Notes
to the Condensed Consolidated Financial Statements
September
30, 2019
(Unaudited)
Note
1 – Nature of the 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.
As
a subsequent event 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 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.
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
Hong Kong Limited (“12HK”)
|
|
Hong
Kong, China
|
|
February
2, 2014
|
|
June
27, 2017
|
|
|
100
|
%
|
|
Development
and sales of technology applications
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Red
Wire Group, LLC
|
|
Utah,
USA
|
|
July
2, 2015
|
|
February
19, 2019
|
|
|
100
|
%
|
|
A
subsidiary of 12 Retail and 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 and is part of the brand acquisition. Operates contemporary women’s ‘Athleisure’
brand which is primarily sold to retailers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Japan Limited (“12JP”)
|
|
Tokyo,
Japan
|
|
February
12, 2015
|
|
July
31, 2017
|
|
|
100
|
%
|
|
Consultation
and sales of technology applications
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Europe AG (“12EU”)
|
|
Zurich,
Switzerland
|
|
August
22, 2013
|
|
October
26, 2017
|
|
|
100
|
%
|
|
Inactive
as of August 20, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bluwire
Group, LLC (“Bluwire”)
|
|
Florida, USA
|
|
|
|
October
1, 2019
|
|
|
51
|
%
|
|
As
a subsequent event, this 12 location retailer was acquired.
|
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
interim financial statements have been prepared on a going concern basis which assumes the Company will continue to realize its
assets and discharge its liabilities in the normal course of business. As of September 30, 2019, the Company had a total accumulated
deficit totaling $26,660,984 since inception, has not yet generated significant revenue from its operations, and will require
additional funds to maintain its normal operations. 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. These interim 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 – Acquisitions
The
Company accounts for all business combinations in accordance with Financial Accounting Standards Board (“FASB”) ASC
805, “Business Combinations” (“ASC 805”), using the acquisition method of accounting. Under this method,
assets and liabilities, including any remaining 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 condensed consolidated statements of operations.
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 the Company’s Series D-5 and Series D-6 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
powers, preferences and rights, and the qualifications, limitations and restrictions of the Series D-5 and Series D-6 Preferred
Stock are set forth in the Company’s Current Report on Form 8-K and exhibits attached thereto previously filed with the
Securities and Exchange Commission on January 11, 2019.
RWG
continued its operations uninterrupted following the closing and retained key employees. The exchange agreement included customary
representations, warranties and covenants of the parties. The closing of the Exchange Agreement is subject to certain closing
conditions, including that the Members have not materially misrepresented any of the representations contained in the Exchange
Agreement and its exhibits.
The
Company has consolidated the acquisition effective February 1, 2019 to simplify the accounting under ASC 805 purchase accounting
as it pertains to the acquisition of the RWG.
The
assets and net liabilities acquired (based on fair values) were as follows:
Cash
|
|
$
|
10
|
|
Other assets (except cash)
|
|
|
106,110
|
|
Goodwill
|
|
|
480,381
|
|
Liabilities
|
|
|
(136,501
|
)
|
Net consideration
provided
|
|
$
|
450,000
|
|
The
fair values of the net assets acquired were determined using the market approach, which indicates value for a subject asset based
on available market pricing for comparable assets. The fair value of the fixed assets of $58,110 has been determined by a third-party
valuation firm and is valued at its estimated sale price. The Company also capitalized assets of approximately $48,000. The fair
value of the debt has been determined using an appropriately required payment amount.
The
purchase price for the acquisition was allocated to the fair value of the assets acquired and liabilities assumed based on the
estimates of the fair values at the acquisition date, with the amount exceeding the estimated fair values being recorded as goodwill.
The
fixed assets are being depreciated over their estimated useful lives of 5 years. Goodwill recorded will not be amortized but tested
for impairment at least annually, which will occur during the fourth quarter of the current year. The Company assumed the liabilities
of the RWG of $136,501.
RWG
results of operations have been included in the Company’s operating results for the period subsequent to the February 1,
2019. RWG contributed revenues of $529,201 for the nine months ended September 30, 2019. The Company is still evaluating
the total assets and liabilities at the date of acquisition and further adjustments might be made to the purchase price.
RuneNYC,
LLC.
On
March 14, 2019, the Company completed the acquisition of RuneNYC, LLC (“Rune”), a New York limited liability company,
pursuant to a share exchange agreement whereby the Company exchanged the Company’s Series D-5 shares for 92.5% of the total
outstanding equity of Rune and the members of Rune (the “Members”). Pursuant to the terms of the exchange agreement,
the Members of Rune (the “Members”) representing 92.5% of the membership interests have agreed to tender their interests
to the Company, and the Company closed the tender offer period on March 14, 2019 at which time the exchange agreement became effective.
Accordingly, pursuant to the terms of the exchange agreement, at closing the Company acquired 92.5% of the membership interests
of Rune were exchange for 82,588 shares of the Company’s Series D-5 Preferred Stock with a stated value of $4.00 per share.
The
powers, preferences and rights, and the qualifications, limitations and restrictions of the Series D-5 Preferred Stock are set
forth in the Corporation’s Current Report on Form 8-K and exhibits attached thereto previously filed with the Securities
and Exchange Commission on January 11, 2019.
Rune
continued its operations uninterrupted during closing and retained certain key employees. The exchange agreement included customary
representations, warranties and covenants of the parties. The closing of the exchange agreement was subject to certain closing
conditions, including that the Members have not materially misrepresented any of the representations contained in the exchange
agreement and its exhibits.
The
Company has consolidated the acquisition effective February 1, 2019 to simplify the accounting under ASC 805 purchase accounting
as it pertains to the acquisition of the Rune.
