstanding balance at December 31, 2017 and 2016 was $0 and $31,156 respectively.

 

Convertible Notes

 

   December 31,   December 31, 
   2017   2016 
Convertible Note -May 24, 2016  $-   $21,900 
Convertible Note -August 9, 2016   -    35,000 
Convertible Note – October 5, 2016   -    363,768 
Convertible Note -November 14, 2016   -    35,000 
Convertible Note -November 29, 2016   -    63,260 
Convertible Note - February 6, 2017   295,750      
Less debt discount and debt issuance costs   (13,950)   (285,781)
Total  $281,800   $233,147 

  

The Company amortized debt discount and debt issuance costs of $280,841 and $1,602,635 for the year ended December 31, 2017 and 2016 respectively. 

 

On December 22, 2015, the Company completed a financing pursuant to a Securities Purchase Agreement with Adar Bays, LLC (“Adar Bays”) providing for the issuance of two convertible promissory notes in the aggregate principal amount of $220,000, with the first note being in the amount of $110,000, and the second note being in the amount of $110,000 (the “Note” or “Notes”). The Notes contain a 10% original issue discount such that the purchase price of each Note is $100,000. The first Note was funded on December 22, 2015 and is due and payable on December 21, 2017. The second Note shall initially be paid for by the issuance of an offsetting $100,000 collateralized secured note issued by Adar Bays to the Company due and payable no later than August 21, 2016. The funding of the second Note is subject to certain conditions, and the Company may reject the closing of the second Note in its discretion. The Notes bear interest at the rate of 8% per annum and may be converted by Adar Bays at any time after the date which is nine months of the date of issuance into shares of Company common stock at a conversion price equal to 60% of the market price (as determined in the Notes) calculated at the time of conversion. The Company did not book a beneficial conversion feature in connection with the issuance of the Notes, as terms of the conversion are variable and the ultimate number of shares to be issued upon conversion could not be determined at the date the Notes were issued. As such, upon conversion of the Notes the number of shares will be determined and the Company will evaluate whether or not a beneficial conversion feature exists based on the conversion price compared to the price of the Company’s common stock at the date of issuance of the Notes. The Notes also contain certain representations, warranties, covenants and events of default, and increases in the amount of the principal and interest rates under the Notes in the event of such defaults. The Notes may be prepaid by the Company at any time prior to 180 days after the date of issuance of the Notes subject to the payment of prepayment penalties as described in the Notes. The foregoing is only a brief description of the material terms of the Securities Purchase Agreement and Notes, and does not purport to be a complete description of the rights and obligations of the parties thereunder, and such descriptions are qualified in their entirety by reference to the agreements which are filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on December 24, 2015. The issuance of the Notes was made in reliance on the exemption provided by Section 4(2) of the Securities Act for the offer and sale of securities not involving a public offering, and Regulation D promulgated under the Securities Act. The Company’s reliance upon Section 4(2) of the Securities Act in issuing the securities was based upon the following factors: (a) the issuance of the securities was an isolated private transaction by us which did not involve a public offering; (b) there was only one recipient; (c) there were no subsequent or contemporaneous public offerings of the securities by the Company; (d) the securities were not broken down into smaller denominations; (e) the negotiations for the issuance of the securities took place directly between the individual and the Company; and (f) the recipient of the Notes was an accredited investor. The Company recorded the original issue discount of $10,000 as debt issuance cost on its balance sheet which is netted against the face value of the Note and is being accreted over the term of the Note. For the year ended December 31, 2016, the Company amortized a total of $7,510 and $10,000, respectively, of the debt issuance cost. During the year ended December 31, 2016, the Note holder converted the Note and accrued unpaid interest into 7,142,526 share of the Company’s common stock.

 

 F-17 

 

 

On June 22, 2016, MyDx, Inc. (the “Company”) and Adar Bays, LLC (“Adar Bays”) agreed to amend the Company’s 8% Convertible Promissory Note in the principal amount of $110,000 (the “Adar Bays Amendment”), issued pursuant to that certain Securities Purchase Agreement, dated December 21, 2015, entered into by and between the Company and Adar Bays, as previously disclosed in a report on Form 8-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on December 24, 2015.

 

Pursuant to the Adar Bays Amendment, the Company agreed to redeem the note by paying 140% of the principal amount plus accrued but unpaid interests to Adar Bays, for a total redemption amount of $158,424.44, pursuant to the payment schedule set forth in the Adar Bays Amendment. In addition, the Company paid 5% of the original principal amount to Adar Bays as consideration for entering into the amendment.

 

Adar Bays agrees not to convert the note unless the Company defaults on the payment of the redemption amount and such default is not cured within fifteen (15) business days. If the Company defaults on the redemption payment and such default is not cured as mentioned above, then the amendment shall be deemed null and void and of no further force or effect. In such event, the allocated payment made by the Company shall be applied pursuant to the payment schedule set forth in the Adar Bays Amendment.

 

On July 29, 2016, the Company and Adar Bays agreed to terminate the standstill portion of the Adar Bays Amendment pertaining to the standstill conversion rights and Adar Bays shall be free to convert the Note without any limitations, except as required by law. All other terms and conditions of the Note and the Adar Bays Amendment shall remain in full force and effect.

 

On August 16, 2016, the Company executed a second note with Adar Bays in the amount of $27,500 as part of the original Securities Purchase Agreement completed on December 22, 2015. The Note contains a 10% original issue discount and a documentation fee of $1,000 such that the purchase price of the Note $23,750. The note matures on August 9, 2017. The Note bears interest at the rate of 8% per annum and may be converted by Adar Bays at any time after the date which is six months of the issuance date of the original note dated December 22, 2015 into shares of Company common stock at a conversion price equal to 60% of the market price (as determined in the Notes) calculated at the time of conversion. The Company did not book a beneficial conversion feature in connection with the issuance of the Notes, as terms of the conversion are variable and the ultimate number of shares to be issued upon conversion could not be determined at the date the Notes were issued. As such, upon conversion of the Notes the number of shares will be determined and the Company will evaluate whether or not a beneficial conversion feature exists based on the conversion price compared to the price of the Company’s common stock at the date of issuance of the Notes. The Notes also contain certain representations, warranties, covenants and events of default, and increases in the amount of the principal and interest rates under the Notes in the event of such defaults. The Note may not be prepaid by the Company. The foregoing is only a brief description of the material terms of the Securities Purchase Agreement and Notes, and does not purport to be a complete description of the rights and obligations of the parties thereunder, and such descriptions are qualified in their entirety by reference to the agreements which are filed as an exhibit to the Company’s Report on Form 8-K filed with the SEC on December 24, 2015. The issuance of the Note was made in reliance on the exemption provided by Section 4(2) of the Securities Act for the offer and sale of securities not involving a public offering, and Regulation D promulgated under the Securities Act. The Company’s reliance upon Section 4(2) of the Securities Act in issuing the securities was based upon the following factors: (a) the issuance of the securities was an isolated private transaction by us which did not involve a public offering; (b) there was only one recipient; (c) there were no subsequent or contemporaneous public offerings of the securities by the Company; (d) the securities were not broken down into smaller denominations; (e) the negotiations for the issuance of the securities took place directly between the individual and the Company; and (f) the recipient of the Notes was an accredited investor. The Company recorded the original issue discount of $2,750 as debt issuance cost on its balance sheet which is netted against the face value of the Note and is being accreted over the term of the Note. For the year ended December 31, 2016, the Company amortized a total of $2,750, of the debt issuance cost.

 

During the year ended December 31, 2016, the Note holder elected to convert the Note and accrued and unpaid interest into 3,107,345 shares of the Company’s common stock.

 

 F-18 

 

 

On September 19, 2016, the Company executed a third note with Adar Bays in the amount of $80,000 as part of the original Securities Purchase Agreement completed on December 22, 2015. The Note contains $5,000 of original issue discount and a documentation fee of $3,750 such that the purchase price of the Note $71,250. The Note matures on September 19, 2017. The Note bears interest at the rate of 8% per annum and may be converted by Adar Bays at any time after the date which is six months of the issuance date of the original note dated December 22, 2015 into shares of Company common stock at a conversion price equal to 60% of the market price (as determined in the Notes) calculated at the time of conversion. The Company did not book a beneficial conversion feature in connection with the issuance of the Notes, as terms of the conversion are variable and the ultimate number of shares to be issued upon conversion could not be determined at the date the Notes were issued. As such, upon conversion of the Notes the number of shares will be determined and the Company will evaluate whether or not a beneficial conversion feature exists based on the conversion price compared to the price of the Company’s common stock at the date of issuance of the Notes. The Notes also contain certain representations, warranties, covenants and events of default, and increases in the amount of the principal and interest rates under the Notes in the event of such defaults. The Notes may not be prepaid by the Company. The foregoing is only a brief description of the material terms of the Securities Purchase Agreement and Notes, and does not purport to be a complete description of the rights and obligations of the parties thereunder, and such descriptions are qualified in their entirety by reference to the agreements which are filed as an exhibit to the Company’s Report on Form 8-K filed with the SEC on December 24, 2015. The issuance of the Note was made in reliance on the exemption provided by Section 4(2) of the Securities Act for the offer and sale of securities not involving a public offering, and Regulation D promulgated under the Securities Act. The Company’s reliance upon Section 4(2) of the Securities Act in issuing the securities was based upon the following factors: (a) the issuance of the securities was an isolated private transaction by us which did not involve a public offering; (b) there was only one recipient; (c) there were no subsequent or contemporaneous public offerings of the securities by the Company; (d) the securities were not broken down into smaller denominations; (e) the negotiations for the issuance of the securities took place directly between the individual and the Company; and (f) the recipient of the Notes was an accredited investor. The Company recorded the original issue discount of $2,750 as debt issuance cost on its balance sheet which is netted against the face value of the Note and is being accreted over the term of the Note. For the year ended December 31, 2016, the Company amortized a total of $3,250, of the debt issuance cost.

