Notes
to the Consolidated Financial Statements
NOTE
1. NATURE OF BUSINESS
12
ReTech Corporation (“the Company”) is a holding company with subsidiaries that develop, sell and deploy software that
the Company believes will REINVENT RETAIL for shoppers and retailers. As a holding company, we also acquire synergistic operating
companies that manufacture and sell products to other retailers as well as sell products online.
On
October 1, 2019, the Company acquired twelve (12) retail stores operating in airport terminals and casinos transforming the Company
into a true Omni-Channel retailer. The Company closed three of these locations by December 31, 2019. See subsequent footnotes
for further details. The new operations will allow us to deploy our cutting-edge software in the United States to demonstrate
its effectiveness as well as to test, in real time, new software products that will continue to delight consumers and generate
additional revenue and profit opportunities for retailers.
Bluwire Group, LLC (“Bluwire”) which provided the bulk
of the revenue growth of the 4th quarter of 2020 has also been impacted by the COVID-19 pandemic. On or about March
16, 2020 every one of our subsidiary Bluwire’s (see below) stores was shut down by local government mandate. Stores were
shuttered and our staff was laid off. We are staying in close communication with our landlords and the various airport authorities
where we have stores located. At this point, Management still does not have a timeline for the reopening of these business operations.
This shutdown has negatively impacted the Company’s revenues and cash flow. We have applied for and received CARES Act Payment
Protection Program funding for each of the stores. These funds will help the Company get back on its feet when the airport and
casino stores are allowed to reopen. Management predicts that it will likely be the following year before airport traffic levels
get back to normal if not longer. We are currently expecting to report large negative impacts to the Bluwire business in terms
of revenues for the balance of this year.
Principal
Subsidiaries
The
details of the principal subsidiaries of the Company are set out as follows:
|
Name
of Company
|
|
Place
of Incorporation
|
|
Date
of Incorporation
|
|
Acquisition
Date
|
|
Attributable
Equity Interest %
|
|
|
Business
|
|
12
Retail Corporation (“12 Retail”)
|
|
Arizona,
USA
|
|
Sept.
18, 2017
|
|
Formed
by 12 ReTech Corporation
|
|
100
|
%
|
|
As
a holding Company to execute the Company’s roll up acquisition strategy as well as to penetrate the North American market
with our technology to select retailers.
|
|
E-motion
Fashion Group, Inc. F/K/A Emotion Apparel, Inc,
|
|
Re-incorporated,
in Utah, USA F/K/I in California, USA
|
|
September
9, 2010. Reincorporated on July 6, 2018 and changed its name on July 26, 2018.
|
|
May
1, 2018
|
|
100
|
%
|
|
A
subsidiary of 12 Retail and is the first microbrand acquired under the microbrand acquisitions roll up strategy. Operates
its own production facilities that can be utilized by all of the Company’s future microbrands.
|
|
Red
Wire Group, LLC
|
|
Utah,
USA
|
|
July
2, 2015
|
|
February
19, 2019
|
|
100
|
%
|
|
A
subsidiary of 12 Retail which is part of the brand acquisition strategy. Operates its own “cut & sew” factory
for independent third-party brands who contract us to produce their apparel products.
|
|
Rune
NYC, LLC
|
|
New
York, USA
|
|
Jan
23, 2013.
|
|
March
14, 2019
|
|
92.5
|
%
|
|
A
subsidiary of 12 Retail which is part of the brand acquisition strategy. Operates contemporary women’s ‘Athleisure’
brand which is primarily sold to retailers.
|
|
Bluwire
Group, LLC (“Bluwire”)
|
|
Florida,
USA
|
|
Feb
1, 2010
|
|
October
1, 2019
|
|
60.5
|
%
|
|
A
subsidiary of 12 Retail with 12 brick and mortar stores was acquired.
|
|
Social
Decay, LLC dba Social Sunday (“Social Sunday”)
|
|
New
York, USA
|
|
Sept
29, 2014
|
|
November
1, 2019
|
|
100
|
%
|
|
A
subsidiary of 12 Retail which is part of the brand acquisition strategy. Is contemporary women’s brand primarily sold
to wholesalers.
|
|
12
Tech
|
|
Arizona,
USA
|
|
Dec
26,2019
|
|
Dec
26,2019
|
|
100
|
%
|
|
As
a holding Company to execute the Company’s technology strategy.
|
|
12
Hong Kong Limited (“12HK”)
|
|
Hong
Kong, China
|
|
February
2, 2014
|
|
June
27, 2017
|
|
100
|
%
|
|
Development
and sales of technology applications
|
|
12
Japan Limited (“12JP”)
|
|
Tokyo,
Japan
|
|
February
12, 2015
|
|
July
31, 2017
|
|
100
|
%
|
|
Consultation
and sales of technology applications
|
|
12
Europe AG (“12EU”)
|
|
Switzerland
|
|
August
22, 2013
|
|
October
26, 2017
|
|
100
|
%
|
|
Consultation
and sales of technology applications
|
Reverse
Stock Split
On
October 18, 2019, the Company completed a 100-for-1 reverse common stock split reducing the outstanding common shares to 25,410,391.
Upon the stock split, the Company’s authorized common shares of 8,000,000,000 did not change. The reverse split has been
retroactively applied to share amounts in these consolidated financial statements.
NOTE
2. GOING CONCERN
The
Company accounts for going concern matters under the guidance of ASU 2014-15, “Presentation of Financial Statements –
Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern (“ASU
2014-15”). The guidance in ASU 2014-15 sets forth management’s responsibility to evaluate whether there is substantial
doubt about an entity’s ability to continue as a going concern as well as required disclosures. ASU 2014-15 indicates that,
when preparing financial statements for interim and annual financial statements, management should evaluate whether conditions
or events, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern for one year
from the date the financial statements are issued or are available to be issued. This evaluation should include consideration
of conditions and events that are either known or are reasonably knowable at the date the financial statements are issued or are
available to be issued, as well as whether it is probable that management’s plans to address the substantial doubt will
be implemented and, if so, whether it is probable that the plans will alleviate the substantial doubt.
These financial statements have been prepared on a going concern
basis which assumes the Company will continue to realize it assets and discharge its liabilities in the normal course of business.
As of December 31, 2019, the Company has incurred losses totaling $22,769,270 since inception, has not yet generated significant
revenue from its operations, and will require additional funds to maintain our operations. As of December 31, 2019, the Company
had a working capital deficit of $17,786,148. These factors raise substantial doubt regarding the Company’s ability to continue as
a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable
operations and/or obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business
operations when they become due. The Company intends to finance operating costs over the next twelve months through continued financial
support from its shareholders, the issuance of debt securities and private placements of common stock. These financial statements
do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities
that might be necessary should the Company be unable to continue as a going concern.
NOTE
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
consolidated financial statements and related disclosures have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission (“SEC”). The financial statements have been prepared using the accrual basis of accounting
in accordance with accounting principles generally accepted in the United States (“GAAP”) and presented in US dollars.
The fiscal year end is December 31.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its subsidiaries 12HK, 12JP, 12EU. 12 Retail, Rune NYC,
LLC, Red Wire Group, LLC (“RWG”), Bluwire Group, LLC, Social Decay LLC dba Social Sunday (“Social Sunday”)
and Emotion Fashion Group which included Emotion Apparel, Inc., Lexi Luu Designs, Inc., Punkz Gear, Skipjack Dive and Dance Wear,
Inc. and Cleo VII, Inc. All inter-company accounts and transactions have been eliminated on consolidation. We currently have no
investments accounted for using the equity or cost methods of accounting.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements. The estimates and judgments will also affect the
reported amounts for certain revenues and expenses during the reporting period. Significant estimates and assumptions reflected
in these consolidated financial statements include, but are not limited to, stock-based compensation, derivate instruments, accounting
for preferred stock, and the valuation of acquired assets and liabilities. The Company bases its estimates on historical experience,
known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. On
an ongoing basis, management evaluates its estimates when there are changes in circumstances, facts and experience. Changes in
estimates are recorded in the period in which they become known. Actual results could differ from those estimates.
Cash
and Cash Equivalents
Cash
and cash equivalents include cash in banks, money market funds, and certificates of term deposits with maturities of less than
three months from inception, which are readily convertible to known amounts of cash and which, in the opinion of management, are
subject to an insignificant risk of loss in value. The Company had $118,860 and $37,421 in cash and cash equivalents as at December
31, 2019 and December 31, 2018, respectively.
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash. Periodically, the
Company maintains deposits in accredited financial institutions in excess of federally insured limits. The Company deposits its
cash in financial institutions that it believes have high credit quality and has not experienced any losses on such accounts and
does not believe it is exposed to any unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
Revenue
Recognition
Under
Financial Accounting Standards Board (“FASB”) Topic 606, “Revenue from Contacts with Customers” (“ASC
606”), the Company recognizes revenue when the customer obtains control of promised goods or services, in an amount that
reflects the consideration which is expected to be received in exchange for those goods or services. The Company recognizes revenue
following the five-step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance
obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s)
in the contract; and (v) recognize revenues when (or as) the Company satisfies a performance obligation.
The
Company’s revenue consists primarily of product sales from our retail stores operating in airport terminals and casinos.
Revenue for retail customers is recognized upon completion of the transaction in the point of sale system and satisfaction of
the sale by providing the corresponding inventory at the retail location. Revenue is recognized upon transfer of control of promised
products to customers, generally as risk of loss pass, in an amount that reflects the consideration the Company expects to receive
in exchange for those products. Shipping and handling costs are expensed as incurred and are included in cost of revenue. Sales
taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from revenue.
The
Company earns ancillary revenue including royalty payments and software licensing fees.
Business
Combinations
The
Company accounts for all business combinations in accordance with FASB ASC 805, “Business Combinations” (“ASC
805”), using the acquisition method of accounting. Under this method, assets and liabilities, including any non-controlling
interests, are recognized at fair value at the date of acquisition. The excess of the purchase price over the fair value of assets
acquired, net of liabilities assumed, and is recognized as goodwill. Certain adjustments to the assessed fair values of the assets,
liabilities, may be made subsequent to the acquisition date, but within the measurement period, which is up to one year, are recorded
as adjustments to goodwill. Any adjustments subsequent to the measurement period would be recorded as income. Results of operations
of the acquired entity are included in the Company’s results from operations from the date of the acquisition onward and
include amortization expense arising from acquired assets. The Company expenses all costs as incurred related to an acquisition
in the consolidated statements of operations.
Accounts
Receivable
The
Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts
receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and
changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific
identification basis. As of December 31, 2019 and 2018, the Company did not have an allowance for doubtful accounts.
Inventory
Inventories,
consisting of a computer application, a mirror with a computer screen and touch monitor, are primarily accounted for using the
first-in-first-out (“FIFO”) method and are valued at the lower of cost or market value. Inventories on hand are evaluated
on an on-going basis to determine if any items are obsolete or in excess of future market needs. Items determined to be obsolete
are reserved for. As of December 31, 2019, all inventory on hand is pursuant to our Bluwire and Social Sunday acquisitions (see
Note 4).
Fixed
Assets
Fixed
assets are recorded at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the shorter of the term of the related lease or the estimated useful life of
the asset. The useful lives are as follows:
|
Office equipment
|
3 years
|
|
Furniture and equipment
|
6 years
|
|
Computer
|
4 years
|
|
Technical equipment
|
3.3 years
|
Maintenance
and repairs are charged to operations as incurred. Expenditures that substantially increase the useful lives of the related assets
are capitalized. When properties are disposed of, the related costs and accumulated depreciation are removed from the accounts
and any gain or loss is reported in the period the transaction takes place.
Software
Development Costs
Under
ASC 350-40, capitalized costs related to the software under development are treated as an asset until the development is completed
and the software is available for licensure under a software-as-a-service (“SaaS”) arrangement. Periodically, management
reviews its capitalized costs to determine if they are properly valued or should they be impaired. During the year ended December
31, 2019, the Company fully impaired $513,601 in development costs for its 12 Technology suite and 12 Sconti APP, which is included
in other expenses in the consolidated statements of operations.
Goodwill
Goodwill
represents the excess of the purchase price of an acquired entity over the fair value of identifiable tangible and intangible
assets acquired and liabilities assumed in a business combination.
Impairment
of Long-Lived Assets
The
Company reviews its long-lived assets (property and equipment) for impairment whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. If the sum of the expected cash flows, undiscounted, is less than the carrying
amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair
value.