The
assets and net liabilities acquired (based on fair values) were as follows:
Cash
|
|
$
|
12,914
|
|
Other assets (except cash)
|
|
|
41,586
|
|
Goodwill
|
|
|
394,440
|
|
Liabilities
|
|
|
(37,817
|
)
|
Net consideration
provided
|
|
$
|
411,123
|
|
The
purchase price for the acquisition was allocated to the fair value of the assets acquired and liabilities assumed based on the
estimates of the fair values at the acquisition date, with the amount exceeding the estimated fair values being recorded as goodwill.
The company also recorded a minority interest of $30,834 which represents 7.5% of the net assets acquired.
Rune’s
results of operations have been included in the Company’s operating results for the period subsequent to it’s acquisition
on February 1, 2019. Rune contributed revenues of $123,168 in 2019. The Company is still evaluating the total assets and
liabilities at the date of acquisition and further adjustments might be made to the purchase price.
The below table sets forth selected unaudited
and unreviewed pro forma financial information for the Company for 2018 compared to 12 ReTech as if RWG and Rune was owned
for the nine months ended September 30, 2019 and 2018.
|
|
Proforma
|
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues
|
|
$
|
705,058
|
|
|
$
|
1,180,989
|
|
Cost of revenues
|
|
|
466,393
|
|
|
|
805,532
|
|
Gross profit
|
|
|
238,665
|
|
|
|
375,457
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
1.924,922
|
|
|
$
|
491,487
|
|
Operating losses
|
|
$
|
(1,686,257
|
)
|
|
$
|
(116,030
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(15,450,614
|
)
|
|
$
|
(2,698,846
|
)
|
|
|
|
|
|
|
|
|
|
Earnings Per Share
|
|
$
|
(0.97
|
)
|
|
$
|
(3.14
|
)
|
The
unaudited pro forma information set forth above is for informational purposes only. The pro forma information should not be considered
indicative of actual results that would have been achieved if the RWG and Rune acquisition had occurred on January 1, 2018. The
unaudited supplemental pro forma financial information was calculated by combining the Company’s results with the stand-alone
results of Rune. For the identified periods, which were adjusted for certain transactions and other costs that would have been
occurred during this pre-acquisition period.
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. (This company shed this subsidiary as of September 30th, 2019 see below).
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. The acquisition of EAI was accounted
for under ASC 805 where purchase price was allocated based on assets acquired and liabilities assumed as of the acquisition date
May 1, 2018, at the estimated fair value. During the fourth quarter of 2018, the Company determined that the goodwill associated
with the acquisition should be fully impaired, and as such was expensed during the fourth quarter of 2018.
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.”
The
EAI share exchange agreement included terms that the Company would provide funding of at least $200,000 in the first 12 months
after acquisition and the Seller, who remained as manager, would produce revenues in excess of $1.3 million dollars over that
period. The Company secured its investment with a secured line of credit and a landlord’s lien through one of its other
subsidiaries. Those liens covered all of the intellectual property and physical assets of Emotion Apparel, Inc. On September 30,
2019 the Company effectively 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. In the 4th quarter 2019 the
Company plans to market those brands under new management as part of its consolidation of its acquisitions and utilize its Emotion
Fashion Group, Inc, subsidiary that was incorporated in Utah in July 2018. As
a result, the related accounts payable and accrued expenses which were payable by Emotion Apparel, Inc. which totaled $511,486
including $250,000 Note Payable, were offset to other income. For further details see Note 6 Accounts Payable and Accrued Expenses
and 9 Notes Payable for further details.
12
Japan, LTD.
After
the initial acquisition of 12 Hong Kong, LTD during 2017 and the first half of 2018 the Company made several acquisitions including;
12 Japan, LTD. Subsequent to this acquisitions the Company took steps to consolidate the assets and streamline operations
that effectively by the end the 3rd quarter 2019, this Company’s no longer function as independent subsidiaries.
12
Japan LTD, in order to streamline operations in the third quarter the Company closed the physical offices in Japan
and while revenues continue to be generated in Japan through its flagship customer ITOYA it is serviced under a licensing
agreement by 12 Hong Kong Ltd. Management believes that these changes will result in a profit for the Company, from operations in Japan beginning in the 4th quarter of 2019.
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 $35K 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, software customer in Europe will
continue to be supported.
Bluwire
Group, LLC.
On
October 1, 2019, the Company acquired a retailer
with 11 airport terminal locations and one casino location under an equity exchange agreement. Under the terms of the agreement
the Company issued to the sellers 500,000 Series A Preferred Shares in exchange for 51% of the equity in Bluwire Group,
LLC and its subsidiaries (“Bluwire”). The Sellers retained 30% of Bluwire and 19% is reserved for 12 months for potential
equity investors into Bluwire. Any of this equity reserve not used to raise capital for Bluwire over that period
would be divided equally between the Company and the Sellers. The Sellers will continue to manage Bluwire under consulting agreements.
See filed 8K between the Company and Bluwire Group, LLC on October 16, 2019.
The Company is expected to consolidate
this acquisition effective October 1, 2019, under ASC 805 purchase accounting. However, the accounting impact of this acquisition,
including the purchase price and fair value of assets and liabilities acquired, is still being determined and will the
result of an independent valuation and will be shown as part of the Company’s 2019 10-K.
The
below table sets forth selected unaudited and unreviewed pro forma financial information for the Company for
2018 compared to 12 ReTech as if Bluwire Group, Redwire and Rune were owned for the nine months ended September 30,
2019 and 2018.
|
|
Proforma
|
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues
|
|
$
|
3,838,793
|
|
|
$
|
5,873,098
|
|
Cost of revenues
|
|
|
1,881,970
|
|
|
|
2,744,412
|
|
Gross profit
|
|
|
1,956,823
|
|
|
|
3,128,686
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
3,969,923
|
|
|
$
|
2,958,089
|
|
Operating loss
|
|
$
|
(2,013,100
|
)
|
|
$
|
170,597
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(15,777,457
|
)
|
|
$
|
(2,528,249
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Share
|
|
$
|
(0.99
|
)
|
|
$
|
(2.82
|
)
|
The
unaudited proforma information set forth above is for informational purposes only. The proforma information should not be considered
indicative of actual results that would have been achieved if the Bluwire Group, LLC acquisition had occurred on January 1, 2018.
