NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2017
NOTE 1 – DESCRIPTION OF
BUSINESS
Eco Tek 360, Inc. ("the Company") was incorporated in Nevada on March 25, 2005. As of September 30, 2017 and December
31, 2016, the Company had 400,000,000 shares of authorized common stock.
During the second quarter, 2014
the Company formed Leading Edge Fashions, LLC of which it controls 51%. Effective December 31, 2014 the Company's Board of Directors
determined it was in the best interest of the Company to discontinue the operations of Leading Edge Fashions, LLC.
The Company created a new limited
liability company, Pure361, LLC ("Pure361") in May 2015 for the purpose of operating the portion of the Company's business
that is involved with the collection, rejuvenation and manufacturing of garments and other accessories for the uniform marketplace
that serves the hospitality, food service, medical, manufacturing, education, military, transportation and other commercial uniform
industries. The Company owns 51% of Pure361. Pure361 entered into a license agreement with Pure System International Ltd. ("Pure"),
the minority owner of Pure 361, related to potential future operations in which Pure361 was granted the exclusive license to use
certain licensed intellectual property related to the manufacturing of uniforms from recyclable waste. Pure361 has had no operations
to date.
The Company created a new wholly
owned subsidiary, Progressive Fashions Inc. ("PFI") in February 2016 for the purpose of designing, producing and marketing
the EMME® Activewear Collection. On June 5, 2017 the Company and True Beauty, LLC (the company that controls the EMME®
trademark) terminated the license agreement. PFI has had no operations to date.
Basis of Presentation: Unaudited
Interim Financial Information
The accompanying
interim condensed consolidated financial statements are unaudited. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all of the normal recurring adjustments necessary to present fairly the financial position
and results of operations as of and for the periods presented. The interim results are not necessarily indicative of the results
to be expected for the full year or any future period.
Certain
information and footnote disclosures normally included in the condensed consolidated financial statements prepared in accordance
with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC"). The Company believes that the disclosures are adequate to make the
interim information presented not misleading. These condensed consolidated financial statements should be read in conjunction with
the Company's audited consolidated financial statements and the notes thereto included in the Company's Report on Form 10-K filed
on March 31, 2017 for the years ended December 31, 2016 and 2015.
Going Concern
The accompanying financial statements
have been prepared in accordance with U.S. generally accepted accounting principles, which contemplates continuation of the Company
as a going concern. The Company has an accumulated deficit of $30,530,887 and $29,730,893 as of September 30, 2017 and December
31, 2016, respectively, which include losses of $799,994 and $162,577 for the nine months ended September 30, 2017 and 2016, respectively.
Consequently, the aforementioned items raise substantial doubt about the Company's ability to continue as a going concern within
one year after the date that the financial statements are issued.
The Company's ability to continue as
a going concern is dependent upon its ability to repay or settle its current indebtedness, acquire an operating business and raise
capital through equity and debt financing or other means on desirable terms. If the Company is unable to obtain additional funds
when they are required or if the funds cannot be obtained on favorable terms, management may be required to restructure the Company
or cease operations. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
NOTE 2 –SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial
statements include all of the accounts of the Company and its wholly owned subsidiary, Trident Merchant Group, Inc., Leading Edge
Fashion, LLC which is 51% owned, and Pure361, LLC which is 51% owned. All significant intercompany accounts and transactions
have been eliminated.
Reclassifications
Certain amounts in the prior period
financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect
on reported consolidated net (loss).
Cash and Cash Equivalents
Cash and cash equivalents include cash
on hand and investments in money market funds. The Company considers all highly-liquid instruments with an original maturity of
90 days or less at the time of purchase to be cash equivalents.
Equipment
Property and equipment are stated at
cost. Costs of replacements and major improvements are capitalized, and maintenance and repairs are charged to operations as incurred.
Depreciation expense is provided primarily by the straight-line method over the estimated useful lives of the assets which is seven
years.
Prepaid interest and deposits
Prepaid interest and deposits consist
of debt discounts, and amounts paid for deposits on property, plant and equipment. Prepaid interest is amortized over the life
of the related liability.
Revenue Recognition
Revenue for the women's fashion division
will be recognized at the point-of-sale for retail store sales, net of estimated customer returns. Revenue is recognized at the
completion of a job or service for the consulting division. Revenue is presented on a net basis and does not include any tax assessed
by a governmental or municipal authority. Payment for merchandise at stores and through the Company's direct-to-consumer channel
will be tendered by cash, check, credit card, debit card or gift card. Therefore, the Company's need to collect outstanding accounts
receivable for its retail and direct-to-consumer channel is negligible and mainly results from returned checks or unauthorized
credit card transactions. The Company maintains an allowance for doubtful accounts for its consulting service accounts receivable,
which management reviews on a regular basis and believes is sufficient to cover potential credit losses and billing adjustments.
