NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The Company was incorporated on March 7, 2008 under the laws of the State of Nevada, as Alcantara Brands Corporation. On October 5, 2010, the Company amended its articles of incorporation and changed its name to Bollente Companies, Inc. On June 4, 2018, the Company amended its articles of incorporation and changed its name to Trutankless, Inc.
Nature of operations
The Company is involved in research and development of a new high quality, whole-house, electric tankless water heater that is more energy efficient than conventional products.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Certain information and note disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in the consolidated financial statements for the six months ended June 30, 2019 should be read in conjunction with the consolidated financial statements and accompanying notes included in the Companys Form 10-K for the Companys fiscal year ended December 31, 2018, as filed with the SEC.
The consolidated balance sheet as of December 31, 2018, included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP.
The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the year ending December 31, 2019.
The consolidated financial statements include the accounts of Trutankless, Inc. and its wholly owned subsidiaries. On May 16, 2010, the Company acquired 100% of the outstanding stock of Bollente, Inc. On the date of acquisition, Bollente, Inc. was 2.78% owned and controlled 100% by Robertson J. Orr, a majority shareholder and officer and director of Trutankless, Inc. and the acquisition was accounted for by means of a pooling of the entities from the date of inception of Trutankless, Inc. on March 7, 2008 because the entities were under common control. All significant inter-company transactions and balances have been eliminated
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ significantly from those estimates.
Cash For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. The carrying value of these investments approximates fair value.
7
Website
The Company capitalizes the costs associated with the development of the Companys website pursuant to ASC Topic 350. Other costs related to the maintenance of the website are expensed as incurred. Amortization is provided over the estimated useful lives of 3 years using the straight-line method for financial statement purposes. The Company plans to commence amortization upon completion and release of the Companys fully operational website.
Stock-based compensation
The Company follows ASC 718-10, "Stock Compensation", which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. ASC 718-10 is a revision to SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and its related implementation guidance. ASC 718-10 requires measurement of the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized.
Earnings per share
The Company follows ASC Topic 260 to account for the earnings per share. Basic earnings per common share (EPS) calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding. During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation.
Inventory
Inventories are stated at the lower of cost (average cost) or market (net realizable value).
Revenue recognition
We recognize revenue in accordance with generally accepted accounting principles as outlined in the Financial Accounting Standard Boards (FASB) Accounting Standards Codification (ASC) 606, Revenue From Contracts with Customers, which requires that five basic criteria be met before revenue can be recognized: (i) identify the contract with the customer; (ii) identity the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price; and (v) recognize revenue when or as the entity satisfied a performance obligation.
Revenue recognition occurs at the time product is shipped to customers, when control transfers to customers, provided there are no material remaining performance obligations required of the Company or any matters of customer acceptance. We only record revenue when collectability is reasonably assured.
Fair value of financial instruments
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 2019. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash and accounts payable. Fair values were assumed to approximate carrying values for cash and payables because they are short term in nature and their carrying amounts approximate fair values or they are payable on demand.
Level 1: The preferred inputs to valuation efforts are quoted prices in active markets for identical assets or liabilities, with the caveat that the reporting entity must have access to that market. Information at this level is based on direct observations of transactions involving the same assets and liabilities, not assumptions, and thus offers superior reliability. However, relatively few items, especially physical assets, actually trade in active markets.
Level 2: FASB acknowledged that active markets for identical assets and liabilities are relatively uncommon and, even when they do exist, they may be too thin to provide reliable information. To deal with this shortage of direct data, the board provided a second level of inputs that can be applied in three situations.
Level 3: If inputs from levels 1 and 2 are not available, FASB acknowledges that fair value measures of many assets and liabilities are less precise. The board describes Level 3 inputs as unobservable, and limits their use by saying they shall be used to measure fair value to the extent that observable inputs are not available. This category allows for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
8
Earlier in the standard, FASB explains that observable inputs are gathered from sources other than the reporting company and that they are expected to reflect assumptions made by market participants.
Recent Accounting Pronouncements
ASU 2016-02 - In February 2016, the FASB issued ASU No. 2016-02, "Leases", ("ASC 842") which amended the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASC 842 is effective for public companies during interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. In July 2018, the FASB issued ASU No. 2018-11, which permits entities to record the right-of-use asset and lease liability on the date of adoption, with no requirement to recast comparative periods.
