Quarterly Report (10-q)

Date : 11/12/2019 @ 4:03PM
Source : Edgar (US Regulatory)
Stock : Vivos Inc. (PC) (RDGL)
Quote : 0.0429  0.00035 (0.82%) @ 8:59PM

Quarterly Report (10-q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED: September 30, 2019

 

OR

 

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM __________ TO __________

 

COMMISSION FILE NUMBER 000-53497

 

VIVOS INC

(Exact name of registrant as specified in its charter)

 

Delaware   80-0138937

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

719 Jadwin Avenue,

Richland, WA 99352

(Address of principal executive offices, Zip Code)

 

(509) 736-4000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

  Large accelerated filer [  ] Accelerated filer [  ]  
       
  Non-accelerated filer [X] Smaller reporting company [X]  
       
    Emerging growth company [  ]  

 

If an emerging growth company, indicate by check mark if the company has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Title of Each Class   Trading Symbol   Name of Each Exchange on which registered
         

 

As of November 12, 2019, there were 184,345,821 shares of the registrant’s common stock outstanding, 2,552,642 shares of the registrant’s Series A Convertible Preferred Stock outstanding, 1,113,245 of the registrant’s Series B Convertible Preferred Stock outstanding and 821,292 of the registrant’s Series C Convertible Preferred Stock outstanding.

 

 

 

     
 

 

TABLE OF CONTENTS

 

    Page
  PART I – FINANCIAL INFORMATION  
     
Item 1. Condensed Financial Statements 1
     
  Condensed Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018 1
     
  Condensed Statements of Operations for the Nine and Three Months ended September 30, 2019 and 2018 (unaudited) 2
     
  Condensed Statement of Changes in Stockholders’ Deficit for the Nine Months Ended September 30, 2019 (unaudited) and Year Ended December 31, 2018 3
     
  Condensed Statements of Cash Flow for the Nine Months ended September 30, 2019 and 2018 (unaudited) 4
     
  Notes to Condensed Financial Statements (unaudited) 5
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
     
Item 4. Controls and Procedures 31
     
  PART II – OTHER INFORMATION  
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
     
Item 6. Exhibits 32
     
SIGNATURES 33

 

  -i-  
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

VIVOS INC

CONDENSED BALANCE SHEETS

SEPTEMBER 30, 2019 (UNAUDITED) AND DECEMBER 31, 2018

 

 

    SEPTEMBER 30, 2019     DECEMBER 31, 2018  
    (UNAUDITED)        
ASSETS                
Current Assets:                
Cash   $ 158,538     $ 5,494  
Prepaid expenses     38,520       10,992  
                 
Total Current Assets     197,058       16,486  
                 
TOTAL ASSETS   $ 197,058     $ 16,486  
                 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

               
                 
LIABILITIES                
Current Liabilities:                
Accounts payable and accrued expenses   $ 602,185     $ 795,129  
Related party accounts payable     38,710       38,610  
Accrued interest payable     75,985       59,646  
Payroll liabilities payable     80,000       11,451  
Convertible notes payable, related party, net     11,475       -  
Convertible notes payable, net     294,827       53,824  
Promissory notes payable, net of discount     100,000       -  
Related party promissory note     187,000       -  
                 
Total Current Liabilities     1,390,182       958,660  
                 
Total Liabilities     1,390,182       958,660  
                 
Commitments and contingencies     -       -  
                 
STOCKHOLDERS’ DEFICIT                
               

Preferred stock, par value, $0.001, 20,000,000 shares authorized, Series A Convertible Preferred, 5,000,000 shares authorized, 2,552,642 shares issued and outstanding, respectively

    2,553       2,553  
Additional paid in capital - Series A Convertible preferred stock     8,870,626       8,870,626  
Series B Convertible Preferred, 5,000,000 shares authorized, 1,543,245 and 3,305,755 shares issued and outstanding, respectively     1,544       3,306  
Additional paid in capital - Series B Convertible preferred stock     836,765       1,876,768  
Series C Convertible Preferred, 5,000,000 shares authorized, 821,292 and 0 shares issued and outstanding, respectively     821       -  
Additional paid in capital - Series C Convertible preferred stock     674,457       -  

Common stock, par value, $0.001, 950,000,000 and 2,000,000,000 shares authorized, 178,585,821 and 163,445,736 issued and outstanding, respectively

    178,586       163,446  
Additional paid in capital - common stock     61,338,595       60,132,139  
Accumulated deficit     (73,097,071 )     (71,991,012 )
                 
Total Stockholders’ Deficit     (1,193,124 )     (942,174 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT   $ 197,058     $ 16,486  

 

The accompanying notes are an integral part of these condensed financial statements.

 

  1  
 

 

VIVOS INC

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

 

    NINE MONTHS ENDED     THREE MONTHS ENDED  
    SEPTEMBER 30, 2019     SEPTEMBER 30, 2018     SEPTEMBER 30, 2019     SEPTEMBER 30, 2018  
                         
Revenues, net   $ 8,000     $ -     $ 8,000     $ -  
                                 
OPERATING EXPENSES                                
Sales and marketing expenses     -       13,700       -       750  
Professional fees     356,248       231,501       87,075       16,223  
Reserved stock units granted     -       104,410       -       19,515  
Stock based compensation     463,917       45,400       457,949       -  
Payroll expenses     90,000       243,570       30,000       82,500  
Research and development     62,194       77,035       18,492       2,455  
General and administrative expenses     41,067       49,884       21,691       15,463  
                                 
Total Operating Expenses     1,013,426       765,500       615,207       136,906  
                                 
OPERATING LOSS     (1,005,426 )     (765,500 )     (607,207 )     (136,906 )
                                 
NON-OPERATING INCOME (EXPENSE)                                
Interest expense     (134,739 )     (5,626,892 )     (96,271 )     (60,752 )
Net gain on debt extinguishment     -       526,222       -       394,618  
Net loss on derivative liability     -       (27,976,982 )     -       (27,109,374 )
Forgiveness of debt     34,106       -       34,106       -  
Grant income     -       17,583       -       -  
                                 
Total Non-Operating Income (Expenses)     (100,633 )     (33,060,069 )     (62,165 )     (26,775,508 )
                                 
NET LOSS BEFORE PROVISION FOR INCOME TAXES     (1,106,059 )     (33,825,569 )     (669,372 )     (26,912,414 )
                                 
Provision for income taxes     -       -       -       -  
                                 
NET LOSS   $ (1,106,059 )   $ (33,825,569 )   $ (669,372 )   $ (26,912,414 )
                                 
Net loss per share - basic and diluted   $ (0.01 )   $ (1.49 )   $ (0.00 )   $ (0.56 )
                                 
Weighted average common shares outstanding - basic     172,437,108       22,748,136       177,835,282       48,295,132  

 

The accompanying notes are an integral part of these condensed financial statements.