Deposits for consulting services are recognized as a sale upon completion of service.
The Company accounts for a gift card
transaction by recording a liability at the time the gift card is issued to the customer in exchange for consideration from the
customer. A liability is established and remains on the Company's books until the card is redeemed by the customer, at which time
the Company records the redemption of the card for merchandise as a sale or when it is determined the likelihood of redemption
is remote, based on historical redemption patterns. Revenues attributable to gift card liabilities relieved after the likelihood
of redemption becomes remote are included in sales and are not material.
Sales Return Reserve
The Company records a reserve for estimated
product returns where the sale has occurred during the period reported, but the return is likely to occur subsequent to the period
reported and may otherwise be considered in-transit. The reserve for estimated in-transit product returns is based on the Company's
most recent historical return trends. If the actual return rate or experience is materially higher than the Company's estimate,
additional sales returns would be recorded in the future.
Income Taxes
Income taxes
are accounted for under the asset and liability method as stipulated by ASC 740 "Income Taxes." Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities
or a change in tax rate is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced
to estimated amounts to be realized by the use of a valuation allowance. A valuation allowance is applied when in management's
view it is more likely than not that such deferred tax asset will be unable to be utilized.
The Company
adopted certain provisions under ASC Topic 740, which provide interpretative guidance for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. Effective with the Company's adoption of these provisions,
interest related to the unrecognized tax benefits is recognized in the financial statements as a component of income taxes.
In the unlikely
event that an uncertain tax position exists in which the Company could incur income taxes, the Company would evaluate whether there
is a probability that the uncertain tax position taken would be sustained upon examination by the taxing authorities. Reserves
for uncertain tax positions would be recorded if the Company determined it is probable that a position would not be sustained upon
examination or if payment would have to be made to a taxing authority and the amount is reasonably estimated. As of December 31,
2016 and 2015, the Company does not believe it has any uncertain tax positions that would result in the Company having a liability
to the taxing authorities. The Company's tax returns are subject to examination by the federal and state tax authorities for the
years ended 2005 through 2016.
Impairment
or Disposal of Long-Lived Assets
ASC Topic 360
(formerly FASB issued Statement No. 144), "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS
144"), clarifies the accounting for the impairment of long-lived assets and for long-lived assets to be disposed of, including
the disposal of business segments and major lines of business. Long-lived assets are reviewed when facts and circumstances
indicate that the carrying value of the asset may not be recoverable. When necessary, impaired assets are written down to
their estimated fair value based on the best information available. No impairment was necessary as of September 30, 2017 or
September 30, 2016.
Stock-based
Compensation
We account for stock-based awards at
fair value on the date of grant, and recognize compensation over the service-period that they are expected to vest. We estimate
the fair value of stock options and stock purchase warrants using the Black-Scholes option pricing model. The estimated value of
the portion of a stock-based award that is ultimately expected to vest, taking into consideration estimated forfeitures, is recognized
as expense over the requisite service periods. The model includes subjective input assumptions that can materially affect the fair
value estimates. The expected volatility is estimated based on the most recent historical period of time, of other comparative
securities, equal to the weighted average life of the options. The estimate of stock awards that will ultimately vest requires
judgment, and to the extent that actual forfeitures differ from estimated forfeitures, such differences are accounted for as a
cumulative adjustment to compensation expenses and recorded in the period that estimates are revised.
Use of Accounting Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Significant items subject to such estimates and assumptions include the valuation of
common stock and options issued as stock based compensation.
Fair Value
FASB ASC 820,
Fair Value Measurements
and Disclosure
s ("ASC 820") establishes a framework for all fair value measurements and expands disclosures related
to fair value measurement and developments. ASC 820 defines fair value 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.
ASC 820 requires that assets and liabilities
measured at fair value are classified and disclosed in one of the following three categories:
Level 1
—
Quoted market prices
for identical assets or liabilities in active markets or observable inputs;
Level 2
—
Significant other
observable inputs that can be corroborated by observable market data; and
Level 3
—
Significant unobservable
inputs that cannot be corroborated by observable market data.
The carrying amounts of cash, accrued
compensation, accounts payable and other liabilities, accrued interest payable, and short-term portion of notes payable approximate
fair value because of the short-term nature of these items.