Goodwill
is tested annually at December 31 for impairment and upon the occurrence of certain events or substantive changes in circumstances.
The
Company accounts for the impairment of goodwill under the provisions of ASU 2011-08 (“ASU 2011-08”), “Intangibles
Goodwill and Other (Topic 350): Testing Goodwill for Impairment.” ASU 2011-08 updated the guidance on the periodic testing
of goodwill for impairment. The updated guidance gives companies the option to perform a qualitative assessment to determine whether
it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
The
Company performs impairment testing for goodwill using a three-step approach. Step “zero” of the annual goodwill impairment
test allows for the option to first assess qualitative factors to determine whether it is more likely than not that the fair value
of a reporting unit is less than its carrying amount. An entity may choose to perform the qualitative assessment on none, some
or all of its reporting units or an entity may bypass the qualitative assessment for any reporting unit and proceed directly to
step “one” of the quantitative impairment test. If it is determined, on the basis of qualitative factors, that the
fair value of a reporting unit is, more likely than not, less than its carrying value, the quantitative impairment test is required.
Step “one” of the quantitative impairment test compares the net assets of the of the relevant reporting entity to
its carrying value. Step “two” of the quantitative impairment test calculates any goodwill impairment as the difference
between the carrying amount of a reporting unit and its fair value, but not to exceed the carrying amount of goodwill.
As
of December 31, 2019, the Company performed its annual impairment test on all reporting units and determined that each unit had indicating
factors of impairment due to failure to meet respective sales projections. As a result, the Company fully impaired the goodwill
from each 2019 acquisition as follows:
|
Redwire
|
|
$
|
480,381
|
|
|
Rune
|
|
|
394,440
|
|
|
Bluwire
|
|
|
623,072
|
|
|
Social Decay
|
|
|
473,784
|
|
|
|
|
$
|
1,971,677
|
|
The
impairment expense is included in other expense in the consolidated statements of operations.
Convertible
Debt and Convertible Preferred Stock
When
the Company issues convertible debt or convertible preferred stock, it first evaluates the balance sheet classification of the
convertible instrument in its entirety to determine whether the instrument should be classified as a liability under ASC 480,
Distinguishing Liabilities from Equity, and second whether the conversion feature should be accounted for separately from the
host instrument. A conversion feature of a convertible debt instrument or certain convertible preferred stock would be separated
from the convertible instrument and classified as a derivative liability if the conversion feature, were it a standalone instrument,
meets the definition of an “embedded derivative” in ASC 815, Derivatives and Hedging. Generally, characteristics that
require derivative treatment include, among others, when the conversion feature is not indexed to the Company’s equity,
as defined in ASC 815-40, or when it must be settled either in cash or by issuing stock that is readily convertible to cash. When
a conversion feature meets the definition of an embedded derivative, it would be separated from the host instrument and classified
as a derivative liability carried on the consolidated balance sheet at fair value, with any changes in its fair value recognized
currently in the consolidated statements of operations.
If
a conversion feature does not meet the conditions to be separated and accounted for as an embedded derivative liability, the Company
then determines whether the conversion feature is “beneficial”. A conversion feature would be considered beneficial
if the conversion feature is “in the money” when the host instrument is issued or, under certain circumstances, later.
If convertible debt contains a beneficial conversion feature (“BCF”), the amount of the amount of the proceeds allocated
to the BCF reduces the balance of the convertible debt, creating a discount which is amortized over the debt’s term to interest
expense in the consolidated statements of operations.
When
a convertible preferred stock contains a BCF, after allocating the proceeds to the BCF, the resulting discount is either amortized
over the period beginning when the convertible preferred stock is issued up to the earliest date the conversion feature may be
exercised, or if the convertible preferred stock is immediately exercisable, the discount is fully amortized at the date of issuance.
The amortization is recorded similar to a dividend.
Financial
Instruments and Fair Value Measurements
The
Company’s financial instruments consist primarily of cash, accounts receivable, inventory, prepaid expenses and other current
assets, accounts payable and accrued liabilities, convertible notes payable and due to stockholders. The carrying amounts of such
financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market
interest rates of these instruments.
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. Assets and liabilities measured at fair value are categorized based on whether
the inputs are observable in the market and the degree that the inputs are observable. Inputs refer broadly to the assumptions
that market participants would use in pricing the asset or liability, including assumptions about risk. Observable inputs are
based on market data obtained from sources independent of the Company. Unobservable inputs reflect our own assumptions based on
the best information available in the circumstances. The fair value hierarchy prioritizes the inputs used to measure fair value
into three broad levels, defined as follows:
|
|
Level 1
|
—
|
Inputs are quoted
prices in active markets for identical assets or liabilities as of the reporting date.
|
|
|
|
|
|
|
|
Level 2
|
—
|
Inputs other
than quoted prices included within Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted
prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable
or can be corroborated with observable market data.
|
|
|
|
|
|
|
|
Level 3
|
—
|
Unobservable
inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities.
This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable
inputs. Unobservable inputs for the asset or liability that reflect management’s own assumptions about the assumptions
that market participants would use in pricing the asset or liability as of the reporting date.
|
The
Company carries certain derivative financial instruments using inputs classified as Level 3 in the fair value hierarchy on the
Company’s consolidated balance sheets. Refer to Note 11 for detail on the derivative liability.
Further,
the Company determined that the certain notes should be measured and carried at fair value in the consolidated financial statements
according to ASC 480, as they are settleable in a variable number of shares based on a fixed monetary amount known at inception.
Stock-Based
Compensation
ASC
718, “Compensation - Stock Compensation,” prescribes accounting and reporting standards for all share-based payment
transactions in which employee services are acquired. Transactions include incurring liabilities, or issuing or offering to issue
shares, options and other equity instruments such as employee stock ownership plans and stock appreciation rights. Share-based
payments to employees, including grants of employee stock options, are recognized as compensation expense in the financial statements
based on their fair values. That expense is recognized over the period during which an employee is required to provide services
in exchange for the award, known as the requisite service period (usually the vesting period).
The
Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC
505-50, “Equity - Based Payments to Non-Employees.” Measurement of share-based payment transactions with non-employees
is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments
issued. The fair value of the share-based payment transaction is determined at the earlier of performance commitment date or performance
completion date.
Income
Taxes
The
Company accounts for income taxes under ASC 740, “Income Taxes”. Under the asset and liability method of ASC 740,
deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more
likely than not that the Company will not realize tax assets through future operations. At December 31, 2019 and 2018, the Company
recognized a full valuation allowance against the recorded deferred tax assets.
Net
Loss per Share
The
Company follows ASC 260, “Earnings per Share” (“EPS”), which requires presentation of basic EPS
on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation. In the accompanying financial statements, basic earnings (loss) per share are computed
by dividing net loss by the weighted average number of shares of common stock outstanding during the period. On October 18, 2019,
the Company successfully completed its reverse stock split and reduced its common stock outstanding by a ratio of one hundred
for one. Per ASC 505-10, if a reverse split occurs after the date of the latest reported balance sheet but before the release
of the financial statements, then such changes in the capital structure must be given retroactive effect in the balance sheet.
As such, the reverse split has been retroactively applied to these financial statements.
Diluted
earnings per share reflects the potential dilution that could occur if securities were exercised or converted into common stock
or other contracts to issue common stock resulting in the issuance of common stock that would then share in the Company’s
earnings subject to anti-dilution limitations. In a period in which the Company has a net loss, all potentially dilutive securities
are excluded from the computation of diluted shares outstanding as they would have an anti-dilutive impact. For the year ended
December 31, 2019, potentially dilutive common shares consist of common stock issuable upon the conversion of convertible notes
payable, Series A Preferred Stock, Series B Preferred Stock, Series D-2 Preferred Stock, Series D-3 Preferred Stock, Series D-5
Preferred Stock and Series D-6 Preferred Stock (using the if converted method). All potentially dilutive securities were excluded
from the computation of diluted weighted average number of shares of common stock outstanding as they would have had an anti-dilutive
impact. At December 31, 2018, if all dilutive securities were converted the Company would be in excess of their authorized shares
of common stock.
Discontinued
Operations
In
accordance with ASU 2014-08, the Company considers discontinued operations a disposal of a component that represents a strategic
shift or will have a major effect on an entity’s operations and financial results.
Foreign
Currency Translation
The
accompanying financial statements are presented in U.S. dollars (“USD”), the reporting currency. The functional currencies
of the Company’s foreign operations are the Hong Kong Dollar (“HKD”), Japanese Yen (“JPY”), and
Swiss Franc (“CHF”). In accordance with ASC 830, “Foreign Currency Matters”, the assets and liabilities
are translated into USD at current exchange rates. Revenue and expenses are translated at average exchange rates for the period.
Resulting translation adjustments are reflected as accumulated other comprehensive income in stockholders’ deficit. Transaction
gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional
currency are charged to operations as incurred. There were no material transaction gains or losses in the periods presented.
Comprehensive
Income
ASC
220, Comprehensive Income, establishes standards for the reporting and display of comprehensive loss and its components in the
condensed consolidated financial statements. During the years ended December 31, 2019 and 2018, the Company’s only component
of comprehensive income was foreign currency translation adjustments.
Contingencies
The
Company follows ASC 450-20, “Loss Contingencies” to report accounting for contingencies. Liabilities for loss contingencies
arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability
has been incurred and the amount of the assessment can be reasonably estimated. There were no loss contingencies as of December
31, 2019 and 2018.
Recent
Accounting Pronouncements
In
May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which supersedes nearly
all existing revenue recognition guidance under accounting principles generally accepted in the United States of America. The
core principle of this ASU is that revenue should be recognized for the amount of consideration expected to be received for promised
goods or services transferred to customers. This ASU also requires additional disclosure about the nature, amount, timing and
uncertainty of revenue and cash flows arising from customer contracts, including significant judgments, and assets recognized
for costs incurred to obtain or fulfill a contract. ASU 2014-09 was scheduled to be effective for annual reporting periods beginning
after December 15, 2016, including interim periods within that reporting period. In August 2015, the FASB issued ASU 2015-14,
“Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date,” which deferred the effective date
of ASU 2014-09 by one year and allowed entities to early adopt, but no earlier than the original effective date. ASU 2014-09 is
now effective for public business entities for the annual reporting period beginning January 1, 2018. This update allows for either
full retrospective or modified retrospective adoption. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts
with Customers (Topic 606): Identifying Performance Obligations and Licensing,” which amends guidance previously issued
on these matters in ASU 2014-09. The effective date and transition requirements of ASU 2016-10 are the same as those for ASU 2014-09.
In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements
and Practical Expedients,” which clarifies certain aspects of the guidance, including assessment of collectability, treatment
of sales taxes and contract modifications, and providing certain technical corrections. The effective date and transition requirements
of ASU 2016-12 are the same as those for ASU 2014-09.
The
Company adopted the new guidance as of January 1, 2018. The Company has evaluated the new guidance and the adoption did not have
a significant impact on the Company’s financial statements and a cumulative effect adjustment under the modified retrospective
method of adoption will not be necessary.
In
February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) which supersedes existing
guidance on accounting for leases in “Leases (Topic 840).” The standard requires lessees to recognize the assets and
liabilities that arise from leases on the balance sheet. A lessee should recognize in the balance sheet a liability to make lease
payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term.
The new guidance is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those
fiscal years. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective
approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company evaluated
the effects of adopting ASU 2016-02 on its consolidated financial statements and determined the amount of lease assets and liabilities
which was associated with the Bluwire leases. As such, the company recognized a lease asset of $303,071 and short- term lease
liability of $245,207 and long- term lease liability of $59,372 as of December 31, 2019. The other leases do not have significant
impact on the Company’s consolidated financial statements as of the date of the filing of this report.
In
January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.”
This new standard clarifies the definition of a business and provides a screen to determine when an integrated set of assets and
activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or
disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business.
The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted. The Company adopted
this standard as of January 1, 2019 and it did not have any material impact on its consolidated financial statements.
Management
has considered all recent accounting pronouncements issued. The Company’s management believes that these recent pronouncements
will not have a material effect on the Company’s financial statements.