 

During the year ended December 31, 2016, the Note holder elected to convert a portion of the Note into 12,045,545 shares of the Company’s common stock. As of December 31, 2016, the Note had an outstanding balance of $0. The Company amortized the entire balance of the debt issuance cost since the Note was converted in the year ended December 31, 2016.

 

On December 22, 2015, the Company completed a financing pursuant to a Securities Purchase Agreement with Union Capital, LLC (“Union Capital”) providing for the purchase of two convertible promissory notes in the aggregate principal amount of $220,000, with the first note being in the amount of $110,000, and the second note being in the amount of $110,000 (the “Note” or “Notes”). The Notes contain a 10% original issue discount such that the purchase price of each Note is $100,000. The first Note was funded on December 22, 2015 and is due and payable on December 21, 2017. The second Note shall initially be paid for by the issuance of an offsetting $100,000 collateralized secured note issued by Union Capital to the Company due and payable no later than August 21, 2016. The funding of the second Note is subject to certain conditions and the Company may reject the closing of the second Note in its discretion. The Notes bear interest at the rate of 8% per annum; are due and payable on December 21, 2017; and may be converted by Union Capital at any time after the date which is nine months of the date of issuance into shares of Company common stock at a conversion price equal to 60% of the market price (as determined in the Notes) calculated at the time of conversion. The Company did not book a beneficial conversion feature in connection with the issuance of the Notes, as terms of the conversion are variable and the ultimate number of shares to be issued upon conversion could not be determined at the date the Notes were issued. As such, upon conversion of the Notes the number of shares will be determined and the Company will evaluate whether or not a beneficial conversion feature exists based on the conversion price compared to the price of the Company’s common stock at the date of issuance of the Notes. The Notes also contain certain representations, warranties, covenants and events of default, and increases in the amount of the principal and interest rates under the Notes in the event of such defaults. The Notes may be prepaid by the Company at any time prior to 180 days after the date of issuance of the Notes subject to the payment of prepayment penalties as described in the Notes. The foregoing is only a brief description of the material terms of the Securities Purchase Agreement and Notes, and does not purport to be a complete description of the rights and obligations of the parties thereunder, and such descriptions are qualified in their entirety by reference to the agreements which are filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on December 24, 2015. The issuance of the Notes was made in reliance on the exemption provided by Section 4(2) of the Securities Act for the offer and sale of securities not involving a public offering, and Regulation D promulgated under the Securities Act. The Company’s reliance upon Section 4(2) of the Securities Act in issuing the securities was based upon the following factors: (a) the issuance of the securities was an isolated private transaction by us which did not involve a public offering; (b) there was only one recipient; (c) there were no subsequent or contemporaneous public offerings of the securities by the Company; (d) the securities were not broken down into smaller denominations; (e) the negotiations for the issuance of the securities took place directly between the individual and the Company; and (f) the recipient of the Notes was an accredited investor. The Company recorded the original issue discount of $10,000 as debt issuance cost on its balance sheet which is netted against the face value of the Note and will be accreted over the term of the Note. For the year ended December 31, 2016, the Company amortized a total of $9,863, of the debt issuance cost. As of December 31, 2016, the Note had outstanding balances of $0, and remaining unamortized debt discount of $0.

 

 F-19 

 

 

During the year ended December 31, 2016, the Note holder elected to convert the Note and accrued interest of $104,500 into 7,107,376 share of the Company’s common stock.

 

On June 22, 2016, the Company and Union Capital, LLC (“Union Capital”) agreed to amend the Company’s 8% Convertible Promissory Note in the principal amount of $110,000 (the “Union Capital Amendment”), issued pursuant to that certain Securities Purchase Agreement, dated December 21, 2015, entered into by and between the Company and Union Capital, as previously disclosed in a report on Form 8-K filed with the SEC on December 24, 2015.

 

On July 29, 2016, the Company and Union Capital agreed to terminate the standstill portion of the Union Capital Amendment pertaining to the standstill conversion rights and Union capital shall be free to convert the Note without any limitations, except as required by law. All other terms and conditions of the Note and the Union Capital Amendment shall remain in full force and effect.

 

Pursuant to the Union Capital Amendment, the Company agreed to redeem the note by paying 140% of the principal amount plus accrued but unpaid interests to Union Capital, for a total redemption amount of $158,363.84, pursuant to the payment schedule set forth in the Union Capital Amendment. In addition, the Company paid 5% of the original principal amount to Union Capital as consideration for entering into the amendment.

 

Union Capital agreed not to convert the note unless the Company defaults on the payment of the redemption amount and such default is not cured within fifteen (15) business days. If the Company defaults on the redemption payment and such default is not cured as mentioned above, then the amendment shall be deemed null and void and of no further force or effect. In such event, the allocated payment made by the Company shall be applied pursuant to the payment schedule set forth in the Union Capital Amendment.

 

During the year ended December 31, 2016, the Note holder elected to convert the Note and unpaid interest into 7,670,457 shares of the Company’s common stock.

 

On September 19, 2016, the Company executed a second Note in the amount of $110,000 with Union Capital LLC as part of the financing pursuant to a Securities Purchase Agreement with Union Capital, LLC dated December 15, 2015. The Note contains a 10% original issue discount and a $5,000 documentation fee such that the purchase price of each Note is $95,000. The Note is due and payable not later than September 19, 2017. The Notes bear interest at the rate of 8% per annum; are due and payable on September 19, 2017; and may be converted by Union Capital at any time after the date which is nine months of the issuance date of the original note dated December 22, 2015 into shares of Company common stock at a conversion price equal to 60% of the market price (as determined in the Notes) calculated at the time of conversion. The Company did not book a beneficial conversion feature in connection with the issuance of the Notes, as terms of the conversion are variable and the ultimate number of shares to be issued upon conversion could not be determined at the date the Notes were issued. As such, upon conversion of the Notes the number of shares will be determined and the Company will evaluate whether or not a beneficial conversion feature exists based on the conversion price compared to the price of the Company’s common stock at the date of issuance of the Notes. The Notes also contain certain representations, warranties, covenants and events of default, and increases in the amount of the principal and interest rates under the Notes in the event of such defaults. The Notes may be prepaid by the Company at any time prior to 180 days after the date of issuance of the Notes subject to the payment of prepayment penalties as described in the Notes. The foregoing is only a brief description of the material terms of the Securities Purchase Agreement and Notes, and does not purport to be a complete description of the rights and obligations of the parties thereunder, and such descriptions are qualified in their entirety by reference to the agreements which are filed as an exhibit to the Company’s Report on Form 8-K filed with the SEC on December 24, 2015. The issuance of the Notes was made in reliance on the exemption provided by Section 4(2) of the Securities Act for the offer and sale of securities not involving a public offering, and Regulation D promulgated under the Securities Act. The Company’s reliance upon Section 4(2) of the Securities Act in issuing the securities was based upon the following factors: (a) the issuance of the securities was an isolated private transaction by us which did not involve a public offering; (b) there was only one recipient; (c) there were no subsequent or contemporaneous public offerings of the securities by the Company; (d) the securities were not broken down into smaller denominations; (e) the negotiations for the issuance of the securities took place directly between the individual and the Company; and (f) the recipient of the Notes was an accredited investor. The Company recorded the original issue discount of $10,000 as debt issuance cost on its balance sheet which is netted against the face value of the Note and will be accreted over the term of the Note. For the year ended December 31, 2016, the Company amortized a total of $10,000 of the debt issuance cost.

 

 F-20 

 

 

During the year ended December 31, 2016, the Note holder elected to convert $63,500 of the Note into 16,487,510 shares of the Company’s common stock. As of December 31, 2016, the Note had an outstanding balance of $0 and remaining unamortized debt discount of $0.

 

On December 10, 2015, the Company entered into a Securities Purchase Agreement (the “SPA”) and Convertible Promissory Note in the original principal amount of $60,000 (the “Note”) with Kodiak Capital Group, LLC (“Kodiak”) pursuant to which Kodiak funded $50,000 to the Company after the deduction of a $10,000 original issue discount. The Note bears interest at the rate of 12% and must be repaid on or before December 20, 2016. The Note may be prepaid by the Company at any time without penalty prior to the date which is 180 days after the date of issuance of the Note. The Note may be converted by Kodiak at any time after 180 days of the date of issuance into shares of Company common stock at a conversion price equal to 50% of the market price (as determined in the Note). The Company did not book a beneficial conversion feature in connection with the issuance of the Notes, as terms of the conversion are variable and the ultimate number of shares to be issued upon conversion could not be determined at the date the Notes were issued. As such, upon conversion of the Notes the number of shares will be determined and the Company will evaluate whether or not a beneficial conversion feature exists based on the conversion price compared to the price of the Company’s common stock at the date of issuance of the Notes. The SPA and Note also contain certain representations, warranties, covenants and events of default, and increases in the amount of the principal and interest rates under the Note in the event of such defaults. The foregoing is only a brief description of the material terms of the SPA and Note, and does not purport to be a complete description of the rights and obligations of the parties thereunder, and such descriptions are qualified in their entirety by reference to the agreements and their exhibits which are filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on December 16, 2015. The Company recorded the original issue discount of $10,000 as debt issuance cost on its balance sheet which is netted against the face value of the Note and will be accreted over the term of the Note. For the nine months ended December 31, 2016, the Company amortized a total of $9,426 of the debt issuance cost. The Note was redeemed on June 6, 2016.

