NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2020 AND 2019
NOTE 1.
|
ORGANIZATION AND NATURE OF BUSINESS
|
Electro Medical Technologies, LLC (“the
Company”), was formed in November 2010 as an Arizona limited liability company. In August 2017, the Company converted
to a Delaware C Corporation under Electromedical Technologies, Inc. The Company is a bioelectronic engineering company with
medical device certifications in the United States (FDA) and Mexico (Cofepris). The Company engineers simple-to-use portable bioelectronics
devices, which provide fast and long -lasting pain relief across a broad range of ailments.
NOTE 2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Accounting Method
The Company maintains its accounting records
on an accrual method in conformity with accounting principles generally accepted in the United States of America (“US GAAP”).
Use of Estimates
The preparation of financial statements in conformity
with US GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities,
certain disclosures at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting
period. Significant estimates affecting the financial statements have been prepared on the basis of the most current and best available
information. However, actual results from the resolution of such estimates and assumptions may vary from those used in the preparation
of the financial statements.
Going Concern
Since inception, the Company has incurred approximately
$9.1 million of accumulated net losses. In addition, during the year ended December 31, 2020, the Company used $1,336,660 in operations
and had a working capital deficit of $1,371,966. 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, 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.
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, 2020 and 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 $28,651 and $40,120 at December 31, 2020 and 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.
At December 31, 2020 and 2019, deferred revenue of $35,200 and $24,177 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 $1,000 as of both December 31, 2020 and 2019. 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 two significant customers (Customers A and B), that
accounted for approximately 20.8% and 13.9% and 16.4% and 10.5% of net sales for the years ended December 31, 2020 and 2019, respectively.
There were no amounts outstanding from these customers at December 31, 2020 and 2019. Amounts due these customers
totaled $0 and $3,100 at December 31, 2020 and 2019, respectively for commissions and reimbursements. Customer
deposits on hand from Customer A totaled $28,651 and $40,120 at December 31, 2020 and 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 that accounted for approximately 82% and 74% of total net purchases for the years ended December 31,
2020 and 2019, respectively. There were no amounts outstanding due this supplier at December 31, 2020 and 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.
|
|
|
|
|
|
Derivative liabilities are adjusted to fair value utilizing the Lattice method
|
Asset and liabilities measured and reported
at fair value are classified and disclosed in one of the following categories based on inputs:
Level 1 — Quoted prices in active
markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date
Level 2 — Inputs other than quoted
prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data
for substantially the entire contractual term of the asset or liability
Level 3 — Pricing inputs include
significant unobservable inputs used in determining the fair value of investments. The types of investments, which would generally
be included in this category include equity securities issued by private entities.
In certain cases, the inputs used to measure
fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within
the fair value hierarchy is appropriate for any given investment is based on the lowest level of input that is significant to the
fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement
in its entirety requires judgment and considers factors specific to the investment.
The levels of the fair value hierarchy
into which the Company’s assets and liabilities fall as of December 31, 2020, are as follows:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities – convertible promissory notes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
831,852
|
|
|
$
|
831,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
831,852
|
|
|
$
|
831852
|
|
The following table presents changes during
the year ended December 31, 2020 in Level 3 liabilities measured at fair value on a recurring basis:
Fair value- December 31, 2019
|
|
$
|
1,444,761
|
|
Net unrealized gain
|
|
|
(63,629
|
)
|
Derivative liabilities in conjunction with convertible promissory notes
|
|
|
903,265
|
|
Conversion of KISS liability – related party to common shares
|
|
|
(1,452,545
|
)
|
Fair value- December 31, 2020
|
|
$
|
831,852
|
|
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 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 5 for discussion of the Company’s
valuation of the KISS liability- related party. See Note 4 for discussion of the Company’s valuation of the derivative liabilities.
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, 2020, and 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
Incremental costs directly associated with the offering of securities
are deferred and charged against the gross proceeds of the offering upon completion. 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.
The Company’s S-1 was effective in August 2020. Additional costs totaling $60,021 were incurred during the year ended
December 31, 2020, of which $65,000 was reclassified to additional paid in capital offsetting proceeds from the offering.
Costs totaling $20,061 are included in other assets on the accompanying balance sheet at December 31, 2020. The remaining
costs will be expensed in the absence of additional offering proceeds.
Property and Equipment
Property and equipment are 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, 2020 and 2019.