NOTE
4 – ACQUISITIONS
Acquisitions
Red
Wire Group, LLC
On
February 19, 2019, the Company completed the acquisition of Red Wire Group, LLC. (“RWG”) a Utah limited liability
company, pursuant to a share exchange agreement whereby the Company exchanged shares of the Company’s Series D-5
and Series D-6 Preferred Stock for 100% of the outstanding equity of RWG. Pursuant to the terms of the exchange agreement,
the Company acquired (i) 75% of the membership interests of RWG in exchange for 54,000 shares of the Company’s Series D-6
Preferred Stock (stated value of $5.00 per share), and (ii) the remaining 25% of the membership interests of RWG in exchange for
37,500 shares of the Company’s Series D-5 Preferred Stock (stated value of $4.00 per share). The total purchase consideration
for the RWG acquisition was $450,000, including the fair value of D-5 and D-6 Preferred Stock of $420,000 and $30,000 in cash.
The
RWG acquisition was accounted for as a business combination in accordance with ASC 805. The Company has determined preliminary
fair values of the assets acquired and liabilities assumed. These values are subject to change as we perform additional reviews
of our assumptions utilized.
The
following table summarizes the provisional purchase price allocations relating to the RWG acquisition:
|
|
|
Preliminary
|
|
|
|
|
Purchase
Price
|
|
|
|
|
Allocation
|
|
|
Cash
and cash equivalents
|
|
$
|
10
|
|
|
Inventory
|
|
|
48,000
|
|
|
Fixed
assets, net
|
|
|
58,110
|
|
|
Goodwill
|
|
|
480,381
|
|
|
Accounts
payable and accrued liabilities
|
|
|
(136,501
|
)
|
|
Net
assets acquired
|
|
$
|
450,000
|
|
The
fixed assets acquired are being depreciated over their estimated useful lives of 5 years.
As
of December 31, 2019, the Company determined, based on various qualitative and quantitative factors, that the acquired goodwill
had indicators of impairment and therefore recorded a full impairment charge of $480,381.
RWG’s
results of operations have been included in the Company’s
operating results for the period from February 1, 2019. RWG contributed revenues of $594,735 for the year
ended December 31, 2019.
Rune
NYC, LLC
Effective
March 14, 2019, the Company completed the acquisition of Rune
NYC, LLC (“Rune”), a New York limited liability company, pursuant to a share exchange agreement whereby the Company
exchanged shares of the Company’s Series D-5 Preferred Stock for 92.5% of the total outstanding equity of
Rune and the members of Rune (the “Members”). The Company issued an aggregate of 82,588 shares of Series D-5
Preferred Stock with a stated value of $4.00 per share, and cash consideration of $49,937, for total purchase consideration
of $380,289.
The
Rune acquisition was accounted for as a business combination in accordance with ASC 805. The Company has determined preliminary
fair values of the assets acquired, liabilities assumed and fair value of the minority interest. These values are subject to change
as we perform additional reviews of our assumptions utilized.
The
following table summarizes the provisional purchase price allocations relating to the Rune acquisition:
|
|
|
Preliminary
|
|
|
|
|
Purchase
Price
|
|
|
|
|
Allocation
|
|
|
Cash and cash equivalents
|
|
$
|
12,914
|
|
|
Accounts receivable, net
|
|
|
23,506
|
|
|
Other current assets
|
|
|
9,750
|
|
|
Goodwill
|
|
|
394,440
|
|
|
Accounts payable and accrued liabilities
|
|
|
(29,487
|
)
|
|
Non-controlling interest
|
|
|
(30,834
|
)
|
|
Net
assets acquired
|
|
$
|
380,289
|
|
As
of December 31, 2019, the Company determined, based on various qualitative and quantitative factors, that the acquired goodwill
had indicators of impairment and therefore recorded a full impairment charge of $394,440.
Rune’s
results of operations have been included in the Company’s operating results for the period from March 1, 2019.
Rune contributed revenues of $163,050 in 2019.
Bluwire
Group, LLC
On
October 1, 2019, the Company completed the acquisition of Bluwire Group, LLC (“Bluwire”), a Florida limited liability
company, pursuant to a share exchange agreement whereby the Company exchanged shares of the Company’s Series A Preferred
Stock for 60.5% of the outstanding equity of Bluwire. Pursuant to the terms of the exchange agreement,
at closing the Company acquired 60.5% of the membership interests of Bluwire in exchange for 500,000 shares of the
Company’s Series A Preferred Stock. The total purchase consideration for the Bluwire acquisition was $200,000, the fair
value of the Series A Preferred Stock issued.
The
Bluwire acquisition was accounted for as a business combination in accordance with ASC 805. The Company has determined preliminary
fair values of the assets acquired, liabilities assumed and fair value of the minority interest. These values are subject to change
as we perform additional reviews of our assumptions utilized.
The
following table summarizes the provisional purchase price allocations relating to the Bluwire acquisition:
|
|
|
Preliminary
|
|
|
|
|
Purchase
Price
|
|
|
|
|
Allocation
|
|
|
Cash
and cash equivalents
|
|
$
|
51,530
|
|
|
Accounts
receivable, net
|
|
|
62,333
|
|
|
Inventory
|
|
|
212,777
|
|
|
Other
assets
|
|
|
179,100
|
|
|
Fixed
assets, net
|
|
|
271,449
|
|
|
Security
deposit
|
|
|
59,800
|
|
|
Goodwill
|
|
|
623,072
|
|
|
Accounts
payable and accrued liabilities
|
|
|
(736,468
|
)
|
|
Due
to stockholders
|
|
|
(395,674
|
)
|
|
Non-controlling interest
|
|
|
(127,919
|
)
|
|
Net
assets acquired
|
|
$
|
200,000
|
|
The
fixed assets acquired are being depreciated over their estimated useful lives of 5 years, as well as leasehold improvements which
are amortized over the short of the useful lives or lease term. Other assets consists of the preliminary fair value of intangible
assets acquired upon the acquisition, including Bluwire’s trademark and lease assets.
As
of December 31, 2019, the Company determined, based on various qualitative and quantitative factors, that the acquired goodwill
had indicators of impairment and therefore recorded a full impairment charge of $623,072.
Bluwire’s
results of operations have been included in the Company’s operating results for the period from October 1, 2019. Bluwire
contributed revenues of $790,534 in 2019.
Social
Decay, LLC dba Social Sunday
On
November 20, 2019, the Company completed the acquisition of Social Decay, LLC dba Social Sunday (“Social Sunday”),
a New York limited liability company, pursuant to a share exchange agreement whereby the Company exchanged shares of the
Company’s Series D-6 Preferred Stock for 100% of the total outstanding equity of Social Sunday and the member
of Social Sunday (the “Member”). The Company issued an aggregate of 30,000 shares of Series D-6 Preferred Stock
with a stated value of $5.00 per share, and an additional 12,000 shares were issued and held in escrow, for total purchase consideration
of $210,000.
The
Social Sunday acquisition was accounted for as a business combination in accordance with ASC 805. The Company has determined preliminary
fair values of the assets acquired, liabilities assumed and fair value of the minority interest. These values are subject to change
as we perform additional reviews of our assumptions utilized.
The
following table summarizes the provisional purchase price allocations relating to the Social Sunday acquisition:
|
|
|
Preliminary
|
|
|
|
|
Purchase
Price
|
|
|
|
|
Allocation
|
|
|
Cash
and cash equivalents
|
|
$
|
3,418
|
|
|
Accounts
receivable, net
|
|
|
13,189
|
|
|
Inventory
|
|
|
55,211
|
|
|
Fixed
assets, net
|
|
|
20,529
|
|
|
Goodwill
|
|
|
473,784
|
|
|
Accounts
payable and accrued liabilities
|
|
|
(356,131
|
)
|
|
Net
assets acquired
|
|
$
|
210,000
|
|
The
fixed assets acquired are being depreciated over their estimated useful lives of 5 years.
As
of December 31, 2019, the Company determined, based on various qualitative and quantitative factors, that the acquired goodwill
had indicators of impairment and therefore recorded a full impairment charge of $473,784.
Social
Sunday’s results of operations have been included in the Company’s operating results for the period from November
1, 2019. Social Sunday contributed revenues of $55,638 in 2019.
Acquisition
– Other
The
Company acquired these entities to expand their retail operations. In addition, the goodwill in connection with these acquisitions
is not expected to be deductible for tax purposes. Intangibles are amortized over their expected life from one to five years.
Unaudited
Pro Forma Financial Information
The following unaudited pro forma financial information presents
the Company’s financial results as if the RWG, Rune, Bluwire and Social Sunday’s acquisitions had occurred as of January
1, 2018. The unaudited pro forma financial information is not necessarily indicative of what the financial results actually would
have been had the acquisition been completed on this date. In addition, the unaudited pro forma financial information is not indicative
of, nor does it purport to project the Company’s future financial results. The pro forma information does not give effect
to any estimated and potential cost savings or other operating efficiencies that could result from the acquisitions:
|
|
|
Proforma
|
|
|
|
|
Twelve months ended
|
|
|
|
|
December
31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Revenues
|
|
$
|
5,219,301
|
|
|
$
|
8,396,491
|
|
|
Cost of revenues
|
|
|
2,845,331
|
|
|
|
4,172,402
|
|
|
Gross profit
|
|
|
2,373,970
|
|
|
|
4,224,088
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
5,799,715
|
|
|
$
|
7,067,476
|
|
|
Operating losses
|
|
$
|
(9,204,291
|
)
|
|
$
|
(5,511,529
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(12,630,036
|
)
|
|
$
|
(8,354,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share
|
|
$
|
(0.47
|
)
|
|
$
|
(4.73
|
)
|
Dispositions
Emotion
Apparel, Inc. & Emotion Fashion Group, Inc.
On
May 1, 2018, the Company completed the acquisition of E-motion Apparel, Inc. (“EAI”) a California corporation, pursuant
to a share exchange agreement whereby the Company exchanged 1.0 million of its common shares for 100% of the outstanding equity
of EAI, in a third-party transaction. The acquisition of EAI was accounted for under ASC 805.
The
Original EAI Transaction was accounted for as follows: The fair value of the 1.0 million shares of common stock issued amounted
to $80,000. EAI owned four wholly-owned and majority –owned subsidiaries: Lexi Luu Designs, Inc, (a Nevada Corporation),
Punkz Gear, Inc, (a Wyoming Corporation), Cleo VII, Inc. (a Nevada Corporation) and Skipjack Dive & Dance Wear, Inc. (a Nevada
Corporation), which together owns five microbrands that were included in this transaction and target specific niche markets: Lexi-Luu
Dancewear, Punkz Gear, Cleo VII, Skipjack Dive & Dance Wear, and E-motion Apparel, Inc. During the fourth quarter of 2018,
the Company determined that the goodwill associated with the acquisition should be fully impaired and recorded an impairment
expense of $551,111.
On
July 6, 2018, the Company incorporated an new Emotion Apparel, Inc. in the state of Utah and immediately re-named it as Emotion
Fashion Group, Inc. (“Emotion Fashion Group” or “EFG”) and does business under the brand name, “Emotion
Fashions.”
On
September 30, 2019, the Company foreclosed on its liens taking possession of the assets including the brands; Lexi-Luu,
Emotion Fashion Group, Punkz Gear and retuned the stock in Emotion Apparel, Inc. and its subsidiaries to the Seller. As a result,
the Company wrote off the payables of Emotion Apparel, Inc. to other income, including $511,486 in accounts payable and
accrued liabilities and $250,000 in notes payable.
The
Company determined that the disposition of Emotional Apparel did not meet the criteria for discontinued operations reporting.
12
Europe, A.G.
12
Europe A.G. which was acquired in 2017 has underperformed against expectation. In the third quarter 2019 it was determined by
management that the costs of continuing to support the expenses of an independent 12 Europe A.G., were unsupportable. Therefore,
the Company reaffirmed its previous master representation agreement between 12 Hong Kong, LTD and Coppola, AG so that the software
customers in Europe can continue to be supported and then closed its operations in Europe. On August 20, 2019, the Company had
successfully discharged all of its debts associated with 12 Europe A.G., as part of the completion of the 12 Europe A.G., bankruptcy
filing except for certain social benefit payments still owed approximately $35,000 by the Company. Therefore, this subsidiary
is no longer in existence. Management does not consider this closure as a condition for discontinued operations as master representation
agreement between 12 Europe is now been transferred to 12 Hong Kong and Coppola AG. As such, the software customer in Europe
will continue to be supported. As such the total discharged accounts payable totalled $445,244 and were offset to other
income.
The
Company determined that the disposition of 12 Europe A.G. did not meet the criteria for discontinued operations reporting.
