NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2018
NOTE 1 – DESCRIPTION OF
BUSINESS AND GOING CONCERN
Eco Tek 360, Inc. ("the Company") was incorporated in Nevada on March 25, 2005. As of September 30, 2018 and December
31, 2017, 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 nor did it have assets or liabilities as of September 30, 2018 and December 31, 2017, respectively.
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 nor did it have assets or liabilities as of September
30, 2018 and December 31, 2017, respectively.
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 April 2, 2018 for the years ended December 31, 2017
and 2016.
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 $30,814,891 and $30,578,048 as of September 30, 2018 and December
31, 2017 and a working capital deficit of approximately $1.5 million and 1.4 million, respectively, and no revenue generating business
at this time. 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. Management plans to raise additional debt or equity
and continue to settle obligations by issuing stock. Management plans to continue to raise additional debt and equity until the
Company has positive cash flows from an operating company.
The Company's ability to continue as
a going concern is dependent upon its ability to repay or settle its current indebtedness, generate positive cash flow from an
operating company, and/or 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 subsidiaries, Trident Merchant Group, Inc. and Progressive
Fashions Inc., and its majority owned subsidiaries, Leading Edge Fashion, LLC and Pure361, LLC which are 51% owned. All significant
intercompany accounts and transactions have been eliminated. As noted above in Note 1, our 51% owned subsidiaries, Pure361
and Leading Edge Fashions, LLC, had no operations, assets or liabilities as of September 30, 2018, or December 31, 2017. Because
of this, a non-controlling interest is not reflected in these financial statements.
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. Depreciation expense amounted to $285 and $285 for the nine months ended September 30, 2018, and 2017, respectively.
Prepaid interest and deposits
Prepaid interest and deposits consist
of prepaid consulting fees, debt discounts, amounts paid for deposits on property, plant and equipment and other prepaid items.
Prepaid interest is amortized over the life of the related liability.
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 September 30,
2018, and December 31, 2017, 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 2006 through 2017.
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, 2018,
or December 31, 2017.
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
stock based awards issued.
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, 2018, and December 31, 2017,
the Company had no amounts in excess of the FDIC limit.
New Accounting Pronouncements
In January 2018, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update No. 2018-01,
Land Easement Practical Expedient for Transition
to Topic 842,
which amends ASC Topic 842. Among other things, the new standard requires us to recognize a right of use
asset and a lease liability on our balance sheet for leases. It also changes the presentation and timing of lease-related expenses.
This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption
is permitted. The Company is currently evaluating the effect this guidance may have on its financial position, results of operations,
comprehensive income, cash flows and disclosures.
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, 2018, and December 31, 2017, the Company had 19,718,927 and 18,738,927 shares of its $0.001 par value common stock issued and
outstanding, respectively. In addition, as of September 30, 2018, and December 31, 2017, the Company had 953,666 and
1,761,166 shares of common stock issuable, respectively.
In the year
ended December 31, 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 was amortized
for the period ended August 31, 2017.
During
the year ended December 31, 2017, the Company issued 29,766 common stock valued at $0.30 per share for $8,915 of consulting services.
In
June 2017, the Company entered into a consulting agreement and agreed to issue 300,000 shares of fully vested common stock valued
at $0.23 per share as of the execution date of the agreement. The consulting firm is required to provide services for one year
from the date of its agreement with the Company. The total value of the common stock to be issued at $0.23 per share totaling $69,000
is amortized over the one year service period. As of September 30, 2018, prepaid consulting expense related to this agreement was
fully expensed. In February 2018, 150,000 shares of common stock were issued to the consulting firm and 150,000 shares remain issuable
as of the date these financial statements.
In
December 2017, the Company agreed to issue 10,000 shares of fully vested common stock valued at $0.22 per share for $2,200 of consulting
services. In January 2018, the 10,000 shares of common stock were issued to the consulting firm.
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. The shares were voluntarily returned, and were cancelled by the Company in August 2017.
On June 15,
2018, 50,000 common shares were issued at a fair value of $5,500 as a commitment fee for the issuance of a $112,238 convertible
note. In addition, the Company granted warrants to purchase 112,238 shares of common stock at $0.35 per share exercisable for a
period of two years. The fair value of these warrants at the time they were granted was approximately $11,224 and was calculated
using the Black-Scholes-Merton model (see Note 4).
On August
15, 2018, the Company issued 25,000 common shares valued at $0.17 per share for a total of $4,250 to extend the loans’ maturity
date.
On August
20, 2018, the Company issued 97,500 common shares valued at $0.12 per share for a total of $11,700 as compensation to the president
and CEO of the Company.
Stock Options
In the year ended December 31, 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. No stock options were issued during the nine months ended September 30, 2018.
