FRZT Freeze Tag Inc (PK)

Notes to Condensed Financial Statements

Nine Months Ended September 30, 2017

(Unaudited)

NOTE 1 - THE COMPANY

Freeze Tag, Inc. (the “Company”) is a leading creator of mobile social games that are fun and engaging for all ages. Based on a free-to-play business model that has propelled games like Candy Crush Saga to worldwide success, the Company employs state-of-the-art data analytics and proprietary technology to dynamically optimize the gaming experience for revenue generation. Players can download and enjoy the Company’s games for free, or they can purchase virtual items and additional features within the game to increase the fun factor. The Company’s games encourage players to compete and engage with their friends on major social networks such as Facebook and Twitter.

NOTE 2 - GOING CONCERN

As shown in the accompanying financial statements, the Company incurred net losses of $2,925,401 and $1,628,305 for the nine months ended September 30, 2017 and 2016, respectively. The Company has generally incurred net losses since its inception and, as of September 30, 2017, the Company’s accumulated deficit was $14,039,330. During the nine months ended September 30, 2017 and the year ended December 3l, 2016, the Company experienced negative cash flows from operations largely due to its continued investment spending for product development of game titles for smartphones and tablets that are expected to benefit future periods. Those facts, along with our lack of access to a significant bank credit facility, create an uncertainty about the Company’s ability to continue as a going concern. Accordingly, the Company is currently evaluating its alternatives to secure financing sufficient to support the operating requirements of its current business plan, as well as continuing to execute its business strategy of distributing game titles to digital distribution outlets, including mobile gaming app stores, online PC and Mac gaming portals, and opportunities for new devices such as tablet (mobile internet device) applications, mobile gaming platforms and international licensing opportunities.

The Company’s ability to continue as a going concern is dependent upon its success in securing sufficient financing and in successfully executing its plans to return to positive cash flows during fiscal 2018. The Company’s financial statements do not include any adjustments that might be necessary if it were unable to continue as a going concern.

Accrued royalties consist of amounts owed to other parties with whom the Company has revenue-sharing agreements or from whom it licenses certain trademarks or copyrights.

Unearned royalties consist of royalties received from licensees, which have not yet been earned. Unearned royalties were $127,187 and $127,201 at September 30, 2017 and December 31, 2016, respectively.

As of September 30, 2017 and December 31, 2016, the Company had technology payable of $18,000 resulting from a technology transfer agreement with an unrelated party entered into in June 2011, payable in 24 installments of $1,500 without interest.

NOTE 4 - DEBT

Notes Payable

On February 1, 2016, the Company entered into a Game Marketing Agreement with an investor whereby the investor agreed, at its option, to loan up to $250,000 (the “Marketing Fund”) to the Company to exclusively fund user acquisition efforts for the game Kitty Pawp (the “Game”). The investor will receive 50% of Net Receipts (as defined in the agreement) from the Game until the Marketing Fund is fully recouped. Once the Marketing Fund is recouped, the investor will receive 50% of Net Receipts from the Game until the investor receives a 50% return on the Marketing Funds advanced.

The Company has recorded Marketing Fund advances as notes payable in the accompanying condensed balance sheets. Upon receiving a Marketing Fund advance, the Company accrues the 50% return as interest expense and includes the obligation in accrued interest payable in the accompanying condensed balance sheets. As of September 30, 2017 and December 31, 2016, total advances recorded as notes payable were $58,096 and accrued interest payable included a total of $22,046 of the 50% guaranteed return.

On July 25, 2017, we entered into a Securities Exchange and Common Stock Purchase Agreement with an Accredited Investor (the “Accredited Investor #3 Securities Exchange Agreement”). Under the Accredited Investor #3 Securities Exchange Agreement, the Accredited Investor #3 agreed to accept 51,094 shares of a yet-to-be-created series of preferred stock (the “Accredited Investor #3 Pref Stock”), for all amounts due to Accredited Investor #3 under that certain Game Marketing Investment Agreement between us and Accredited Investor #3 dated February 1, 2016, as orally modified by the parties on June 9, 2016 (the “Game Marketing Agreement”). Once created, each share of the Preferred Stock will be convertible into fifty (50) shares of our common stock, on a post-reverse basis (based on a prospective 1-for-100 reverse stock split that was recognized by FINRA on October 5, 2017 - a subsequent event to this report - see Note 7), but the holder cannot convert the Accredited Investor #3 Pref Stock if it would cause the holder to own more than 4.99% of our outstanding common stock. The closing under the Accredited Investor #3 Securities Exchange Agreement for the exchange of the amounts due under the Game Marketing Agreement for the Accredited Investor #3 Pref Stock occurred automatically upon the effectiveness of the referenced reverse stock split with FINRA (see Note 12). At the closing, any interest due under the Game Marketing Agreement, as amended, will be waived.

Holland Family Trust Convertible Note

The “Holland Family Trust Convertible Note” is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Company’s common stock during the twenty-five (25) trading-day period ending on the latest complete trading day prior to the date of conversion. “Fixed Conversion Price” shall mean $0.00005. The Holland Family Trust is a trust controlled by Craig Holland, our Chief Executive Officer.

The Company evaluated the Holland Family Trust Convertible Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The note payable is convertible into common stock at the discretion of the Holland Family Trust. Furthermore, at any time, the Company may pay the balance of the unconverted note payable in cash.

As of September 30, 2014, $72,107 of accrued interest was added to the note principal and $813,602 of the note was transferred to Craig Holland. A new convertible note for $222,572 was issued to the Holland Family Trust with the same terms as the previous note, with the exception of the maturity date, which was extended to December 31, 2017. As of September 30, 2017 and December 31, 2016, accrued interest related to the Holland Family Trust Convertible Note was $66,771 and $50,124, respectively.

