NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
NOTE 1 – DESCRIPTION OF BUSINESS
Eco Tek 360, Inc. (“the Company”) was incorporated in Nevada on March 25, 2005. As of December 31, 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 December 31, 2018 and 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 December 31, 2018 and 2017, respectively.
The Company created a new incorporation, ECO CHAIN 360, Inc. in November 2018 for the purpose of operating as an intermediary providing an expedited trading platform for buyers and sellers to efficiently consummate fiber transactions. The Company owns 51% of ECO CHAIN 360, Inc. ECO CHAIN 360, Inc. has had no operations to date nor did it have assets or liabilities as of December 31, 2018 and 2017, respectively.
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 $31,023,302 and $30,578,048 as of December 31, 2018 and 2017, respectively, which include net losses of $445,254 and $847,155 for the years ended December 31, 2018, and 2017, respectively. In addition as of December 31, 2018 and 2017, the Company had a working capital deficit of $1,667,899 and $1,383,149 respectively, with limited cash resources available. 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, Pure361, LLC and ECO CHAIN 360, Inc. which are 51% owned. All significant intercompany accounts and transactions have been eliminated. As noted above in Note 1, our 51% owned subsidiaries, Pure361, Leading Edge Fashions, LLC and ECO CHAIN 360, Inc., had no operations, assets or liabilities as of December 31, 2018 or 2017. Because of this, a non-controlling interest is not reflected in these financial statements.
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 $380 and $380 for the years ended December 31, 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 December 31, 2018 and 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 2018.
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 December 31, 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 December 31, 2018 and 2017, the Company had no amounts in excess of the FDIC limit.
New Accounting Pronouncements
In July 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This update addresses several aspects of the accounting for nonemployee share-based payment transactions and expands the scope of ASC 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The main provisions of the update change the way nonemployee awards are measured in the financial statements. Under the simplified standards, nonemployee options will be valued once at the date of grant, as compared to at each reporting period end under ASC 505-50. At adoption, all awards without established measurement dates will be revalued one final time, and a cumulative effect adjustment to retained earnings will be recorded as the difference between the pre-adoption value and new value. Companies will be permitted to make elections to establish the expected term and either recognize forfeitures as they occur or apply a forfeiture rate. Compensation expense recognition using a graded vesting schedule will no longer be permitted. This pending content is the result of the FASB’s Simplification Initiative, to maintain or improve the usefulness of the information provided to the users of financial statements while reducing cost and complexity in financial reporting. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. Because the Company does not currently have any outstanding awards to non-employees for which a measurement date has not been established the adoption of ASU 2018-07 does not have a material impact to the Company’s financial statements and related disclosures upon adoption. The adoption of this standard will change the way that the Company accounts for non-employee compensation in the future.
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.
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.
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 December 31, 2018 and 2017, the Company had 19,975,927 and 18,738,927 shares of its $0.001 par value common stock issued and outstanding, respectively. In addition, as of December 31, 2018 and 2017, the Company had 1,168,666 and 1,761,166 shares of common stock issuable, respectively.
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 exercisable 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.
The following assumptions were used for the warrants granted in June 2018 are as follows:
Fair value of common stock at measurement date
|
|
$
|
0.11
|
|
Expected term at issuance
|
|
2 years
|
|
Expected average volatility
|
|
|
273
|
%
|
Expected dividend yield
|
|
|
-
|
|
Risk-free interest rate
|
|
|
2.55
|
%
|
The below table summarizes the activity of warrants exercisable for common shares during the year ended December 31, 2018 and 2017:
|
|
Number of
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
Balance as of December 31, 2016
|
|
|
275,000
|
|
|
$
|
0.59
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(25,000
|
)
|
|
|
1.50
|
|
Balance as of December 31, 2017
|
|
|
250,000
|
|
|
|
0.50
|
|
Granted
|
|
|
112,238
|
|
|
|
0.35
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(250,000
|
)
|
|
|
0.50
|
|
Balance as of December 31, 2018
|
|
|
112,238
|
|
|
|
0.35
|
|
The following table summarizes information relating to outstanding and exercisable stock warrants as of December 31, 2018:
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
Number of Shares
|
|
|
Weighted Average
Remaining Contractual
life (in years)
|
|
|
Weighted Average
Exercise Price
|
|
|
Number
of
Shares
|
|
|
112,238
|
|
|
|
1.45
|
|
|
$
|
0.35
|
|
|
|
112,238
|
|
During the year ended December 31, 2018, the Company issued common shares as follows,
|
·
|
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.
|
|
·
|
In October 2018, the Company issued 222,000 common shares valued at $0.15 for $33,300 to repay the loan from the President and Director of the Company.
