NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE
AND NINE MONTHS ENDED September 30, 2020 AND 2019 (UNAUDITED)
(Amounts
in thousands, except share and per share amounts)
NOTE
1 – DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Quanta,
Inc. (the “Company”) is an applied science company focused on increasing energy levels in plant matter to increase
performance within the human body. The Company’s operations are based in Burbank, California. On April 28, 2016, the Company
was incorporated as Freight Solution, Inc. in the State of Nevada. Effective June 6, 2018, the Company (then known as Bioanomaly
Inc.) was acquired by Freight Solution in a transaction accounted for as a reverse merger transaction. On July 11, 2018, the Company
changed its name to Quanta, Inc.
Subsequent
to September 30, 2020, the Company experienced a change in control and appointment of a new Chief Executive Officer, among other
corporate actions, and commenced a transition into a holding company. During the transition phase, the Company furloughed most
of its employees, and has continued to sell its products online (see Note 12).
Going
Concern
The
accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and
the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements,
for the nine months ended September 30, 2020, the Company incurred a net loss of $5,931 and used cash in operating activities
of $1,804, and at September 30, 2020, the Company had a stockholders’ deficit of $1,850. These factors raise
substantial doubt about the Company’s ability to continue as a, going concern within one year of the date that the
financial statements are issued. In addition, the Company’s independent registered public accounting firm, in their report
on the Company’s December 31, 2019 audited financial statements, raised substantial doubt about the Company’s ability
to continue as a going concern. The consolidated financial statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern.
At
September 30, 2020, the Company had cash on hand in the amount of $11. Subsequent to September 30, 2020, the Company received
$1,643 from the issuance of notes payable. Management estimates that the current funds on hand will be sufficient to continue
operations through the next three months. The Company’s ability to continue as a going concern is dependent upon improving
its profitability and the continuing financial support from its shareholders. Management believes the existing shareholders or
external financing will provide the additional cash to meet the Company’s obligations as they become due. No assurance can
be given that any future financing, if needed, will be available or, if available, that it will be on terms that are satisfactory
to the Company. Even if the Company is able to obtain additional financing, if needed, it may contain undue restrictions on its
operations, in the case of debt financing, or cause substantial dilution for its stockholders, in the case of equity financing
Basis
of presentation and principles of Consolidation
The
accompanying unaudited condensed consolidated financial statements as of and for the three and nine months ended September 30,
2020 and 2019, have been prepared in accordance with accounting principles generally accepted in the United States of America
(“U.S. GAAP”) for interim financial information and with the rules and regulations of the United States Securities
and Exchange Commission (the “SEC”) to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position,
results of operations and cash flows for the interim periods have been included. The results of operations for the nine months
ended September 30, 2020 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending
December 31, 2020. The Condensed Consolidated Balance Sheet information as of December 31, 2019 was derived from the Company’s
audited Consolidated Financial Statements as of and for year ended December 31, 2019, included in the Company’s Annual Report
on Form 10-K/A filed with the SEC on April 10, 2020. These financial statements should be read in conjunction with that report.
The
consolidated financial statements include the accounts of Quanta Inc, and its wholly-owned subsidiary, Bioanomaly, Inc. Intercompany
transactions have been eliminated in consolidation.
COVID-19
The
global outbreak of COVID-19 has negatively affected the U.S. and global economies and has negatively impacted businesses, workforces,
customers, and created significant volatility of financial markets. It has also disrupted the normal operations of many businesses,
including ours. The extent of the impact of the pandemic on our business and financial results will depend largely on future developments,
including the duration and severity of the outbreak, the length of restrictions and business closures, and the impact on capital
and financial markets, all of which are highly uncertain and cannot be predicted. This outbreak could decrease spending, adversely
affect demand for our products and harm our business and results of operations. In the quarter ended June 30, 2020 and September
30, 2020, we believe the COVID-19 pandemic did impact our operating results as shipments to customers in the second quarter and
third quarter were down 13% and 10% from the first quarter of the year. However, we have not observed any material impairments
of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic. While it is not possible at
this time to estimate the full impact that COVID-19 will have on our business, restrictions resulting from COVID-19 on general
economic conditions could, among other things, impair our ability to raise capital when needed. This situation is changing rapidly,
and additional impacts may arise that we are not aware of currently.
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 and the reported amounts of revenues and expenses
during the reporting period. Significant accounting estimates include certain assumptions related to, among others, allowance
for doubtful accounts receivable, impairment analysis of long-term assets, valuation allowance on deferred income taxes, assumptions
used in valuing stock instruments issued for services, assumptions made in valuing derivative liabilities, and the accrual of
potential liabilities. Actual results may differ from these estimates.
Revenue
The
Company follows the guidance of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers.
ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contracts, which includes
(1) identifying the contracts or agreements with a customer, (2) identifying our performance obligations in the contract or agreement,
(3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing
revenue as each performance obligation is satisfied. The Company only applies the five-step model to contracts when it is probable
that the Company will collect the consideration it is entitled to in exchange for the services it transfers to its clients.
Product
Sales—Revenue from sales of the Company’s CBD products is recognized at the point in time when the Company’s
performance obligations with the applicable customers have been satisfied. Revenue is recorded at the transaction price, which
is the amount of consideration the Company expects to receive in exchange for transferring products to a customer. Generally,
the Company’s performance obligations are transferred to the customer at a point in time, typically upon delivery of products.
The Company historically has offered no discounts, rebates, rights of return, or other allowances to clients which would result
in the establishment of reserves against revenue. The Company sells its products (i) directly to customers (“DTC”)
through online orders from our websites, and DTC sales at conventions and events; and (ii) through wholesalers, including physicians,
pharmacies, fitness studios, grocery stores, and other organizations.