NOTE
5 – PREPAID EXPENSE AND OTHER CURRENT ASSETS
Prepaid
expense and other current assets at December 31, 2019 and 2018 consists of the following:
|
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
|
Prepaid expense
|
|
$
|
7,600
|
|
|
$
|
4,884
|
|
|
Other current
assets
|
|
|
-
|
|
|
|
19,344
|
|
|
|
|
$
|
7,600
|
|
|
$
|
24,228
|
|
NOTE
6 – FIXED ASSETS, NET
Fixed
assets, net at December 31, 2019 and 2018 consists of the following:
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Leasehold improvements and
office equipment
|
|
$
|
281,365
|
|
|
$
|
32,107
|
|
|
Furniture and equipment
|
|
|
58,118
|
|
|
|
607
|
|
|
Computer
|
|
|
13,704
|
|
|
|
13,704
|
|
|
Technical equipment
|
|
|
27,492
|
|
|
|
27,492
|
|
|
Intellectual
Property
|
|
|
78,506
|
|
|
|
65,487
|
|
|
|
|
|
458,785
|
|
|
|
139,397
|
|
|
Less: accumulated
depreciation
|
|
|
(110,388
|
)
|
|
|
(41,102
|
)
|
|
Total
|
|
$
|
348,396
|
|
|
$
|
98,295
|
|
Depreciation
expense for the years ended December 31, 2019 and 2018 amounted to $99,107 and $9,395, respectively.
NOTE
7 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts
payable and accrued liabilities at December 31, 2019 and 2018, consists of the following:
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,249,740
|
|
|
$
|
379,448
|
|
|
Accrued expenses
|
|
|
548,920
|
|
|
|
495,785
|
|
|
Accrued salaries
|
|
|
111,000
|
|
|
|
206,031
|
|
|
Accrued board of
director fees
|
|
|
30,000
|
|
|
|
74,295
|
|
|
Accrued
interest
|
|
|
191,836
|
|
|
|
79,153
|
|
|
|
|
$
|
2,167,496
|
|
|
$
|
1,234,712
|
|
NOTE
8 - DUE TO STOCKHOLDERS
Due
to stockholders at December 31, 2019 and 2018 consists of the following:
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Daniel Monteverde
|
|
$
|
1,388
|
|
|
$
|
143,195
|
|
|
Angelo Ponzetta
|
|
|
10,167
|
|
|
|
623,202
|
|
|
Christopher Burden
|
|
|
172,536
|
|
|
|
-
|
|
|
Maurice Ojeda
|
|
|
200,000
|
|
|
|
-
|
|
|
|
|
$
|
384,091
|
|
|
$
|
766,397
|
|
On
August 12, 2017, Gianni Ponzetta loaned CHF 60,000. The promissory note was unsecured, bore an interest at 1% per annum and is
due December 31, 2019. In September 2018, the note was converted to shares of 54,840 D-3 Preferred Stock.
During
the year ended December 31, 2018, total advances and expenses paid directly by stockholders on behalf of the Company $107,326
and total amounts repaid were $36,931.
During
the year December 31, 2019, the Company converted amounts to Daniele Monteverde and Angelo Ponzetta totaling
$723,253 into Series A Preferred Shares, which was treated as contributed capital. See Note 13 for additional information.
In
connection with the Bluwire acquisition, the Company assumed liabilities to Bluwire’s members, Christopher Burden and Maurice
Ojeda, totaling $395,674. The amounts do not incur interest and are due on demand. See Note 9 for additional information.
As
of December 31, 2019, accounts payable and accrued liabilities included salaries of $111,000 and accrued board of director fees
of $30,000.
NOTE
9 – NOTES PAYABLE
On
May 1, 2018, 12 ReTech acquired Emotion Apparel, Inc. As part of the acquisition, Emotion Fashion Group was obligated under a
disputed note payable to a third party in the amount of $250,000, maturing in July 2027 and bearing an interest rate of 2% per
annum. The note calls for monthly payments to be made to equal to ten percent (10%) of the gross sales of the Company until paid
in full, including accrued interest. When the note was acquired, the Company recorded the note at its fair market value of $156,014.
The note discount is being amortized to interest expense through maturity. Prior to September 30, 2019 the total payments made
under the note payable were $0. Amortization of debt discount amortized amounted to $8,340 and $10,194 for the years ended December
31, 2019 and 2018, respectively.
On
September 30, 2019, the Company foreclosed on its liens taking possession of the assets including the brands; Lexi-Luu, Emotion
Fashion Group, Punkz Gear and retuned the stock in Emotion Apparel, Inc. and its subsidiaries to the Seller. As a result, the
Company wrote off the payables of Emotion Apparel, Inc. to other income, including $261,486 in accounts payable and accrued liabilities
and $250,000 in notes payable.
On
October 3, 2019, Bluwire issued a demand promissory note to a related party $300,000 and it accrued interest of $15,000 in 2019.
As of December 31, 2019, the entire principal and interest balance was outstanding.
As
of December 31, 2019, there were two demand notes outstanding totaling $31,000.
NOTE
10 – CONVERTIBLE NOTES PAYABLE
Convertible
notes payable at December 31, 2019 and 2018 consists of the following:
|
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
|
September 15, 2017
|
|
$
|
337,653
|
|
|
$
|
344,262
|
|
|
December 8, 2017
|
|
|
-
|
|
|
|
52,260
|
|
|
December 12, 2017
|
|
|
-
|
|
|
|
107,109
|
|
|
March 15, 2018
|
|
|
40,123
|
|
|
|
40,123
|
|
|
April 27, 2018
|
|
|
-
|
|
|
|
16,000
|
|
|
May 17, 2018
|
|
|
56,714
|
|
|
|
60,000
|
|
|
September 17, 2018
|
|
|
60,000
|
|
|
|
60,000
|
|
|
September 21, 2018
|
|
|
25,443
|
|
|
|
64,500
|
|
|
November 28, 2018
|
|
|
57,870
|
|
|
|
64,500
|
|
|
November 28, 2018
|
|
|
25,000
|
|
|
|
25,000
|
|
|
December 13, 2018
|
|
|
105,000
|
|
|
|
105,000
|
|
|
January 15, 2019
|
|
|
115,000
|
|
|
|
-
|
|
|
February 7, 2019
|
|
|
132,720
|
|
|
|
-
|
|
|
February 19, 2019
|
|
|
64,500
|
|
|
|
-
|
|
|
February 19, 2019
|
|
|
55,125
|
|
|
|
-
|
|
|
March 13, 2019
|
|
|
55,125
|
|
|
|
-
|
|
|
May 14, 2019
|
|
|
26,500
|
|
|
|
-
|
|
|
May 17, 2019
|
|
|
27,825
|
|
|
|
-
|
|
|
August 1, 2019
|
|
|
56,194
|
|
|
|
-
|
|
|
August 7, 2019
|
|
|
55,125
|
|
|
|
-
|
|
|
October 3,2019
|
|
|
5,350
|
|
|
|
|
|
|
October 25, 2019
|
|
|
6,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,308,092
|
|
|
$
|
938,754
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: unamortized
debt discount
|
|
|
-
|
|
|
|
(313,909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total convertible
notes payable, net of discounts
|
|
$
|
1,308,092
|
|
|
$
|
624,845
|
|
During
the year ended December 31, 2019, the Company recognized
interest expense of $1,259,889 and $1,295,055, respectively, all of which represented the amortization of original issue
discounts and debt discounts. As of December 31, 2019, all original issue and debt discounts pertaining to outstanding convertible
notes were fully amortized.
During
the year ended December 31, 2019, the Company converted
principal and unpaid accrued interest totaling $251,521 into an aggregate of 17,803,260 shares of common stock.
The
Company has twenty (20) outstanding convertible notes as of December 31, 2019, with a total outstanding principal
of $1,308,092. The 2019 notes mature from January 2020 to May 2020. These notes carry an interest rate ranging between
8% and 12% per annum. The notes carry an original issue discounts ranging between 10% to 25% of the face value of each note.
The
notes may be converted into shares of the Company’s common stock at any time on or after the occurrence of an event of default.
The conversion prices of the notes include The conversion price shall be the 60% multiplied by the lowest trading price
during the 30 trading days period ending, in holder’s sole discretion on each conversion, on either (i) the last complete
trading day prior to the conversion date or (ii) the conversion date.
For
some notes, the Company agreed to pay a one-time interest charge of 9% of the principal amount for each note. The notes may be
converted at specified times per the respective agreements. The conversion price shall be 75% multiplied by the lowest
trading price during the 10 prior trading days period ending on either (i) the last complete trading day prior to conversion date
or (ii) the conversion date.
All
terms of the notes, including but not limited to interest rate, prepayment terms, conversion discount or look-back period
will be adjusted downward if the Company offers more favorable terms to another party, while this note is in effect.
The
notes may be redeemed by the Company at rates ranging from 105% to 130% depending on the redemption date provided that
no redemption is allowed after the 180th day.
The
following table is a rollforward of activity, by each noteholder, for the years ended December 31, 2019 and 2018:
|
|
|
Loan
Holder
|
|
Principal
Amount
|
|
|
Date
|
|
Maturity
|
|
OID
& Financing Costs
|
|
|
Balance
at
12 31 17
|
|
|
Additions
|
|
|
Payments
|
|
|
Conversion
|
|
|
Balance
at
12 31 18
|
|
|
Additions
|
|
|
Payments
|
|
|
Conversion
|
|
|
Balance
at
12 31 19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
SBI
Investment
|
|
$
|
200,000
|
|
|
9/27/2017
|
|
3/15/2018
|
|
|
|
|
|
|
200,000
|
|
|
|
75,000
|
|
|
|
(25,000
|
)
|
|
|
(93,150
|
)
|
|
|
156,850
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,697
|
)
|
|
|
150,153
|
|
|
1
|
|
SBI
Investment
|
|
$
|
187,500
|
|
|
11/14/2017
|
|
5/14/2018
|
|
|
|
|
|
|
187,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
187,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
187,500
|
|
|
2
|
|
LG
Capital Funding, LLC
|
|
$
|
185,292
|
|
|
12/8/2017
|
|
6/8/2018
|
|
|
17,646
|
|
|
|
92,646
|
|
|
|
92,646
|
|
|
|
-
|
|
|
|
(133,032
|
)
|
|
|
52,260
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(52,260
|
)
|
|
|
0
|
|
|
3
|
|
Cerberus
Finance Group Ltd
|
|
$
|
185,292
|
|
|
12/12/2017
|
|
6/8/2018
|
|
|
17,646
|
|
|
|
92,646
|
|
|
|
92,646
|
|
|
|
(25,000
|
)
|
|
|
(53,183
|
)
|
|
|
107,109
|
|
|
|
-
|
|
|
|
(99,684
|
)
|
|
|
(7,425
|
)
|
|
|
-
|
|
|
4
|
|
Eagle
Equities LLC
|
|
$
|
50,000
|
|
|
3/15/2018
|
|
3/15/2019
|
|
|
2,500
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
(50,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
5
|
|
Adar
Capital LLC
|
|
$
|
50,000
|
|
|
3/15/2018
|
|
3/15/2019
|
|
|
2,500
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
(50,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
6
|
|
Bellridge
Capital LP
|
|
$
|
60,000
|
|
|
5/17/2018
|
|
5/17/2019
|
|
|
10,000
|
|
|
|
-
|
|
|
|
60,000
|
|
|
|
-
|
|
|
|
(44,000
|
)
|
|
|
16,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(16,000
|
)
|
|
|
-
|
|
|
7
|
|
Auctus
|
|
$
|
100,000
|
|
|
4/27/2018
|
|
4/25/2019
|
|
|
10,000
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
(59,877
|
)
|
|
|
40,123
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40,123
|
|
|
8
|
|
Bellridge
Capital LP
|
|
$
|
60,000
|
|
|
9/17/2018
|
|
3/15/2019
|
|
|
10,000
|
|
|
|
-
|
|
|
|
60,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,286
|
)
|
|
|
56,714
|
|
|
9
|
|
Eagles
Equity
|
|
$
|
50,000
|
|
|
9/21/2018
|
|
3/15/2019
|
|
|
2,500
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
(50,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
10
|
|
Adar
Bay
|
|
$
|
50,000
|
|
|
10/4/2018
|
|
10/4/2018
|
|
|
2,500
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
(50,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
11
|
|
Bellridge
Capital LP
|
|
$
|
60,000
|
|
|
10/18/2018
|
|
10/18/2019
|
|
|
10,000
|
|
|
|
-
|
|
|
|
60,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60,000
|
|
|
12
|
|
Adar
Alef Omnibus
|
|
$
|
64,500
|
|
|
11/28/2018
|
|
11/29/2019
|
|
|
4,125
|
|
|
|
-
|
|
|
|
64,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(39,057
|
)
|
|
|
25,443
|
|
|
13
|
|
Adar
Alef Debt Purchase
|
|
$
|
25,000
|
|
|
11/28/2018
|
|
11/29/2019
|
|
|
|
|
|
|
-
|
|
|
|
25,000
|
|
|
|
-
|
|
|
|
(25,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
14
|
|
LG
Capital Omnibus
|
|
$
|
64,500
|
|
|
11/28/2018
|
|
11/29/2019
|
|
|
4,125
|
|
|
|
-
|
|
|
|
64,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,630
|
)
|
|
|
57,870
|
|
|
15
|
|
LG
Capital Debt Purchase
|
|
$
|
25,000
|
|
|
11/29/2018
|
|
11/29/2018
|
|
|
|
|
|
|
-
|
|
|
|
25,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,000
|
|
|
16
|
|
LG
Capital Omnibus
|
|
$
|
105,000
|
|
|
12/13/2018
|
|
12/14/2019
|
|
|
5,000
|
|
|
|
-
|
|
|
|
105,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
105,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
105,000
|
|
|
17
|
|
LG