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, 2020 and 2019, 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, 2020 and 2019.
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 2020 related to deferred tax charges consisting of accrued liabilities and accounts payable, for which the Company will receive the
benefit from when paid and the net operating loss incurred during 2020. During the year ended December 31, 2020, the Company evaluated
its deferred tax assets of $547,256 and determined a full valuation allowance was appropriate. Deferred tax assets related primarily to
accrued liabilities and accounts payable of $115,490 and net operating losses of $431,766. During the year ended December 31, 2020, the
valuation allowance increased by $379,812.
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.
For the years ended December 31, 2020 and 2019 the Company’s
net operating loss carry forward was increased by $1,062,772 and $673,257, respectively. NOLs originating in 2020 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, 2020 and 2019 totaled $2,536,907
and $1,474,135, respectively.
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, 2020 and 2019 were recorded on a net basis. Included
in accrued expenses at, December 31, 2020 and 2019 is approximately $58,000 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 years ended December 31, 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, December 31, 2020
and 2019 of $17,483 and $16,183, respectively. The expense 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 for both the years ended December 31, 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 $31,600 and $82,849 for the years ended December 31, 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. As all potentially dilutive securities are anti-dilutive as of
December 31, 2020 and 2019, diluted net loss per share is the same as basic net loss per share for each year. Stock options,
warrants and convertible promissory notes with underlying shares totaling 3,803,949 at December 31, 2020, have not been included in
the net loss per share calculation. The number of underlying shares related to convertible promissory notes may vary based upon the actual date of
conversion.
COVID-19
On January 30, 2020, the World Health
Organization declared the COVID-19 outbreak a “Public Health Emergency of International Concern” and on March 10,
2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the COVID-19 include restrictions
on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. COVID-19, and
actions taken to mitigate it, have had and are expected to continue to have an adverse impact on the economies and financial markets
of many countries, including the geographical area in which the Company operates. While it is unknown how long these conditions
will last and what the complete financial effect will be to the company, COVID-19 has had an adverse effect on our business, including
our supply chains and distribution systems. While we are taking diligent steps to mitigate disruptions to our supply chain, we
are unable to predict the extent or nature of these impacts at this time to our future financial condition and results of operations.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued Accounting
Standards Update (“ASU”) 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (“ROU”)
model that requires a lessee to record a ROU asset and a lease liability, measured on a discounted basis, on the balance sheet for all
leases with terms greater than 12 months. Leases will be classified as either finance or operating, with classification affecting the
pattern of expense recognition in the statements of operations and comprehensive loss. A modified retrospective transition approach
is required for capital and operating leases existing at the date of adoption, with certain practical expedients available. The Company
is currently in the process of evaluating the potential impact of this new accounting guidance, which is effective for the Company beginning
on January 1, 2022. The impact is not expected to be significant.
Management does not believe that any other
recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on the Company’s
financial statement presentation or disclosures.
NOTE 3.
|
PROPERTY AND EQUIPMENT
|
Property and equipment consisted of the
following as of December 31:
|
|
2020
|
|
|
2019
|
|
Building
|
|
$
|
875,000
|
|
|
$
|
875,000
|
|
Furniture and equipment
|
|
|
24,987
|
|
|
|
24,987
|
|
|
|
|
899,987
|
|
|
|
899,987
|
|
Less: accumulated depreciation and amortization
|
|
|
(150,768
|
)
|
|
|
(128,893
|
)
|
|
|
$
|
749,219
|
|
|
$
|
771,094
|
|
Depreciation and amortization expense related
to property and equipment was $21,875 and $24,457 for the years ended December 31, 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 December 31, 2020 and 2019 is $12,846 and 18,846, respectively.
Interest
expense of $8,348 has been accrued in the Company’s balance sheet as of December 31, 2020, of which $1,703 and $2,507,
has been recorded in the Company’s statement of operations for the years ended December 31, 2020 and 2019, respectively.
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 December 31, 2020 and 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. No payment is due during the deferral period which ends the earlier of the date of
SBA forgiveness or ten months after the last day of the covered period. The remaining portion needs to be repaid over 2 years and carries
a 1% annual interest rate. These loans require no collateral nor personal guarantees. The loan was forgiven in its entirety in February
2021.