License
revenue— Revenue from symbolic IP is recognized over the access period to the Company’s IP (see Note 2).
Cost
of goods sold includes direct costs and fees related to the sale of our products.
Leases
Effective
January 1, 2019, the Company adopted the guidance of ASC 842, Leases, which requires an entity to recognize a right-of-use asset
and a lease liability for virtually all leases. The Company determines if an arrangement contains a lease at the inception of
the contract. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease
term while lease liabilities represent our obligation to make lease payments arising from the lease. All leases with terms greater
than twelve months result in the recognition of a ROU asset and a liability at the lease commencement date based on the present
value of the lease payments over the lease term. Leases with terms of twelve months or less at the commencement date are expensed
on a straight-line basis over the lease term and do not result in the recognition of an asset or liability (see Note 5).
Derivative
Financial Instruments
The
Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported
in the statements of operations. For stock-based derivative financial instruments, the Company uses a probability weighted average
Black-Scholes-Merton model to value the derivative instruments at inception and on subsequent valuation dates through the September
30, 2020, reporting date. The classification of derivative instruments, including whether such instruments should be recorded
as liabilities or as equity, is evaluated at the end of each reporting period
Convertible
Notes with Fixed Rate Conversion Options
The
Company may enter into convertible notes, some of which contain, predominantly, fixed rate conversion features, whereby the outstanding
principal and accrued interest may be converted by the holder, into common shares at a fixed discount to the market price of the
common stock at the time of conversion. This results in a fair value of the convertible note being equal to a fixed monetary amount.
The Company records the convertible note liability at its fixed monetary amount by measuring and recording a premium, as applicable,
on the Note date with a charge to interest expense in accordance with ASC 480 - “Distinguishing Liabilities from Equity”.
Stock
Compensation
The
Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions
for services and for financing costs. The Company accounts for such grants issued and vesting based on ASC 718, whereby the value
of the award is measured on the date of grant and recognized as compensation expense on the straight-line basis over the vesting
period. The Company recognizes the fair value of stock-based compensation within its Statements of Operations with classification
depending on the nature of the services rendered.
The
fair value of the Company’s stock options is estimated using a Black-Scholes-Merton option pricing model, which uses certain
assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or restricted stock,
and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton option pricing
model and based on actual experience. The assumptions used in the Black-Scholes-Merton option pricing model could materially affect
compensation expense recorded in future periods.
Advertising
costs
Advertising
costs are expensed as incurred. During the nine months ended September 30, 2020 and 2019, advertising costs totaled $53 and $58,
respectively.
Research
and Development Costs
Costs
incurred for research and development are expensed as incurred. During the nine months ended September 30, 2020 and 2019, research
and development costs totaled $307 and $197, respectively and include salaries, benefits, and overhead costs of personnel conducting
research and development of the Company’s products.
Net
Loss per Share
Basic
net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period,
excluding shares of unvested restricted common stock. Shares of restricted stock are included in the basic weighted average number
of common shares outstanding from the time they vest. At September 30, 2020, shares used in the calculation of basic net loss
per common share include 4,125,000 of vested but unissued shares underlying awards of restricted common stock. Diluted earnings
per share is computed by dividing the net income applicable to common stockholders by the weighted average number of common shares
outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares
had been issued, using the treasury stock method. Shares of restricted stock are included in the diluted weighted average number
of common shares outstanding from the date they are granted. Potential common shares are excluded from the computation when their
effect is anti-dilutive.
For
the nine months ended September 30, 2020, the dilutive impact of stock options exercisable into 2,732,261 shares of common
stock, convertible notes convertible into 61,171,291 shares of common stock, and 4,500,000 shares of unvested restricted
common stock have been excluded from calculation of weighted average shares because their impact on the loss per share is anti-dilutive.
It should be noted that under the contractual terms of the convertible notes; one note holder is limited no more than
4.99% of outstanding shares; the other note holders are limited to no more than 9.99% of the outstanding shares at any time within
61 days of conversion. Therefore at September 30, 2020, the note holders could not convert their respective notes into more than
20,361,669 common shares.
Fair
Value of Financial Instruments
The
Company follows the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) for fair value
measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the
measurement date. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three
broad levels as follows:
Level
1—Quoted prices in active markets for identical assets or liabilities.
Level
2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
Level
3—Unobservable inputs based on the Company’s assumptions.
The
Company is required to use observable market data if such data is available without undue cost and effort.
The
Company believes the carrying amount reported in the balance sheet for cash, accounts receivable, accounts payable and accrued
liabilities, and notes payable, approximate their fair values because of the short-term nature of these financial instruments
As
of September 30, 2020, the Company’s balance sheet includes Level 2 liabilities comprised of the fair value of embedded
derivative liabilities of $179 (see Note 8).
Concentrations
of risks
For
the nine months ended September 30, 2020 and 2019, one customer accounted for 15% or more of revenue. No other customer accounted
for 10% or more of revenue. As of September 30, 2020, one customer accounted for 17% of accounts receivable, and one accounted
for 10% of accounts receivable. No other customer accounted for 10% or more of accounts receivable. As of December 31, 2019, two
customers accounted for 19% and 12% of accounts receivable, respectively. No other customer accounted for 10% or more of accounts
receivable.
As
of September 30, 2020, four vendors accounted for 11% and 17% and 14% and 14% of accounts payable, respectively, and no other
vendor accounted for 10% or more of accounts payable. As of September 30, 2020 no vendor accounted for 10% or more of accounts
payable.
The
Company maintains the majority of its cash balances with one financial institution, in the form of demand deposits that are insured
by the Federal Deposit Insurance Corporation, or FDIC. At times, deposits held may exceed the amount of insurance provided by
the FDIC. The Company has not experienced any losses in its cash and believes it is not exposed to any significant credit risk.