 

  2  
 

 

VIVOS INC

CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2018

 

                Additional                 Additional                 Additional                                
                Paid-In                 Paid-In                 Paid-In           Additional              
    Series A Preferred    

Capital –

Series A

    Series B Preferred    

Capital –

Series B

    Series C Preferred    

Capital –

Series C

    Common Stock    

Paid-In

Capital -

    Accumulated        
    Shares     Amount     Preferred     Shares     Amount     Preferred     Shares     Amount     Preferred     Shares     Amount     Common     Deficit     Total  
                                                                                     
Balance - December 31, 2017     3,778,622     $ 3,779     $ 13,547,780       -     $ -     $ -       -     $ -     $ -       8,211,902     $ 8,212     $ 46,465,926     $ (64,288,167 )   $ (4,262,470 )
                                                                                                                 
Stock issued for:                                                                                                                
Services     -       -       -       -       -       -       -       -       -       1,250       1       448       -       449  
Conversion of preferred stock into common stock     (574,200 )     (575 )     (3,236,164 )     -       -       -       -       -       -       717,750       718       3,236,021       -       -  
Restricted units vested     -       -       -       -       -       -       -       -       -       77,500       78       (78 )     -       -  
Reserved shares for services     -       -       -       -       -       -       -       -       -       -       -       52,094       -       52,094  
Options and warrants issued for services     -       -       -       -       -       -       -       -       -       -       -       23,766       -       23,766  
Net loss for the period     -       -       -       -       -       -       -       -       -       -       -       -       (901,185 )     (901,185 )
                                                                                                                 
Balance - March 31, 2018     3,204,422       3,204       10,311,616       -       -       -       -       -       -       9,008,402       9,009       49,778,177       (65,189,352 )     (5,087,346 )
                                                                                                                 
Stock issued for:                                                                                                                
Settlement of debt     -       -       -       -       -       -       -       -       -       5,143,258       5,143       371,038       -       376,181  
Conversion of preferred stock into common stock     (392,467 )     (393 )     (735,811 )     -       -       -       -       -       -       490,584       490       735,714       -       -  
Restricted units vested     -       -       -       -       -       -       -       -       -       77,500       78       (78 )     -       -  
Reserved shares for services     -       -       -       -       -       -       -       -       -       -       -       32,801       -       32,801  
Options and warrants issued for services     -       -       -       -       -       -       -       -       -       -       -       21,645       -       21,645  
Net loss for the period     -       -       -       -       -       -       -       -       -       -       -       -       (6,011,970 )     (6,011,970 )
                                                                                                                 
Balance - June 30, 2018     2,811,955       2,811       9,575,805       -       -       -       -       -       -       14,719,744       14,720       50,939,297       (71,201,322 )     (10,668,689 )
                                                                                                                 
Stock issued for:                                                                                                                
Settlement of debt     -       -       -       -       -       -       -       -       -       74,558,393       74,558       2,789,922       -       2,864,480  
Conversion of preferred stock into common stock     (41,016 )     (41 )     (77,671 )     -       -       -       -       -       -       51,270       51       77,661       -       -  
Restricted units vested     -       -       -       -       -       -       -       -       -       77,500       78       (78 )     -       -  
Reserved shares for services     -       -       -       -       -       -       -       -       -       -       -       19,514       -       19,514  
Net loss for the period     -       -       -       -       -       -       -       -       -       -       -       -       (26,912,414 )     (26,912,414 )
                                                                                                                 
Balance - September 30, 2018     2,770,939       2,770       9,498,134       -       -       -       -       -       -       89,406,907       89,407       53,826,316       (98,113,736 )     (34,697,109 )
                                                                                                                 
Stock issued for:                                                                                                                
Cash     -       -       -       110,000       110       54,890       -       -       -       17,078,500       17,078       666,062       -       738,140  
Settlement of debt     -       -       -       2,995,755       2,996       1,542,078       -       -       -       48,827,137       48,827       2,346,420       -       3,940,321  
Accounts payable and accrued expenses     -       -       -       200,000       200       279,800       -       -       -       7,782,820       7,783       1,377,513       -       1,665,296  
Conversion of preferred stock into common stock     (218,297 )     (217 )     (627,508 )     -       -       -       -       -       -       272,872       273       627,452       -       -  
Restricted units vested     -       -       -       -       -       -       -       -       -       77,500       78       (78 )     -       -  
Reserved shares for services     -       -       -       -       -       -       -       -       -       -       -       8,779       -       8,779  
Options and warrants issued for services     -       -       -       -       -       -       -       -       -       -       -       1,279,675       -       1,279,675  
Net income for the period     -       -       -       -       -       -       -       -       -       -       -       -       26,122,724       26,122,724  
                                                                                                                 
Balance - December 31, 2018     2,552,642       2,553       8,870,626       3,305,755       3,306       1,876,768       -       -       -       163,445,736       163,446       60,132,139       (71,991,012 )     (942,174 )
                                                                                                                 
Stock issued for:                                                                                                                
Cash     -       -       -       100,000       100       49,900       -       -       -       1,250,000       1,250       48,750       -       100,000  
Conversion of preferred stock into common stock     -       -       -       (524,218 )     (524 )     (209,163 )     -       -       -       6,552,725       6,553       203,134       -       -  
Conversion of Series B Preferred into Series C Preferred     -       -       -       (821,292 )     (821 )     (674,457 )     821,292       821       674,457       -       -       -       -       -  
Warrants issued with notes payable (discount)     -       -       -       -       -       -       -       -       -       -       -       28,721       -       28,721  
Options and warrants issued for services     -       -       -       -       -       -       -       -       -       -       -       3,792       -       3,792  
Net loss for the period     -       -       -       -       -       -       -       -       -       -       -       -       (236,382 )     (236,382 )
                                                                                                                 
Balance - March 31, 2019     2,552,642       2,553       8,870,626       2,060,245       2,061       1,043,048       821,292       821       674,457       171,248,461       171,249       60,416,536       (72,227,394 )     (1,046,043 )
                                                                                                                 
