REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
The Board of Directors and
Stockholders of Electromedical Technologies, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance
sheets of Electromedical Technologies, Inc. (the “Company”) as of December 31, 2018 and 2017, the related statements
of operations, stockholders’ deficit, and cash flows, for the years then ended, and the related notes (collectively referred
to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects,
the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for
the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the
Company has suffered recurring losses from operations and has a negative working capital balance, which raises substantial doubt
about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note
2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based
on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required
to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ dbbmckennon
|
|
We have served as the Company's auditor since 2018.
|
|
San Diego, California
|
|
April 30, 2019
|
|
ELECTROMEDICAL TECHNOLOGIES, INC.
BALANCE SHEETS
DECEMBER 31, 2018 AND 2017
|
|
2018
|
|
|
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
-
|
|
|
$
|
27,860
|
|
Accounts receivable
|
|
|
13,774
|
|
|
|
28,058
|
|
Inventories
|
|
|
29,604
|
|
|
|
96,689
|
|
Prepaid expenses and other current assets
|
|
|
128,553
|
|
|
|
207,298
|
|
Total current assets
|
|
|
171,931
|
|
|
|
359,905
|
|
Property and equipment, net
|
|
|
795,551
|
|
|
|
817,890
|
|
Due from Chief Executive Officer
|
|
|
11,304
|
|
|
|
-
|
|
Total assets
|
|
$
|
978,786
|
|
|
$
|
1,177,795
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
-
|
|
|
$
|
87,747
|
|
Accounts payable
|
|
|
166,979
|
|
|
|
394,906
|
|
Credit cards payable
|
|
|
42,515
|
|
|
|
70,377
|
|
Accrued expenses and other current liabilities
|
|
|
104,394
|
|
|
|
273,053
|
|
Customer deposits
|
|
|
112,300
|
|
|
|
273,939
|
|
KISS liability - related party
|
|
|
1,621,805
|
|
|
|
-
|
|
Note payable
|
|
|
27,307
|
|
|
|
-
|
|
Bank debt, current portion
|
|
|
24,425
|
|
|
|
25,341
|
|
Total current liabilities
|
|
|
2,099,725
|
|
|
|
1,125,363
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Bank debt, net of current portion
|
|
|
591,650
|
|
|
|
615,466
|
|
Notes Payable
|
|
|
157,000
|
|
|
|
157,000
|
|
Convertible promissory note
|
|
|
25,000
|
|
|
|
-
|
|
Related party notes payable, net of amount due from Chief Executive Officer
|
|
|
149,000
|
|
|
|
133,645
|
|
Other liabilities
|
|
|
16,651
|
|
|
|
6,282
|
|
Total liabilities
|
|
|
3,039,026
|
|
|
|
2,037,756
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' deficit
|
|
|
|
|
|
|
|
|
Common stock, $0.00001 par value, 25,000,000 shares authorized; 16,320,823 and 15,000.000 shares outstanding as of December 31, 2018 and 2017, respectively
|
|
|
162
|
|
|
|
150
|
|
Additional paid-in- capital
|
|
|
1,447,960
|
|
|
|
697,834
|
|
Accumulated deficit
|
|
|
(3,508,362
|
)
|
|
|
(1,557,945
|
)
|
Total stockholders' deficit
|
|
|
(2,060,240
|
)
|
|
|
(859,961
|
)
|
Total liabilities and stockholders' deficit
|
|
$
|
978,786
|
|
|
$
|
1,177,795
|
|
See accompanying notes to financial statements
The
accompanying notes are an integral part of these audited financial statements
ELECTROMEDICAL
TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND
2017
|
|
2018
|
|
|
2017
|
|
Net sales
|
|
$
|
675,383
|
|
|
$
|
857,717
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
168,716
|
|
|
|
197,430
|
|
Gross profit
|
|
|
506,667
|
|
|
|
660,287
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
787,370
|
|
|
|
1,116,992
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(280,703
|
)
|
|
|
(456,705
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(86,463
|
)
|
|
|
(53,707
|
)
|
Change in fair value of related party KISS liability
|
|
|
(1,586,805
|
)
|
|
|
-
|
|
Other income
|
|
|
3,554
|
|
|
|
-
|
|
Total other expense
|
|
|
(1,669,714
|
)
|
|
|
(53,707
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,950,417
|
)
|
|
$
|
(510,412
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
15,198,564
|
|
|
|
15,000,000
|
|
Weighted average earnings per share
|
|
$
|
(0.13
|
)
|
|
$
|
(0.03
|
)
|
See accompanying notes to financial statements
The
accompanying notes are an integral part of these audited financial statements
ELECTROMEDICAL
TECHNOLOGIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS'
AND MEMBER'S DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2018 AND
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
and
|
|
|
|
Member's
|
|
|
Common Stock
|
|
|
|
|
|
Accumulated
|
|
|
Member's
|
|
|
|
Capital
|
|
|
Amount
|
|
|
Shares
|
|
|
Paid in Capital
|
|
|
Deficit
|
|
|
(Deficit)
|
|
Balance, December 31, 2016
|
|
$
|
721,984
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
(1,047,533
|
)
|
|
$
|
(325,549
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member distributions
|
|
|
(24,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(24,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(510,412
|
)
|
|
|
(510,412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of LLC to C Corporation
|
|
|
(697,984
|
)
|
|
|
150
|
|
|
|
15,000,000
|
|
|
|
697,834
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
|
-
|
|
|
|
150
|
|
|
|
15,000,000
|
|
|
|
697,834
|
|
|
|
(1,557,945
|
)
|
|
|
(859,961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in conjunction with 2017 marketing promotion
|
|
|
-
|
|
|
|
2
|
|
|
|
243,584
|
|
|
|
172,943
|
|
|
|
-
|
|
|
|
172,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in conjunction with Reg A+ filing, net of offering costs
|
|
|
-
|
|
|
|
7
|
|
|
|
724,674
|
|
|
|
247,510
|
|
|
|
-
|
|
|
|
247,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for cash
|
|
|
-
|
|
|
|
1
|
|
|
|
105,000
|
|
|
|
104,999
|
|
|
|
-
|
|
|
|
105,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in conjunction with vendor settlement
|
|
|
-
|
|
|
|
2
|
|
|
|
247,565
|
|
|
|
175,769
|
|
|
|
-
|
|
|
|
175,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
48,905
|
|
|
|
-
|
|
|
|
48,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,950,417
|
)
|
|
|
(1,950,417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
|
$
|
-
|
|
|
$
|
162
|
|
|
|
16,320,823
|
|
|
$
|
1,447,960
|
|
|
$
|
(3,508,362
|
)
|
|
$
|
(2,060,240
|
)
|
See accompanying notes to financial statements
The
accompanying notes are an integral part of these audited financial statements
ELECTROMEDICAL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND
2017
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,950,417
|
)
|
|
$
|
(510,412
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
-
|
|
|
|
1,000
|
|
Stock-based compensation expense
|
|
|
48,905
|
|
|
|
-
|
|
Depreciation and amortization
|
|
|
22,339
|
|
|
|
22,582
|
|
Change in excess fair value of KISS liability- related party
|
|
|
1,586,805
|
|
|
|
-
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
14,284
|
|
|
|
(2,878
|
)
|
Inventories
|
|
|
67,085
|
|
|
|
(11,723
|
)
|
Prepaid expenses and other current assets
|
|
|
(115,401
|
)
|
|
|
(103,326
|
)
|
Due from Chief Executive Officer
|
|
|
(11,304
|
)
|
|
|
103,677
|
|
Accounts payable
|
|
|
(8,464
|
)
|
|
|
251,709
|
|
Credit cards payable
|
|
|
(27,862
|
)
|
|
|
(21,860
|
)
|
Accrued expenses and other current liabilities
|
|
|
14,655
|
|
|
|
188,224
|
|
Customer deposits
|
|
|
(161,639
|
)
|
|
|
(54,920
|
)
|
Net cash used in operating activities
|
|
|
(521,014
|
)
|
|
|
(137,926
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayments on line of credit
|
|
|
(87,747
|
)
|
|
|
(23,835
|
)
|
Repayments on bank debt
|
|
|
(24,732
|
)
|
|
|
(19,937
|
)
|
Related party notes payable-net
|
|
|
15,355
|
|
|
|
88,645
|
|
Proceeds from KISS liability- related party
|
|
|
35,000
|
|
|
|
-
|
|
Issuance of convertible promissory note
|
|
|
25,000
|
|
|
|
-
|
|
Repayments on note payable
|
|
|
(16,385
|
)
|
|
|
-
|
|
Issuance of common stock for cash- net
|
|
|
546,663
|
|
|
|
-
|
|
Distributions to member
|
|
|
-
|
|
|
|
(24,000
|
)
|
Net cash provided by financing activities
|
|
|
493,154
|
|
|
|
20,873
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(27,860
|
)
|
|
|
(117,053
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year
|
|
|
27,860
|
|
|
|
144,913
|
|
Cash and cash equivalents, end of year
|
|
$
|
-
|
|
|
$
|
27,860
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
81,912
|
|
|
$
|
51,155
|
|
Non-cash investing and financing
activities:
In 2018, the Company reclassified deferred
offering costs of $194,146 to paid in capital in conjunction with completion of its Reg A+ offering
In 2018, the Company issued 247,565 shares
of restricted stock in exchange for an outstanding liability totaling $175,771
In 2018, the Company issued 243,584 shares
of restricted stock in conjunction with the 2017 marketing promotion liability totaling $172,945
In 2018, the Company issued a note payable
in exchange for an outstanding liability totaling $43,692
The
accompanying notes are an integral part of these audited financial statements
ELECTROMEDICAL
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2018 AND 2017
|
NOTE 1.
|
ORGANIZATION AND
NATURE OF BUSINESS
|
Electro Medical Technologies, LLC
(“the Company”), was formed in November 2010 as an Arizona limited liability company. In August 2017, the Company converted
to a Delaware C Corporation under Electromedical Technologies, Inc. The Company is a bioelectronic engineering company with medical
device certifications in the United States (FDA) and Mexico (Cofepris). The Company engineers simple-to-use portable bioelectronics
devices, which provide fast and long -lasting pain relief across a broad range of ailments.
|
NOTE 2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
|
Accounting Method
The Company maintains its accounting
records on an accrual method in conformity with accounting principles generally accepted in the United States of America (“US
GAAP”).