|
|
·
|
In April 2018, the Company issued 250,000 common shares valued at $0.15 for $37,500 for consulting services which is being amortized over the one year service period. As of December 31, 2018, prepaid consulting expense related to this agreement was $11,507.
|
During the year ended December 31, 2017, the Company issued common shares as follows,
|
·
|
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 being amortized over the one year service period. As of December 31, 2017, prepaid consulting expense related to this agreement was $34,500. 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. As of December 31, 2017 the shares were voluntarily returned, and were cancelled by the Company in August 2017.
|
|
·
|
$241,059 of the notes and interest was converted at approximately $0.19 for 580,000 common shares (see Note 6).
|
Stock Options
During 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 year ended December 31, 2017 was $433,870. No stock options were issued during the year ended December 31, 2018.
The following assumptions were used for the options granted in the period 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
|
%
|
A summary of the change in stock purchase options outstanding for the period ended December 31, 2018 and 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Contractual
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Grant Date
|
|
|
Life
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Fair Value
|
|
|
(Years)
|
|
Balance - December 31, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options issued
|
|
|
2,650,000
|
|
|
$
|
0.33
|
|
|
$
|
0.30
|
|
|
|
6.26
|
|
Options expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance - December 31, 2017
|
|
|
2,650,000
|
|
|
$
|
0.33
|
|
|
$
|
0.30
|
|
|
|
6.26
|
|
Options issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance - December 31, 2018
|
|
|
2,650,000
|
|
|
$
|
0.33
|
|
|
$
|
0.30
|
|
|
|
5.26
|
|
The following table shows information on our vested and unvested options outstanding during the year ended December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Contractual
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Grant Date
|
|
|
Life
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Fair Value
|
|
|
(Years)
|
|
Balance - December 31, 2016, unvested
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options issued
|
|
|
2,650,000
|
|
|
$
|
0.33
|
|
|
$
|
0.30
|
|
|
|
6.26
|
|
Options vested
|
|
|
2,650,000
|
|
|
$
|
0.33
|
|
|
$
|
0.30
|
|
|
|
6.26
|
|
Options expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance - December 31, 2017, unvested
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2018, unvested
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
As of December 31, 2018 and December 31, 2017, the intrinsic value of 350,000 options was $56,990 and $42,990, respectively.
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 $157,855 and $134,333 as of December 31, 2018 and 2017. 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 years ended December 31, 2018 and 2017, the amortization expense on the extension fees were $0 and $21,622, respectively. The note remains unpaid as of December 31, 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 December 31, 2018 and 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 $7,909 and $7,557 as of December 31, 2018 and 2017, respectively. 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 $5,319 and $5,160 as of December 31, 2018 and 2017, respectively 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 valued at approximately $3,909. The note does not contain a beneficial conversion feature. The balance of this note plus accrued interest totals were $63,500 and $59,500 at December 31, 2018 and 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 note holder by the ability of the note holder 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 $62,305 of the debt discount during the year ended December 31, 2018.
As of December 31, 2018, the balance of this note plus accrued interest was $99,968, net of debt discount of $52,720.
Subscription Payable
In December 2018, the Company received $20,000 as a prepayment related to a future private placement offering.
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 December 31, 2018, and 2017 current liabilities from discontinued operations includes $84,281 accounts payable.
During the year ended December 31, 2018 and 2017, the Company had no income or loss from discontinued operations.
NOTE 6 – RELATED PARTY TRANSACTIONS
During the year ended December 31, 2018 and 2017, the Company’s President paid on behalf of the Company $227,214 and $164,660 of expenses and was repaid $87,444 and $64,007, respectively. The Company settled $33,300 of advances by issuing to the president of the Company 222,000 shares of common stock valued at $0.15 per share. The President of the Company was owed $231,708 and $125,238 at December 31, 2018 and 2017, respectively.
During the year ended December 31, 2018, the CEO and Director of the Company made advancement of $23,588 to the Company.
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 in the year ended December 31, 2017. The balance of these notes and accrued interest were $234,273 and $223,880 as of December 31, 2018 and 2017, respectively.
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. During the year ended December 31, 2018, the loan balance of $5,936 was determined to be uncollectible and an allowance for doubtful accounts was set up for the full amount of the receivable.
During the year ended December 31, 2018, the Company incurred signing bonus of $25,000 to a newly appointed CTO hired in December 2018.
NOTE 7 – INCOME TAXES
The Company uses the liability method, whereby deferred taxes and liabilities are determined based on the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes. The net deferred tax asset generated by the loss carryforward has been fully reserved. The cumulative net operating loss carry-forward is approximately $14,265,000 at December 31, 2018, and will expire in the years 2027 through 2037.