Conversion of preferred stock into common stock     -       -       -       (517,000 )     (517 )     (206,283 )     -       -       -       6,462,500       6,462       200,338       -       -  
Adjustment for fractional shares in reverse split     -       -       -       -       -       -       -       -       -       (140 )     -       -       -       -  
Warrants issued with notes payable (discount)     -       -       -       -       -       -       -       -       -       -       -       12,592       -       12,592  
Options and warrants issued for services     -       -       -       -       -       -       -       -       -       -       -       2,176       -       2,176  
Net loss for the period     -       -       -       -       -       -       -       -       -       -       -       -       (200,305 )     (200,305 )
                                                                                                                 
Balance - June 30, 2019     2,552,642       2,553       8,870,626       1,543,245       1,544       836,765       821,292       821       674,457       177,710,821       177,711       60,631,642       (72,427,699 )     (1,231,580 )
                                                                                                                 
Stock issued for:                                                                                                                
Accounts payable     -       -       -       -       -       -       -       -       -       562,500       563       21,937       -       22,500  
Services     -       -       -       -       -       -       -       -       -       312,500       312       12,188       -       12,500  
Warrants issued with notes payable (discount)     -       -       -       -       -       -       -       -       -       -       -       95,437       -       95,437  
Warrants issued for extension of notes payable     -       -       -       -       -       -       -       -       -       -       -       25,656       -       25,656  
Options issued for settlement of accounts payable     -       -       -       -       -       -       -       -       -       -       -       33,829       -       33,829  
Options and warrants issued for services     -       -       -       -       -       -       -       -       -       -       -       457,949       -       457,949  
BCF recognized on convertible notes     -       -       -       -       -       -       -       -       -       -       -       59,957       -       59,957  
Net loss for the period     -       -       -       -       -       -       -       -       -       -       -       -       (669,372 )     (669,372 )
                                                                                                                 
Balance - September 30, 2019     2,552,642     $ 2,553     $ 8,870,626       1,543,245     $ 1,544     $ 836,765       821,292     $ 821     $ 674,457       178,585,821     $ 178,586     $ 61,338,595     $ (73,097,071 )   $ (1,193,124 )

 

The accompanying notes are an integral part of these condensed financial statements.

 

  3  
 

 

VIVOS INC

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

 

    2019     2018  
CASH FLOW FROM OPERTING ACTIVIITES                
Net loss   $ (1,106,059 )   $ (33,825,569 )

Adjustments to reconcile net loss to net cash used in operating activities

               
Amortization of convertible debt discount     66,969       791,937  
Amortization of BCF discount     16,327       -  
Common stock issued for services     12,500       449  
Stock options and warrants for services     489,573       45,400  
Reserved stock units issued for services     -       104,410  
Derivatives recorded as loan fees     -       4,636,517  
(Gain) on debt extinguishment     -       (526,222 )
Forgiveness of debt     (34,106 )     -  
Loss of derivative liability     -       27,976,982  
Changes in assets and liabilities                
Prepaid expenses and other assets     (27,528 )     (4,351 )
Accounts payable and accrued expenses     (101,620 )     239,596  
Accounts payable and accrued expenses from related party     15,100       (9,955 )
Payroll liabilities     68,549       204,550  
Accrued interest     16,339       198,448  
Total adjustments     522,103       33,657,761  
                 
Net cash used in operating activities     (583,956 )     (167,808 )
                 
CASH FLOWS FROM FINANCING ACTIVITES                
Proceeds from promissory notes     450,000       -  
Proceeds from related party notes payable     187,000       -  
Proceeds from sale of preferred stock     50,000       -  
Proceeds from sale of common stock     50,000       -  
Proceeds from convertible debt     -       50,000  
Proceeds from promissory notes - related party, net of repayments     -       109,491  
Net cash provided by financing activities     737,000       159,491  
                 
NET INCREASE (DECREASE) IN CASH     153,044       (8,317 )
                 
CASH - BEGINNING OF PERIOD     5,494       8,317  
                 
CASH - END OF PERIOD   $ 158,538     $ -  
                 
CASH PAID DURING THE PERIOD FOR:                
Interest expense   $ 4,000     $ -  
                 
Income taxes   $ -     $ -  
                 
SUPPLEMENTAL INFORMATION - NON-CASH INVESTING AND FINANCING ACTIVITIES:                
                 
Conversion of preferred stock into common stock   $ 416,487     $ 4,050,654  
Conversion of convertible preferred B into convertible preferred C   $ 675,278     $ -  
Recognition of debt discount at inception of notes payable   $ 136,750     $ -  
Recognition of BCF discount at inception of notes payable   $ 59,957     $ -  
Common stock issued in settlement of accounts payable   $ 22,500     $ -  
Stock options issued in settlement of accounts payable   $ 33,829     $ -  
Vesting of restricted stock units   $ -     $ 1,860  
Reclassification of shareholder advances to convertible notes payable   $ 15,000     $ 32,279  
Conversion of notes payable and accrued interest into common stock   $ -     $ 3,240,661  

 

The accompanying notes are an integral part of these condensed financial statements.

 

  4  
 

 

Vivos Inc.

Notes to Condensed Financial Statements

(Unaudited)

 

NOTE 1: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying condensed financial statements of Vivos Inc. (the “Company”) have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures required by accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. These condensed financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the results of operations of the Company for the period presented. The results of operations for the nine months ended September 30, 2019, are not necessarily indicative of the results that may be expected for any future period or the fiscal year ending December 31, 2019 and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on March 25, 2019.

 

Effective June 28, 2019, FINRA approved the Company’s reverse 1 for 8 stock-split. The reverse stock split will enable the Company to issue additional shares now that there is availability to do so. All share and per-share figures herein have been restated to take effect for this reverse stock-split.

 

In April of 2017, the Company filed a Certificate of Merger with the Delaware Division of Corporations in order to merge the Company’s wholly-owned subsidiary, IsoPet Solutions Corporation, with and into the Company. The Company therefore no longer prepares Consolidated Financial Statements.

 

The Company is a radiation oncology medical device company engaged in the development of its yttrium-90 based brachytherapy device RadioGel™ for the treatment of non-resectable tumors. A prominent team of radiochemists, scientists and engineers, collaborating with strategic partners, including national laboratories, universities and private corporations, lead the Company’s development efforts. The Company’s overall vision is to globally empower physicians, medical researchers and patients by providing them with new isotope technologies that offer safe and effective treatments for cancer.

 

The Company’s current focus is on the development of its RadioGel™ device. RadioGel™ is an injectable particle-gel, for brachytherapy radiation treatment of cancerous tumors in people and animals. RadioGel™ is comprised of a hydrogel, or a substance that is liquid at room temperature and then gels when reaching body temperature after injection into a tumor. In the gel are small, one micron, yttrium-90 phosphate particles (“Y-90”). Once injected, these inert particles are locked in place inside the tumor by the gel, delivering a very high local radiation dose. The radiation is beta, consisting of high-speed electrons. These electrons only travel a short distance so the device can deliver high radiation to the tumor with minimal dose to the surrounding tissue. Optimally, patients can go home immediately following treatment without the risk of radiation exposure to family members. Since Y-90 has a half-life of 2.7 days, the radioactively drops to 5% of its original value after ten days.