On July 25, 2017, we entered into a Securities Exchange and Common Stock Purchase Agreement with the Holland Family Trust (the “Holland Family Trust Securities Exchange Agreement”). Under the Holland Family Trust Securities Exchange Agreement, the Holland Family Trust agreed to exchange the Holland Family Trust Convertible Note into 10,354,150 shares of our common stock on a post-reverse basis (based on a prospective 1-for-100 reverse stock split - see Note 7). The closing under the Holland Family Trust Securities Exchange Agreement occurred on October 5, 2017 with the effectiveness of the referenced reverse stock split with FINRA (see Note 12). At the closing, all accrued interest payable due under the Holland Family Convertible Note, including the amount added to note principal in 2014, was waived.

Craig Holland Transferred Convertible Note

On September 30, 2014, $813,602 principal balance (including interest) of the Holland Family Trust Convertible Note was transferred to Craig Holland, our Chief Executive Officer, (the “Holland Transferred Convertible Note”). The Holland Transferred Convertible Note retained the same terms as the original Holland Family Trust Convertible Note with the exception of the maturity date, which was extended to December 31, 2017. As of September 30, 2017 and December 31, 2016, accrued interest related to the Holland Transferred Convertible Note was $244,081 and $183,228, respectively.

On July 25, 2017, we entered into a Securities Exchange and Common Stock Purchase Agreement with the Holland Family Trust (the “Holland Securities Exchange Agreement”). Under the Holland Securities Exchange Agreement, Mr. Holland agreed to exchange the Holland Transferred Convertible Note into 10,354,150 shares of our common stock on a post-reverse basis (based on a prospective 1-for-100 reverse stock split - see Note 7). The closing under the Holland Securities Exchange Agreement occurred on October 5, 2017 with the effectiveness of the referenced reverse stock split with FINRA (see Note 12). At the closing, all accrued interest payable due under the Holland Transferred Convertible Note, including the amount added to note principal in 2014, was waived.

Mick Donahoo and Craig Holland Convertible Notes

On December 31, 2013, the Company converted a note payable to Mick Donahoo of $55,250 and accrued interest of $15,399 into a new convertible related party note in the amount of $70,649 (the “Mick Donahoo Convertible Note”).

On December 31, 2013, the Company converted a note payable to Craig Holland of $35,100 and accrued interest of $11,432 into a new convertible related party note in the amount of $46,532 (the “Craig Holland Convertible Note”).

The Mick Donahoo Convertible Note and the Craig Holland Convertible Note are convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Company’s common stock during the twenty-five (25) trading-day period ending on the latest complete trading day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The maturity date of the notes was extended to December 31, 2017.

The Company evaluated the Mick Donahoo Convertible Note and the Craig Holland Convertible Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The agreements modified the debt to make it convertible into common stock of the Company. As of September 30, 2017 and December 31, 2016, there was accrued interest payable related to the Mick Donahoo Convertible Note of $10,410 and $8,854, respectively. As of September 30, 2017 and December 31, 2016, there was accrued interest payable related to the Craig Holland Convertible Note of $1,372 and $1,025, respectively.

On October 23, 2014, Craig Holland converted $35,000 principal and $2,836 accrued interest into 398,298 shares of the Company’s common stock.

On October 23, 2014, Mick Donahoo converted $35,000 principal and $2,836 accrued interest into 398,298 shares of the Company’s common stock.

On October 8, 2015, Craig Holland converted $4,607 principal and $2,028 accrued interest into 126,379 shares of the Company’s common stock.

On October 8, 2015, Mick Donahoo converted $4,607 principal and $2,028 accrued interest into 126,379 shares of the Company’s common stock.

Effective October 15, 2015, the Company entered into an Amendment to Convertible Promissory Note with each of Craig Holland and Mick Donahoo with respect to the Craig Holland Convertible Note and the Mick Donahoo Convertible Note. The parties agreed to modify the terms of the notes such that in the event the lender issues a valid conversion notice and the conversion notice results in a conversion price less than the then-par value of the Company’s common stock, the conversion will be effected at par value with additional principal amounts added to the note equal to the value of the common shares that were not able to be issued due to the conversion price being less than the par value of the Company’s common stock. As the amendment did not alter the shares received by converting the notes, no additional value was recorded by the Company as a result of these amendments.

On July 25, 2017, we entered into a Securities Exchange and Common Stock Purchase Agreement with Mr. Donahoo (the “Donahoo Securities Exchange Agreement”). Under the Donahoo Securities Exchange Agreement, Mr. Donahoo agreed to exchange the Mick Donahoo Convertible Note into 1,552,100 shares of our common stock on a post-reverse basis (based on a prospective 1-for-100 reverse stock split - see Note 7). The closing under the Donahoo Securities Exchange Agreement occurred on October 5, 2017 with the effectiveness of the referenced reverse stock split with FINRA (see Note 12). At the closing, all accrued interest payable due under the Mick Donahoo Convertible Note was waived.

On July 25, 2017, the Company entered into an Amendment No. 1 to a Promissory Note with Craig Holland, under which the Company agreed to amend the terms of the Craig Holland Convertible Note in order to (i) make the note non-interest bearing, (ii) make the Holland Note non-convertible, and (iii) waive all interest due and owing under the note. Pursuant to this amendment, $1,243 in accrued interest payable to Mr. Holland was forgiven and contributed to capital.