Use of Estimates
The preparation of financial statements
in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets
and liabilities, certain disclosures at the date of the financial statements, as well as the reported amounts of revenues and expenses
during the reporting period. Significant estimates affecting the financial statements have been prepared on the basis of the most
current and best available information. However, actual results from the resolution of such estimates and assumptions may vary
from those used in the preparation of the financial statements.
Going Concern
Since inception, the Company
has incurred approximately $3.5 million of accumulated net losses, which includes approximately $1.6 million related to the adjustment
to fair market value of the Company’s related party KISS liability. In addition, during the year ended December 31, 2018,
the Company used $521,014, in operations and had a working capital deficit of $1,927,794. These factors raise substantial doubt
regarding the Company's ability to continue as a going concern. The Company expects to obtain funding through additional debt
and equity placement offerings until it consistently achieves positive cash flows from operations. If the Company is unable to
obtain additional funding, it may not be able to meet all of its obligations as they come due for the next twelve months. The
continuing viability of the entity and its ability to continue as a going concern is dependent upon the entity being successful
in its continuing efforts in growing its revenue base and/or accessing additional sources of capital, and/or selling assets.
As a result, there is significant
uncertainty whether the entity will continue as a going concern and, therefore, whether it will realize its assets and settle
its liabilities and commitments in the normal course of business and at the amounts stated in the financial statements.
Accordingly, no adjustments have
been made to the financial statements relating to the recoverability and classification of the asset carrying amounts or the amount
and classification of liabilities that might be necessary should the entity not continue as a going concern. At this time, management
is of the opinion that no asset is likely to be realized for an amount less than the amount at which it is recorded in the financial
statements as at December 31, 2018. (See Note 9).
Revenue Recognition
As required
by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605, Revenue
Recognition, the Company also has a policy which requires it to meet certain criteria in order to recognize revenue, including
satisfaction of the following requirements:
a) Persuasive
evidence that an arrangement exists;
b) The
price to the buyer is fixed or determinable;
c) Collectability
is reasonably assured; and
d) The
Company has no significant obligations for future performance.
Revenue
and related costs are generally recorded when products are shipped and invoiced to either independently owned and operated distributors
or to end-customers.
Certain larger customers pay in
advance for future shipments. These advance payments totaled $112,300 and $273,939 at December 31, 2018 and 2017, respectively,
and are recorded as customer deposits in the accompanying balance sheets. Revenue related to these advance payments is recognized
upon shipment to the distributor or the end-customer.
At the completion of the initial
three-year warranty, the Company sells extended warranties for periods ranging from one to three years. Revenue is recognized on
a straight-line basis over the term of the contract. Deferred revenue of $16,651 and $11,781 is recorded in connection with these
extended warranties as of December 31, 2018 and 2017, respectively.
Cash and Cash Equivalents
The Company considers all highly
liquid investments purchased with original maturities of three months or less to be cash equivalents.
Accounts
Receivable
Accounts receivable are stated
at amounts due from customers, net of an allowance for doubtful accounts, and the Company generally does not require collateral.
As a general policy, the Company determines an allowance for doubtful accounts by considering a number of factors, including the
length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current
ability to pay its obligation to the Company, and the condition of the general economy and industry as a whole. The Company writes
off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to
the allowance for doubtful accounts.
The Company recorded an allowance
for doubtful accounts of $1,000 as of both December 31, 2018 and 2017.
Financial Instruments and Concentrations
of Business and Credit Risk
The estimated fair value of financial
instruments has been determined using available market information and appropriate valuation methodologies. However, considerable
judgment is often required to interpret market data used to develop the estimates of fair value. Accordingly, the estimates presented
may not be indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies could have a material effect on the estimated fair value amounts.
Disclosure of Fair Value
The disclosure requirements within
Accounting Standards Codification (ASC) Topic 820-10, Fair Value Measurement, require disclosure of estimated fair values of certain
financial instruments. For financial instruments recognized at fair value in the Company’s statements of operations, the
disclosure requirements of ASC Topic 820-10 also apply. The methods and assumptions are set forth below:
|
·
|
Cash and cash equivalents are carried at cost, which approximates fair value.
|
|
·
|
The carrying amounts of receivables approximate fair value due to their short-term maturities.
|
|
·
|
The carrying amount of payables approximate fair value due to their short-term maturities.
|
|
·
|
KISS liability-related party is adjusted to fair value based on the value of the Company as a whole using the discounted cash flow method.
|
Asset and liabilities measured
and reported at fair value are classified and disclosed in one of the following categories based on inputs:
Level 1 — Quoted prices
in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date
Level 2 — Inputs other
than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable
market data for substantially the entire contractual term of the asset or liability
Level 3 — Pricing inputs
include significant unobservable inputs used in determining the fair value of investments. The types of investments, which would
generally be included in this category include equity securities issued by private entities.
In certain cases, the inputs
used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which
category within the fair value hierarchy is appropriate for any given investment is based on the lowest level of input that is
significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair
value measurement in its entirety requires judgment and considers factors specific to the investment.
The levels of the fair value
hierarchy into which the Company’s investments fall as of December 31, 2018, are as follows:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KISS liability- related party
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,621,805
|
|
|
$
|
1,621,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,621,805
|
|
|
$
|
1,621,805
|
|
See Note 6 for discussion of the
Company’s valuation of the KISS liability- related party.
The Company maintains cash balances
that can, at times, exceed amounts insured by the Federal Deposit Insurance Corporation. The Company has not experienced any losses
in these accounts and believes it is not exposed to any significant credit risk.
The Company’s accounts receivable,
which are unsecured, expose the Company to credit risks such as collectability and business risks such as customer concentrations.
The Company mitigates credit risk by investigating the creditworthiness of all customers prior to establishing relationships with
them, performing periodic review of the credit activities of those customers during the course of the business relationship, regularly
analyzing the collectability of accounts receivables, and recording allowances for doubtful accounts when these receivables become
uncollectible. The Company mitigates business risks by attempting to diversify its customer base.
The Company had one significant
customer for the years ended December 31, 2018 and 2017 that in total accounted for approximately 24% and 18%, respectively, of
net sales. There were no amounts outstanding from this customer as of both December 31, 2018 and 2017. Customer deposits on hand
from this customer totaled approximately $112,000 and $274,000 at December 31, 2018 and 2017, respectively. The loss of this customer
would have a significant impact on the operations and cash flows of the Company.
The Company’s supplier concentrations
expose the Company to business risks which the Company mitigates by attempting to diversify its supply chain. Supplier concentrations
for the years ended December 31, 2018 and 2017 consisted of one significant supplier that accounted for approximately 60% and 39%,
respectively, of total net purchases. This supplier accounted for approximately 35% of the Company’s total accounts payable
as of December 31, 2017. In November 2018, the Company entered into an agreement with this supplier, whereby the Company exchanged
247,565 shares of common stock as payment in full for the outstanding amount due the supplier of $175,771. The loss of key vendors
may have a significant impact on the operations and cash flows of the Company.
Inventories
Inventories are stated at the lower
of cost or market. Cost is determined based on the first-in, first-out cost flow assumption (“FIFO”) while market is
determined based upon the estimated net realizable value less an allowance for selling and distribution expenses and a normal gross
profit. The Company evaluates the need for inventory reserves associated with obsolete, slow moving, and non-sellable inventory
by reviewing estimated net realizable values on a periodic basis. As of December 31, 2018, and 2017, the Company believes there
are no excess and obsolete inventories and accordingly, did not record an inventory reserve. Inventories consist of purchased finished
goods. As of December 31, 2017, recorded within prepaids and other current assets on the accompanying balance sheet is $15,186
in credits to which the Company expected to receive credit form their primary manufacturer. There were no credits due from the
supplier at December 31, 2018.
Deferred Offering Costs
Included in Other Current Assets
at December 31, 2017 are deferred offering costs totaling $188,424. The Company accounts for offering costs in accordance with
FASB ASC 340, Other Assets and Deferred Costs. Prior to the completion of an offering, offering costs will be included
in prepaid expenses and other current assets on the accompanying balance sheet. The Company’s filing became effective in
January 2018 at which time deferred offering costs totaling $194,146 were reclassified to stockholders’ deficit in the accompanying
balance sheet (see Note 9).