 

The Company’s lead brachytherapy products, including RadioGel™, incorporate patented technology developed for Battelle Memorial Institute (“Battelle”) at Pacific Northwest National Laboratory, a leading research institute for government and commercial customers. Battelle has granted the Company an exclusive license to patents covering the manufacturing, processing and applications of RadioGel™ (the “Battelle License”). Other intellectual property protection includes proprietary production processes and trademark protection in 17 countries. The Company plans to continue efforts to develop new refinements on the production process, and the product and application hardware, as a basis for future patents.

 

The Company is currently focusing on obtaining approval from the Food and Drug Administration (“FDA”) to market and sell RadioGel™ as a Class II medical device. The Company first requested FDA approval of RadioGel™ in June 2013, at which time the FDA classified RadioGel™ as a medical device. The Company then followed with a 510(k) submission which the FDA responded, in turn, with a request for a physician letter of substantial equivalence and a reformatted 510(k) summary, which the Company provided in January 2014.

 

In February 2014, the FDA ruled the device as not substantially equivalent due to a lack of a predicate device and it was therefore classified as a Class III device. Class III devices are generally the highest risk devices and are therefore subject to the highest level of regulatory review, control and oversight. Class III devices must typically be approved by the FDA before they are marketed. Class II devices represent lower risk devices than Class III and require fewer regulatory controls to provide reasonable assurance of the device’s safety and effectiveness. In contrast, Class I devices are deemed to be lower risk than Class II or III and are therefore subject to the least regulatory controls.

 

The Company is currently developing test plans to address issues raised by the FDA in connection with the Company’s previous submissions regarding RadioGel™, including developing specific test plans and specific indication of use. The Company intends to request that the FDA grant approval to re-apply for de novo classification of RadioGel™, which would reclassify the device from a Class III device to a Class II device, further simplifying the path to FDA approval. In the event the FDA denies the Company’s application and subsequently determines during the de novo review that RadioGel™ cannot be classified as a Class I or Class I1 device, the Company will then need to submit a pre-market approval application to obtain the necessary regulatory approval as a Class III device. See also Business – Regulatory History in Part I of the Annual Report on Form 10-K (“Annual Report”) for a discussion regarding the Company’s application for FDA approval of RadioGel™.

 

  5  
 

 

IsoPet Solutions

 

The Company’s IsoPet Solutions division was established in May 2016 to focus on the veterinary oncology market, namely engagement of university veterinarian hospital to develop the detailed therapy procedures to treat animal tumors and ultimately use of the technology in private clinics. The Company has worked with three different university veterinarian hospitals on IsoPet® testing and therapy. Washington State University treated five cats for feline sarcoma and served to develop the procedures which are incorporated in our label. They concluded that the product was safe and effective in killing cancer cells. Colorado State University demonstrated the CT and PET-CT imaging of IsoPet®. A contract was signed with University of Missouri to treat canine sarcomas and equine sarcoids starting in November 2017. To date, five dogs, representing six therapies (one repeat therapy), have been treated with IsoPet® at the University of Missouri. In addition, five cats have been treated at Washington State University and one cat at Vista which resulted in revenue of $8,000 (see below) at Vista.

 

The dogs were treated for canine soft tissue sarcoma. Response evaluation criteria in solid tumors (“RECIST”) is a set of published rules that define when tumors in cancer patients improve (respond), stay the same (stabilize), or worsen (progress) during treatment. The criteria were published by an international collaboration including the European Organisation for Research and Treatment of Cancer (EORTC), National Cancer Institute of the United States, and the National Cancer Institute of Canada Clinical Trials Group. The principal investigator from the University of Missouri rated the tumor as CR, Complete Response, after three months. This RECIST rating means that the tumor was completely eliminated by the IsoPet® therapy.

 

The Company anticipates that future profits, if any, will be derived from direct sales of RadioGel™ (under the name IsoPet®) and related services, and from licensing to private medical and veterinary clinics in the U.S. and internationally. The Company intends to report the results from the IsoPet® Solutions division as a separate operating segment in accordance with GAAP.

 

  6  
 

 

On July 10, 2019, the Company recognized its first commercial sale of IsoPet®. A doctor brought his cat with a re-occurrent spindle cell sarcoma tumor on his face. The cat had previously received external beam therapy, but now the tumor was growing rapidly. He was given a high dose of 400Gy with heavy therapy at the margins. This sale of $8,000 met the revenue recognition requirements under ASC 606 as the performance obligation was satisfied.

 

Use of Estimates

 

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates the Company considers include criteria for stock-based compensation expense, and valuation allowances on deferred tax assets. Actual results could differ from those estimates.

 

Financial Statement Reclassification

 

Certain account balances from prior periods have been reclassified in these financial statements so as to conform to current period classifications.

 

Cash Equivalents

 

For the purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

 

Inventory

 

Inventory is reported at the lower of cost or market, determined using the first-in, first-out basis, or net realizable value. All inventories consisted of finished goods. The Company has no inventory for the nine-months ended September 30, 2019 and for the year ended December 31, 2018.

 

Fair Value of Financial Instruments

 

Fair value of financial instruments requires disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of September 30, 2019 and December 31, 2018, the balances reported for cash, prepaid expenses, accounts receivable, accounts payable, and accrued expenses, approximate the fair value because of their short maturities.

 

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. Accounting Standards Codification (“ASC”) Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:

 

Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;

 

Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and

 

Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

The Company measures certain financial instruments including options and warrants issued during the period at fair value on a recurring basis.

 

  7  
 

 

Derivative Liabilities and Beneficial Conversion Feature

 

The Company evaluates its convertible debt, options, warrants or other contracts, if any, to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC Topic 815, Accounting for Derivative Instruments and Hedging Activities (“ASC 815”) as well as related interpretations of this standard and Accounting Standards Update 2017-11, which was adopted by the Company effective January 1, 2018. In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings.

 

The result of this accounting treatment is that the fair value of the derivative instrument is marked-to-market each balance sheet date and with the change in fair value recognized in the statement of operations as other income or expense.

 

Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation than that the related fair value is removed from the books. Gains or losses on debt extinguishment are recognized in the statement of operations upon conversion, exercise or cancellation of a derivative instrument after any shares issued in such a transaction are recorded at market value.