Segments
The
Company operates in one segment for the development and distribution of our CBD products. In accordance with the “Segment
Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive
Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for
the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements
to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major
customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify
for aggregation under “Segment Reporting” due to their similar customer base and similarities in economic characteristics;
nature of products and services; and procurement, manufacturing and distribution processes. Since the Company operates in one
segment, all financial information required by “Segment Reporting” can be found in the accompanying financial statements.
Recent
Accounting Pronouncements
In
June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326). ASU 2016-13 requires
entities to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses
on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances
for losses. ASU 2016-13 is effective for the Company beginning January 1, 2023, and early adoption is permitted. The Company does
not believe the potential impact of the new guidance and related codification improvements will be material to its financial position,
results of operations and cash flows.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact
on the Company’s present or future consolidated financial statements.
NOTE
2 – LICENSE AGREEMENT
Effective
January 22, 2019, the Company entered into an agreement with a wholesaler for the exclusive rights to distribute the Company’s
products in the state of Colorado for three years. In consideration, the Company received an up-front payment of $100. The Company
determined that the exclusive distribution agreement was a distinct agreement for the license of symbolic IP and thus should be
recognized on a straight-line basis over the three-year life of the agreement. For the three and nine months ended September 30,
2020 the Company recognized revenue related to this agreement in the amount of $9 and $25, respectively. For the three and nine
months ended September 30, 2019 the Company recognized revenue related to this agreement in the amount of $9 and $17, respectively.
NOTE
3 – INVENTORIES
Inventories
are valued at the lower of cost (first-in, first-out) or net realizable value, and consisted of the following:
|
|
September
30, 2020
|
|
|
December
31, 2019
|
|
|
|
|
|
Raw materials and packaging
|
|
$
|
120
|
|
|
$
|
103
|
|
Finished goods
|
|
|
37
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
157
|
|
|
$
|
123
|
|
NOTE
4 - EQUIPMENT
Equipment,
stated at cost, less accumulated depreciation consisted of the following:
|
|
September
30, 2020
|
|
|
December
31, 2019
|
|
|
|
|
|
|
|
|
Machinery-technology equipment
|
|
$
|
705
|
|
|
$
|
607
|
|
Machinery-technology
equipment under construction
|
|
|
12
|
|
|
|
30
|
|
|
|
|
717
|
|
|
|
637
|
|
Less
accumulated depreciation
|
|
|
(485
|
)
|
|
|
(324
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
232
|
|
|
$
|
313
|
|
Depreciation
expense for the three and nine months ended September 30, 2020 was $55 and $162, respectively. Depreciation expense for the three
and nine months ended September 30, 2019 was $50 and $122, respectively. As of September 30, 2020, the equipment under construction
is approximately 80% complete, and is expected to be completed and placed into service during the year ended December 31, 2020.
NOTE
5 - OPERATING LEASES
At
December 31, 2019, the Company had one operating lease for its headquarters office space in Burbank, California. In February
2020, the Company took possession of a second leased facility consisting of office, research, and production space also located
in Burbank, California. The lease commenced on January 1, 2020, and has a term for 5 years, with annual fixed rental payments
ranging from $90 to $101. The aggregate total fixed rent is approximately $478 and resulted in the recognition of an operating
lease right-of-use (“ROU”) asset and of corresponding lease liability of approximately $432 each. The Company also
paid a security deposit of $17. At September 30, 2020, the Company did not have any other leases.
During
the nine months ended September 30, 2020, the Company consolidated
it operations into one space located in Burbank, California. In connection with one lease that is no longer utilized, the Company
recorded an impairment of the related net right of use asset of $255, and wrote of a deposit of $17 with the lessor. The
total due to the lessor is $236 and is recorded as settlement reserve at September 30, 2020.
ROU
assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term.
Generally the implicit rate of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing
rate in determining the present value of lease payments. The Company’s incremental borrowing rate is a hypothetical rate
based on its understanding of what its credit rating would be. The operating lease ROU asset includes any lease payments made
and excludes lease incentives.
The
components of lease expense and supplemental cash flow information related to leases for the period are as follows:
|
|
Nine
months ended
September
30, 2020
|
|
|
|
(in thousands)
|
|
Lease Cost
|
|
|
|
|
Operating lease cost (included
in selling, general, and administrative expense in the Company’s statement of operations)
|
|
$
|
171,332
|
|
|
|
|
|
|
Other Information
|
|
|
|
|
Cash paid for amounts included in the
measurement of lease liabilities for 2020
|
|
$
|
92
|
|
Weighted average remaining lease term
– operating leases (in years)
|
|
|
3.25
|
|
Average discount rate – operating
leases
|
|
|
4
|
%
|
The
supplemental balance sheet information related to leases for the period is as follows:
|
|
At
September 30, 2020
|
|
Operating
leases
|
|
|
|
|
Long-term
right-of-use assets
|
|
$
|
382
|
|
|
|
|
|
|
Short-term operating lease liabilities
|
|
$
|
99
|
|
Long-term operating
lease liabilities
|
|
|
315
|
|
Total operating
lease liabilities
|
|
$
|
414
|
|
Maturities
of the Company’s lease liabilities are as follows:
Year
Ending
|
|
Operating
Leases
|
|
2020
|
|
$
|
23
|
|
2021
|
|
|
94
|
|
2022
|
|
|
96
|
|
2023
|
|
|
99
|
|
2024
|
|
|
102
|
|
Total lease payments
|
|
|
414
|
|
Less:
Imputed interest/present value discount
|
|
|
(-
|
)
|
Present value of lease liabilities
|
|
|
414
|
|
Less
current portion
|
|
|
(99
|
)
|
Operating
lease liabilities, long-term
|
|
$
|
315
|
|
Lease
expenses were $72 and $171 during the three and nine months ended September 30, 2020, respectively. Lease expenses were $20 and
$81 during the three and nine months ended September 30, 2019, respectively.