Property and Equipment
Property and equipment is recorded
at cost and is comprised of a building and office furniture and equipment. The building is depreciated using the straight-line
method over the estimated useful life of 40 years. Office furniture and equipment is depreciated using the double-declining method
or the straight-line method over the estimated useful lives of 3 to 7 years.
Betterments, renewals, and extraordinary
repairs that materially extend the useful life of the asset are capitalized; other repairs and maintenance charges are expensed
as incurred. The cost and related accumulated depreciation applicable to assets retired are removed from the accounts, and the
gain or loss on disposition, if any, is recognized in the accompanying statements of operations.
Impairment of Long-Lived Assets
In accordance with FASB ASC Topic
360, Property, Plant and Equipment, long-lived assets such as property and equipment are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is
recognized on long-lived assets when indicators of impairment are present and the undiscounted future cash flows estimated to be
generated by those assets are less than the carrying amount of the assets. In such cases, the carrying value of these assets are
adjusted to their estimated fair values and assets held for sale are adjusted to their estimated fair values less selling expenses.
No impairment losses of long-lived
assets were recognized for the years ended December 31, 2018 and 2017.
Income Taxes
The Company, which was formed as
an Limited liability Company in Arizona, previously filed an Entity Classification Election, commonly known as a check-the-box-election,
to be classified as a corporation for tax purposes. The Company also made an election to be treated for income tax purposes as
an S corporation. Under U.S. and Arizona law, the taxable income or loss of an S corporation is included in the shareholder’s
income tax returns. In August 2017, the Company converted to a Delaware Corporation. The conversion was tax-free under Internal
Revenue Code Section 368(a)(1)(F) and is referred to as an F-reorganization, which is typically defined as a mere change in identity,
form or place of organization. Management elected to terminated the S corporation election effective January 1, 2018 and the Company
will operate for tax purposes as a C corporation from that date forward.
The Company follows the provisions
of uncertain tax positions as addressed in FASB ASC Subtopic 740-10-65-1, Income Taxes. The Company has no such tax
positions as of both December 31, 2018 and 2017, for which the ultimate deductibility is highly certain but for which there is
uncertainty about the timing of such deductibility. The Company recognizes interest accrued related to unrecognized tax benefits
in interest expense and penalties in selling, general and administrative expenses. No such interest or penalties were recognized
during the periods presented. The Company had no accruals for interest and penalties as of December 31, 2018 and 2017.
The Company files income tax returns
in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to examination
by U.S. federal tax authorities for returns filed for the prior three years and by state and local income tax authorities for returns
filed for the prior four years. There are no examinations currently pending.
The Company’s tax provision
for 2018 related to deferred tax charges consisting of a minor amount of accruals for which the Company will receive the benefit
from when paid and the net operating loss incurred during 2018. During the year ended December 31, 2018, the Company evaluated
its deferred tax assets of $199,188 and determined a full valuation allowance was appropriate.
At December 31, 2018, the Company’s
net operating loss carry forward was $800,884 which originated in 2018. NOLs originating in 2018 can be carried forward indefinitely.
The difference between the statutory rate of 21% and the effective tax rate is due to permanent differences and a full valuation
allowance
Sales
Taxes
FASB ASC Subtopic 605-45, Revenue
Recognition – Principal Agent Considerations, provides that the presentation of taxes assessed by a governmental
authority that are directly imposed on revenue-producing transactions (e.g. sales, use, and excise taxes) between a seller and
a customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting
policy decision that should be disclosed. In addition, for any such taxes that are reported on a gross basis, the amounts of those
taxes should be disclosed in the financial statements for each period for which a statement of operations is presented if those
amounts are significant. Sales taxes for the years ended December 31, 2018 and 2017 were recorded on a net basis. Included in accrued
expenses at December 31, 2018 and 2017 is approximately $51,000 and $44,000, respectively, related to sales taxes.
Shipping and Handling Costs
The Company included shipping and
handling costs in cost of sales on the accompanying statements of operations for the years ended December 31, 2018 and 2017.
Warranty
The Company warranties the sale
of most of its products and records an accrual for estimated future claims. The standard warranty is typically for a period of
three years. Such accruals are based upon historical experience and management's estimate of the level of future claims. The Company
recorded a liability as of December 31, 2018 and 2017 of $13,067 and $14,231, respectively and is included in cost of sales in
the statements of operations and within accrued expenses on the accompanying balance sheets.
Advertising
Advertising costs are expensed
as incurred. Total advertising expenses amounted to $15,181 and $7,952 and are included in selling, general and administrative
expenses on the accompanying statements of operations for the years ended December 31, 2018 and 2017, respectively.
Research and Development Costs
Research and development costs
are expensed as incurred. Total research and development costs amounted to $0 and $4,000 during the years ended December 31, 2018
and 2017, respectively and are included in selling, general and administrative expenses on the accompanying statements of operations.
Net Loss
per Share
Net earnings or loss per share
is computed by dividing net income or loss by the weighted-average number of common shares outstanding during the period, excluding
shares subject to redemption or forfeiture. The Company presents basic and diluted net earnings or loss per share. Diluted
net earnings or loss per share reflect the actual weighted average of common shares issued and outstanding during the period, adjusted
for potentially dilutive securities outstanding. Potentially dilutive securities are excluded from the computation of the diluted
net loss per share if their inclusion would be anti-dilutive. As all potentially dilutive securities are anti-dilutive as of December
31, 2018 and 2017, diluted net loss per share is the same as basic net loss per share for each year.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued
Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). The new standard establishes a right-of-use
("ROU") model that requires a lessee to record a ROU asset and a lease liability, measured on a discounted basis, on
the balance sheet for all leases with terms greater than 12 months. Leases will be classified as either finance or operating, with
classification affecting the pattern of expense recognition in the statements of operations and comprehensive loss. A modified
retrospective transition approach is required for capital and operating leases existing at the date of adoption, with certain practical
expedients available. The Company is currently in the process of evaluating the potential impact of this new accounting guidance,
which is effective for the Company beginning on January 1, 2020 . The impact is not expected to be significant.
In May 2014, the FASB issued ASU
2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 supersedes existing revenue
recognition guidance, including ASC 605-35. ASU 2014-09 outlines a single set of comprehensive principles for recognizing revenue
under US GAAP. Among other things, it requires companies to identify contractual performance obligations and determine whether
revenue should be recognized at a point in time or over time. These concepts, as well as other aspects of ASU 2014-09, may change
the method and/or timing of revenue recognition for some of the Company’s contracts. ASU 2014-09 may be applied either retrospectively
or through the use of a modified-retrospective method. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with
Customers (Topic 606): Deferral of the Effective Date. The amendments of ASU 2015-14 defer the effective date of ASU 2104-09
for all entities by one year. Private companies should apply the guidance in ASU 2014-09 to annual reporting periods beginning
after December 15, 2018. The Company is currently evaluating methods of adoption as well as the impact that adoption of this guidance
will have on its financial statements and does not expect it to be significant.
Management does not believe that
any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on
the Company’s financial statement presentation or disclosures.
|
NOTE 3.
|
PROPERTY AND EQUIPMENT
|
Property and equipment consisted
of the following as of December 31:
|
|
2018
|
|
|
2017
|
|
Building
|
|
$
|
875,000
|
|
|
$
|
875,000
|
|
Furniture and equipment
|
|
|
24,987
|
|
|
|
24,987
|
|
|
|
|
899,987
|
|
|
|
899,987
|
|
Less: accumulated depreciation and amortization
|
|
|
(104,436
|
)
|
|
|
(82,097
|
)
|
|
|
$
|
795,551
|
|
|
$
|
817,890
|
|
Depreciation and amortization expense
related to property and equipment was $22,339 and $22,583 for the years ended December 31, 2018 and 2017, respectively, and is
included in selling, general and administrative expenses on the accompanying statements of operations.
|
NOTE 4.
|
REVOLVING LINE OF
CREDIT
|
In November 2010, the Company obtained
a revolving line of credit (the “Revolver”) with a financial institution that expired in November 2017 at which time
all outstanding interest and principal became due. The Revolver was collateralized by substantially all of the Company’s
assets; was personally guaranteed by the Company’s member and did not contain any financial covenants. The interest rate
is based on the prime rate plus 4%, or 8.5% as of December 31, 2017. Interest on the Revolver is payable monthly in arrears in
an amount equal to the actual accrued interest or $100, whichever is greater. The outstanding balance on the Revolver was $87,747
as of December 31, 2017. In November 2018, the revolver and all accrued interest were paid in full and the revolver was cancelled.
In May 2018, the Company entered
into a note payable with a third- party vendor as payment for an outstanding balance in the amount of $43,692. At December 31,
2017, the amount is recorded as accounts payable on the accompanying balance sheet. The note is interest free and requires monthly
payments of $5,461 beginning June 15, 2018 with the remaining balance due and payable on December 15, 2018. The Company did not
make timely payments as of December 15, 2018 which resulted in interest being accrued on the unpaid balance at a rate of ten percent
beginning July 31, 3017. The note payable balance as of December 31, 2018 is $27,307. Interest expense of $4,138 has been accrued
in the Company’s statement of operations as of December 31, 2018.
|
NOTE 6.
|
KISS
LIABILITY- RELATED PARTY
|
In July 2018, The Company entered
into KISS agreement with a related party for a purchase price of $35,000. The purchase price of the KISS agreement is non-interest
bearing, matures twelve months from the issuance date in July 2019 and has been recorded as KISS liability- related party in the
current liabilities section of the Company’s balance sheet.