Concentration of Credit Risk
The carrying value of short-term financial
instruments, including cash, restricted cash, trade accounts receivable, accounts payable, accrued expenses and short-term debt,
approximates the fair value of these instruments. These financial instruments generally expose the Company to limited credit risk
and have no stated maturities or have short-term maturities and carry interest rates that approximate market. The Company
maintains cash balances at financial institutions that are insured by the FDIC. At September 30, 2017, and December 31, 2016,
the Company had no amounts in excess of the FDIC limit.
NOTE 3 – CAPITAL STOCK
Preferred Stock
The
Company has designated a "Class B Convertible Preferred Stock" (the "Class B Preferred"). The number
of authorized shares totals 1,000,000 and the par value is $.001 per share. The Class B Preferred shareholders vote
together with the common stock as a single class. The holders of Class B Preferred are entitled to receive all notices
relating to voting as are required to be given to the holders of the Common Stock. The holders of shares of Class B
Preferred shall be entitled to 10,000 votes per share. The Class B Preferred Stock will have the rights to liquidation
as all classes of the Common Stock of the Company. The Class B Preferred stockholders are entitled to receive non-cumulative
dividends at the rate of 8% per annum, and are accrued daily. The Class B Preferred Stock shall be redeemed by the Corporation
for 100% of the original purchase price plus the amount of cash dividends accrued on the earlier of 6 months from the date of issuance,
or the date that the Corporation received its funding from any outside source in conjunction with a merger, reverse merger or any
change of control. In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or
involuntary, the holders of the Class B Preferred Stock shall be entitled to receive, prior and in preference to any distribution
of any assets of the Corporation to the holders of the Common Stock, the amount of $.035 per share plus any and all accrued but
unpaid dividends.
During the
fourth quarter, 2011, 200,000 shares of the Series B Preferred Stock were issued to a related party for reimbursement of $7,500
of legal and accounting fees paid on behalf of the Company.
Common Stock
As of September
30, 2017 and December 31, 2016, the Company had 18,738,877 and 19,209,161 shares of its $0.001 par value common stock issued and
outstanding, respectively. In addition, as of September 30, 2017, and December 31, 2016, the Company had 1,451,666
and 871,666 shares of common stock issuable, respectively.
In February
2016, the Company issued 50,000 shares of its common stock at a value of $1.00 per share for $50,000 to a board director for payment
of services.
In March 2016,
the Company issued 250,000 shares of its common stock at a value of $1.00 per share for $250,000 in payment for consulting services.
In addition, the Company granted a warrant to the consultant to purchase 250,000 shares of common stock at $0.50 per share for
a period of two years. The fair value of these warrants at the time they were granted was approximately $170,000 and was
calculated using the Black-Scholes-Merton model. During the nine months ended September 30, 2017, and 2016, $0 and $56,658 was
expensed, respectively.
The
following assumptions were used for the warrants granted in March 2016 are as follows:
Expected term at issuance
|
|
2 years
|
|
|
|
Expected average volatility
|
|
|
70.71% to 141.42
|
%
|
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
Risk-free interest rate
|
|
.70%– 1.64%
|
|
|
|
The following table summarizes information relating to outstanding
and exercisable stock warrants as of September 30, 2017:
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Weighted Average Remaining
Contractual life (in years)
|
|
|
Weighted Average
Exercise Price
|
|
|
Number of Shares
|
|
|
|
|
|
275,000
|
|
|
.621
|
|
|
$
|
0.59
|
|
|
|
275,000
|
|
|
|
|
|
In March 2016,
the Company issued 50,000 shares of its common stock at a value of $1.00 per share for $50,000 as payment for consulting services.
In the nine
month period ended September 30, 2016, the Company issued 200,000 shares of its common stock at a value of $1.00 per share, in
conjunction with the extension of the maturity date of the $100,000 note. $150,000 was amortized as of September 2016, and
$50,000 is being amortized for the period ended August 31, 2017. The unamortized portion as of September 30, 2017 and December
31, 2016 was $0 and $21,622, respectively. Amortization expense for the nine months ended September 30, 2017, and 2016, was $21,622
and $18,919, respectively.
In March 2016,
the Company issued 884,001 shares of its common stock at approximately $0.25 per share amounting to $250,000 to
two individuals for monies received in 2015 from subscription agreements that were entered into with the Company in 2015.
115,100 shares remain issuable related to these subscription agreements as of September 30, 2017.
During
the nine months ended September 30, 2017, the Company issued 29,716 common stock valued at $.30 per share for $8,885 of consulting
services.