NOTE
6 – NOTES PAYABLE
|
|
September
30, 2020
|
|
|
December
31, 2019
|
|
Secured
|
|
|
|
|
|
|
|
|
(a) Notes payable secured
by equipment
|
|
$
|
440
|
|
|
$
|
-
|
|
(a) Deferred finance charges
on notes payable secured by equipment
|
|
|
(89
|
)
|
|
|
-
|
|
(b) Note payable secured by
assets
|
|
|
33
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
Unsecured
|
|
|
|
|
|
|
|
|
(c) Note payable-Payroll Protection
Loan
|
|
|
134
|
|
|
|
-
|
|
(d) Note payable-
Economic Injury Disaster Loan
|
|
|
160
|
|
|
|
-
|
|
(e) Revenue
sharing agreement
|
|
|
250
|
|
|
|
-
|
|
(e)
Deferred finance charges, revenue sharing
|
|
|
(25
|
)
|
|
|
-
|
|
Total notes payable outstanding
|
|
|
903
|
|
|
|
56
|
|
Current portion
|
|
|
420
|
|
|
|
-
|
|
Long-term
portion
|
|
$
|
483
|
|
|
$
|
56
|
|
|
(a)
|
In
April 2020 and May 2020, the Company entered into two financing agreements aggregating $506. The notes were issued at a discount
including fees for underwriting , legal and administrative costs along with deferred financing costs. The deferred financing
costs are being amortized over the terms of the notes. The notes are secured by the Company’s equipment, and require
monthly payments of principal and interest of $21, and mature in April 2022 and May 2022. During the nine months ended September
30, 2020, the Company made payments of $67 and at September 30, 2020, the balance due on these notes was $439.
|
|
|
|
|
(b)
|
Note
payable, interest at 8.3% per annum, secured by all the assets of the Company. The note was due January 13, 2019 and on April
24, 2020, the note holder waived the default through December 31, 2020. At December 31, 2019, the balance of this Note was
$56, During the nine months ended September 30, 2020, the company made principal payments of $22, and at September 30, 2020,
the balance due on this note was $33.
|
|
|
|
|
(c)
|
On
May 7, 2020, the Company was granted a loan (the “PPP loan”) from Bank of America in the aggregate amount of $134,
pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act. The PPP loan agreement is dated May
4, 2020, matures on May 4, 2022, bears interest at a rate of 1% per annum, with the first six months of interest deferred,
is payable monthly commencing on November 2020, and is unsecured and guaranteed by the U.S. Small Business Administration
(“SBA”). The loan term may be extended to April 20, 2025, if mutually agreed to by the Company and lender. We
applied ASC 470, Debt, to account for the PPP loan. The PPP loan may be prepaid at any time prior to maturity with
no prepayment penalties. Funds from the PPP loan may only be used for qualifying expenses as described in the CARES Act, including
qualifying payroll costs, qualifying group health care benefits, qualifying rent and debt obligations, and qualifying utilities.
The Company intends to use the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of
the loan may be forgiven if they are used for qualifying expenses. The Company intends to apply for forgiveness of the PPP
loan with respect to these qualifying expenses, however, we cannot assure that such forgiveness of any portion of the PPP
loan will occur. As for the potential loan forgiveness, once the PPP loan is, in part or wholly, forgiven and a legal release
is received, the liability would be reduced by the amount forgiven and a gain on extinguishment would be recorded. The terms
of the PPP loan provide for customary events of default including, among other things, payment defaults, breach of representations
and warranties, and insolvency events. The Company was in compliance with the terms of the PPP loan as of September 30, 2020.
|
|
|
|
|
(d)
|
On
September 5, 2020, the Company received a $150 loan (the “EID Loan”) from
the SBA under the SBA’s Economic Injury Disaster Loan program. The EID Loan has
a thirty-year term and bears interest at a rate of 3.75% per annum. Monthly principal
and interest payments of $0.7 per month are deferred for twelve months, and commence
in June 2021. The EID Loan may be prepaid at any time prior to maturity with no prepayment
penalties. The proceeds from the EID Loan must be used for working capital. The Loan
contains customary events of default and other provisions customary for a loan of this
type. The Company was in compliance with the terms of the EID loan as of September 30,
2020.
|
|
|
|
|
(e)
|
Between
July 7, 2020, and July 29, 2020, the Company issued notes payable to a third-party
investors totaling $250. Under the terms of the note, the Company is to pay 50% of
the net revenues beginning on August 21, 2020, for a product to be designed and produced
by the Company. The product has not been produced and therefore no payments have been
made. The Company issued 280,000 shares of common stock as fees in conjunction with this
financing. The Company recorded $28, of discount which is being amortized to interest
expense over the expected term of the arrangement.