Under the terms of the agreement,
the KISS agreement may be converted into a certain amount of “Conversion Shares” at the earlier of the Company’s
“Next Equity Financing” or “Corporate Transaction” as defined in the agreement, or at maturity. The Company
has calculated the estimated number of conversion shares to be 8,042,246 at December 31, 2018. The fair market value of the convertible
note at December 31, 2018 is $1,621,805, with the excess in value over the proceeds received of $1,586,805 recorded as excess fair
value of KISS liability in the Company’s statement of operations in 2018.
KISS conversion shares are
equal to the quotient obtained by dividing the Conversion Amount by the Conversion Price as defined in the agreement. At December
31, 2018, the Conversion Amount is the purchase price of $35,000. The conversion price is the quotient resulting from dividing
(A) the Valuation Cap by (B) the Fully-Diluted Capitalization immediately prior to the conversion. "Valuation Cap"
shall mean (i) US $82,497 for shares converted prior to July 1, 2020 (the "2020 Valuation Cap").
The Company determined the fair
value of the KISS liability using the estimated enterprise value of the Company, allocating the percentage of fully diluted pro-rata
shares to the value of the KISS liability. The Company will mark to market the liability at each reporting period.
Note Payable
In March 2015, the Company entered
into an $850,000 note payable (the “Original Note Payable”) with a third-party to finance the purchase of its office
building (see note 8). The Original Note Payable consisted of interest-only payments at 4.5% per annum, payable monthly in arrears.
The Original Note Payable was collateralized by a deed of trust in the office building. During 2015, the Company refinanced the
Original Note Payable with bank debt and a new note payable (“Note Payable”) for the unpaid principal balance.
The Note Payable, effective December
31, 2015, was issued for a principal amount of $157,000. Interest began accruing on the interest commencement date of January 1,
2018, at 2% per annum, compounded monthly. The unpaid principal balance and accrued interest is due within ten days of the maturity
date on December 31, 2020. The outstanding balance on the Note Payable at both December 31, 2018 and 2017 was $157,000. The Note
Payable is personally guaranteed by the Company’s CEO.
Convertible Promissory Note
In May 2018, the Company borrowed
$25,000 in conjunction with a convertible promissory note. The note matures in June 2020 and accrues interest at a rate of 8% per
annum. The lender has the right at any time to convert the debt into fully paid and non- assessable shares of common stock at a
price of $0.71 per share. The proceeds were used for operations.
Bank Debt
In September 2015, the Company
entered into a credit agreement for a $700,000 term loan with a financial institution. Payment terms consist of monthly payments
in arrears of $3,547 for the first year outstanding. The monthly payment then increases to $4,574 until the term loan matures on
September 30, 2025, in which the remaining unpaid principal balance and accrued interest is due. The interest rate for the first
year was 1.99% per annum and increased to 4.95% per annum for the remaining life of the term loan. The term loan is collateralized
by a deed of trust in the office building. The proceeds were used to purchase a building for which the Company's operations are
located. The net principal balance outstanding on the term loan at December 31,2018 and 2017 was $616,075 and $640,807, respectively.
The term loan is personally guaranteed by the Company’s CEO.
Related
Party Notes Payable
In October 2013, the Company entered
in to a $45,000 note payable with an individual related to the Company's CEO. The proceeds were used for operations. Interest began
accruing on the interest commencement date of January 1, 2018, at 2% per annum, compounded monthly. The unpaid principal balance
and accrued interest is due within ten days of the maturity date on December 31, 2020. The outstanding principal balance on the
related party note payable at both December 31, 2018 and 2017 was $44,000.
In July 2017, the Company entered
into a $250,000 promissory note with its CEO. The proceeds were used for operations and Regulation A+ offering costs. The promissory
note will begin accruing interest on the interest commencement date of October 1, 2018 at 2% per annum, compounded monthly. The
unpaid principal balance and accrued interest are due within ten days of the maturity date on September 30, 2020. Included in the
accompanying balance sheets is $261,304 and $160,355 due from the Company’s CEO as of December 31, 2018 and 2017, respectively.
In 2018, $250,000 of the amount due from the Company’s CEO has been net against the note payable due the CEO, leaving a receivable
of $11,304. In 2017, the total amount due from the Company’s CEO has been net against the note payable due the CEO for a
total net due of $89,645.
In 2018, the Company entered in
to promissory notes totaling $105,000 with a related party. All notes mature at various times in 2020. Interest will accrue at
10% per annum from the due date thereon until all principal is paid in full. Proceeds from the loans were used for operations.
See Note 12 for additional transactions with this related party.
Future aggregate maturities of long-term debt, excluding
the short-term note payable and the KISS liability-related party are as follows:
For the Years Ending December 31:
|
|
|
|
|
2019
|
|
|
$
|
24,425
|
|
2020
|
|
|
|
356,595
|
|
2021
|
|
|
|
26,994
|
|
2022
|
|
|
|
28,381
|
|
2023
|
|
|
|
29,838
|
|
Thereafter
|
|
|
|
480,842
|
|
|
|
|
$
|
947,075
|
|
The long-term
debt agreements do not contain any financial covenants.
|
NOTE 8.
|
RELATED PARTY TRANSACTIONS
|
The Company has a promissory note
with a related party for $44,000 (see Note 7).
Included in the accompanying balance
sheets is $261,305 and $160,355 of amounts due from the Company’s CEO as of December 31, 2018 and 2017, respectively. The
amounts due are non-interest bearing, payable upon demand and have been net against the note payable due the Company’s CEO
(see Note 7).
In 2018, the Company entered in
to promissory notes totaling $105,000 and a $35,000 KISS agreement with a related party (see Notes 6 and 7). The Company sold the
related party 452,114 shares of common stock in conjunction with its Reg A+ offering in 2018 (see Note 9).
|
NOTE 9.
|
STOCKHOLDERS’
DEFICIT
|
In August 2017, the Company converted
to a Delaware C Corporation. In conjunction with the conversion, the Company authorized 25 million shares of common stock with
a par value of $0.00001 of which 15 million shares were issued to the Company’s sole member. The sole member’s percentage
in the converted entity remained equal to the sole member’s interest in the LLC.
In February and March 2017, the
Company executed a promotion whereby distributors who made purchases during the promotional period would receive credits towards
either future purchases of product through September 1, 2017 or shares of stock. Credits totaling $173,955 were earned by such
distributors of which $ 1,010 had been applied against purchases of product. The remaining credit of $172,945 would be satisfied
in shares of the Company’s common stock. As of and for the year ended December 31, 2017, an accrual for $170,930 of the amount
of the net credits has been recorded as marketing expense in the statement of operations as well as within accrued liabilities
on the accompanying balance sheet. The Company recorded the amount as marketing expense as the promotion was provided directly
to distributors rather than to end users. In 2018, the Company issued 243,584 common shares to 25 unaffiliated shareholders
earned in the 2017 promotional program.
The Company’s Reg A+ filing
with the Securities and Exchange Commission became effective in January 2018. The offering consisted of 7,042,254 shares of common
stock at a price of $0.71 per share. The Company’s Reg A+ offering was closed on August 27, 2018. Pursuant to that offering,
the Company sold and issued a total of 724,674 common shares to 46 shareholders with net proceeds of $441,662 which includes costs
totaling $72,856. The Company incurred additional costs totaling $194,146, which have been recorded as a reduction in stockholders’
deficit as of December 31, 2018 (see Note 2).
In October and November 2018, the
Company received a total of $105,000 from two investors in exchange for 105,000 common shares of the Company at a price of $1.00
per share.
In November 2018, the Company entered
into an agreement with a key supplier, whereby the Company exchanged 247,565 shares of common stock at a price of $0.71 per share
as payment in full for the outstanding amount due the supplier of $175,771. The Company also entered into a development stock issuance
agreement with the supplier under which the Company will compensate the supplier for future development services not to exceed
$100,000 with shares of the Company’s stock at a per share price of $0.71. If at the time of delivery of a working prototype,
the value of the 247,565 shares are worth less than the amount originally owed plus the amount owed under the development agreement,
then additional shares will be issued to make the supplier whole at the then current stock price. (see Note 2).
In December 2018, the Company issued
a warrant to a third party to purchase 100,000 shares of the Company’s common stock at an exercise price of $0.71 per share.
The warrant is fully vested upon issuance and expires December 1, 2023. Compensation expense of $48,905 has been recorded in selling,
general and administrative expenses in the accompanying statement of operations for the year ended December 31, 2018. The Company
utilizes the Black Scholes valuation model which relies on certain assumptions to estimate the warrant’s fair value. The
assumptions used in the determination of the fair value of the warrant awarded in 2018, are provided in the table below.
Assumptions
|
|
|
|
Expected volatility rate
|
|
|
88
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Average risk-free interest rate
|
|
|
2.51
|
%
|
Expected term years
|
|
|
5.0
|
|
|
NOTE 10.
|
EQUITY COMPENSATION
|
In 2017, the Company’s Board
of Directors approved the 2017 Employee and Consultant Stock Ownership Plan, (the “Plan”). The Plan provides that
the Board of Directors may grant restricted stock units, incentive stock options and non-statutory stock options to officers,
key employees and certain consultants and advisors to the Company up to a maximum of 2,500,000 shares. Stock options granted under
the Plan have ten-year terms with vesting terms to be determined by the administrator of the Plan. Restricted stock unit
grant terms will be set by the administrator and at the discretion of the administrator, be settled in cash, shares, or a combination
of both. No grants have been made as of April 30, 2019.
|
NOTE 11.
|
COMMITMENTS AND
CONTINGENCIES
|
Contingencies
The Company is subject to various
loss contingencies and assessments arising in the normal course of the business, some of which relate to litigation, claims, property
taxes and sales and use tax or goods and services tax assessments. The Company considers the likelihood of the loss or the incurrence
of a liability, as well as its ability to reasonably estimate the amount of loss in determining loss contingencies and assessments.