Holland and Donahoo Accrued Salary Notes

On December 31, 2013, the Company converted $186,450 of accrued salaries due to Craig Holland into a convertible note (the “Holland Accrued Salary Note”) and converted $186,450 of accrued salaries due to Mick Donahoo, our Chief Financial Officer, into a convertible note (the “Donahoo Accrued Salary Note”). The Holland Accrued Salary Note and the Donahoo Accrued Salary Note are convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Company’s common stock during the twenty-five (25) trading-day period ending on the latest complete trading day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The maturity date of the notes was extended to December 31, 2017.

The Company evaluated the Holland Accrued Salary Note and the Donahoo Accrued Salary Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, the conversion feature does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur.

On July 25, 2017, the Company entered into an Amendment No. 1 to a Promissory Note with each of Craig Holland and Mick Donahoo, under which the Company agreed to amend the terms of the Holland Accrued Salary Note and Donahoo Accrued Salary in order to (i) make the notes non-interest bearing, (ii) change the conversion price from a variable price to $0.0002 per share (share price before prospective 1-for-100 reverse stock split - see Note 7) , and (iii) waive all interest due and owing under the notes. Pursuant to these amendments, $66,407 in accrued interest payable to each individual was forgiven and contributed to capital. As of September 30, 2017 and December 31, 2016, there was $0 and $55,935, respectively, of accrued interest related to each of the notes.

Total accrued interest payable for the related party convertible notes was $462,396 and $354,165 as of September 30, 2017 and December 31, 2016, respectively.

Convertible Cowdell Note

On December 31, 2013, the Company converted $55,429 of convertible debt and $6,014 in accrued interest due to Robert Cowdell (the “Convertible Cowdell Note”) into a convertible note. The Convertible Cowdell Note is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Company’s common stock during the twenty-five (25) trading-day period ending on the latest complete trading day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The maturity date of the note was extended to December 31, 2017. The Convertible Cowdell Note had accrued interest of $23,028 and $18,433 as of September 30, 2017 and December 31, 2016, respectively.

The Company evaluated the Convertible Cowdell Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available or issuable for settlement to occur. The agreement modified the debt to make it convertible into common stock of the Company.

On July 25, 2017, we entered into a Securities Exchange and Common Stock Purchase Agreement with Mr. Cowdell (the “Cowdell Securities Exchange Agreement”). Under the Cowdell Securities Exchange Agreement, Mr. Cowdell agreed to exchange the Convertible Cowdell Note into 3,072,100 shares of our common stock on a post-reverse basis (based on a prospective 1-for-100 reverse stock split - see Note 7). The closing under the Cowdell Securities Exchange Agreement occurred on October 5, 2017 with the effectiveness of the referenced reverse stock split with FINRA (see Note 12). At the closing, $21,900 of interest payable due under the Convertible Cowdell Note was waived.

Accredited Investor #1 December 20, 2013 Convertible Note

The $500,000 principal amount convertible note dated December 20, 2013 to an accredited investor (“Accredited Investor #1”) with an outstanding balance of $214,966 at September 30, 2017 was funded in $50,000 tranches in January, February, March, April and May 2014. The note is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Company’s common stock during the twenty-five (25) trading-day period ending on the latest complete trading day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also includes conversion price reset features that are triggered when the Company issues certain new equity instruments; as a result, this feature caused the Company to consider this feature a derivative liability. The maturity date of the note initially was one year from the date of funding, but was subsequently extended and changed to be such that the note amount is payable upon demand (with ten days written notice) by the accredited investor, but in no event later than December 20, 2018.

On July 25, 2017, we entered into a Securities Exchange and Preferred Stock Purchase Agreement with Accredited Investor #1 (the “Accredited Investor #1 Securities Exchange Agreement”). Under the Accredited Investor #1 Securities Exchange Agreement, as amended, the Accredited Investor #1 agreed to exchange the December 20, 2013 convertible note and the $214,966 in principal owing under the note into 214,966 shares of the Company’s Series B Convertible Preferred Stock (see Note 7). The closing under the Accredited Investor #1 Securities Exchange Agreement for the exchange of the Accredited Investor #1 Note for the shares of Series B Preferred Stock occurred on October 5, 2017 with the effectiveness of the referenced reverse stock split with FINRA (see Note 12). At the closing, the $70,815 in interest due under the note was waived.

Accredited Investor #2 Convertible Notes

The $500,000 principal amount convertible note dated June 25, 2014 to an accredited investor (“Accredited Investor #2”) with an outstanding balance of $465,322 at September 30, 2017 was funded in $50,000 tranches in June, July, August, September, October, and December 2014, and tranches of $100,000 in November 2014, $70,000 in January 2015, and $30,000 in February 2015. The note is convertible into Company common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three lowest trading prices for the Company’s common stock during the twenty-five (25) trading-day period ending on the latest complete trading day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005. The note also includes conversion price reset features that are triggered when the Company issues certain new equity instruments; as a result, this feature caused the Company to consider this feature a derivative liability. The maturity date of the note initially was one year from the date of funding, with the maturity date subsequently extended to June 25, 2017.

The $500,000 principal amount convertible note dated February 11, 2015 to Accredited Investor #2 with an outstanding balance of $448,000 at September 30, 2017 was funded by tranches of $30,000 in February 2015, $40,000 in February 2015, $110,000 in March 2015, $88,000 in April 2015, $90,000 in May and June 2015. The note is convertible into Company common stock at the lesser of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three (3) lowest trade prices on three (3) separate trading days of Common Stock recorded after the original Effective Date of the note. “Fixed Conversion Price” shall mean $0.003. The note also includes conversion price reset features that are triggered when the Company issues certain new equity instruments; as a result, this feature caused the Company to consider this feature a derivative liability. The maturity date of the note initially was nine months from the date of funding, but was subsequently extended and changed to be such that the note amount is payable upon demand (with ten days written notice) by the accredited investor, but in no event later than February 11, 2020.