 

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Instruments that become a derivative after inception are recognized as a derivative on the date they become a derivative with the offsetting entry recorded in earnings.

 

The Company determines the fair value of derivative instruments and hybrid instruments, considering all of the rights and obligations of each instrument, based on available market data using a binomial model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk-free rates) necessary to fair value these instruments. For instruments in default with no remaining time to maturity the Company uses a one-year term for their years to maturity estimate unless a sooner conversion date can be estimated or is known. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading market price of our common stock.

 

The Company accounts for the beneficial conversion feature on its convertible instruments in accordance with ASC 470-20. The Beneficial Conversion Feature (“BCF”) is normally characterized as the convertible portion or feature that provides a rate of conversion that is below market value or in the money when issued. The Company records a BCF when these criteria exist, when issued. BCFs that are contingent upon the occurrence of a future event are recorded when the contingency is resolved.

 

To determine the effective conversion price, the Company first allocates the proceeds received to the convertible instrument, and then use those allocated proceeds to determine the effective conversion price. The intrinsic value of the conversion option should be measured using the effective conversion price for the convertible instrument on the proceeds allocated to that instrument.

 

The accounting for a BCF requires that the BCF be recognized by allocating the intrinsic value of the conversion option to additional paid in capital, resulting in a discount to the convertible instrument. This discount should be accreted from the date on which the BCF is first recognized through the earliest conversion date for instruments that do not have a stated redemption date.

 

Fixed Assets

 

Fixed assets are carried at the lower of cost or net realizable value. Production equipment with a cost of $2,500 or greater and other fixed assets with a cost of $1,500 or greater are capitalized. Major betterments that extend the useful lives of assets are also capitalized. Normal maintenance and repairs are charged to expense as incurred. When assets are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in operations.

 

Depreciation is computed using the straight-line method over the following estimated useful lives:

 

Production equipment: 3 to 7 years
Office equipment: 2 to 5 years
Furniture and fixtures: 2 to 5 years

 

Leasehold improvements and capital lease assets are amortized over the shorter of the life of the lease or the estimated life of the asset.

 

Management of the Company reviews the net carrying value of all of its equipment on an asset by asset basis whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. These reviews consider the net realizable value of each asset, as measured in accordance with the preceding paragraph, to determine whether impairment in value has occurred, and the need for any asset impairment write-down.

 

  8  
 

 

License Fees

 

License fees are stated at cost, less accumulated amortization. Amortization of license fees is computed using the straight-line method over the estimated economic useful life of the assets.

 

Effective March 2012, the Company entered into an exclusive license agreement with Battelle Memorial Institute regarding the use of its patented RadioGel™ technology. This license agreement originally called for a $17,500 nonrefundable license fee and a royalty based on a percent of gross sales for licensed products sold; the license agreement also contains a minimum royalty amount to be paid each year starting with 2013. The license agreement was most recently amended on December 20, 2018, and pursuant to the amendment the maintenance fee schedule was updated for minimum royalties, as well as the increase in royalties from one percent (1%) to two percent (2%), then on October 8, 2019 to reduce the fee back to one percent (1%).

 

Future minimum royalties for the years ended December 31 are noted below:

 

Calendar Year  

Minimum

Royalties per
Calendar Year

 
2019   $ 10,000  
2020     10,000  
2021     10,000  
2022     4,000  
Total   $ 34,000  

 

The Company periodically reviews the carrying values of capitalized license fees and any impairments are recognized when the expected future operating cash flows to be derived from such assets are less than their carrying value.

 

The Company entered into a Letter Amendment #2 with Battelle Memorial Institute on December 20, 2018. as a result of this Amendment, the Company has agreed to revised terms regarding the license fee as indicated in the chart above. $10,000 of this fee due within 1 year relates to the 2018 license fee which was paid in January 2019. The Company also agreed to change the royalty fee on net sales back to 1% on October 8, 2019.

 

Patents and Intellectual Property

 

While patents are being developed or pending, they are not being amortized. Management has determined that the economic life of the patents to be ten years and amortization, over such 10-year period and on a straight-line basis will begin once the patents have been issued and the Company begins utilization of the patents through production and sales, resulting in revenues.

 

The Company evaluates the recoverability of intangible assets, including patents and intellectual property on a continual basis. Several factors are used to evaluate intangibles, including, but not limited to, management’s plans for future operations, recent operating results and projected and expected undiscounted future cash flows.

 

There have been no such capitalized costs in the nine-months ended September 30, 2019 and 2018, respectively. However, a patent was filed on July 1, 2019 (No. 1811.191) filed by Michael Korenko and David Swanberg and assigned to the Company based on the Company’s proprietary particle manufacturing process. The timing of this filing was important given the Company’s plans to make IsoPet® commercially available, which it did on or about July 9, 2019. This additional patent protection will strengthen the Company’s competitive position. It is the Company’s intention to further extend this patent protection to several key countries within one year, as permitted under international patent laws and treaties.

 

  9  
 

 

Revenue Recognition

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). This standard provides a single set of guidelines for revenue recognition to be used across all industries and requires additional disclosures. The updated guidance introduces a five-step model to achieve its core principal of the entity recognizing revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted the updated guidance effective January 1, 2018 using the full retrospective method.

 

Under ASC 606, in order to recognize revenue, the Company is required to identify an approved contract with commitments to preform respective obligations, identify rights of each party in the transaction regarding goods to be transferred, identify the payment terms for the goods transferred, verify that the contract has commercial substance and verify that collection of substantially all consideration is probable. The adoption of ASC 606 did not have an impact on the Company’s operations or cash flows.

 

Income from Grants and Deferred Income

 

Government grants are recognized when all conditions of such grants are fulfilled or there is reasonable assurance that they will be fulfilled. The Company has chosen to recognize income from grants as it incurs costs associated with those grants, and until such time as it recognizes the grant as income those funds received will be classified as deferred income on the balance sheet.

 

On December 22, 2017, the Company received notification that Washington State University awarded it $17,500 of grant funds from the sub-award project entitled “Optimized Injectable Radiogels for High-dose Therapy of Non-Resectable Solid Tumors”. The Company received the $17,500 of the grant award in the nine-months ended September 30, 2018.

 

Loss Per Share

 

The Company accounts for its loss per common share by replacing primary and fully diluted earnings per share with basic and diluted earnings per share. Basic loss per share is computed by dividing loss available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) for the period, and does not include the impact of any potentially dilutive common stock equivalents since the impact would be anti-dilutive. The computation of diluted earnings per share is similar to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares had been issued. For the given periods of loss, of the periods ended in the nine and three months ended September 30, 2019 and 2018, the basic earnings per share equals the diluted earnings per share.