The unaudited supplemental pro forma financial information was calculated by combining the Company’s results with the stand-alone
results of Bluwire Group, LLC. For the identified periods.
Note
4 – Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of
Regulation S-X. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three months ended September 30, 2019 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2019. Notes to the unaudited interim condensed consolidated financial statements
that would substantially duplicate the disclosures contained in the audited condensed consolidated financial statements for fiscal
year 2018 have been omitted. This report should be read in conjunction with the audited condensed consolidated financial statements
and the footnotes thereto for the fiscal year ended December 31, 2018 included in the Company’s Form 10-K as filed with
the Securities and Exchange Commission on April 16, 2019.
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”), 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. Since January 2019, the consolidation includes
both Rune and RWG which were acquired in the first quarter 2019. All inter-company accounts and transactions have been eliminated.
We currently have no investments accounted for using the equity or cost methods of accounting. On October 1, 2019, Bluwire
Group, LLC will be included in the consolidation.
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. Actual results could differ from these good faith
estimates and judgments.
Software
Development Costs
At
September 30, 2019 and December 31, 2018 software development costs totaled $0 and $371,118, respectively. 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. As of June 30, 2019, management had capitalized approximately
$513,601 in development costs for its 12 Technology suite and 12 Sconti APP. While management still believes in the long-term
validity of these software applications, the fact remains that adoption by retailers has not met management’s expectations.
As a result, management believed that the capitalized costs for the software development should be fully impaired as of that date.
As of September 30, 2019, management has not since revised its opinion. Please see Management, Discussion Analysis for further
details in the resulting cutting of costs in 12 Europe and 12 Japan.
Goodwill
Goodwill
represents the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired.
The
goodwill amount of $480,381 related to the acquisition of RWG and $394,440 related to the acquisition of Rune as of September
30, 2019. Goodwill is not amortized, but is tested annually for impairment, or if circumstances occur that more likely than not
reduce the fair value of the reporting unit below its carrying amount. The Company has determined that there has been no impairment
of goodwill at September 30, 2019. The Company performs its annual test during the fourth quarter.
Revenue
Recognition
The
Company recognizes revenue from the sale of products and services in accordance with ASC 606, “Revenue from Contracts with
Customers”. Revenue is recognized when the earnings process is complete typically when services or products are provided
to the customer.
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.
Derivative
Liabilities and 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 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.
The
Company classified certain conversion features in the convertible notes issued during 2019 and 2018 as embedded derivative instruments
due to down-round ratchet provisions and potential adjustments to conversion prices due to events of default and accordingly measures
and carries the conversion features as derivative liabilities in the consolidated financial statements. Also, 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. 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 Black Scholes Simulation model, which incorporates inputs classified as
“Level 3” was appropriate.
The
conversion feature was recognized as an embedded derivative and was valued using a Black Scholes model that resulted in a derivative
liability of $14,494,342 and $2,696,470 at September 30, 2019 and December 31, 2018, respectively.
|
|
September
30, 2019
|
|
Risk-free interest rates
|
|
|
1.74
– 2.63
|
%
|
Expected life (years)
|
|
|
0.05
– 1.00 years
|
|
Expected dividends
|
|
|
0
|
%
|
Expected volatility
|
|
|
226
– 736
|
%
|
In
connection with convertible notes payable, the Company records derivative liabilities for the conversion feature. 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 certain of the convertible note payables by approximately $1,637,572, which was recorded as
a day one loss on derivative liability. On December 31, 2018, the derivative liabilities were revalued at $2,696,470 resulting
in a loss of $760,508 related to the change in fair market value of the derivative liabilities during the year ended December
31, 2018. In connection with convertible notes, as disclosed in Note 8, the Company reclassified derivative liabilities with a
fair value of $1,418,516 to additional paid-in capital during year ended December 31, 2018. The Company revalued the derivative
liabilities at each conversion date recording the pro-rata portion of the derivative liability as compared to the portion of the
convertible note converted to the pre-conversion carrying value to additional paid-in capital.
During
the nine months ended September 30, 2019, the Company recorded additional derivative liabilities of $1,150,152 related
to convertible notes payable and $2,717,043 for various series of preferred stock. The Company also recorded $4,555,575 of additional
derivative liability for the default reserve related to the potential additional liability for the default on convertible notes
and certain Series D Preferred Stock. See further details convertible notes below and management discussion analysis section.
On September 30, 2019, the derivative liabilities were revalued at $14,494,342 resulting in a loss of $4,169,269 related to the
change in fair market value of the derivative liabilities during the nine months ended September 30, 2019.
|
|
For
the
Nine Months Ended
September 30, 2019
|
|
Balance – December 31, 2018
|
|
$
|
2,696,470
|
|
Issuance of new derivative liabilities
|
|
|
8,422,770
|
|
Conversions to paid-in capital
|
|
|
(794,167
|
)
|
Change in fair
market value of derivative liabilities
|
|
|
4,169,269
|
|
Balance – September 30, 2019
|
|
$
|
14,494,342
|
|
Management
views these convertible notes, due to their conversion feature to be viewed as equity, and the expenses associated through derivative
calculations to be estimates that are only finalized once the actual conversion has been consummated. For the balance outstanding,
please see Note 8.
Commitments
and Contingencies
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-2 Preferred Stock is classified as temporary equity due to the fact that it is redeemable immediately.
The Series D-3 Preferred Stock is also classified as temporary equity due to the existence of the PUT. Under the terms of the
acquisition of the Red Wire Group, certain members received Series D-5 with a PUT option with a face value of $150,000. If those
members so elect, to not convert those shares to common stock, they have the right to PUT those shares to the Company for cash.