Capital Omnibus
|
|
$
|
115,000
|
|
|
1/15/2019
|
|
1/15/2020
|
|
|
5,750
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
115,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
115,000
|
|
|
18
|
|
Adar
Alef Omnibus
|
|
$
|
132,720
|
|
|
2/7/2019
|
|
2/7/2020
|
|
|
6,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
132,720
|
|
|
|
-
|
|
|
|
-
|
|
|
|
132,720
|
|
|
19
|
|
Adar
Alef Debt Note
|
|
$
|
108,055
|
|
|
2/7/2019
|
|
2/7/2019
|
|
|
8,371
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
108,055
|
|
|
|
-
|
|
|
|
(108,055
|
)
|
|
|
-
|
|
|
20
|
|
Adar
Alef Omnibus
|
|
$
|
64,500
|
|
|
2/19/2019
|
|
2/19/2020
|
|
|
4,125
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
64,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64,500
|
|
|
21
|
|
LG
Capital Omnibus
|
|
$
|
55,125
|
|
|
2/19/2019
|
|
2/19/2020
|
|
|
2,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
55,125
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55,125
|
|
|
22
|
|
LG
Capital Omnibus
|
|
$
|
55,125
|
|
|
3/13/2019
|
|
3/13/2020
|
|
|
2,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
55,125
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55,125
|
|
|
23
|
|
Adar
Alef Omnibus #2 Back End
|
|
$
|
26,500
|
|
|
5/14/2019
|
|
2/20/2020
|
|
|
1,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
26,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26,500
|
|
|
24
|
|
LG
Capital Omnibus #5
|
|
$
|
27,825
|
|
|
5/17/2019
|
|
5/15/2020
|
|
|
2,825
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
27,825
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,825
|
|
|
25
|
|
Adar
Alef Omnibus #2 BE 3rd Tranche
|
|
$
|
53,500
|
|
|
8/1/2019
|
|
2/7/2020
|
|
|
3,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
56,194
|
|
|
|
-
|
|
|
|
-
|
|
|
|
56,194
|
|
|
26
|
|
LG
Capital Omnibus #7
|
|
$
|
55,125
|
|
|
8/6/2019
|
|
2/7/2020
|
|
|
5,125
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
55,125
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55,125
|
|
|
27
|
|
Adar
Alef Omnibus #2 BE 4th Tranche
|
|
$
|
5,350
|
|
|
10/3/2019
|
|
2/7/2020
|
|
|
5,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
5,350
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,350
|
|
|
28
|
|
LG
Capital Omnibus #8
|
|
$
|
6,825
|
|
|
10/25/2019
|
|
10/26/2020
|
|
|
5,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
6,825
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
note total
|
|
|
|
|
|
|
|
|
|
|
242,113
|
|
|
|
572,792
|
|
|
|
1,024,292
|
|
|
|
(50,000
|
)
|
|
|
(608,242
|
)
|
|
|
938,842
|
|
|
|
708,344
|
|
|
|
(99,684
|
)
|
|
|
(239,411
|
)
|
|
|
1,308,092
|
|
As
additional consideration, the Company is to issue to Adar Bays Capital shares of common stock with a value equal to 25% if each
note, determine at the time of signing of each note.
As
of December 31, 2019, several notes were past maturity, in default and due on demand. As such, the Company accelerated the amortization
of the remaining unamortized original issue and debt discounts.
The
Company calculated a default reserve which represents the additional amount the Company would have to pay to all note holders
in the event of the default. Management calculated the amount utilizing additional premiums, accrued interest and default accrued
interest as per the agreements. As of December 31, 2019, the Company recorded a general default reserve of $1,769,791.
NOTE 11 – DERIVATIVE LIABILITIES
The
Company classified certain conversion features in the convertible notes and preferred stock issued as embedded derivative instruments
due to the variable conversion price feature and potential adjustments to conversion prices due to events of default. These conversion
features are recorded as derivative liabilities at fair value in the consolidated financial statements. These fair value estimates
were measured using inputs classified as Level 3 of the fair value hierarchy. The Company develops unobservable Level 3 inputs
using the best information available in the circumstances, which might include its own data, or when it believes inputs based
on external data better reflect the data that market participants would use, its bases its inputs on comparison with similar entities.
Due to the existence of down round provisions, which create a path-dependent nature of the conversion prices of the convertible
notes, the Company decided a Lattice-Based Simulation model, which incorporates inputs classified as Level 3 was appropriate.
The following table present the assumptions used in the Lattice-Based
and Black-Scholes Simulation models to determine the fair value of the derivative liabilities as of December 31, 2019 and 2018:
|
|
|
December
31, 2019
|
|
|
Risk-free interest rates
|
|
|
1.74
– 2.63
|
%
|
|
Expected life (years)
|
|
|
0.05
– 1.00 years
|
|
|
Expected dividends
|
|
|
0
|
%
|
|
Expected volatility
|
|
|
226
– 736
|
%
|
|
|
|
December
31, 2018
|
|
|
Risk-free
interest rates
|
|
|
2.22
- 2.69
|
%
|
|
Expected
life (years)
|
|
|
0.20
- 1.08 years
|
|
|
Expected
dividends
|
|
|
0
|
%
|
|
Expected
volatility
|
|
|
270
– 796
|
%
|
During
the year ended December 31, 2019, the Company recorded new derivative liabilities of $8,443,538 related to the issuance of convertible
notes payable and Series D-2 Preferred Stock. and converted $2,255,704 in derivative liability to additional paid-in capital due
to conversions of notes payable into common stock.
During
the year ended December 31, 2018, the Company recorded initial derivative liabilities of $3,229,344. Upon initial valuation, the
derivative liability exceeded the face value of the related convertible note payable by approximately $1,637,572, which was recorded as a day one loss on
derivative liabilities.
The following table provides a roll-forward of the fair values of
the Company’s derivative liabilities:
|
|
|
Year
Ended
December 31, 2019
|
|
|
Balance – December 31, 2018
|
|
$
|
2,696,470
|
|
|
Issuance of new derivative liabilities
|
|
|
7,592,844
|
|
|
Conversions to paid-in capital
|
|
|
(822,187
|
)
|
|
Reclass to additional paid-in capital
|
|
|
(582,824
|
)
|
|
Change in
fair market value of derivative liabilities
|
|
|
(3,524,861
|
)
|
|
Balance – December 31,
2019
|
|
$
|
5,359,442
|
|
|
|
|
For
the Year Ended
December 31, 2018
|
|
|
Balance - December 31, 2017
|
|
$
|
-
|
|
|
Issuance of new derivative
liabilities
|
|
|
3,229,344
|
|
|
Conversions to paid-in capital
|
|
|
(1,293,381
|
)
|
|
Change in
fair market value of derivative liabilities
|
|
|
760,509
|
|
|
Balance – December 31,
2018
|
|
$
|
2,696,470
|
|
NOTE
12 – MERCHANT FINANCING
On
June 27, 2019, the Company’s Rune subsidiary entered into another future receivable purchase agreement with Vox Funding
and received $19,400. This agreement provides for payment over 7 months and carried a fee of $7,600. This obligation is not convertible
under any terms into Company stock.
On
August 20, 2019, the Company had successfully discharged all of its debts associated with 12 Europe A.G., as part of the completion
of the 12 Europe A.G., bankruptcy filing except for certain social benefit payments still owed of approximately $35,000 by the
Company.
On
September 24, 2019, the Company’s Rune subsidiary entered into another future receivable purchase agreement with Vox Funding
and received $14,550. This agreement provides for payment over 3.5 months and carried a fee of $4,800. This obligation is not
convertible under any terms into Company stock.
On
September 24, 2019, the Company’s Rune subsidiary entered into another future receivable purchase agreement with Vox Funding
and received $17,666. This agreement provides for payment over 9 months and carried a fee of $12,900 and retired a prior obligation
of $15,353. This obligation is not convertible under any terms into Company stock.
On
October 11, 2019, the Company’s Bluwire subsidiary entered into a future receivable purchase agreement with Libertas Funding
and received $343,000. This agreement provides for payment over 8 months and caries a fee of $7,000. This obligation is not convertible
under any terms into Company stock. The balance of this note is approximately $360,000 as of December 31, 2019.
On
November 4, 2019, the Company’s Bluwire subsidiary entered into a second future receivable purchase agreement with Libertas
Funding and received $145,500. This agreement provides for payment over 6 months and caries a fee of $4,500. This obligation is
not convertible under any terms into Company stock. The balance of this note is approximately $162,000 as of December 31, 2019.
On
December 18, 2019, the Company’s Rune subsidiary entered into another future receivable purchase agreement with Vox Funding
and received $24,279.49. This agreement provides for payment over 8.5 months and carried a fee of $24,759.91 and retired prior
obligation of $29,020.60. This obligation is not convertible under any terms into Company stock.
On
December 23, 2019, the Company’s Red Wire Group subsidiary entered into a future receivable purchase agreement with Vox
Funding and received $24,200. This agreement provides for payment over 5.5 months and carried a fee of $12,050. This obligation
is not convertible under any terms into Company stock.
As
of December 31, the Company had total merchant financing payables of $631,664 with unamortized discounts of $158,835 for net payable
of $472,829.
NOTE
13 - STOCKHOLDERS’ DEFICIT
Amendments
to Articles of Incorporation
As
of December 31, 2019, the Company’s Articles of Incorporation, as amended and restated, is
authorized to issue 8,000,000,000 shares of common stock at par value of $0.0001 and 50,000,000 shares of preferred
stock at par value of $0.00001.
Reverse
Stock Split
On October 18, 2019, the Company completed a 100 for 1 reverse common
stock split reducing the outstanding common shares to 25,410,391. The authorized common shares remain at 8 billion authorized common
stock.
Preferred
Stock
The
Preferred Stock may be divided into such number of series as the Board of Directors may determine. The Board of Directors is authorized
to determine and alter the rights, preferences, privileges and restrictions granted to and imposed upon any wholly unissued series
of Preferred Stock, and to fix the number of shares of any series of Preferred Stock and the designation of any such series of
Preferred Stock. The Board of Directors, may increase or decrease (but not below the number of shares such series then outstanding)
the number of shares of any series subsequent to the issue of shares of that series.
The
Series B Redeemable Convertible Preferred Stock is classified as temporary equity as it is mandatorily redeemable by the holder
at a future date. The Series D-1 and D-2 Preferred Stock are classified as temporary equity as they are redeemable immediately.
The Series D-3 Preferred Stock is also classified as temporary equity due to its put option, which providers the holders the right
to put the shares to the Company for cash if they elect not to convert into shares of common stock.
Series
A Preferred Stock
As
of December 31, 2019, there were 10,000,000 designated shares of Series A Preferred Stock.
Liquidation
In
the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of
the Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets
of the Company to the holders of any junior stock by reason of their ownership of such stock an amount per share
for each share of Series A Preferred Stock held by them equal to the sum of the liquidation preference. If upon the liquidation,
dissolution or winding up of the Company, the assets of the Company legally available for distribution to the holders of
the Series A Preferred Stock are insufficient to permit the payment to such Holders of the full amounts specified in this Section
then the entire remaining assets of the Company legally available for distribution shall be distributed with equal priority and
pro rata among the holders of the Series A Preferred Stock in proportion to the full amounts they would otherwise be entitled
to receive.
Redemption
The
Series A Preferred Stock shall have no redemption rights.
