KRED KonaRed Corporation New (CE)

NOTES TO FINANCIAL STATEMENTS

NOTE 1 – Nature of Organization

KonaRed Corporation (“KonaRed”, “KonaRed Corporation”, “us”, “we”, the “Registrant”, or the “Company”) was incorporated in the State of Nevada on October 4, 2010 as TeamUpSport Inc. Prior to, and in anticipation of, closing of an asset purchase agreement (the “Asset Agreement”) with Sandwich Isles Trading Co, Inc., on September 9, 2013 our company effected a name change by merging with our wholly-owned Nevada subsidiary named “KonaRed Corporation” with our company as the surviving corporation under the new name “KonaRed Corporation”. On October 4, 2013 pursuant to the terms the Asset Agreement, we acquired substantially all of the assets, property and undertaking of the health beverage and food business (the “Business”) operated under the name “KonaRed” from Sandwich Isles Trading Co., Inc., which was a private company incorporated in Hawaii on August 22, 2008 and dissolved on May 23, 2014. As a result of October 4, 2013 acquisition of the Business from Sandwich Isles Trading Co., Inc. we ceased to be a “shell company” as defined in Rule 12b-2 of the Securities Exchange Act of 1934 (the “Exchange Act”).

NOTE 2 – Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation and Fiscal Year

These financial statements have been presented by the Company in accordance with accounting principles generally accepted in the United States and are expressed in U.S. dollars. The Company’s fiscal year-end is December 31st.

Use of Estimates

The preparation of these financial statements in accordance with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. The Company regularly evaluates estimates and assumptions related to recoverability of long-lived assets, and deferred income tax asset valuations. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between estimates and the actual results, future results of operations will be affected.

Financial Instruments

The Company’s financial instruments consist principally of cash, accounts receivable, inventory, accounts payable, notes payable and related party debt. The Company believes that the recorded values of all of these financial instruments approximate their current fair values because of the short term nature and respective maturity dates or durations.

Cash and Cash Equivalents

The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents. There were no cash equivalents recorded for the years ended December 31, 2017 and December 31, 2016.

Deferred Revenue

Revenue from customer purchase agreements is recorded as unearned revenue and amortized over the term of the agreements. At December 31, 2017 and December 31, 2016, unearned revenues were $152,986 and $193,020 respectively. Unearned revenue is normally comprised of online subscriptions wherein we ship a scheduled amount of product to online retail subscribers each month. During the year ended December 31, 2016, unearned revenue also included a cash payment we received for a non-refundable signing fee of $200,000 from a strategic supplier partnership arrangement (the “FP Agreement”). The FP Agreement was executed on October 28, 2016 and because this was included in a license fee agreement, to conform with generally accepted accounting principles it is recorded as unearned revenue which is to be amortized over the five year life of the agreement. For fiscal 2017 and 2016, the amortized portion was $40,000 and $7,014, respectively. The fee is recorded as other income.

Revenue amortizations under the FP License agreement have been, and will be, recorded as income based on the following schedule:

Accounts Receivable

Trade accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial condition. Bad debts expense or write offs of receivables are determined on the basis of loss experience, known and inherent risks in the receivable portfolio and current economic conditions. During the years ended December 31, 2017 and December 31, 2016, the Company wrote off accounts receivable totaling $- and $6,149, respectively, and during the year ended December 31, 2016 collected $12,238 which had been written off as bad debt in a prior period. There were no allowances for doubtful accounts recorded for the years ended December 31, 2017 and December 31, 2016.

Inventories

Inventories are composed of raw materials and finished goods. Our raw materials inventory is comprised of dried coffee fruit and other input components, such as labels, caps, and packaging materials. Our finished goods inventory process begins when we take possession of dried coffee fruit from coffee growers in Hawaii. We then ship the raw material to our California warehouse for storage and then send required quantities to subcontractors for value-added processing; or we ship the raw materials directly from Hawaii to the processors. For our beverage products which include coffee fruit, value-added processing then occurs whereby the dried coffee fruit is converted to liquid extract through water based extraction. The extracts are then shipped from the raw materials processors to our California warehouse or directly to our bottling contractors. The bottling contractors then add our proprietary extract to other ingredients to produce our finished goods. Our cold brew coffee is manufactured using a comparable process. Finished goods are shipped back to either our Company’s warehouse or third party transit agents and subsequently disseminated to either distributors or shipped directly to retailers. The process for production of our nutritional wellness products follows a similar manufacturing chain, but does not involve a bottling process.

Inventories are valued at the lower of cost, as determined on an average basis, or market. Market value is determined by reference to selling prices at, or around, balance sheet date or by management’s estimates based on prevailing market conditions. Management writes down the inventories to market value if it is below cost. Management also regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine if a valuation allowance is required. If a valuation allowance is required, an offsetting entry is made which expenses the reserved inventory to cost of goods sold during the period in which the valuation was required. Subsequently, if this reserved inventory is used in future periods, an offset is entered to cost of goods sold which decreases cost of goods sold during that subsequent period. Costs of raw material and finished goods inventories include purchase and related costs incurred in bringing the products to their present location and condition. Labor, direct and indirect overhead, and the processing, bottling and shipping costs incurred during 3 ^rd party manufacturing are factored into the costs of our inventories.

Revenue Recognition

Sales revenue consists of amounts earned from customers through the sales of its finished products via wholesale and direct online retail channels. The Company also operates a branded ingredients division that sells raw material fruit powder and extracts to wholesale customers. Sales revenue is recognized when persuasive evidence of an arrangement exists, price is fixed or determinable, title to and risk of loss for the product has passed, which is generally when the products are received by the customers, and collectability is reasonably assured. Customers accept goods FOB shipping point. Goods are sold on a final sale basis and in the normal course of business the Company does not accept sales returns. In circumstances where returns are negotiated, sales returns which are accepted are returned to inventory and deducted from sales revenue.

Cost of goods sold

Cost of goods sold (“COGS”) primarily consist of raw materials purchases and third party processing costs. COGS also include: warehousing and distribution costs for inbound freight charges; shipping and handling costs; purchasing and receiving costs; costs for our labor; direct and indirect overhead costs; and the processing, bottling and shipping costs charged by 3 ^rd party manufacturers.

Customer shipping expenses

In accordance with guidance provided in EITF Abstracts Issue No. 00-10 ‘Accounting for Shipping and Handling Fees and Costs’, the Company records costs for products shipped to customers within general and administrative expenses, rather than within COGS. Prior to the year ended December 31, 2016, these costs were included within COGS and COGS for the year ended December 31, 2015 shown in these financial statements were adjusted to reflect the change in accounting policy during fiscal 2016. During the years ended December 31, 2017 and December 31, 2016, customer shipping expenses totaled $281,255 and $124,760, respectively.

Income Taxes

In accordance with ASC 740 - Income Taxes, the provision for income taxes is computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.

The Company also follows the guidance related to accounting for income tax uncertainties. In accounting for uncertainty in income taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in these financial statements is the benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.

No liability for unrecognized tax benefits was recorded as of December 31, 2017 and December 31, 2016.

Stock Based Payments

We account for share-based awards to employees in accordance with ASC 718 “Stock Compensation”. Under this guidance, stock compensation expense is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the estimated service period (generally the vesting period) on the straight-line attribute method. Share-based awards to non-employees are accounted for in accordance with ASC 505-50 “Equity”, wherein such awards are expensed over the period in which the related services are rendered.

Derivative financial instruments

In accordance with ASC 820–10–35–37 Fair Value in Financial Instruments ; ASC 815 Accounting for Derivative Instruments and Hedging Activities ; and ASC 815–40 (formerly Emerging Issues Task Force (“EITF”) Issue No. 00–19 and EITF 07–05), the Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations.

As of December 31, 2016, the Company had outstanding a senior convertible note (the “VDF Note”) with a balance of $869,674, net of a discount of $16,786. The Company determined the VDF Note had an embedded derivative valued at $11,649 at December 31, 2016 due to Sr. Note One having a provision which required adjustments to the conversion price to compensate for dilutive stock issuance events unrelated to the VDF Note. During the period ended December 31, 2016, $417,188 of principal was added to the VDF Note. This was comprised of $375,000 of patent license fees which were rolled over to the VDF Note and accrued interest for the year ended December 31, 2016 of $42,188. On September 29, 2017, the Company and VDF signed an amendment to the Senior Convertible Note. Per the amendment, the companies agreed that the total new outstanding balance was $916,457, and that VDF immediately converted all of the debt into equity of common shares at a conversion price of $0.07 per share, resulting in 13,092,242 common shares being issued to VDF. The loss on conversion of $335,409 has been recognized in the Statements of Operations as a Loss of Debt Modification in Other Income (Expense).

The net amount of the Change in Fair Value of Derivatives for the period ended December 31, 2016 was a gain of $7,463 which included the net amount of mark-to-market value changes in the embedded derivatives liabilities of the VDF Note of $7,463 for the year ended December 31, 2016. The VDF Note has a zero balance as of December 31, 2017.

As discussed in Note 9, on October 24, 2017 in connection with the issuance of the Series A Preferred shares, the shareholders also received warrants to purchased Series A Preferred shares and Common Stock shares. The Series A warrants and tainted Common Stock warrants contain a value of $9,016,712.

There are no embedded derivatives in any other notes issued by the Company.

Research and Development

Costs incurred in developing the ability to create and manufacture products for sale are included in research and development. Once a product is commercially feasible and starts to sell to third party customers, the classification of such costs as development costs stops and such costs are recorded as costs of production, which are included in cost of goods sold. Research and development costs are expensed when incurred.

Basic and Diluted Net Loss per Share

The Company computes loss per share in accordance with ASC 260, Earnings per Share. ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock warrants and options, using the treasury stock method; and convertible preferred stock and convertible debt using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive. The Company currently has options, warrants and convertible debt outstanding, and no convertible preferred stock has been issued. Common stock equivalents pertaining to the options, warrants and convertible debt were not included in the computation of diluted net loss per common share in these financial statements because the effect would have been anti-dilutive due to the net losses for the years ended December 31, 2017 and December 31, 2016.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and trade receivables. The Company places its cash with high credit quality financial institutions. At times such cash may be in excess of the FDIC limit. With respect to trade receivables, the Company routinely assesses the financial strength of its customers and, as a consequence, believes that the receivable credit risk exposure is limited.

Related parties

A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.

Fair Value Measurements

As defined in ASC 820 “Fair Value Measurements”, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).

The three levels of the fair value hierarchy defined by ASC 820 are as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

The Company’s Level 1 assets and liabilities consist of cash, accounts receivable, accounts receivable - related party, inventories net, of any inventory allowance, prepaid expenses, other current assets, accounts payable and accrued liabilities, accounts payable - related party, short term debt, net of discounts, and unearned revenue. Pursuant to ASC 820, the fair value of these assets and liabilities is determined based on Level 1 inputs, which consist of quoted prices in active markets for identical assets. Level 2 assets and liabilities consist of a derivative liability arising from a convertible note payable. Pursuant to ASC 820, the fair value of this liability is determined based on Level 2 inputs, which consisted of a valuation by an accredited third party expert. We do not currently have any assets or liabilities which are classified under the criterion of Level 3.