 

The issuance of the Note was made in reliance on the exemption provided by Section 4(2) of the Securities Act for the offer and sale of securities not involving a public offering, and Regulation D promulgated under the Securities Act. The Company’s reliance upon Section 4(2) of the Securities Act in issuing the securities was based upon the following factors: (a) the issuance of the securities was an isolated private transaction by us which did not involve a public offering; (b) there was only one recipient; (c) there were no subsequent or contemporaneous public offerings of the securities by the Company; (d) the securities were not broken down into smaller denominations; (e) the negotiations for the issuance of the securities took place directly between the individual and the Company; and (f) the recipient of the Note was an accredited investor.

 

The EPA provides that the Company may, in its discretion, sell up to $1,000,000 of shares of Company common stock to Kodiak. The sale of shares of Company common stock is subject to the conditions set forth in the EPA, which include, but are not limited to, the Company filing a Registration Statement on Form S-1 to register the shares to be sold to Kodiak and the Registration Statement becoming effective. The purchase price to be paid for the shares will be 70% of the market price for such shares as determined pursuant to the terms set forth in the EPA. The RRA provides that the Company will file a Registration Statement to register up to 4,000,000 shares to be sold to Kodiak pursuant to the EPA, or issued to Kodiak upon conversion of the Note, and that the Company shall use commercially reasonable efforts to file the Registration Statement before March 31, 2016. Pursuant to the terms of the EPA, the Company agreed to issue Kodiak the Note as a commitment fee. The Note must be repaid on or before February 2, 2017. The Note may be prepaid by the Company at any time without penalty. The Note may be converted by Kodiak at any time after August 2, 2016 into shares of Company common stock at a conversion price equal to 50% of the market price (as determined in the Note). Any financing pursuant to the EPA is subject to the Company’s fulfilling the conditions to sell shares to Kodiak, including the effectiveness of the Registration Statement. The Company cannot provide any assurances that any shares will be sold under the EPA or the prices at which such shares may be sold.

 

 F-21 

 

 

The EPA, RRA and Note also contain certain representations, warranties, covenants and events of default, and increases in the amount of the principal under the Note in the event of such defaults. The foregoing is only a brief description of the material terms of the EPA, RRA and Note, and does not purport to be a complete description of the rights and obligations of the parties thereunder, and such descriptions are qualified in their entirety by reference to the agreements and their exhibits which are filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on February 9, 2016. The Company recorded the original issue discount of $10,000 as debt issuance cost on its balance sheet which is netted against the face value of the Note and will be accreted over the term of the Note. For the year months ended December 31, 2016, the Company amortized a total of $10,000, of the debt issuance cost. As of December 31, 2016, the Note had an outstanding balance of $0. As of December 31, 2016, the Note had a remaining unamortized debt discount of $0.

 

The issuance of the Note was made in reliance on the exemption provided by Section 4(2) of the Securities Act for the offer and sale of securities not involving a public offering, and Regulation D promulgated under the Securities Act. The Company’s reliance upon Section 4(2) of the Securities Act in issuing the securities was based upon the following factors: (a) the issuance of the securities was an isolated private transaction by us which did not involve a public offering; (b) there was only one recipient; (c) there were no subsequent or contemporaneous public offerings of the securities by the Company; (d) the securities were not broken down into smaller denominations; (e) the negotiations for the issuance of the securities took place directly between the individual and the Company; and (f) the recipient of the Note was an accredited investor.

 

On February 8, 2016, the Company entered into an Equity Purchase Agreement (the “EPA”), Registration Rights Agreement (“RRA”) and Convertible Promissory Note in the original principal amount of $60,000 (the “Note”) with Kodiak Capital Group, LLC (“Kodiak”) pursuant to which Kodiak funded $50,000 to the Company after the deduction of a $10,000 original issue discount. The Note bears interest at the rate of 12% and must be repaid on or before February 7, 2017. The Note may be prepaid by the Company at any time without penalty prior to the date which is 180 days after the date of issuance of the Note. The Note may be converted by Kodiak at any time after 180 days of the date of issuance into shares of Company common stock at a conversion price equal to 50% of the market price (as determined in the Note). The Company did not book a beneficial conversion feature in connection with the issuance of the Notes, as terms of the conversion are variable and the ultimate number of shares to be issued upon conversion could not be determined at the date the Notes were issued. As such, upon conversion of the Notes the number of shares will be determined and the Company will evaluate whether or not a beneficial conversion feature exists based on the conversion price compared to the price of the Company’s common stock at the date of issuance of the Notes. The SPA and Note also contain certain representations, warranties, covenants and events of default, and increases in the amount of the principal and interest rates under the Note in the event of such defaults. The foregoing is only a brief description of the material terms of the SPA and Note, and does not purport to be a complete description of the rights and obligations of the parties thereunder, and such descriptions are qualified in their entirety by reference to the agreements and their exhibits. The Company recorded the original issue discount of $10,000 as debt issuance cost on its balance sheet which is netted against the face value of the Note and will be accreted over the term of the Note. For the year ended December 31, 2016, the Company amortized a total of $ $6,319 of the debt issuance cost. The Note was redeemed on September 9, 2016. As of December 31, 2015, the Note had an outstanding balance of $56,319 and a remaining unamortized debt discount of $6,319.

 

On June 30, 2016, the Company elected to terminate the EPA and RRA by delivering a termination notice to Kodiak. The Company shall have no further liabilities or obligations under the EPA and the RRA. The rights and obligations of the Note hereunder shall continue and remain in full force and effect until all obligations are satisfied in full.

 

On March 15, 2016, the Company entered into Securities Purchase Agreement (the “SPA”) and Convertible Promissory Note in the original principal amount of $55,750 (the “Note”) with Auctus Fund, LLC (“Auctus”) pursuant to which Auctus funded $50,000 to the Company after the deduction of $5,750 of diligence and legal fees. The Note bears interest at the rate of 10% and must be repaid on or before December 15, 2016. The Note may be prepaid by the Company at any time prior to the date which is 180 days after the date of issuance of the Note in an amount equal to 110% of the amount outstanding. The Note may be converted by Auctus at any time into shares of Company common stock at a conversion price equal to 50% of the market price (as determined in the Note). The SPA and Note also contain certain representations, warranties, covenants and events of default, and increases in the amount of the principal and interest rates under the Note in the event of such defaults. The foregoing is only a brief description of the material terms of the SPA and Note, and does not purport to be a complete description of the rights and obligations of the parties thereunder, and such descriptions are qualified in their entirety by reference to the agreements and their exhibits which are filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on March 8, 2016. The Company recorded the cost of the due diligence and legal fees of $5,750 as financing fees.

 

 F-22 

 

 

The issuance of the Note was made in reliance on the exemption provided by Section 4(2) of the Securities Act for the offer and sale of securities not involving a public offering, and Regulation D promulgated under the Securities Act. The Company’s reliance upon Section 4(2) of the Securities Act in issuing the securities was based upon the following factors: (a) the issuance of the securities was an isolated private transaction by us which did not involve a public offering; (b) there was only one recipient; (c) there were no subsequent or contemporaneous public offerings of the securities by the Company; (d) the securities were not broken down into smaller denominations; (e) the negotiations for the issuance of the securities took place directly between the individual and the Company; and (f) the recipient of the Note was an accredited investor.

 

During the year ended December 31, 2016, the Note holder elected to convert the Note balance of $55,750 and accrued interest into 11,819,360 shares of the Company’s common stock.

 

On May 24, 2016, MyDx, Inc. (the “Company”) entered into a Convertible Note (the “Note”) with Vista Capital Investments, LLC (“Vista”) in the Original Principal Amount of $275,000 (including a 10% Original Issue Discount (“OID”)). The Company and Vista agreed to an initial funding under the Note of $55,000, including an OID of $5,000 (“Initial Funding”). Future advances under the Note are at the sole discretion of Vista. The Company is only required to repay the amount funded, including the prorated portion of the OID. The note bears interest at the rate of 10% and must be repaid on or before May 24, 2018. The Note may be prepaid by the Company at any time prior to the date, which is 180 days after issuance of the Note at a premium to the amount outstanding at the time of prepayment (as determined in the Note). The Note may be converted by Vista at any time after the six (6) month anniversary of the Note into shares of Company common stock at a conversion price equal to 50% of the market price (as determined in the Note). The Note also contains certain representations, warranties, covenants and events of default, and increases in the amount of the principal and interest rates under the Note in the event of such defaults. The foregoing is only a brief description of the Note and does not purport to be a complete description of the rights and obligations of the parties thereunder, and such descriptions are qualified in their entirety by reference to the agreements and their exhibits, which were filed as Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on May 27, 2016.