Conversion
The
“Conversion Ratio” per share of the Series A Preferred Stock in connection with any Conversion shall be at a ratio
of 1:20, meaning every (1) one Preferred A share shall convert into 20 shares of Common Stock of the Company (the “Conversion”).
Holders of Class A Preferred Shares shall have the right, exercisable at any time and from time to time to convert any
or all their shares of the Class A Preferred Shares into Common Stock at the Conversion Ratio.
Voting
The
Holder of each share of Series A Preferred Stock shall have such number of votes as is determined by multiplying (a) the number
of shares of Series A Preferred Stock held by such holder; and, (b) by 20. The holders of Series A Preferred Stock shall vote
together with all other classes and series of common and preferred stock of the Company as a single class on all actions to be
taken by the common stock shareholders of the Company
2019
and 2018 Transactions
During
the year ended December 31, 2019, the Company issued Series A Preferred Stock as follows:
|
-
|
The
Company issued 1,915,151 Series A shares upon conversion of accounts payable, accrued
liabilities, board director fees and due to stockholders totaling $1,154,591.
|
|
-
|
The Company issued 114,165 Series A shares for compensation and
154,500 shares for professional services for an aggregate fair value of $103,247.
|
|
-
|
In
October 2019, the Company issued 500,000 Series A shares in connection with the Bluwire
acquisition.
|
During
the year ended December 31, 2018, the Company issued 1,500,000 shares of Series A shares for services.
As
of December 31, 2019 and 2018, there was 9,183,816 and 6,500,000 shares of Series A Preferred Stock deemed issued and outstanding.
Series
B Preferred Stock
As
of December 31, 2019, there were 1,000,000 designated shares of Series B Preferred Stock.
Liquidation
Holders
of Series B Preferred Stock shall have a liquidation preference junior to Series A holders.
Conversion
Each
share of Series B Preferred Stock shall be convertible at the option of the holder at any time into shares of common stock at
a conversion price equal to 65% multiplied by lowest average traded price during the ten (10) trading day period ending.
Voting
Series
B Preferred Stock shall be non-voting on any matters requiring shareholder vote.
Dividends
Series
B Preferred Stock will carry an annual cumulative dividend, compounded monthly, payable solely upon redemption, liquidation or
conversion.
Redemption
The
Series B Preferred Stock is mandatorily redeemable by the holder 15 months after issuance, and therefore is classified as temporary
equity in the consolidated balance sheet.
2019
and 2018 Transactions
During
the year ended December 31, 2019, the Company issued Series B Preferred Stock as follows:
|
-
|
The
holders of 68,000 shares of Series B Preferred Stock converted these shares for 1,815,742
shares of common stock.
|
|
-
|
In
November 2019, the Company issued 68,000 shares of Series B Preferred Stock for $68,000.
|
|
-
|
In
December 2019 the company issued 53,000 shares of Series B Preferred Stock for $53,000.
|
During
the year ended December 31, 2018, the Company issued Series B Preferred Stock as follows:
|
-
|
On
January 31, 2018, the Company sold 203,000 shares of Series B Preferred Stock to Geneva
Roth Remark Holdings, Inc. (“Geneva”) in exchange for $203,000 before fees.
|
|
-
|
On
March 20, 2018, Geneva agreed to purchase an additional 63,000 Series B Preferred shares
for $63,000 under the same terms as the initial purchase on January 31, 2018.
|
|
-
|
On July 31, 2018, Geneva converted 15,000 Series B Preferred shares
into 7,328 shares of common stock. On August 14, 2018, Geneva converted 15,000 Series B Preferred shares into 15,007 shares of
common stock. On August 23, 2018, Geneva converted 20,000 Series B Preferred shares into 20,583 shares of common stock. On September
10, 2018, Geneva converted 25,000 Series B Preferred shares into 41,732 shares of common stock. On September 13, 2018, Geneva converted
25,000 Series B Preferred shares into 42,742 shares of common stock. On September 20, 2018, Geneva converted 25,000 Series B Preferred
shares into 52,579 shares of common stock. On September 26, 2018, Geneva converted 20,000 Series B Preferred shares into 56,533
shares of common stock.
|
|
-
|
On September 13, 2018, Geneva converted 25,000 Series B Preferred
shares into 42,742 shares of common stock. On September 20, 2018, Geneva converted 25,000 Series B Preferred shares into 52,579
shares of common stock. On September 26, 2018, Geneva converted 20,000 Series B Preferred shares into 56,533 shares of common stock.
On September 13, 2018, Geneva agreed to purchase an additional 68,000 Series B Preferred shares for $63,000 under the same terms
as the initial purchase on January 31, 2018.
|
|
-
|
On October 1, 2018, Geneva converted 18,600 Series B Preferred shares
for 73,022 of common stock. On October 2, 2018, Geneva converted 17,900 Series B Preferred shares for 72,9776 of common stock.
On October 3, 2018, Geneva converted 17,995 Series B Preferred shares for 73,364 of common stock. On October 4, 2018, Geneva converted
5,905 Series B Preferred shares for 24,074 of common stock. On October 4, 2018, Geneva converted 12,000 Series B Preferred shares
for 48,923 of common stock. On October 8, 2018, Geneva converted 17,200 Series B Preferred shares for 72,928 of common stock. On
October 9, 2018, Geneva converted 33,800 Series B Preferred shares for 152,586 of common stock.
|
Series
C Preferred Stock
As
of December 31, 2019, there were two designated shares of Series C Preferred Stock.
The
Series C Preferred Shares have no equity value, no preference in liquidation, is not convertible into common shares and does not
accrue dividends or have redemption rights. Each issued and outstanding share of Series C Preferred Stock authorizes the holder
to vote eight billion (8,000,000,000) votes on any matter that shareholders are entitled to vote for under our Bylaws at a cost
of $1.00 per share. Holders of shares of Series C Preferred Stock shall vote together with the holders of Common Shares as a single
class.
On
August 6, 2018, the Company authorized the issuance of one share of our Series C Preferred Shares to the founder, Angelo
Ponzetta.
As
of December 31, 2019 and 2018, there is one share of S Series
C Preferred Stock issued and outstanding.
Series
D Preferred Stock
Series
D Preferred Stock are “Blank Check” Preferred which allows the Board of Directors to subdivide and/or determine the
rights, privileges and other features of this stock.
The
total number of shares of Series D Preferred Stock the Company is authorized to issue is ten million (10,000,000) shares.
Series
D-1 Preferred Stock
On
July 2, 2018, the Company entered in to Equity Line of Credit
agreement with Oasis Capital, LLC (“Oasis Agreement”) and as a part of that Agreement the Company created a subset
Series D-1 Preferred Stock from the authorized Series D Preferred Stock having special rights and privileges as follows:
As
of December 31, 2019, there were 311,250 shares designated as Series D-1 Preferred Stock with a stated value of $2.00 per share
(the “Stated Value”).
Liquidation
Holders
of Series D-1 Preferred Stock shall have a liquidation preference junior to Series A, B and C holders.
Upon any liquidation, dissolution or winding-down of the Company, the holders of the shares of Series D-1 Preferred Stock shall
be paid in cash an amount for each share of Series D-1 Preferred Stock held by such holder equal to 140% of the Stated Value plus
any dividends accrued but unpaid.
Conversion
Each
share of Series D-1 Preferred Stock, together with accrued but unpaid dividends, shall be convertible at the option
of the holder at any time into shares of common stock as is determined by dividing the Stated Value per share being converted
plus accrued and unpaid dividends by the Series D-1 Conversion Price. The “Series D-1 Conversion Price” per share
of Common Stock shall be the lowest traded price of the Common Stock during the thirty (30) trading day period ending, in Holder’s
sole discretion on each conversion, on either (i) the last complete trading day prior to the Conversion Date or (ii) the Conversion
Date.
Voting
Series
D-1 Preferred Stock shall be non-voting except on certain major corporate actions or as required by law. In the event of such
a right to vote, each holder of Series D-1 Preferred Stock shall have the right to the number of votes equal to the number of
Conversion Shares then issuable upon conversion of the Series D-1 Preferred Stock held by such holder.
Dividends
Before
any dividends shall be paid or set aside for payment on any junior security of the Company, each holder of the Series D-1
Preferred Stock shall be entitled to receive dividends, in the manner provided herein, payable on the Stated Value of the Series
D-1 Preferred Stock at a rate of 8% per annum, which shall be cumulative and be due and payable in shares of common stock
on the Conversion Date. Such dividends shall accrue from the date of issue of each share of Series D-1 Preferred Stock, whether
or not declared.
Redemption
Shares
of the Series D-1 Preferred Stock shall be redeemable in cash, at any after the issuance of the respective Series D-1 Preferred
Stock at a price per share equal to 125% of the Stated Value plus the amount of accrued but unpaid dividends, provided, however,
that 125% shall be replaced with 140% if the Company exercises its option to redeem the Series D-1 Preferred Stock after the initial
60 calendar day period. Therefore, the Series D-1 Preferred Stock is classified as temporary equity in the consolidated balance
sheet.
2019
and 2018 Transactions
During
the year ended December 31, 2019, the Company issued Series D-1 Preferred Stock as follows:
|
-
|
During
the first quarter of 2019, Oasis Capital converted 28,500 shares for 630,000 shares common
stock and reduced the principal outstanding balance by $57,000. As such, the Company
recorded a change in derivative liability associated the Series D-1 Preferred Shares
of $86,428.
|
|
-
|
On
March 14, 2019, the Company executed an agreement with Oasis Capital, whereby the Company
agreed to exchange the remaining outstanding 282,750 Series D-1 shares for 282,750 Series
D-2 Preferred Shares. In addition, the Company executed an agreement whereby 62,250 outstanding
D-1 shares were exchanged for 62,250 Series D-2 preferred shares in exchange of $100,000.
In addition, the Company agreed to pay 1,425 shares of D-2 shares as a finance charge
for this agreement. The excess fair value of the shares exchanged was recorded as additional
interest expense.
|
During
the year ended December 31, 2018, the Company issued Series D-1 Preferred Stock as follows:
|
|
-
|
In
connection with the Oasis Agreement, Oasis Capital was issued 311,250 shares
of the Company’s Series D-1 Preferred Stock for a total value of $622,500. The
Company recorded a derivative liability of $700,000 associated with Series D-1 Preferred
Shares.
|
As
of December 31, 2019 and 2018, there are 0 and 311,250 Preferred Series D-1 shares issued and outstanding, respectively.
Series
D-2 Preferred Stock
The
total number of shares of Series D-2 Preferred Stock the Company is authorized to issue 2,500,000 shares, with a stated value
of $2.00 per share.
Dividends
Before
any dividends shall be paid or set-side for payment on any junior security, each holder of Series D-2 Preferred Stock shall
be entitled to receive dividends payable on the stated value of the Series D-2 Preferred Stock at a rate of 8% per annum,
or 18% per annum following the occurrence of an event of default, which shall be cumulative and be due and payable
in shares of common stock on the conversion date or in cash on the redemption date. Such dividends shall
accrue from the date of issue of each share of Series D-2 Preferred Stock.
Liquidation
Holders
of Series D-2 Preferred Stock shall have a liquidation preference junior to Series A, B, C and D-1 holders.
Conversion
Each
share of Series D-2 Preferred Stock, together with accrued but unpaid dividends, shall be convertible at the option of the holder
at any time into shares of common stock as is determined by dividing the Stated Value per share being converted plus accrued and
unpaid dividends by the Series D-2 Conversion Price. The “Series D-2 Conversion Price” per share of Common Stock shall
be the lowest traded price of the Common Stock during the thirty (30) trading day period ending, in Holder’s sole discretion
on each conversion, on either (i) the last complete trading day prior to the Conversion Date or (ii) the Conversion Date.
Redemption
The
Series D-2 Preferred Stock is classified temporary equity due to the fact that the shares are redeemable immediately.
2019
Transactions
The
Company issued 346,625 Series D-2 shares to Oasis Capital
with a value of $692,850. On April 1,2019, Oasis Capital received $103,500 in exchange for 103,500 Series D-2 shares. On
May 9, 2019, the Company received $50,000 in exchange for 45,045 Series D-2 Preferred Shares from Oasis Capital with which the
Company had previously executed the PIPE Securities Purchase Agreement in March of 2019. During the year ended December 31,
2019 Oasis Capital redeemed $127,580 or 63,790 shares of its Series D-2 Preferred shares for 3,000,000 common
shares. In addition, Oasis purchased an additional 9,009 series D-2 Preferred shares for $10,000. For the year ended December,
2019, Oasis redeemed and exchanged $127,580 or 63,790 shares of its D-2 Preferred shares for 10,536,281
commons shares.