On
February 14, 2017, the Chief Technical Officer resigned. On June 8, 2017, the Company authorized the cancellation of 500,000 shares
held by the Chief Technical Officer. As of September 30, 2017 the shares were voluntarily returned, and were cancelled by the Company
in August 2017.
Stock Options
In the nine months ended September 30, 2017 the Company
granted 2,650,000 options to consultants, employees and management. One hundred thousand of those options had an exercise price
of $.0001, and 250,000 options at an exercise price of $0.01 vested immediately and were valued at the fair value of the Company’s
stock at the measurement date less the exercise price. The value of the options was $151,490 and recorded as stock based compensation.
The other 2,300,000 of options vested immediately and the fair value of these options were calculated using the Black-Scholes-Merton
model. The stock compensation expense related to these options for the nine months ended September 30, 2017 was $341,327.
The following
assumptions were used for the options granted in the period ended September 30, 2017 are as follows:
|
|
At September 30, 2017
|
Fair values
|
|
|
$0.17 - $0.45
|
|
|
|
Exercise price
|
|
|
$0.17-$1.50
|
|
|
|
Expected term at issuance
|
|
2 - 10 years
|
|
|
|
Expected average volatility
|
|
|
75.93% to 85.41%
|
|
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
Risk-free interest rate
|
|
1.23%– 2.45%
|
|
|
|
NOTE 4 –
NOTES PAYABLE
Unsecured Notes Payable
On November
25, 2014, the Company issued an unsecured promissory note to an individual in the amount of $100,000 at 10% interest and due on
April 1, 2015. On April 1, 2016 the Company entered into a forbearance agreement. The Company was granted an extension of
the note through September 30, 2016 in consideration of 150,000 shares of common stock valued at $150,000 with interest accruing
after March 29, 2016 at 12%. The lender was issued an additional 50,000 shares valued at $50,000 to extend the note to August
31, 2017. The note and accrued interest was $131,333 and $122,333 as of September 30, 2017, and December 31, 2016.
The initial extension fee was amortized ratably over the extension period of 180 days. The subsequent extension fee is amortized
over the period of the extension. During the nine months ended September 30, 2017, and September 30, 2016, the amortization expense
on the extension fees were $21,622, and $50,000, respectively. The note remains unpaid as of September 30, 2017 and is currently
in default.
During the year ended December
31, 2016, the Company received two separate payments of $12,500, totaling $25,000, as secured notes. The notes are non-interest
bearing, and have no terms of repayment. The balance of the notes was $25,000 as of September 30, 2017.
On December 12, 2016, the Company issued
an unsecured promissory note to an investor. The note bears interest at 5% and matured on June 30, 2017. As of December 31, 2016,
payments from the investor are $2,200. On January 11, 2017 the investor loaned an additional $5,000 related to the promissory note.
The balance of this note plus accrued interest totals $7,468 as of September 30, 2017. The notes are currently unpaid and in default.
On March 14, 2017, the Company issued
an unsecured promissory note to an investor in the amount of $5,000. The note bears interest at 4% and matures on March 14, 2018.
The balance of this note plus interest totals $5,109 as of September 30, 2017.
Convertible Notes Payable
In
August 2015, The Company issued an unsecured promissory note to an investor in the amount of $50,000, convertible to common stock
at $1.00 per share. The note bears an interest rate of 8% per annum and matured on August 8, 2016. The note is currently
unpaid and in default. The note was also issued with a warrant for this investor to purchase 25,000 shares of common stock
at $1.50 for a period of 2 years. The fair value of these warrants was approximately $3,909 as of December 31, 2016
and was calculated using the Black-Scholes-Merton model. The note does not contain a beneficial conversion feature. The balance
of this note plus accrued interest totals were $58,500 and $55,500 at September 30, 2017 and December 31, 2016, respectively.
NOTE 5 – DISCONTINUED OPERATIONS
During 2014, the Company's Leading
Edge Fashions, LLC retail businesses, of which it owned 51%, was classified as discontinued operations. Based on the
Company's strategy to allocate resources to its businesses relative to their growth potential and those with the greater right
to win in the marketplace, the Company determined that this business did not align with the Company's long-term growth plans.
As of September 30, 2017, and December
31, 2016 current liabilities from discontinued operations includes $84,281 accounts payable. In July 2016, a loan payable from
discontinued operations was converted to common stock, which resulted in a gain on the extinguishment of debt related to discontinued
operations in the amount of $635,764.