It is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from the financial instruments which it holds.

Advertising

Costs for advertising are expensed when incurred. Advertising costs totaled $272,461 and $9,945 for the years ended December 31, 2017 and December 31, 2016, respectively. The Company also incurs marketing expenses for product promotion and investor relations which are combined with advertising to form the advertising and marketing line item in our statement of operations. Excluding advertising, these other promotional costs totaled $204,512 and $266,354 for the years ended December 31, 2017 and December 31, 2016, respectively.

During the years ended December 31, 2017 and December 31, 2016: (a) depreciation for furniture and equipment of $2,450 and $2,096 was respectively recorded; and (b) depreciation for warehouse fixtures of $348 and $348 was respectively recorded. Accumulated depreciation for all fixed assets totaled $9,669 at December 31, 2017. Maintenance and repairs are expensed as incurred while renewals and betterments are capitalized.

Recent Accounting Pronouncements

In April 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15 “Statement of Cash Flows” (Topic 230) - Classification of Certain Cash Receipts and Cash Payments because stakeholders had indicated that there is diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. This Update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this Update apply to all entities, including both business entities and not-for-profit entities that are required to present a statement of cash flows under Topic 230. Among the eight issues, there were two which appeared germane to the Company: (i) Debt Prepayment or Debt Extinguishment Costs , which provided guidance that Cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows for financing activities; and (ii) Separately Identifiable Cash Flows and Application of the Predominance Principle , which provided guidance that the classification of cash receipts and payments that have aspects of more than one class of cash flows should be determined first by applying specific guidance in generally accepted accounting principles. In the absence of specific guidance, an entity should determine each separately identifiable source or use within the cash receipts and cash payments on the basis of the nature of the underlying cash flows. An entity should then classify each separately identifiable source or use within the cash receipts and payments on the basis of their nature in financing, investing, or operating activities. In situations in which cash receipts and payments have aspects of more than one class of cash flows and cannot be separated by source or use, the appropriate classification should depend on the activity that is likely to be the predominant source or use of cash flows for the item.

The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. This ASU conforms with the Company’s current protocols and the Company expects to adopt this ASU once it becomes effective. The Company does not expect the adoption of the ASU to have a significant impact on our consolidated financial statements.

In April 2016, FASB issued ASU No. 2016-10 “Revenue from Contracts with Customers” (Topic 606). This follows the May 28, 2014, FASB and the International Accounting Standards Board (IASB) issuance of a converged standard on recognition of revenue from contracts with customers. The amendments in this Update affect entities with transactions included within the scope of Topic 606. The scope of that Topic includes entities that enter into contracts with customers to transfer goods or services (that are an output of the entity’s ordinary activities) in exchange for consideration. The core principle of the guidance in Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this Update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date , defers the effective date of Update 2014-09 by one year. The Company will evaluate this standard and may implement adoption of once the standard becomes effective. The Company does not expect the adoption of the standard to have a significant impact on our financial statements.

Management does not anticipate that the adoption of these standards will have a material impact on the financial statements.

The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new pronouncements that have been issued that might have a material impact on its financial position or results of operations.

NOTE 3 – Going Concern

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Since inception, the Company has incurred losses totaling $37,308,866 as of December 31, 2017 and has incurred a net loss for the current year of $13,926,649. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. As needed, the Company will pursue additional equity and/or debt financing while managing cash flows from operations in an effort to provide funds to meet its obligations on a timely basis and to support future business development. The financial statements do not contain any adjustments to reflect the possible future effects on the classification of assets or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern. To address these issues, during the year ended December 31, 2017, the Company raised $1,248,968 from private placement equity offerings, $491,600 from exercise of warrants, and benefited from conversion of $1,552,816 of debt into common shares of equity and $306,949 of debt into Series B Preferred Stock. In addition, on October 24, 2017, the Company was able to raise over $2 million through preferred shares issuances. The Company anticipates that it will continue to raise funds through private placement equity sales in the near future.

During the years ended December 31, 2017 and December 31, 2016, the Company respectively wrote down inventory by $97,298 and $24,769 to account for expired inventory which had been written-off and disposed of, and for minor manufacturing process shrinkages. There were no reserved inventory balances as of December 31, 2017 and December 31, 2016 and the Company respectively recognized $nil and $nil recovery in inventory allowance for the years ended December 31, 2017 and December 31, 2016. At December 31, 2017 all inventory was valued at full cost.

NOTE 5 – Fixed Assets

Fixed assets at December 31, 2017 and December 31, 2016 respectively comprised: (a) furniture and equipment totaling $10,154 and $5,543, net of accumulated depreciation of $8,109 and $5,659; and (b) warehouse fixtures totaling $1,912 and $2,260, net of accumulated depreciation of $1,560 and $1,212.

NOTE 6 – Debt

September 2015 Notes:

On September 30, 2015, subject to securities purchase agreements we issued two subordinated promissory notes (“September 2015 Note One” and “September 2015 Note Two”, collectively, the “September 2015 Notes”) to two lenders (the “September 2015 Lenders”). The September 2015 Notes provided for customary events of default such as failing to timely make payments and the occurrence of certain fundamental defaults, as described in the September 2015 Notes. The September 2015 Notes were not secured and are subordinated to senior notes issued by the Company. September 2015 Note One had a face value of $100,000 and September 2015 Note Two had a face value of $150,000. The interest rate on each note was 8% per annum and this amount fully accrued upon issuance and added $8,000 to September 2015 Note One and $12,000 to September 2015 Note Two to bring the total balances due on each note to $108,000 and $162,000, respectively. The September 2015 Notes each included a 10% original issuance discount (“OID”) which resulted in total net proceeds to the Company of $225,000. As an inducement for the loans, On September 30, 2015 the September 2015 Lenders received five-year warrants, with cashless exercise rights, to purchase restricted shares of our common stock at an exercise price of $0.08 per share. September 2015 Note One Lender received 1,250,000 warrants which were valued using a Black-Scholes model at $67,115; and September 2015 Note Two Lender received 1,875,000 warrants which were valued using a Black-Scholes model at non-cash cost of $100,673.

At December 31, 2016, the balance on September 2015 Note One was $nil. During the year ended December 31, 2016, the Company timely met a series of scheduled cash payments on September 2015 Note One totaling $49,000 and on August 30, 2016 redeemed the balance of $59,000 due through issuance of 1,475,000 shares valued at $95,875 based on a market close price of $0.065 per share on date of issuance. The $36,875 difference between the cash redemption balance and the value of the shares redemption was treated as a conversion loss and recorded as an additional non-cash interest expense. At time of redemption on August 30, 2016 the remaining $50,245 of the warrant discount on September 2015 Note One was recorded as an amortization expense and the remaining $7,486 OID was recorded as interest expense.

During the year ended December 31, 2017, the holder of September 2015 Note Two converted the remaining balance of $65,000 due on the note into 1,625,000 shares valued at $128,463 based on a market close prices on dates of issuance. The conversions resulted in a $63,463 difference between the cash redemption balance and the value of the shares redemption which was treated as a conversion loss and recorded as an additional non-cash interest expense. Concurrent with the conversions, the remaining $16,527 of the warrant discount on September 2015 Note Two was recorded as an amortization expense and the remaining $8,062 OID was recorded as interest expense.

At December 31, 2016, the balance on September 2015 Note Two was $40,411. This included the remaining face value and accrued interest totaling $65,000, net of an unamortized warrant and beneficial conversion feature (“BCF”) discounts of $16,527 and an unamortized OID discount of $8,062. During the year ended December 31, 2016, the Company timely met a series of scheduled cash payments on September 2015 Note One totaling $88,500 and, prior to scheduled redemption date, on September 23, 2016 the original lender extended the maturity date of the note to November 14, 2016 in exchange for the right to convert the balance of $73,500 into common shares of the Company at a price of $0.04 per share. On September 23, 2016 the Company’s closing share price was $0.0605 and this created a BCF which was valued at $37,669. On November 7, 2016, prior to scheduled redemption date, the $73,500 balance due on September 2015 Note Two was purchased by the September 2015 Note One Lender (hereinafter referred to as “September 2015 Note Two Purchaser”) from the original lender. Also on November 7, 2016, in return for the addition of $11,500 to the OID for September 2015 Note Two, the September 2015 Note Two Purchaser extended the maturity of September 2015 Note Two to August 7, 2017 based on the Company meeting a payment schedule of $40,000 on May 7, 2017 and $45,000 on August 7, 2017. The $11,500 addition to the OID increased the principal due on September 2015 Note Two to $85,000.

Because the market price of the shares was higher than the conversion price on conversion date, the transaction resulted in a conversion loss of $6,850 which was the difference between the cash redemption balance and the value of the shares issued for redemption and was recorded as an additional non-cash interest expense. During the year ended December 31, 2016, a total of $96,509 of the warrant and BCF discounts were recorded as an amortization expense and $14,668 amortization of the OID was recorded as interest expense. September 2015 Note Two was fully satisfied by conversion into common stock in January 2017.  At September 30, 2017, the balances on the September 2015 Notes were $nil.

December 2015 Note:

On December 3, 2015, subject to a securities purchase agreement we issued a subordinated promissory note (the “December 2015 Note”) to one lender (the “December 2015 Lender”) in the aggregate amount of $110,000 (the “Original Principal”). The December 2015 Note bears interest at 8% per annum and this amount fully accrued upon execution of the loan and added $8,800 to the balance due at issuance date. The principal and interest was due and payable in full on December 3, 2016 (“Maturity Date”) and had a re-payment schedule which requires payments of $39,600 respectively on sixth, ninth and twelfth month anniversary dates of issuance. The December 2015 Notes included an aggregate $10,000 original issuance discount (“OID”) which resulted in net proceeds of $100,000. The December 2015 Note provides for customary events of default such as failing to timely make payments and the occurrence of certain fundamental defaults, as described in the December 2015 Note. The Note is not secured and is subordinated to senior notes issued by the Company and ranks equally with other debt issued by the Company. As an inducement for the loan, the Company issued the December 2015 Lender 500,000 restricted common shares valued at a non-cash cost of $30,050.

At December 31, 2017, the balance on the December 2015 Note was $nil. At December 31, 2016, the balance on the December 2015 Note was $32,081. This included the remaining face value and accrued interest totaling $39,600, net of an unamortized BCF discount of $6,340 and an unamortized OID discount of $1,179. During the year ended December 31, 2016, the Company timely met two scheduled cash payments totaling $79,200 and, prior to scheduled redemption date, on December 2, 2016 the lender extended the maturity date of the note to March 7, 2016 in exchange for 300,000 shares of the Company and the right to convert the balance of $39,600 into common shares of the Company at a price of $0.04 per share. On December 2, 2016, the Company's closing share price was $0.05 which created a BCF valued at $9,405 and a non-cash cost for the shares issuance of $15,000. During the year ended December 31, 2016, a total of $3,065 of the BCF discount was recorded as an amortization expense and $8,056 amortization of the OID was recorded as interest expense.