We adopted ASC 842 effective January 1, 2019 using the optional transition method of recognizing a cumulative-effect adjustment to the opening balance of retained earnings on January 1, 2019. Therefore, comparative financial information was not adjusted and continues to be reported under the prior lease accounting guidance in ASC 840. We elected the transition relief package of practical expedients, and as a result, we did not assess 1) whether existing or expired contracts contain embedded leases, 2) lease classification for any existing or expired leases, and 3) whether lease origination costs qualified as initial direct costs. We elected the short-term lease practical expedient by establishing an accounting policy to exclude leases with a term of 12 months or less, as well as the land easement practical expedient for maintaining our current accounting policy for existing or expired land easements.
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
Management evaluated all relevant conditions and events that are reasonably known or reasonably knowable, in the aggregate, as of the date the consolidated financial statements are issued and determined that substantial doubt exists about the Companys ability to continue as a going concern. The Companys ability to continue as a going concern is dependent on the Companys ability to generate revenues and raise capital. The Company has not generated sufficient revenues from product sales to provide sufficient cash flows to enable the Company to finance its operations internally. As of June 30, 2019, the Company had $141,821 cash on hand. At June 30, 2019 the Company has an accumulated deficit of $29,915,575. For the six months ended June 30, 2019, the Company had a net loss of $2,382,823, and cash used in operations of $1,253,852. These factors raise substantial doubt about the Companys ability to continue as a going concern.
Over the next twelve months the Company intends to invest its working capital resources in sales and marketing in order to increase the distribution and demand for its products. If the Company fails to generate sufficient revenue and obtain additional capital to continue at its expected level of operations, the Company may be forced to scale back or discontinue its sales and marketing efforts. However, there is no guarantee the Company will generate sufficient revenues or raise capital to continue operations. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
NOTE 3 - INVENTORY
Inventories consist of the following at:
|
June 30, 2019
|
|
December 31, 2018
|
Finished goods
|
357,931
|
|
403,322
|
Total
|
$357,931
|
|
$403,322
|
9
NOTE 4 - NOTES PAYABLE TO RELATED PARTIES
The Company has two notes payable due to an officer and director of the Company. The notes have interest rate that range from 0%-8% and are due upon demand. During the six months ended June 30, 2019, the Company has made payments in the amount of $30,000 towards these notes. As of June 30, 2019, and December 31, 2018, the outstanding balance on the notes was $4,150 and $34,150, respectively.
On January 25, 2018, the Company issued a $100,000 12% secured promissory grid notes. The note is due on December 31, 2020. As of June 30, 2019, and December 31, 2018, there was $65,000 and $65,000 outstanding on the note, respectively.
Interest expense associated with the related party notes for the six months ended June 3, 2019 and 2018 was $3,951 and $2,334, respectively.
NOTE 5 - NOTES PAYABLE
Notes payable consist of the following at:
|
June 30,
2019
|
|
December 31,
2018
|
Note payable, secured, 12% interest, due January 2020
|
$
|
150,000
|
|
$
|
150,000
|
Note payable, secured, 12% interest, due January 2020
|
|
100,000
|
|
|
100,000
|
Note payable, secured, 12% interest, due January 2020
|
|
50,000
|
|
|
50,000
|
Note payable, secured, 12% interest, due September 2020
|
|
--
|
|
|
50,000
|
Note payable, secured, 12% interest, due September 2019
|
|
100,000
|
|
|
--
|
Note payable, secured, 12% interest, due October 2019
|
|
12,500
|
|
|
--
|
Note payable, secured, 12% interest, due March 2020
|
|
12,000
|
|
|
--
|
Total Notes Payable
|
$
|
424,500
|
|
$
|
350,000
|
|
|
|
|
|
|
Less discounts
|
|
(38,551)
|
|
|
(22,050)
|
Total Notes Payable
|
|
385,949
|
|
|
327,980
|
Less current portion
|
|
(385,949)
|
|
|
(45,717)
|
|
|
|
|
|
|
Total Notes Payable - long term
|
$
|
--
|
|
$
|
282,263
|
On February 8, 2019, the Company issued a $50,000 10% promissory note. The note is due on February 8, 2020 and is convertible at a price of $0.50 per share. As an incentive to enter into the agreement the noteholder was also granted 60,000 shares valued at $30,000. As of June 30, 2019, the shares have not been issued and were included in stock payable. As of June 30, 2019, $11,671 of the debt discount has been amortized and the note was shown net of unamortized discount of $18,329.