On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (the “Act”) resulting in significant modifications to existing law. The Company has completed the accounting for the effects of the Act during the year ended December 31, 2018. The Company’s financial statements for the year ended December 31, 2018 reflect certain effects of the Act which includes a reduction in the corporate tax rate from 34% to 21% as well as other changes.
The following is a reconciliation of the federal statutory tax rate to the effective tax rate for the years ended December 31, 2018 and 2017:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Income tax benefit (federal and state)
|
|
$
|
(94,000
|
)
|
|
$
|
(262,000
|
)
|
Change in deferred tax rate - Federal Tax Reform
|
|
|
1,804,000
|
|
|
|
-
|
|
Non-deductible items
|
|
|
11,000
|
|
|
|
202,000
|
|
Change in valuation allowance
|
|
|
(1,721,000
|
)
|
|
|
60,000
|
|
Income tax benefit
|
|
$
|
-
|
|
|
$
|
-
|
|
The components of the Company’s deferred tax asset and reconciliation of income taxes computed at the statutory rate to the income tax amount recorded as of December 31, 2018 and 2017 are as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net operating loss carryforward
|
|
$
|
14,265,000
|
|
|
$
|
13,874,000
|
|
Effective tax rate
|
|
|
21
|
%
|
|
|
34
|
%
|
Deferred tax asset
|
|
|
2,996,000
|
|
|
|
4,717,000
|
|
Less: Valuation allowance
|
|
|
2,996,000
|
|
|
|
4,717,000
|
|
Net deferred asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The utilization of the carryforwards is dependent upon the Company’s ability to generate sufficient taxable income during the carryforward period. In addition, utilization of these carryforwards may be limited due to ownership changes as defined in the Internal Revenue Code.
NOTE 8 – 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 year ended December 31, 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 year ended December 31, 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, 2018 and 2017 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 9 – 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:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Warrants
|
|
|
112,238
|
|
|
|
250,000
|
|
Options
|
|
|
2,650,000
|
|
|
|
2,650,000
|
|
Convertible notes payable, including accrued interest
|
|
|
943,794
|
|
|
|
59,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,706,032
|
|
|
|
2,959,500
|
|
NOTE 10 – SUBSEQUENT EVENTS
Subsequent to December 31, 2018 and through the date that these financials were made available, the Company had the following subsequent events:
In January 2019, a convertible noteholder converted $10,000 of the debt outstanding at $0.14 per share into a total of 70,588 shares. The Company made payments totaling $135,000 to repay the balance due on the convertible note.
In January 2019, the Company entered into a service agreement with Codezeroes Technology Pvt. Ltd. to create an exchange for the fiber market.
In January 2019, the Company issued a convertible promissory note in the amount of $86,250, convertible into common stock at the lower of the lowest trading price within the prior twenty-five days of the note or 50% multiplied by the lowest traded price of the common stock during the twenty-five consecutive trading day period immediately preceding the conversion date. The note bears interest at 12% per annum and matures on October 3, 2019.
In January 2019, the Company issued a convertible promissory note in the amount of $60,000, with an original issue discount of $3,000, convertible into common stock at the lower of $0.21 per share or 35% multiplied by the lowest traded price of the common stock during the ten consecutive trading day period immediately preceding the notice of conversion. The note bears interest at 5% per annum and matures on January 16, 2020.
In January 2019, the Company issued a convertible promissory note in the amount of $58,000, with an original issue discount of $5,000, convertible into common stock at a price of 60% of the lowest traded price of the common stock during the twenty consecutive trading day period immediately preceding the notice of conversion. The note bears interest at 10% per annum and matures on January 23, 2020.
In January 2019, the Company received $5,000 as a prepayment related to a future private placement offering.
In January 2019, the CEO of the Company advanced $25,000 to the Company as a prepayment for a future private placement offering.
In February 2019, the Company issued a convertible promissory note in the amount of $45,500, with an original issue discount of $4,000, convertible into common stock at the lower of the lowest trading price within the prior twenty-five days of the note or 50% multiplied by the lowest traded price of the common stock during the twenty-five consecutive trading day period immediately preceding the conversion date. The note bears interest at 12% per annum and matures on October 25, 2019.
On March 1, 2019, ECOTEK 360, INC signed an agreement with Issuance Inc/CROWDFUNDX www.issuance.com www.crowdfundx.io to raise $3,000,000 in equity for its ECOCHAIN 360 subsidiary. The monies will be used to finish building an “exchange platform” based on blockchain technology for the trading of textile fiber products bringing substantial efficiency and cost savings as an alternative to the status quo.
In March 2019, the Company received $25,000 as a prepayment related to a future private placement offering.
In March 2019, the Company received $25,000 as a prepayment related to a future private placement offering.