The $500,000 principal amount convertible note dated July 28, 2015 to Accredited Investor #2 with an outstanding balance of $475,000 at September 30, 2017 was funded by tranches of $65,000 in July and August 2015, $60,000 in September 2015, $50,000 in October and November 2015, $55,000 in December 2015, $25,000 in January 2016, $55,000 in February 2016, and $50,000 in March 2016. The note is convertible into Company common stock at the lesser of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three (3) lowest trade prices on three (3) separate trading days of Common Stock recorded after the original Effective Date of the note. “Fixed Conversion Price” shall mean $0.003. The note also includes conversion price reset features that are triggered when the Company issues certain new equity instruments; as a result, this feature caused the Company to consider this feature a derivative liability. The maturity date of the note initially was nine months from the date of funding, but was subsequently extended and changed to be such that the note amount is payable upon demand (with ten days written notice) by the accredited investor, but in no event later than July 28, 2020.

The $600,000 principal amount convertible note, dated April 7, 2016 and amended on January 18, 2017, to Accredited Investor #2 with an outstanding balance of $554,000 at September 30, 2017 was funded by tranches of $60,000 in April 2016, $45,000 in May 2016, $55,000, $27,000 and $10,000 in June 2016, $48,000 and $24,000 in July 2016, $50,000 in August 2016, $50,000 in September 2016, $50,000 in October 2016 and $45,000 in November and December 2016 and $45,000 in July 2017. The note is convertible into Company common stock at the lesser of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market Price” means the average of the three (3) lowest trade prices on three (3) separate trading days of Common Stock recorded after the original Effective Date of the note. “Fixed Conversion Price” shall mean $0.003. The note also includes conversion price reset features that are triggered when the Company issues certain new equity instruments; as a result, this feature caused the Company to consider this feature a derivative liability. The maturity date of the note was extended and changed to be such that the note amount is payable upon demand (with ten days written notice) by the accredited investor, but in no event later than April 7, 2021.

On July 25, 2017, we entered into a Securities Exchange and Preferred Stock Purchase Agreement with Accredited Investor #2 (the Accredited Investor #2 Securities Exchange Agreement”). Under the Accredited Investor #2 Securities Exchange Agreement, as amended, the Accredited Investor #2 agreed to exchange promissory notes issued by us dated June 25, 2014, February 11, 2015, July 28, 2015 and April 7, 2016 and the $1,942,322 in total principal owing under the notes, into 1,942,322 shares of the Company’s Series B Convertible Preferred Stock (see Note 7). The closing under the Accredited Investor #2 Securities Exchange Agreement occurred on October 5, 2017 with the effectiveness of the referenced reverse stock split with FINRA (see Note 12). At the closing, the $363,706 in interest due under the notes was waived.

The $500,000 principal amount convertible note, dated February 8, 2017 to Accredited Investor #2 with an outstanding balance of $444,150 at September 30, 2017, was funded by tranches of $55,000 in February 2017, April 2017, May 2017 and July 2017, $60,000 in March 2017 and August 2017, and $75,000 in September 2017. The note is convertible into Company common stock at the lesser of (a) $0.0003 per share, (b) 50% of the average three (3) lowest trade prices on three (3) separate trading days of Common Stock recorded after the original Effective Date of the note or (c) the lowest effective price per share granted to any person or entity after the Effective Date of the note. “Fixed Conversion Price” shall mean $0.003. Because of these and other variable features of the note, the Company considers the conversion feature to be a derivative liability. The maturity date of the note is February 8, 2018.

On July 25, 2017, we entered into a second Securities Exchange and Preferred Stock Purchase Agreement with Accredited Investor #2 (the Second Accredited Investor #2 Securities Exchange Agreement”). Under the Second Accredited Investor #2 Securities Exchange Agreement, as amended, the Accredited Investor #2 agreed to exchange a promissory note issued by us dated April 8, 2017 and the $441,150 in total principal owing under the note, into 441,150 shares of the Company’s Series B Convertible Preferred Stock (see Note 7). The closing under the Second Accredited Investor #2 Securities Exchange Agreement occurred on October 5, 2017 with the effectiveness of the referenced reverse stock split with FINRA (see Note 12). At the closing, the $15,082 in interest due under the notes was waived.

The January 2014 derivative was valued as of January 6, 2014 at $44,493, of which all was recorded as a debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The January 2014 note had accrued interest of $7,624 and $4,025 as of September 30, 2017 and December 31, 2016, respectively.

The February 2014 derivative was valued as of February 18, 2014 at $44,556, which was recorded as a debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The February 2014 note had accrued interest of $18,069 and $14,329 as of September 30, 2017 and December 31, 2016, respectively.

The March 2014 derivative was valued as of March 26, 2014 at $77,884, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. The debt discount was fully amortized to interest expense at September 30, 2017. The March 2014 note had accrued interest of $17,575 and $13,836 as of September 30, 2017 and December 31, 2016, respectively.

The April 2014 derivative was valued as of April 25, 2014 at $90,605, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. The debt discount was fully amortized to interest expense at September 30, 2017. The April 2014 note had accrued interest of $17,164 and $13,425 as of September 30, 2017 and December 31, 2016, respectively.

The May 2014 derivative was valued as of May 21, 2014 at $95,029, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. The debt discount was fully amortized to interest expense at September 30, 2017. The May 2014 note had accrued interest of $14,329 and $13,068 as of September 30, 2017 and December 31, 2016, respectively.