 

The issuance of the Note was made in reliance on the exemption provided by Section 4(a)(2) of the Securities Act for the offer and sale of securities not involving a public offering, and Regulation D promulgated under the Securities Act. The Company’s reliance upon Section 4(a)(2) of the Securities Act in issuing the securities was based upon the following factors: (a) the issuance of the securities was an isolated private transaction by us which did not involve a public offering; (b) there was only one recipient; (c) there were no subsequent or contemporaneous public offerings of the securities by the Company; (d) the securities were not broken down into smaller denominations; (e) the negotiations for the issuance of the securities took place directly between the individual and the Company; and (f) the recipient of the Note was an accredited investor. During the year ended December 31, 2017 the, the Company amortized a total of $13,148 of the debt issuance cost. As of December 31, 2017 and 2016, the Note had an outstanding balance of $0 and $21,900 respectively, and a remaining unamortized debt discount of $0 and $13,148 respectively.

 

On March 14, 2017, the Company and Vista Capital Investments, LLC (“Vista”) entered into a Settlement Agreement dated March 14, 2017 (the “Vista Settlement”). Vista claimed, and the Company disputed, that Vista was still entitled to certain payments pursuant to convertible promissory notes the Company previously issued. On March 13, 2017, Vista submitted a conversion request of 68,437,500 shares of the Company’s common stock. Pursuant to the Vista Settlement, the Company issued 35,000,000 shares to Vista on March 14, 2017 and all convertible promissory notes issued by the Company to Vista are now considered paid in full. During the year ended December 31, 2017 the, the Company amortized a total of $9,084 of the debt issuance cost. As of December 31, 2017 and 2016, the Note had an outstanding balance of $0 and $0 respectively, and a remaining unamortized debt discount of $0 and $0 respectively.

  

 F-23 

 

 

On August 9, 2016, the Company entered into Securities Purchase Agreement (the “SPA”) and Convertible Promissory Note in the original principal amount of $35,000 (the “Note”) with Crown Bridge Partners, LLC (“Crown”) pursuant to which Crown funded $30,000 to the Company after the deduction of a $3,500 original issue discount and $1,500 for legal fees. The Note bears interest at the rate of 8% and must be repaid on or before August 9, 2017. The Note may be prepaid by the Company at any time prior to the date which is 180 days after the date of issuance of the Note at a premium to the amount outstanding at the time of prepayment (as determined in the Note). The Note may be converted by Crown at any time after the six (6) month anniversary of the Note into shares of Company common stock at a conversion price equal to 50% of the market price (as determined in the Note). The SPA and Note also contain certain representations, warranties, covenants and events of default, and increases in the amount of the principal and interest rates under the Note in the event of such defaults.

 

The issuance of the Note was made in reliance on the exemption provided by Section 4(a)(2) of the Securities Act for the offer and sale of securities not involving a public offering, and Regulation D promulgated under the Securities Act. The Company’s reliance upon Section 4(a)(2) of the Securities Act in issuing the securities was based upon the following factors: (a) the issuance of the securities was an isolated private transaction by us which did not involve a public offering; (b) there was only one recipient; (c) there were no subsequent or contemporaneous public offerings of the securities by the Company; (d) the securities were not broken down into smaller denominations; (e) the negotiations for the issuance of the securities took place directly between the individual and the Company; and (f) the recipient of the Note was an accredited investor. During the year ended December 31, 2017, the Company amortized a total of $21,250 of the debt issuance cost. During the year ended December 31, 2016, the Company amortized a total of $13,750 of the debt issuance cost. As of December 31, 2017 and 2016, the Note had an outstanding balance of $0 and $35,000 respectively, and a remaining unamortized debt discount of $0 and $21,250 respectively.

 

During the year ended December 31, 2017, the Note holder elected to convert the Note and accrued interest of $36,522 into 86,654,550 share of the Company’s common stock.

 

On May 6, 2016, the Company entered into Securities Purchase Agreement (the “SPA”) and Convertible Promissory Note in the original principal amount of $55,750 (the “Note”) with Auctus Fund, LLC (“Auctus”) pursuant to which Auctus funded $50,000 to the Company after the deduction of $5,750 of diligence and legal fees. The Note bears interest at the rate of 10% and must be repaid on or before February 6, 2017. The Note may be prepaid by the Company at any time prior to the date which is 180 days after the date of issuance of the Note in an amount equal to 110% of the amount outstanding. The Note may be converted by Auctus at any time into shares of Company common stock at a conversion price equal to 50% of the market price (as determined in the Note). The SPA and Note also contain certain representations, warranties, covenants and events of default, and increases in the amount of the principal and interest rates under the Note in the event of such defaults. The foregoing is only a brief description of the material terms of the SPA and Note, and does not purport to be a complete description of the rights and obligations of the parties thereunder, and such descriptions are qualified in their entirety by reference to the agreements and their exhibits which are filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on May 10, 2016. The Company recorded the cost of the due diligence and legal fees of $5,750 as financing fees.

 

The issuance of the Note was made in reliance on the exemption provided by Section 4(2) of the Securities Act for the offer and sale of securities not involving a public offering, and Regulation D promulgated under the Securities Act. The Company’s reliance upon Section 4(2) of the Securities Act in issuing the securities was based upon the following factors: (a) the issuance of the securities was an isolated private transaction by us which did not involve a public offering; (b) there was only one recipient; (c) there were no subsequent or contemporaneous public offerings of the securities by the Company; (d) the securities were not broken down into smaller denominations; (e) the negotiations for the issuance of the securities took place directly between the individual and the Company; and (f) the recipient of the Note was an accredited investor. During the year ended December 31, 2016, the Note holder elected to convert a portion of the Note into 21,775,653 shares of the Company’s common stock. As of December 31, 2016, the Note had an outstanding balance of $0.

 

 F-24 

 

 

On November 14, 2016, the Company entered into Securities Purchase Agreement (the “SPA”) and Convertible Promissory Note in the original principal amount of $35,000 (the “Note”) with Crown Bridge Partners, LLC (“Crown”) pursuant to which Crown funded $31,500 to the Company after the deduction of a $3,500 original issue discount and $1,500 for legal fees. The Note bears interest at the rate of 8% and must be repaid on or before August 9, 2017. The Note may be prepaid by the Company at any time prior to the date which is 180 days after the date of issuance of the Note at a premium to the amount outstanding at the time of prepayment (as determined in the Note). The Note may be converted by Crown at any time after the six (6) month anniversary of the Note into shares of Company common stock at a conversion price equal to 50% of the market price (as determined in the Note). The SPA and Note also contain certain representations, warranties, covenants and events of default, and increases in the amount of the principal and interest rates under the Note in the event of such defaults.

 

The issuance of the Note was made in reliance on the exemption provided by Section 4(a)(2) of the Securities Act for the offer and sale of securities not involving a public offering, and Regulation D promulgated under the Securities Act. The Company’s reliance upon Section 4(a)(2) of the Securities Act in issuing the securities was based upon the following factors: (a) the issuance of the securities was an isolated private transaction by us which did not involve a public offering; (b) there was only one recipient; (c) there were no subsequent or contemporaneous public offerings of the securities by the Company; (d) the securities were not broken down into smaller denominations; (e) the negotiations for the issuance of the securities took place directly between the individual and the Company; and (f) the recipient of the Note was an accredited investor. During the year ended December 31, 2017, the Company amortized a total of $30,577, of the debt issuance cost. As of December 31, 2017 and 2016, the Note had an outstanding balance of $0 and $35,000 respectively, and a remaining unamortized debt discount of $0 and $30,577 respectively.

 

During the year ended December 31, 2017, the Note holder elected to convert the Note and accrued interest of $36,749 into 14,699,616 share of the Company’s common stock.

 

On December 1, 2016, MyDx, Inc. (“MyDx”, or the “Company”) entered into an advisory services agreement (the “Advisory Services Agreement”) and an indemnification agreement (“Indemnification Agreement”) with BCI Advisors, LLC (“BCI”) pursuant to which BCI shall, provide advice and counsel to senior management of the Company on business planning and strategy, restructuring and recapitalization, and consultation to the Board of Directors. BCI will be paid an initial fee of $50,000 in cash or unrestricted shares of the Company’s Common Stock, and a retainer fee of $25,000 per month for the eleven (11) months subsequent thereto. In addition, on the 45 and 90th day anniversary of the effectiveness of this Agreement and performance of its services, BCI shall have the right to receive a two (2) year A-1 and A-2 warrant based on a fully diluted basis, each equal to seven-and-one-half percent (7.5%) for a total of (15%) subject to adjustment of the then issued and outstanding Company common shares. The initial fee as well as A-1 and A-2 warrants have been completely earned, free of liens or encumbrances, and non-assessable and can be exercised at any time at an exercise price of $0.001 per share. This summary contains only a brief description of the material terms of the Advisory Services Agreement and does not purport to be a complete description of the rights and obligations of the parties thereunder, and such description is qualified in its entirety by reference to the Advisory Services Agreement. A copy of the Advisory Services Agreement was filed as Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on January 11, 2017. As of December 31, 2017 and 2016, the Note had an outstanding balance of $239,182 and $0 respectively.

 

During the year ended December 31, 2017, the Note holder elected to convert the principal of $137,103 into 140,000,000 share of the Company’s common stock.