 

The following represent common stock equivalents that could be dilutive in the future as of September 30, 2019 and December 31, 2018, which include the following:

 

    September 30, 2019     December 31, 2018  
Convertible debt     9,465,196       17,594  
Preferred stock     32,747,515       44,512,740  
Common stock options     34,154,271       11,318,021  
Common stock warrants     30,161,847       23,052,472  
Total potential dilutive securities     106,528,829       78,900,827  

 

Research and Development Costs

 

Research and developments costs, including salaries, research materials, administrative expenses and contractor fees, are charged to operations as incurred. The cost of equipment used in research and development activities which has alternative uses is capitalized as part of fixed assets and not treated as an expense in the period acquired. Depreciation of capitalized equipment used to perform research and development is classified as research and development expense in the year computed.

 

  10  
 

 

The Company incurred $62,194 and $77,035 research and development costs for the nine-months ended September 30, 2019, and 2018, respectively, all of which were recorded in the Company’s operating expenses noted on the statements of operations for the three and nine months then ended.

 

Advertising and Marketing Costs

 

Advertising and marketing costs are expensed as incurred except for the cost of tradeshows which are deferred until the tradeshow occurs. There were no tradeshow expenses incurred and not expensed for the nine-months ended September 30, 2019 and 2018, respectively. During the nine-months ended September 30, 2019 and 2018, the Company incurred $0 and $13,700, respectively, in advertising and marketing costs.

 

Shipping and Handling Costs

 

Shipping and handling costs are expensed as incurred and included in cost of materials.

 

Contingencies

 

In the ordinary course of business, the Company is involved in legal proceedings involving contractual and employment relationships, product liability claims, patent rights, and a variety of other matters. The Company records contingent liabilities resulting from asserted and unasserted claims against it, when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. The Company discloses contingent liabilities when there is a reasonable possibility that the ultimate loss will exceed the recorded liability. Estimated probable losses require analysis of multiple factors, in some cases including judgments about the potential actions of third-party claimants and courts. Therefore, actual losses in any future period are inherently uncertain. See Note 9 – Legal Matters for description of lawsuit filed against the Company on January 28, 2019. In addition, the Company has entered into various agreements that require them to pay certain fees to consultants and/or employees that have been fully accrued for as of September 30, 2019 and 2018.

 

Income Taxes

 

To address accounting for uncertainty in tax positions, the Company clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. The Company also provides guidance on de-recognition, measurement, classification, interest, and penalties, accounting in interim periods, disclosure and transition.

 

The Company files income tax returns in the U.S. federal jurisdiction. The Company did not have any tax expense for the nine-months ended September 30, 2019 and 2018. The Company did not have any deferred tax liability or asset on its balance sheet on September 30, 2019 and December 31, 2018.

 

Interest costs and penalties related to income taxes, if any, will be classified as interest expense and general and administrative costs, respectively, in the Company’s financial statements. For the nine-months ended September 30, 2019 and 2018, the Company did not recognize any interest or penalty expense related to income taxes. The Company believes that it is not reasonably possible for the amounts of unrecognized tax benefits to significantly increase or decrease within the next twelve months.

 

The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings.

 

These amounts are provisional and subject to change. The most significant impact of the legislation for the Company was a $3,300,000 reduction of the value of net deferred tax assets (which represent future tax benefits) as a result of lowering the U.S. corporate income tax rate from 35% to 21%. The Act also includes a requirement to pay a one-time transition tax on the cumulative value of earnings and profits that were previously not repatriated for U.S. income tax purposes. The Company has no earnings and profits that were previously not repatriated for U.S. income tax purposes.

 

  11  
 

 

Stock-Based Compensation

 

The Company recognizes compensation costs to employees under FASB ASC Topic 718, Compensation – Stock Compensation. Under FASB ASC Topic. 718, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. As such, compensation cost is measured on the date of grant at their fair value. Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant.

 

In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation.” The update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC Topic 718. An entity shall account for the effects of a modification described in ASC paragraphs 718-20-35-3 through 35-9, unless all the following are met: (1) The fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The provisions of this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company’s adoption of this guidance on January 1, 2018 did not have a material impact on the Company’s results of operations, financial position and related disclosures.

 

In June 2018, the FASB issued ASU No. 2018-07 “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” These amendments expand the scope of Topic 718, Compensation - Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU supersedes Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees. The guidance is effective for public companies for fiscal years, and interim fiscal periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The adoption of this standard did not have a material impact on its financial statements.

 

Recent Accounting Pronouncements

 

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which eliminates Step 2 from the goodwill impairment test. When an indication of impairment was identified after performing the first step of the goodwill impairment test, Step 2 required that an entity determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) using the same procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under the amendments in ASU No. 2017-04, an entity would perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying value. An entity would recognize an impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value.

 

In addition, an entity must consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. A public business entity that is a SEC filer should adopt the amendments in ASU No. 2017-04 for its annual, or any interim, good will impairment tests in fiscal years beginning after December 15, 2019. The Company does not believe the guidance will have a material impact on its financial statements.

 

In August 2018, the FASB issued ASU 2018-13, “Changes to Disclosure Requirements for Fair Value Measurements,” which will improve the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain disclosure requirements, and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company does not believe the guidance will have a material impact on its financial statements.

 

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.

 

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NOTE 2: GOING CONCERN

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements, the Company has suffered recurring losses and used significant cash in support of its operating activities and the Company’s cash position is not sufficient to support the Company’s operations. Research and development of the Company’s brachytherapy product line has been funded with proceeds from the sale of equity and debt securities as well as a series of grants.

 

The Company requires funding of approximately $2.3 million annually to maintain current operating activities. Over the next 12 to 24 months, the Company believes it will cost approximately $5.0 million to $10.0 million to: (1) fund the FDA approval process and initial deployment of the brachytherapy products, and (2) initiate regulatory approval processes outside of the United States. The continued deployment of the brachytherapy products and a worldwide regulatory approval effort will require additional resources and personnel. The principal variables in the timing and amount of spending for the brachytherapy products in the next 12 to 24 months will be the FDA’s classification of the Company’s brachytherapy products as Class II or Class III devices (or otherwise) and any requirements for additional studies which may possibly include clinical studies. Thereafter, the principal variables in the amount of the Company’s spending and its financing requirements would be the timing of any approvals and the nature of the Company’s arrangements with third parties for manufacturing, sales, distribution and licensing of those products and the products’ success in the U.S. and elsewhere. The Company intends to fund its activities through strategic transactions such as licensing and partnership agreements or additional capital raises.