On
April 3, 2019, the Company entered into a Securities Exchange Agreement with Mr. D’Alleva and issued him 332,032 Series
D-2 Preferred Shares in exchange for the 6,250,000 common shares that Mr. D’Alleva had previously purchased from the Company.
Mr.
D’Alleva received 318,750 Series D-2 shares in exchange for the 62,500 common shares that he previously purchased
for $531,250. He will also receive an additional 13,282 Series D-2 Preferred shares in the form of debt discount in this share
exchange.
On
April 3, 2019, concurrent with the PIPE Securities Purchase
Agreement entered into with Mr. D’Alleva, the Company entered into a PIPE Securities Purchase Agreement with Dominic D’Alleva
to sell to Mr. D’Alleva in various $25,000 tranches up to 93,750 Series D-2 Preferred Shares for a commitment of a $150,000
investment into the Company.
Thus
far, Mr. D’Alleva has purchased 15,625 Series D-2 Preferred Shares for $25,000. He has delivered $12,500 and the Company
expects him to deliver the remainder of the purchase price in the current period.
In
addition, on April 3, 2019, the Company entered into a PIPE Securities Purchase Agreement with a key technology vendor where the
Company exchanged 125,000 Series D-2 Preferred Shares for $200,000 of Company debt held by that vendor. An additional $50,000
was expensed as a result of this transaction. During the fourth quarter Oasis converted 6.040 Series D-2 Preferred shares.
The
Company recorded an initial $775,808 derivative liability in connection with the issuance of Series D-2 Preferred Stock.
As
of December 31, 2019 the Company had 935,368 Series D-2 Preferred Shares with a redemption value of $2,442,542.
Series
D-3 Preferred Shares
The
total number of shares of Series D Preferred Stock the Company is authorized to issue is 500,000 shares.
Conversion
The
Holder may convert some, part of all of the Series D-3 shares into common shares of the Company based on the closing market
price on the day before notice of conversion is presented to the Company.
Dividends
The
Company will pay dividends on the Series D-3 Preferred Stock at the rate of 10% per annum and shall pre-pay the Holder the first
12 month’s dividends from proceeds. After 12 months the Company would pay the pro-rata interest on a monthly basis due the
first of each month and late after the 10th of each month.
Redemption
At
the option of the Holder the Company may be obligated to redeem any non-converted shares of Series D-3 Preferred Stock that are
not deemed to be incentive shares and that are not deemed to be settlement shares through the issuance of a “PUT”
to the Company. At the conclusion of the PUT Notice Period, the Holder may at any time request a redemption of some, part, or
all of Holder’s any non-converted shares of Series D-3 Preferred Stock by providing the Company with a PUT DEMAND. The Company
would then be obligated to redeem any undisputed Securities within 10 business days of receipt of the PUT DEMAND. The Holder may
at any time after issuing a PUT NOTICE rescind the PUT option which could then only be re-instituted through a future PUT NOTICE.
The Series D-3 Preferred Stock is classified as temporary equity due to the existence of the PUT.
Transactions
On
September 29, 2018, the Company issued 20,000 shares of Series D-3 Preferred Shares to Gianni Ponzetta effective at a price of
$5.00 par value per share in exchange for $100,000 in loans in which had been previously provided. The Company also issued 4,000
Series D-3 preferred shares to Gianni Ponzetta with a value of $20,000 as incentive shares at no additional costs to Gianni Ponzetta
for which were expensed as stock based compensation. Lastly, The Company issued 30,846 shares of Series D-3 Preferred Shares to
Gianni Ponzetta in exchange of $154,234 which was owed to Gianni Ponzetta.
As
of December 31, 2019 and 2018, there were 54,840 Preferred Series D-3 shares outstanding at $5.00 par representing a total
of $274,234. There were accrued dividends of $34,482 at December 31,2019
Series
D-5 Preferred Stock
The
total number of shares of Series D-5 Preferred Stock the Company is authorized to issue 1,000,000 shares, with a stated value
of $4.00 per share.
Liquidation
The
holders shall be paid in cash after the holders of the superior preferred shares (Series A, B, D-1, and D-2), but before any junior
securities, including common shares and other shares have no liquidation preferences.
Conversion
The
holder may convert some or all of its Series D-5 Preferred Shares into common shares of the Company based on the closing market
price on the day of or the day before notice of conversion.
Dividends
Series
D-5 Preferred Stock will carry an annual dividend of 6% which will be paid in arrears.
Voting
Holders
of the shares of Series D-5 Preferred Stock shall not have the right to vote on any matter as to which shareholders are required
or permitted to vote, except as otherwise required by law.
2019
Transactions
On
February 21, 2019, the Company issued 37,500 shares for 25% interest in the Red Wire Group. On March 14, 2019, the Company issued
82,588 shares of Series D-5 Preferred Stock for 92.5% interest in Rune. See Note 4. In addition, the Company issued 2,625
Series D-5 shares in exchange for professional Services.
As
of December 31, 2019, the Company had 128,494 Series D-5 Preferred Shares outstanding with a face value of $513,976. The
company recorded had accrued dividends of $20,452 as of December 31, 2019.
Series
D-6 Preferred Stock
The
total number of shares of Series D-6 Preferred Stock the Company is authorized to issue 1,000,000 shares, with a stated value
of $5.00 per share.
Liquidation
The
holders shall be paid in cash after the holders of the superior preferred shares (Series A, B, D-1, and D-2), but before any junior
securities, including common shares and other shares have no liquidation preferences.
Conversion
The
holder may convert some or all its Series D-6 Preferred Shares of the Company based on the closing market price on the day of
or the day before notice of conversion.
Dividends
Series
D-6 Preferred Stock shall not declare or accrue any dividends.
Voting
Holders
of the shares of Series D-6 Preferred Stock shall not have the right to vote on any matter as to which shareholders are required
or permitted to vote, except as otherwise required by law
2019
Transactions
-
The Company issued 55,600 shares for an additional 75% interest in the Red Wire Group. See Note 4.
-
The Company issued 7,080 shares as compensation for a value of $35,400.
-
The Company issued 42,000 shares pursuant to the acquisition of Social Sunday. See Note 4.
As
of December 31, 2019, the Company had 104,680 Series D-6 Preferred Shares with a face value of $523,400.
Common
Stock
2018
Transactions
The
Company issued 1,000,000 shares for the acquisition of EAI
in 2018.
The Company issued 31,250 shares to
a stakeholder for total proceeds of $500,000. The Company received $100,000 at issuance and was to receive $400,000 in payments
from June 2018 through October 2018 at the rate of $80,000 per month.
In
June 2018, the same stakeholder as described above, who joined the advisory board in June 2018, purchased an additional 31,250
shares at a discounted price of $0.01 per share. As a result of the discount, the Company recognized stock compensation of
$218,750.
As
discussed above, the Company issued 4,696,568 shares with the convertible debt and 754,379 shares of common stock
were issued as a result of converted Series B Preferred Stock.
The
Company issued 121,573 shares to various consultants and recognized stock compensation expense of $579,927 for both the
year ended December 31, 2018. The stocks were issued for services rendered to the Company in the form of consulting related to
various professional services. The Company recorded the fair market value of the consideration provided over the service period.
The fair market value of the common stock was based upon the closing market price of the Company’s common stock.
The
Company issued 21,247 shares for an exchange of the settlement of the convertible debt. The Company issued 30,000
common shares to Oasis Capital in exchange for Preferred shares.
2019
Transactions
On
October 18, 2019. the Company completed a 100 for 1 reverse common stock split reducing the outstanding common shares to 25,410,391.
All of the above transactions occurred prior to the completion of the Reverse Stock split and with the exception of the authorized
common shares which remain at 8 billion authorized common stock issuances listed here had the effect of being divided by 100.
The
Company issued an aggregate of 17,803,260 shares in exchange of the settlement of convertible debt. The Company issued 12,652,023
common shares to Geneva Roth and Oasis Capital in exchange for Preferred Shares.
As
of December 31, 2019, and December 31, 2018, 36,410,374 and 654,251,953 shares of common stock were issued and outstanding, respectively.
NOTE
14 - INCOME TAXES
The
Company operates in the United States and its wholly owned subsidiaries operate in Japan, Hong Kong and Switzerland and files
tax returns in these jurisdictions.
Loss
from continuing operations before income tax expense (benefit) is as follows:
|
|
|
For
the Years Ended
|
|
|
|
|
December
31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Tax jurisdiction
from:
|
|
|
|
|
|
|
|
|
|
-
US
|
|
$
|
(11,180,704
|
)
|
|
$
|
(7,942,359
|
)
|
|
- Foreign
|
|
|
|
|
|
|
|
|
|
Hong Kong (HK)
|
|
|
(788,542
|
)
|
|
|
(470,131
|
)
|
|
Japan (JP)
|
|
|
(39,642
|
)
|
|
|
(71,296
|
)
|
|
Switzerland
(EU)
|
|
|
(215,687
|
)
|
|
|
(283,378
|
)
|
|
Loss
before income taxes
|
|
$
|
(12,146,948
|
)
|
|
$
|
(8,767,146
|
)
|
There
was no provision for income taxes for the years ended December 31, 2019 and 2018, as the Company has tax losses in all jurisdictions.
The expected approximate income tax rate for 2018 and 2017, for United States is 21% for (2019) and 34% for (2018), Hong Kong
is 16.5%, Japan is 30%, and Switzerland is 20%, whereas the actual rate was zero. The total income tax benefit differs from the
expected income tax benefit principally due to the valuation allowance recorded against the deferred tax assets which are principally
comprised of net operating losses (“NOLs”) and permanent differences due to a significant amount of non-cash income
and expenses.
The
following table sets forth the significant components of the aggregate deferred tax assets of the Company as of December 31, 2019
and 2018:
|
|
|
December
31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Deferred tax
assets:
|
|
|
|
|
|
|
|
|
|
NOL carryforwards
|
|
|
|
|
|
|
|
|
|
United
States – current rate
|
|
$
|
2,917,945
|
|
|
$
|
961,780
|
|
|
United States
– effect of change in statutory rate
|
|
|
-
|
|
|
|
-
|
|
|
-Foreign
|
|
|
728,789
|
|
|
|
569.412
|
|
|
Total
|
|
|
3,646,734
|
|
|
|
1,531,192
|
|
|
Less:
valuation allowance
|
|
|
(3,646,734
|
)
|
|
|
(1,531,192
|
)
|
|
Net
deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
On
December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (the “Act”) resulting in significant modifications
to existing law including lowering the corporate tax rate from 34% to 21%. In addition to applying the new lower corporate tax
rate in 2019 and thereafter to any taxable income we may have, the legislation affects the way we can use and carry forward net
operating losses previously accumulated and results in a revaluation of deferred tax assets and liabilities recorded on our balance
sheet. The Company has completed the accounting for the effects of the Act during the year ended December 31, 2019. Given that
current deferred tax assets are offset by a full valuation allowance, these changes will have no impact on the balance sheet.
The
Company applies the authoritative accounting guidance under ASC 740 for the recognition, measurement, classification and disclosure
of uncertain tax positions taken or expected to be taken in a tax return. The Company provided a full valuation allowance against
its deferred tax assets as of December 31, 2019 and 2018. This valuation allowance reflects the estimate that it is more likely
than not that the net deferred tax assets may not be realized.
The
Company has approximately $12,100,000 of U.S. and foreign carryforwards, the tax effect of which is approximately $3,700,000 as
of December 31, 2019. These carryforwards begin to expire in 2024.
The
U. S. NOL carryforwards are subject to certain limitations due to the change in control of the Company pursuant to Internal Revenue
Code Section 382. The Company has not performed a study to determine if the NOL carryforwards are subject to these Section 382
limitations. In addition, the Company has foreign NOLs. The Company is still evaluating the impact of a change in stock ownership
and the potential limitation of foreign NOLs.
A
valuation allowance is recorded on certain deferred tax assets if it has been determined it is more likely than not that all or
a portion of these assets will not be realized. The Company has recorded a full valuation allowance of $3,646,734 and $1,531,192
for deferred tax assets existing as of December 31, 2019 and 2018, respectively. The change in the valuation allowance was an
increase of $2,115,542 and $1,092,042 for the years ended December 31, 2019 and 2018, respectively. The valuation allowance as
of December 31, 2019 and 2018 is attributable to NOL carryforwards in the United States and foreign jurisdictions.