This would be an additional cash constraint on the company. For additional detail, See Note 3 Acquisitions.
Earnings
(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. As a subsequent event, 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 nine months
ended September 30, 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. If all dilutive securities were converted the Company would be in excess of their authorized shares
of common stock.
Financial
Instruments
The
Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, prepaid expenses and
other current assets, accounts payable and accrued liabilities, due to stockholders and notes payable. 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.
Recent
Accounting Pronouncements
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
5 – Fixed Assets
Fixed
assets at September 30, 2019 and December 31, 2018 consisted of the following:
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
|
|
|
|
|
|
|
Office equipment
|
|
$
|
90,798
|
|
|
$
|
32,107
|
|
Furniture and equipment
|
|
|
607
|
|
|
|
607
|
|
Computer
|
|
|
13,704
|
|
|
|
13,704
|
|
Technical equipment
|
|
|
27,492
|
|
|
|
27,492
|
|
Intellectual
Property
|
|
|
74,982
|
|
|
|
65.487
|
|
Subtotal Fixed Assets
|
|
$
|
207,583
|
|
|
$
|
139,397
|
|
Less: accumulated
depreciation
|
|
|
(51,127
|
)
|
|
|
(41,102
|
)
|
Fixed Assets
|
|
$
|
156,456
|
|
|
$
|
98,295
|
|
Depreciation expense for the nine months ended
September 30, 2019 and 2018 was to $16,095 and $5,085, respectively.
Note
6 – Accounts Payable and Accrued Liabilities
Accounts
payable and accrued liabilities at September 30, 2019 and December 31, 2018 consisted of the following:
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
308,230
|
|
|
$
|
379,448
|
|
Accrued expenses
|
|
|
452,838
|
|
|
|
495,785
|
|
Accrued salaries
|
|
|
6,753
|
|
|
|
206,031
|
|
Accrued board of director fees
|
|
|
-
|
|
|
|
74,295
|
|
Accrued interest
|
|
|
156,631
|
|
|
|
79,153
|
|
|
|
$
|
924,452
|
|
|
$
|
1,234,712
|
|
During
the three months ended September 30, 2019, some accounts payable and accrued expenses were exchanged for Series A Preferred shares.
The majority of which represented professional consulting fees of approximately $161,221 and board of director fees of approximately
$264,616. See Note 10 Series A Preferred Stock for further details.
In
addition, as detailed in Note 3, on September 30, 2019 the Company effectively foreclosed on its liens taking possession of the
assets including the brands; Lexi-Luu, Emotion Apparel, Inc., Punkz Gear and retuned the stock in Emotion Apparel, Inc.
and its subsidiaries to the Seller. As a result, the related accounts payable and accrued expenses which were payable by Emotion
Apparel, Inc. which totaled $511,486 including $250,000 Note Payable, were offset to other income. For further details
See Note 9 Notes Payable for further details.
Also
12 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 by the Company.
As a result of filing for bankruptcy, all the companies have been discharged and are no longer owed by the Company with the
exception of approximately $35K in social benefits liabilities. As such the total discharged accounts payable totaled $445,244
and were offset to other income.
Lastly,
after careful review by management, certain invoices posted to accounts payable were deemed to not be owed by
the Company. These payables totaled approximately $68K were offset to other income.
See
further discussion as part of the Management Discussion and Analysis below.
Note
7 – Due to Stockholders
Amounts
due to stockholders (related party) at September 30, 2019 and December 31, 2018 consist of the following:
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
Daniel Monteverde
|
|
$
|
1,388
|
|
|
$
|
143,195
|
|
Angelo Ponzetta
|
|
|
119,354
|
|
|
|
623,201
|
|
|
|
$
|
120,742
|
|
|
$
|
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, Gianni Ponzetta converted this note and all the due to Gianni Ponzetta payables to Preferred
D-3 shares. See Preferred D-3 shares in Note 10 below. During the 12 months ended December 31, 2018 total advances and expenses
paid directly by stockholders on behalf of the Company $107,326 and $36,931.
During
the nine months ended September 30, 2019, the Company exchanged most its accounts payables due to Daniele Monteverde and Angelo
Ponzetta of approximately $723,253 into Series A Preferred shares. See Note 10 Series A Preferred Stock for further details.
Note
8 – Convertible Notes Payable
Convertible
notes payable at September 30, 2019 and December 31, 2018 consists of the following:
|
|
September
30, 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
|
|
|
30,285
|
|
|
|
64,500
|
|
November 28, 2018
|
|
|
64,500
|
|
|
|
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
|
|
|
53,500
|
|
|
|
-
|
|
August 7, 2019
|
|
|
55,125
|
|
|
|
-
|
|
Total
|
|
$
|
1,304,695
|
|
|
$
|
938,754
|
|
|
|
|
|
|
|
|
|
|
Less: unamortized
debt discount
|
|
|
(298,682
|
)
|
|
|
(313,909
|
)
|
|
|
|
|
|
|
|
|
|
Total convertible
notes
|
|
$
|
1,006,013
|
|
|
$
|
624,845
|
|
For
the nine months ended September 30, 2019, the Company recognized interest expense of $674,210, all of which represented
the amortization of original issue discounts, debt discounts and beneficial conversion features. For the nine months ended September
30, 2019, the Company reduced the principal by $339,371 principal through conversion through the issuance of 10,904,612
shares of common stock. The issue discounts and debt discounts are being amortized over the life of the convertible notes
using straight line amortization due to the short-term nature of the note. Remaining issue discounts and debt discounts of $298,682
will be fully amortized by May 2020.
The
Company has twenty four (24) outstanding convertible notes as of September 30, 2019, with a total outstanding balance of $1,006,013.
All the notes have matured that were entered into prior to 2019. The 2019 notes mature from January 2020 to March 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 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. All terms of the note, 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.