At December 31, 2017, the balance on the December 2015 Note was $nil. In the fourth quarter of 2017, the December 2015 Note was converted into a stock issuance. The conversion resulted in a difference between the cash redemption balance and the value of the shares redemption which was treated as a conversion loss of $19,800 and has been recognized in the Statements of Operations as a Loss on Debt Modification, conversions, and settlement in Other Income (Expense).

LPC Note One:

On August 18, 2015, we issued a Senior Convertible Note (“LPC Note One”) to Lincoln Park Capital Fund, LLC (“LPC”) in the amount of $250,000. LPC Note One was issued pursuant to the terms of a Securities Purchase Agreement and bears interest at the rate of 5% per annum (or 18% upon the occurrence of an event of default). Principal and interest is due and payable in full on December 31, 2016 and LPC Note One is now classified as short term convertible debt. Interest may be paid via issuance of the Company’s common stock if the Company meets certain conditions that would allow the issuance of the Company’s common stock without any trading restrictions. LPC Note One has a $25,000 original issuance discount (“OID”) which resulted in net proceeds of $225,000. The Company has the right to prepay LPC Note One, pursuant to the terms thereof, at any time, provided it pays a prepayment amount of 120% of the then outstanding balance, accrued interest and interest payable from the date of prepayment to the Maturity Date. LPC Note One provides for customary events of default such as failing to timely make payments and the occurrence of certain fundamental defaults, as described in LPC Note One. LPC Note One is not secured and is subordinated to the VDF Note, ranks equally with LPC Note Two, and ranks above other debt issued by the Company. The principal amount of LPC Note One and all accrued interest were convertible at the option of LPC into shares of our common stock at any time at a fixed Conversion Price of $0.07 per share, subject to adjustments for stock splits, stock dividends, stock combinations or other similar transactions as provided in LPC Note One. At no time may LPC Note One be converted into shares of our common stock if such conversion would result in LPC and its affiliates owning an aggregate of shares of our common stock in excess of 4.99% of the then outstanding shares of our common stock, provided such percentage may increase to 9.99% upon not less than 61 days prior written notice. As an inducement for the loan, on August 18, 2015 the Company granted LPC 3,750,000 six year warrants, which includes a cashless exercise provision, to purchase 3,750,000 restricted shares of our common stock at an exercise price of $0.10 per share which was valued using a Black-Scholes model at a non-cash cost of $277,014. At August 18, 2015, LPC Note One also included a BCF of $107,143 because the exercise price of LPC Note One was set below the market price of our stock when the note was executed. Since the combined warrant discount and BCF exceeded the face value of the note less OID, the warrant discount for LPC Note One was capped at $117,857, resulting in a total discount of $225,000. On December 16, 2016, prior to the scheduled redemption dates, LPC extended the maturities of each of its two notes from December 31, 2016 to December 31, 2017 in return for issuance by the Company of 7,000,000 six year warrants, with cashless exercise rights, to purchase 7,000,000 restricted shares of our common stock at an exercise price of $0.05 per share. The warrants were valued using a Black-Scholes model at a non-cash cost of $315,658, of which $143,481 was ascribed as an increase to the discount of LPC Note One and $172,177 was ascribed as an increase to the discount of LPC Note Two.

At December 31, 2016, the recorded balance on LPC Note One was $68,086. This included the remaining face value of 250,000, net of an unamortized warrant and BCF discounts totaling $177,505 and an unamortized OID discount of $4,409. During the year ended December 31, 2016, $130,348 of the BCF and warrant discounts were recorded as an amortization expense, $13,854 of the OID was recorded as interest expense, and accrued interest of $12,708 was paid via issuances of 181,544 restricted common shares.

At December 31, 2017, the recorded balance on LPC Note One was $140,035. During the year ended December 31, 2017 $177,505 of the BCF and warrant discounts were recorded as amortization expenses, and $4,409 of the OID amortization was recorded as interest expenses. In the fourth quarter of 2017, in three transactions, LPC settled $250,000 principal and $6,164 accrued interest due on LPC Note One as discussed in Note 9. The settlement resulted in a $454,105 difference between the cash redemption balance and the value of the shares redemption which was treated as a modification loss and has been recognized in the Statements of Operations as a Loss on Debt Modification, conversions, and settlement in Other Income (Expense).

LPC Note Two:

On November 23, 2015, we issued a Senior Convertible Note (“LPC Note Two”) to LPC in the amount of $300,000. LPC Note Two was issued pursuant to the terms of a Securities Purchase Agreement and bears interest at the rate of 5% per annum (or 18% upon the occurrence of an event of default). Principal and interest is due and payable in full on December 31, 2016. LPC Note Two is now classified as short term convertible term debt. Interest may be paid via issuance of the Company’s common stock if the Company meets certain conditions that would allow the issuance of the Company’s common stock without any trading restrictions. LPC Note Two has a $30,000 OID which resulted in net proceeds of $270,000. The Company has the right to prepay LPC Note Two, pursuant to the terms thereof, at any time, provided it pays a prepayment amount of 120% of the then outstanding balance, accrued interest and interest payable from the date of prepayment to the Maturity Date. LPC Note Two provides for customary events of default such as failing to timely make payments and the occurrence of certain fundamental defaults, as described in LPC Note Two. LPC Note Two is not secured and is subordinated to the VDF Note, ranks equally with LPC Note One, and ranks above other debt issued by the Company. The principal amount of LPC Note Two and all accrued interest is convertible at the option of LPC into shares of our common stock at any time at a fixed Conversion Price of $0.05 per share, subject to adjustments for stock splits, stock dividends, stock combinations or other similar transactions as provided in LPC Note Two. At no time may LPC Note Two be converted into shares of our common stock if such conversion would result in LPC and its affiliates owning an aggregate of shares of our common stock in excess of 4.99% of the then outstanding shares of our common stock, provided such percentage may increase to 9.99% upon not less than 61 days prior written notice. On November 23, 2015, as an inducement for the loan the

Company granted LPC 5,000,000 six year warrants, which includes a cashless exercise provision, to purchase 5,000,000 shares of our restricted common stock at an exercise price of $0.07 per share which was valued using a Black-Scholes model at a cost of $253,098. At November 23, 2015, LPC Note Two also included a BCF of $102,600 because the exercise price of LPC Note Two was set below the market price of our stock when the note was executed. Since the combined warrant discount and BCF exceeded the face value of the note less OID, the warrant discount for LPC Note Two was capped at $167,400, resulting in a total discount of $270,000. On December 16, 2016, prior to the scheduled redemption dates, LPC extended the maturities of each of its two notes from December 31, 2016 to December 31, 2017 in return for issuance by the Company of 7,000,000 six year warrants, with cashless exercise rights, to purchase 7,000,000 restricted shares of our common stock at an exercise price of $0.05 per share. The warrants were valued using a Black-Scholes model at a non-cash cost of $315,658, of which $143,481 was ascribed as an increase to the discount of LPC Note One and $172,177 was ascribed as an increase to the discount of LPC Note Two.

During the year ended December 31, 2017, LPC converted $300,000 principal and $3,060 accrued interest due on LPC Note Two into 6,105,843 shares valued at $405,361 based on market close prices on dates of issuance. The conversions resulted in a $98,963 difference between the cash redemption balance and the value of the shares redemption which was treated as a conversion loss and has been recognized in the Statements of Operations as a Loss on Debt Modification, conversions, and settlement in Other Income (Expense). Concurrent with the conversions, $210,745 of the warrant discount was recorded as an amortization expense and $6,162 OID was recorded as interest expense. For the year ended December 31, 2017, excluding the conversion amortization adjustments, $13,693 of the remaining warrant discount was recorded as amortization expense and $400 of the remaining OID was recorded as interest expense.

At December 31, 2017, the recorded balance on LPC Note Two was $nil. At December 31, 2016, the recorded balance on LPC Note Two was $69,000. This included the remaining face value of $300,000, net of an unamortized discount of $224,438 and an unamortized OID of $6,562.

Short Term Debt - Related Party:

RP Note:  

On July 31, 2016, the Company issued a $100,000 note (the “RP Note”) to a director of the Company for a loan. The RP Note had an original maturity date of January 27, 2017 and is classified as short term related party debt. The RP Note bears interest at 8% per annum due at maturity and may be prepaid in whole, or in part, at any time before each maturity date without prepayment penalty. As an inducement for the loan, the Company issued 340,000 restricted common shares to the lender at a non-cash cost of $15,504 valued at market close price on date of issue. At December 31, 2016, the balance due on the RP Note was $103,353 including $3,353 of accrued interest for the year ended December 31, 2016. On January 27, 2017, the lender extended the maturity of the RP Note to July 27, 2017 in return for 340,000 restricted common shares valued at $16,592 at market close price on date of issue. On September 25, 2017, the lender further extended the maturity of the RP Note to December 31, 2017 in return for 340,000 restricted common shares valued at $14,620 at market close price on date of issue.  On July 18, 2017, the Company issued a $100,000 note (the “RP Note Two) to such director of the Company for a loan. The RP Note Two had an original maturity date of December 31, 2017, and is classified as short term related party debt. The RP Note Two bears interest at 8% per annum due at maturity and may be prepaid in whole, or in part, at any time before the maturity date without prepayment penalty. As an inducement for the loan, the Company repriced the RP Noteholder’s warrants from $0.17 to $0.055. At December 31, 2017, the balance due on the RP Note was $0, in accordance with the debt modification.

SFC Note:

 On February 14, 2017, the Company issued a $100,000 note (the “SFC Note”) to a long term shareholder of the Company for a loan. The SFC Note has maturity date of August 14, 2017 and bears interest at 8% per annum due at maturity and may be prepaid in whole, or in part, at any time before each maturity date without prepayment penalty. As an inducement for the loan, the Company issued 340,000 restricted common shares to the lender at a non-cash cost of $23,800 valued at market close price on date of issue. At December 31, 2017, the balance due on the SFC Note was $0 in accordance with the debt conversion into Preferred Series B shares resulting in a loss of $139,751 and has been recognized in the Statements of Operations as a Loss on Debt Modification, conversions, and settlement in Other Income (Expense).