Convertible Promissory Notes
The aggregate of convertible promissory notes is as follows:
|
|
As of December 31,
|
|
Convertible promissory notes
|
|
2020
|
|
|
2019
|
|
Principal balance
|
|
$
|
1,534,653
|
|
|
$
|
50,000
|
|
Debt discount balance
|
|
|
(1,277,255
|
)
|
|
|
-
|
|
Net Notes balance
|
|
$
|
257,398
|
|
|
$
|
50,000
|
|
In May 2018, the Company borrowed
$25,000 in conjunction with a convertible promissory note. The note matured 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 matured in May 2020 and is interest free. The lender has the right at
any time to convert the debt into fully paid and non- assessable shares of common stock at a price of $0.71 per share. There is no beneficial
conversion feature as the conversion price is at fair market value. The proceeds were used for operations.
In 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 December 2020, the investor converted the note into 339,429 shares of common stock.
In conjunction with the note issued in June 2020, the Company
issued 100,000 shares of common stock to the investor as a well as a warrant to purchase 250,000 shares of the Company’s
common stock.
The Common shares were valued at 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. (see Note 10).
If the Company, at any time while this warrant is outstanding, shall
sell or grant any option to purchase, or sell or grant any right to re-price, or otherwise dispose of or issue (or announce any offer,
sale, grant or any option to purchase or other disposition) any common stock or common stock equivalents entitling any person to acquire
shares of common stock, at an effective price per share less than the then exercise price (such lower price, the “Base Share
Price”), then the exercise price shall be reduced and only reduced to equal the Base Share Price and the number of shares issuable
hereunder shall be increased accordingly.
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. As of December 31, 2020, there are 3,395,190 remaining shares reserved.
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 an unsecured convertible promissory note from an investor. Proceeds of $100,000 include an original
issue discount of $3,000. The notes mature on August 11, 2021. The lender has the right for 180 days from the issuance date
to convert the debt into fully paid and non- assessable shares of common stock at a price of $1.00 per share. From the period 180
days from issuance to maturity, the lender has the right to convert the debt into fully paid and non-assessable shares of common
stock at a price of 63% of market value. Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings
or combinations, recapitalizations and reorganizations. Interest accrues at the rate of ten percent (10%) per annum, simple interest,
in each case to the extent that the note and the principal amount and any unpaid accrued interest has not been converted into conversion
shares (as defined) prior to the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis
of a 365-day year. In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at
the rate of 22% per year, simple interest, non-compounding, until paid. The Company shall issue irrevocable transfer agent instructions
reserving 1,915,548 shares of common stock for conversions under the note. The note has a variable conversion price and the Company
recorded an embedded derivative liability. The fair value of the liability totaled $97,654 at the date of issuance and has been
recorded as a discount on the note. (see Note 7).
In September 2020, the Company borrowed
$107,500 in conjunction with an unsecured convertible promissory note from an investor. Proceeds of $100,000 include an original
issue discount of $7,500. The note matures on September 3, 2021. The lender has the right after March 3, 2021 to convert
the debt into fully paid and non- assessable shares of common stock at a price of $0.50 per share. Conversions are subject to adjustments
due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest accrues
at the rate of eight percent (8%) per annum, simple interest, in each case to the extent that the note and the principal amount
and any unpaid accrued interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest
shall commence accruing on the issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder
is not paid as and when due, such amounts shall accrue interest at the rate of 18% per year, simple interest, non-compounding,
until paid. A beneficial conversion feature valued at $100,000 has been recorded as a discount on the note.
In September 2020, the Company borrowed
$78,000 in conjunction with an unsecured convertible promissory note from an investor. Proceeds of $75,000 include an original
issue discount of $3,000. The notes mature on September 8, 2021. The lender has the right for 180 days from the issuance date
to convert the debt into fully paid and non- assessable shares of common stock at a price of $1.00 per share. From the period 180
days from issuance to maturity, the lender has the right to convert the debt into fully paid and non-assessable shares of common
stock at a price of 63% of market value. Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings
or combinations, recapitalizations and reorganizations. Interest accrues at the rate of ten percent (10%) per annum, simple interest,
in each case to the extent that the note and the principal amount and any unpaid accrued interest has not been converted into conversion
shares (as defined) prior to the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis
of a 365-day year. In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at
the rate of 22% per year, simple interest, non-compounding, until paid. The Company shall issue irrevocable transfer agent instructions
reserving 1,450,609 shares of common stock for conversions under the note. The note has a variable conversion price and the Company
recorded an embedded derivative liability. The fair value of the liability totaled $74,238 at the date of issuance and has been
recorded as a discount on the note. (see Note 7).