 

On February 6, 2017, YCIG, Inc. (“Seller”) entered into a purchase and sale agreement where it sold the rights to its loan agreement with the Company to Hasper, Inc. in exchange for the assumption of liabilities under the note and a commitment to fund additional advances to the company. The loans accrue interest at a rate of 12% per annum and all amounts loaned are due and payable on or before September 28, 2018. The amounts loaned may be prepaid by the Company at any time without penalty. The Loan Agreement provides that in the event of a default, the loan amount becomes immediately due and payable, which may be repaid by the Company common stock at a conversion price of $0.0023  the trading price on January 4, 2017 or at the close of business on the date of conversion.  Interest is due on June 1, 2017 and the first of every month thereafter.

 

 F-25 

 

 

Amendment 1

 

On August 22, 2017 the Company and Hasfer, Inc. entered into an amendment to the note. The note was modified as follows:

 

The facility limit was increased to $850,000.

The company received proceeds of $263,500.

Fees related to the amendment totaled $18,500. The fees were recorded as a loss on extinguishment of debt.

The maturity date of the principal is September 28, 2018

 

All remaining terms of the Revolving note remained the same.

 

In accordance with ASC 470, since the present value of the cash flows under the new debt instrument was at least ten percent different from the present value of the remaining cash flows under the terms of the original debt instrument, the Company accounted for the amendment to SPA as a debt extinguishment. Accordingly, the Company recorded a loss on extinguishment of debt of $384,903.

 

Amendment 2

 

On December 27, 2017 the Company, Hasfer, Inc. and Legacy, entered into an amendment to the note. The note was modified as follows:

 

A portion of the outstanding principal and interest was assigned to Legacy.

The company received proceeds of $48,500.

Fees related to the amendment totaled $1,500. The fees were recorded as a loss on extinguishment of debt.

 

All remaining terms of the Revolving note remained the same.

 

In accordance with ASC 470, since the present value of the cash flows under the new debt instrument was at least ten percent different from the present value of the remaining cash flows under the terms of the original debt instrument, the Company accounted for the amendment to SPA as a debt extinguishment. Accordingly, the Company recorded a loss on extinguishment of debt of $155,086.

 

During the year ended December 31, 2017 Hasfer converted $236,250 of the outstanding principal into 99,891,304 share of the company’s common stock.

 

As of December 31, 2017 and 2016 the balance of this agreement was $295,750 and $0 respectively.

 

Note Payable – Related Party

 

On December 10, 2015, YCIG, Inc. (“YCIG”), an entity owned and controlled by Daniel Yazbeck, who is an officer, director and major shareholder of the Company, entered into a Loan Agreement (the “Loan Agreement”) with the Company. The Loan Agreement provides that the amounts loaned accrue interest at a rate of 12% per annum and all amounts loaned are due and payable on or before September 28, 2018. The amounts loaned may be prepaid by the Company at any time without penalty. The Loan Agreement provides that in the event of a default, the loan amount becomes immediately due and payable, which may be repaid by the Company in its election in cash or a number of shares of Company common stock equal to four times the amount outstanding at the date of default.

 

On January 4, 2017 the Company and YCIG. entered into an amendment to the note. The note was modified as follows:

 

The note may be repaid by the Company common stock at a conversion price of $0.0023 or at the close of business on the date of conversion upon default

Interest shall be due in a single lump sum payment on June 1, 2017.

Subsequent to June 1, 2017, all monthly interest payments that accrue shall be payable on the first (1st) day of next month during the remainder life of the Note.

 

YCIG advanced the Company funds under the loan agreement as follows:

 

   Outstanding Balances as of 
   December 31, 2017   December 31,
2016
 
November 20, 2015          -    15,000 
December 1, 2015   -    25,000 
December 2, 2015   -    25,000 
April 6, 2016   -    10,000 
April 27, 2016   -    25,000 
July 20, 2016   -    25,000 
August 8, 2016   -    25,000 
September 19, 2016   -    25,000 
December 1, 2016   -    25,000 
February 7, 2017   -    - 
   $-   $200,000 

 

 F-26 

 

 

Due to related party

 

On February 7, 2017, the Company’s officer made non-interest bearing loans of $25,000 to the Company in the form of cash. The loan is due on demand and unsecure.  During the year ended December 31, 2017 the note was repaid.

 

On April 20, 2017, the Company’s officer made non-interest bearing loans of $20,000 to the Company in the form of cash. The loan is due on demand and unsecure.  During the year ended December 31, 2017 the note was repaid.

 

On May 8, 2017, the Company’s officer made non-interest bearing loans of $10,000 to the Company in the form of cash. The loan is due on demand and unsecure.  During the year ended December 31, 2017 the note was repaid.

 

On June 19, 2017, the Company’s officer made non-interest bearing loans of $35,000 to the Company in the form of cash. The loan is due on demand and unsecure.  During the year ended December 31, 2017 the note was repaid.

  

On July 17, 2017, the Company’s officer made non-interest bearing loans of $10,000 to the Company in the form of cash. The loan is due on demand and unsecure.  During the year ended December 31, 2017 the note was repaid.

 

On July 20, 2017, the Company’s officer made non-interest bearing loans of $20,000 to the Company in the form of cash. The loan is due on demand and unsecure.  During the year ended December 31, 2017 the note was repaid.

 

On August 22, 2017, the Company’s officer made non-interest bearing loans of $45,000 to the Company in the form of cash. The loan is due on demand and unsecure. This was the result of the officer selling 100,000 personal owned shares of Series B Preferred for net proceeds of $45,000.

 

During the year ended December 31, 2017, the Company has repaid $120,000. As of December 31, 2017, and 2016 the Company is reflecting a liability of $46,075, and $1,075, respectively.

 

Settlement of Liabilities

 

In March 2017, the Company sued Phoenix Fund Management, LLC (“Phoenix”) to prevent further issuances and conversion notices pursuant to, respectively, a June 2016 $250,000 Section 3(a)(10) settlement and an October 2016 $1,000,000 convertible promissory note. Between February 23, 2017 and March 8, 2017, Phoenix submitted five (5) issuance or conversion requests to the Company’s transfer agent for a total of 239,188,023 shares of the Company’s common stock. As a result of the settlement described below, none of these shares were issued.

 

On March 10, 2017, the Company entered into a Settlement Agreement with Phoenix dated March 9, 2017 (the “Phoenix Settlement”). Pursuant to the Phoenix Settlement, Phoenix has agreed it is no longer entitled to any shares pursuant to these two agreements, which are now considered paid in full. On March 15, 2017, in connection with the Phoenix Settlement, the Company filed a motion to dismiss the pending lawsuit with the Eleventh Judicial Circuit of Florida. The Company recorded a gain on settlement of debt of $80,315

 

On March 13, 2017, the Company and Bright Light Marketing, Inc. (“BLM”), in a settlement related to the Phoenix Settlement, entered into a Settlement Agreement dated March 10, 2017 (the “BLM Settlement”). In 2016, BLM notified the Company that Phoenix was a potential lender. Pursuant to the BLM Settlement, BLM will pay the Company a total of $217,500 over the next twelve (12) months. BLM is due to pay the first $100,000 within thirty (30) business days of the signing of the BLM Settlement. BLM will then pay the Company $10,000 per month on the first day of the next eleven (11) months with the final payment of $7,500 due on March 1, 2018. 

 

 F-27 

 

 

On April 25, 2017, the Company and its previous auditor, BPM LLP (“BPM”), entered into a Settlement Agreement pursuant to which the Company agreed to pay BPM $80,000 by May 31, 2018. The Company and BPM agreed that, following the Company’s receipt of each new debt or equity investment (including investments paid in tranches over time) by a party who was not, as of April 25, an officer, director, shareholder, or creditor of the Company, the Company shall pay fifteen percent (15%) of the net proceeds to BPM on the first day of the month following receipt of the investment until the $80,000 has been paid. The Company recorded a gain on settlement of debt of $70,781. During the year ended December 31, 2017 the Company repaid $0.

 

On June 16, 2017, the Company issued 500,000 shares valued at $3,950 for the settlement of an outstanding accounts payable balance of $4,870. The company recorded a gain on settlement of debt of $920.

 

On July 22, 2016, the Company entered into an agreement with Talent Cloud Limited, Hong Kong, (“Talent Cloud”) to provide recruitment services for a Vice President of Business Development for the Company’s Asian market development. At the date of this report, no acceptable candidates have been presented to the Company.

 

During the year ended December 31, 2016 the Company entered into agreements with Talent Cloud to provide recruitment services for a Community Manager; an APP Manager; and, a Software Developer for the Company’s Asian markets development. The total cost of these services was $143,900 (the “Claim”).

 

On September 13, 2016, the Company entered into an agreement with Meyers Associates, L.P. (“Meyers Associates”) to provide support to recruitment services. The total cost of these services was $10,000 (the “Claim”).

 

On September 20, 2016, Talent Cloud and Meyers Associates entered into a Claims Purchase Agreement with Rockwell Capital Partners, Inc. (“Rockwell Capital”) to purchase the Claims held by Talent Cloud and Meyers Associates. Rockwell Capital executed a Settlement Agreement whereas the Company and Rockwell Capital agreed to resolve, settle and compromise among other things, the liabilities claimed in the Claims Purchase Agreement. In settlement of the Claim, the Company shall issue freely traded shares of the Company’s common stock as requested by Rockwell Capital, periodically, at a 45% discount from the average lowest closing price for the 15-day trading period preceding the share request.