The June 2014 derivative was valued as of June 25, 2014 at $83,184, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. The debt discount was fully amortized to interest expense at September 30, 2017. The June 2014 note had accrued interest of $6,264 and $8,470 as of September 30, 2017 and December 31, 2016, respectively.

The July 2014 derivative was valued as of July 15, 2014 at $73,999, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. The debt discount was fully amortized to interest expense at September 30, 2017. The July 2014 note had accrued interest of $16,041 and $12,301 as of September 30, 2017 and December 31, 2016, respectively.

The August 2014 derivative was valued as of August 19, 2014 at $64,104, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. The debt discount was fully amortized to interest expense at September 30, 2017. The August 2014 note had accrued interest of $15,562 and $11,836 as of September 30, 2017 and December 31, 2016, respectively.

The September 2014 derivative was valued as of September 17, 2014 at $62,915, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. The debt discount was fully amortized to interest expense at September 30, 2017. The September 2014 note had accrued interest of $15,178 and $11,438 as of September 30, 2017 and December 31, 2016, respectively.

The October 2014 derivative was valued as of October 13, 2014 at $63,347, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. The debt discount was fully amortized to interest expense at September 30, 2017. The October 2014 note had accrued interest of $14,808 and $11,068 as of September 30, 2017 and December 31, 2016, respectively.

The November 2014 derivative was valued as of November 7, 2014 at $99,757, which was recorded as a debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The November 2014 note had accrued interest of $29,151 and $21,644 as of September 30, 2017 and December 31, 2016, respectively.

The December 2014 derivative was valued as of December 17, 2014 at $58,456, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. The debt discount was fully amortized to interest expense at September 30, 2017. The December 2014 note had accrued interest of $13,918 and $10,178 as of September 30, 2017 and December 31, 2016, respectively.

The January 2015 derivative was valued as of January 14, 2015 at $29,360, which was recorded as a debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The January 2015 note had accrued interest of $18,986 and $13,751 as of September 30, 2017 and December 31, 2016, respectively.

The first February 2015 derivative was valued as of February 10, 2015 at $23,984, which was recorded as a debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The first February 2015 note had accrued interest of $7,915 and $5,671 as of September 30, 2017 and December 31, 2016, respectively.

The second February 2015 derivative was valued as of February 11, 2015 at $18,003, which was recorded as a debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The second February 2015 note had accrued interest of $7,913 and $5,669 as of September 30, 2017 and December 31, 2016, respectively.

The third February 2015 derivative was valued as of February 25, 2015 at $19,494, which was recorded as a debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The third February 2015 note had accrued interest of $10,389 and $11,096 as of September 30, 2017 and December 31, 2016, respectively.

The March 2015 derivative was valued as of March 10, 2015 at $31,885, which was recorded as a debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The March 2015 note had accrued interest of $28,178 and $19,951 as of September 30, 2017 and December 31, 2016, respectively.

The April 2015 derivative was valued as of April 17, 2015 at $31,397, which was recorded as a debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The April 2015 note had accrued interest of $21,626 and $15,044 as of September 30, 2017 and December 31, 2016, respectively.

The May 2015 derivative was valued as of May 22, 2015 at $36,550, which was recorded as a debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The May 2015 note had accrued interest of $21,255 and $14,523 as of September 30, 2017 and December 31, 2016, respectively.

The June 2015 derivative was valued as of June 23, 2015 at $41,878, which was recorded as a debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The June 2015 note had accrued interest of $20,466 and $13,734 as of September 30, 2017 and December 31, 2016, respectively.

The July 2015 derivative was valued as of July 28, 2015 at $38,600, which was recorded as a debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The July 2015 note had accrued interest of $14,158 and $9,296 as of September 30, 2017 and December 31, 2016, respectively.

The August 2015 derivative was valued as of August 21, 2015 at $37,269, which was recorded as a debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The August 2015 note had accrued interest of $13,730 and $8,869 as of September 30, 2017 and December 31, 2016, respectively.

The September 2015 derivative was valued as of September 24, 2015 at $37,820, which was recorded as a debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The September 2015 note had accrued interest of $12,115 and $8,263 as of September 30, 2017 and December 31, 2016, respectively.

The October 2015 derivative was valued as of October 23, 2015 at $35,290, which was recorded as a debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The October 2015 note had accrued interest of $9,699 and $5,959 as of September 30, 2017 and December 31, 2016, respectively.

The November 2015 derivative was valued as of November 30, 2015 at $36,448, which was recorded as a debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The November 2015 note had accrued interest of $9,178 and $5,438 as of September 30, 2017 and December 31, 2016, respectively.

The December 2015 derivative was valued as of December 21, 2015 at $37,163, which was recorded as a debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The December 2015 note had accrued interest of $9,779 and $5,666 as of September 30, 2017 and December 31, 2016, respectively.

The January 2016 derivative was valued as of January 22, 2016 at $30,855, of which $25,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. The debt discount was fully amortized to interest expense at September 30, 2017. The January 2016 note had accrued interest of $4,226 and $2,357 as of September 30, 2017 and December 31, 2016, respectively.

The February 2016 derivative was valued as of February 8, 2016 at $37,835, which was recorded as a debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The February 2016 note had accrued interest of $9,028 and $4,914 as of September 30, 2017 and December 31, 2016, respectively.

The March 2016 derivative was valued as of March 7, 2016 at $37,402, which was recorded as a debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The March 2016 note had accrued interest of $7,824 and $4,085 as of September 30, 2017 and December 31, 2016, respectively.