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 any time after the maturity date. 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 note, 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
note 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. All terms of the note, including but not limited to interest rate, prepayment terms,
conversion discount or look-back period will be adjusted downward in the Company offers more favorable terms to another party,
while this note is in effect. As additional consideration, the Company is to issue to Adar Bays Capital shares of common stock
with a value equal to 25% of each note, determine at the time of signing of each note.
See
summary of outstanding notes payable by debt holder with related change in derivative liability and amortization of debt discount
for the period ended September 30, 2019.
|
|
|
Loan
Holder
|
|
Principal
Amount
|
|
|
Date
|
|
|
Maturity
|
|
|
Balance
at
12 31 18
|
|
|
Additions
|
|
|
Payments
|
|
|
Conversion
|
|
|
Balance
at
9 30 19
|
|
1
|
|
|
SBI Investment
|
|
$
|
200,000
|
|
|
|
9/27/2017
|
|
|
|
3/15/2018
|
|
|
|
156,850
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,697
|
)
|
|
|
150,153
|
|
1
|
|
|
SBI Investment
|
|
$
|
187,500
|
|
|
|
11/14/2017
|
|
|
|
5/14/2018
|
|
|
|
187,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
187,500
|
|
2
|
|
|
LG Capital Funding, LLC
|
|
$
|
185,292
|
|
|
|
12/8/2017
|
|
|
|
6/8/2018
|
|
|
|
52,260
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(52,260
|
)
|
|
|
-
|
|
3
|
|
|
Cerberus Finance Group Ltd
|
|
$
|
185,292
|
|
|
|
12/12/2017
|
|
|
|
6/8/2018
|
|
|
|
107,109
|
|
|
|
-
|
|
|
|
(99,684
|
)
|
|
|
(7,425
|
)
|
|
|
-
|
|
6
|
|
|
Bellridge Capital LP
|
|
$
|
60,000
|
|
|
|
5/17/2018
|
|
|
|
5/17/2019
|
|
|
|
16,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(16,000
|
)
|
|
|
-
|
|
7
|
|
|
Auctus
|
|
$
|
100,000
|
|
|
|
4/27/2018
|
|
|
|
4/25/2019
|
|
|
|
40,123
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40,123
|
|
8
|
|
|
Bellridge Capital LP
|
|
$
|
60,000
|
|
|
|
9/17/2018
|
|
|
|
3/15/2019
|
|
|
|
60,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,286
|
)
|
|
|
56,714
|
|
9
|
|
|
Bellridge Capital LP
|
|
$
|
60,000
|
|
|
|
10/18/2018
|
|
|
|
10/18/2019
|
|
|
|
60,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60,000
|
|
10
|
|
|
Adar Alef Omnibus
|
|
$
|
64,500
|
|
|
|
11/28/2018
|
|
|
|
11/29/2019
|
|
|
|
64,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(34,215
|
)
|
|
|
30,285
|
|
11
|
|
|
Adar Alef Debt Purchase
|
|
$
|
25,000
|
|
|
|
11/28/2018
|
|
|
|
11/29/2019
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
12
|
|
|
LG Capital Omnibus
|
|
$
|
64,500
|
|
|
|
11/28/2018
|
|
|
|
11/29/2019
|
|
|
|
64,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64,500
|
|
13
|
|
|
LG Capital Debt Purchase
|
|
$
|
25,000
|
|
|
|
11/29/2018
|
|
|
|
11/29/2018
|
|
|
|
25,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,000
|
|
14
|
|
|
LG Capital Omnibus
|
|
$
|
105,000
|
|
|
|
12/13/2018
|
|
|
|
12/14/2019
|
|
|
|
105,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
105,000
|
|
15
|
|
|
LG Capital Omnibus
|
|
$
|
115,000
|
|
|
|
1/15/2019
|
|
|
|
1/15/2020
|
|
|
|
-
|
|
|
|
115,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
115,000
|
|
16
|
|
|
Adar Alef Omnibus
|
|
$
|
132,720
|
|
|
|
2/7/2019
|
|
|
|
2/7/2020
|
|
|
|
-
|
|
|
|
132,720
|
|
|
|
-
|
|
|
|
-
|
|
|
|
132,720
|
|
17
|
|
|
Adar Alef Debt Note
|
|
$
|
108,055
|
|
|
|
2/7/2019
|
|
|
|
2/7/2019
|
|
|
|
-
|
|
|
|
108,055
|
|
|
|
-
|
|
|
|
(108,056
|
)
|
|
|
-
|
|
18
|
|
|
Adar Alef Omnibus
|
|
$
|
64,500
|
|
|
|
2/19/2019
|
|
|
|
2/19/2020
|
|
|
|
-
|
|
|
|
64,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64,500
|
|
19
|
|
|
LG Capital Omnibus
|
|
$
|
55,125
|
|
|
|
2/19/2019
|
|
|
|
2/19/2020
|
|
|
|
-
|
|
|
|
55,125
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55,125
|
|
20
|
|
|
LG Capital Omnibus
|
|
$
|
55,125
|
|
|
|
3/13/2019
|
|
|
|
3/13/2020
|
|
|
|
-
|
|
|
|
55,125
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55,125
|
|
21
|
|
|
Adar Alef Omnibus
|
|
$
|
26,500
|
|
|
|
5/14/2019
|
|
|
|
2/20/2020
|
|
|
|
-
|
|
|
|
26,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26,500
|
|
22
|
|
|
LG Capital Omnibus
|
|
$
|
27,825
|
|
|
|
5/17/2019
|
|
|
|
2/15/2020
|
|
|
|
-
|
|
|
|
27,825
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,825
|
|
23
|
|
|
Adar Alef Omnibus
|
|
$
|
53,500
|
|
|
|
8/1/2019
|
|
|
|
2/7/2020
|
|
|
|
-
|
|
|
|
53,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
53,500
|
|
24
|
|
|
LG Capital Omnibus
|
|
$
|
55,125
|
|
|
|
8/6/2019
|
|
|
|
2/7/2020
|
|
|
|
-
|
|
|
|
55,125
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
note total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
938,843
|
|
|
$
|
693,475
|
|
|
|
(99,684
|
)
|
|
|
(227,939
|
)
|
|
|
1,304,695
|
|
On
July 25, 2019 the Company was served with a lawsuit from Auctus Fund, LLC (“Auctus”). For additional details, see
MD&A Item 1. Legal Proceedings
As
a subsequent event, on October 3, 2019 the Company received an additional $5,000 from Adar Alef as part of aback end promissory
note agreement. The cost to the Company was $5,350 which includes $350 OID.