An estimated loss contingency or assessment is accrued when it is probable that a liability has been incurred and the amount of
loss can be reasonably estimated. Management regularly evaluates current information available to them to determine whether such
accruals should be adjusted. Based on the information presently available, including discussion with counsel and other consultants,
management believes that resolution of these matters will not have a material adverse effect on its business, results of operations,
financial condition or cash flows.
Operating Leases
The Company is obligated under
certain non-cancellable operating leases for its corporate vehicles, which expired on various dates through February 2018. Total
rental expense amounted to $5,123 and $10,679 for the years ended December 31, 2018 and 2017, respectively, and is included in
selling, general and administrative expenses in the accompanying statements of operations.
|
NOTE 12.
|
SUBSEQUENT EVENTS
|
The Company has evaluated subsequent
events that have occurred through the independent auditor’s report date, which is the date that the financial statements
were available to be issued and determined that there were no subsequent events or transactions that required recognition or disclosure
in the financial statements, except as disclosed below.
The Company entered into additional
promissory notes with a related party totaling $117,000. All notes mature in two years in 2021. Interest will accrue at 10% from
the due date thereon until all principal is paid in full. Total amount due the related party is $222,000.
In January and February 2019, the
Company entered into subscription agreements for 49,295 shares of restricted common stock at a share price of $0.71 per share.
In February 2019, the Company entered into a one-year consulting agreement with the stockholder. As compensation for services provided,
the Company has issued 150,000 common shares at a share price of $1.00 per share. The shares are deemed earned as of the commencement
of the agreement. The Company is currently determining the impact of this transaction.
In March 2019, the Company entered
into a subscription agreement with a third party for 35,211 shares of common stock at a share price of $0.71 per share.
INTERIM FINANCIAL
STATEMENTS
The following tables set forth our most recent interim financial statements. Our unaudited quarterly results
of operations data have been prepared on the same basis as our audited financial statements included elsewhere in this prospectus.
In the opinion of management, the financial information set forth in the table below reflects all normal recurring adjustments
necessary for the fair statement of results of operations for these periods in accordance with generally accepted accounting principles
in the United States. Our historical results are not necessarily indicative of the results that may be expected in the future and
the results of a particular quarter or other interim period are not necessarily indicative of the results for a full year. This
data should be read in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.
ELECTROMEDICAL TECHNOLOGIES, INC.
BALANCE SHEETS
Unaudited
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
-
|
|
|
$
|
-
|
|
Accounts receivable
|
|
|
13,516
|
|
|
|
13,774
|
|
Inventories
|
|
|
104,104
|
|
|
|
29,604
|
|
Prepaid expenses and other current assets
|
|
|
103,263
|
|
|
|
128,553
|
|
Total current assets
|
|
|
220,883
|
|
|
|
171,931
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
782,032
|
|
|
|
795,551
|
|
Due from CEO
|
|
|
126,632
|
|
|
|
11,304
|
|
Total assets
|
|
$
|
1,129,547
|
|
|
$
|
978,786
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
210,371
|
|
|
|
166,979
|
|
Credit cards payable
|
|
|
35,877
|
|
|
|
42,515
|
|
Accrued expenses and other current liabilities
|
|
|
171,931
|
|
|
|
104,394
|
|
Customer deposits
|
|
|
50,149
|
|
|
|
112,300
|
|
Put option liability
|
|
|
112,631
|
|
|
|
-
|
|
KISS liability - related party
|
|
|
1,661,508
|
|
|
|
1,621,805
|
|
Convertible promissory note
|
|
|
25,000
|
|
|
|
-
|
|
Notes payable
|
|
|
19,846
|
|
|
|
27,307
|
|
Bank debt, current portion
|
|
|
25,595
|
|
|
|
24,425
|
|
Total current liabilities
|
|
|
2,312,908
|
|
|
|
2,099,725
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Bank debt, net of current portion
|
|
|
578,459
|
|
|
|
591,650
|
|
Note Payable
|
|
|
157,000
|
|
|
|
157,000
|
|
Convertible promissory note
|
|
|
-
|
|
|
|
25,000
|
|
Related party notes payable, net of amount due from CEO
|
|
|
352,000
|
|
|
|
149,000
|
|
Other liabilities
|
|
|
22,618
|
|
|
|
16,651
|
|
Total liabilities
|
|
|
3,422,985
|
|
|
|
3,039,026
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit
|
|
|
|
|
|
|
|
|
Common stock, $.00001 par value, 25,000,000 shares authorized; 16,668,790 and 16,320,823 shares outstanding as of June 30, 2019 and December 31, 2018, respectively
|
|
|
165
|
|
|
|
162
|
|
Additional paid-in-capital net of offering costs of $267,001
|
|
|
2,255,146
|
|
|
|
1,447,960
|
|
Accumulated deficit
|
|
|
(4,548,749
|
)
|
|
|
(3,508,362
|
)
|
Total stockholders’ deficit
|
|
|
(2,293,438
|
)
|
|
|
(2,060,240
|
)
|
Total liabilities and stockholders’ deficit
|
|
$
|
1,129,547
|
|
|
$
|
978,786
|
|
See accompanying notes to financial statements
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
|
|
2019
|
|
|
2018
|
|
Net sales
|
|
$
|
354,893
|
|
|
|
353,483
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
106,208
|
|
|
|
78,680
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
248,685
|
|
|
|
274,803
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
1,224,627
|
|
|
|
418,576
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(975,942
|
)
|
|
|
(143,773
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(24,742
|
)
|
|
|
(26,836
|
)
|
Change in fair value of related party KISS liability
|
|
|
(39,703
|
)
|
|
|
-
|
|
Total other expense
|
|
|
(64,445
|
)
|
|
|
(26,836
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,040,387
|
)
|
|
|
(170,609
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
16,553,916
|
|
|
|
15,000,000
|
|
Weighted average earnings per share
|
|
$
|
(0.06
|
)
|
|
|
(0.01
|
)
|
STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE PERIOD ENDED JUNE 30, 2019
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common
|
|
|
|
|
|
Paid in
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Stock
|
|
|
Shares
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
Balance, December 31, 2018
|
|
$
|
162
|
|
|
|
16,320,823
|
|
|
$
|
1,447,960
|
|
|
$
|
(3,508,362
|
)
|
|
$
|
(2,060,240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for cash
|
|
|
1
|
|
|
|
104,506
|
|
|
|
79,999
|
|
|
|
-
|
|
|
|
80,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for consulting services
|
|
|
2
|
|
|
|
193,461
|
|
|
|
137,355
|
|
|
|
-
|
|
|
|
137,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for software development services
|
|
|
-
|
|
|
|
50,000
|
|
|
|
35,500
|
|
|
|
-
|
|
|
|
35,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
554,332
|
|
|
|
|
|
|
|
554,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,040,387
|
)
|
|
|
(1,040,387
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2019
|
|
$
|
165
|
|
|
|
16,668,790
|
|
|
$
|
2,255,146
|
|
|
$
|
(4,548,749
|
)
|
|
$
|
(2,293,438
|
)
|
See accompanying notes to financial statements
ELECTROMEDICAL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
|
|
2019
|
|
|
2018
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,040,387
|
)
|
|
$
|
(170,609
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
691,689
|
|
|
|
-
|
|
Depreciation and amortization
|
|
|
13,519
|
|
|
|
10,937
|
|
Financing costs on put option liability
|
|
|
76,931
|
|
|
|
-
|
|
Excess fair value of KISS liability- related party
|
|
|
39,703
|
|
|
|
-
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
258
|
|
|
|
8,800
|
|
Inventories
|
|
|
(74,500
|
)
|
|
|
50,749
|
|
Prepaid expenses and other current assets
|
|
|
96,490
|
|
|
|
(9,993
|
)
|
Due from member
|
|
|
(119,103
|
)
|
|
|
-
|
|
Accounts payable
|
|
|
43,392
|
|
|
|
46,046
|
|
Credit cards payable
|
|
|
(6,638
|
)
|
|
|
(8,001
|
)
|
Accrued expenses and other current liabilities
|
|
|
77,279
|
|
|
|
15,556
|
|
Customer deposits
|
|
|
(62,151
|
)
|
|
|
(70,741
|
)
|
Net cash used in operating activities
|
|
|
(263,518
|
)
|
|
|
(127,256
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings on line of credit
|
|
|
-
|
|
|
|
3,548
|
|
Convertible note payable
|
|
|
-
|
|
|
|
25,000
|
|
Repayments on bank debt
|
|
|
(12,021
|
)
|
|
|
(11,301
|
)
|
Related party notes payable-net
|
|
|
203,000
|
|
|
|
82,149
|
|
Notes payable
|
|
|
(7,461
|
)
|
|
|
20,000
|
|
Issuance of common stock for cash- net
|
|
|
80,000
|
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
263,518
|
|
|
|
143,088
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
-
|
|
|
|
(27,860
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year
|
|
|
-
|
|
|
|
27,860
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
14,805
|
|
|
$
|
27,968
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Stock and put option liability for software
|
|
$
|
71,200
|
|
|
$
|
-
|
|
Accounts payable converted to note payable
|
|
$
|
-
|
|
|
$
|
43,692
|
|
See accompanying notes to financial statements
ELECTROMEDICAL TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1.
|
ORGANIZATION AND NATURE OF BUSINESS
|
ElectroMedical Technologies, LLC
(“the Company”), was formed in November 2010 as an Arizona limited liability company. In August 2017, the Company converted
to a Delaware C Corporation under Electromedical Technologies, Inc. The Company is a bioelectronic engineering company with medical
device certifications in the United States (FDA) and Mexico (Cofepris). The Company engineers simple-to-use portable bioelectronics
devices, which provide fast and long-lasting pain relief across a broad range of ailments.