|
NOTE
7 – CONVERTIBLE NOTES PAYABLE
Convertible
notes payable consisted of the following:
|
|
September
30, 2020
|
|
|
December
31, 2019
|
|
Unsecured
|
|
|
|
|
|
|
|
|
(a) Convertible notes
with fixed discount percentage conversion prices
|
|
|
223
|
|
|
|
282
|
|
(b) Convertible
notes with fixed conversion prices
|
|
|
497
|
|
|
|
-
|
|
Default penalty
principal added, charged to loss on debt extinguishment
|
|
|
315
|
|
|
|
-
|
|
Put premiums on stock settled debt
|
|
|
155
|
|
|
|
-
|
|
Total convertible notes principal
outstanding
|
|
|
1,035
|
|
|
|
282
|
|
Debt discount
|
|
|
(590
|
)
|
|
|
(225
|
)
|
|
|
|
|
|
|
|
|
|
Convertible notes, net of discount
and premium
|
|
$
|
600
|
|
|
$
|
57
|
|
Current portion
|
|
|
600
|
|
|
|
57
|
|
Long-term
portion
|
|
$
|
-
|
|
|
$
|
-
|
|
|
(a)
|
At
December 31, 2019, there were $282 of convertible notes with adjustable conversion prices outstanding. During the nine months
ended September 30, 2020, the Company issued one unsecured convertible promissory note for $153, bearing interest at 22% per
annum, and maturing in February 2021. Also during the nine months ended September 30, 2020, the Company also issued two unsecured
convertible notes payable for $30, bearing interest at 10% per annum, and maturing on December 31, 2020, that were issued
as loan commitment fees for notes payable. At the option of the holder, the notes are convertible into shares of the
Company’s common stock at a price per share discount of 39% to 50% of the average market price of the Company’s
common stock, as defined. As a result, the Company determined that the conversion options of the convertible notes were not
considered derivatives and qualify as stock settled debt under ASC 480 – “Distinguishing Liabilities from Equity”.
Therefore the Company calculated fixed premiums totaling $226 which were charged to interest expense at the dates of the note
issuance. During the nine months ended September 30, 2020, one convertible note payable for $282 was paid off and another
was partially converted into common stock. At September 30, 2020, the balance of these convertible notes was $223.
|
|
|
|
|
(b)
|
At
December 31, 2019, the Company had no convertible notes outstanding with fixed conversion
prices. During the nine months ended September 30, 2020, the Company issued seven convertible
notes with fixed conversion prices aggregating $497. The notes are unsecured, bear interest
at 10% per annum, and mature through March 31, 2021. The notes were initially
convertible into shares of the Company’s common stock at a fixed conversion
price of $0.05 per share. The Company recorded debt discounts of $531 to account for
loan fees, beneficial conversion features ($323), and original issue discounts. The debt
discounts are amortized over the life of the notes or are amortized in full upon the
conversion of the corresponding notes to common stock.
On
September 2, 2020, the Company issued a convertible note (see paragraph a above) having a conversion
price less than $0.05 which triggered a term common to all notes in paragraph b, which changed the conversion terms to be the
lower of $0.05 or 61% of the lowest traded price during the 15 days prior to the conversion. This event is also considered a
default for which a penalty is charged equal to 150% of the accrued interest, default interest and principal, totaling $315. On
December 9, 2020, the Company executed amendments to these notes effective September 30, 2020 (as further discussed at Note
12), which extended the maturity dates and fixed the conversion price at $0.015. Due to the change in conversion terms the
notes now require the recognition of the beneficial conversion feature of the increased principal and lowering of the
conversion price resulting in recognition of additional charges of $1,215. Loss on debt extinguishment was charged $901 and
debt discounts were charged $315 with a credit to additional paid in capital for the debt discounts which will be amortized
to interest expense over the extended term of the amended notes. At September 30, 2020 the new principal totaled
$812.
|
At
December 31, 2019, the balance of unamortized discount on convertible notes was $225. During the nine months ended September
30, 2020, debt discount of $761 was recorded, and debt discount amortization of $396 was recorded. At September
30, 2020, the balance of the unamortized discount was $590.
Note
8 – DERIVATIVE FINANCIAL INSTRUMENTS
At
December 31, 2019, the balance of the derivative liabilities was $400, which was fully extinguished upon
pay-off of the related convertible note with
a decrease of fair value of $114 and gain on debt extinguishment of $286 during the nine months ended September 30, 2020. The
Company also recorded additions of $101 related to the conversion features of a note issued during the period
(see Note 7), and recorded a gain on extinguishment of $101 upon conversion of the related convertible note. At
September 30, 2020, the Company had no convertible notes outstanding that are considered to have embedded derivative liabilities
that require bifurcation per the note agreements.
The
derivative liabilities were valued at the following dates using a binomial model with the following assumptions:
|
|
September
30, 2020
|
|
|
December
31, 2019
|
|
Conversion
feature:
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
0.17
|
%
|
|
|
1.8
|
%
|
Expected
volatility
|
|
|
182
|
%
|
|
|
222
|
%
|
Expected
life (in years)
|
|
3
– 12 months
|
|
|
1
year
|
|
Expected
dividend yield
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Fair
Value:
|
|
|
-
|
|
|
|
-
|
|
Conversion
feature
|
|
$
|
-
|
|
|
$
|
400
|
|
The
risk-free interest rate was based on rates established by the Federal Reserve Bank. The expected volatility is based on the historical
volatility of the Company’s stock. The expected life of the conversion feature of the notes was based on the remaining terms
of the related notes. The expected dividend yield was based on the fact that the Company has not customarily paid dividends to
its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future.
NOTE
9 – STOCKHOLDERS’ EQUITY
Series
A Preferred Stock
On
April 14, 2020, the Company filed a Certificate of Designation for the Company’s Series A Preferred Stock with the Secretary
of State of Nevada designating 2,500,000 shares of its authorized preferred stock as Series A Preferred Stock, par value of $0.001
per share. The Series A Preferred Stock is not entitled to receive any dividends or liquidation preference and are not convertible
into shares of the Company’s common stock. The holders of the Series A Preferred Stock, in the aggregate, have voting power
equal to 51% of the total votes of all of the outstanding common and preferred stock of the Company entitled to vote. Accordingly,
each share of Series A Preferred Stock shall have voting rights equal to one and one-tenth (1.1) times a fraction, the numerator
of which is the shares of outstanding common stock and undesignated preferred stock of the Company and the denominator of which
is number of shares of outstanding Series A Preferred Stock. With respect to all matters upon which stockholders are entitled
to vote or give consent, the holders of the outstanding shares of Series A Preferred Stock shall vote with the holders of the
common stock and any outstanding preferred stock without regard to class, except as to those matters on which separate class voting
is required by applicable law or the Company’s Articles of Incorporation.