As
a subsequent event, on October 8, 2019 the Company entered into a promissory note agreement with LG Capital Funding, LLC (“LG”)
for loans totaling $6,850. The consideration to the Company is $5,000 with $1,500 legal fees and a $350 OID. LG delivered those
funds on October 24, 2019.
Note
9 – Note 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 the third party 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 $2,780
for the nine and three months ended September 30, 2019. On September 30, 2019 the Company effectively 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 detailed in Note 6, all accounts payable, accrued expenses and notes payable
reverted back to the seller and offset to Other Income.
As
a subsequent event, on October 3, 2019 one of the Sellers of Bluwire to the Company provided $300,000 to its Bluwire subsidiary
under a secured demand promissory note executed jointly by Bluwire and the Company. This note caries interest of 15%. This obligation
is not convertible into Company stock under any terms.
As
a subsequent event, 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.
As
a subsequent event, 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.
Note
10 – Common and Preferred Stock
Capitalization
The
Company has authorized shares of common stock of 80,000,000 at a par value of $0.00001, and 50,000,000 shares of Preferred
Stock as described below.
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, within the limits and restrictions stated in any resolution or resolutions of the Board
of Directors originally fixing the number of shares constituting any series, 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.
Commitment
and Contingencies
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 Preferred Stock is classified as temporary Series D-1 as temporary equity due to the fact that
redeemable immediately. The Series D-3 Preferred Stock is classified as temporary equity due to the existence of the PUT. Under
the terms of the acquisition of the Red Wire Group, certain members received Series D-5 with a PUT option with a face value of
$150,000. If those members so elect to not convert those shares to common stock, they have the right to PUT those shares to the
Company for cash. This would be an additional cash constraint on the company. For additional detail, See Note 3 Acquisitions.
Series
A Preferred Stock
On
July 19, 2018, 1,500,000 shares of Series A Preferred Stock were deemed issued as compensation for services These were,
by agreement, not delivered until August, 2019.
As
detailed in Note 6 and 7, during the third quarter 2019, Series A preferred stock was issued in exchange for certain accounts
payable, accrued expenses, board director fees and related parties payable which total approximately $1,154,572 for 1,915,151
Series A Preferred Shares. In addition, management issued Series A Preferred shares in exchange for professional fees
of 114,165 Series A shares.
The
Company issued a total of 2,029,316 Series A preferred shares related to the aforementioned.
Therefore,
as of September 30, 2019 and December 31, 2018, there was
8,529,316 and 6,500,000 shares of Series A Preferred Stock deemed issued and outstanding.
In
addition, as a subsequent event, effective October 1, 2019, the Company issued 500,000 Series A shares in exchange for equity
in Bluwire Group, LLC. See Note 3 above for further details.
Series
B Preferred Stock
The
Series B Redeemable Convertible Preferred Stock is classified as temporary equity, as it is mandatorily redeemable by the holder
15 months after issuance and thus have been recorded as mezzanine. During the six months ended September 30, 2019, the Company
issued Series B Preferred Stock and converted to common shares the following Series B Preferred shares as follow:
|
●
|
As
of September 30, 2019 and December 31, 2018, 0 and 68,000 shares of Series B Preferred Stock were issued and outstanding
at $1.00 par value, respectively. The Company recognized interest expense of $12,063 for the nine months ended September 30,2019.
|
Series
C Preferred Stock
There
was a single issuance of the Series C Preferred Stock during the years ended December 31, 2018. There have been no additional
Series C Preferred Stock issued during the three and six months ended September 30, 2019.
On
August 6, 2018, the Board of Directors of 12 ReTech corporation authorized the issuance of one (1) share of our Series C Preferred
Shares to the founder, Angelo Ponzetta, effective August 14, 2018.
The
Series C Preferred Shares have no equity value, no preference in liquidation and is not convertible into common shares, but 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. Please note, original 1 share of Series C Preferred shares authorized the holder to vote one billion
(1,000,000,000) votes on any matter that shareholders are entitled to vote but was modified on January 14, 2019 to be eight billion
(8,000,000,000) votes per share.
The
Board believes that this was necessary so that the Company maintains a consistent vision going forward that can only be achieved
if the Founder’s vision is maintained. This vision is the same vision that all current shareholders bought into as evidenced
by their investment into the Company. To ensure that the founder’s vision is maintained, it is necessary that no outsider
person or group can gain voting control from the founder as the Company.
There
is one share of Series C Preferred Stock issued and outstanding as of September 30, 2019 and December 31, 2018.
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, with a stated par value of $0.00001 per share with such powers, preferences, rights and restrictions which shall be determined
by the Company’s Board of Directors in its sole discretion, and which designations and issuances shall not require the approval
of the shareholders of the Corporation.
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. On July 13, 2018, the Company filed an amended certificate of designation
increasing the authorized Series D preferred shares from 1 million (1,000,000) to 10 million (10,000,000), as a reallocation of
the 50 million (50,000,000) shares of preferred stock authorized. All of these 10 million (10,000,000) shares of Series D Preferred
Stock are part of the 50 million (50,000,000) authorized shares of preferred stock.
Series
D-1 Preferred Stock
On
July 5, 2018 the Company filed a certificate of designation to create a subset of the Series D Preferred Stock designated Series
D-1.