NOTE 2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Accounting Method
The accompanying unaudited financial
statements of Electromedical Technologies, Inc. have been prepared in accordance with Accounting Principles Generally Accepted
in the United States of America ("GAAP") for interim financial information and in accordance with Rule 8-03 of Regulation
S-X per Regulation A requirements. Certain information and disclosures normally included in the annual financial statements prepared
in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all
adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. These
interim financial statements should be read in conjunction with the audited annual financial statements of the Company as of and
for the years ended December 31, 2017 and 2018. The results of operations for the six months ended June 30, 2019 and 2018 are not
necessarily indicative of the results that may be expected for the full year.
Use of Estimates
The preparation of financial statements
in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets
and liabilities, certain disclosures at the date of the financial statements, as well as the reported amounts of revenues and expenses
during the reporting period. Significant estimates affecting the financial statements have been prepared on the basis of the most
current and best available information. However, actual results from the resolution of such estimates and assumptions may vary
from those used in the preparation of the financial statements.
Going Concern
Since inception, the Company
has incurred $4.5 million of accumulated net losses. Excluding $808,323 of non-cash expenses in the six-month period ended June
30, 2019, the Company incurred accumulated net losses of $3.7 million. In addition, during the six months ended June 30, 2019,
the Company used $263,518 in operations and had a working capital deficit of $2,092,025. These factors raise substantial doubt
regarding the Company's ability to continue as a going concern. The Company expects to obtain funding through additional debt
and equity placement offerings until it consistently achieves positive cash flows from operations. If the Company is unable to
obtain additional funding, it may not be able to meet all of its obligations as they come due for the next twelve months. The
continuing viability of the entity and its ability to continue as a going concern is dependent upon the entity being successful
in its continuing efforts in growing its revenue base and/or accessing additional sources of capital, and/or selling assets.
As a result, there is significant
uncertainty whether the entity will continue as a going concern and, therefore, whether it will realize its assets and settle its
liabilities and commitments in the normal course of business and at the amounts stated in the financial statements.
Accordingly, no adjustments have
been made to the financial statements relating to the recoverability and classification of the asset carrying amounts or the amount
and classification of liabilities that might be necessary should the entity not continue as a going concern. At this time, management
is of the opinion that no asset is likely to be realized for an amount less than the amount at which it is recorded in the financial
statements as at June 30, 2019.
Revenue Recognition
The FASB issued Accounting
Standards Update (“ASU”) No. 2014-09, codified as ASC 606: Revenue from Contracts with Customers, which provides a
single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The Company adopted
ASC 606 effective January 1, 2019 using modified retrospective basis and the cumulative effect was immaterial to the financial
statements. In addition, the comparative prior period has not been restated.
Revenues
are recognized when performance obligations are satisfied through the transfer of promised goods to the Company’s customers.
Control transfers upon shipment of product and when the title has been passed to the customers. This includes the transfer of
legal title, physical possession, the risks and rewards of ownership, and customer acceptance. Revenue is recorded net of sales
taxes collected from customers on behalf of taxing authorities, allowance for estimated returns, chargebacks, and markdowns based
upon management’s estimates and the Company’s historical experience. The Company’s liability for sales return
refunds is recognized within other current liabilities, and an asset for the value of inventory which is expected to be returned
is recognized within other current assets on the balance sheets. The Company generally allows a 30 day right of return to its
customers. As of June 30, 2019 and December 31, 2018, the sales returns allowance was insignificant to the financial statements.
Certain larger customers pay in
advance for future shipments. These advance payments totaled $50,149 and $112,300 at June 30, 2019 and December 31, 2018, respectively,
and are recorded as customer deposits in the accompanying balance sheets. Revenue related to these advance payments is recognized
upon shipment to the distributor or the end-customer.
At the completion of the initial
three-year warranty, the Company sells extended warranties for periods ranging from one to three years. Revenue is recognized on
a straight-line basis over the term of the contract. As of June 30, 2019, deferred revenue of $22,618 is recorded in connection
with these extended warranties.
Cash and Cash Equivalents
The Company considers all highly
liquid investments purchased with original maturities of three months or less to be cash equivalents.
Accounts
Receivable
Accounts receivable are stated
at amounts due from customers, net of an allowance for doubtful accounts, and the Company generally does not require collateral.
As a general policy, the Company determines an allowance for doubtful accounts by considering a number of factors, including the
length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current
ability to pay its obligation to the Company, and the condition of the general economy and industry as a whole. The Company writes
off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to
the allowance for doubtful accounts.
The Company recorded an allowance
for doubtful accounts of $1,000 as of both June 30, 2019 and December 31, 2018.
ELECTROMEDICAL TECHNOLOGIES, INC.
Notes
to interim Financial Statements
(UNAUDITED)
Financial Instruments and Concentrations
of Business and Credit Risk
The Company elected early adoption
of the Accounting Standards Update (“ASU”) 2016-01, Recognition and Measurement of Financial Assets and Liabilities,
which eliminates the requirement of the Company to disclose the fair value of its financial instruments as of the balance sheet
date. Financial instruments that potentially subject the Company to concentrations of business and credit risks consist of cash
and cash equivalents, accounts receivable, and accounts payable.
The Company maintains cash balances
that can, at times, exceed amounts insured by the Federal Deposit Insurance Corporation. The Company has not experienced any losses
in these accounts and believes it is not exposed to any significant credit risk.
The Company’s accounts receivable,
which are unsecured, expose the Company to credit risks such as collectability and business risks such as customer concentrations.
The Company mitigates credit risk by investigating the creditworthiness of all customers prior to establishing relationships with
them, performing periodic review of the credit activities of those customers during the course of the business relationship, regularly
analyzing the collectability of accounts receivables, and recording allowances for doubtful accounts when these receivables become
uncollectible. The Company mitigates business risks by attempting to diversify its customer base.
The Company had one significant
customer for the six- month periods ended June 30, 2019 and 2018 that in total accounted for approximately 19% and 20%, respectively,
of net sales. There were no amounts outstanding from this customer as of June 30, 2019 and December 31, 2018. Customer deposits
on hand from this customer totaled $50,149 and $112,300 at June 30, 2019 and December 31, 2018, respectively. The loss of this
customer would have a significant impact on the operations and cash flows of the Company.
The Company’s supplier concentrations
expose the Company to business risks which the Company mitigates by attempting to diversify its supply chain. Supplier concentrations
for the six-month periods ended June 30, 2019 and 2018 consisted of one significant supplier in China that accounted for approximately
90% and 92%, respectively of total net purchases. There were no amounts outstanding due this supplier at June 30, 2019 or December
31, 2018. The loss of key vendors may have a significant impact on the operations and cash flows of the Company.
Inventories
Inventories are stated at the lower
of cost or market. Cost is determined based on the first-in, first-out cost flow assumption (“FIFO”) while market is
determined based upon the estimated net realizable value less an allowance for selling and distribution expenses and a normal gross
profit. The Company evaluates the need for inventory reserves associated with obsolete, slow moving, and non-sellable inventory
by reviewing estimated net realizable values on a periodic basis. As of June 30, 2019 and December 31, 2018, the Company believes
there are no excess and obsolete inventories and accordingly, did not record an inventory reserve. Inventories consist of purchased
finished goods.
ELECTROMEDICAL TECHNOLOGIES, INC.
Notes
to interim Financial Statements
(UNAUDITED)
Property and Equipment
Property and equipment is recorded
at cost and is comprised of a building and office furniture and equipment. The building is depreciated using the straight-line
method over the estimated useful life of 40 years. Office furniture and equipment is depreciated using the double-declining method
or the straight-line method over the estimated useful lives of 3 to 7 years.
Betterments, renewals, and extraordinary
repairs that materially extend the useful life of the asset are capitalized; other repairs and maintenance charges are expensed
as incurred. The cost and related accumulated depreciation applicable to assets retired are removed from the accounts, and the
gain or loss on disposition, if any, is recognized in the accompanying statements of operations and comprehensive loss.
ELECTROMEDICAL TECHNOLOGIES, INC.
Notes
to interim Financial Statements
(UNAUDITED)
Deferred tax assets as of
June 30, 2019 consist of a minor amount of accruals for which the Company will receive the benefit from when paid. The amount is
insignificant to the financial statements as of June 30, 2019, for which a full valuation allowance would have been present.
Sales
Taxes
Sales taxes for the six- month
periods ended June 30, 2019 and 2018 were recorded on a net basis. Included in accrued expenses at June 30, 2019 and December 31,
2018 is approximately $56,000 and $51,000 respectively, related to sales taxes.