On January 30, 2019, the Company issued a $100,000 12% promissory note. The note is due on September 30, 2019. As an incentive to enter into the agreement the noteholder was also granted 100,000 shares valued at $50,000. As of June 30, 2019, $31,070 of the debt discount was amortized. As of June 30, 2019, the note was shown net of unamortized discount of $18,930.
On February 11, 2019, the Company issued a $12,500 12% promissory note. The note is due on October 11, 2019. As an incentive to enter into the agreement the noteholder was also granted 25,000 shares valued at $12,500. As of June 30, 2019, $7,180 of the debt discount was amortized. As of June 30, 2019, the note was shown net of unamortized discount of $5,320. On May 17, 2019, the Company agreed to settle the note along with $833 in accrued interest for 53,334 shared valued at $13,333. As of June 30, 2019, the shares were not issued and were included in stock payable.
On February 11, 2019, the Company issued a $12,500 12% promissory note. The note is due on October 11, 2019. As an incentive to enter into the agreement the noteholder was also granted 25,000 shares valued at $12,500. As of June 30, 2019, $7,180 of the debt discount was amortized. As of June 30, 2019, the note was shown net of unamortized discount of $5,320.
10
On March 1, 2019, the Company issued a $12,000 12% promissory note. The note is due on March 1, 2020. As of June 30, 2019, the note was shown net of unamortized discount of $0.
Interest expense including amortization of the associated debt discount for the six months ended June 30, 2019 and 2018 was $78,825 and $8,877, respectively.
NOTE 6 - CONVERTIBLE NOTES PAYABLE
Convertible notes payable, net of debt discount consist of the following:
|
June 30,
2019
|
|
December 31,
2018
|
Convertible note payable, secured, 12% interest,
due March 2019, convertible at $1 per share
|
$
|
-
|
|
$
|
10,000
|
Convertible note payable, secured, 12% interest,
due May 2018, convertible at $1 per share
|
|
-
|
|
|
50,000
|
Convertible note payable, secured, 12% interest,
due August 2019, convertible at $1 per share
|
|
50,000
|
|
|
50,000
|
Convertible note payable, secured, 12% interest,
due August 2018, convertible at $1 per share
|
|
-
|
|
|
50,000
|
Convertible note payable, secured, 12% interest,
due 120 days after delivery of payment notice from
lender or August 2019, convertible at $0.25 per share
|
|
900,000
|
|
|
900,000
|
Convertible note payable, secured, 12% interest,
due May 2020, convertible at $1 per share
|
|
100,000
|
|
|
100,000
|
Convertible note payable, secured, 12% interest,
due May 2020, convertible at $1 per share
|
|
50,000
|
|
|
50,000
|
Convertible note payable from a shareholder, secured,
12% interest, due May 2020, convertible at $1 per share
|
|
5,000
|
|
|
5,000
|
Convertible note payable from a shareholder, secured,
12% interest, due Feb 2020, convertible at $1 per share
|
|
75,000
|
|
|
75,000
|
Convertible note payable from a shareholder, secured,
4% interest, due August 2019
|
|
75,000
|
|
|
--
|
Convertible note payable from a shareholder, secured,
12% interest, due January 2020, convertible at $0.50 per share
|
|
160,000
|
|
|
160,000
|
Convertible note payable, secured, 10% interest,
due Sept 2020, convertible at $0.50 per share
|
|
50,000
|
|
|
--
|
Convertible note payable, secured, 10% interest,
due Sept 2020, convertible at $0.50 per share
|
|
50,000
|
|
|
--
|
Note payable, secured, 12% interest, due May 2020
|
|
32,700
|
|
|
--
|
|
|
|
|
|
|
Less discounts
|
|
(190,086)
|
|
|
(239,900)
|
Total notes payable, net
|
$
|
1,357,614
|
|
$
|
1,210,100
|
Less current portion
|
|
(1,357,614)
|
|
|
(983,220)
|
|
|
|
|
|
|
Convertible notes payable, net - Long-term
|
$
|
--
|
|
$
|
226,880
|
On September 17, 2018, the Company issued a $50,000 10% promissory note. The note is due on September 18, 2020. As an incentive to enter into the agreement the noteholder was also granted 10,000 shares valued at $5,000. On February 9, 2019, the note was amended for the issuance of 50,000 shares of common stock valued at $25,000, the note holder agreed to a convert the note at a price of $0.50 per share. Additionally, the maturity date of the note was changed to February 8, 2020. As of June 30, 2019, the shares have not been issued and were included in stock payable. As of June 30, 2019, $11,493 of the debt discount has been amortized and the note was shown net of unamortized discount of $18,507.