The April 2016 derivative was valued as of April 7, 2016 at $53,978, which was recorded as a debt discount. During the nine months ended September 30, 2017, $14,345 was amortized from the debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The April 2016 note had accrued interest of $8,881 and $4,393 as of September 30, 2017 and December 31, 2016, respectively.

The May 2016 derivative was valued as of May 10, 2016 at $47,249, of which $45,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the nine months ended September 30, 2017, $16,027 was amortized from the debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The May 2016 note had accrued interest of $6,267 and $2,902 as of September 30, 2017 and December 31, 2016, respectively.

The first June 2016 derivative was valued as of June 6, 2016 at $48,678, which was recorded as a debt discount. During the nine months ended September 30, 2017, $20,938 was amortized from the debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The first June 2016 note had accrued interest of $7,254 and $3,142 as of September 30, 2017 and December 31, 2016, respectively.

The second June 2016 derivative was valued as of June 9, 2016 at $35,935, of which $27,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the nine months ended September 30, 2017, $11,836 was amortized from the debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The second June 2016 note had accrued interest of $3,532 and $1,512 as of September 30, 2017 and December 31, 2016, respectively.

The third June 2016 derivative was valued as of June 30, 2016 at $14,630, of which $10,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the nine months ended September 30, 2017, $4,959 was amortized from the debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The third June 2016 note had accrued interest of $1,253 and $506 as of September 30, 2017 and December 31, 2016, respectively.

The first July 2016 derivative was valued as of July 13, 2016 at $46,259, which was recorded as a debt discount. During the nine months ended September 30, 2017, $24,587 was amortized from the debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The first July 2016 note had accrued interest of $5,846 and $2,256 as of September 30, 2017 and December 31, 2016, respectively.

The second July 2016 derivative was valued as of July 21, 2016 at $32,140, of which $24,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the nine months ended September 30, 2017, $13,282 was amortized from the debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The second July 2016 note had accrued interest of $2,870 and $1,075 as of September 30, 2017 and December 31, 2016, respectively.

The August 2016 derivative was valued as of August 15, 2016 at $20,723, which was recorded as a debt discount. During the nine months ended September 30, 2017, $12,888 was amortized from the debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The August 2016 note had accrued interest of $5,639 and $1,899 as of September 30, 2017 and December 31, 2016, respectively.

The September 2016 derivative was valued as of September 13, 2016 at $21,612, which was recorded as a debt discount. During the nine months ended September 30, 2017, $15,158 was amortized from the debt discount. The debt discount was fully amortized to interest expense at September 30, 2017. The September 2016 note had accrued interest of $5,246 and $1,503 as of September 30, 2017 and December 31, 2016, respectively.

The October 2016 derivative was valued as of October 11, 2016 at $52,130, of which $50,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the nine months ended September 30, 2017, $37,397 was amortized from the debt discount. The debt discount had a balance at September 30, 2017 of $1,507. The October 2016 note had accrued interest of $4,860 and $1,120 as of September 30, 2017 and December 31, 2016, respectively.

The November 2016 derivative was valued as of November 15, 2016 at $43,444, which was recorded as a debt discount. During the nine months ended September 30, 2017, $32,494 was amortized from the debt discount. The debt discount had a balance at September 30, 2017 of $5,475. The November 2016 note had accrued interest of $3,944 and $578 as of September 30, 2017 and December 31, 2016, respectively.

The December 2016 derivative was valued as of December 13, 2016 at $29,988, which was recorded as a debt discount. During the nine months ended September 30, 2017, $22,429 was amortized from the debt discount. The debt discount had a balance at September 30, 2017 of $6,080. The December 2016 note had accrued interest of $3,599 and $234 as of September 30, 2017 and December 31, 2016, respectively.

The January 2017 derivative was valued as of January 11, 2017 at $38,071, which was recorded as a debt discount. During the nine months ended September 30, 2017, $27,328 was amortized from the debt discount. The debt discount had a balance at September 30, 2017 of $10,743. The January 2017 note had accrued interest of $3,242 as of September 30, 2017.

The February 2017 derivative was valued as of February 8, 2017 at $24,398, which was recorded as a debt discount. During the nine months ended September 30, 2017, $15,641 was amortized from the debt discount and $2,167 debt discount was reduced due to note conversions. The debt discount had a balance at September 30, 2017 of $6,590. The February 2017 note had accrued interest of $2,848 as of September 30, 2017.

The March 2017 derivative was valued as of March 9, 2017 at $25,838, which was recorded as a debt discount. During the nine months ended September 30, 2017, $14,512 was amortized from the debt discount. The debt discount had a balance at September 30, 2017 of $11,326. The March 2017 note had accrued interest of $3,386 as of September 30, 2017.

The April 2017 derivative was valued as of April 12, 2017 at $46,692, which was recorded as a debt discount. During the nine months ended September 30, 2017, $21,875 was amortized from the debt discount. The debt discount had a balance at September 30, 2017 of $24,817. The April 2017 note had accrued interest of $2,604 as of September 30, 2017.

The May 2017 derivative was valued as of May 9, 2017 at $43,190, which was recorded as a debt discount. During the nine months ended September 30, 2017, $17,039 was amortized from the debt discount. The debt discount had a balance at September 30, 2017 of $26,151. The May 2017 note had accrued interest of $2,185 as of September 30, 2017.

The June 2017 derivative was valued as of June 12, 2017 at $161,459, of which $59,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the nine months ended September 30, 2017, $17,781 was amortized from the debt discount. The debt discount had a balance at September 30, 2017 of $41,219. The June 2017 note had accrued interest of $1,794 as of September 30, 2017.