On
July 2, 2018, the Company entered into an 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:
The
total number of shares of Series D-1 Preferred Stock issued was 311,250 shares, with a par value of $0.0001 per share and a stated
value of $2.00 per share (the “Stated Value”). The Series D-1 Preferred Stock as a whole, of which Series D-1 is a
subset, has such powers, preferences, rights and restrictions which shall be determined by the Company’s Board of Directors
in its sole discretion, and which designations and issuances shall not require the approval of the shareholders of the Company.
For additional information on Series D-1 Preferred Stock, please see Company’s 10_K filed April 16, 2019.
As
of December 31, 2018 with the execution of the Oasis Agreement, the Company issued 311,250 shares of Preferred Series D-1 shares
which are at par value of $2 per share total $622,500. The Company recorded a derivative liability of approximately $700,000 associated
with Series D-1 Preferred Shares. The Series D-1 Preferred Stock is classified Series D-1 as temporary equity due to the fact
that redeemable immediately.
During
the first quarter of, 2019 Oasis Capital converted 28,500 shares for 630,000 common stock and reduced the principal
outstanding balance by $28,500. As such, the Company recorded a change in derivative liability associated the Series D-1 Preferred
Shares of approximately ($86,428).
On
March 14, 2019, the Company executed an agreement with Oasis Capital, whereby the Company agreed to exchange the remaining outstanding
of Series D-1 Preferred Shares of 282,750 for 282,750 Series D-2 Preferred Shares. In addition, the Company executed an agreement
whereby 62,250 outstanding D-1 shares 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. As of September 30, 2019 there are no Preferred Series D-1 shares outstanding.
Series
D-2 Preferred Stock
The
Company designated Series D-2 Preferred Stock. The following summary of the Company’s 8% Series D-2 Preferred Stock. The
Series D Preferred Stock as a whole, of which Series D-2 is a subset, has such powers, preferences, rights and restrictions which
shall be determined by the Company’s Board of Directors in its sole discretion, and which designations and issuances shall
not require the approval of the stockholders of the Company. Before any dividends shall be paid or set-side for payment on any
Junior Security Corporation, each holder of Series D-2 Preferred Stock shall be entitled to receive dividends, in the manner provided
herein, 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.
The
total number of shares of Series D-2 Preferred Stock this Company is authorized to issue 2,500,000 shares, with a par value of
$0.00001 per share and a stated value of $2.00 per share.
The
Company issued 346,625 Series D-2 shares to Oasis Capital with a value of $692,850. 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 three months ended September 30, 2019 Oasis Capital redeemed $30,000
or 15,000 shares of its Series D-2 Preferred shares for 300,000,000 common shares. In addition, Oasis purchased an additional
9,009 series D-2 Preferred shares for $10,000. For the nine months ended September 30, 2019, Oasis redeemed and exchanged $115,500
or 57,750 shares of its D-2 Preferred shares for 558,000,000 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 6,250,000 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.
Also
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.
As
of September 30, 2019 the Company had 941,408 Series D-2 Preferred Shares with a face value of $1,882,816.
The
Series D-2 Preferred Stock is classified temporary equity due to the fact that the shares are redeemable immediately. As such,
the Company recorded an associated derivative liability of $2,156,164 a general default reserve of $387,002 and derivative
on default of $701,229.
Series
D-3 Preferred Shares
On
September 29, 2018, the Board of Directors of 12 ReTech corporation authorized the issuance of twenty thousand (20,000) shares
of Series D-3 Preferred Shares to Gianni Ponzetta at a price of $5.00 par value in exchange for $100,000. On the same date, 12
ReTech corporation authorized the issuance of four thousand (4,000) shares of its Series D-3 preferred shares to Gianni Ponzetta
at $5.00 par value with a face value of $20,000 as incentive shares at no additional costs to Gianni Ponzetta. Lastly,
12 ReTech corporation issued 30,840 shares of Series D-3 Preferred Shares to Gianni Ponzetta with par value per share of $5.00
in exchange of $154,234 which was owed to Gianni Ponzetta. On October 30, 2018, this Certificate of Designation was filed with
the Secretary of State in the State of Nevada.
The
Company agrees in connection with this subscription created a sub-class of its Series D Preferred shares which are designated
as “Blank Check Preferred” which allows the Board of Directors of the Company to designate, without further shareholder
approval, the rights, privileges and preferences or some, part or all of the Series D Preferred Shares and/or to create sub-classification
of those Series D Preferred Shares as they deem necessary. The Holder may convert some, part of all of the Securities into common
shares of the Company based on the closing market price on the day before notice of conversion is presented to the Company. The
Company will pay dividends on the Securities 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. For additional information of Series D-3 Preferred Shares, please see the Company’s
filed 10-K from April 16, 2019.
The
Series D-3 Preferred Stock is classified as temporary equity due to the existence of the PUT. As of September 30, 2019, there
were 54,846 Preferred Series D-3 shares outstanding at $5.00 par representing a total of $274,234.
Series
D-5 Preferred Stock
The
Company designated Series D-5 Preferred Stock, which consists of one million (1,000,000) shares of stock that are designated as
the Series D-5 Convertible Preferred Stock. The par value of each issued share of Series D-5 Preferred Stock is $0.00001 per share,
and the stated value of each issued share of Series D-5 Preferred Stock is deemed to be $4.00. Series D-5 Preferred Stock carries
an annual dividend of 6% which will be paid in arrears. 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. On
February 21, 2019, the Company issued 37,500 shares for 25% minority 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 3, Acquisitions for additional information.
The company recorded an associated derivative liability of $424,753 which remained the same as of September 30, 2019.
As
of September 30, 2019 the Company had 120,088 Series D-5 Preferred Shares with a face value of $480,352.