Warranty
The Company warranties the sale
of most of its products and records an accrual for estimated future claims. The standard warranty is typically for a period of
three years. Such accruals are based upon historical experience and management's estimate of the level of future claims. The Company
recorded a liability as of June 30, 2019 and December 31, 2018 of $19,688 and $13,067, respectively and is included in cost of
sales in the statement of operations and within accrued expenses on the accompanying balance sheets.
Advertising
Advertising costs are expensed
as incurred. Total advertising expenses amounted to $0 and $14,681 and are included in selling, general and administrative expenses
on the accompanying statements of operations and comprehensive loss for the six-month periods ended June 30, 2019 and 2018, respectively.
Research and Development Costs
Research and development costs
are expensed as incurred. Research and development costs amounted to $21,081 and $0 during the six-month periods ended June 30,
2019 and 2018, respectively and are included in selling, general and administrative expenses on the accompanying statement of operations.
Net Loss
per Share
Net earnings or loss per share
is computed by dividing net income or loss by the weighted-average number of common shares outstanding during the period, excluding
shares subject to redemption or forfeiture. The Company presents basic and diluted net earnings or loss per share. Diluted
net earnings or loss per share reflect the actual weighted average of common shares issued and outstanding during the period,
adjusted for potentially dilutive securities outstanding. Potentially dilutive securities are excluded from the computation of
the diluted net loss per share if their inclusion would be anti-dilutive. As all potentially dilutive securities are anti-dilutive
as of June 30, 2019 and 2018, diluted net loss per share is the same as basic net loss per share for each six-month period.
ELECTROMEDICAL TECHNOLOGIES, INC.
Notes
to interim Financial Statements
(UNAUDITED)
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued
Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). The new standard establishes a right-of-use
("ROU") model that requires a lessee to record a ROU asset and a lease liability, measured on a discounted basis, on
the balance sheet for all leases with terms greater than 12 months. Leases will be classified as either finance or operating, with
classification affecting the pattern of expense recognition in the statements of operations and comprehensive loss. A modified
retrospective transition approach is required for capital and operating leases existing at the date of adoption, with certain practical
expedients available. The Company is currently in the process of evaluating the potential impact of this new accounting guidance,
which is effective for the Company beginning on January 1, 2020.
Management does not believe that
any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on
the Company’s financial statement presentation or disclosures.
NOTE 3.
|
PROPERTY AND EQUIPMENT
|
Property
and equipment consisted of the following as of:
|
|
June 30,
2019
|
|
|
December 31, 2018
|
|
Building
|
|
$
|
875,000
|
|
|
$
|
875,000
|
|
Furniture and equipment
|
|
|
24,987
|
|
|
|
24,987
|
|
|
|
|
899,987
|
|
|
|
899,987
|
|
Less: accumulated depreciation and amortization
|
|
|
(117,955
|
)
|
|
|
(104,435
|
)
|
|
|
$
|
782,032
|
|
|
$
|
795,551
|
|
Depreciation and amortization expense
related to property and equipment was $13,519 and $10,937 for each of the six-month periods ended June 30, 2019 and 2018, and is
included in selling, general and administrative expenses on the accompanying statements of operations.
In May 2018, the Company entered
into a note payable with a third- party vendor as payment for an outstanding balance in the amount of $43,692. The note is interest
free and requires monthly payments of $5,461.50 beginning June 15, 2018 with the remaining balance due and payable on December
15, 2018. Failure to make timely payments as of December 15, 2018 resulted in interest to be accrued on the unpaid balance at a
rate of ten percent beginning July 31, 3017. The outstanding balance as of June 30, 2019 and December 31, 2018 is $19,846 and $27,307,
respectively. Interest expense of $5,657 has been accrued in the Company’s balance sheet as of June 30, 2019, of which $1,520
has been recorded in the Company’s statement of operations for the six- month period then ended. No interest expense has
been recorded for the six-month period ended June 30, 2018.
Convertible Promissory Note
In May 2018, the Company borrowed $25,000 in conjunction with a convertible promissory note. The note
matures in June 2020 and accrues interest at a rate of 8% per annum. The lender has the right at any time to convert the debt into
fully paid and non- assessable shares of common stock at a price of $0.71 per share. In October 2019, the lender converted the
note and unpaid accrued interest into 39,363 shares of restricted common stock. The proceeds were used for operations (See Note
11).
NOTE 5.
|
PUT OPTION LIABILITY
|
On January 24, 2019, the Company entered into an agreement with a third-party to exchange stock for software
services. In exchange for these services, the Company issued 50,000 shares of common stock to the service provider. At the time
of the transaction, the shares were valued at $0.71 per share. The Company also added a guarantee that these shares would be worth
$3.00 per share one year from the date of the agreement. If the share price does not equal this amount on the settlement date of
January 24, 2020, the Company is obligated to issue more shares to equal the obligation.
To value this liability, the Company used an option
pricing model to derive a value $112,631 and booked this liability on the balance sheet. The Black-Scholes valuation model was
utilized to estimate the fair value of the time-based options. The weighted average assumptions utilized in the valuation of the
time-based option awards granted during the period ended June 30, 2019 are summarized as follows:
(1) Expected volatility is based on the historical volatilities of comparable public companies.
(2) Risk-free interest rate is based on the yields from US State Treasury zero-coupon issues for a term consistent with the expected
life of the awards in effect at the date of grant.
(3) Expected life of the option
(4) The Company currently has no expectation of paying cash dividends on its common stock.
The Company will review and revalue this each reporting
period until the settlement date.
NOTE 6.
|
KISS LIABILITY- RELATED PARTY
|
In November 2018, The Company entered
into KISS agreement with a related party for a purchase price of $35,000. The purchase price of the KISS agreement is non-interest
bearing, matures in November 2019 and has been recorded as KISS liability- related party in the current liabilities section of
the Company’s balance sheet. The liability is currently in default.
Under the terms of the agreement, the KISS agreement may be converted into a certain amount of “Conversion
Shares” at the earlier of the Company’s “Next Equity Financing” or “Corporate Transaction”
as defined in the agreement, or at maturity. The Company has calculated the estimated number of conversion shares to be 8,189,874
at June 30, 2019. The fair market value of the convertible note at June 30, 2019 is $1,661,508.. The increase in fair market value
for the six -month period ended June 30, 2019 totaled $39,703 and has been included in the Company’s statement of operations.
In October 2019, the related party converted 1,000,000 of the conversion shares (See Note 11).
The Company determined the fair
value of the KISS liability using the estimated enterprise value of the Company, allocating the percentage of fully diluted pro-rata
shares to the value of the KISS liability. The Company will mark to market the liability at each reporting period.
Note Payable
In March 2015, the Company entered
into an $850,000 note payable (the “Original Note Payable”) with a third-party to finance the purchase of its office
building (see note 8). The Original Note Payable consisted of interest-only payments at 4.5% per annum, payable monthly in arrears.
The Original Note Payable was collateralized by a deed of trust in the office building. During 2015, the Company refinanced the
Original Note Payable with bank debt and a new note payable (“Note Payable”) for the unpaid principal balance.
The Note Payable, effective December 31, 2015, was issued for a principal amount of $157,000. Interest
began accruing on the interest commencement date of January 1, 2018, at 2% per annum, compounded monthly. The unpaid principal
balance and accrued interest is due within ten days of the maturity date on December 31, 2020. The outstanding balance on the Note
Payable at both June 30, 2019 and December 31, 2018 was $157,000. The Note Payable is personally guaranteed by the Company’s
CEO. In August 2019, the Company’s CEO personally repaid $100,000 of the note payable to the third-party and was recorded
as a reduction of the CEO’s amount due the Company of $126,632 at June 30, 2019. In October 2019, the lender converted the
remaining balance of $57,000 and unpaid accrued interest into 87,849 shares of restricted common stock (See Note 11).
Bank Debt
In September 2015, the Company
entered into a credit agreement for a $700,000 term loan with a financial institution. Payment terms consist of monthly payments
in arrears of $3,547 for the first year outstanding. The monthly payment then increases to $4,574 until the term loan matures on
September 30, 2025, in which the remaining unpaid principal balance and accrued interest is due. The interest rate for the first
year was 1.99% per annum and increased to 4.95% per annum for the remaining life of the term loan. The term loan is collateralized
by a deed of trust in the office building. The proceeds were used to purchase a building for which the Company's operations are
located. The net principal balance outstanding on the term loan at June 30,2019 and December 31, 2018 was $604,054 and $616,075,
respectively. The term loan is personally guaranteed by the Company’s CEO.
Related
Party Notes Payable
In October 2013, the Company entered
in to a $45,000 note payable with an individual related to the Company's CEO. The proceeds were used for operations. Interest began
accruing on the interest commencement date of January 1, 2018, at 2% per annum, compounded monthly. The unpaid principal balance
and accrued interest is due within ten days of the maturity date on December 31, 2020. The outstanding principal balance on the
related party note payable at both June 30, 2019 and December 31, 2018 was $44,000. In October 2019, the related party lender converted
the principal amount of $44,000 plus unpaid accrued interest into 64,215 shares of restricted common stock (See Notes 8 and 11).