Convertible Long Term Notes Payable:

VDF Note:

On January 28, 2014, we entered into a patent settlement with VDF FutureCeuticals, Inc. (“VDF”) at which time a senior convertible note (the “VDF Note”) was issued to VDF, whereby we promised to pay VDF a principal amount equal to the sum of aggregate accrued and unpaid patent license fee payments plus accrued interest. The maturity of the VDF Note is December 31, 2018 unless accelerated pursuant to an event of default or the License Agreement is terminated and all accrued and unpaid obligations under the VDF Note have been paid. Due to its term the VDF Note is classified as long term debt. Interest on the note is 7% per annum, subject to an adjustment to 12% for events of default and we have the right, subject to certain limitations, to prepay principal at any time and from time to time. At any time VDF has the option to convert any principal outstanding on the VDF Note into shares of our common stock at a Conversion Price determined by the terms of the VDF Note, which is subject to adjustment based on our issuance of stock and other securities. During the year ended December 31, 2016, the Conversion Price of the Senior Convertible Note was adjusted from $0.3823 per share to $0.2157 per share per the terms of the Senior Convertible Note. The VDF Note provides that we may, at our option, roll-over to the VDF Note quarterly License fee payments and accrued interest and is secured through the Pledge and Security Agreement (“PSA”) and is senior to any other debt issued by the Company unless prior written consent of VDF is obtained to amend the ranking.

At December 31, 2016, the VDF Note had an outstanding balance $869,674. This included the principal due of $886,460, net of a discount of $16,786 resulting from the embedded derivative. During the year ended December 31, 2016, we rolled-over License fee payments totaling $375,000 and recorded accrued interest of $42,188 for a total addition to the VDF Note of $417,188.

On January 4, 2017, VDF and the Company executed an addendum to the VDF Note and the PSA in which VDF agreed it will: (i) remove its lien on the Company’s inventory and accounts receivable in the event that the Company executes any line of credit, inventory purchase order financing, or accounts receivable factoring agreements with third party lender(s); and (ii) promptly execute any inter-creditor agreement(s) provided to VDF by such third party lender(s) which affirm VDF’s permission for the creation of liens by the third party lender(s) which rank in priority above VDF’s existing lien. A copy of this agreement is attached to this Report as Exhibit 10.54.

On September 29, 2017, the Company and VDF signed an amendment to the Senior Convertible Note. Per the amendment the companies agreed that the total new outstanding balance was $916,457, and that VDF would immediately convert all of the debt into 13,092,242 common shares at a conversion price of $.07/share, resulting in 13,092,242 common shares being issued to VDF. The modification loss of $335,409 has been recognized in the Statements of Operations as a Loss on Debt Modification, conversions, and settlement in Other Income (Expense). At December 31, 2017, the VDF Note had an outstanding balance of $0.

NOTE 7 – Derivatives

In connection with the issuance of debt or equity instruments, the Company may sell options or warrants to purchase our common stock. In certain circumstances, the convertible debt, options or warrants may be classified as derivative liabilities, rather than as equity. Additionally, the debt or equity instruments may contain embedded derivative instruments, such as embedded derivative features which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability. The Company’s derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income in the period in which the changes occur. For options, warrants and bifurcated embedded derivative features that are accounted for as derivative instrument liabilities, the Company estimates fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. The valuation techniques require assumptions related to the remaining term of the instruments and risk-free rates of return, our current common stock price and expected dividend yield, and the expected volatility of our common stock price over the life of the option.

The Company no longer has any variable rate convertible debt outstanding at December 31, 2017.

On September 29, 2017, the derivative balance of $11,649 related to VDF Note was settled per Note amendment and subsequent conversion of VDF Note to equity. Per amendment, the Note was fully satisfied and canceled upon issuance of 13,092,242 common shares at $0.07 per share.

As discussed in Note 9, on October 24, 2017 in connection with the issuance of the Series A Preferred shares, the shareholders also received warrants to purchased Series A Preferred shares and Common Stock shares. The value of the Series A warrants and tainted Common Stock warrants are included in the table below.

The following table summarizes the derivative activity for the year ended December 31, 2016 and during the year ended December 31, 2017:

Due to the indeterminate nature of the number of common shares issuable upon exercise and/or conversion of these warrants into common shares of the Company, the Warrants need to be accounted for as derivative instruments. These warrants taint the equity environment. Existing warrants were evaluated to determine if they are scoped out of derivative treatment. Since the Company had a number of existing warrants and options previously outstanding, based on the warrants issued in the October 24, 2017 financing, these warrants and options must be valued as derivative instruments because the equity environment is tainted, as of the quarterly period end date of December 31, 2017.

For the year ended December 31, 2017, the change in the fair market value of the derivative liability of $9,016,712 was recorded as Other Expense. For the year ended December 31, 2016 the change in the fair market value of the derivative liability of $(7,463) was recorded as Other Income.

The Black-Scholes model was used to value the warrants and the lattice methodology was used to value the derivative liabilities related to the convertible notes, with the following assumptions.

NOTE 8 – Related Party Transactions

During the years ended December 31, 2017 and December 31, 2016, related party transactions included:

Chief Executive Officer, Director

The previous President and Chief Operating Officer, Director, discussed below, assumed the role of Chief Executive Officer in October 2017. Amounts related to the assumption to this role for the year ended December 31, 2017 are as follows: (i) compensation of $35,000; (ii) automobile allowance of $1,300; and (iii) Black-Scholes non-cash expense amortization of $138,243 related to 67 Series B Preferred Stock options granted on October 24, 2017 for services, which vested immediately.

(Former) Chief Executive Officer, Director, Board Chair, Consultant

For the year ended December 31, 2017: (i) compensation of $73,125; (ii) office rent of $5,850; (iii) Black-Scholes non-cash expense amortization of $35,861 related to 1,063,782 options granted on March 6, 2017 which vested immediately; and (iv) accrued bonus of $97,825. On October 24, 2017, the former CEO was signed as a consultant to provide consulting services for the Company. Compensation for this service for the year ended December 31, 2017 consisted of: (i) compensation of $18,334; (ii) office rent of $1,800; (iii) automobile allowance of $1,200. For the year ended December 31, 2016: (i) compensation of $105,624; (ii) office rent of $15,600; (iii) issuance of 150,366 restricted common shares at a closing market price of $0.051 per share on date of issue, for deemed compensation of $7,669; (iv) issuance of 333,781 restricted common shares at a closing market price of $0.049 on date of issue for deemed compensation of $16,355; (v) issuance of 164,841 restricted common shares at a closing market price of $0.052483 per share on date of issue for deemed compensation of $8,651; (vi) issuance of 435,180 restricted common shares at a closing market price of $0.05802 per share on date of issue for deemed compensation of $25,249; (vii) issuance of 193,848 restricted common shares at a closing market price of $0.0561 per share on date of issue for deemed compensation of $10,875; and (viii) Black-Scholes non-cash expense amortization of $39,736 related to 19 Series B Preferred Stock options granted on October 24, 2017 for services, which vested immediately.

(Former) President and Chief Operating Officer, Director

For the year ended December 31, 2017: (i) compensation of $147,187; (ii) accrued bonus of $225,342; (iii) Black-Scholes non-cash expense amortization of $83,481 related to 2,476,377 options granted on March 6, 2017 which vested immediately; and (iv) Black-Scholes non-cash expense amortization of $24,222 related to 559,841 options granted on May 31, 2017 which vested immediately. For the year ended December 31, 2016: (i) compensation of $223,439; (ii) issuance of 318,081 restricted common shares at a closing market price of $0.051 per share on date of issue for deemed compensation of $16,222; (iii) issuance of 254,441 restricted common shares at a closing market price of $0.049 per share on date of issue for deemed compensation of $12,468; (iv) issuance of 348,702 restricted common shares at a closing market price of $0.052483 per share on date of issue for deemed compensation of $18,301; (v) issuance of 1,333,333 restricted common shares at a closing market price of $0.049 per share on date of issue for deemed compensation of $65,333; (vi) issuance of 906,634 restricted common shares at a closing market price of $0.05802 per share on date of issue for deemed compensation of $52,603; and (vii) issuance of 1,382,532 restricted common shares at a closing market price of $0.0561 per share on date of issue for deemed compensation of $77,560.

(Former) Chief Financial Officer, Secretary and Treasurer

For the year ended December 31, 2017: (i) compensation of $46,875; (ii) office rent of $2,250; and (iii) issuance of 653,842 restricted common shares at a non-cash cost of $0.056 per share, for aggregate deemed compensation of $36,615. For the year ended December 31, 2016: (i) compensation of $117,188 (ii) office rent of $9,000; (iii) issuance of 462,663 restricted common shares at a closing market price of $0.051 per share on date of issue for deemed compensation of $23,596; (iv) issuance of 507,202 restricted common shares at a closing market price of $0.052483 per share on date of issue for deemed compensation of $26,619; and (v) issuance of 426,040 restricted common shares at a closing market price of $0.0561 per share on date of issue for deemed compensation of $23,901.

Non-executive Director One

For the year ended December 31, 2017: (i) extension of the maturity of a prior loan of $100,000 to the Company in return for an inducement fee of 340,000 restricted common shares priced at a closing market of $0.0488 per share on date of issue for a deemed non-cash cost of $16,592; and (ii) issuance of short term loan of $100,000 to the Company in return for re-pricing of existing warrants from $0.170 to $0.055; and (iii) further extension of the maturity of a prior loan of $100,000 to the Company in return for an inducement fee of 340,000 restricted common shares priced at a closing market of $0.043 per share on date of issue for a deemed non-cash cost of $14,620. For the year ended December 31, 2016: nil transactions.

Non-executive Retiring Director One:

During the year ended December 31, 2017: Retiring Director One resigned from the Board at which time the Company: (i) re-priced 1,000,000 options Retiring Director One held from an exercise price of $0.17 per share to an exercise price of $0.05 per share. The Black-Scholes options pricing model cost of the transaction was $14,303; and (ii) issued to him 150,000 restricted common shares at a non-cash cost of $0.0722 per share for aggregate deemed compensation of $10,830.

Non-executive Director Two:

For the year ended December 31, 2017: issuance of 250,000 restricted common shares at a non-cash cost of $0.0484 per share for aggregate deemed compensation of $12,100 as an inducement to join the Board. For the year ended December 31, 2016: (i) purchase by a holding company wholly owned by Independent Director One of 1,875,000 units priced at $0.04 per unit for aggregate proceeds of $75,000 with each unit including one restricted common share and one five year warrant exercisable at $0.055 per share in Unit Offer One; (ii) purchase by Independent Director One of 500,000 units priced at $0.04 per unit for aggregate proceeds of $20,000 with each unit including one restricted common share and one five year warrant exercisable at $0.055 per share in Unit Offer Two; (iii) provision of a loan of $100,000 to the Company in return for an inducement fee of 340,000 restricted common shares priced at a closing market of $0.0456 per share on date of issue for a deemed cost of $15,504; and (iv) accrual of $3,353 interest on the loan at December 31, 2016.

Non-executive Retiring Director Two:

During the year ended December 31, 2017, Retiring Director Two resigned from the Board at which time the Company re-priced 750,000 options he held from an exercise price of $0.17 per share to an exercise price of $0.05 per share and issued him an additional 150,000 options with the same three year remaining maturity. The exercise price of the new options was set on date of grant and these options vested immediately. The combined Black-Scholes options pricing model cost of the transactions was $14,528.