The
following assumptions were used for the options granted in the year ended December 31, 2017 are as follows:
For the year ended December 31, 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 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 $153,605 and $134,333 as
of September 30, 2018, and December 31, 2017. The initial extension fee was amortized ratably over the extension period of
180 days. The subsequent extension fee was amortized over the period of the extension. A second extension was signed in October
2017 to extend the note to March 30, 2018 and the interest rate was increased to 17% per annum. The note remains unpaid as of September
30, 2018, 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, 2018 and December
31, 2017, respectively.
On December
12, 2016, the Company issued an unsecured promissory note to an investor for $2,200. The note bears interest at 5% and matured
on June 30, 2017. 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 $7,819 as of September 30, 2018. 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 matured on March 14, 2018.
The balance of this note plus interest totals $5,269 as of September 30, 2018 and is currently in default.
Convertible Notes Payable –
Related Party
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 balance of this note plus accrued interest totals were $62,500 and $59,500 at
September 30, 2018 and December 31, 2017, respectively.
Convertible Notes Payable
On
June 15, 2018, The Company issued a convertible promissory note to an investor in the amount of $112,238, with an original issue
discount of $9,738, convertible into common stock at the lower of $0.35 per share or 75% multiplied by the lowest traded price
of the common stock during the ten consecutive trading day period immediately preceding the notice of conversion. The Company has
accounted for this conversion provision under ASC 815-40-25 subsection 28 and therefore has treated the note as stock-settled debt.
The Company recorded an additional liability for the value transferred to the noteholder by the ability of the noteholder to obtain
a conversion price at a fixed discount to the trading price of the Company’s common stock in the amount of $37,413 and has
treated that amount as a discount to the note and is amortization this discount over the life of the note to interest expense.
The note bears interest at 5% per annum and matures on June 15, 2019. In connection with issuance of the note, the Company issued
warrants to purchase 112,238 shares of common stock at $0.35 per share exercisable for a period of two years. The fair value of
these warrants at the time they were granted was $11,224 and was calculated using the Black-Scholes-Merton model. The market value
of the stock and the historical volatility of the Company’s stock on the day the warrant was granted was $0.11 and 273%,
respectively. The total beneficial conversion feature discount recognized was $ 56,650. The total discount of $115,024 is being
amortized over the term of the note.
The
Company has amortized $33,549 of the debt discount during the nine months ended September 30, 2018.
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, 2018, and December
31, 2017, current liabilities from discontinued operations includes $84,281 accounts payable. During the nine months ended September
30, 2018 and 2017, the Company had no income or loss from discontinued operations.
NOTE 6 – RELATED PARTY
TRANSACTIONS
During the nine months ended September
30, 2018 the Company’s President paid on behalf of the Company $153,675 of expenses and was repaid $87,394. The President
of the Company was owed $191,619 and $125,238 at September 30, 2018 and December 31, 2017, respectively.
During 2016, the Company received loans
from the CEO and a member of the board of directors totaling $284,900. In the year ended December 31, 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 year ended December 31, 2017, $241,059 of the notes and interest was converted at approximately
$0.19 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 $231,670 and $223,880 at September 30, 2018 and December 31, 2017, 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 year ended
December 31, 2017, $14,463 was repaid. As of September 30, 2018, an amount of $5,836 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 $0 for the nine months ended September 30, 2018. On June
5, 2017, the Company and True Beauty, LLC, entered into an agreement to terminate the agreement. The Company is required to make
twelve repayments totaling $37,500 to resolve all amounts
outstanding. For the nine months ended September 30, 2018,
the Company entered into a settlement agreement with True Beauty, LLC which controls the trademark EMME. The Company paid $5,000
to settle all outstanding balances with True Beauty, LLC. As a result, the Company recorded gain on settlement of debt of $5,394.
As of the date of this filing, the Company
is a party to three pending litigation matters. The Company does not believe it has any liability nor has it accrued any liability
as of December 31, 2017 and 2016 for the following:
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,
|
|
September 30,
|
|
|
2018
|
|
2017
|
Warrants
|
|
|
112,238
|
|
|
|
275,000
|
|
Options
|
|
|
2,650,000
|
|
|
|
2,650,000
|
|
Convertible notes payable, including accrued interest
|
|
|
809,750
|
|
|
|
50,000
|
|
|
|
|
3,571,988
|
|
|
|
2,975,000
|
|
NOTE 9 – SUBSEQUENT EVENTS
In October
2018, the Company issued 202,500 common shares valued at $0.15 for $30,375 as compensation to the president and CEO of the Company.
In October
2018, the Company issued 19,500 common shares valued at $0.15 for $2,925 of consulting services.