 

Following receipt of required regulatory approvals and financing, in the U.S., the Company intends to outsource material aspects of manufacturing, distribution, sales and marketing. Outside of the U.S., the Company intends to pursue licensing arrangements and/or partnerships to facilitate its global commercialization strategy.

 

In the longer-term, subject to the Company receiving adequate funding, regulatory approval for RadioGel™ and other brachytherapy products, and thereafter being able to successfully commercialize its brachytherapy products, the Company intends to consider resuming research efforts with respect to other products and technologies intended to help improve the diagnosis and treatment of cancer and other illnesses.

 

Based on the Company’s financial history since inception, the Company’s independent registered public accounting firm has expressed substantial doubt as to the Company’s ability to continue as a going concern. The Company has limited revenue, nominal cash, and has accumulated deficits since inception. If the Company cannot obtain sufficient additional capital, the Company will be required to delay the implementation of its business strategy and may not be able to continue operations.

 

The Company has completed its reverse stock split which was approved by FINRA and went effective on June 28, 2019 which will enable them to begin the process of raising capital through their Regulation A+ which was filed with the Securities and Exchange Commission (“SEC”) now that the Company has available authorized shares to issue and is currently pending approval.

 

The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis and ultimately to attain profitability. The Company plans to seek additional funding to maintain its operations through debt and equity financing and to improve operating performance through a focus on strategic products and increased efficiencies in business processes and improvements to the cost structure. There is no assurance that the Company will be successful in its efforts to raise additional working capital or achieve profitable operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

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NOTE 3: FIXED ASSETS

 

Fixed assets consist of the following at September 30, 2019 (unaudited) and December 31, 2018:

 

    September 30, 2019     December 31, 2018  
Production equipment   $ -     $ 15,182  
Less accumulated depreciation     (- )     (15,182 )
    $ -     $ -  

 

There is no depreciation expense for the above fixed assets for the nine months ended September 30, 2019 and 2018, respectively. In June 2019, the Company sold the one piece of equipment still held for $0. The basis of this piece of equipment was also $0, resulting in no gain or loss on the sale.

 

NOTE 4: RELATED PARTY TRANSACTIONS

 

Related Party Convertible Notes Payable

 

As of September 30, 2019 (unaudited) and December 31, 2018, the Company had the following related party convertible notes outstanding:

 

    September 30, 2019     December 31, 2018  
    Principal     Accrued
Interest
    Principal     Accrued
Interest
 
September 2019 $15,000 Note, 8% interest, due January 2020   $ 15,000     $ 36     $ -     $ -  
Other related party notes     -       1,054       -       1,054  
March 2017 $332,195 Note, 10% interest, due May 2017     -       -       -       -  
Total Convertible Notes Payable, Net   $ 15,000     $ 1,090     $ -     $ 1,054  
Less: Debt Discount     (3,525 )     -       -       -  
    $ 11,475     $ 1,090     $ -     $ 1,054  

 

In March 2017, the Company combined Outstanding Notes owed to a director and major stockholder, along with $51,576 of accrued interest payable, into one promissory note (the “Related Party Note”). The Related Party Note accrues interest at a rate of 10% and was due and payable on December 31, 2017. The note holder agreed to an extension of the due date until May 9, 2018. On August 9, 2018 the Company entered into a Path Forward and Restructuring Agreement whereby this Convertible Note would convert at a conversion price of $0.032 per share concurrently with a funding of at least $500,000 (the “Qualified Financing”). The Qualified Financing occurred on October 10, 2018 at which time this note was fully converted into 6,250,000 shares of Company common stock, 385,302 Series B Convertible Preferred shares of the Company, and 5,533,138 warrants that are exercisable into common shares with an exercise price of $0.08. The Company valued this transaction at a price of $0.104 per share as the conversion occurred October 19, 2018 upon board approval.

 

The Company has outstanding accrued interest in the amount of $1,054 from old related party notes that the principal had been paid off in full.

 

The Company from time to time receives non-interest bearing advancers from its Chief Executive Officer that are due on demand. During the nine months ended September 30, 2019, the Company received $20,000 in advances and repaid $5,000 of these and had $15,000 outstanding at September 24, 2019. On September 24, 2019, these advances were converted into a convertible note at 8% interest which matures January 15, 2020. Interest on this note for the period ended September 30, 2019 amounted to $36, and this amount is accrued at September 30, 2019. The Chief Executive Officer received 150,000 warrants when the advances were converted into this convertible note payable. The Company recognized a discount on the convertible note of $3,721 as a result of the warrants which are being amortized over the life of the note through January 15, 2020.

 

Interest expense for the nine-months ended September 30, 2019 and 2018 on the related party convertible notes payable amounted to $36 and $28,704, respectively.

 

Related Party Notes Payable

 

As of September 30, 2019 (unaudited) and December 31, 2018, the Company had the following related party notes outstanding:

 

    September 30, 2019     December 31, 2018  
    Principal     Accrued
Interest
    Principal     Accrued
Interest
 
January 2019 $60,000 Note, 8% interest, due January 2020   $ 60,000     $ 3,266     $         -     $         -  
March 2019 $48,000 Note, 8% interest, due March 2020     48,000       1,962       -       -  
April 2019 $29,000 Note, 8% interest, due April 2020     29,000       976       -       -  
July 2019 $50,000 Note 8% interest, due July 2020     50,000       951       -       -  
Total Related Party Notes Payable, Net   $ 187,000     $ 7,155     $ -     $ -  

 

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On January 24, 2019 the Company entered into a note payable with a trust related to one of the Company’s directors in the amount of $60,000. The note is for a one-year period maturing January 24, 2020 and bears interest at an annual rate of 8.00%. On March 27, 2019 the Company entered into a note payable with a trust related to one of our directors in the amount of $48,000. The note is for a one-year period maturing March 27, 2020 and bears interest at an annual rate of 8%. On April 29, 2019 the Company entered into a note payable with a trust related to one of our directors in the amount of $29,000. On July 5, 2019 the Company entered into a note payable with a trust related to one of our directors in the amount of $50,000. The note is for a one-year period maturing July 5, 2020 and bears interest at an annual rate of 8%. Interest expense for these notes for the nine-months ended September 30, 2019 and accrued interest at September 30, 2019 is $7,155.

 

Related Party Payables

 

The Company periodically receives advances for operating funds from related parties or has related parties make payments on the Company’s behalf. As a result of these activities the Company had related party payables of $38,710 and $38,610 as of September 30, 2019 (unaudited) and December 31, 2018, respectively.