Non-executive Director Three:

For the year ended December 31, 2017: (i) purchase of 909,091 restricted common shares at $0.055 per share for aggregate proceeds of $50,000; (ii) issuance of 250,000 restricted common shares at a non-cash cost of $0.0692 per share for aggregate deemed compensation of $17,300 as an inducement to join the Board. For the year ended December 31, 2016: (i) receipt by the Company of payment by Independent Director Two to the Company of $18,000 for a related party accounts receivable which was outstanding at December 31, 2015; and (ii) an arm’s length purchase by a company owned by Independent Director Two for $1,800 of raw material products, such order which was recorded as a related party accounts receivable at December 3, 2016.

Non-executive Director Four:

For the year ended December 31, 2016: issuance on October 4, 2016 of 150,000 restricted common shares valued at a cost of $8,850 which were issued as an inducement fee for joining the Company’s Board

Non-executive Director Five:  

For the year ended December 31, 2016: as part of a group which executed license fee and securities purchase agreements with the Company on December 6, 2016, on December 23, 2016 Director Five purchased 2,500,000 restricted common shares at $0.024 per share for proceeds of $60,000. The appointment of Director Five to the Board fulfilled a clause of the same purchase agreement.

NOTE 9 – Equity

Overview:

Our authorized capital stock consists of 877,500,000 shares of common stock, with a par value of $0.001 per share; and 10,000 shares of preferred stock at a par value of 0.001, with no outstanding shares. The holders of common stock have dividend rights, liquidation rights and voting rights of one vote for each share of common stock. In October 2017, the Company created the Series A Preferred Stock series and the Series B Preferred Stock series. The Series A Preferred Stock series has 6,500 authorized shares and the Series B Preferred Stock series has 810 authorized shares.  There are 1554 Series A and 252 Series B preferred shares issued and outstanding. The terms of any future preferred shares issuances will be as determined by the Board of Directors. As of December 31, 2017, there were 226,116,621 shares of our common stock issued and outstanding.

2017 Share Transactions

On January 23, 2017, we issued 250,000 restricted common shares at $0.0484 per share to a new director at market close price on date of grant as an inducement fee for joining our Board for a deemed non-cash cost of $12,100. These shares were issued to one Accredited Investor (as that term is defined in Rule 501 of Regulation D under Securities Act of 1933, as amended (the “Securities Act”) Rule 506 of Regulation D, and in issuing these shares we relied on the exemptions from registration requirements provided for in Rule 506 of Regulation D and/or Section 4(a)(2) of the Securities Act.

On January 26, 2017, we issued 340,000 restricted common shares at $0.0488 per share to an Accredited Investor related party at market close price on date of grant as an inducement fee extension of the maturity of a promissory note for a deemed non-cash cost of $16,592. These shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act) in offshore transactions in which we relied on the exemptions from registration requirements provided for in Regulation S and/or Section 4(a)(2) of the Securities Act.

On February 14, 2017, we remedially executed a private placement related to the Company’s previous Unit Offer #3 which raised $15,000 through the sale of 375,000 units. Each unit was priced at $0.04 per unit and comprised of one restricted common share price plus one five year warrant exercisable to purchase one restricted common share at $0.055 per share. The fair market value of the shares and embedded value of the warrants is based on the valuations done for Unit Offer #3. These shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act) in offshore transactions in which we relied on the exemptions from registration requirements provided for in Regulation S and/or Section 4(a)(2) of the Securities Act. The warrants were valued using a Black-Scholes model at a non-cash cost of $16,463. At September 30, 2017, none of these warrants had been exercised.

On February 14, 2017, we issued 340,000 restricted common shares to an Accredited Investor long term shareholder at $0.07 per share at market close price on date of grant as an inducement fee for a $100,000 promissory note for a deemed non-cash cost of $23,800. These shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act) in offshore transactions in which we relied on the exemptions from registration requirements provided for in Regulation S and/or Section 4(a)(2) of the Securities Act.

During January, 2017, in two transactions we issued a total of 1,625,000 common shares at $0.04 per share for conversion by September 2015 Note Two Purchaser of the remaining $65,000 due on September 2015 Note Two. The market values of the shares totaled $128,463 based on market close prices on dates of issuance. The conversions resulted in a $63,463 difference between the cash redemption balance and the value of the shares redemption which was treated as a conversion loss and recorded as an additional non-cash interest expense. These conversions fully satisfied the note and no further payments are due.

These shares were issued to an Accredited Investor with reliance on the exemptions from registration requirements provided in Securities Act Sections 3(a)(9) and 4(a)(2).

During February, 2017, we issued 1,500,000 restricted common shares to two prior unit offering subscribers for exercises of 1,500,000 warrants they held at the exercise price $0.055 per share for proceeds of $82,500. These subscribers are Accredited Investors (as that term is defined in Rule 501 of Regulation D under the Securities Act), and in issuing these shares we relied on the exemptions from registration requirements provided for in Rule 506 of Regulation D and/or Section 4(a)(2) of the Securities Act.

On February 22, 2017, we issued 990,000 common shares at $0.04 per share for conversion by December 2015 Lender of the remaining $39,600 due on the December 2015 Note. The value of the shares was $61,578 based on a market close price on date of issuance. The conversion resulted in a $21,978 difference between the cash redemption balance and the value of the shares redemption which was treated as a conversion loss and recorded as an additional non-cash interest expense. This conversion fully paid the note and no further payments are due. These shares were issued to one Accredited Investor with

reliance on the exemptions from registration requirements provided in Securities Act Sections 3(a)(9) and 4(a)(2).

During February and March of 2017, as part of a stock offering, the Company issued 2,636,363 restricted common shares at $0.055 per share at market close price on dates of grant to various parties for cash of $145,000. These shares were issued to five US persons and companies, with reliance on the exemptions from registration requirements provided for in Rule 506 of Regulation D and/or Section 4(a)(2) of the Securities Act.

During the year ended December 31, 2017 in six transactions, LPC converted $300,000 principal and $3,060 accrued interest due on LPC Note Two at a conversion price of $0.05 per share into 6,105,843 shares valued at $405,361 based on market close prices on dates of issuance. The conversions resulted in a $99,064 difference between the cash redemption balance and the value of the shares redemption which was treated as a conversion loss and recorded as an additional non-cash interest expense. These shares were issued to one Accredited Investor with reliance on the exemptions from registration requirements provided in Securities Act Sections 3(a)(9) and 4(a)(2). These conversions fully paid all amounts due on LPC Note Two and the note is extinguished.

On March 1, 2017, we issued 1,100,000 restricted common shares at $0.0548 per share at market close price on date of grant for consultant services rendered for a deemed cost of $60,280. These shares were issued to one Accredited Investor (as that term is defined in Rule 501 of Regulation D under the Securities Act) or a person qualified under the terms of Rule 506 of Regulation D, and in issuing these shares we relied on the exemptions from registration requirements provided for in Rule 506 of Regulation D and/or Section 4(a)(2) of the Securities Act.

On March 2, 2017, we issued 15,500 restricted common shares at $0.0518 per share to a professional athlete for endorsement services rendered. These shares were issued at market close price on issue date for deemed compensation of $803. These shares were issued to US persons with reliance on the exemptions from registration requirements provided for in Rule 506 of Regulation D and/or Section 4(a)(2) of the Securities Act.

On March 6, 2017, we issued 653,842 restricted common shares to a company wholly owned by our CFO at a price of $0.0559 on date of grant as compensation for a deemed cost of $36,615. These shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act) in offshore transactions in which we relied on the exemptions from registration requirements provided for in Regulation S and/or Section 4(a)(2) of the Securities Act.

On March 7, 2017, we issued 50,000 restricted common shares at $0.0604 per share to a professional athlete for endorsement services rendered. These shares were issued at market close price on issue date for deemed compensation of $3,020. These shares were issued to US persons with reliance on the exemptions from registration requirements provided for in Rule 506 of Regulation D and/or Section 4(a)(2) of the Securities Act.

On April 3, 2017, we issued 11,000 restricted common shares at $0.0720 per share to a professional athlete for endorsement services rendered. These shares were issued at market close price on issue date for deemed compensation of $792. These shares were issued to US persons with reliance on the exemptions from registration requirements provided for in Rule 506 of Regulation D and/or Section 4(a)(2) of the Securities Act.

On April 11, 2017 we issued 50,000 restricted common shares at $0.0709 per share at market close price on date of grant to an employee for deemed compensation of $3,545. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 of Regulation D and/or Section 4(a)(2) of the Securities Act.

On April 27, 2017, we issued 36,364 restricted common shares at $0.0550 per share to a professional athlete for endorsement services rendered. These shares were issued at market close price on issue date for deemed compensation of $2,000. These shares were issued to US persons with reliance on the exemptions from registration requirements provided for in Rule 506 of Regulation D and/or Section 4(a)(2) of the Securities Act.

On May 31, 2017, we issued 150,000 restricted common shares at $0.0722 per share market close price on date of grant to a Director for deemed compensation of $10,830. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 of Regulation D and/or Section 4(a)(2) of the Securities Act.

During March, April, May and June of 2017, as part of a stock offering, the Company issued 5,172,147 restricted common shares at $0.06 per share at market close price on dates of grant to various parties for cash of $284,468. These shares were issued to eleven US persons with reliance on the exemptions from registration requirements provided for in Rule 506 of Regulation D and/or Section 4(a)(2) of the Securities Act.

On June 8, 2017, we issued 250,000 restricted common shares at $0.0692 per share market close price on date of grant to a Director for deemed compensation of $17,300. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 of Regulation D and/or Section 4(a)(2) of the Securities Act.

On July 6, 2017, we issued 25,000 restricted common shares at $0.060 per share market close price on date of grant to an employee for deemed compensation of $1,500. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 of Regulation D and/or Section 4(a)(2) of the Securities Act.

On July 31, 2017, we issued 12,500,000 restricted common shares to two parties (collectively, “PCF”) as part of a previous equity agreement.  The shares were issued for $500,000 received and priced at $.04/share.  This was the second payment received under the same provisions of the PCF Agreements. These shares were issued to two Accredited Investors with reliance on the exemption from registration requirements provided in Securities Act Section 4(a)(2).

On July 31, 2017, the Company issued 4,000,000 restricted common shares at $0.055 per share in exchange for $220,000 received in second quarter as part of a private placement stock offering. These shares were issued to one non-U.S. Company (as that term is defined in Regulation S of the Securities Act) in offshore transactions in which we relied on the exemptions from registration requirements provided for in Regulation S and/or Section 4(a)(2) of the Securities Act.

On August 30, 2017, the Company issued 340,000 shares of restricted common stock for the extension of a short term loan maturity date.  These shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act) in offshore transactions in which we relied on the exemptions from registration requirements provided for in Regulation S and/or Section 4(a)(2) of the Securities Act.

