NOTES
TO FINANCIAL STATEMENTS
MARCH 31,
2021 AND 2020
(UNAUDITED)
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 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 year ended December 31, 2020. The results of operations for the three
months ended March 31, 2021 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 approximately $11.7 million
of accumulated net losses. In addition, during the three months ended March 31, 2021, the Company used $327,237 in operations and
had a working capital deficit of $1,826,511. 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 March 31,
2021.
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.
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 March 31,2021 and December 31, 2020, the
sales returns allowance was $6,990.
Certain larger customers pay in advance for future
shipments. These advance payments totaled $10,350 and $28,651 at March 31, 2021 and December 31, 2020, 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. At March 31, 2021 and December 31, 2020, deferred revenue of $35,543 and $35,200, respectively, is
recorded in connection with these extended warranties.
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 two significant customers (Customers A and B), that
accounted for approximately 12.4% and 18.6% of net sales for the three months ended March 31, 2021. Customer A accounted for approximately
29.3% of sales for the three months ended March 31, 2020. There were no amounts outstanding from these customers at March 31,
2021 and December 31, 2020. Amounts due these customers totaled $12,500 and $12,100 at March 31, 2021 December 31, 2020,
respectively for commissions and reimbursements. Customer deposits on hand from Customer A totaled $10,350 and $28,651 at March 31, 2021
and December 31, 2020, respectively. The loss of these customers 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 consisted
of one significant supplier in China that accounted for approximately 96% and 94% of total net purchases for the three months ended March 31,
2021 and 2020, respectively. There were no amounts outstanding due this supplier at March 31, 2021 and December 31, 2020. The
loss of key vendors may have a significant impact on the operations and cash flows of the Company.
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 amounts of payables approximate fair value due to their short-term maturities.
|
|
·
|
Derivative liabilities are adjusted to fair value utilizing the Lattice 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 assets and liabilities fall as of March 31, 2021 are as follows:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities – convertible promissory notes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,601,932
|
|
|
$
|
1,601,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,601,932
|
|
|
$
|
1,601,932
|
|
The levels of the fair value hierarchy into which
the Company’s assets and liabilities fall as of December 31, 2020 are as follows:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities – convertible promissory notes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
831,852
|
|
|
$
|
831,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
831,852
|
|
|
$
|
831,852
|
|
The following table presents changes during the
three months ended March 31, 2021 in Level 3 liabilities measured at fair value on a recurring basis:
Fair value- December 31, 2020
|
|
$
|
831,852
|
|
Net unrealized gain
|
|
|
(14,798
|
)
|
Derivative liabilities in conjunction with convertible promissory notes
|
|
|
974,931
|
|
Conversion of convertible promissory notes
|
|
|
(190,053
|
)
|
Fair value- March 31, 2021
|
|
$
|
1,601,932
|
|
See Note 6 for discussion of the Company’s
valuation of the derivative liabilities.
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 three months ended
March 31, 2021 and 2020, were recorded on a net basis. Included in accrued expenses at, March 31, 2021 and December 31,
2020 is approximately $59,000 and $58,000 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, March 31, 2021 and December 31, 2020 of $15,795 and $17,483, respectively. The expense is included in cost of sales in the
statements of operations and within accrued expenses on the accompanying balance sheets.
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 March 31, 2021 and December 31,
2020, diluted net loss per share is the same as basic net loss per share for each period.
COVID-19
On January 30, 2020, the World Health Organization
declared the COVID-19 outbreak a “Public Health Emergency of International Concern” and on March 10, 2020, declared it
to be a pandemic. Actions taken around the world to help mitigate the spread of the COVID-19 include restrictions on travel, and quarantines
in certain areas, and forced closures for certain types of public places and businesses. COVID-19, and actions taken to mitigate it, have
had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical
area in which the Company operates. While it is unknown how long these conditions will last and what the complete financial effect will
be to the company, COVID-19 has had an adverse effect on our business, including our supply chains and distribution systems. While we
are taking diligent steps to mitigate disruptions to our supply chain, we are unable to predict the extent or nature of these impacts
at this time to our future financial condition and results of operations.
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, 2022. The impact is not expected 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.