In July 2017, the Company entered into a $250,000 promissory note with its CEO. The proceeds were used
for operations and Regulation A+ offering costs. The promissory note began accruing interest on the interest commencement date
of October 1, 2018 at 2% per annum, compounded monthly. The unpaid principal balance and accrued interest are due within ten days
of the maturity date on September 30, 2020. Included in the accompanying balance sheets is $380,407 and $261,304 due from the Company’s
CEO as of June 30, 2019 and December 31, 2018, respectively. At both June 30, 2019 and December 31, 2018, $250,000 of the promissory
note and unpaid accrued interest,have been offset against the amount due from the Company’s CEO, leaving a receivable of
$126,632 and $11,304, respectively. The note payable and accrued interest are deemed paid in full as of June 30, 2019.
As of June 30, 2019, the Company entered in to promissory notes totaling $308,000 with a related party.
All notes mature at various times in 2020 and 2021. Interest will accrue at 10% per annum from the due date thereon until all principal
is paid in full. Proceeds from the loans were used for operations (See Note 8).
Future aggregate maturities of long-term debt are as
follows:
For the Years Ending December 31:
|
|
|
|
|
|
2019
|
|
|
$
|
24,425
|
|
|
2020
|
|
|
|
356,595
|
|
|
2021
|
|
|
|
26,994
|
|
|
2022
|
|
|
|
28,381
|
|
|
2023
|
|
|
|
29,838
|
|
|
Thereafter
|
|
|
|
480,842
|
|
|
|
|
|
$
|
947,075
|
|
The long-term
debt agreements do not contain any financial covenants.
NOTE 8.
|
RELATED PARTY TRANSACTIONS
|
The Company has a promissory note
with a related party for $44,000.
Included in the accompanying balance
sheets is $380,407 and $261,304 of amounts due from the Company’s CEO as of June 30, 2019 and December 31, 2018, respectively.
The amounts due are non-interest bearing, payable upon demand and have been net against the note payable due the CEO.
As of June 30, 2019, the Company
entered in to promissory notes totaling $308,000 with a related party. In November 2018, The Company entered into KISS agreement
with the related party for a purchase price of $35,000. The purchase price of the KISS agreement is non-interest bearing, matures
in November 2019 and has been recorded as KISS liability- related party in the current liabilities section of the Company’s
balance sheet. Under the terms of the agreement, the KISS agreement may be converted into a certain amount of “Conversion
Shares” at the earlier of the Company’s “Next Equity Financing” or “Corporate Transaction”
as defined in the agreement, or at maturity. The Company has calculated the estimated number of conversion shares to be 8,189,874
at June 30, 2019.
In October 2019, the related party converted 1,000,000 of the conversion shares in conjunction with an
outstanding kiss liability (See Note 11).
In August 2019, the Company’s
CEO personally repaid $100,000 of a note payable due to a third-party and was recorded as a reduction of the CEO’s amount
due the Company at June 30, 2019 ( See Note 11)
During the six-month period ended
June 30, 2019, the Company’s CEO personally sold 693,750 shares of his restricted common stock to several employees at par
value.
The Company’s CEO personally guarantees certain
amounts due under its long-term debt agreements.
In October 2019, the Company entered into an employment agreement with the Company’s CEO (See Note
11).
NOTE 9.
|
STOCKHOLDERS’ DEFICIT
|
During
the six-month period ended June 30, 2019, the Company received a total of $80,000 from several investors in exchange for 104,506
restricted common shares of the Company at a price of $0.71 per share.
During
the six-month period ended June 30, 2019, the Company issued 193,461 restricted common shares in conjunction with an agreement
for consulting services at a value of $137,357 or $0.71 per share. The value of the consulting services has been recorded as selling,
general and administrative expenses in the Company’s statement of operations.
During
the six-month period ended June 30, 2019, the Company issued 50,000 restricted common shares in conjunction with a software services
agreement at a value of $35,500 or $0.71 per share. The value of the software services agreement has been recorded as prepaid and
other assets in the Company’s balance sheet.
NOTE 10.
|
EQUITY COMPENSATION
|
In 2017, the Company’s Board
of Directors approved the 2017 Employee and Consultant Stock Ownership Plan, (the “Plan”). The Plan provides that the
Board of Directors may grant restricted stock units, incentive stock options and non-statutory stock options to officers, key employees
and certain consultants and advisors to the Company up to a maximum of 2,500,000 shares. Stock options granted under the Plan have ten-year
terms with vesting terms to be determined by the administrator of the Plan. Restricted stock unit grant terms will be set by the
administrator and at the discretion of the administrator, be settled in cash, shares, or a combination of both.
The Black-Scholes valuation model was utilized to estimate
the fair value of the time-based options. The weighted average assumptions utilized in the valuation of the time-based option awards
granted during the period ended June 30, 2019 are summarized as follows:
(1) Expected volatility is based on the historical volatilities
of comparable public companies.
(2) Risk-free interest rate is based on the yields from US State Treasury zero-coupon issues for a term consistent with the expected
life of the awards in effect at the date of grant.
(3) Expected life of the option
(4) The Company currently has no expectation of paying cash dividends on its common stock.
The Company recorded pretax stock
compensation expense of $61,769 during the period ended June 30, 2019, respectively. Stock-based compensation is included in selling,
general, and administrative expense in the accompanying statements of operations. Stock-based compensation expense is based
on awards ultimately expected to vest; therefore, it has been reduced for estimated forfeitures. Total unrecognized stock-based
compensation cost related to unvested time-based stock options was $93,390 as of June 30, 2019 and is expected to be recognized
over a weighted-average period of 10 months.
|
|
Number of shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted
Average
Contractual
term (months)
|
|
|
Aggregate
Intrinsic Value
|
|
Options outstanding at December 31, 2018
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
581,250
|
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
206,250
|
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2019
|
|
|
375,000
|
|
|
$
|
0.71
|
|
|
|
10
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2019
|
|
|
150,000
|
|
|
$
|
0.71
|
|
|
|
10
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable and expected to vest at June 30, 2019
|
|
|
375,000
|
|
|
$
|
0.71
|
|
|
|
10
|
|
|
|
-
|
|
During the six-month
period ended June 30, 2019, the Company’s CEO personally sold 693,750 shares of his restricted common shares to several
employees at par value. Compensation expense has been recorded at the fair market value of $492,563 and is included is selling,
general and administrative expenses for the six-month period ended June 30, 2019.
COMMITMENTS AND
CONTINGENCIES
Contingencies
The Company is subject to various
loss contingencies and assessments arising in the normal course of the business, some of which relate to litigation, claims, property
taxes and sales and use tax or goods and services tax assessments. The Company considers the likelihood of the loss or the incurrence
of a liability, as well as its ability to reasonably estimate the amount of loss in determining loss contingencies and assessments.
An estimated loss contingency or assessment is accrued when it is probable that a liability has been incurred and the amount of
loss can be reasonably estimated. Management regularly evaluates current information available to them to determine whether such
accruals should be adjusted. Based on the information presently available, including discussion with counsel and other consultants,
management believes that resolution of these matters will not have a material adverse effect on its business, results of operations,
financial condition or cash flows.
Future Commitments
The Company has a commitment, under
an agreement, to make certain payments totaling $35,000 through April 2021.
NOTE 11.
|
SUBSEQUENT EVENTS
|
The Company has evaluated subsequent
events that have occurred through the independent auditor’s report date, which is the date that the financial statements
were available to be issued and determined that there were no subsequent events or transactions that required recognition or disclosure
in the financial statements, except as disclosed below.
In August 2019, the Company’s
CEO personally repaid $100,000 to the holder of the $157,000 long-term note payable which was recorded as a reduction of the CEO’s
amount due the Company at June 30, 2019. In October 2019, the lender converted the remaining balance of $57,000 and unpaid accrued
interest into 87,849 shares of restricted common stock.
In October 2019, the lender of
the $25,000 convertible note -payable converted the principal amount of $25,000 plus unpaid accrued interest into 39,363 shares
of restricted common stock ( See Note 7)
In October 2019, the related party
lender of the $44,000 note-payable, converted the principal amount of $44,000 plus unpaid accrued interest into 64,215 shares of
restricted common stock ( See Note 7)
In October 2019, the Company
issued 1,000,000 shares to a related party for conversion of debt. (See Notes 6 and 8)
In
October 2019, the Company entered into an employment agreement with the Company’s CEO. The terms of the agreement include
an annual base salary of $240,000 and a signing bonus of $500,000, as well as discretionary annual bonuses and participation in
long-term incentive plans. The signing bonus may be paid in shares of the Company’s restricted common stock. The agreement
remains in effect until the earlier of the discharge or resignation of the CEO.
In October 2019, the Company’s
board of directors and a majority of shareholders eligible to vote, adopted a resolution increasing the number of authorized common
shares from Twenty Five Million (25,000,000) to Fifty Million (50,000,000).
On November 1, 2019, the Company’s
board of directors and a majority of shareholders eligible to vote adopted a resolution designating a new Series A Preferred Stock.
One Million (1,000,000) shares were authorized.
On November 1, 2019, the Company’s board of directors and the majority of shareholders awarded CEO,
Matthew Wolfson, Five Hundred Thousand (500,000) shares of Preferred A stock.
On December 11, 2019, the Company
borrowed $50,000 in conjunction with a convertible promissory note. The note matures in May 2020 and is non- interest bearing.
The lender has the right at any time on or after May 30, 2020, to convert the debt into fully paid and non- assessable shares
of common stock at a price of $0.71 per share. The proceeds were used for operations.