Pursuant to a previous financing commitment
entered into September 28, 2020, received on October 1, 2020, the Company borrowed $108,000 in conjunction with an unsecured
convertible promissory note from an investor. Proceeds of $100,000 include an original issue discount of $8,000. The notes mature
on September 28, 2021. From the period 180 days from issuance to maturity, the lender has the right to convert the debt into
fully paid and non-assessable shares of common stock at a price of 63% of market value. Conversions are subject to adjustments
due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest accrues
at the rate of ten percent (10%) per annum, simple interest, in each case to the extent that the note and the principal amount
and any unpaid accrued interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest
shall commence accruing on the issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder
is not paid as and when due, such amounts shall accrue interest at the rate of 22% per year, simple interest, non-compounding,
until paid. The 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. The fair value
of the liability totaled $182,670 at the date of issuance and has been recorded as a discount on the note. The fair value of the
derivative liability as of the date of issuance was in excess of the note resulting in full discount of the note and a charge to
interest expense. (see Note 7).
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 2,171,014 shares of common stock for conversions under the note. The note has
a variable conversion price and the Company recorded an embedded derivative liability. The fair value of the liability totaled
$81,969 at the date of issuance and has been recorded as a discount on the note. (see Note 7).
Pursuant to a financing commitment, on
November 3, 2020, the Company entered into a Note Purchase Agreement (the “Agreement”) with a third party for
the sale of a convertible promissory note in the principal amount of $244,853 at a purchase price of $225,000. Proceeds of $225,000
include an original issue discount of $19,853. The note matures on November 3, 2021. The lender has the right to convert the
debt into fully paid and non- assessable shares of common stock at a price of $0.50 per share, beginning 180 days after issuance.
Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations
and reorganizations. Interest will accrue at the rate of eight percent (8%) per annum, simple interest, in each case to the extent
that the note and the principal amount and any unpaid accrued interest has not been converted into conversion shares (as defined)
prior to the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis of a 365-day year.
In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at the rate of 18% per
year, simple interest, non-compounding, until paid. A beneficial conversion feature valued at $176,294 has been recorded as a discount
on the note.
Pursuant to a financing commitment, on
December 1 2020, the Company entered into a Note Purchase Agreement (the “Agreement”) with a third party for the
sale of a convertible promissory note in the principal amount of $172,800 at a purchase price of $160,000. Proceeds of $147,200
include an original issue discount of $12,800 and fees of $12,800. The note matures on December 1, 2021. The lender has the
right to convert the debt into fully paid and non- assessable shares of common stock at a price equal to 70% of the outstanding
share price. Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations
and reorganizations. Interest will accrue at the rate of five percent (5%) per annum, simple interest, in each case to the extent
that the note and the principal amount and any unpaid accrued interest has not been converted into conversion shares (as defined)
prior to the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis of a 365-day year.
In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at the rate of 22% per
year, simple interest, non-compounding, until paid. The 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. The fair value of the liability totaled $237,021 at the date of issuance and has been recorded as a discount
on the note. The fair value of the derivative liability as of the date of issuance was in excess of the note resulting in full
discount of the note and a charge to interest expense. (see Note 7).
In conjunction with the note the Company
issued a warrant to purchase 135,000 shares of the Company’s common stock at an exercise price of $1.50 per share. The warrant
expires on December 1, 2023. The fair value of the warrant of $190,144 has been recorded as a discount on the note. (see Note
10).
If the Company, at any time while this warrant is outstanding, shall
sell or grant any option to purchase, or sell or grant any right to re-price, or otherwise dispose of or issue (or announce any offer,
sale, grant or any option to purchase or other disposition) any common stock or common stock equivalents entitling any person to acquire
shares of common stock, at an effective price per share less than the then exercise price (such lower price, the “New Issuance
Price”), then the exercise price shall be reduced and only reduced to equal the New Issuance Price and the number of shares
issuable hereunder shall be increased accordingly.
Pursuant to a financing commitment, on
December 3, 2020, the Company entered into a Note Purchase Agreement (the “Agreement”) with a third party for
the sale of a convertible promissory note in the principal amount of $110,000 at a purchase price of $96,000. Proceeds of $96,000
include an original issue discount of $14,000. The note matures on December 3, 2021. The lender has the right to convert the
debt into fully paid and non- assessable shares of common stock at a price of $0.50 per share, beginning 180 days after issuance.
Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations
and reorganizations. Interest will accrue at the rate of eight percent (8%) per annum, simple interest, in each case to the extent
that the note and the principal amount and any unpaid accrued interest has not been converted into conversion shares (as defined)
prior to the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis of a 365-day year.
In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at the rate of 18% per
year, simple interest, non-compounding, until paid. A beneficial conversion feature valued at $66,000 has been recorded as a discount
on the note.
Pursuant to a financing commitment, on
December 14, 2020, the Company entered into a Note Purchase Agreement (the “Agreement”) with a third party for
the sale of a convertible promissory note in the principal amount of $110,000 at a purchase price of $105,000. The note matures
on December 14, 2021. The lender has the right to convert the debt into fully paid and non- assessable shares of common stock
at a price equal to the lower of $0.55 per share or at a price equal to 63% of the outstanding share price. Conversions are subject
to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest
will accrue at the rate of ten percent (10%) per annum, simple interest, in each case to the extent that the note and the principal
amount and any unpaid accrued interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest
shall commence accruing on the issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder
is not paid as and when due, such amounts shall accrue interest at the rate of 22% per year, simple interest, non-compounding,
until paid. The 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. The fair value
of the liability totaled $229,713 at the date of issuance and has been recorded as a discount on the note. The fair value of the
derivative liability as of the date of issuance was in excess of the note resulting in full discount of the note and a charge to
interest expense. (see Note 7).
The beneficial conversion features and derivatives
are initially recorded as a discount to the debt and amortized using the effective interest method. For the year ended December 31,
2020, $684,901 of debt discount amortization and day 1 derivative loss are recorded as interest expense. The remaining debt discount of
$1,277,255 will be amortized in 2021. Additional interest expense of $39,285 has been recorded during the year ended December 31, 2020,
of which $30,485 is included in accrued and other liabilities.
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. Unless
earlier converted at the election of the investor at any time on or after the maturity date or the common stock of the Company is quoted
on the OTC Markets, the KISS agreement shall be converted (in whole or in part) into that number of Conversion Shares equal to
the quotient obtained by dividing the remaining purchase price by the conversion price.
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.
The Company has calculated the estimated
number of conversion shares to be 8,156,497 based upon the Company’s listing on the OTC in August 2019. 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 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 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 years ended December 31, 2020 and 2019 totaled $7,784 and $20,898, respectively.
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 December 31, 2020 and 2019 was $573,213 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 and significant shareholder, for $84,500 and repaid $70,000 of promissory notes in the year ended December 31,
2020, for a total of $332,500 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.
Future aggregate maturities of long-term debt, are as follows:
For the Years Ending December 31:
|
|
|
|
2021
|
|
$
|
28,260
|
|
2022
|
|
|
30,853
|
|
2023
|
|
|
32,400
|
|
2024
|
|
|
27,020
|
|
2025
|
|
|
468,121
|
|
Thereafter
|
|
|
145,612
|
|
|
|
$
|
732,266
|
|
NOTE 7.
|
DERIVATIVE LIABILITIES
|
The Company issued debts that consist of
the issuance of convertible promissory notes with variable conversion provisions. The conversion terms of the convertible notes
are variable based on certain factors, such as the future price of the Company’s common stock. The number of shares of common
stock to be issued is based on the future price of the Company’s common stock. The number of shares of common stock issuable
upon conversion of the promissory note is indeterminate. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable
conversion option and shares to be issued were recorded as derivative liabilities on the issuance date.
Based on the various convertible promissory
notes described in Note 4, the fair value of applicable derivative liabilities on notes and the change in fair value of derivative
liabilities are as follows for the year ended December 31, 2020:
|
|
Derivative
Liability -
Convertible
Promissory Notes
|
|
Balance as of December 31, 2019
|
|
$
|
–
|
|
Additions during the year
|
|
|
903,265
|
|
Change in fair value
|
|
|
(71,413
|
)
|
Balance as of December 31, 2020
|
|
$
|
831,852
|
|
The fair value of the derivative liabilities – convertible
promissory notes is estimated using a Lattice pricing model with the following assumptions:
Market value of common stock
|
|
$
|
0.30-1.01
|
|
Expected volatility
|
|
|
189-315.8
|
%
|
Expected term (in years)
|
|
|
.63-1.00
|
|
Risk-free interest rate
|
|
|
0.09-0.13
|
%
|
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 4).