 

On October 19, 2016, the Company, Talent Cloud, Meyers Associates, and Rockwell Capital entered into an Assignment and Modification Agreement. Rockwell purchased the debt claim held by Talent Cloudand Meyers Associates from MyDx. In settlement of the Claim, the Company shall issue and deliver to Rockwell shares of its common stock as requested by Rockwell, periodically, at a forty-five percent (45%) discount from the lowest price of the Company’s common stock for the seven trading days prior to the date of issuance. Upon execution of the assignment, Talent Cloud and Meyers Associates released MyDx, Inc. from all liabilities under the original claims.

 

On November 11, 2016, the Company, Talent Cloud, Meyers Associates, and Rockwell Capital entered into an Assignment and Modification Agreement. Rockwell purchased the debt claim held by Talent Cloud and Meyers Associates from MyDx. In settlement of the Claim, the Company shall issue and deliver to Rockwell shares of its common stock as requested by Rockwell, periodically, at a forty-five percent (45%) discount from the lowest price of the Company’s common stock for the seven trading days prior to the date of issuance. Upon execution of the assignment, Talent Cloud and Meyers Associates released MyDx, Inc. from all liabilities under the original claims.

 

On November 29, 2016, the Company, Talent Cloud, Good Project, Windset Capital, Next Dimension Technologies, Meyers Associates and Rockwell Capital entered into an Assignment and Modification Agreement. Rockwell purchased the debt claim held by Talent Cloud and Meyers Associates from MyDx. In settlement of the Claim, the Company shall issue and deliver to Rockwell shares of its common stock as requested by Rockwell, periodically, at a forty-five percent (45%) discount from the lowest price of the Company’s common stock for the seven trading days prior to the date of issuance. Upon execution of the assignment, Talent Cloud, Good Project, Windset Capital, Next Dimension Technologies, and Meyers Associates released MyDx, Inc. from all liabilities under the original claims.

 

During the year ended December 31, 2016 the Company issued 3,500,000 shares of the Company’s common stock to retire $40,895 of the total claims and recorded a gain on debt settlement of $198,261.

 

 F-28 

 

 

9. Derivative Liabilities

 

The Company has identified derivative instruments arising from embedded conversion features in the Company’s convertible notes payable and accounts payable at December 31, 2017.

 

The following summarizes the Black-Scholes assumptions used to estimate the fair value of the derivative liability and warrant liability at the date of issuance and for the convertible notes converted during the year ended December 31, 2017 and 2016.

 

   Low   High 
Annual dividend rate   0%   0%
Expected life   0.74    1.40 
Risk-free interest rate   

1.20

%   1.76%
Expected volatility   121.60%   266.00%

 

Risk-free interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Note with a similar term on the date of the grant.

 

Dividend yield: The Company uses a 0% expected dividend yield as the Company has not paid dividends to date and does not anticipate declaring dividends in the near future.

 

Volatility: The volatility was estimated using the historical volatilities of the Company’s common stock.

 

Remaining term: The Company’s remaining term is based on the remaining contractual maturity of the convertible notes payable and accounts payable.

 

The following are the changes in the derivative liabilities during the year ended December 31, 2017.

 

   Year Ended December 31, 2017 
   Level 1   Level 2   Level 3 
Derivative liabilities as January 1, 2017  $   -   $-   $1,812,441 
Addition   -    -    3,519,922 
Conversion   -    -    (1,845,677)
Settlement of debt   -    -    (1,087,226)
Loss on changes in fair value   -    -    196,545 
Derivative liabilities as December 31, 2017  $-   $-   $2,596,005 

 

The following are the changes in the warrant liability during the year ended December 31, 2017.

 

   Year Ended December 31, 2017 
   Level 1   Level 2   Level 3 
Fair value as January 1, 2016  $   -   $   -   $247,203 
Warrants issued   -    -    (222,184)
Gain on changes in fair value   -    -    (25,019)
Fair value as December 31, 2017  $-   $-   $- 

 

 F-29 

 

 

10. Stockholders’ Deficit

 

Reverse Capitalization

 

Pursuant to the Merger Agreement, upon consummation of the Merger, each share of CDx’s capital stock issued and outstanding immediately prior to the Merger was converted into the right to receive one (1) share of Company common stock, par value $0.001 per share. Additionally, pursuant to the Merger Agreement, upon consummation of the Merger, the Company assumed all of CDx’s options and warrants issued and outstanding immediately prior to the Merger, 6,069,960 and 7,571,395 shares of common stock, respectively.

 

Prior to and as a condition to the closing of the Merger, each then-current Company stockholder agreed to sell certain shares of common stock held by such holder to the Company and the then-current Company stockholders retained an aggregate of 1,990,637 shares of common stock.

 

Settlement Agreement

 

On December 23, 2016, the Company entered into a settlement and release agreement (the “Yazbeck Settlement”) with Daniel R. Yazbeck, the Chief Executive Officer and Director of the Company (“Yazbeck”), relating to certain bona fide, outstanding, and past-due liabilities of the Company in the aggregate principal amount of approximately $321,000 for certain unpaid base salary and bonus obligations that remained deferred and/or outstanding, due and owing to Yazbeck.

 

Under the terms of the Yazbeck Settlement, Yazbeck agreed to forgo and release any claims against the Company under that certain Employment Agreement, by and between Yazbeck and the Company, dated October 15, 2014 (the “Employment Agreement”) in exchange for (1) the issuance of fifty-one (51) shares of the Company’s Series A Preferred Stock (defined below); (2) the issuance of three hundred thousand (300,000) shares of the Company’s Series B Preferred Stock (defined below); (3) a warrant for fifteen percent (15%) of the common shares of the Company issued and outstanding as of January 3, 2017, at an exercise price of $0.001 per share, with an expiration date of January 3, 2019; and (4) the issuance of thirty million (30,000,000) shares of the Company’s restricted common stock.

 

Preferred Stock

 

On September 30, 2016, the Company filed a Certificate of Amendment to Articles of Incorporation with the Secretary of State of the State of Nevada to authorize for issuance ten million (10,000,000) shares of blank check preferred stock, par value $0.001 (“Blank Check Preferred Stock”) as included on Form 8-K filed with the SEC on October 4, 2016.

 

Series A Preferred Stock

 

As of December 31, 2017, and 2016, the Company has designated 51 shares of Series A Preferred Stock par value $0.001 and 51 shares are issued and outstanding. The Series A Preferred Stock can convert into common stock at a 1:1 ratio. Each one (1) share of the Series A Preferred shall have voting rights equal to (x) 0.019607 multiplied by the total issued and outstanding shares of Common Stock eligible to vote at the time of the respective vote (the “Numerator”), divided by (y) 0.49, minus (z) the Numerator. For purposes of illustration only, if the total issued and outstanding shares of Common Stock eligible to vote at the time of the respective vote is 5,000,000, the voting rights of one share of the Series A Preferred Stock shall be equal to 102,036 (0.019607 x 5,000,000) / 0.49) – (0.019607 x 5,000,000) = 102,036). On December 23, the 51 shares were issued to Mr. Yazbeck, the Company’s sole officer and the sole member of the Board. Mr. Yazbeck, via his ownership of the 51 shares of the Series A Preferred, has control of the majority of the Company’s voting stock.

 

During the year ended December 31, 2017 an investor converted 3,300 Series B Preferred stock in to 33,000,000 shares of common stock.

 

Series B Preferred Stock

 

The Series B Preferred is convertible into shares of Common Stock at a conversion price of $0.0001. Holders of the Series B Preferred are entitled to receive dividends annually equal to $0.10 for each share of Series B Preferred held. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of Series B Preferred then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders, before any payment shall be made to the holders of Common Stock. Until such time as there are fewer than 20,000 shares of Series B Preferred outstanding, the Company needs to obtain the majority votes of the holders of Series B Preferred with regard to certain actions. Holders of Series B Preferred shares are entitled to one vote for each share held, are entitled to elect up to two members to the Board, and, absent such election, are provided certain voting and veto rights with regard to any vote by the Board.

  

 F-30 

 

 

Common Stock

 

On September 30, 2016, the Company amended articles of incorporation to increase the number of authorized commons shares to 10,000,000,000 as included on Form 8-K filed with the SEC on October 4, 2016.

 

During the year ended December 31, 2017, the Company issued 143,977,273 shares of common stock in exchange for services at a fair value of $668,695. During the year ended December 31, 2016, the Company issued 16,654,214 shares of common stock in exchange for services at a fair value of $378,345.

 

On March 16, 2017, the Company entered into a securities purchase agreement (“SPA”) with TLG, Inc, and TRD, Inc. (“Investors”) pursuant to which the Company agreed to sell 25,000,000 restricted shares of the Company’s common stock, in an above market transaction at a purchase price of $0.004 per share for a total of $100,000. As part of the SPA, the Company granted the Investors the option, within the next 60 days, to purchase an additional 25,000,000 of restricted shares of the Company’s common stock at a purchase price of $0.006 per share for a total of $150,000. The shares of Common Stock issued pursuant to the Subscription Agreement have not been registered under the Securities Act of 1933, as amended (the “Securities Act”) and are “restricted securities” as that term is defined by Rule 144 promulgated under the Securities Act. Pursuant to the securities purchase agreement, the Investors agreed not to sell more than three hundred and seventy-five thousand shares per day (subject to adjustment for forward and reverse stock splits that occur after the date hereof) or more than seven million five hundred thousand shares per month (subject to adjustment for forward and reverse stock splits that occur after the date hereof) of the securities purchased pursuant to the SPA. On May 1, 2017, the Company entered into an amendment to the TLG, Inc SPA. The modification allowed TLG, Inc to purchase a total of 25,000,000 of restricted shares of the Company’s common stock at a purchase price of $0.006 per share for a total of $150,000. TLG exercised all of these options on May 2, 2017.