11
During the year ended December 31, 2016, the Company issued $160,000 of principal amount of 12% secured convertible promissory notes and warrants to purchase our common stock. The notes were due between May and August 2018 and bear interest of percent (12%). The notes are secured by all of the Companys assets. The outstanding principal amounts and accrued but unpaid interest of the notes are convertible at any time at the option of the holder into common stock at a conversion price of $1.00 per share. The notes were issued with warrants to purchase up to 160,000 shares of the Companys common stock which were valued at $119,616. As of June 30, 2019, $119,616 of the debt discount was amortized and the note was shown net of unamortized discount of $0. During the six months ended June 30, 2019, the notes holders of $110,000 of the convertible notes agreed to convert the notes and accrued interest at a conversion price of $0.25 per share into 552,767 shares of common stock. As of June 30, 2019, the shares were not issued and were included in stock payable. The Company evaluated the adjustment of the conversion price under ASC 470, and recorded an additional loss on conversion of $126,813 Which was recognized as an expense equal to the fair value of all securities and other consideration transferred in the transaction in excess of fair value of securities issuable pursuant to the original conversion terms.
On December 14, 2018, the Company issued a $50,000 4% convertible note. The note is due on February 14, 2019 and is convertible at a rate of $0.50 per shares. As an incentive to enter into the agreement the noteholder was also granted 10,000 shares valued at $5,000. As of June 30, 2019, $5,000 of the debt discount was amortized. As of June 30, 2019, the note was shown net of unamortized discount of $0.
On February 19, 2019, the Company issued a $25,000 4% convertible note. The note is due on May 19, 2019 and is convertible at a rate of $0.50 per shares. As an incentive to enter into the agreement the noteholder was also granted 5,000 shares valued at $2,500. As of June 30, 2019, the shares have not been issued and were included in stock payable. As of June 30, 2019, $2,500 of the debt discount was amortized and the note was shown net of unamortized discount of $0.
On January 25, 2019, the Company issued a $100,000 8% promissory grid note. The note is due on July 25, 2019 and is convertible at a rate of $0.50 per shares. Additionally, the note holder is two shares of common stock for every dollar funded. As of June 30, 2019, the note holder has advanced a total of $37,500 and the Company has made payments of $14,800. As of June 30, 2019, there was an outstanding balance on the note in the amount of $32,700.
Interest expense including amortization of the associated debt discount for the six months ended June 30, 2019 and 2018 was $295,844 and $100,020, respectively.
NOTE 7 - ROYALTY PAYMENTS
The Company has agreed to allow accredited investors the ability to receive a royalty on products sold in an effort to fund its distribution and marketing advances internationally by purchasing units. Each unit represents 0.625% royalty interest in the Gross Margin of product sold by Bollente International, Inc., costing $25,000 per unit.
On October 18, 2017, the Company entered into royalty termination agreements whereas the Company converted all royalties interest into a total of 1,400,000 shares of common stock valued at $700,000. As of June 30, 2019, the Company has issued 1,200,000 shares of common stock and has recorded the balance of the common stock due to stock payable.
NOTE 8 - RESTATEMENT
The Company has restated the financial statements for the three months ended March 31, 2019 to correct the accounting for the conversion of the convertible promissory notes.
As disclosed in Note 6, the notes holders of $110,000 of convertible notes originally convertible at $1.00 agreed to convert the notes and accrued interest of the notes at $0.25. The Company evaluated the adjustment of the conversion price under ASC 470, and recorded a loss on conversion of $126,813, which was recognized as an expense equal to the fair value of all securities and other consideration transferred in the transaction in excess of fair value of securities issuable pursuant to the original conversion terms.