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. During the year ended December 31, 2020, the Company paid the Company’s CEO $124,022 towards the balance of
the 2019 signing bonus. Total amount outstanding at December 31, 2020 is $20,978.
As of December 31, 2019, the Company entered
into promissory notes totaling $318,000 with a related party. The Company entered into additional promissory notes with the related party
for $84,500 and repaid $70,000 of promissory notes during the year ended December 31, 2020, for a total of $332,500 outstanding.
In October 2019, the related party converted
1,000,000 of the conversion shares in conjunction with the outstanding KISS liability. On September 23, 2020, the related party converted
the remaining shares of 7,156,497 (see Note 5).
NOTE 9.
|
STOCKHOLDERS’ DEFICIT
|
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). In
December 2020, the Company increased its authorized common shares from Fifty Million (50,000,000) to One Hundred Twenty-Five
Million (125,000,000).
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.
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 January 2020, the Company issued 10,355
shares of common stock to a vendor as settlement for a liability totaling $14,585 at $0.71 per share
In February 2020, the Company issued 200,000
shares of common stock in conjunction with a twelve-month agreement for financial advisory consulting services at a value of $102,000
or $0.51 per share. The value of the consulting services has been recorded as selling, general and
administrative expenses in the Company’s statement of operations. The fair market value of the shares was determined based the on
the Company’s closing price on the date of issuance.
In February 2020, the Company entered into
a six- month agreement for financial advisory consulting services with a third party. In conjunction with the agreement, the Company issued
the third party 400,000 shares of common stock at a value of $188,000 or $0.47 per share, with the option to issue an additional 900,000
shares at the Company’s discretion. The value of the consulting services has been recorded
as selling, general and administrative expenses in the Company’s statement of operations. The fair market value of the shares was
determined based the on the Company’s closing price on the date of issuance. In August 2020, the Company issued the 900,000
shares of common stock in conjunction with the consulting agreement at a value of $1,818,000 or $2.02 per share. The value of the compensation
has been recorded in selling, general and administrative expenses in the Company’s statement of operations.
In 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. The shares were cancelled in December 2020 and
the compensation expense was reversed.
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 Notes 4 and 10).
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 value of $55,900 or $0.86 per share, in conjunction with an agreement for financial advisory consulting services
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 November 2020, the Company purchased,
from a third-party prior note holder, and returned to treasury stock 87,849 shares of common stock for a purchase price of $36,413.
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 issued a
warrant to purchase 135,000 shares of common stock in conjunction with a convertible promissory note (see Notes 4 and 10).
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 (see Note 4).
NOTE 10.
|
STOCK OPTIONS AND WARRANTS
|
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. No time-based options were granted during the year ended December 31,
2020. 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 $21,807 and
$157,168 during the years ended December 31, 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 $5,288 as of December 31,
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, 2018
|
|
|
-
|
|
|
$
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
651,250
|
|
|
|
0.71
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(206,250
|
)
|
|
|
0.71
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2019
|
|
|
445,000
|
|
|
$
|
.71
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2020
|
|
|
445,000
|
|
|
$
|
0.71
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2020
|
|
|
360,000
|
|
|
$
|
0.71
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable and expected to vest at December 31, 2020
|
|
|
445,000
|
|
|
$
|
0.71
|
|
|
|
1.5
|
|
The following table summarizes the information with respect
to outstanding warrants to purchase common stock of the Company, all of which were exercisable at December 31, 2020:
Date Issued
|
|
Exercise Price
|
|
|
Number Outstanding
|
|
|
Expiration Date
|
December 1, 2018
|
|
$
|
0.71
|
|
|
|
100,000
|
|
|
December 1, 2023
|
May 1, 2020
|
|
$
|
0.52
|
|
|
|
100,000
|
|
|
May 1, 2025
|
June 4, 2020
|
|
$
|
0.35
|
|
|
|
714,206
|
|
|
June 30, 2023
|
December 1, 2020
|
|
$
|
0.55
|
|
|
|
368,182
|
|
|
December 1, 2023
|
|
|
|
|
|
|
|
1,282,388
|
|
|
|
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 year ended December 31, 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
|
|
On June 4, 2020, the Company issued a warrant
to purchase 250,000 shares of the Company’s common stock in conjunction with a convertible promissory note. The warrant entitles
the holder to purchase 250,000 shares of common stock at an exercise price of $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 warrant will expire on
June 30, 2023 or earlier upon redemption or liquidation.