The July 2017 derivative was valued as of July 10, 2017 at $114,292, of which $55,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the nine months ended September 30, 2017, $12,356 was amortized from the debt discount. The debt discount had a balance at September 30, 2017 of $42,644. The July 2017 note had accrued interest of $1,160 as of September 30, 2017.

The August 2017 derivative was valued as of August 11, 2017 at $101,979, of which $60,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the nine months ended September 30, 2017, $8,219 was amortized from the debt discount. The debt discount had a balance at September 30, 2017 of $51,781. The August 2017 note had accrued interest of $838 as of September 30, 2017.

The September 2017 derivative was valued as of September 18, 2017 at $89,771, of which $75,000 was recorded as a debt discount with the remaining amount that exceeded the face value of the note expensed. During the nine months ended September 30, 2017, $2,466 was amortized from the debt discount. The debt discount had a balance at September 30, 2017 of $72,534. The September 2017 note had accrued interest of $267 as of September 30, 2017.

Total accrued interest payable for the non-related party convertible notes was $534,737 and $361,503 as of September 30, 2017 and December 31, 2016, respectively.

The Company recorded total interest expense, including debt discount and beneficial conversion feature amortization, for all debt of $225,618 and $215,225 for the three months ended September 30, 2017 and 2016, respectively, and $650,226 and $657,271 for the nine months ended September 30, 2017, respectively.

NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company adopted FASB ASC 820 on October 1, 2008. Under this FASB, fair value is defined as 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 (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.

The Company has various financial instruments that must be measured under the new fair value standard including: cash and debt. The Company currently does not have non-financial assets or non-financial liabilities that are required to be measured at fair value on a recurring basis. The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:

Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. The fair value of the Company’s cash is based on quoted prices and therefore classified as Level 1.

Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.

Cash, accounts receivable, capitalized production costs, prepaid royalties, prepaid expenses, accounts payable, accrued compensation, accrued royalties, accrued interest, accrued expenses, unearned royalties, notes payable - related party and technology payables reported on the balance sheet are estimated by management to approximate fair market value due to their short term nature.

The following tables provide a summary of the fair values of liabilities measured on a recurring basis as of September 30, 2017 and December 31, 2016:

NOTE 6 - DERIVATIVE FINANCIAL INSTRUMENTS

As discussed in Note 4, the Company issued convertible notes payable to non-related parties that contain anti-dilutive, or down round, price protection and other variable features. Pursuant to ASC 815-15, Embedded Derivatives, and ASC 815-40, Contracts in Entity’s Own Equity, the Company recorded a derivative liability for the price protection provisions issued within the convertible debt transactions.

The fair values of the Company’s derivative liabilities are estimated at the issuance date and are revalued at each subsequent reporting date using a multinomial lattice model simulation discussed below. At September 30, 2017 and December 31, 2016, the Company recorded current derivative liabilities of $4,005,735 and $1,934,617, respectively. The net change in fair value of the derivative liabilities resulted in a gain of $926,943 for the three months ended September 30, 2017 and losses of $592,785 for the three months ended September 30, 2016, $1,757,960 for the nine months ended September 30, 2017 and $398,509 for the nine months ended September 30, 2016. These gains and losses are reported as other income (expense) in the condensed statements of operations.

The following table presents details of the Company’s derivative liabilities for the nine months ended September 30, 2017:

The Company calculated the fair value of the compound embedded derivatives using a multinomial lattice model simulation. The model is based on a probability weighted discounted cash flow model using projections of the various potential outcomes.

Key inputs and assumptions used in valuing the Company’s derivative liabilities are as follows for issuances of notes:

See Note 5 for a discussion of fair value measurements.

NOTE 7 - STOCKHOLDERS’ DEFICIT

Common Stock

On August 21, 2017, the Board of Directors of the Company adopted resolutions authorizing an amendment to the Company’s Articles of Incorporation to approve a reverse stock split of the Company’s outstanding common stock at a ratio of 1-for-100 and to decrease the number of the Company’s authorized common shares from 2,000,000,000 shares to 800,000,000 shares. The par value of the Company’s common stock of $0.00001 per share was not adjusted in connection with the reverse stock split. The reverse stock split was approved by FINRA and went effective on October 5, 2017. The Company has given retroactive effect to the reverse stock split in the accompanying condensed financial statements for all periods presented.

As of September 30, 2017 and December 31, 2016, the Company had common stock payable of $16,800 resulting from a technology transfer agreement with an unrelated party that obligated the Company to issue a total of 960 shares of its common stock, payable in 8 quarterly installments of 120 shares.

During the nine months ended September 30, 2017, the Company issued a total of 6,041,531 shares of its common stock to an accredited investor in conversion of $51,255 principal and $5,203 accrued interest payable at conversion prices ranging from $0.005 to $0.02 per share and settled $114,031 of derivative liabilities and reduced debt discount by $2,167. As a result of the debt conversions and derivative settlement, common stock was increased by $60 and additional paid-in capital was increased by $168,262. After giving retroactive effect to the reverse stock split, we increased the number of common shares outstanding by 11 shares due to rounding.

Preferred Stock

As of September 30, 2017, the Company was authorized to issue up to 25,000,000 shares of its $.00001 par value preferred stock. The shares of preferred stock may be issued from time to time in one or more series.

On August 18, 2017, we issued 1,000 shares of our Series A Preferred Stock to Craig Holland, our Chief Executive Officer. The shares of Series A Preferred Stock entitle the holder to voting rights of the company equal to 51% of the then-outstanding voting rights on any matter properly brought before our shareholders for a vote. The issuance of the shares was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933. The investor is one of our executive officers, accredited and sophisticated, familiar with our operations, and there was no solicitation. The 1,000 shares were recorded at par value of $0.00001 per share for a total value of $0.01.

