NOTE

STOCKHOLDERS’ DEFICIT

Common Stock

June 20, 2019,

the Company issued an aggregate of

3,500,000

restricted shares of common stock to certain promissory note holders as consideration for early payment of the promissory notes. The value of the shares issued amounted to

$315,000

and was recorded as interest expense during the

three

and

six

months ended

June 30, 2019.

June 20, 2019,

the Company issued

30,000,000

restricted shares of common stock to Emerging Growth, LLC as part of the acquisition under the Emerging Growth Agreement (see Note

). The value of the stock amounted to

$2,700,000

and was recorded as part of the acquisition price of the net assets acquired under the Emerging Growth Agreement.

Restricted Stock Issued as Compensation

During

2018

and

2017,

the Company issued

120,000

restricted shares of its common stock, at a value of

$0.50

per share, vesting in

equal quarterly increments commencing on

July 1, 2018

and

July 1, 2017,

to each of its non-employee directors as partial annual compensation for services as a director. As of

June 30, 2019

and

2018,

these restricted shares were fully issued. The Company recorded expenses of

$30,000

during the

three

month periods ended

June 30, 2019

and

2018

and

$60,000

during the

six

months ended

June 30, 2019

and

2018.

Preferred Stock

The Company is authorized to issue

2,000,000

shares of preferred stock with a par value of

$0.001

per share, of which

500

have been authorized as Series A Preferred Stock and

3,000

have been authorized as Series B Preferred Stock.

June 20, 2019,

the Company issued to certain of its promissory noteholders an aggregate of

500

shares of Series A Preferred Stock, each with a stated value per share of

$1,000,

as conversion of

$500,000

worth of outstanding promissory notes. The Series A Preferred Stock bears interest at

12%

per annum, and is convertible into the Company’s common stock at the election of the holder at a conversion price per share to be mutually agreed between the Company and the holder in the future, and be redeemable at the Company’s option following the

third

year after issuance, without voting rights or a liquidation preference.

June 20, 2019,

the Company issued

3,000

shares of Series B Preferred Stock to Emerging Growth, LLC, each with a stated value of

$1,000

per share, as part of the Emerging Growth Agreement. The aggregate fair value of

$687,000

was recorded as part of the acquisition price of the net assets acquired from Emerging Growth, LLC (see Note

). The Series B Preferred Stock bears interest at

per annum and is convertible into the Company’s common stock at the election of Emerging Growth, LLC at a conversion price per share to be mutually agreed between the Company and Emerging Growth, LLC in the future, without voting rights or a liquidation preference, except with respect to accrued penalty interest.

For the

three

and

six

months ended

June 30, 2019,

the Company incurred

$6,575

of interest from the outstanding preferred stock.

Warrants

There were

exercises of warrants during the

six

months ended

June 30, 2019

2018.

During the

three

months ended

March 31, 2019,

the Company issued

500,000

warrants exercisable at a price of

$0.15

per share which expire on

January 25, 2024.

The fair value of these warrants amounted to

$44,670,

and was recognized as deferred financing costs using the effective interest method during the

three

-month period ended

March 31, 2019.

Additionally, per the down round feature of

7,935,000

warrants issued in connection with the Beedie Credit Agreement (see Note

), pursuant to ASU

2017

which allows instruments with a down round feature to qualify for equity classification, the Company recognized the value of the feature when it was activated and there was an actual reduction of the strike price or conversion feature. The reduction in income of such

7,935,000

warrants amounted to

$104,638

and was capitalized as deferred financing costs during the

three

-month period ended

March 31, 2019.

During the

three

months ended

March 31, 2018,

the Company issued

200,000

and

4,500,000

warrants exercisable at a price of

$0.35

per share and which expire on

January 25, 2028

and

January 25, 2024,

respectively. The fair value of these warrants amounted to

$56,834

and

$1,099,861,

respectively, and were recognized as deferred financing costs and amortized using the effective interest method over the terms of the associated loan. During this same period,

58,824

warrants expired.

There were

warrants granted during the

three

months ended

June 30, 2019.

In connection with the closing of the Asset Purchase Agreement for the sale of the CAKE Business, warrants to purchase an aggregate of

9,668,333

shares of the Company’s common stock were cancelled. In addition,

3,250,075

of previously granted warrants to employees were forfeited during the

three

months ended

June 30, 2019.

As of

June 30, 2019,

and

December 31, 2018,

there were

12,627,109

and

16,110,517

warrants issued and outstanding, respectively, with a weighted average exercise price

$0.66

and

$0.62,

respectively.

The Company recorded expenses of

$37,691

and

$66,515

during the

three

months ended

June 30, 2019

and

2018,

respectively, related to warrants granted. The Company recorded expenses of

$126,810

and

$127,565

during the

six

months ended

June 30, 2019

and

2018,

respectively, related to warrants granted. As of

June 30, 2019,

there is

remaining unrecorded compensation expense relating to warrants granted.

Options

The following summarizes the Company’s stock option activity for the

six

months ended

June 30, 2019.

	Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (Years)

Outstanding at December 31, 2018		7,232,500		$	0.40		3.45
Granted		-
Forfeited/cancelled		(102,500	)		1.07
Exercised		-
Outstanding at June 30, 2019 (unaudited)		7,130,000		$	0.39		2.92

Vested and expected to vest at June 30, 2019 (unaudited)		7,125,801		$	0.39		2.92

Exercisable at June 30, 2019 (unaudited)		7,125,801		$	0.39		2.92

As of

June 30, 2019,

and

December 31, 2018,

there were

7,130,000

and

7,232,500

options, respectively, issued and outstanding with a weighted average exercise price of

$0.39

and

$0.40,

respectively.

The Company recorded expenses of

$4,385

and

$7,619

during the

three

months ended

June 30, 2019

and

2018,

respectively, related to stock options. The Company recorded expenses of

$10,963

and

$15,922

during the

six

months ended

June 30, 2019

and

2018,

respectively, related to stock options. Employees with unvested stock options all left the Company in connection with the closing of the Asset Purchase Agreement for the sale of the CAKE Business on

June 18, 2019.

As a result,

further options are expected to vest, and the total compensation cost related to non-vested awards

not

yet recognized amounted to

June 30, 2019.