The warrant qualified for equity accounting
as the warrant did not fall within the scope of ASC Topic 480, Distinguishing Liabilities from Equity. The warrant was measured
at fair value at the time of issuance and classified as equity.
The Company valued the warrant using the
Black-Scholes valuation model and recorded the warrant as a reduction of the note included in the debt discount balance. The following
table summarizes the assumptions used in the valuation model to determine the fair value of the warrant:
Fair Value of Common Share
|
|
$
|
0.51
|
|
Exercise Price
|
|
$
|
1.00
|
|
Risk Free Rate
|
|
|
0.36
|
%
|
Expected Life (Yrs.)
|
|
|
3.00
|
|
Volatility
|
|
|
95.00
|
%
|
In June 2020, subsequent stock issuances triggered the warrant
reset feature, resulting in an increase in underlying shares to 714,286 from 250,000 and a reduction in exercise price to $0.35 per
share. The reset was recorded as a reduction to retained earnings and an increase in additional paid-in-capital of $371,069.
On December 1, 2020, the Company issued
a warrant to purchase 135,000 shares of the Company’s common stock in conjunction with a convertible promissory note. The
warrant entitles the holder to purchase 135,000 shares of the Company’s common stock at an exercise price of $1.50 per share.
The warrant expires on December 1, 2023.
The warrant qualified for equity accounting
as the warrant did not fall within the scope of ASC Topic 480, Distinguishing Liabilities from Equity. The warrant was measured
at fair value at the time of issuance and classified as equity.
The Company valued the warrant using the
Monte Carlo pricing model and recorded the warrant as a reduction of the note included in the debt discount balance. The following
table summarizes the assumptions used in the valuation model to determine the fair value of the warrant:
Fair Value of Common Share
|
|
$
|
0.8-0.89
|
|
Exercise Price
|
|
$
|
1.50
|
|
Risk Free Rate
|
|
|
0.11-0.26
|
%
|
Expected Life (Yrs.)
|
|
|
2.96-3
|
|
Volatility
|
|
|
147.4-254.4
|
%
|
In December 2020, the subsequent issuance of convertible promissory
notes with certain terms triggered the warrant reset feature, resulting in an increase in underlying shares of common stock to 368,182
from 135,000 and a change in exercise price to $0.55 per share. The reset was recorded as a reduction to retained earnings and in an
increase to additional paid-in-capital of $136,238.
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 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 February and March 2021, the Company repaid
$50,000 of its related party notes payable for a total outstanding of $282,500.
In February and March 2021, holders of convertible promissory
notes converted principal and accrued interest totaling $184,900 into 1,019,113 shares of common stock.
In February 2021, the Company issued 1,100,000 shares of common
stock to the Company’s CEO as compensation expense.
In February 2021, the Company issued 1,084,120 shares of common
stock in conjunction with various agreements for financial advisory consulting services.
Pursuant to a financing commitment, on February 8,
2021 the Company entered into a Note Purchase Agreement (the “Agreement”) with a third party for the sale of convertible promissory
notes in the principal amount totaling $1,000,000 and at a purchase price of 950,000. The first closing occurred upon the execution of
the material definitive agreement in the face amount of $500,000, for a purchase price of $475,000. The second closing is in the face
amount of $250,000 for a purchase price of $237,500, which was received on March 5, 2021, and the third closing in the face amount
of $250,000 for a purchase price of $237,500. The notes mature 1 year from issuance. The lender has the right to convert the debt
into fully paid and non- assessable shares of common stock at a price equal to the lower of $0.40 per share or at a price equal to 70%
of the outstanding share price. Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations,
recapitalizations and reorganizations. Interest will accrue at the rate of ten percent (10%) per annum, simple interest, in each case
to the extent that the note and the principal amount and any unpaid accrued interest has not been converted into conversion shares (as
defined) prior to the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis of a 365-day year.
In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at the rate of 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. The Company
is determining the accounting impact of this transaction on the financial statements.
SUPPLEMENTARY
DATA
The Company is a smaller reporting Company as defined by
Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.