On September 25, 2017, the Company issued 340,000 shares of restricted common stock to a Director of the Company for the extension of a short term loan maturity date.  These shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act) in offshore transactions in which we relied on the exemptions from registration requirements provided for in Regulation S and/or Section 4(a)(2) of the Securities Act.

On September 29, 2017, the Company issued 13,092,242 common shares of restricted common stock at $0.07 per share as and for full satisfaction of VDF Note. These shares were issued to one U.S. Company with reliance on the exemptions from registration requirements provided in the Securities Act Sections 3(a)(9) and 4(a)(2).

On October 17, 2017, the Company issued 448,000 restricted common shares at $0.0413 per share in exchange for $18,502 to individuals and directors of the company for deemed compensation. These shares were issued to various US persons with reliance on the exemptions from registration requirements provided for in Rule 506 of Regulation D and/or Section 4(a)(2) of the Securities Act.

On October 18, 2017, the Company issued 250,000 restricted common shares at $0.0485 per share in exchange for $12,125 to Pillar Marketing for services rendered. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 of Regulation D and/or Section 4(a)(2) of the Securities Act. These conversions fully paid all amounts due on LPC Note One and the note is extinguished.

Preferred Issuances

On October 24, 2017, the Company entered into and closed a Series A Preferred Stock Purchase Agreement with Kona Holdings I LLC and Kona Holdings II LLC (together, the “Series A Investors”); entered into and closed a Series B Preferred Stock Purchase Agreement with three accredited investors (together, the “Series B Investors”); issued certain warrants to the Series A Investors and to the Series B Investors; entered into a consulting letter agreement with The Roberts Group, LLC (an affiliate of its chairman Shaun Roberts); and entered into an employment letter agreement with its chief executive officer Kyle Redfield.

Under the   Series A Preferred Stock Purchase Agreement, the Series A Investors invested $2,200,000 in exchange for 1,554.26 shares of newly-issued Series A Preferred Stock. (On October 12, 2017, the Company borrowed $250,000 from Kona Holdings I LLC, which indebtedness was automatically converted on October 24, 2017 into the securities contemplated by the Series A Preferred Stock Purchase Agreement at a value of $262,500.  Accordingly, the new cash received on October 24, 2017 from the Series A Investors was $1,937,500.)  The price per share of Series A Preferred Stock was $1,415.46, which corresponds to $0.02831 per share of Common Stock on an as-if-converted basis.

Under the   Series B Preferred Stock Purchase Agreement, the Series B Investors invested $356,949 in exchange for 252.17 shares of newly-issued Series B Preferred Stock. (The Series B Investors paid this purchase price in the form of surrender of a $203,968 indebtedness owed to Company director Gonzalo Camet (a Series B Investor), surrender of a $102,981 indebtedness owed to a second Series B Investor, and $50,000 cash received from a third Series B Investor.) The conversions resulted in a difference between the cash redemption balance and the value of the shares redemption which was treated as a loss on conversion of $139,751 and has been recognized in the Statements of Operations as a Loss on Debt Modification, conversions, and settlement in Other Income (Expense). The price per share of Series B Preferred Stock was $1,415.51, which corresponds to $0.02831 per share of Common Stock on an as-if-converted basis.

The Company created the Series A Preferred Stock series and the Series B Preferred Stock series by filing respective Certificates of Designation with the Nevada Secretary of State on October 24, 2017.  The Series A Preferred Stock series has 6,500 authorized shares and the Series B Preferred Stock series has 810 authorized shares.  The Certificates of Designation provide that no dividends or distributions shall be declared or paid on the Common Stock unless and until the Series A Preferred Stock and the Series B Preferred Stock have received an aggregate dividends and distributions total of $1,415.4661 per share of Series A Preferred Stock and per share of Series B Preferred Stock; thereafter, any dividends and distributions shall be paid pro rata to the outstanding shares of Common Stock and (on an as-if-converted basis) Series A Preferred Stock and Series B Preferred Stock.  Shares of each Preferred Stock series have a liquidation preference of $1,415.4661 (less dividends previously received) per share, plus full participation rights.  (The dividend rights and liquidation preferences of the two series are pari passu with each other.)  Shares of each Preferred Stock series are convertible into Common Stock at a ratio of 50,000 shares of Common Stock per share (subject to adjustment under broad-based antidilution protection provisions).  The Series A Preferred Stock has significant protective provisions (i.e., veto rights); the Series B Preferred Stock does not.

Pursuant to the Certificates of Designation, the number of seats on the Company’s Board of Directors is established at nine: four seats designated as Common Director seats, four seats designated as Series A Director seats, and one seat designated as a Swing Director seat.  The Series A Preferred Stock has general voting power on an as-if-converted basis and has a special right to elect the four Series A Directors.  The Series B Preferred Stock has general voting power on an as-if-converted basis but has no right to vote for any set of Directors.  The Common Stock has a special right to elect the four Common Directors and the Swing Director; provided, that if the Series A Investors’ “Pre-Wired Warrants #1” (defined below) are exercised for at least $2,000,000, thereafter the Series A Preferred Stock shall have the special right to elect the Swing Director.  By virtue of the Series A Preferred Stock’s Certificate of Designation, incumbent Directors Shaun Roberts, Kyle Redfield, Gonzalo Camet and Richard Fischler were sorted into the four Common Director seats and incumbent Directors Mark Masten, Brad Paris and James S. Tonkin were sorted into three of the four Series A Director seats.

Pursuant to the Series A Preferred Stock Purchase Agreement, the Series A Investors also collectively received:

Warrants to purchase Series A Preferred Stock, at an aggregate exercise price equal to the dollar amount of any settlements ever paid for breach of contract claims arising from the Company “going dark” or electing to remain “dark” and at an exercise price per share of $1,388.24.

The Company and the Series A Investors also entered into an Investor Rights Agreement dated October 24, 2017, pursuant to which the Series A Investors received demand and piggyback registration rights and the Company agreed to pay Kona Holdings I LLC a financial consulting fee of $50,000 per year beginning April 24, 2018 (increasing to $75,000 per year after the Company achieves net sales of at least $7,000,000 in a calendar year).

The Company and the Series A Investors and (in their individual capacities) Company directors Shaun Roberts, Kyle Redfield and Gonzalo Camet also entered into a Stockholders Agreement dated October 24, 2017, pursuant to which the individuals subjected their Company shares to a right of first refusal in favor the Series A Investors and to a drag-along right.  In addition, the individuals agreed to, if the Series A Investors’ Pre-Wired Warrants #1 were exercised for at least $2,000,000, thereafter vote their Company stock, on all matters other than Director elections, as directed by the Series A Investors.  Also, the Series A Investors and the individuals agreed not to vote any of their Company stock for any person as the Swing Director except a person who has substantial beverage industry experience and connections, is not affiliated with the Series A Investors, is not otherwise affiliated with the Company or any of its officers or directors, is (and continues to be) recommended by a majority of the current Directors, is reasonably acceptable to the Series A Investors and is reasonably acceptable to a majority in interest of the three individuals (provided, that if the Series A Investors’ Pre-Wired Warrants #1 were exercised for at least $2,000,000, thereafter it would be permissible for the Swing Director to be a person affiliated with the Series A Investors so long as such person meets such other qualifications).

The Series A Investors are affiliates of Venice Brands, LLC.

Pursuant to the Series B Preferred Stock Purchase Agreement, the Series B Investors also collectively received:

During the year ended December 31, 2017, we raised $1,248,968 through a private placement stock offering in exchange for 26,219,874 restricted common shares at $0.055 per share. These shares were issued to sixteen Accredited Investors (as that term is defined in Rule 501 of Regulation D under the Securities Act) or persons qualified under the terms of Rule 506 of Regulation D, and in issuing these shares we relied on the exemptions from registration requirements provided for in Rule 506 of Regulation D and/or Section 4(a)(2) of the Securities Act. We raised an additional $500,000 through the issuance of 12,500,000 common shares at $0.04 per share through exercised warrants.

2016 Share Transactions

On August 11, 2016 we discontinued the 2015 Equity Line after the last shares which had been registered under the related Form S-1 were sold. Subsequently there has not been filing of, and there are no plans to file, a new registration statement to effect further sales and the 2015 Equity Line is now effectively defunct. During the year ended December 31, 2016, the Company issued 6,450,000 Sale Shares and 21,529 per sale Commitment Shares under the 2015 Equity Line for aggregate proceeds of $322,936.

On January 1, 2016 we issued 600 restricted common shares at $0.0614 per share at market close price on date of grant to an employee for deemed compensation of $37. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On January 8, 2016, we issued 651,269 restricted common shares at $0.05 per share at market close price on date of grant for deemed compensation of $32,563 to a service provider as final payment for services rendered. These shares were issued to one US person, who is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act), and in issuing these shares to this person we relied on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On January 11, 2016 we issued 5,000 restricted common shares at $0.064 per share to an employee at market close price on date of grant for deemed compensation of $320. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

In February 2016, we executed a private placement unit offering which raised $171,000 through the sale of 4,275,000 units. Unit offer #1 terminated on March 29, 2016 and was priced at $0.04 per unit with each unit being comprised of one restricted common share price plus one five year warrant exercisable to purchase one restricted common share at $0.055 per share. The fair market value of the shares based on closing market prices on dates of sale was $227,160 and the embedded value of the warrants based on a Black-Scholes option pricing model was $182,910. These shares were issued to four US persons who are accredited investors (as that term is defined in Rule 501 of Regulation D under the Securities Act) or qualified under the terms Rule 506 Regulation D, and in issuing these shares we relied on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On February 23, 2016 we issued 5,000 restricted common shares at $0.0502 per share at market close price on date of grant to an employee for deemed compensation of $251. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On March 4, 2016, we issued 3,500 restricted common shares at $0.0559 per share at market close price on date of grant to a professional athlete for endorsement services rendered for deemed compensation of $196. These shares were issued to US persons with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

For the three month period ended March 31, 2016, we issued to LPC: (a) 45,143 restricted common shares at $0.07 per share for a deemed cost of $3,160 for interest accrued on LPC Note One for the period from January 1, 2016 to March 31, 2016; and (b) 75,840 restricted common shares at $0.05 per share for a deemed cost of $3,792 for interest accrued on LPC Note Two for the period from January 1, 2016 to March 31, 2016. These shares were issued at market close price on date of grant to one US company, which is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act), and in issuing these shares to this person we relied on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On March 31, 2016 we issued 150,366 restricted common shares at $0.051 per share at market close price on date of grant to our CEO for deemed compensation totaling $7,669. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On March 31, 2016 we issued 318,081 restricted common shares at $0.051 per share at market close price on date of grant to our President & COO for deemed compensation totaling $16,222. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On March 31, 2016 we issued 462,663 restricted common shares at $0.051 per share at market close price on date of grant to a company wholly owned by our CFO for deemed compensation totaling $23,596. These shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act) in offshore transactions in which we relied on the exemptions from registration requirements provided for in Regulation S and/or Section 4(2) of the Securities Act.