12
The following tables summarize the corrections on each of the affected financial statement line items as of and for the three months ended March 31, 2019
|
As Previously
Reported
|
|
Adjustment
|
|
As
Restated
|
As of March 31, 2019
|
|
|
|
|
|
Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
$
|
1,093,736
|
|
(39,570)
|
|
$
|
1,054,166
|
Convertible notes payable, net of debt discount
|
$
|
1,219,868
|
|
(110,000)
|
|
$
|
1,109,868
|
Total Current Liabilities
|
$
|
2,828,370
|
|
(110,000)
|
|
$
|
2,718,370
|
Total Liabilities
|
$
|
2,981,670
|
|
(110,000)
|
|
$
|
2,871,670
|
Subscriptions payable
|
$
|
900,500
|
|
276,384
|
|
$
|
1,176,884
|
Accumulated deficit
|
$
|
(28,667,581)
|
|
(126,814)
|
|
$
|
(28,794,395)
|
Total Stockholders' Equity
|
$
|
(1,776,175)
|
|
149,570
|
|
$
|
(1,626,605)
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2019
|
|
|
|
|
|
|
|
Consolidated Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on conversion of notes payable
|
$
|
-
|
|
(126,814)
|
|
$
|
(126,814)
|
Other income (expense)
|
$
|
(184,218)
|
|
(126,814)
|
|
$
|
(311,032)
|
Net loss
|
$
|
(1,134,829)
|
|
(126,814)
|
|
$
|
(1,261,643)
|
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Office Lease
During 2018, the Company executed a lease agreement. The lease term is 39 months at a rate of $1,780 per month with rent commencing on January 1, 2019. The Company was required to pay a $1,781 security deposit. On January 1, 2019, the Company has recorded a $64,978 right to use asset and lease liability associated with this lease in accordance with ASC 842. The lease was recorded as at the present value of the minimum lease payments over the 51- month term with a borrowing rate of 12%. As of June 30, 2019, the right to use asset and lease liability were $58,356 and $56,856, respectively.
In January 2019, the Company executed a sublease agreement with Templar Asset Group, LLC, a related party. The lease term is one year at a rate of $3,200 per month for a period of one year with an option to continue a month to month basis thereafter.
Rent expense for the year ended June 30, 2019 and 2018 was $56,481 and $20,400, respectively.
NOTE 10 - STOCK WARRANTS
During the six months ended June 30, 2019, we issued 82,500 warrants in conjunction with units which included shares sold for cash to purchase 426,500 shares of the Companys common stock at an exercise price of $1.00 per share associated with. The warrants are exercisable at any time until three (3) years after the closing date.
The following is a summary of stock warrants activity during the three months ended June 30, 2019.
|
Number of
Shares
|
|
Weighted Average
Exercise Price
|
Balance, December 31, 2018
|
2,395,624
|
|
$1.00
|
Warrants granted and assumed
|
82,500
|
|
$1.00
|
Warrants expired
|
--
|
|
--
|
Warrants canceled
|
--
|
|
--
|
Warrants exercised
|
--
|
|
--
|
Balance, June 30, 2019
|
2,478,124
|
|
$1.00
|
As of June 30, 2019, there are warrants exercisable to purchase 2,478,124 shares of common stock in the Company.
13
NOTE 11 - STOCKHOLDERS EQUITY
The Company is authorized to issue 10,000,000 shares of it $0.001 par value preferred stock and 100,000,000 shares of its $0.001 par value common stock.
Each share of Preferred Stock is convertible, at any time, at the option of the holder, is convertible into five shares of our common stock and one warrant to purchase one share of our common stock at $1.00 per share. All Preferred Stock will be automatically converted into shares of the Companys common stock and warrants after three years from the original issue date of the Preferred Stock.
During the six months ended June 30, 2019, the Company issued 1,096,300 shares of common stock with a fair value of $505,325 for services. Additionally, the Company cancelled two consulting agreements entered into during the year ended December 31, 2018. As a result, the Company, received and cancelled 100,000 shares of common stock valued at $50,000. The Company valued the share at their fair market value which was considered the most readily determinable value.
During the six months ended June 30, 2019, the Company issued 3,001,000 shares of common stock for $823,750 cash. Additionally, the Company received $333,500 for the sale of common stock which has not been issued and has been recorded as stock payable.
During the six months ended June 30, 2019, the Company issued 150,000 shares of common stock valued at $75,000 as incentives for certain noteholders to enter into financing agreements.
NOTE 12 - SUBSEQUENT EVENTS
Subsequent to quarter end, the Company issued 1,104,000 shares of common stock for $473,500 cash that was received during the June 30, 2019 and recorded as stock payable.
Subsequent to quarter end, the Company issued 540,000 shares of common stock for services.
Subsequent to quarter end, the Company issued 53,338 shares of common stock for the conversion of debt.
On August 2, 2016, the Company entered into a Loan Agreement and Security Agreement with Built-Right Holdings, LLC, an Arizona limited liability company. On July 26, 2019, the noteholder agreed to extend the maturity date of the note to November 1, 2019.
14