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PROPERTY AND EQUIPMENT
|
Property and equipment consisted of the following
as of:
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
Building
|
|
$
|
875,000
|
|
|
$
|
875,000
|
|
Furniture and equipment
|
|
|
24,987
|
|
|
|
24,987
|
|
|
|
|
899,987
|
|
|
|
899,987
|
|
Less: accumulated depreciation and amortization
|
|
|
(156,237
|
)
|
|
|
(150,768
|
)
|
|
|
$
|
743,750
|
|
|
$
|
749,219
|
|
Depreciation and amortization expense related
to property and equipment was $5,469 for the three months ended March 31, 2021 and 2020. Depreciation and amortization are 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 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, 2017. The outstanding principal balance as of December 31, 2020 of $12,846, and accrued interest
of $5,154 was paid in full as of March 31, 2021. Accrued interest of $3,283 was forgiven and included in other income in the accompanying
statement of operations
In April 2020, the Company received $39,500
in payroll protection program loans (“PPP”). These loans provide for certain funding based on previous employment which
in part may be forgivable under certain conditions. No payment is due during the deferral period which ends the earlier of the date of
SBA forgiveness or ten months after the last day of the covered period. The remaining portion needs to be repaid over 2 years and carries
a 1% annual interest rate. These loans require no collateral nor personal guarantees. The loan was forgiven in its entirety in February 2021
and has been included in other income in the accompanying statement of operations.
Convertible Promissory Notes
The aggregate of convertible promissory notes is as follows:
Convertible promissory notes
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
Principal balance
|
|
$
|
2,103,653
|
|
|
$
|
1,534,653
|
|
Debt discount balance
|
|
|
(1,699,181
|
)
|
|
|
(1,277,255
|
)
|
Net Notes balance
|
|
$
|
404,472
|
|
|
$
|
257,398
|
|
In December 2019, the Company borrowed $50,000
in conjunction with a convertible promissory note. The note matured in May 2020 and is interest free. 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. There is no beneficial
conversion feature as the conversion price is at fair market value. The proceeds were used for operations.
In July 2020, the Company borrowed $107,500
in conjunction with an unsecured convertible promissory note from an investor. Proceeds of $90,000 include an original issue discount
of $7,500 and legal fees of $10,000. The note matures on July 21, 2021. The lender has the right after January 21, 2021 to convert
the debt into fully paid and non- assessable shares of common stock at a price of $0.50 per share. Conversions are subject to adjustments
due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest accrues at the
rate of eight percent (8%) per annum, simple interest, in each case to the extent that the note and the principal amount and any unpaid
accrued interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing
on the issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when
due, such amounts shall accrue interest at the rate of 18% per year, simple interest, non-compounding, until paid. A beneficial conversion
feature valued at $90,000 has been recorded as a discount on the note.
In August 2020, the Company borrowed $215,000
in conjunction with an unsecured convertible promissory note from an investor. Proceeds of $200,000 include an original issue discount
of $15,000. The note matures on August 4, 2021. The lender has the right after February 4, 2021 to convert the debt into fully
paid and non- assessable shares of common stock at a price of $0.50 per share. Conversions are subject to adjustments due to stock dividends,
stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest accrues at the rate of eight percent (8%)
per annum, simple interest, in each case to the extent that the note and the principal amount and any unpaid accrued interest has not
been converted into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing on the issuance date and
be computed on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when due, such amounts shall
accrue interest at the rate of 18% per year, simple interest, non-compounding, until paid. A beneficial conversion feature valued at $200,000
has been recorded as a discount on the note.
In August 2020, the Company borrowed $103,000
in conjunction with an unsecured convertible promissory note from an investor. Proceeds of $100,000 include an original issue discount
of $3,000. The notes mature on August 11, 2021. The lender has the right for 180 days from the issuance date to convert the debt
into fully paid and non- assessable shares of common stock at a price of $1.00 per share. From the period 180 days from issuance to maturity,
the lender has the right to convert the debt into fully paid and non-assessable shares of common stock at a price of 63% of market value.
Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations.
Interest accrues at the rate of ten percent (10%) per annum, simple interest, in each case to the extent that the note and the principal
amount and any unpaid accrued interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest
shall commence accruing on the issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder
is not paid as and when due, such amounts shall accrue interest at the rate of 22% per year, simple interest, non-compounding, until paid.