On March 31, 2016 we issued 600 restricted common shares at $0.054 per share at market close price on date of grant to an employee for deemed compensation of $30. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

From April to May 2016, we executed a private placement unit offering which raised $394,000 through the sale of 9,850,000 units. Unit Offer #2 terminated on May 31, 2016 and was priced at $0.04 per unit with each unit being comprised of one restricted common share price plus one five year warrant exercisable to purchase one restricted common share at $0.055 per share. The fair market value of the shares based on closing market prices on dates of sale was $532,443 and the embedded value of these warrants based on a Black-Scholes option pricing model was $426,730. These shares were issued to nine US persons who are accredited investors (as that term is defined in Rule 501 of Regulation D under the Securities Act) or qualified under the terms Rule 506 Regulation D, and in issuing these shares we relied on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On May 20, 2016 we issued 10,000 restricted common shares at $0.054 per share at market close price on date of grant to an employee for deemed compensation of $540. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On May 20, 2016 we issued 5,000 restricted common shares at $0.054 per share at market close price on date of grant to an employee for deemed compensation of $270. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On May 20, 2016, we issued 68,000 restricted common shares at $0.054 per share at market close price on date of grant to a professional athlete for endorsement services rendered for deemed compensation of $3,672. These shares were issued to US persons with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On May 20, 2016, we issued 8,500 restricted common shares at $0.054 per share at market close price on date of grant to a professional athlete for endorsement services rendered for deemed compensation of $459. These shares were issued to US persons with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On May 20, 2016, we issued 7,000 restricted common shares at $0.054 per share at market close price on date of grant to a professional athlete for endorsement services rendered for deemed compensation of $378. These shares were issued to US persons with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On May 20, 2016, we issued 8,500 restricted common shares at $0.054 per share at market close price on date of grant to a professional athlete for endorsement services for deemed compensation of $459. These shares were issued to US persons with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On June 6, 2016, we issued 5,000 restricted common shares at $0.0518 per share at market close price on date of grant to a health care professional for endorsement services for deemed compensation of $259. These shares were issued to US persons with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On June 8, 2016 we issued 333,781 restricted common shares at $0.049 per share at market close price on date of grant as compensation to our CEO for deemed compensation totaling $16,355. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On June 8, 2016 we issued 254,441 restricted common shares at $0.049 per share at market close price on date of grant as compensation to our President & COO for deemed compensation totaling $12,468. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

For the period ended June 30, 2016 we issued 164,841 restricted common shares at $0.052483 per share at market close price on date of grant to our CEO for deemed compensation totaling $8,651. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

For the period ended June 30, 2016 we issued 348,702 restricted common shares at $0.052483 per share at market close price on date of grant to our President & COO for deemed compensation totaling $18,301. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

For the period ended June 30, 2016 we issued 507,202 restricted common shares at $0.052483 per share at market close price on date of grant to a company wholly owned by our CFO for deemed compensation totaling $26,619. These shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act) in offshore transactions in which we relied on the exemptions from registration requirements provided for in Regulation S and/or Section 4(2) of the Securities Act.

On June 30, 2016 we issued 1,200 restricted common shares at $0.0497 per share at market close price on date of grant to an employee for deemed compensation of $60. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On June 30, 2016, we issued 17,000 restricted common shares at $0.0497 per share at market close price on date of grant to a professional athlete for endorsement services rendered for deemed compensation of $845. These shares were issued to US persons with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On June 30, 2016, we issued 1,500,000 restricted common shares at $0.0497 per share at market close price on date of grant for consultant services rendered for a deemed cost of $74,550. These shares were issued to three US persons with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

For the three months ended June 30, 2016, we issued to LPC: (a) 45,143 restricted shares at $0.0497 per share for a deemed cost of $2,244 for interest accrued on LPC Note One for the period from April 1, 2016 to June 30, 2016; and (b) 75,840 restricted shares at $0.0497 per share for a deemed cost of $3,769 for interest accrued on LPC Note Two for the period from April 1, 2016 to June 30, 2016. These shares were issued at market close price on date of grant to one US company, which is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act), and in issuing these shares to this person we relied on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On July 13, 2016, we issued 294,737 restricted common shares at $0.0475 per share at market close price on date of grant for consultant services rendered for a deemed cost of $14,000. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

From July to September 2016, we executed a private placement offering which raised $101,000 through the sale of 2,525,000 units. Unit Offer #3 terminated on September 30, 2016 and was priced at $0.04 per unit with each unit being comprised of one restricted common share price plus one five year warrant exercisable to purchase one restricted common share at $0.055 per share. The fair market value of the shares based on closing market prices on dates of sale was $168,525 and the embedded value of the warrants based on a Black-Scholes option pricing model was $132,571. These shares were issued to eight persons who are accredited investors (as that term is defined in Rule 501 of Regulation D under the Securities Act) or qualified under the terms Rule 506 Regulation D, and in issuing these shares we relied on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On August 1, 2016, the Company received a loan of $100,000 from a director of the Company and issued 340,000 restricted common shares as an inducement fee at market close price of $0.0456 on date of issue for a deemed cost of $15,504. These shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act) in offshore transactions in which we relied on the exemptions from registration requirements provided for in Regulation S and/or Section 4(2) of the Securities Act.

On August 8, 2016, we issued 20,000 restricted common shares at $0.0475 per share market close price on date of grant to an employee for deemed compensation of $950. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On August 8, 2016, we issued 50,000 restricted common shares at $0.0475 per share market close price on date of grant to an employee for deemed compensation of $2,375. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On August 15, 2016, we issued 1,333,333 restricted common shares at $0.049 per share at market close price on date of grant to our President & COO for deemed compensation totaling $65,333. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On August 24, 2016, we issued 42,500 restricted common shares at $0.0639 per share market close price on date of grant to an employee for deemed compensation of $2,716. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On August 24, 2016, we issued 25,000 restricted common shares at $0.0639 per share market close price on date of grant to an employee for deemed compensation of $1,598. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On August 30, 2016, the Company redeemed the balance due of $59,000 on the September 2015 Note One through issuance of 1,475,000 shares valued at $95,875 based on a market close price of $0.065 per share on date of issuance. This included a loss on conversion of $36,875 based on the difference between the value of the shares issued at market close price on date of issue and the agreed conversion price of $0.04 per share. These shares were issued to one US company, which is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act), and in issuing these shares to this person we relied on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On September 6, 2016, we issued 10,000 restricted common shares at $0.0599 per share market close price on date of grant to an employee for deemed compensation of $599. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On September 8, 2016, we issued 25,000 restricted common shares at $0.06 per share market close price on date of grant to an employee for deemed compensation of $1,500. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On September 9, 2016, we issued 10,000 restricted common shares at $0.0581 per share market close price on date of grant to an employee for deemed compensation of $581. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On September 23, 2016, a note holder provided an extension of the maturity of the note held in return for the note being amended to provide for conversion into shares at $0.04 per share. This amendment created a beneficial conversion feature which was valued at a cost of $37,669, such amount which was recorded as an increase to Additional Paid in Capital.

On September 27, 2016 we issued 435,180 restricted common shares at $0.05802 per share at market close price on date of grant as compensation to our CEO for deemed compensation totaling $25,249. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On September 27, 2016 we issued 906,634 restricted common shares at $0.05802 per share at market close price on date of grant to our President & COO for deemed compensation totaling $52,603. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On September 29, 2016, we issued 129,244 restricted common shares at $0.058 per share market close price on date of grant to a predecessor investor for deemed cost of $7,496 to revise the shares owed to him from our reverse merger share exchange in 2014. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act. A value for capital stock of $129 was recorded and the balance of $7,367 for the cost of the shares was offset to additional paid in capital.

On September 30, 2016, we issued to LPC: (a) 45,629 restricted shares at $0.0561 per share for a deemed cost of $2,560 for interest accrued on LPC Note One for the period from July 1, 2016 to September 30, 2016; and (b) 76,660 restricted shares at $0.0561 per share for a deemed cost of $4,301 for interest accrued on LPC Note Two for the period from July 1, 2016 to September 30, 2016. These shares were issued at market close price on date of grant to one US company, which is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act), and in issuing these shares to this person we relied on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On September 30, 2016, we issued 193,848 restricted common shares at $0.0561 per share at market close price on date of grant to our CEO for deemed compensation totaling $10,875. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On September 30, 2016, we issued 1,382,532 restricted common shares at $0.0561 per share at market close price on date of grant to our President & COO for deemed compensation totaling $77,560. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On September 30, 2016, we issued 426,040 restricted common shares at $0.0561 per share at market close price on date of grant to a company wholly owned by our CFO for deemed compensation totaling $23,901. These shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act) in offshore transactions in which we relied on the exemptions from registration requirements provided for in Regulation S and/or Section 4(2) of the Securities Act.

From July 1 to September 30, 2016, we raised $120,000 through a private placement stock offering of 3,000,000 restricted common shares at $0.04 per share. These shares were issued to six US persons who are accredited investors (as that term is defined in Rule 501 of Regulation D under the Securities Act) or qualified under the terms Rule 506 Regulation D, and in issuing these shares we relied on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On October 4, 2016, we issued 150,000 restricted common shares at $0.059 per share at market close price on date of grant to a newly appointed director as an inducement for joining our Board for a deemed cost of $8,850. These shares were issued to one US person with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On October 28, 2016, we issued 1,000,000 restricted common shares at $0.0525 per share at market close price on date of grant for consultant services rendered for a deemed cost of $52,500. These shares were issued to three US persons with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On November 23, 2016, we issued 500,000 common shares at $0.04 per share for conversion by September 2015 Note Two Purchaser of $20,000 of debt. These shares were issued to one US person with reliance on the exemptions from registration requirements provided in the Securities Act, Section 4(1) and Rule 144. Because these shares were issued at below the closing market price of $0.0537 on date of issue, the conversion resulted in a loss of $6,850 which was recorded as additional interest expense.

On November 30, 2016, we issued 1,000,000 restricted common shares at $0.0529 per share at market close price on date of grant for consultant services rendered for a deemed cost of $52,900. These shares were issued to three US persons with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

On December 2, 2016, we issued 300,000 common shares at $0.0495 per share at market close price on date of grant to a debt holder as part of the compensation for a maturity extension on the note held for a deemed cost of $14,850. These shares were issued to one US person with reliance on the exemptions from registration requirements provided in Rule 144(d)(3)(ii). At this time the underlining note was also amended to provide for conversion of the note to shares at $0.04 per share and this created a beneficial conversion feature which was valued at a cost of $9,405, such amount which was recorded as an increase to Additional Paid in Capital.

On December 6, 2016, LPC provided an extension of the maturity of two notes held in return for the grant of 7,000,000 six year warrants exercisable at $0.05 per share. The warrants were valued using a Black-Scholes model at a non-cash cost of $315,658, such amount which was recorded as an increase to Additional Paid in Capital.