The Company’s Series A Preferred Stock has One Thousand (1,000) shares authorized and the following rights: (i) no dividend rights; (ii) no liquidation preference over the Company’s common stock; (iii) no conversion rights; (iv) the shares are automatically redeemed by the Company in the event: (a) Mr. Craig Holland is no longer an officer, director or consultant with the Company, or (b) the Company’s common stock is listed on a national exchange, if the listing rules require the shares to be eliminated; (v) no call rights by the Company; (vi) non-transferable; and (vii) the aggregate 1,000 shares have votes equal to 51% of the then-outstanding voting rights of the Company (including all common stock and any other series of preferred stock) on any matter properly brought before the Company’s stockholders for a vote.

The Company’s Series B Preferred Stock has Two Million Seven Hundred Thousand (2,700,000) shares authorized and the following rights: (i) dividend rights equal to the Company’s common stock; (ii) no liquidation preference over the Company’s common stock; (iii) each share is convertible into 50 shares of the Company’s common stock (post reverse stock split that was effective with FINRA on 10/5/2017); (iv) no redemption rights; (v) no call rights by the Company; and (vi) no voting rights.

The Company’s Series C Preferred Stock has Four Million Five Hundred Thousand (4,500,000) shares authorized and the following rights: (i) dividend rights equal to the Company’s common stock; (ii) no liquidation preference over the Company’s common stock; (iii) each share is convertible into 50 shares of the Company’s common stock (post reverse stock split that was effective with FINRA on 10/5/2017); (iv) no redemption rights; (v) no call rights by the Company; and (vi) each shares votes on an “as converted” basis, such that each share currently has 50 votes on all matters brought before the Company’s common stockholders for a vote.

2006 Stock Option Plan

The Company’s 2006 Stock Option Plan adopted by our Board of Directors in March of 2006 terminated in the year ended December 31, 2016. As of September 30, 2017, there were 5,600 stock options outstanding under the 2006 Stock Option Plan.

The Company did not grant any stock options or warrants during the nine months ended June 30, 2017, and did not record any stock-based compensation expense during the three months or nine months ended September 30, 2017 and 2016.

A summary of the status of the options and warrants issued by the Company as of September 30, 2017, and changes during the nine months then ended is presented below:

The outstanding options expire on various dates beginning May 2020 through August 2020.

NOTE 8 - INCOME (LOSS) PER COMMON SHARE

The computation of basic earnings per common share is based on the weighted average number of shares outstanding during the period. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the period plus the weighted average common stock equivalents which would arise from the exercise of stock options, warrants and rights outstanding using the treasury stock method and the average market price per share during the period.

For the three months ended September 30, 2017, potential dilutive securities included 244,382,250 shares issuable for convertible debt, using the treasury stock method. For the three months ended September 30, 2016 and the nine months ended September 30, 2017 and 2016, the diluted weighted average number of shares is the same as the basic weighted average number of shares as the conversion of debt, options and warrants would be anti-dilutive.

NOTE 9 - RELATED PARTY TRANSACTIONS

The Company had convertible notes payable to related parties totaling $1,447,041 as of September 30, 2017 and December 31, 2016. See Note 4 for a detailed disclosure of this related party debt, including interest rates, terms of conversion and other repayment terms. Accrued interest payable to related parties was $321,262 and $354,165 as of September 30, 2017 and December 31, 2016, respectively. Pursuant to amendments to convertible notes payable - related parties in July 2017, a total of $134,057 in accrued interest payable - related party was forgiven and contributed to capital.

As further discussed in Notes 4 and 11, on July 25, 2017, we entered into a series of Securities Exchange and Common Stock Purchase Agreements with related parties. The related parties agreed to exchange convertible notes payable into shares of our common stock on a post-reverse basis (based on a prospective 1-for-100 reverse stock split - see Note 7). The closing under Securities Exchange and Common Stock Purchase Agreements occurred on October 5, 2017 with the effectiveness of the referenced reverse stock split with FINRA. At the closing, substantially all accrued interest payable due under the convertible notes payable to related parties was waived.

NOTE 10 - MERGER

On July 26, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Munzee, Inc., a Delaware corporation (“Munzee”). The Merger Agreement provides for the merger of Munzee with and into the Company, with the Company being the surviving corporation (the “Merger”). Upon closing of the Merger, the Company will issue the current owners of all of Munzee’s outstanding common stock 4,355,000 shares of the Company’s Series C Convertible Preferred Stock, a series of preferred stock created subsequent to September 30, 2017 (see Note 12). On October 18, 2017, the Company closed the Merger (see Note 12.)

NOTE 11 - RECENT ACCOUNTING PRONOUNCEMENTS

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

In January 2017, the FASB issued Accounting Standards Update (“ASU”) No. 2017-4, “Intangibles - Goodwill and Other (Topic 350): “Simplifying the Test for Goodwill Impairment.” This update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity should apply the amendments in this update on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the first annual period and in the interim period within the first annual period when the entity initially adopts the amendments in this update. A public business entity that is an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is currently unable to determine the impact on its financial statements of the adoption of this new accounting pronouncement.

In January 2017, the FASB issued ASU No. 2017-1, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments of this ASU are effective for public business entities for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The amendments in this Update are to be applied prospectively on or after the effective date. The Company is currently unable to determine the impact on its financial statements of the adoption of this new accounting pronouncement.

Although there are several other new accounting pronouncements issued or proposed by the FASB, which the Company has adopted or will adopt, as applicable, the Company does not believe any of these accounting pronouncements has had or will have a material impact on its financial position or results of operations.