The note has a variable conversion price and the Company recorded an embedded derivative liability. The fair value of the liability totaled
$97,654 at the date of issuance and has been recorded as a discount on the note. (see Note 6). As of March 31, 2021, the lender converted
the principal amount plus accrued interest into 519,113 shares of common stock at prices ranging from $0.1638 to $0.2659.
In September 2020, the Company borrowed $107,500
in conjunction with an unsecured convertible promissory note from an investor. Proceeds of $100,000 include an original issue discount
of $7,500. The note matures on September 3, 2021. The lender has the right after March 3, 2021 to convert the debt into fully
paid and non- assessable shares of common stock at a price of $0.50 per share. Conversions are subject to adjustments due to stock dividends,
stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest accrues at the rate of eight percent (8%)
per annum, simple interest, in each case to the extent that the note and the principal amount and any unpaid accrued interest has not
been converted into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing on the issuance date and
be computed on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when due, such amounts shall
accrue interest at the rate of 18% per year, simple interest, non-compounding, until paid. A beneficial conversion feature valued at $100,000
has been recorded as a discount on the note.
In September 2020, the Company borrowed $78,000
in conjunction with an unsecured convertible promissory note from an investor. Proceeds of $75,000 include an original issue discount
of $3,000. The notes mature on September 8, 2021. The lender has the right for 180 days from the issuance date to convert the debt
into fully paid and non- assessable shares of common stock at a price of $1.00 per share. From the period 180 days from issuance to maturity,
the lender has the right to convert the debt into fully paid and non-assessable shares of common stock at a price of 63% of market value.
Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations.
Interest accrues at the rate of ten percent (10%) per annum, simple interest, in each case to the extent that the note and the principal
amount and any unpaid accrued interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest
shall commence accruing on the issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder
is not paid as and when due, such amounts shall accrue interest at the rate of 22% per year, simple interest, non-compounding, until paid.
The note has a variable conversion price and the Company recorded an embedded derivative liability. The fair value of the liability totaled
$74,238 at the date of issuance and has been recorded as a discount on the note. (see Note 6). As of March 31, 2021, the lender converted
the principal amount plus accrued interest into 500,000 shares of common stock at a price of $0.1638 per share.
Pursuant to a previous financing commitment entered
into September 28, 2020, received on October 1, 2020, the Company borrowed $108,000 in conjunction with an unsecured convertible
promissory note from an investor. Proceeds of $100,000 include an original issue discount of $8,000. The notes mature on September 28,
2021. From the period 180 days from issuance to maturity, the lender has the right to convert the debt into fully paid and non-assessable
shares of common stock at a price of 63% of market value. Conversions are subject to adjustments due to stock dividends, stock splits,
rights offerings or combinations, recapitalizations and reorganizations. Interest accrues at the rate of ten percent (10%) per annum,
simple interest, in each case to the extent that the note and the principal amount and any unpaid accrued interest has not been converted
into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing on the issuance date and be computed
on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest
at the rate of 22% per year, simple interest, non-compounding, until paid. The note has a variable conversion price and the Company recorded
an embedded derivative liability. The fair value of the liability totaled $182,670 at the date of issuance and has been recorded as a
discount on the note. The fair value of the derivative liability as of the date of issuance was in excess of the note resulting in full
discount of the note and a charge to interest expense. (see Note 6).
Pursuant to a financing commitment, on October 22,
2020, the Company entered into a Note Purchase Agreement (the “Agreement”) with a third party for the sale of a convertible
promissory note in the principal amount of $128,000 at a purchase price of $128,000. The note matures on October 22, 2021. The lender
has the right to convert the debt into fully paid and non- assessable shares of common stock at a price equal to 65% of the outstanding
share price. Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations
and reorganizations. Interest will accrue at the rate of ten percent (10%) per annum, simple interest, in each case to the extent that
the note and the principal amount and any unpaid accrued interest has not been converted into conversion shares (as defined) prior to
the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis of a 365-day year. In the event
that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at the rate of 22% per year, simple interest,
non-compounding, until paid. The note has a variable conversion price and the Company recorded an embedded derivative liability. The fair
value of the liability totaled $81,969 at the date of issuance and has been recorded as a discount on the note. (see Note 6).