 

Common Stock Warrants

 

During the year ended December 31, 2017, the Company agreed to issue warrants to purchase 252,773,754 shares of common stock. During the year ended December 31, 2016, the Company did not issue any warrants to purchase shares of common stock. No common stock warrants have been exercised or have expired and warrants to purchase 260,345,149 shares of common stock were outstanding as of December 31, 2017.

  

 F-31 

 

 

2015 Equity Incentive Plan

 

In connection with the Merger on April 30, 2015, the Company adopted the MyDx, Inc. 2015 Equity Incentive Plan (the “2015 Plan”), and to date, has reserved 6,200,000 shares of common stock for issuance under the 2015 Plan. Under the 2015 Plan, employees, directors or consultants may be granted nonstatutory stock options, stock appreciation rights, restricted stock and restricted stock units to purchase shares of MyDx’s common stock. Only employees are eligible to receive incentive stock options (“ISO”) to purchase common stock. Vesting and exercise provisions are determined by the Board of Directors at the time of grant. The options generally expire ten years from the date of grant. ISOs granted to a participant who, at the time the ISO is granted, has more than 10% of the voting power between all classes of stock, will expire five years from the date of grant. Options vest at various rates ranging from immediately to three years. As of December 31, 2017, options to purchase 1,496,250 shares were available under the 2015 Plan for issuance.

 

2017 Equity Incentive Plan

 

The Company adopted the MyDx, Inc. 2017 Equity Incentive Plan (the “2017 Plan”), and to date, has reserved 150,000,000 shares of common stock for issuance under the 2017 Plan. Under the 2017 Plan, employees, directors or consultants may be granted nonstatutory stock options, stock appreciation rights, restricted stock and restricted stock units to purchase shares of MyDx’s common stock. Employees, non-employee directors and consultants are eligible to receive incentive stock options to purchase common stock. Vesting and exercise provisions are determined by the Board of Directors at the time of grant.

 

A summary of the Company’s stock option plan for the year ended December 31, 2017 was as follows:

 

   Shares   Weighted- Average Exercise Price 
Outstanding as of December 31, 2015   4,626,245   $0.39 
Granted   125,000   $0.57 
Exercised   -    - 
Forfeited or cancelled   (3,254,995)  $0.36 
Outstanding as of December 31, 2016   1,496,250   $0.48 
Granted   -   $- 
Exercised   -   $- 
Forfeited or cancelled   -   $- 
Outstanding as of December 31, 2017   1,496,250   $0.27 
Options exercisable as of December 31, 2017   1,457,500   $0.25 

 

The aggregate intrinsic value of options exercised was $0 and $0 for the year ended December 31, 2017 and 2016, respectively.

 

Information regarding options outstanding and exercisable as of December 31, 2017, is as follows:

 

    Options Outstanding   Options Exercisable 
Exercise
Price
   Number
Outstanding
   Average
Remaining
Contractual
Life (Years)
   Weighted-
Average
Exercise
Price
   Number
Outstanding
   Weighted-
Average
Exercise
Price
 
$0.08    900,000    3.86   $0.08    900,000   $0.08 
$0.55    515,000    3.41   $0.55    482,500   $0.55 
$0.57    81,250    3.99   $0.57    75,000   $0.57 
      1,496,250    3.8   $0.27    1,457,500   $0.27 

 

Total unrecognized compensation expense from employee stock options as of December 31, 2017 was $1,525 and will be recognized over a weighted average recognition period of 0.70 years.

 

Total stock-based compensation expense, both employee and non-employee, recognized by the Company for the year ended December 31, 2017 and 2016 was $11,909 and $378,597 respectively. No tax benefits were recognized in the year ended December 31, 2017 and 2016.

  

 F-32 

 

 

11. Commitments and Contingencies

 

Distribution and License Agreement and Joint Development Agreements

 

The Company entered into a Distribution and License Agreement with a third-party for the purpose of developing a sensor array to be used in the Company’s product. The Distribution and License Agreement has an initial term of ten years, but can be terminated earlier if the project does not meet the specifications of the Company. The Company will obtain exclusive rights to sell and distribute once a successful sensor prototype is developed. In exchange for a functional prototype, the Company will pay the third-party a 7% royalty on net sales. During the years ended December 31, 2017 and 2016, the Company did not incur any development costs related to the Distribution and License Agreement.

 

On November 1, 2013, the Company entered into a two-year Joint Development Agreement (the “Agreement”) with an unrelated third-party to develop chemical sensors and peripheral sensing equipment and software for the detection and characterization of cannabis and compounds associated with cannabis.

 

The Agreement provides for, among other things, any arising intellectual property rights (as defined) outside of the field (as defined), and any arising intellectual property rights relating to improvements to detection materials shall belong to the Joint Venture Developer.

 

The Agreement also provides that any arising intellectual property rights other than those covered above shall belong to the Company. To the extent that it is necessary to do so to enable the Company to use and exploit its respective arising intellectual property rights, the Joint Developer grants the Company a perpetual, irrevocable, exclusive, and royalty free license (including the right to assign the license and to grant sub-licenses) to use and exploit the Joint Developer’s arising intellectual property rights in the field. Under the terms of the Agreement, either party may cancel the Agreement as the specific tasks provided for in the Agreement have been completed or for causes specifically provided for in the Agreement. During the years ended December 31, 2015 and 2014, the Company paid the Joint Developer $200,000 and $227,500 for development costs, respectively.

 

On May 19, 2015, the Company entered into an Exclusive Patent Sublicense Agreement (the “License Agreement”) with Next Dimension Technologies, Inc. (“NDT”). The License Agreement grants the Company a worldwide right to the patents licensed by NDT from the California Institute of Technology. The License Agreement grants both exclusive and non-exclusive patent rights. The license granted in the License Agreement permits the Company to make, have made, use, sell and offer for sale sublicensed products in the field of use. The License Agreement continues until the expiration, revocation, invalidation or enforceability of the rights licensed. The License Agreement provides for the payment of a license fee and royalty payments by CDx to NDT. The License Agreement also contains minimum royalty payments and milestone payments by CDx to NDT. NDT has a right to terminate the License Agreement in the event of an uncured breach by CDx; the insolvency or bankruptcy of CDx; or if CDx does not meet certain productivity milestones. The License Agreement also contains representations, warranties and indemnity obligations for each of CDx and NDT. In connection with the License Agreement, on May 19, 2015, CDx and NDT also executed an Amended Amendment No. 4 (the “Amended Amendment No. 4”) to the Joint Development Agreement, dated as of November 1, 2013, between CDx and NDT, which extended the date of negotiation for the License Agreement through May 19, 2015.

 

On February 8, 2017, MyDx, Inc. entered into an option agreement (the “Option Agreement’) with the Torque Research & Development, Inc. (“TRD”). The Option Agreement provides MyDx with the exclusive right to license two patent pending inventions (the “TRD Inventions”), and requires MyDx to make annual payments to TRD as well as royalty payments on any products that are commercialized which are based on the TRD Inventions. MyDx’s rights under the Option Agreement require customary measures of performance on the part of MyDx in terms of patent cost maintenance and other payments of costs associated with the TRD Inventions. With respect to the Option Agreement, MyDx rights are broad in terms of the potential access MyDx has to use the TRD Inventions in products, and services and many of the key economic terms of a future license, should MyDx exercise its rights under the Option Agreement, are agreed to in the Option Agreement.

 

 F-33 

 

 

In addition to the Option Agreement with the TRD, on February 8, 2017, MyDx has entered into a research and development agreement (the “RD Agreement”) with TRD for the Project titled “Manufacturable, Medical Grade Smart Vape Devices and Related Medical Software Applications for Prescribers, Administrators and Patient Applications.” The RD Agreement allows MyDx to fund research based on the TRD Inventions with a three year budget of $280,371 and a deferred payment of $75,000 within ninety days of the Effective Date. The RD Agreement provides MyDx with an exclusive right to license all technology that is discovered from the monies funded to TRD through the RD Agreement (the “Derivative IP”). To the extent that MyDx exercises its rights under the RD Agreement, MyDx will be required to make customary annual payments to TRD, who shall be the owners of any Derivative IP, as well as royalty payments as any commercialization of such Derivative IP occurs. TRD may elect to accept payment in whole or in part in cash or the companies restricted common stock priced at the Effective Date. MyDx is currently in default on its payment obligations to Torque.

 

License and Distribution Agreement

 

On September 1, 2016, MyDx, Inc. (the “Company” or “Licensor”) entered into a Distribution and License Agreement (the “License Agreement”) with Powerfull Holdings, Ltd, a company operating under the charter of the People’s Republic of China (“Assignor”) and China Science and Technology, a Powerfull Holdings affiliated Company (“Licensee”), (together the “Parties”). The Parties intend there to be two phases of the License Agreement: Phase One and Phase Two. During Phase One, the Licensor shall provide test samples and validation data for market validation. Subject to Phase One producing satisfactory results, and proof of concept, the Parties will commence Phase Two.