NOTE 6 – RELATED PARTY
TRANSACTIONS
During the nine months ended September 30, 2017, the Company
repaid advances from related parties in the amount of $23,479. The President of the Company was owed $15,569 and $39,048 at September
30, 2017 and December 31, 2016, respectively.
During 2016, the Company received loans
from the CEO and a member of the board of directors totaling $284,900. In the nine months ended September 30, 2017, the Company
received additional loans from these individuals in the amount of $160,650. The loans bear interest at 5% per annum and matured
on June 30, 2017 and September 30, 2017. During the nine months ended September 30, 2017, $237,400 of the notes and interest was
converted at approximately $0.40 for 580,000 common shares. The conversion of debt resulted in a gain on extinguishment of debt
in the amount of $130,859. The balance of these loans plus accrued interest was $221,279 and $289,741 at September 30, 2017 and
December 31, 2016, respectively. These loans are currently unpaid and are in default.
In March 2017, the Company loaned a related party $20,000.
The loan bears interest at the rate of 5% per annum and has a term of six months. During the nine months ended September 30, 2017,
$12,106 was repaid. As of September 30, 2017, an amount of $8,436 is receivable.
NOTE 7 – COMMITMENTS AND
CONTINGENCIES
On
March 15, 2015 the Company entered into a trademark license agreement with True Beauty, LLC which controls the trademark EMME.
EMME is a market pioneer and trusted voice of the "Full-Figured" market. Under this licensing agreement the Company has
the right to design, produce and market the EMME® Activewear Collection. On April 13, 2016, the agreement was amended
regarding the term and minimum royalties. The royalty expense was $38,500 for the nine months ended September 30, 2017. On
June 5, 2017, the Company and True Beauty, LLC, entered into an agreement to terminate the agreement. The Company is scheduled
to make twelve repayments totaling of $37,500 to resolve all amounts outstanding. As of September 30, 2017, $23,394 is outstanding.
As of the date of this filing,
the Company is a party to three pending litigation matters.
One matter is entitled Randazzo
LLC v. Avani Holdings LLC & Global Fashion Technologies, Inc. This litigation was initiated by the plaintiff in
order to evict Avani Holdings LLC from its rented premises in California and to recover unpaid rent. ECTX does not operate
out of the premises in question and has never signed any leases or other documents with the plaintiff. A judgment of
eviction was entered, but ECTX does not operate out of the premises in question and therefore did not appear in the matter to oppose
the judgment of eviction. The plaintiff is also seeking unpaid rent in the amount of $26,595.
The second matter is entitled Patricia
Witthuhn v. Global Fashion Technologies, Inc. This litigation was initiated by the plaintiff in order to collect
wages allegedly due pursuant to her employment with Avani Holdings LLC. The Company never hired Ms. Witthuhn and never
acquired Avani Holdings, LLC. Consequently, there is no legitimate cause of action against the Company. However, due
to cash flow constraints, the Company is unable to hire outside counsel for this litigation. The amount being sought
by the plaintiff is approximately $15,000.
The third matter is entitled William
Corso v. Global Fashion Technologies, Inc. This litigation was initiated by the plaintiff in order to collect wages
allegedly due pursuant to his employment with Avani Holdings LLC. The Company never hired Mr. Corso and never acquired Avani
Holdings, LLC. Consequently, there is no legitimate cause of action against the Company. However, due to cash flow
constraints, the Company is unable to hire outside counsel for this litigation. The amount being sought by the plaintiff
is approximately $40,000.
NOTE 8 – NET LOSS PER
SHARE
Potentially
dilutive securities are excluded from the calculation of net loss per share when their effect would be anti-dilutive. For all periods
presented in the consolidated financial statements, all potentially dilutive securities have been excluded from the diluted share
calculations as they were anti-dilutive as a result of the net losses incurred for the respective periods. Accordingly, basic shares
equal diluted shares for all periods presented.
Potentially dilutive securities
were comprised of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
2017
|
|
|
2016
|
Warrants
|
|
|
275,000
|
|
|
|
275,000
|
Options
|
|
|
2,650,000
|
|
|
|
-
|
Convertible notes payable, including accrued interest
|
|
|
50,000
|
|
|
|
50,000
|
Contingently issuable shares
|
|
|
-
|
|
|
|
-
|
|
|
|
2,975,000
|
|
|
|
325,000
|
NOTE 9 –
RECLASSIFICATION
For comparability
purposes, certain figures for 2016 have been reclassified where appropriate to conform to the financial statement presentation
used in 2017. These reclassifications had no effect on the reported net loss.