Pursuant to a financing commitment, on November 3,
2020, the Company entered into a Note Purchase Agreement (the “Agreement”) with a third party for the sale of a convertible
promissory note in the principal amount of $244,853 at a purchase price of $225,000. Proceeds of $225,000 include an original issue discount
of $19,853. The note matures on November 3, 2021. The lender has the right to convert the debt into fully paid and non- assessable
shares of common stock at a price of $0.50 per share, beginning 180 days after issuance. Conversions are subject to adjustments due to
stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest will accrue at the rate
of eight percent (8%) per annum, simple interest, in each case to the extent that the note and the principal amount and any unpaid accrued
interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing on the
issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when due,
such amounts shall accrue interest at the rate of 18% per year, simple interest, non-compounding, until paid. A beneficial conversion
feature valued at $176,294 has been recorded as a discount on the note.
Pursuant to a financing commitment, on December 1
2020, the Company entered into a Note Purchase Agreement (the “Agreement”) with a third party for the sale of a convertible
promissory note in the principal amount of $172,800 at a purchase price of $160,000. Proceeds of $147,200 include an original issue discount
of $12,800 and fees of $12,800. The note matures on December 1, 2021. The lender has the right to convert the debt into fully paid
and non- assessable shares of common stock at a price equal to 70% of the outstanding share price. Conversions are subject to adjustments
due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest will accrue at
the rate of five percent (5%) per annum, simple interest, in each case to the extent that the note and the principal amount and any unpaid
accrued interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing
on the issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when
due, such amounts shall accrue interest at the rate of 22% per year, simple interest, non-compounding, until paid. The note has a variable
conversion price and the Company recorded an embedded derivative liability. The fair value of the liability totaled $237,021 at the date
of issuance and has been recorded as a discount on the note. The fair value of the derivative liability as of the date of issuance was
in excess of the note resulting in full discount of the note and a charge to interest expense. (see Note 6).
In conjunction with the note the Company issued
a warrant to purchase 135,000 shares of the Company’s common stock at an exercise price of $1.50 per share. The warrant expires
on December 1, 2023. The fair value of the warrant of $190,144 has been recorded as a discount on the note. (see Note 9).
If the Company, at any time while this warrant
is outstanding, shall sell or grant any option to purchase, or sell or grant any right to re-price, or otherwise dispose of or issue (or
announce any offer, sale, grant or any option to purchase or other disposition) any common stock or common stock equivalents entitling
any person to acquire shares of common stock, at an effective price per share less than the then exercise price (such lower price, the
“New Issuance Price”), then the exercise price shall be reduced and only reduced to equal the New Issuance Price and
the number of shares issuable hereunder shall be increased accordingly.
Pursuant to a financing commitment, on December 3,
2020, the Company entered into a Note Purchase Agreement (the “Agreement”) with a third party for the sale of a convertible
promissory note in the principal amount of $110,000 at a purchase price of $96,000. Proceeds of $96,000 include an original issue discount
of $14,000. The note matures on December 3, 2021. The lender has the right to convert the debt into fully paid and non- assessable
shares of common stock at a price of $0.50 per share, beginning 180 days after issuance. Conversions are subject to adjustments due to
stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest will accrue at the rate
of eight percent (8%) per annum, simple interest, in each case to the extent that the note and the principal amount and any unpaid accrued
interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing on the
issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when due,
such amounts shall accrue interest at the rate of 18% per year, simple interest, non-compounding, until paid. A beneficial conversion
feature valued at $66,000 has been recorded as a discount on the note.
Pursuant to a financing commitment, on December 14,
2020, the Company entered into a Note Purchase Agreement (the “Agreement”) with a third party for the sale of a convertible
promissory note in the principal amount of $110,000 at a purchase price of $105,000. The note matures on December 14, 2021. The lender
has the right to convert the debt into fully paid and non- assessable shares of common stock at a price equal to the lower of $0.55 per
share or at a price equal to 63% of the outstanding share price. Conversions are subject to adjustments due to stock dividends, stock
splits, rights offerings or combinations, recapitalizations and reorganizations. Interest will accrue at the rate of ten percent (10%)
per annum, simple interest, in each case to the extent that the note and the principal amount and any unpaid accrued interest has not
been converted into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing on the issuance date and
be computed on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when due, such amounts shall
accrue interest at the rate of 22% per year, simple interest, non-compounding, until paid. The note has a variable conversion price and
the Company recorded an embedded derivative liability. The fair value of the liability totaled $229,713 at the date of issuance and has
been recorded as a discount on the note. The fair value of the derivative liability as of the date of issuance was in excess of the note
resulting in full discount of the note and a charge to interest expense. (see Note 6).
Pursuant to a financing commitment, on February 8,
2021 the Company entered into a Note Purchase Agreement (the “Agreement”) with a third party for the sale of convertible promissory
notes in the principal amount totaling $1,000,000 and at a purchase price of $950,000. The first closing occurred upon the execution of
the material definitive agreement in the face amount of $500,000, for a purchase price of $475,000. The second closing is in the face
amount of $250,000 for a purchase price of $237,500, which was received on March 5, 2021, and the third closing in the face amount
of $250,000 for a purchase price of $237,500. The notes mature 1 year from issuance. The lender has the right to convert the debt into
fully paid and non- assessable shares of common stock at a price equal to the lower of $0.40 per share or at a price equal to 70% of the
outstanding share price. Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations,
recapitalizations and reorganizations. Interest will accrue at the rate of ten percent (10%) per annum, simple interest, in each case
to the extent that the note and the principal amount and any unpaid accrued interest has not been converted into conversion shares (as
defined) prior to the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis of a 365-day year.
In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at the rate of 15% per year,
simple interest, non-compounding, until paid. The note has a variable conversion price and the Company recorded an embedded derivative
liability. The fair value of the liability totaled $691,234 at the date of issuance and has been recorded as a discount on the note. The
fair value of the derivative liability as of the date of issuance was in excess of the note resulting in full discount of the note and
a charge to interest expense. (see Note 6).
The fair value of the derivative liability is estimated using a Lattice
pricing model with the following assumptions:
Market value of common stock
|
|
$
|
0.5678
|
|
Expected volatility
|
|
|
254.6
|
%
|
Expected term (in years)
|
|
|
1.0
|
|
Risk-free interest rate
|
|
|
0.11
|
%
|
In conjunction with the note the Company
issued a warrant to purchase 2,500,000 shares of the Company’s common stock at an exercise price of $0.40 per share. The
warrant expires on February 8, 2026. The relative fair value of the warrant of $420,096 has been recorded as a discount on
the note. (see Note 10).
If the Company, at any time while this warrant
is outstanding, shall sell or grant any option to purchase, or sell or grant any right to re-price, or otherwise dispose of or issue (or
announce any offer, sale, grant or any option to purchase or other disposition) any common stock or common stock equivalents entitling
any person to acquire shares of common stock, at an effective price per share less than the then exercise price (such lower price, the
“New Issuance Price”), then the exercise price shall be reduced and only reduced to equal the New Issuance Price and
the number of shares issuable hereunder shall be increased accordingly.
The beneficial conversion features and
derivatives are initially recorded as a discount to the debt and amortized using the effective interest method. For the three months
ended March 31, 2021, $1,010,601 of debt discount amortization day one derivative loss and fair market value of warrants are
recorded as interest expense. The remaining debt discount of $1,699,181 will be amortized in 2021 and 2022. Additional interest
expense of $37,312 and $0 has been recorded during the three months ended March 31, 2021 and 2020, respectively, with a total
of $58,747 which is included in accrued and other liabilities.
The company has 72,775,123 shares of common stock reserved in
conjunction with its outstanding convertible promissory notes and warrants.
Government Debt
In June 2020, the Company received a $150,000
economic injury disaster loan (“EIDL”). The loan accrues interest at a rate of 3.75% annually and is collateralized by all
personal property and intangible assets of the Company. The loan has a 24-month moratorium on payments, after which monthly principal
and interest payments of $731 will be made through the maturity date of June 2050.
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 March 31, 2021 and December 31, 2020 was $566,657 and $573,213, respectively. The term loan
is personally guaranteed by the Company’s CEO.
In March 2020, the Company entered into an
agreement with the financial institution to defer its monthly payments for three months through May 2020. Such payments and additional
accrued interest have been deferred to the maturity date of the loan.
Related Party Notes Payable
The Company repaid $50,000 of promissory notes
with a related party and significant shareholder, in the three months ended March 31, 2021, for a total of $282,500 outstanding.
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. Interest expense totaled $2,837 and $0 for three months ended March 31,
2021 and 2020, respectively
The long-term debt agreements do not contain any
financial covenants.
NOTE 6.
|
DERIVATIVE LIABILITIES
|
The Company issued debts that consist of the issuance
of convertible promissory notes with variable conversion provisions. The conversion terms of the convertible notes are variable based
on certain factors, such as the future price of the Company’s common stock. The number of shares of common stock to be issued is
based on the future price of the Company’s common stock. The number of shares of common stock issuable upon conversion of the promissory
note is indeterminate. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion option and shares to be
issued were recorded as derivative liabilities on the issuance date.
Based on the various convertible promissory notes
described in Note 4, the fair value of applicable derivative liabilities on notes and the change in fair value of derivative liabilities
are as follows for the three months ended March 31, 2021:
|
|
Derivative
Liability -
Convertible
Promissory
Notes
|
|
Balance as of December 31, 2020
|
|
$
|
831,852
|
|
Conversion of convertible notes payable
|
|
|
(190,053
|
)
|
Additions during the year
|
|
|
974,931
|
|
Change in fair value
|
|
|
(14,798
|
)
|
Balance as of March 31, 2021
|
|
$
|
1,601,932
|
|
The fair value of the derivative liabilities – convertible promissory
notes at March 31, 2021 is estimated using a Lattice pricing model with the following assumptions:
Market value of common stock
|
|
$
|
0.225
|
|
Expected volatility
|
|
|
182.6-210.7
|
|
Expected term (in years)
|
|
|
.38-.95
|
|
Risk-free interest rate
|
|
|
0.13-0.20
|
%
|
NOTE 7.
|
RELATED PARTY TRANSACTIONS
|
During the three months ended March 31, 2021,
the Company paid the Company’s CEO $20,978 towards the balance of the 2019 signing bonus. Total amount outstanding at March 31,
2021 and December 31, 2020 is $0 and $20,978, respectively.
In February 2021, the Company issued 1,100,000 shares of common
stock to the Company’s CEO as compensation expense. (see Note 8)
The Company repaid $50,000 during the three months
ended March 31, 2021 of related party notes payable.
NOTE 8.
|
STOCKHOLDERS’ DEFICIT
|
In January 2020, the Company issued 10,355
shares of common stock to a vendor as settlement for a liability totaling $14,585 at $0.71 per share
In February 2020, the Company issued 200,000
shares of common stock in conjunction with a twelve-month agreement for financial advisory consulting services at a value of $102,000
or $0.51 per share. The value of the consulting services has been recorded as selling, general and
administrative expenses in the Company’s statement of operations. The fair market value of the shares was determined based the on
the Company’s closing price on the date of issuance.
In February 2020, the Company entered into
a six- month agreement for financial advisory consulting services with a third party. In conjunction with the agreement, the Company issued
the third party 400,000 shares of common stock at a value of $188,000 or $0.47 per share, with the option to issue an additional 900,000
shares at the Company’s discretion. The value of the consulting services has been recorded
as selling, general and administrative expenses in the Company’s statement of operations. The fair market value of the shares was
determined based the on the Company’s closing price on the date of issuance. In August 2020, the Company issued the 900,000
shares of common stock in conjunction with the consulting agreement at a value of $1,818,000 or $2.02 per share. The value of the compensation
has been recorded in selling, general and administrative expenses in the Company’s statement of operations.
In February and March 2021, holders
of convertible promissory notes converted principal and accrued interest totaling $190,050 into 1,019,113 shares of common stock.
In February 2021, the Company issued 1,100,000
shares of common stock to the Company’s CEO as compensation expense at a value of $604,890 or $0.5499 per share. The
value of the compensation has been recorded in selling, general and administrative expenses in the Company’s statement of operations.
The fair market value of the shares was determined based the on the Company’s closing price on the date of issuance.
In February 2021, the Company issued 1,084,120
shares of common stock in conjunction with various agreements for financial advisory consulting services for a value of $693,837 or $0.64
per share. The value of the compensation has been recorded in selling, general and administrative
expenses in the Company’s statement of operations. The fair market value of the shares was determined based the on the Company’s
closing price on the date of issuance.
NOTE 9.
|
STOCK OPTIONS AND WARRANTS
|
In 2017, the Company’s
Board of Directors approved the 2017 Employee and Consultant Stock Ownership Plan, (the “Plan”) as amended February 16,
2021. The Plan provides that the Board of Directors may grant restricted stock units, incentive stock options non-statutory stock options
and common shares to officers, key employees and certain consultants and advisors to the Company up to a maximum of 10,000,000 shares.
Stock options granted under the Plan have vesting terms 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. No time-based options were granted during the three months ended March 31,
2021 or the year ended December 31, 2020.
The Company recorded pretax stock compensation
expense of $0 and $5,265 during the three months ended March 31, 2021 and 2020, 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.
|
|
Number of
shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Contractual
term
(years)
|
|
Options outstanding at December 31, 2020
|
|
|
445,000
|
|
|
$
|
.71
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at March 31, 2021
|
|
|
445,000
|
|
|
$
|
0.71
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2021
|
|
|
420,000
|
|
|
$
|
0.71
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable and expected to vest at March 31, 2021
|
|
|
445,000
|
|
|
$
|
0.71
|
|
|
|
1.3
|
|
On February 8, 2021, the Company issued a warrant to purchase
2,500,000 shares of the Company’s common stock in conjunction with a convertible promissory note ( see Note 4) The warrant entitles
the holder to purchase 2,500,000 shares of the Company’s common stock at an exercise price of $0.40 per share. The warrant expires
on February 8, 2026.
The warrant qualified for equity accounting as
the warrant did not fall within the scope of ASC Topic 480, Distinguishing Liabilities from Equity. The warrant was measured at fair value
at the time of issuance and classified as equity.
The Company valued the warrant using the Monte
Carlo pricing model and recorded the warrant as a reduction of the note included in the debt discount balance. The following table summarizes
the assumptions used in the valuation model to determine the fair value of the warrant:
Fair Value of Common Share
|
|
$
|
0.225-0.47
|
|
Exercise Price
|
|
$
|
0.164-$0.40
|
|
Risk Free Rate
|
|
|
0.41-1.74
|
%
|
Expected Life (Yrs.)
|
|
|
4.86-5.0
|
|
Volatility
|
|
|
147.4-154.0
|
%
|
The relative fair value of the warrant of $420,096 has been recorded
as a discount on the note.
During the three months ended March 31, 2021, subsequent convertible
promissory note conversions triggered the warrant reset feature, resulting in an increase in underlying shares of common stock to 6,097,561
from 2,500,000 and a change in exercise price to $0.164 per share. The reset was recorded as a reduction to retained earnings and in an
increase to additional paid-in-capital of $1,211,350.
During the three months ended March 31, 2021, the subsequent issuance
of convertible promissory notes with certain terms and convertible promissory note conversions triggered the warrant reset feature on
certain previously issued warrants, resulting in an increase in underlying shares of common stock to 2,759,146 from 1,082,388 and a change
in exercise price to $0.164 per share. The resets were recorded as a reduction to retained earnings and in an increase to additional paid-in-capital
of $478,079.
The following table summarizes the information with respect to outstanding
warrants to purchase common stock of the Company, all of which were exercisable at March 31, 2021:
Date Issued
|
|
Exercise Price
|
|
|
Number
Outstanding
|
|
|
Expiration Date
|
December 1, 2018
|
|
$
|
0.71
|
|
|
|
100,000
|
|
|
December 1, 2023
|
May 1, 2020
|
|
$
|
0.52
|
|
|
|
100,000
|
|
|
May 1, 2025
|
June 4, 2020
|
|
$
|
0.164
|
|
|
|
1,524,390
|
|
|
June 30, 2023
|
December 1, 2020
|
|
$
|
0.164
|
|
|
|
1,234,756
|
|
|
December 1, 2023
|
February 8, 2021
|
|
$
|
0.164
|
|
|
|
6,097,561
|
|
|
February 8, 2026
|
|
|
|
|
|
|
|
9,056,707
|
|
|
|
NOTE 10.
|
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.
NOTE 11.
|
SUBSEQUENT EVENTS
|
The Company has evaluated subsequent events that
have occurred through the date of this filing and determined that there were no subsequent events or transactions that required recognition
or disclosure in the financial statements, except as disclosed below.
In April and May 2021, holders of convertible
promissory notes converted principal and accrued interest totaling $273,179 into 4,268,283 shares of common stock.
In April 2021, the Company issued 50,000
shares of common stock in conjunction with a consulting agreement for strategic advisory services.
In May 2021, the Company received proceeds of $237,500 in conjunction
with one of its convertible promissory notes.