The
Company’s tax returns are subject to examination by tax authorities in the U.S., various state and foreign jurisdictions.
The Company is generally no longer subject to examinations for years prior to 2013. The Company is currently delinquent in its
income tax filings.
NOTE
15 - COMMITMENTS
Lease
Commitments
The
Company determines if an arrangement is a lease at inception. This determination generally depends on whether the arrangement
conveys to the Company the right to control the use of an explicitly or implicitly identified fixed asset for a period of time
in exchange for consideration. Control of an underlying asset is conveyed to the Company if the Company obtains the rights to
direct the use of and to obtain substantially all of the economic benefits from using the underlying asset. The Company has lease
agreements which include lease and non-lease components, which the Company has elected to account for as a single lease component
for all classes of underlying assets. Lease expense for variable lease components are recognized when the obligation is probable.
Operating
lease right of use (“ROU”) assets and lease liabilities are recognized at commencement date based on the present value
of lease payments over the lease term. Operating lease payments are recognized as lease expense on a straight-line basis over
the lease term. The Company primarily leases buildings (real estate) which are classified as operating leases. ASC 842 requires
a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily
determined, its incremental borrowing rate. As an implicit interest rate is not readily determinable in the Company’s leases,
the incremental borrowing rate is used based on the information available at commencement date in determining the present value
of lease payments.
The
lease term for all of the Company’s leases includes the non-cancellable period of the lease plus any additional periods
covered by either a Company option to extend (or not to terminate) the lease that the Company is reasonably certain to exercise,
or an option to extend (or not to terminate) the lease controlled by the lessor. Options for lease renewals have been excluded
from the lease term (and lease liability) for the majority of the Company’s leases as the reasonably certain threshold is
not met.
Lease
payments included in the measurement of the lease liability are comprised of fixed payments, variable payments that depend on
index or rate, and amounts probable to be payable under the exercise of the Company option to purchase the underlying asset if
reasonably certain.
Variable
lease payments not dependent on a rate or index associated with the Company’s leases are recognized when the event, activity,
or circumstance in the lease agreement on which those payments are assessed as probable. Variable lease payments are presented
as operating expenses in the Company’s income statement in the same line item as expense arising from fixed lease payments.
As of and during the year ended December 31, 2020, management determined that there were no variable lease costs.
Right
of Use Asset
In
connection with the Bluwire acquisition, the Company recognized a right of use asset and liability of $303,071. The Company used
an effective borrowing rate of 13% within the calculation. The lease agreement matures in August 2021. Minimum rental payments
in 2020 and 2021 are $276,756 and $55,328, respectively, and the imputed interest is $29,013.
Operating
Leases
The
Company and its subsidiaries have various short-term leases that mature in 2020.
Other
Commitments
The
Company has a significant contract with an independent contractor third party company which plays a critical role to the ongoing
operations of the Company. The contract is for an initial period of five years for which can be cancelled upon six month’s
notice and payment of all outstanding fees. The minimum monthly payment is $35,000 for which additional amounts are to be reimbursed
for expenses, etc. During the year ended December 31, 2019, the Company paid $476,037 under the contract to which an additional
$142,037 was payable as of December 31, 2019. The Company relies upon the third party for obtaining financing, targeting acquisitions,
general corporate guidance, financial reporting, etc. See Note 10 for discussion regarding issuances of Series A and common stock
to the third party.
Contingencies
|
|
●
|
Auctus Fund Management
(“Auctus”) vs. 12 ReTech Corporation. Auctus Filed suit in August 2019 claiming breach of contract on a convertible
promissory note dated April 25, 2018, which had a remaining principal balance of nearly $40,000. Auctus claimed damages totaling
over $482,000. The Company had entered into a settlement agreement with Auctus that required the Company to make a cash payment
of $117,000 and which was dependent on the Company receiving funding from a foreign investor. That investment did not occur,
and the Company was unable to perform. Upon information and belief, management believes that Auctus will at some point re-institute
that lawsuit. Management has reserved on its financial statements a sum in excess of $482,000 in regards to this claim. To
the best of management’s knowledge, Auctus has not taken other actions.
|
|
|
|
|
|
|
●
|
Bellridge Capital
(“Bellridge”) vs 12 ReTech Corporation. Bellridge claims that the Company is in default of two of its convertible
promissory notes, dated September 14, 2018 and October 17, 2018, with a combined remaining principal balance of $117,000 due
to Bellridge, for not having sufficient common share reserves to satisfy Bellridge’s conversion requirements. The Company
has not reserved any specific amounts in regards to this claim, as management believes that Bellridge’s claims may later
be able to be settled for cash or by providing a larger common share reserve. To the best of management’s knowledge,
Bellridge has not taken other actions.
|
|
|
|
|
|
|
●
|
Garden Concessions
LLC (“Garden”) vs Bluwire Group LLC (“Bluwire Group”) and 12 ReTech Corporation. Garden agreed to
provide $300,000 in new funding to Bluwire Group under certain terms and conditions. On October 7, 2019, Bluwire Group and
the Company agreed to those terms, subject to certain disbursement stipulations provided by the Company. No funds have ever
been disbursed by Garden to Bluwire Group nor to the Company. On April 9, 2020, the Company received a demand letter from
Garden, which was promptly answered by the Company, as no loan from Garden was ever consummated. To the best of management’s
knowledge, Garden has not taken other actions. See Note 9.
|
|
|
●
|
J&S Properties
(“J&S”) vs 12 ReTech Corporation. A cause of action was filed by J&S on February 20, 2020 against the
Company in the state of Utah, for a failure to make lease payments on a lease that was never executed by the Company, but
rather was executed by Emotion Apparel, Inc., a California corporation, prior to the Company’s acquisition of Emotion
Apparel, Inc and subsequent divestiture. At no time did the Company make any payments to J&S, nor agree to guarantee any
payments to nor or have any other involvement with J&S. Therefore, it is management’s belief that this cause it
meritless, and that the State of Utah lacks jurisdiction, as 12 ReTech does not itself do business in the state of Utah. The
Company has retained counsel in this matter, who has communicated to counsel for J&S.
|
|
|
|
|
|
|
●
|
RedWire Group,
LLC (“RedWire Group”) filed for bankruptcy under Chapter 11 subsection V on March 6, 2020, and the case in ongoing.
The Company has funded the initial costs, as well as some ongoing storage costs for RedWire Group equipment. The Company plans
to liquidate the equipment and some other assets to pay creditors.
|
|
|
|
|
|
|
●
|
Leider Enterprises
(“Leider”) vs. Bluwire Sun LLC (“Bluwire Sun”). Leider filed suit in Palm Beach County, Florida, on
May 1, 2010 against Bluwire Sun, alleging a failure by Bluwire Sun to make certain payments to Leider in the amount of at
least $15,000, for product delivered to various locations not owned by Bluwire Sun. Management does not believe that this
matter is accurate nor material but has retained counsel to represent its interests.
|
|
|
|
|
|
|
●
|
Samantha Sisca
(“Sisca”) was the Seller of the membership interests of Social Decay LLC d/b/a Social Sunday (“Social”)
to the Company. The Company may have claims and/or causes of actions against Sisca for misrepresentation, breach of contract,
and other claims. On April 15, 2020, Sisca terminated her employment with the Company. Management has not determined the extent
of its claims, nor what actions are in the best interests of shareholders.
|
NOTE
16 – SUBSEQUENT EVENTS
The
Company evaluated all events and transactions that occurred after December 31, 2019 and through the date of this filing in accordance
with FASB ASC 855, “Subsequent Events”. The Company determined that it does have a material subsequent events to disclose
as follows;
Subsequent
Events:
|
-
|
On
January 4, 2020, the Company’s Rune subsidiary entered into another future receivable purchase agreement with Vox Funding
and received $14,500. This agreement provides for payment over 70 business days and carried a fee of $4,850. This obligation
is not convertible under any terms into Company stock.
|
|
|
|
|
-
|
On
January 16, 2020, Geneva agreed to purchase an additional 53,000 Series B Preferred shares for $53,000 under the same terms
as their prior purchases.
|
|
|
|
|
-
|
On
January 24, 2020, the Company’s Social Sunday subsidiary entered into a first future receivable purchase agreement with
Vox Funding and received $14,500. This agreement provides for payment over 3.5 months and carried a fee of $4,850. This obligation
is not convertible under any terms into Company stock.
|
|
|
|
|
-
|
In
March 2020, as a subsequent event and as part of the Company’s streamlining operations and as a result of COVID-19,
the Company filed a Chapter 11 Reorganization of Red Wire Group, LLC. The Company’s 12 Fashion Group, a division 12
Retail, continues to service Red Wire Group customers under the trade name Red Wire Design.
|
|
|
|
|
-
|
On
March 3, 2020, the Company’s Social Sunday subsidiary entered into a second future receivable purchase agreement with
Vox Funding and received $5,605. This agreement provides for payment over 2 months and carried a fee of $1,895. This obligation
is not convertible under any terms into Company stock.
|
|
-
|
On
March 5, 2020, the Company’s Bluwire subsidiary entered into a third future receivable purchase agreement with Reliant
Funding and received $83,000. This agreement provides for payment over 6 months and caries a fee of $3,000. This obligation
is not convertible under any terms into Company stock.
|
|
|
|
|
-
|
On
March 16, 2020, the President of the United States of America issued a stay-at-home instructions and business closure directive
in response to COVID-19 pandemic. Management took steps to promptly close all of its Bluwire stores and Fashion Group operations,
laying off the vast majority of its employees. The Company’s landlords and Libertas, Vox and Reliant have all agreed
to collections deferment of an indeterminant duration. The Fashion Group continues limited operations in creating and producing
PPE materials.
|
|
|
|
|
-
|
On
March 18, 2020 the Company received $30,000 from Adar Alef, LLC (“Adar”) from a $33,600 convertible promissory
note agreement including fees and legal expenses of $3,600. The note is convertible after 181 days at a (i) $0.0075 ceiling
or (ii) 60% of the lowest trading price over the past twenty trading days prior to the conversion date.
|
|
|
|
|
-
|
On
March 25, 2020 the Company entered into a promissory note agreement with LG Capital Funding, LLC (“LG”) for loans
totaling $33,600. The consideration to the Company is $30,000 with $3,600 legal fees and OID. The note is convertible
after 181 days at a (i) $0.0075 ceiling or (ii) 60% of the lowest trading price over the past twenty trading days prior to
the conversion date.
|
|
|
|
|
-
|
In
the first quarter of 2020, LG converted $20,100 of principle and $2,274 of interest of the outstanding convertible note into
36,764,27 common shares.
|
|
|
|
|
-
|
In
the first quarter of 2020, SBI Investments converted $4,722 of principle of the outstanding convertible note into 12,649,250
common shares.
|
|
|
|
|
-
|
During
the first quarter of 2020, Adar Alef converted $25,410 of principle and $5,549 of interest of the outstanding convertible
note into 84,000,954 common shares.
|
|
|
|
|
-
|
During
the first quarter of 2020, Oasis Capital converted 5,450 Series D -2 Shares or $10,900 of principle of the outstanding convertible
note into 25,642,105 common shares.
|
|
|
|
|
-
|
On
March 27, 2020, passed the Cares Act allowing companies to apply for SBA Payroll Protection Loans (PPP). These loans provide
for certain funding based on previous employment which in part may be forgivable under certain conditions. The remaining portion
needs to be repaid over 2 years with a 6-month moratorium on payments and carry a 1% annual interest rate. These loans require
no collateral nor personal guarantees. During the period from May 5, 2020 to May 22, 2020, the Company’s subsidiaries
quality and received an aggregate of $294,806.78 in PPP loans.
|
|
|
|
|
-
|
In
the second quarter of 2020, LG converted $7,170 of principle and $1,417 of interest of the outstanding convertible note into 90,613,000
common shares.
|
|
|
|
|
-
|
During
the second quarter of 2020, Adar Alef converted $17,886 of principle of the outstanding convertible note into 191,118,916
common shares.
|
|
|
|
|
-
|
In
the second quarter of 2020, SBI Investments converted $880 of principle of the outstanding convertible note into 9,780,003
common shares.
|
|
|
|
|
-
|
In
April 2020, the Company authorized one million (1,000,000) shares of Series D-4 Preferred
stock with a face value of $100
and
no dividends, are non-voting, and have a liquidation preference after Series D-3 Preferred
Shares. These shares are convertible into the Company’s Common Shares at no discount.
|