 

Preferred and Common Shares Issued to Officers and Directors

 

During 2018, the Company issued 4,832,820 shares of common stock and warrants to purchase shares of common stock totaling 2,416,410 in settlement of accrued compensation valued at $541,276. The warrants were valued at $238,973 and the Company reflected $586,936 as a loss on conversion of debt.

 

During 2018, the Company issued 450,000 shares of common stock in settlement of accounts payable and notes payable valued at $50,400. The Company granted 225,000 warrants in connection with this transaction and recognized a loss of $35,400 in accordance with this settlement.

 

NOTE 5: CONVERTIBLE NOTES PAYABLE

 

As of September 30, 2019 (unaudited) and December 31, 2018, the Company had the following convertible notes outstanding:

 

    September 30, 2019     December 31, 2018  
    Principal     Accrued
Interest
    Principal     Accrued
Interest
 
July and August 2012 $1,060,000 Notes convertible into common stock at $4.60 per share, 12% interest, due December 2013 and January 2014   $ 45,000     $ 38,631     $ 45,000       34,603  
May through October 2015 $605,000 Notes convertible into preferred stock at $1 per share, 8-10% interest, due September 30, 2015     -       17,341       -       17,341  
October through December 2015 $613,000 Notes convertible into preferred stock at $1 per share, 8% interest, due June 30, 2016, net of debt discount of $0 and $560,913, respectively     -       5,953       -       5,953  
January through March 2016 $345,000 Notes convertible into preferred stock at $1 per share, 8% interest, due June 30, 2016     -       696       -       696  
May 2019 $60,000 Note convertible into common shares at $0.04 per share, 8% interest, due October 30, 2019     60,000       1,600       -       -  
July 2019 $50,000 Note convertible into common shares at $0.04 per share, 8% interest, due January 15, 2020     50,000       874       -       -  
September 2019 $50,000 Note convertible into common shares at $0.04 per share, 8% interest, due January 15, 2020     50,000       230       -       -  
September 2019 $38,000 Note convertible into common shares at $0.04 per share, 8% interest, due January 15, 2020     38,000       174       -       -  
September 2019 $25,000 Note convertible into common shares at $0.04 per share, 8% interest, due January 15, 2020     25,000       109       -       -  
September 2019 $50,000 Note convertible into common shares at $0.04 per share, 8% interest, due January 15, 2020     50,000       208       -       -  
September 2019 $50,000 Note convertible into common shares at $0.04 per share, 8% interest, due January 15, 2020     50,000       197       -       -  
September 2019 $37,000 Note convertible into common shares at $0.04 per share, 8% interest, due January 15, 2020     37,000       89       -       -  
                                 
Penalties on notes in default     10,166       -       8,824       -  
Total Convertible Notes Payable, Net   $ 415,166     $ 66,102     $ 53,824     $ 58,593  
Less: Original Issue Discount     (1,970 )     -       -       -  
Less: BCF Discount     (43,630 )     -       -       -  
Less: Debt Discount     (74,739 )     -       -       -  
    $ 294,827     $ 66,102     $ 53,824     $ 58,593  

 

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Interest expense for the nine-months ended September 30, 2019 and 2018 on the convertible notes payable amounted to $7,509 and $100,826, respectively.

 

The May 2017 notes totaling $3,136,506, $2,419,240 after debt discounts, had a December 2017 due date which was extended to May 2018.

 

The November 2017 Note totaling $166,666, $92,004 after debt discount, included an Investor’s Put Option whereby if the Company’s stock was not listed on the Nasdaq or NYSE by January 31, 2018, the lender had the right to require the Company to repurchase the Note at any time after January 31, 2018 in an amount equal to 130% of the sum of the Principal plus all accrued and unpaid interest. The Investor issued notice February 2, 2018 exercising it’s Put Option and requiring the Company repurchase the Note on April 19, 2018 in the aggregate amount of $228,332. The investor may elect to cancel the repurchase notice at any time prior to receiving the repurchase payment.

 

On October 10, 2018, the Company successfully completed the terms of the Path Forward Agreements, resulting in the automatic conversion of the outstanding balance due under certain outstanding convertible secured debentures and convertible promissory, amounting to an aggregate of $2,253,538, into an aggregate of 37,792,407 shares of Company common stock and 2,610,453 shares of Series B Convertible Preferred at a fixed conversion price of $0.032 per share. These shares were subject to a restriction on any sales below $0.16 through December 31, 2018 and will have volume limitations on any sales below $0.08 during the first six months of 2019.

 

The Company entered into a convertible note in the amount of $50,000 in July 2018 with an interest rate of 8%. This note was convertible upon a Company capital raise of at least $500,000. On October 30, 2018, the Company converted this note into 1,500,000 shares of common stock at a conversion rate of $0.112 (total of $60,000 which includes $10,000 of interest and other costs) and recognized a loss on extinguishment of $108,916 on this conversion.

 

The Company entered into a $50,000 convertible promissory note dated May 31, 2019, that matures October 30, 2019. The convertible promissory note bears interest at a rate of 8%, The convertible promissory note is convertible into shares of common stock at a price of $0.032 per share. Upon the closing of an equity financing pursuant to an effective registration statement with gross proceeds to the Company totaling at least $250,000 exclusive of any exchanges (“Qualified Financing”), the outstanding principal amount of this convertible promissory note together with all accrued and unpaid interest shall be exchanged into such securities as are issued in the Qualified Financing at a rate of 1.20. Upon an exchange, the Payee shall be granted all rights afforded to an investor in the Qualified Financing. The $10,000 contingent exchange amount is classified as original issue discount and will be amortized over the life of the convertible promissory note. The convertible promissory noteholder received 625,000 warrants at an exercise price of $0.04 per share, that have a term of two years. The warrants were valued at $12,592 and represent a debt discount, which will be amortized over the life of the convertible promissory note.

 

The Company entered into $300,000 in convertible promissory note in July and September 2019, that mature January 15, 2020. The convertible promissory notes bear interest at a rate of 8%, The convertible promissory notes are convertible into shares of common stock at a price of $0.04 per share. Upon the closing of an equity financing pursuant to an effective registration statement with gross proceeds to the Company totaling at least $250,000 exclusive of any exchanges (“Qualified Financing”), the outstanding principal amount of this convertible promissory notes together with all accrued and unpaid interest shall be exchanged into such securities as are issued in the Qualified Financing at a rate of 1.20. Upon an exchange, the Payee shall be granted all rights afforded to an investor in the Qualified Financing. The convertible promissory noteholders received 3,000,000 warrants at an exercise price ranging between $0.06 and $0.08 per s