For the year ended December 31, 2016, we issued to LPC: (a) 45,629 restricted shares at $0.0451 per share for a deemed cost of $2,058 for interest accrued on LPC Note One for the period from October 1, 2016 to December 31, 2016; and (b) 76,660 restricted shares at $0.0451 per share for a deemed cost of $3,457 for interest accrued on LPC Note Two for the period from October 1, 2016 to December 31, 2016. These shares were issued at market close price on date of grant to one US company, which is an accredited investor (as that term is defined in Rule 501 of Regulation D under the Securities Act), and in issuing these shares to this person we relied on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

PCF Holdings Investment:  

On December 6, 2016, the Company entered into a securities purchase agreement (the “Securities Agreement”) with PCF Holdings Group, LLC. (“PCF”) under which PCF committed to invest, or cause to be invested, $940,000 in three tranches of (i) $300,000, (ii) $500,000 and (iii) $140,000, respectively for the purchase of Stock Units. Under the Securities Agreement, PCF (or its designee) will purchase from the Company up to 28.5 million stock units (each a “Stock Unit” and in the plural, the “Stock Units”), to be paid in three tranches. The series of warrants for each tranche each have the same three exercise prices, include cashless exercise rights, and have the same three expiry terms. The first tranche was priced at $0.024 per Stock Unit and the second and third tranches are priced at $0.04 per Stock Unit. Each Stock Unit consists of one share of restricted common stock of the Company (each a “Share”) and three separate warrant classes (each a “Warrant” and the shares underlying the Warrants being the “Warrant Shares” or, in the singular a “Warrant Share”) respectively have (i) an exercise price of $0.055 per share for a term of five years, (ii) an exercise price of $0.20 per shares for a term of three years and (iii) an exercise price of $0.25 per share for a term of 18 months. The fair market value of the shares based on closing market price on date of sale was $625,000 and the embedded value of the warrants based on a Black-Scholes option pricing model was $1,410,059. These shares were issued to three accredited investors (as that term is defined in Rule 501 of Regulation D under the Securities Act) or qualified under the terms Rule 506 Regulation D, and in issuing these shares we relied on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act. For the second and third tranches, each Stock Unit shall be priced at $0.04 per Stock Unit and shall consist of one Share and three separate warrant classes (each a “Warrant” and the shares underlying the Warrants being the “Warrant Shares”, or in the singular a “Warrant Share”) that shall respectively have (i) an exercise price of $0.055 per share for a term of five years, (ii) an exercise price of $0.20 per share for a term of three years and (iii) an exercise price of $0.25 per share for a term of 18 months. At the initial Tranche Closing, PCF purchased 12,500,000 Stock Units for a purchase price of $300,000 in cash (the “Initial Tranche”) and paid the related Supply Agreement license fee of $200,000. Subject to the continued accuracy and validity of the representations and warranties of the Company to PCF, the satisfaction by the Company of all its covenants set forth in the Securities Agreement and other considerations, then not later than 120 days from the Initial Tranche Closing (the “Second Tranche Closing”), Purchaser shall purchase 12,500,000 Stock Units (the “Second Tranche) for a purchase price of $500,000; and then not later than 120 days from the Second Tranche Closing (the “Third Tranche Closing”), Purchaser shall purchase 3,500,000 Stock Units (the “Third Tranche) for a purchase price of $140,000. The Securities Agreement includes a Beneficial Ownership Limitation and at no time may PCF exercise warrants or purchase shares if such exercises or purchases would result in PFC and its affiliates owning an aggregate of shares of our common stock in excess of 17.5% of the then outstanding shares of our common stock. PCF and its affiliates may sell or transfer Units, Shares or Warrants that exceed, or might cause PCF to exceed, the Beneficial Ownership Limitation in order for PCF to comply with the Beneficial Ownership Limitation. PCF may at any time request one registration under the Securities Act, of all or part of its Shares (including any Warrant Shares issuable upon exercise of any Warrants) (a “Demand Registration”), however the Company will not be obligated to effect any Demand Registration within nine months from the Initial Tranche Closing, or when Purchaser has the ability to freely sell the securities proposed to be registered under Rule 144, without being subject to any volume or manner of sale restrictions thereunder.

On December 8, 2016, we issued 170,000 restricted common shares at $0.048 per share market close price on date of grant to seven employees for deemed compensation of $8,160. These shares were issued to seven US persons with reliance on the exemptions from registration requirements provided for in Rule 506 Regulation D and/or Section 4(a)(2) of the Securities Act.

Warrants:

2017 Warrant Transactions -

On February 14, 2017, we remedially executed a private placement related to Unit Offer #3 which raised $15,000 through the sale of 375,000 units. Each unit was priced at $0.04 per unit and comprised of one restricted common share price plus one five year warrant exercisable to purchase one restricted common share at $0.055 per share. The fair market value of the shares and embedded value of the warrants is based on the valuations done for Unit Offer #3. These shares were issued to one non-U.S. person (as that term is defined in Regulation S of the Securities Act) in offshore transactions in which we relied on the exemptions from registration requirements provided for in Regulation S and/or Section 4(a)(2) of the Securities Act. The warrants were valued using a Black-Scholes model at a non-cash cost of $16,463. At December 31, 2017, none of these warrants had been exercised.

During February, 2017, we issued 1,500,000 restricted common shares to two prior unit offering subscribers for exercises of 1,500,000 warrants they held at the exercise price of $0.055 per share for proceeds of $82,500. These subscribers are Accredited Investors (as that term is defined in Rule 501 of Regulation D under the Securities Act) or qualified under the terms Rule 506 of Regulation D, and in issuing these shares we relied on the exemptions from registration requirements provided for in Rule 506 of Regulation D and/or Section 4(a)(2) of the Securities Act.

On April 18, 2017, LPC exercised on a cashless basis 5,000,000 warrants it held into 1,264,674 common shares. These warrants had been issued with LPC Note Two and this effected full exercise of that warrant.

On May 9, 2017, pursuant to a letter agreement, LPC exercised 1,136,364 warrants which it had been issued on January 27, 2014 into 1,136,364 restricted common shares for the exercise price of $0.15 per share to provide the Company with aggregate proceeds of $170,455. At this same time, the Company issued to LPC 5,000,000 six year warrants with an exercise price of $0.05. The warrants were valued using a Black-Scholes model at a non-cash cost of $342,480. At current date, none of these warrants had been exercised.

On October 24, 2017, the Company terminated its Securities Purchase Agreement dated December 6, 2016 with PCF Holdings Group, LLC due to the counterparty’s failure to complete its purchase of a third $140,000 tranche of newly-issued Company Stock Units (i.e., Common Stock and warrants). Contingency warrants based on going dark and related settlements were assumed not to occur.

See Preferred Issuances section of Note 9 for addition 2017 warrant transactions related to the preferred issuances.

2016 Warrant Transactions

During the year ended December 31, 2016, we raised $681,000 through three private placement unit offerings priced at $0.04 per unit which included the issuance of 17,025,000 five year warrants each exercisable to purchase one restricted common share at $0.055 per share. The aggregate embedded value of these warrants based on a Black-Scholes option pricing model was $742,211. At December 31, 2016, none of these warrants had been exercised.

On December 6, 2016, in relation to its first investment tranche we issued PCF a series of three warrants which include cashless exercise rights. These included: Warrant 1 with an exercise price of $0.055 per share and a term of five years, Warrant 2 with an exercise price of $0.20 per shares and a term of three years, and Warrant 3 with an exercise price of $0.25 per share and a term of 18 months. The aggregate embedded value of the warrants based on a Black-Scholes option pricing model was $1,410,059. At December 31, 2016, none of these warrants had been exercised.

On December 16, 2016, LPC extended the maturities of each of its two notes from December 31, 2016 to December 31, 2017 in return for issuance by the Company of 7,000,000 six year warrants, with cashless exercise rights, to purchase 7,000,000 restricted shares of our common stock at an exercise price of $0.05 per share. The warrants were valued using a Black-Scholes model at a non-cash cost of $315,658, of which $143,481 was ascribed as an increase to the discount of LPC Note One and $172,177 was ascribed as an increase to the discount of LPC Note Two. At December 31, 2016, none of these warrants had been exercised.

The fair valuations for warrants were done on date of grant using a Black Scholes option pricing model with the following assumptions:

*(based on US Treasury Constant Maturities matching estimated life)

The following table summarizes the Company’s Common Stock warrant activity for the years ended December 31, 2017 and December 31, 2016:

* (remaining term as of December 31, 2017)

**(intrinsic value based on the closing share price of $0.04 on December 31, 2017)

The following table summarizes the Company’s Preferred Stock warrant activity for the years ended December 31, 2017 and December 31, 2016:

* (remaining term as of December 31, 2017)

**(intrinsic value based on the closing share price of $0.04 on December 31, 2017)

Options:

On December 12, 2013, the Company adopted an incentive stock option plan (the “Stock Option Plan”). The Stock Option Plan allows for the issuance of up to 11,000,000 options to acquire 11,000,000 restricted shares of the Company’s common stock, with a maximum exercise period of ten years, to be granted to eligible employees, officers, directors, and consultants. As of December 31, 2016 6,750,000 options had been granted under the Stock Option Plan to directors and officers of the Company. The expensing and amortization of all options grants have been credited to Additional Paid-In Capital.

During the year ended December 31, 2016, 250,000 options which had been issued to a consultant on November 25, 2013, which were not issued under the Stock Option Plan, expired without being exercised.

On January 20, 2017, as compensation to a retiring director we re-priced 750,000 options he held from an exercise price of $0.17 per share to an exercise price of $0.05 per share and issued him an additional 150,000 options with the same three year remaining maturity. The exercise price of the new options was set on date of grant and these options vested immediately. The combined Black-Scholes options pricing model cost of the transactions was $14,528.

On March 6, 2017, we issued 1,063,782 five year options with an exercise price of $0.0559 set on date of grant to our CEO as compensation. These options vested immediately and had a Black-Scholes options pricing model cost of $35,861.

On March 6, 2017, we issued 2,476,377 five year options with an exercise price of $0.0559 set on date of grant to our President & COO as compensation. These options vested immediately and had a Black-Scholes options pricing model cost of $83,481.

On October 24, 2017, the Company’s Board of Directors adopted a 2017 Equity Incentive Plan covering 36,737,032 shares of Common Stock and a 2017 Series B Equity Incentive Plan covering 88 shares of Series B Preferred Stock.  Each Plan authorizes incentive and nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, etc.

The fair valuations for outstanding options were done on date of grant using a Black Scholes option pricing model with the following assumptions:

A summary of changes in outstanding stock options for the years ended December 31, 2017 and December 31, 2016 is as follows:

* (remaining term as of December 31, 2017)

**(intrinsic value based on the closing share price of $0.04 on December 31, 2017)

A summary of changes in outstanding preferred stock options for the years ended December 31, 2017 and December 31, 2016 is as follows: