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,
2019 and 2018, 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, 2019 and 2018, 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 29, 2020
|
|
ELECTROMEDICAL
TECHNOLOGIES, INC.
BALANCE
SHEETS
DECEMBER
31, 2019 AND 2018
|
|
December
31,
2019
|
|
|
December
31,
2018
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
-
|
|
|
$
|
-
|
|
Accounts
receivable
|
|
|
15,667
|
|
|
|
13,774
|
|
Inventories
|
|
|
24,694
|
|
|
|
29,604
|
|
Prepaid expenses
and other current assets
|
|
|
65,831
|
|
|
|
128,553
|
|
Total
current assets
|
|
|
106,192
|
|
|
|
171,931
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
25,580
|
|
|
|
-
|
|
Property and equipment,
net
|
|
|
771,094
|
|
|
|
795,551
|
|
Due from Chief Executive
Officer
|
|
|
-
|
|
|
|
11,304
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
902,866
|
|
|
$
|
978,786
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
251,162
|
|
|
$
|
166,979
|
|
Credit cards payable
|
|
|
31,009
|
|
|
|
42,515
|
|
Accrued expenses
and other current liabilities
|
|
|
289,791
|
|
|
|
104,394
|
|
Customer deposits
|
|
|
40,120
|
|
|
|
112,300
|
|
KISS liability -
related party
|
|
|
1,444,761
|
|
|
|
1,621,805
|
|
Convertible promissory
note
|
|
|
50,000
|
|
|
|
-
|
|
Related party notes
payable
|
|
|
105,000
|
|
|
|
-
|
|
Notes payable
|
|
|
59,153
|
|
|
|
27,307
|
|
Bank debt, current
portion
|
|
|
25,595
|
|
|
|
24,425
|
|
Total
current liabilities
|
|
|
2,296,591
|
|
|
|
2,099,725
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Bank debt, net of
current portion
|
|
|
566,406
|
|
|
|
591,650
|
|
Note Payable
|
|
|
-
|
|
|
|
157,000
|
|
Convertible promissory
note
|
|
|
-
|
|
|
|
25,000
|
|
Related party notes
payable, net of amount due from Chief Executive Officer
|
|
|
213,000
|
|
|
|
149,000
|
|
Other liabilities
|
|
|
11,306
|
|
|
|
16,651
|
|
Total
liabilities
|
|
|
3,087,303
|
|
|
|
3,039,026
|
|
|
|
|
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
deficit
|
|
|
|
|
|
|
|
|
Series A Preferred
Stock, 1,000,000 shares authorized and 500,000 outstanding
|
|
|
355,000
|
|
|
|
-
|
|
Common stock, $.00001
par value, 50,000,000 and 25,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
17,900,639 and 16,320,823
shares outstanding at December 31, 2019 and 2018, respectively
|
|
|
177
|
|
|
|
162
|
|
Additional paid-in-capital
|
|
|
2,713,087
|
|
|
|
1,447,960
|
|
Accumulated deficit
|
|
|
(5,252,701
|
)
|
|
|
(3,508,362
|
)
|
Total
stockholders’ deficit
|
|
|
(2,184,437
|
)
|
|
|
(2,060,240
|
)
|
|
|
$
|
902,866
|
|
|
$
|
978,786
|
|
The
accompanying notes are an integral part of these financial statements
ELECTROMEDICAL
TECHNOLOGIES, INC.
STATEMENTS
OF OPERATIONS
THE
YEARS ENDED DECEMBER 31, 2019 AND 2018
|
|
2019
|
|
|
2018
|
|
Net sales
|
|
$
|
829,737
|
|
|
|
675,383
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
238,516
|
|
|
|
168,716
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
591,221
|
|
|
|
506,667
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
2,259,848
|
|
|
|
787,370
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,668,627
|
)
|
|
|
(280,703
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(54,814
|
)
|
|
|
(86,463
|
)
|
Change in fair value
of related party KISS liability
|
|
|
(20,898
|
)
|
|
|
(1,586,805
|
)
|
Other income
|
|
|
-
|
|
|
|
3,554
|
|
Total other expense
|
|
|
(75,712
|
)
|
|
|
(1,669,714
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,744,339
|
)
|
|
|
(1,950,417
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
16,809,947
|
|
|
|
15,198,564
|
|
Weighted average loss per share
|
|
$
|
(0.10
|
)
|
|
|
(0.13
|
)
|
The
accompanying notes are an integral part of these financial statements
ELECTROMEDICAL
TECHNOLOGIES, INC.
STATEMENTS
OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR
THE YEARS ENDED DECEMBER 31, 2019 AND 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Series A Preferred Stock
|
|
|
Common Stock
|
|
|
Paid in
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of preferred stock for CEO bonus
|
|
|
355,000
|
|
|
|
500,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
355,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
146,759
|
|
|
|
109,999
|
|
|
|
-
|
|
|
|
110,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for consulting services
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
213,461
|
|
|
|
151,555
|
|
|
|
-
|
|
|
|
151,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of KISS liability- related party shares
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
1,000,000
|
|
|
|
197,932
|
|
|
|
-
|
|
|
|
197,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion on convertible note and note payable
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
219,596
|
|
|
|
155,910
|
|
|
|
-
|
|
|
|
155,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock -based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
157,168
|
|
|
|
-
|
|
|
|
157,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of Chief Executive Officer’s shares to employees at par value
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
492,563
|
|
|
|
-
|
|
|
|
492,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,744,339
|
)
|
|
|
(1,744,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2019
|
|
$
|
355,000
|
|
|
|
500,000
|
|
|
$
|
177
|
|
|
|
17,900,639
|
|
|
$
|
2,713,087
|
|
|
$
|
(5,252,701
|
)
|
|
$
|
(2,184,437
|
)
|
The
accompanying notes are an integral part of these financial statements
ELECTROMEDICAL
TECHNOLOGIES, INC.
STATEMENTS
OF CASH FLOWS
YEARS
ENDED DECEMBER 31, 2019 AND 2018
|
|
2019
|
|
|
2018
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,744,339
|
)
|
|
$
|
(1,950,417
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
801,287
|
|
|
|
48,905
|
|
Depreciation and amortization
|
|
|
24,457
|
|
|
|
22,339
|
|
Change in excess fair value of KISS liability-
related party
|
|
|
20,898
|
|
|
|
1,586,805
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,893
|
)
|
|
|
14,284
|
|
Inventories
|
|
|
4,910
|
|
|
|
67,085
|
|
Prepaid expenses and other current assets
|
|
|
37,142
|
|
|
|
(115,401
|
)
|
Due from Chief Executive Officer
|
|
|
11,304
|
|
|
|
(11,304
|
)
|
Accounts payable
|
|
|
84,183
|
|
|
|
(8,464
|
)
|
Credit cards payable
|
|
|
(11,506
|
)
|
|
|
(27,862
|
)
|
Accrued expenses and other current liabilities
|
|
|
564,965
|
|
|
|
14,655
|
|
Customer deposits
|
|
|
(72,180
|
)
|
|
|
(161,639
|
)
|
Net cash used in operating
activities
|
|
|
(280,772
|
)
|
|
|
(521,014
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from short-term financing
|
|
|
40,307
|
|
|
|
|
|
Repayments on line of credit
|
|
|
-
|
|
|
|
(87,747
|
)
|
Repayments on bank debt
|
|
|
(24,074
|
)
|
|
|
(24,732
|
)
|
Related party notes payable-net
|
|
|
213,000
|
|
|
|
15,355
|
|
Proceeds from KISS liability-related party
|
|
|
|
|
|
|
35,000
|
|
Issuance of convertible promissory note
|
|
|
50,000
|
|
|
|
25,000
|
|
Repayments on notes payable
|
|
|
(108,461
|
)
|
|
|
(16,385
|
)
|
Issuance of common stock for cash- net
|
|
|
110,000
|
|
|
|
546,663
|
|
|
|
|
-
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
280,772
|
|
|
|
493,154
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
56,008
|
|
|
$
|
81,912
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
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
In
2019, the Company issued 28,169 shares of restricted stock in exchange for an outstanding liability totaling $20,000
In
2019, the Company issued 64,215 shares of restricted stock in exchange for an outstanding related party note payable and accrued
interest totaling $45,592
In
2019, the Company issued 127,212 shares of restricted stock in exchange for outstanding notes payable and accrued interest totaling
$90,321
In
2019, the Company converted 1,000,000 shares of the KISS liability-related party valued at $197,942
In
2019, the Company issued 500,000 shares of its Series A Preferred stock to the Company’s CEO in exchange for an outstanding
bonus liability totaling $355,000.
The
accompanying notes are an integral part of these financial statements
ELECTROMEDICAL
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2019 AND 2018
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 he 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 $5.3 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, 2019, the Company used $280,772 in operations and had a working capital deficit of $2,190,399. 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, 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.
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 December 31, 2019 and 2018, the sales returns allowance was insignificant to the financial statements.
Certain
larger customers pay in advance for future shipments. These advance payments totaled $40,120 and $112,300 at December 31, 2019
and 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. At December 31, 2019 and 2018, deferred revenue
of $24,177 and $16,651 is recorded, respectively, 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 $4,225 and $1,000 as of December 31, 2019 and 2018, respectively.
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 years ended December 31, 2019 and 2018 that in total accounted for approximately
17% and 24%, respectively, of net sales. There were no amounts outstanding from this customer as of December 31, 2019 and 2018.
Customer deposits on hand from this customer totaled approximately $40,000 and $112,000 at December 31, 2019 and 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 consisted of one significant supplier in China that accounted for approximately 74%
and 60% of total net purchases for the years ended December 31, 2019 and 2018. There were no amounts outstanding due this supplier
at December 31, 2019 and 2018. 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.
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.
|
|
·
|
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 assets and liabilities fall as of December 31, 2019, are
as follows:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KISS liability- related party
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,444,761
|
|
|
$
|
1,444,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,444,761
|
|
|
$
|
1,444,761
|
|
The
levels of the fair value hierarchy into which the Company’s assets and liabilities 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
|
|
The
following table presents changes during the year ended December 31, 2019 in Level 3 liabilities measured at fair value on a recurring
basis:
Fair
value- December 31, 2018
|
|
$
|
1,621,805
|
|
Net unrealized gain
|
|
|
20,898
|
|
Conversion to restricted
common shares
|
|
|
(197,942
|
)
|
Fair value- December
31, 2019
|
|
$
|
1,444,761
|
|
See
Note 6 for discussion of the Company’s valuation of the KISS liability- related party.
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, 2019, and 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.
Deferred
Offering Costs
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 Reg A+ 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). Costs associated with the Company’s
pending S-1 filing totaled $25,580 and are included in other assets on the accompanying balance sheet at December 31, 2019.
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, 2019 and 2018.
Income
Taxes
The
Company, which was formed as a 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 terminate 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, 2019 and 2018, 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, 2019 and 2018.
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 2019 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 2019. During the year ended December
31, 2019, the Company evaluated its deferred tax assets of $167,444 and determined a full valuation allowance was appropriate.
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
At
December 31, 2019, the Company’s net operating loss carry forward was increased by $ 673,251. NOLs originating in 2019
can be carried forward indefinitely until
the loss is fully recovered, but they are limited to 80% of the taxable income in any one tax period. However, this 80% limitation
was removed for the 2018, 2019, and 2020 tax years by the CARES Act, which also allows for a 5-year carryback of the NOLs generated
in 2018 and 2019. The
difference between the statutory rate of 21% and the effective tax rate is due to permanent differences and a full valuation allowance.
Total net loss operating carry forward at December 31, 2019 totaled $1,474,135.
Deferred
tax assets as of December 31, 2018 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 December 31, 2018, for which a full valuation allowance would
have been present.
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, 2019 and 2018 were recorded
on a net basis. Included in accrued expenses at, December 31, 2019 and 2018 is approximately $62,000 and $51,000 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, 2019 and 2018.
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, 2019 and 2018 of $16,183 and $13,067, 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 $0 and $15,181 for the years ended December 31, 2019 and
2018, respectively Total advertising are included in selling, general and administrative expenses on the accompanying statements
of operations.
Research
and Development Costs
Research
and development costs are expensed as incurred. Total research and development costs amounted to $82,849 and $0 for the years
ended December 31, 2019 and 2018, respectively. Total research and development costs 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, 2019 and 2018, 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, 2021. 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.
|
PROPERTY AND
EQUIPMENT
|
Property
and equipment consisted of the following as of December 31:
|
|
2019
|
|
|
2018
|
|
Building
|
|
$
|
875,000
|
|
|
$
|
875,000
|
|
Furniture and equipment
|
|
|
24,987
|
|
|
|
24,987
|
|
|
|
|
899,987
|
|
|
|
899,987
|
|
Less: accumulated depreciation and amortization
|
|
|
(128,893
|
)
|
|
|
(104,436
|
)
|
|
|
$
|
771,094
|
|
|
$
|
795,551
|
|
Depreciation
and amortization expense related to property and equipment was $24,457 and $22,339 for the years ended December 31, 2019 and 2018,
respectively. Depreciation and amortization are 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. 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 balance as of December 31,
2019 and 2018 is $18,846 and $27,307, respectively.
Interest
expense of $6,645 and $4,138 has been accrued in the Company’s balance sheets as of December 31, 2019 and 2018, respectively,
of which $2,507 and $4,139 have been recorded in the Company’s statements of operations for the years then ended.
In
October 2019, the Company entered into a future revenue sale agreement. Under the terms of the agreement, the Company agrees to
sell $73,336 of its future revenues for a purchase price of $50,500 less transaction fees of $3,115 for a net advance of $47,385.
Payments of $375 per day are to be made for principal and interest until the $73,336 is paid in full. The note payable is estimated
to be paid in full in 2020. The outstanding balance as of December 31, 2019 is $40,307.
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 $25,000 note and unpaid accrued
interest of $2,948 into 39,363 shares of common stock. There is no beneficial conversion feature as the conversion price is at
fair market value. The proceeds were used for operations (See Note 9).
In
December 2019, the Company borrowed $50,000 in conjunction with a convertible promissory note. The note matures 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.
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 twelve months from the issuance date in November 2019 and has been recorded
as KISS liability- related party in the current liabilities section of the Company’s balance sheet. The Company’s
obligation is to convert the KISS note into common shares upon election of the investor. To date, the investor elected to convert
one million shares and the Company fulfilled its obligation and is not 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 7,298,905 and 8,042,246 at December
31, 2019 and 2018, respectively. KISS conversion shares are equal to the quotient obtained by dividing the Conversion Amount by
the Conversion Price as defined in the agreement. At both December 31, 2019 and 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”).
In
October 2019, the related party converted 1,000,000 of the conversion shares at a value of $197,942, which was reclassed
to additional paid-in-capital.
The
fair market value of the KISS liability- related party at December 31, 2019 and 2018 is $1,444,761 and $1,621,805, respectively.
Changes in fair market value are recorded as other income in the Company’s statements of operations. The change in fair
market value for the year ended December 31, 2019, totaled $(20,898). The excess in value over the proceeds received totaled $1,586,805
in 2018.
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 and personally guaranteed by the Company’s
CEO. 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 December 31, 2018 was $157,000. 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. In October 2019, the
lender converted the remaining balance of $57,000 and unpaid accrued interest of $5,373 into 87,849 shares of common stock (See
Note 9).
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, 2019 and 2018
was $592,001 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. In
October 2019, the related party lender converted the principal amount of $44,000 and unpaid accrued interest of $1,592 into 64,215
shares of common stock (See Notes 8 and 9). The outstanding principal balance on the related party note payable at December 31,
2018 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 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 $0 and $261,304 due from the Company’s CEO as of December 31, 2019
and 2018, respectively. At 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 $11,304. The note payable and accrued interest are deemed
paid in full as of December 31, 2019.
In
2018, the Company entered into promissory notes totaling $105,000 with a related party, who is a significant stockholder. The
Company entered into additional promissory notes with the related party for $213,000 during the year ended December 31, 2019,
for a total of $318,000 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. See Notes6, 8
and 12 for additional transactions with this related party.
Future
aggregate maturities of long-term debt, excluding the short-term notes payable and the KISS liability-related party are as follows:
For
the Years Ending December 31:
|
|
|
|
2020
|
|
$
|
140,595
|
|
2021
|
|
|
229,994
|
|
2022
|
|
|
28,381
|
|
2023
|
|
|
29,838
|
|
2024
|
|
|
31,302
|
|
Thereafter
|
|
|
449,891
|
|
|
|
$
|
910,001
|
|
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 that was converted into shares of common stock in 2019 (see Note
7).
Included
in the accompanying balance sheet is $261,305 of amounts due from the Company’s CEO as of December 31, 2018. The amount
due is non-interest bearing, payable upon demand and has been net against the note payable due the Company’s CEO (see Note
7). 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.
During
the year ended December 31, 2019, the Company’s CEO personally sold 693,750 shares of his common stock to several employees
at par value (see Note 9).
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. 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 common stock. The agreement remains
in effect until the earlier of the discharge or resignation of the CEO. In
conjunction with the agreement, the $500,000 signing bonus has been accrued and included in selling, general and administrative
expenses in the accompanying statement of operations during the year ended December 31, 2019.
On
November 1, 2019, the Company’s board of directors and the majority of shareholders awarded CEO, Matthew Wolfson, 500,000
shares of Series A Preferred stock., which was valued at $355,000 or $.71 per share. The shares were issued as partial payment
for the $500,000 signing bonus, for which $145,000 remained payable at December 31, 2019. See Note 9 regarding rights and preferences
related to the Series A Preferred stock.
As
of December 31, 2019, the Company entered into promissory notes totaling $318,000 with a related party (see Note 7).
In
October 2019, the related party converted 1,000,000 of the conversion shares in conjunction with the outstanding KISS liability
(see Note 6).
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 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. The Company has one class of Preferred
Stock, which has been designated Series A Preferred. The Company has designated 1,000,000 shares of Series A Preferred, of which
500,000 shares have been issued and are outstanding. Holders of Series A Preferred hold rights to vote on all matters requiring
a shareholder vote at 100 common shares vote equivalents for each share of Series A Preferred held. The Series A Preferred Stock
shall hold senior liquidation rights to all other classes of shares, including, but not limited to Common Shares.
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.
In
2018, the Company issued 243,584 common shares to 25 unaffiliated shareholders earned in its 2017 promotional program.
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). A working prototype has not yet been delivered.
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
|
|
During
the year ended December 31, 2019, the Company received a total of $110,000 from several investors in exchange for 146,759 common
shares of the Company at a price of $0.71 per share.
During
the year ended December 31, 2019, the Company’s CEO personally sold 693,750 shares of his common shares to several employees
at par value. Compensation expense has been recorded at the fair market value of $492,563 and is included in selling, general
and administrative expenses for the year then ended.
During
the year ended December 31, 2019, the Company issued 213,461 common shares in conjunction with agreements for financial and marketing
consulting services at a value of $151,557 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 year ended December 31, 2019, the Company issued 219,596 common shares in conjunction with the conversion of various notes
payable and unpaid accrued interest totaling $155,912.
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 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. 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 year ended December 31, 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.
Assumptions
|
|
|
|
Expected volatility rate
|
|
|
88
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Average risk-free interest rate
|
|
|
2.51
|
%
|
Expected term years
|
|
|
3,0
|
|
The
Company recorded pretax stock compensation expense of $157,168 during the year ended December 31, 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. Total unrecognized stock-based compensation cost related
to unvested time-based stock options was $24,953 as of December 31, 2019 and is expected to be recognized over a weighted-average
period of 15 months.
|
|
Number
of
shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Contractual
term (years)
|
|
Options outstanding at December 31, 2018
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
651,250
|
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(206,250
|
)
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2019
|
|
|
445,000
|
|
|
$
|
0.71
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2019
|
|
|
150,000
|
|
|
$
|
0.71
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable and expected to vest at
December 31, 2019
|
|
|
445,000
|
|
|
$
|
0.71
|
|
|
|
2.5
|
|
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 for the year ended December 31, 2018, 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 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
January 2020, the Company issued 10,355 shares of common stock to a vendor as settlement for a liability totaling $14,585.
In
February 2020, the Company issued 200,000 shares of common stock in conjunction with a twelve-month agreement for consulting services.
In
February 2020, the Company entered into a six- month consulting agreement with a third party. In conjunction with the agreement,
the Company issued the third party 400,000 shares of common stock, with the option to issue an additional 900,000 shares at the
Company’s discretion.
In
April 2020, the Company issued 2,000,000 shares of stock to one of its employees as compensation.
In
April 2020, the Company entered additional promissory notes totaling $58,000 due in 2021 with a related party for a total of $376,000.
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.
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)
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
85,477
|
|
|
$
|
-
|
|
Accounts receivable
|
|
|
16,841
|
|
|
|
15,667
|
|
Inventories
|
|
|
62,500
|
|
|
|
24,694
|
|
Prepaid expenses and other current assets
|
|
|
295,392
|
|
|
|
65,831
|
|
Total current assets
|
|
|
460,210
|
|
|
|
106,192
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
-
|
|
|
|
25,580
|
|
Property and equipment, net
|
|
|
754,688
|
|
|
|
771,094
|
|
Total assets
|
|
$
|
1,214,898
|
|
|
$
|
902,866
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
308,198
|
|
|
$
|
251,162
|
|
Credit cards payable
|
|
|
22,531
|
|
|
|
31,009
|
|
Accrued expenses and other current liabilities
|
|
|
254,038
|
|
|
|
289,791
|
|
Customer deposits
|
|
|
64,780
|
|
|
|
40,120
|
|
KISS liability - related party
|
|
|
-
|
|
|
|
1,444,761
|
|
Convertible promissory notes, net of discount
of $684,855
|
|
|
86,145
|
|
|
|
50,000
|
|
Related party notes payable
|
|
|
357,000
|
|
|
|
105,000
|
|
PPP Loan
|
|
|
39,500
|
|
|
|
-
|
|
Notes payable
|
|
|
17,846
|
|
|
|
59,153
|
|
Long term debt, current portion
|
|
|
27,236
|
|
|
|
25,595
|
|
Derivative liabilities
|
|
|
194,307
|
|
|
|
-
|
|
Total current liabilities
|
|
|
1,372,081
|
|
|
|
2,296,591
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Bank debt, net of current portion
|
|
|
553,203
|
|
|
|
566,406
|
|
Government debt, net of current portion
|
|
|
154,991
|
|
|
|
-
|
|
Related party notes payable
|
|
|
-
|
|
|
|
213,000
|
|
Other liabilities
|
|
|
18,794
|
|
|
|
11,306
|
|
Total liabilities
|
|
|
2,099,069
|
|
|
|
3,087,303
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit
|
|
|
|
|
|
|
|
|
Series A Preferred Stock, 1,000,000 shares
authorized and 500,000 outstanding
|
|
|
355,000
|
|
|
|
355,000
|
|
Common
stock, $.00001 par value, 50,000,000 shares authorized; 28,810,348 and 17,900,639 shares outstanding as of
September 30, 2020 and December 31, 2019, respectively
|
|
|
286
|
|
|
|
177
|
|
Additional paid-in- capital
|
|
|
7,474,723
|
|
|
|
2,713,087
|
|
Accumulated deficit
|
|
|
(8,714,180
|
)
|
|
|
(5,252,701
|
)
|
Total stockholders’ deficit
|
|
|
(884,171
|
)
|
|
|
(2,184,437
|
)
|
Total liabilities and stockholders’ deficit
|
|
$
|
1,214,898
|
|
|
$
|
902,866
|
|
See
accompanying notes to financial statements
ELECTROMEDICAL
TECHNOLOGIES, INC.
STATEMENTS
OF OPERATIONS
(UNAUDITED)
|
|
THREE
MONTHS ENDED SEPTEMBER 30,
|
|
|
NINE
MONTHS ENDED SEPTEMBER 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net sales
|
|
$
|
205,850
|
|
|
$
|
270,128
|
|
|
$
|
557,476
|
|
|
$
|
625,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
57,383
|
|
|
|
75,202
|
|
|
|
139,892
|
|
|
|
181,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
148,467
|
|
|
|
194,926
|
|
|
|
417,584
|
|
|
|
443,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
2,243,377
|
|
|
|
373,402
|
|
|
|
3,768,196
|
|
|
|
1,598,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,094,910
|
)
|
|
|
(178,476
|
)
|
|
|
(3,350,612
|
)
|
|
|
(1,154,418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(52,658
|
)
|
|
|
(10,601
|
)
|
|
|
(82,168
|
)
|
|
|
(35,342
|
)
|
Change in fair value of related party KISS liability
|
|
|
-
|
|
|
|
(1,553
|
)
|
|
|
(7,784
|
)
|
|
|
(41,257
|
)
|
Change in fair value of derivative liabilities
|
|
|
(22,415
|
)
|
|
|
-
|
|
|
|
(22,415
|
)
|
|
|
-
|
|
Other income
|
|
|
-
|
|
|
|
-
|
|
|
|
1,500
|
|
|
|
-
|
|
Total other expense
|
|
|
(75,073
|
)
|
|
|
(12,154
|
)
|
|
|
(110,867
|
)
|
|
|
(76,599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,169,983
|
)
|
|
$
|
(190,630
|
)
|
|
$
|
(3,461,479
|
)
|
|
$
|
(1,231,017
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding- basic and
diluted
|
|
|
21,875,068
|
|
|
|
16,681,043
|
|
|
|
20,201,697
|
|
|
|
16,567,820
|
|
Weighted average loss per share- basic and diluted
|
|
$
|
(0.10
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.07
|
)
|
See
accompanying notes to financial statements
ELECTROMEDICAL
TECHNOLOGIES, INC.
STATEMENT
OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2019
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid in
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
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
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
150,000
|
|
|
|
106,500
|
|
|
|
-
|
|
|
|
106,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Shares issued for software development services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
35,500
|
|
|
|
-
|
|
|
|
35,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
513,644
|
|
|
|
-
|
|
|
|
513,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(818,969
|
)
|
|
|
(818,969
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2019
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
164
|
|
|
|
16,625,329
|
|
|
$
|
2,183,603
|
|
|
$
|
(4,327,331
|
)
|
|
$
|
(2,143,564
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for consulting services
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
43,461
|
|
|
|
30,855
|
|
|
|
-
|
|
|
|
30,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40,688
|
|
|
|
-
|
|
|
|
40,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(221,418
|
)
|
|
|
(221,418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2019
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
165
|
|
|
|
16,668,790
|
|
|
$
|
2,255,146
|
|
|
$
|
(4,548,749
|
)
|
|
$
|
(2,293,438
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
42,253
|
|
|
|
30,000
|
|
|
|
-
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for consulting services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,000
|
|
|
|
14,200
|
|
|
|
-
|
|
|
|
14,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
48,428
|
|
|
|
-
|
|
|
|
48,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(190,630
|
)
|
|
|
(190,630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2019
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
165
|
|
|
|
16,731,043
|
|
|
$
|
2,347,774
|
|
|
$
|
(4,739,379
|
)
|
|
$
|
(2,391,440
|
)
|
See accompanying notes to financial statements
ELECTROMEDICAL
TECHNOLOGIES, INC.
STATEMENT
OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2020
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid in
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
Balance, December 31, 2019
|
|
$
|
355,000
|
|
|
|
500,000
|
|
|
$
|
177
|
|
|
|
17,900,639
|
|
|
$
|
2,713,087
|
|
|
$
|
(5,252,701
|
)
|
|
$
|
(2,184,437
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in conjunction with vendor settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,355
|
|
|
|
7,352
|
|
|
|
-
|
|
|
|
7,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for consulting services
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
600,000
|
|
|
|
289,994
|
|
|
|
-
|
|
|
|
290,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,265
|
|
|
|
-
|
|
|
|
5,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(451,241
|
)
|
|
|
(451,241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2020
|
|
$
|
355,000
|
|
|
|
500,000
|
|
|
$
|
183
|
|
|
|
18,510,994
|
|
|
$
|
3,015,698
|
|
|
$
|
(5,703,942
|
)
|
|
$
|
(2,333,061
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in conjunction with convertible promissory note
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
100,000
|
|
|
|
42,968
|
|
|
|
-
|
|
|
|
42,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial conversion feature in conjunction with convertible promissory note
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,800
|
|
|
|
-
|
|
|
|
8,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued to employee for services
|
|
|
-
|
|
|
|
-
|
|
|
|
20
|
|
|
|
2,000,000
|
|
|
|
599,980
|
|
|
|
-
|
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
85,380
|
|
|
|
-
|
|
|
|
85,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
142,857
|
|
|
|
49,999
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,481
|
|
|
|
-
|
|
|
|
5,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(840,255
|
)
|
|
|
(840,255
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2020
|
|
$
|
355,000
|
|
|
|
500,000
|
|
|
$
|
205
|
|
|
|
20,753,851
|
|
|
$
|
3,808,306
|
|
|
$
|
(6,544,197
|
)
|
|
$
|
(2,380,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial conversion feature in conjunction with convertible promissory notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
390,000
|
|
|
|
-
|
|
|
|
390,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of KISS liability- related party shares
|
|
|
|
|
|
|
-
|
|
|
|
72
|
|
|
|
7,156,497
|
|
|
|
1,452,473
|
|
|
|
|
|
|
|
1,452,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for consulting services
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
|
|
900,000
|
|
|
|
1,817,991
|
|
|
|
|
|
|
|
1,818,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,953
|
|
|
|
-
|
|
|
|
5,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,169,983
|
)
|
|
|
(2,169,983
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2020
|
|
$
|
355,000
|
|
|
|
500,000
|
|
|
$
|
286
|
|
|
|
28,810,348
|
|
|
$
|
7,474,723
|
|
|
$
|
(8,714,180
|
)
|
|
$
|
(884,171
|
)
|
See accompanying notes to financial statements
ELECTROMEDICAL
TECHNOLOGIES, INC.
STATEMENTS
OF CASH FLOWS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
|
|
2020
|
|
|
2019
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,461,479
|
)
|
|
$
|
(1,231,017
|
)
|
Adjustments to reconcile net loss to net cash
used in operating activities:
|
|
|
|
|
|
|
|
|
Financing costs on put option liability
|
|
|
-
|
|
|
|
76,931
|
|
Provision for allowance for doubtful accounts
|
|
|
3,765
|
|
|
|
-
|
|
Stock-based compensation expense
|
|
|
2,761,848
|
|
|
|
754,317
|
|
Depreciation and amortization
|
|
|
16,406
|
|
|
|
18,988
|
|
Change in excess fair value of KISS liability-
related party
|
|
|
7,784
|
|
|
|
41,256
|
|
Beneficial Conversion Feature
|
|
|
33,038
|
|
|
|
-
|
|
Change in fair value of derivative liabilities
|
|
|
22,415
|
|
|
|
-
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(4,939
|
)
|
|
|
(2,239
|
)
|
Inventories
|
|
|
(37,806
|
)
|
|
|
(29,847
|
)
|
Prepaid expenses and other current assets
|
|
|
(214,561
|
)
|
|
|
-
|
|
Due from Chief Executive Officer
|
|
|
-
|
|
|
|
10,256
|
)
|
Other assets
|
|
|
25,580
|
)
|
|
|
-
|
|
Accounts payable
|
|
|
57,036
|
|
|
|
82,435
|
|
Credit cards payable
|
|
|
(8,478
|
)
|
|
|
(9,942
|
)
|
Accrued expenses and other current liabilities
|
|
|
(28,401
|
)
|
|
|
91,515
|
|
Customer deposits
|
|
|
24,660
|
|
|
|
(95,300
|
)
|
Other liabilities
|
|
|
7,488
|
|
|
|
-
|
|
Net cash used in operating activities
|
|
|
(795,644
|
)
|
|
|
(187,547
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayments on short-term financing
|
|
|
(40,308
|
)
|
|
|
-
|
|
Proceeds from PPP loan
|
|
|
39,500
|
|
|
|
-
|
|
Issuance of convertible promissory note
|
|
|
665,000
|
|
|
|
-
|
|
Repayments on bank debt
|
|
|
(12,471
|
)
|
|
|
(17,992
|
)
|
Related party notes payable-net
|
|
|
24,500
|
|
|
|
203,000
|
|
Proceeds from government debt
|
|
|
155,900
|
|
|
|
-
|
|
Repayments on notes payable
|
|
|
(1,000
|
)
|
|
|
(107,461
|
)
|
Issuance of common stock for cash- net
|
|
|
50,000
|
|
|
|
110,000
|
|
Net cash provided by financing activities
|
|
|
881,121
|
|
|
|
187,547
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
85,477
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
85,477
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
37,408
|
|
|
$
|
14,805
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 50,000 shares of stock and put option
liability for prepaid software
|
|
$
|
-
|
|
|
$
|
71,200
|
|
Shares issued in conjunction with vendor settlement
|
|
$
|
7,352
|
|
|
$
|
-
|
|
Warrants, common stock and beneficial conversion
feature issued in conjunction with convertible promissory note
|
|
$
|
490,000
|
|
|
$
|
-
|
|
Conversion of Kiss liability-related party to
common stock
|
|
$
|
1,452,545
|
|
|
$
|
-
|
|
See
accompanying notes to financial statements
ELECTROMEDICAL
TECHNOLOGIES, INC.
NOTES
TO FINANCIAL STATEMENTS
(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, 2019. The results of operations for the three
months and nine months ended September 30, 2020 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 $8.7 million of accumulated net losses. In addition, during the nine months
ended September 30, 2020, the Company used $795,644 of cash from operations and had a working capital deficit of $911,863.
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 September 30, 2020.
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 September 30, 2020, and December 31, 2019, the sales returns allowance was $6,990 and $3,225, respectively.
Certain
larger customers pay in advance for future shipments. These advance payments totaled $64,780 and $40,120 at September 30,
2020 and December 31, 2019, 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 September 30, 2020 and December 31,
2019, deferred revenue of $38,796 and $24,177, respectively 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 at both September 30, 2020 and December 31, 2019,
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 three significant customers (“Customers A, B and C”) for the three months ended September 30, 2020
that accounted for approximately 19.3%, 15.2% and 10.7%, respectively, of net sales. and one significant customer for the three
months ended September 30, 2019 (“Customer A”), that accounted for approximately 10.0% of net sales. Customer
A and Customer B accounted for 17.2% and 12.9% of net sales for the nine months ended September 30, 2020, respectively. Customer
A accounted for 15.1% of net sales for the nine months ended September 30, 2019, respectively. There were no amounts outstanding
from these customers as of September 30, 2020 and December 31, 2019. Amounts due these customers totaled $0 and $3,100
as of September 30, 2020 and December 31, 2019, respectively for commissions and reimbursements. Customer deposits on
hand from Customer A totaled approximately $64,780 and $40,120 at September 30, 2020 and December 31, 2019, 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 (“Supplier A”) that accounted
for approximately 86.8% and 80.8% of total net purchases for the three months and nine months ended September 30, 2020 and
0.0% and 81.6% for the three and nine months ended September 30, 2019., respectively. An additional supplier (“Supplier
B”), accounted for approximately 100.0% and 11.0% of total net purchases for the three months and nine months ended September 30,
2019, respectively. There were no amounts due these suppliers at both September 30, 2020 and December 31, 2019. 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.
|
|
·
|
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 assets and liabilities fall as December 31, 2019 are as
follows:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KISS
liability- related party
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,444,761
|
|
|
$
|
1,444,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,444,761
|
|
|
$
|
1,444,761
|
|
See
Note 5 for discussion of the Company’s valuation of the KISS liability- related party.
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 September 30, 2020 and December 31,
2019, the Company believes there are no excess and obsolete inventories and accordingly, did not record an inventory reserve.
Inventories consist of purchased finished goods.
Deferred
Offering Costs
Costs
associated with the Company’s pending S-1 filing totaled $85,601 and $25,580 as of September 30, 2020 and December 31,
2019, Such costs are included in other assets on the accompanying balance sheets as of September 30, 2020 and December 31,
2019.
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 three months ended September 30, 2020 and 2019.
Income
Taxes
Deferred
tax assets as of September 30, 2020 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 September 30, 2020, for which a full valuation
allowance would have been present.
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 and nine month periods ended September 30,
2020 and 2019 were recorded on a net basis. Included in accrued expenses at September 30,2020 and December 31, 2019
is approximately $70,000 and $62,000 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 three months
ended September 30, 2020 and 2019 and for the nine months ended September 30, 2020 and 2019.
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, September 30, 2020 and December 31, 2019 of $21,026
and $16,183, respectively, and is included in cost of sales in the statements of operations and within accrued expenses and other
current liabilities on the accompanying balance sheets.
Advertising
Advertising
costs are expensed as incurred. Total advertising expenses amounted to $0 for both the three months and nine months ended September 30,
2020 and 2019. Total advertising costs are included in selling, general and administrative expenses on the accompanying statements
of operations.
Research
and Development Costs
Research
and development costs are expensed as incurred. Total research and development costs amounted to $0 and $14,529 for the three
months ended September 30, 2020 and 2019, respectively. Total research and development costs amounted to $0 and $35,610 for
the nine months ended September 30, 2020 and 2019, respectively Total research and development costs 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. Potentially dilutive
securities include convertible notes payable, warrants, stock options and the KISS liability-related party. As all potentially
dilutive securities are anti-dilutive as of September 30, 2020 and 2019, 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, 2021. 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.
|
PROPERTY AND
EQUIPMENT
|
Property
and equipment consisted of the following:
|
|
September 30,
2020
|
|
|
December
31,
2019
|
|
Building
|
|
$
|
875,000
|
|
|
$
|
875,000
|
|
Furniture and equipment
|
|
|
24,987
|
|
|
|
24,987
|
|
|
|
|
899,987
|
|
|
|
899,987
|
|
Less: accumulated
depreciation and amortization
|
|
|
(145,299
|
)
|
|
|
(128,893
|
)
|
|
|
$
|
754,688
|
|
|
$
|
771,094
|
|
Depreciation
and amortization expense related to property and equipment was $5,468 for both the three months ended September 30, 2020
and 2019, respectively. Depreciation and amortization expense related to property and equipment was $16,406 and $18,988 for the
nine months ended September 30, 2020 and 2019, respectively. 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
balance as of September 30, 2020 and December 31, 2019 is 17,846 and $18,846, respectively.
Interest
expense of $7,584 has been accrued in the Company’s balance sheet as of September 30, 2020, of which $444 and $1,382,
respectively, has been recorded in the Company’s statement of operations for the three months and nine months then ended.
Interest expense of $494 and $2,014, respectively, has been recorded for the three months and nine months ended September 30,
2019.
In
October 2019, the Company entered into a future revenue sale agreement. Under the terms of the agreement, the Company agrees
to sell $73,336 of its future revenues for a purchase price of $50,500 less transaction fees of $3,115 for a net advance of $47,385.
Payments of $375 per day are to be made for principal and interest until the $73,336 is paid in full. The outstanding balance
as of September 30, 2020 and December 31, 2019 is $0 and $40,307, respectively.
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. The remaining portion
needs to be repaid over 2 years with a 6-month moratorium on payments and carry a 1% annual interest rate. These loans require
no collateral nor personal guarantees. The Company anticipates that this loan will be forgiven in full.
Convertible
Promissory Notes
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 $25,000 note and
unpaid accrued interest of $2,948 into 39,363 shares of common stock. There is no beneficial conversion feature as the conversion
price is at fair market value. The proceeds were used for operations.
In
December 2019, the Company borrowed $50,000 in conjunction with a convertible promissory note. The note matures 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
June 2020, the Company borrowed $110,000 in conjunction with an unsecured convertible promissory note from an investor. Proceeds
of $100,000 include an original issue discount of $10,000. A one-time charge of 8% will be applied to the principal amount of
$110,000 on the Issuance Date to be paid upon maturity. The note matures on December 15, 2020. 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 $0.35 per share. The number
of shares of common stock issuable upon conversion of any conversion amount shall be equal to the quotient of dividing the conversion
amount by the conversion price of $0.35.
In
conjunction with the note issued in June 2020, the Company issued 100,000 shares of common stock to the Investor as well
as a warrant to purchase 250,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The warrant
expires on June 30, 2023.
The
common shares and warrants qualified for equity accounting as the warrants did not fall within the scope of ASC Topic 480, Distinguishing
Liabilities from Equity. The warrants were measured at fair value at the time of issuance and classified as equity.
Each
warrant entitles the holder to purchase one share of common stock for $1.00 per share. If held by the initial purchaser of the
Private Warrant or certain permitted transferees, the purchase can occur on a cashless basis. The warrants will expire on June 4,
2023 or earlier upon redemption or liquidation.
The
Company valued the warrants using the Black-Scholes model and recorded the warrants as a reduction of the note included in the
debt discount balance. The following table summarizes the assumptions used in the valuation models to determine the fair value
of the warrants:
Fair
Value of Common Share
|
|
$
|
0.51
|
|
Exercise Price
|
|
$
|
1.00
|
|
Risk Free Rate
|
|
|
0.36
|
%
|
Expected Life (Yrs.)
|
|
|
3.00
|
|
Volatility
|
|
|
95.00
|
%
|
The
Common shares were valued at OTC market price on June 4, 2020. Upon valuation of the common shares and the warrants, the
Company allocated the values using a relative fair market value approach. The common shares were valued at $42,969 and the warrants
were valued at $48,231. The residual value of $8,800 was recorded as a discount associated with the beneficial conversion feature.
The
Company shall at all times reserve and keep available out of its authorized common stock a number of shares equal to at least
5 times the full number of shares of common stock issuable upon conversion of all outstanding amounts under these notes. The Company
will at all times reserve at least 5,000,000 shares of common stock for conversion.
The
Company shall have the option, under specific terms in each note, to pre-pay the entire remaining outstanding principal amount
of this note in cash plus a premium ranging from 20-50%.
Upon
the occurrence of any Event of Default (without the need for any party to give any notice or take any other action) for the notes
issued in June 2020, the outstanding balance shall immediately and automatically increase to 120% of the outstanding balance
immediately prior to the occurrence of the Event of Default (the “Default Sum”). Upon the occurrence of any Event
of Default, the note shall become immediately due and payable. In the event of default, the Company would be required to convert
the notes at a price of 60% of the lowest trade in the last 25 days prior to default.
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 unsecured convertible promissory notes 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.
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 unsecured convertible promissory notes 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.
|
|
As
of September 30,
|
|
Convertible
notes
|
|
2020
|
|
|
2019
|
|
Principal balance
|
|
$
|
771,000
|
|
|
$
|
-
|
|
Debt discount balance
|
|
|
(684,855)
|
|
|
|
-
|
|
Net Notes balance
|
|
$
|
86,145
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Debt discount is amortized over the term of
the note using the effective interest method.
|
|
|
|
|
|
|
|
|
The
beneficial conversion features and derivatives are initially recorded as a discount to the debt and amortized using the effective
interest method. As of September 30, 2020, $33,038 of debt discount amortization is recorded as interest expense.
NOTE
5.
|
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 twelve months from the issuance date in November 2019 and has
been recorded as KISS liability- related party in the current liabilities section of the Company’s balance sheet. Upon (a) after
the maturity date of November 1, 2019; (b) in the event of a “Next Equity Financing” where the Company sells
its preferred shares from which the Company receives not less than $1 million dollars; or, (c) a corporate transaction in
which all or substantially all of the Company’s assets are sold, merged or consolidated into another entity, the investor
may, at his discretion, convert the principal of the KISS into common shares of Company. The Company’s obligation is to
convert the KISS note upon election of the investor.
(k)
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 8,156,497. KISS conversion shares are equal to the quotient obtained by dividing
the Conversion Amount by the Conversion Price as defined in the agreement. 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”)”); (ii) US $106,376 for shares
converted prior to July 1, 2022 (the “2022 Valuation Cap”) and (iii) US
$142,458 for shares converted on or after July 1, 2022.
In
October 2019, the related party converted 1,000,000 of the conversion shares at a value of $197,942, which was reclassed
to additional paid-in-capital. On September 23, 2020, the related party converted the remaining shares of 7,156,497 at a
value of $1,452,575, which was reclassed to additional paid-in-capital.
The
fair market value of the KISS liability- related party at December 31, 2019 is $1,444,762. Changes in fair market value are
recorded as other income in the Company’s statements of operations. The change in fair market value for the three months
ended September 30, 2020 and 2019, totaled $0 and $1,553 respectively. The change in fair market value for the nine months
ended September 30, 2020 and 2019 totaled $7,784 and $41,257, respectively.
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. 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 and personally guaranteed by the
Company’s CEO. 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 December 31, 2018 was $157,000. 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. In October 2019, the lender converted the remaining balance of $57,000 and unpaid accrued interest of $5,373
into 87,849 shares of common stock.
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 12-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 September 30,
2020 and December 31, 2019 was $581,145 and $592,001, 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
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. In October 2019, the related party lender converted the principal amount of $44,000 and unpaid accrued interest of
$1,592 into 64,215 shares of common stock.
In
July 2017, the Company entered 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. The note payable and accrued interest are deemed paid in full as of December 31, 2019.
The
Company entered into additional promissory notes with a related party for $84,500 and repaid $45,000 of promissory notes in the
nine months ended September 30, 2020, for a total of $357,500 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.
The
long-term debt agreements do not contain any financial covenants.
NOTE 7.
|
DERIVATIVE LIABILITIES
|
The
Company issued debts that consist of the issuance of convertible 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 notes described in Note 4. The fair value of applicable derivative liabilities on notes and the change
in fair value of derivative liability are as follows for the nine months ended September 30, 2020:
|
|
Derivative
Liability -
Convertible
Notes
|
|
Balance as of December 31, 2019
|
|
$
|
–
|
|
Additions during the period
|
|
|
171,892
|
|
Change in fair value
|
|
|
22,415
|
|
Balance as of September 30, 2020
|
|
$
|
194,307
|
|
The
fair value of the derivative liability – convertible notes is estimated using a Black Scholes pricing model with the following
assumptions:
Market value of common stock
|
|
$
|
0.69
|
|
Expected volatility
|
|
|
95
|
%
|
Expected term (in years)
|
|
|
1
|
|
Risk-free interest rate
|
|
|
0.36
|
%
|
NOTE
8.
|
RELATED PARTY
TRANSACTIONS
|
The
Company has a promissory note with a related party for $44,000 that was converted into shares of common stock in 2019.
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 common stock. The agreement remains
in effect until the earlier of the discharge or resignation of the CEO. In
conjunction with the agreement, the $500,000 signing bonus has been accrued and included in selling, general and administrative
expenses in the accompanying statement of operations during the year ended December 31, 2019.
During
the nine months ended September 30, 2020, the Company paid the Company’s CEO $27,256 towards the balance of the 2019
signing bonus. Total amount outstanding at September 30, 2020 and December 31, 2019 is $46,204 and $73,460, respectively.
The
Company entered into additional promissory notes with a related party for $84,500 and repaid $45,000 of promissory notes in the
nine months ended September 30, 2020, for a total of $357,500 outstanding.
See
Notes 5, 6 and 12 for additional related party disclosure.
NOTE
9.
|
STOCKHOLDERS’
DEFICIT
|
In
January 2020, the Company issued 10,355 shares of common stock to a vendor as settlement for a liability totaling $7,532.
In
February 2020, the Company issued 200,000 shares of common stock in conjunction with a twelve-month agreement for 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 consulting agreement 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
April 2020, the Company issued 2,000,000 shares of common stock to one of its employees as compensation for services provided
at a value of $600,000 or $.30 per share. The value of the compensation has been recorded
as selling, general and administrative expenses in the Company’s statement
of operations.
On
May 1, 2020, 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 $0.52 per share. The warrant is fully vested upon issuance and expires May 1, 2025. Compensation
expense of $37,149 has been recorded in selling, general and administrative expenses in the accompanying statement of operations
for the nine months ended September 30, 2020. 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 are provided in the table below.
Assumptions
|
|
|
|
Expected
volatility rate
|
|
|
95
|
%
|
Expected dividend
yield
|
|
|
0
|
%
|
Average risk-free
interest rate
|
|
|
.36
|
%
|
Expected term years
|
|
|
5.0
|
|
In
June 2020, the Company received a total of $50,000 from an investor in exchange for
142,857 shares of common stock of the Company at a price of $0.35 per share.
In
June 2020, the Company issued 100,000 shares of common stock and a warrant to purchase 250,000 shares of common stock in
conjunction with a convertible promissory note (see Note 4).
In
August 2020, the Company issued 900,000 shares of common stock to a third party in conjunction with a consulting agreement at
a value of $1,818,000 or $2.02 per share (see Note 4). The value of the compensation has been recorded in selling, general and
administrative expenses in the Company’s statement of operations.
The
Company recorded stock compensation expense of $5,953 and $48,429 during the three months ended September 30, 2020 and 2019,
respectively and $16,894 and $110,198 during the nine months ended September 30, 2020 and 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. Total unrecognized stock-based compensation cost related
to unvested time-based stock options was $9,425 as of September 30, 2020 and is expected to be recognized over a weighted-average
period of 12 months.
|
|
Number
of
shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Contractual
term (years)
|
|
Options outstanding at December 31,
2019
|
|
|
445,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at September 30, 2020
|
|
|
445,000
|
|
|
$
|
0.71
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2020
|
|
|
360,000
|
|
|
$
|
0.71
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable and expected to vest at
September 30, 2020
|
|
|
445,000
|
|
|
$
|
0.71
|
|
|
|
2.5
|
|
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.
NOTE
12.
|
SUBSEQUENT EVENTS
|
The
Company has evaluated subsequent events that have occurred through the filing 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.
Pursuant
to a previous financing commitment entered into September 28, 2020, received on October 1, 2020, the Company borrowed $108,000
in conjunction with unsecured convertible promissory notes 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 Company shall issue irrevocable transfer
agent instructions reserving 4,023,000 shares of common stock for conversions under the note The note has a variable conversion
price and the Company recorded an embedded derivative liability.
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
Company shall issue irrevocable transfer agent instructions reserving 4,214,762 shares of common stock for conversions under the
note The note has a variable conversion price and the Company recorded an embedded derivative liability.
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.
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 Company shall issue irrevocable transfer agent instructions reserving 7,100,000 shares of common
stock for conversions under the note The note has a variable conversion price and the Company recorded an embedded derivative liability.
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.
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.
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 Company shall issue irrevocable transfer agent instructions reserving 831,440 shares of common
stock for conversions under the note. The note has a variable conversion price and the Company recorded an embedded derivative
liability.
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 and the
third closing in the face amount of$250,000 for a purchase price of $237,500. The notes mature 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
$0.40 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 22% per year, simple interest, non-compounding,
until paid. The Company shall issue irrevocable transfer agent instructions reserving 15,471,894 shares of common stock for conversions
under the note. 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.
In
October 2020, the Company received a total of $35,000 from investors in exchange for
26,316 shares of common stock of the Company at a price of $1.33 per share.
In
November 2020, the Company issued 65,000 shares of common stock, at a price of $0.86 per share, in conjunction with a consulting
agreement.
In
November 2020, the Company purchased and returned to treasury stock 87,849 shares of common stock for a purchase price of $36,413.
In
December 2020, the Company increased its authorized common shares from 50,000,000 to 125,000,000.
In
December 2020, the Company received $5,000 from an investor in exchange for 3,759 shares of common stock for a purchase price
of $1.33 per share.
In
December 2020, the Company cancelled 2.000,000 shares of common stock previously issued as compensation to one of its employees.
In
December 2020, the holder of one of the convertible notes, converted principal and unpaid accrued interest totaling $118,800 into
339,429 shares of common stock.
In
February 2021, holders of convertible notes converted principal totaling $65,000 into 258,657 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.
In
February 2021, the Company issued 1,084,120 shares of common stock in conjunction with various consulting agreements.