On April 14, 2020, The Company issued 2,500,000
shares of a newly created class of preferred stock, Series A Preferred Stock to the Company’s Chief Executive Officer in
a private placement transaction. The fair value of the was determined to be $465 and was recorded as stock compensation.
Common
Stock
During
the nine months ended September 30, 2020, the Company issued 407,408 shares of common stock in a private placement of shares at
a price of $0.26 per share for total proceeds of $125.
The
Company issued 3,955,747 common shares of stock to two holders of convertible notes at contracted prices. The fair value of
the shares was $211 and the conversions reduced the convertible note principal due by $140.
The
Company issued 1,127,522 common shares of stock to secure financing for total fair value of $105.
During the nine months ended September
30, 2020, the Company recognized beneficial conversion features totaling $1,569, as additional paid in capital for the difference
between the conversion price of the convertible notes payable and the fair value as of the date of the amendments to the related
convertible notes.
NOTE
10 – STOCK BASED COMPENSATION
The
total charged to stock-based compensation for the nine months ended September 30, 2020, was $1,542. The total included the following:
Preferred
stock
On
April 14, 2020, The Company issued 2,500,000 shares of a newly created class of preferred stock, Series A Preferred Stock to the
Company’s Chief Executive Officer in a private placement transaction. The fair value of the Series A Preferred shares was
determined to be $465 and was recorded as stock compensation in selling, general and administrative expense during the nine months
ended September 30, 2020. The Company determined the fair value of the Series A Preferred shares by obtaining an independent valuation
of the fair value of the Company’s Series A Preferred shares.
Common
stock
During
the nine months ended September 30, 2020, the Company issued 451,198 shares of common stock to employees and officers of the Company.
The fair value of the shares was determined to be $106 based on the closing price of the Company’s common stock on
the dates shares were granted, and recorded as stock compensation in selling, general and administrative expense during the nine
months ended September 30, 2020.
During
the nine months ended September 30, 2020, the Company recorded $929 to stock-based compensation as accretion of the expense
related to grants of restricted stock (see below).
During
the nine months ended September 30, 2020, the Company issued 750,000 common shares of stock to service vendors for a total
fair value of $42.
Restricted
common stock
On
May 20, 2019, the Company agreed to issue 8,000,000 shares of the Company’s common stock with vesting terms to a consultant
for services. 1,000,000 shares vested immediately, and the balance of 7,000,000 shares will vest 625,000 shares per quarter over
2.8 years. In the event the consultants service with the Company terminates, any or all of the shares of common stock held by
such recipient that have not vested as of the date of termination are forfeited to the Company in accordance with such restricted
grant agreement.
The
total fair value of the 8,000,000 shares was determined to be $4,000 based on the price per shares of a contemporaneous private
placement of the Company’s common stock on the date granted. The Company accounts for the share awards using a graded vesting
attribution method over the requisite service period, as if each tranche were a separate award. During the nine months ended September
30, 2020, total share-based expense recognized related to vested restricted shares totaled $929. At September 30, 2020,
there was $753 of unvested compensation related to these awards that will be amortized over a remaining vesting period
of 1.4 years.
The
following table summarizes restricted common stock activity for the nine months ended September 30, 2020:
|
|
Number
of shares
|
|
|
Fair
value of shares
(in thousands)
|
|
Non-vested shares, December 31, 2019
|
|
|
5,750,000
|
|
|
$
|
1,682
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(1,875,000
|
)
|
|
|
(929
|
)
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Non-vested shares, September 30,
2020
|
|
|
3,875,000
|
|
|
$
|
753
|
|
As
of September 30, 2020, no shares have been issued and 4,125,000 vested shares are included in shares to be issued on the
accompanying financial statements
Stock
Options
During
the year ended December 31, 2019, the Company issued options exercisable into 3,290,000 shares of common stock. The options initially
had an exercise price of $0.23 per share, and this was amended in May 2020 to $0.10 per share. The Company used the Black-Scholes-Merton
option pricing model to estimate the fair value of the modified option grants immediately before and immediately after the modification
and determined the change in fair value related to the modification was de minimis.
During
the nine months ended September 30, 2020, the Company issued
options exercisable into 900,000 shares of common stock. 600,000 of the options vested immediately, and 300,000
of the options vest over 24 months. The options have an exercise price of $0.10 to $0.14 per share, and expire in ten
years. Total fair value of these options at grant date was approximately $85, which was determined using the Black-Scholes-Merton
option pricing model with the following average assumption: stock price $0.14 per share, expected term ranging from five years,
volatility 236%, dividend rate of 0% and risk-free interest rate of 0.17%.
During the nine months ended September 30,
2020, the Company recognized $250 of compensation expense relating to vested stock options. As of September 30, 2020, the amount
of unvested compensation related to stock options was approximately $346 which will be recorded as an expense in future
periods as the options vest.
The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of measurement corresponding with the
expected term of the share option award; the expected term represents the weighted-average period of time that share option awards
granted are expected to be outstanding giving consideration to vesting schedules and historical participant exercise behavior;
the expected volatility is based upon historical volatility of the Company’s common stock; and the expected dividend yield
is based on the fact that the Company has not paid dividends in the past and does not expect to pay dividends in the future.