 

For Phase One, the Licensee will pay the Licensor a minimum of Forty-Five Thousand Dollars ($45,000.00) as a Licensing and Technology Transfer Fee (the “Transfer Fee”) per application (AquaDx™, OrganaDx™, AeroDx™). These fees shall be credited towards Phase Two’s mandatory minimum payments. The Licensee shall pay the Transfer Fee within 10 business days of being provided with an invoice by the Licensor. However, should the Parties determine that the results of the activities of Phase One were not satisfactory to both parties, this Agreement shall terminate pursuant to Section 7.2(b). 

 

In connection with the agreement referenced above, the licensor and licensee are currently still operating under Phase I and the company has not yet received adequate information to enter Phase II. MyDx has not yet received and has requested market feasibility, regulatory and other studies from Licensee as contemplated under the agreement and has requested the results of their Phase I findings to be delivered to Company on or before April 21, 2017. To the extent MyDx management is unable to receive satisfactory results and confirm proof of concept, MyDx has notified Licensee it will be difficult to continue under the current agreement and the parties are permitted to terminate for cause and defectiveness in the event the products do not pass tests for quality, reliability, efficacy, and marketability or if at the completion of Phase I, the results were not satisfactory and the concept was not proven.

 

Effective as of April 21, 2017, the Company terminated its Distribution and License Agreement (the “License Agreement”) with China Science and Technology (“Licensee”) entered into in September 2016. The Company terminated the License Agreement due to the Company not receiving confirmation of proof of concept from the Licensee for deployment of the Company’s products in China. The Company recognized $135,000 as a gain on forfeiture of technology transfer deposit.

 

On June 12, 2017, MyDx, Inc. (the “Company” or “Licensor”) entered into a license and services agreement (the “License Agreement”) with Black Swan, LLC (the “Licensee”). The Licensor agrees to grant to the Licensee the Access License which shall consist of:

 

  (a) access to the Database to enable Licensee to engage in formulation queries regarding the effects of having different amounts of terpene or other chemicals in cannabis strains;

 

  (b) access to the Database’s chemical profile library and related definitions;

 

  (c) access to a list with the contact information and fee schedule of cannabis extractors with state licenses so that Licensee can submit the formulation query results to such licensed cannabis extractors. Such licensed extractor list may change and Licensor shall have no obligation to provide Licensee with an updated list; and

 

  (d) access to the CannaDxTM mobile application to track feedback and reviews by up to 20,000 users of Licensee’s products.

 

 F-34 

 

 

The Licensor will provide the Product Services which shall consist of:

 

  (1) Licensor providing annual MyDx360 SAAS Premium Subscription at a cost of $15,000 per annum

 

  (2) Licensor providing 6,000 Cartridges every six months to the Licensee at a cost of $2.49 per Cartridge ($14,940 in total every six months). It shall be a requirement of this Agreement that Licensee order 6,000 Cartridges from Licensor every six months;

 

  (3) Licensor providing 1,000 Eco Smart Pens to the Licensee, when available, over the three-year term of this Agreement at a cost of $25 per Eco Smart Pen ($25,000 in total); and

 

  (4) Licensor providing 6,000 batteries to the Licensee over the three-year term of this Agreement at a cost of $3.99 per battery ($23,940 in total).

 

The term of this Agreement shall be three (3) years. Licensor shall have the right, in its sole discretion, to terminate this Agreement if Licensee does not order and pay for at least 6,000 Cartridges every six months at a cost of $2.49 per Cartridge ($14,940 in total every six months).

 

Marketing and Advertising Advisory Services Agreement

 

On April 5, 2016, the Company entered into a Marketing and Advertising Advisory Services Agreement (the “Agreement”) with Growth Point Advisors, Ltd. (“Growth Point”) for Growth Point to provide a comprehensive marketing, advertising and branding campaign for the Greater China Region on behalf of the Company’s MyDx AquaDx sensor. The campaign shall include, but not be limited to, the development of both the front and back-end of an e-commerce web site targeting the Chinese audience as well as introductions to potential key personnel to launch and manage the campaign.

 

In consideration for the services described above, the Company shall pay Growth Point a monthly service fee of $30,000. Should the Company fail to pay the monthly service fee, Growth Point shall have the right to convert the monthly service fee into the Company’s common stock at a 50% discount of the lowest closing price of the Company’s common stock for the 15 trading days upon send notice of non-payment to the Company.

 

On May 16, 2017, the Company terminated its Marketing and Advertising Advisory Services Agreement with Growth Point Advisors, Ltd. (“Growth Point”) entered into in April 2016. Growth Point had been expected to provide a comprehensive marketing, advertising and branding campaign for the Greater China Region on behalf of the Company’s MyDx AquaDx sensor. Growth Point failed to satisfy the agreed upon deliverables as stated in the agreement. As of the date of this filing the Company has not received communication from Growth Point.

 

On February 17, 2017 MyDx and Libre Design, LLC (“LDL”) entered into a twelve (12) month Research, Branding, Advertising and Marketing Services Agreement (“Agency Agreement”). The Company agreed to pay deferred cash compensation as follows of three thousand dollars ($3,000) upon execution and one thousand five hundred dollars ($1,500) per month for a subsequent eleven (11) payments thereafter on or before the first (1st) of each month. In addition, Agency is entitled to receive sixty seven million shares of restricted common stock at a closing market price equal to $0.0011.

 

On March 1 and 15th, 2017, MyDx, Inc. received a payment demand for the initial and subsequent payment of $50,000 and $25,000 per month respectively, exclusive of costs and other fees, due and owing under the BCI Advisors, LLC (“BCI”) advisory services agreement (the “Advisory Services Agreement”). The Company elected in lieu of cash to pay in unrestricted common stock, registered in form S-8. The Company made an initial payment of seventy five million shares in partial satisfaction of the amount due and owing that does not exceed the Company’s obligations under the Advisory Services Agreement to restrict BCI’s beneficial ownership to 4.99%. This summary contains only a brief description of the material terms of the Advisory Services Agreement and does not purport to be a complete description of the rights and obligations of the parties thereunder, and such description is qualified in its entirety by reference to the Advisory Services Agreement. A copy of the Advisory Services Agreement was filed in a Current Report on Form 8-K.

 

On November 3, 2017 the Company and Phylos Bioscience, Inc. (“Phylos”) entered into a License, Co-Marketing, and Data Sharing Agreement (the “Phylos Agreement”). Pursuant to the Phylos Agreement, the Company and Phylos each granted a non-exclusive license to the other party to access their data and use their trademarks and logo on marketing materials. Neither party paid cash or issued shares in connection with the Phylos Agreement. The license was the consideration given by each party. The term of the agreement is five (5) years.

 

 F-35 

 

 

Resale Licensing Agreement

 

On October 4, 2016, the Company executed a Resale Licensing Agreement with ANP Technologies, Inc. (“ANP”) (the “Agreement”) that outlines the terms and conditions for a One-Time, Non-Exclusive Resale License to MyDx, Inc. for the sale of ANP’s ACE-III-C pesticide and toxic heavy metal Lateral Flow Assay detection test under MyDx, Inc.’s brand. The Agreement provides for the purchase and resale of 10,000 units as part of a Phase I validation of the product’s merchantability. On June 9, 2017, the Company and ANP terminated the Resale Licensing Agreement.

 

Litigation

 

In the normal course of business, the Company may be subject to other legal proceedings, lawsuits and other claims. Although the ultimate aggregate amount of probable monetary liability or financial impact with respect to these matters is subject to many uncertainties and is therefore not predictable with assurance, the Company’s management believes that any monetary liability or financial impact to the Company from these other matters, individually and in the aggregate, would not be material to the Company’s financial condition, results of operations or cash flows.

 

However, there can be no assurance with respect to such result, and monetary liability or financial impact to the Company from these other matters could differ materially from those projected.

 

12. Income Taxes

 

The components of the provision for income taxes are as follows:

 

   For the years ended
December 31,
 
   2017   2016 
Current:        
Federal  $-   $- 
State   800    800 
    800    800 
Deferred:          
Federal   -    - 
State   -    - 
         
Total provision for (benefit from) income taxes  $800   $800 

 

Deferred tax assets (liabilities) consist of the following:

 

   For the years ended
December 31,
 
   2017   2016 
Deferred Tax Assets:        
Net operating loss carryforwards  $3,551,327   $4,824,505 
Research and development credits   144,305    151,303 
Accruals, reserves and other   59,006    14,037 
Depreciation and amortization   -    - 
Stock-based compensation   628,289    460,201 
Total deferred tax asset   4,382,538    5,450,046 
           
Valuation allowance   (4,376,733)   (5,445,149)
           
Deferred tax liabilities          
Depreciation and amortization   (6,194)   (4,897)
Net deferred tax assets  $-   $- 

 

 F-36 

 

 

Reconciliation of the statutory federal income tax to the Company's effective tax:

 

   For the year ended
December 31,
 
   2017   2016 
   %   % 
Statutory federal tax rate   21.00%   34.00%
State taxes, net of federal benefit   6.32%   -0.00%
Valuation allowance   -21.99%   -25.11%
Other   -5.33%   8.89%
Provision for income taxes