Series
D-6 Preferred Stock
The
Company designated Series D-6 Convertible Preferred Stock, which consists of one million (1,000,000) shares of stock. The par
value of each issued share of Series D-6 Preferred Stock is $0.00001 per share, and the stated value of each share is $5.00. On
February 21, 2019, the Company issued 54,000 shares for 75% minority interest in the Red Wire Group. See Note 3, Acquisitions
for additional information.
The
Company issued 55,600 Series D-6 shares related to the acquisitions of RWG (54,000 shares) and another individual (1,600 shares)
with a value of $278,000. The Company recorded an associated derivative liability of $248,618 which remained the same
as of September 30, 2019.
As
of September 30, 2019 the Company had 55,600 Series D-6 Preferred Shares with a face value of $278,000.
Common
Stock
The
Company is authorized to issue 80,000,000 shares of common stock at a par value of $0.00001.
Common
stock issued for the three months ended September 30, 2019 was as follows:
The
Company issued 2,124,667 shares for an exchange of the settlement of the convertible debt. The Company issued
3,000,000 common shares to Oasis Capital in exchange for Preferred shares.
Common
stock issued for the nine months ended September 30, 2019 was as follows:
The
Company issued 10,904,612 shares in exchange of the settlement of the convertible debt. The Company issued 8,025,742
common shares to Geneva Roth and Oasis Capital in exchange for Preferred shares.
As
of September 30, 2019, and December 31, 2018, 25,410,374 and 6,542,519 shares of common stock were issued and outstanding,
respectively.
As a subsequent event, 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.
Note
11 – Segment Data
The
Company does business on three continents (North America, Asia, and Europe) in three different jurisdictions (Hong Kong-special
economic zone of the People’s Republic of China, Japan, United States of America, and the European common market through
Switzerland). These segments are components of the Company about which separate financial information is available and regularly
evaluated by the Chief Executive Officer decision maker in deciding how to allocate resources and in assessing performance. The
accounting policies of the segments are the same as those described in Note 3, Summary of Significant Accounting Policies.
The
following table shows operating activities information by geographic segment for the nine and three months ended September 30,
2019 and 2018.
Nine
months ended September 30, 2019
September 30, 2019
|
|
North
America
|
|
|
Asia
|
|
|
Europe
|
|
|
Total
|
|
Revenue
|
|
$
|
597,678
|
|
|
$
|
27,091
|
|
|
$
|
289
|
|
|
$
|
625,058
|
|
September 30, 2019
|
|
North
America
|
|
|
Asia
|
|
|
Europe
|
|
|
Total
|
|
Fixed assets, net
|
|
$
|
68,109
|
|
|
$
|
88,347
|
|
|
$
|
-
|
|
|
$
|
156,456
|
|
Three
months ended September 30, 2019
September
30, 2019
|
|
North
America
|
|
|
Asia
|
|
|
Europe
|
|
|
Total
|
|
Revenue
|
|
$
|
156,788
|
|
|
$
|
9,010
|
|
|
$
|
-
|
|
|
$
|
165,798
|
|
Nine
months ended September 30, 2018
September 30,
2018
|
|
North
America
|
|
|
Asia
|
|
|
Europe
|
|
|
Total
|
|
Revenue
|
|
$
|
26,896
|
|
|
$
|
46,792
|
|
|
$
|
38
|
|
|
$
|
73,726
|
|
September 30, 2018
|
|
North
America
|
|
|
Asia
|
|
|
Europe
|
|
|
Total
|
|
Fixed assets, net
|
|
$
|
22,916
|
|
|
$
|
8,179
|
|
|
$
|
-
|
|
|
$
|
31,095
|
|
Three
months ended September 30, 2018
September 30,
2018
|
|
North
America
|
|
|
Asia
|
|
|
Europe
|
|
|
Total
|
|
Revenue
|
|
$
|
19,642
|
|
|
$
|
28,460
|
|
|
$
|
-
|
|
|
$
|
48,102
|
|
Note
12 – Subsequent Events
The
Company evaluated all events and transactions that occurred after September 30, 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:
The
Company obtained additional working capital from the following sources:
●
|
As
a subsequent event on October 1, 2019 the Company acquired a retailer with 11
airport terminal locations and one casino location under an equity exchange agreement.
Under the terms of the agreement the Company issued to the Sellers 500,000 Series
A Preferred Shares in exchange for 51% of the equity in Bluwire Group, LLC and its subsidiaries
(“Bluwire”). The Sellers retained 30% of Bluwire and 19% is was reserved
for 12 months for potential equity investors into Bluwire. Any of the equity not used
to raise capital for Bluwire over that period would be divided equally between the Company
and the Sellers. The Sellers will continue to manage Bluwire under consulting agreements.
|
|
|
●
|
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. While the board of directors and a majority of the voting interests of the Company had
approved an increase in the authorized common shares in an amount up to 20 billion common shares within 12 months of July
18, 2019 at this time management has elected to keep the authorized stock at 8 billion common shares.
|
|
|
●
|
The
Company has decided to decrease costs in 12 Japan as well. By cutting all fixed costs and having the one employee in 12 Japan
work directly for 12 Hong Kong, Ltd, as a contractor, the Company will now generate an operating profit from the licensing
and maintenance revenue generated from 12 Japan.
|
|
|
●
|
On
October 3, 2019 the Company received an additional $5,000 from Adar Alef as part of aback
end promissory note agreement. The cost to the Company was $5,350 which includes $350
OID.
|
●
|
On
October 8, 2019 the Company entered into a promissory note agreement with LG Capital Funding, LLC (“LG”) for loans
totaling $6,850. The consideration to the Company is $5,000 with $1,500 legal fees and a $350 OID. LG delivered those funds
on October 24, 2019.
|
|
|
●
|
On October 3, 2019
one of the Sellers of Bluwire provided $300,000 to its Bluwire subsidiary under a secured demand promissory note executed
jointly by Bluwire and the Company. This note caries interest of 15% per annum. This obligation is not convertible
into Company stock under any terms.
|
|
|
●
|
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.
|
|
|
●
|
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.
|