A
summary of stock option activity during the three months ended September 30, 2020:
|
|
Number
of options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Contractual
Life in Years
|
|
Options Outstanding as of
December 31, 2019
|
|
|
3,230,000
|
|
|
$
|
0.10
|
|
|
|
6.0
|
|
Granted
|
|
|
900,000
|
|
|
|
0.11
|
|
|
|
10.0
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options Outstanding
as of September 30, 2020
|
|
|
4,130,000
|
|
|
|
0.11
|
|
|
|
6.5
|
|
Options Exercisable
as of September 30, 2020
|
|
|
2,732,261
|
|
|
$
|
0.10
|
|
|
|
5.5
|
|
At
September 30, 2020, the options outstanding had no intrinsic value.
NOTE
11 – COMMITMENTS AND CONTINGENCIES
The
Company has an agreement with an individual in consideration of the Company’s exclusive use of patented technology developed
by the individual. Pursuant to the agreement, as amended, the Company shall pay a royalty of 25% of all the net income from the
sale of licensed products, as defined with a minimum royalty of $35 per month payable in cash or common stock of the Company.
In addition, the Company agreed to issue 8,000,000 shares of the Company’s common stock with vesting terms to the individual
(see Note 10). During the three and nine months ended September 30, 2020, the Company paid $62 and $296 to the individual.
The
Company entered into agreements to share revenue for a product to be designed and produced with several investors. The agreements
specify payments of 50% of the net revenues from the specified new product sales. The investors advanced $250 for the right to
receive the payments specified. The Company has not produced the specified product. The Company has recorded the advances as liabilities
under notes payable. In addition, the Company issued 280,000 shares of common stock to the related investors and the recognized
the fair value of $28 as a discount. The discount is being amortized to interest expense over the expected life of the agreement.
The Company has determined that there is the potential for litigation under these agreements however no estimate of liability
can be calculated as of September 30, 2020.
NOTE
12 – SUBSEQUENT EVENTS
Change
in Control, Appointment of New Board Member and Chief Executive Officer and Other Corporate Actions
On November 13, 2020, Mr. Phil Sands was
appointed as a member of the Board of Directors of the Company, and to serve as our new Chief Executive Officer, a role which
he assumed following the ten-day period after the mailing of a Schedule 14F to our shareholders of record, Eric Rice has resigned
from all officer and director positions with the Company.
On
November 15, 2020, the Company entered into an interim compensation agreement with Mr. Phil Sands providing for monthly compensation
of $8 commencing December 1, 2020 until March 1, 2021.
On
November 16, 2020, the Company entered into a Control Block Transfer Agreement with Eric Rice and Phil Sands, pursuant to which,
Mr. Rice agreed to transfer 2,500,000 shares of the Company’s Series A Super Voting Preferred Stock to Mr. Sands, representing
a transfer of majority voting control over the Company because the holder of such 2,500,000 shares of our Series A Super Voting
Preferred Stock automatically carries a vote equal to 51% on all matters submitted to a vote of the holders of our Common Stock
and Preferred Stock. Mr. Rice agreed to transfer the Control Block to Phil Sands in order to consummate the Company’s transition
into a holding company (transition phase), without requiring the Company to further dilute its stock through the issuance of new
shares.
During
the transition phase, the Company has furloughed most of its employees, and formulation of product has been intermittent while
fulfilling orders has continued. Finished goods inventory is been replenished by packaging and labeling inventory classified as
raw materials. Management believes that order fulfilment can continue into the first quarter of 2021, while any organizational
and staffing changes are being evaluated.
On
November 16, 2020, the Company entered into a Share Cancellation Agreement with Eric Rice, holder of 18,030,032 shares of QNTA
Common Stock, pursuant to which Mr. Rice agreed to cancel 17,030,032 shares, and to retain ownership of 1,000,000 shares of Common
Stock. Mr. Rice agreed to cancel and return to treasury 17,030,032 shares in order to assist the Company with its plans to attract
experienced management, reorganize into a holding company, while transitioning the Company’s existing CBD business operations
into a newly formed operating subsidiary, without requiring QNTA to further dilute its stock through the issuance of new shares.
On
November 20, 2020, the Board of Directors approved an increase in the Company’s authorized shares of Common Stock from 100,000,000
to 500,000,000 shares by Unanimous Written Consent in order to provide the Company with sufficient shares to adequately pay down
its debt, to allow for compensation to vendors and executives for ongoing services being rendered to the Company, and to accommodate
for future financings and acquisitions. On November 20, 2020, the Board Received the Majority Shareholder’s Consent from
Phil Sands, holder of 2,500,000 shares of our Series A Preferred Stock, approving the increase in our authorized shares of Common
Stock to 500,000,000. No changes to our Preferred Stock are being made. The Secretary of the state of Nevada approved the amendment
to the articles of incorporation and approved the share increase.
Issuances
of Common Stock
In
October 2020, the Company issued 2,509,217 shares of common stock for conversion of $43 of principal and $9 of accrued
interest at contracted prices. Following the conversion, the principal and accrued interest of the related note were fully
liquidated.
Convertible
Notes Issued
In
November 2020, the Company issued four notes payable for aggregate proceeds of $85,000 and received $77 in
cash. The notes are convertible into common shares of stock at the fixed price of $0.015 per share. The notes mature in April
2021 and bear interest at 10%. The note holders were issued 155,000 of restricted shares of common stock at $0.0365 for total
of $6 of fair value. The Company defaulted on these notes due to a failure to file the September 30, 2020 Form 10Q on a timely
basis and therefore is subject default penalties of 150% of accrued interest and principal.
On
December 9, 2020, the Company issued a convertible promissory note to Trillium Partners LP for $25. The note: carries $3 of original
issue discount (OID), may be converted into the Company’s common stock at $0.015 per share, bears interest at 10% and matures
on June 30, 2021. The OID will be amortized to interest expense over the term of the note and the beneficial conversion feature
will be recognized as a debt discount and additional paid in capital.
On
December 16, 2020, the Company issued a convertible promissory note to Trillium Partners LP for $23. The note: carries $3 of original
issue discount (OID), may be converted into the Company’s common stock at $0.015 per share, bears interest at 10% and matures
on June 30, 2021. The OID will be amortized to interest expense over the term of the note and the beneficial conversion feature
will be credited to additional paid in capital and $20,000 will be recognized as a debt discount and amortized to interest expense
over the term of the note.
Amendments
to Convertible Notes effective September 30, 2020 to Cure Defaults
On
December 9, 2020, the Company executed an amendment to its convertible note payable issued to Livingston Asset Management LLC
on April 27, 2020, curing the defaults under the terms of the original note. The maturity was extended to June 30, 2021, the conversion
terms were changed from fixed percentage discount to a fixed price of $0.015. Additionally, the investor is now entitled to deduct
$1,000 for each conversion to cover related costs.
On
December 9, 2020, the Company executed an amendment to its convertible note payable issued to Alpha Capital Anstalt on April 27,
2020, curing the defaults under the terms of the original note. The principal was restated under the default terms to be $160,
the maturity was extended to June 30, 2021, the conversion terms were changed from fixed percentage discount to a fixed price
of $0.015. Additionally, the investor is now entitled to deduct $1,000 for each conversion to cover related costs.
On
December 9, 2020, the Company executed an amendment to its convertible note payable issued to Trillium Partners LP on April 27,
2020, curing the defaults under the terms of the original note. The principal was restated under the default terms to be $160,
the maturity was extended to June 30, 2021, the conversion terms were changed from fixed percentage discount to a fixed price
of $0.015. Additionally, the investor is now entitled to deduct $1,000 for each conversion to cover related costs.
On
December 9, 2020, the Company executed an amendment to its convertible note payable issued to an individual on April 27, 2020,
curing the defaults under the terms of the original note. The principal was restated under the default terms to be $36, the maturity
was extended to June 30, 2021, the conversion terms were changed from fixed percentage discount to a fixed price of $0.015. Additionally,
the investor is now entitled to deduct $1,000 for each conversion to cover related costs.
On
December 9, 2020, the Company executed an amendment to its convertible note payable issued to Trillium Partners LP on May 27,
2020, curing the defaults under the terms of the original note. The principal was restated under the default terms to be $18,
the maturity was extended to June 30, 2021, the conversion terms were changed from fixed percentage discount to a fixed price
of $0.015. Additionally, the investor is now entitled to deduct $1,000 for each conversion to cover related costs.
On
December 9, 2020, the Company executed an amendment to its convertible note payable issued to Alpha Capital Anstalt on May 27,
2020, curing the defaults under the terms of the original note. The principal was restated under the default terms to be $9, the
maturity was extended to June 30, 2021, the conversion terms were changed from fixed percentage discount to a fixed price of $0.015.
Additionally, the investor is now entitled to deduct $1,000 for each conversion to cover related costs.
On
December 9, 2020, the Company executed an amendment to its convertible note payable issued to Trillium Partners LP on June 26,
2020, curing the defaults under the terms of the original note. The principal was restated under the default terms to be $154,
the maturity was extended to June 30, 2021, the conversion terms were changed from fixed percentage discount to a fixed price
of $0.015. Additionally, the investor is now entitled to deduct $1,000 for each conversion to cover related costs.
On
December 9, 2020, the Company executed an amendment to its convertible note payable issued to Trillium Partners LP on August 27,
2020, curing the defaults under the terms of the original note. The principal was restated under the default terms to be $71,
the maturity was extended to June 30, 2021, the conversion terms were changed from fixed percentage discount to a fixed price
of $0.015. Additionally, the investor is now entitled to deduct $1,000 for each conversion to cover related costs.
The
amendments to the notes above have been recognized in the financial statements as of September 30, 2020, as loss on debt extinguishment
(for changes in principal amount of $315) the beneficial conversion features recorded as additional paid in capital and were charged
to loss on debt extinguishment ($901) and debt discount of $315 which will be amortized with periodic charges to interest expense
over the amended terms of the notes.
Amendments
to Convertible Notes Issued Subsequent to September 30, 2020 to Cure Defaults
On
December 9, 2020, the Company executed an amendment to its convertible note payable issued to Alpha Capital Anstalt on November
3, 2020, curing the defaults under the terms of the original note. The principal was restated under the default terms to be $35,
the maturity was extended to June 30, 2021, the conversion terms were changed from fixed percentage discount to a fixed price
of $0.015. Additionally, the investor is now entitled to deduct $1,000 for each conversion to cover related costs.
On
December 9, 2020, the Company executed an amendment to its convertible note payable issued to an individual on November 3, 2020,
curing the defaults under the terms of the original note. The principal was restated under the default terms to be $26, the maturity
was extended to June 30, 2021, the conversion terms were changed from fixed percentage discount to a fixed price of $0.015. Additionally,
investor is now entitled to deduct $1,000 for each conversion to cover related costs.
On
December 9, 2020, the Company executed an amendment to its convertible note payable issued to another individual on November 3,
2020, curing the defaults under the terms of the original note. The principal was restated under the default terms to be $26,
the maturity was extended to June 30, 2021, the conversion terms were changed from fixed percentage discount to a fixed price
of $0.015. Additionally, the investor is now entitled to deduct $1,000 for each conversion to cover related costs.
On
December 9, 2020, the Company executed an amendment to its convertible note payable issued to Trillium Partners LP on November
3, 2020, curing the defaults under the terms of the original note. The principal was restated under the default terms to be $43,
the maturity was extended to June 30, 2021, the conversion terms were changed from fixed percentage discount to a fixed price
of $0.015. Additionally, the investor is now entitled to deduct $1,000 for each conversion to cover related costs.