NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (UNAUDITED)
NOTE
1 – DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Quanta,
Inc. (the “Company”) is an applied science company focused on increasing energy levels in plant matter to increase performance
within the human body. The Company’s operations are based in Burbank, California.
Basis
of presentation-Unaudited Interim Financial Information
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) for interim financial information and with the rules and regulations of
the United States Securities and Exchange Commission (the “SEC”) to Form 10-Q and Article 8 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position, results
of operations and cash flows for the interim periods have been included. The results of operations for the three months and nine months
ended September 30, 2021, are not necessarily indicative of the results of operations to be expected for the full fiscal year ending
December 31, 2021. These financial statements should be read in conjunction with the financial statements of the Company for the year
ended December 31, 2020 and notes thereto contained in the Annual Report on Form 10-K of the Company as filed with the SEC on April 15,
2021. The condensed consolidated balance sheet as of December 31, 2020 included herein was derived from the audited consolidated financial
statements as of that date, but does not include all disclosures, including notes, required by GAAP.
The
consolidated financial statements include the accounts of Quanta Inc, and its 51% owned subsidiary, Medolife Rx, Inc. All intercompany
balances and transactions have been eliminated in consolidation.
Going
Concern
The
accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements,
for the nine months ended September 30, 2021, the Company incurred a net loss of $6,950,307 and
used cash in operating activities of $3,216,914, and
at September 30, 2021, the Company had a stockholders’ deficit of $4,798,703. These
factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that
the financial statements are issued. In addition, the Company’s independent registered public accounting firm, in its report
on the Company’s December 31, 2020 financial statements, raised substantial doubt about the Company’s ability to
continue as a going concern. The consolidated financial statements do not include any adjustments that might be necessary if the
Company is unable to continue as a going concern.
At
September 30, 2021, the Company had cash on hand in the amount of $22,262. Management estimates that the current funds on hand will be
sufficient to continue operations through the next six months. The Company’s ability to continue as a going concern is dependent
upon improving its profitability and the continuing financial support from its shareholders. Management believes the existing shareholders
or external financing will provide the additional cash to meet the Company’s obligations as they become due. No assurance can be
given that any future financing, if needed, will be available or, if available, that it will be on terms that are satisfactory to the
Company. Even if the Company is able to obtain additional financing, if needed, it may contain undue restrictions on its operations,
in the case of debt financing, or cause substantial dilution for its stockholders, in the case of equity financing
Use
of estimates
The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant accounting
estimates include certain assumptions related to, among others, allowance for doubtful accounts receivable, impairment analysis of long-term
assets, valuation allowance on deferred income taxes, assumptions used in valuing stock instruments issued for services, assumptions
made in valuing derivative liabilities, and the accrual of potential liabilities. Actual results may differ from these estimates.
Revenue
recognition
Product
Sales—Substantially all of the Company’s revenue is derived from product sales. Product revenue and costs of sales are
recognized when control of the products transfers to our customer, which generally occurs upon shipment from our facilities. The Company’s
performance obligations are satisfied at that time. The Company does not have any significant contracts with customers requiring performance
beyond delivery, and contracts with customers contain no incentives or discounts that could cause revenue to be allocated or adjusted
over time.
License
revenue— Revenue from symbolic IP is recognized over the access period to the Company’s IP (see Note 2).
Cost
of goods sold includes direct costs and fees related to the sale of our products.
Convertible
Notes with Fixed Rate Conversion Options
The
Company may enter into convertible notes, some of which contain, predominantly, fixed rate conversion features, whereby the outstanding
principal and accrued interest may be converted by the holder, into common shares at a fixed discount to the market price of the common
stock at the time of conversion. This results in a fair value of the convertible note being equal to a fixed monetary amount. The Company
records the convertible note liability at its fixed monetary amount by measuring and recording a premium, as applicable, on the Note
date with a charge to interest expense in accordance with ASC 480 - “Distinguishing Liabilities from Equity”.
Stock-based
compensation
The
Company periodically issues stock options, warrants, shares of common stock, and restricted stock unit awards, as share-based compensation
to employees and non-employees. The Company accounts for its share-based compensation in accordance with FASB ASC 718, Compensation
– Stock Compensation (Topic 718). Stock-based compensation cost for employees is measured at the grant date, based on the estimated
fair value of the award, and is recognized as expense over the requisite service period. Recognition of compensation expense for non-employees
is in the same period and manner as if the Company had paid cash for the services.
The
fair value of the Company’s stock options is estimated using the Black-Scholes-Merton Option Pricing model, which uses certain
assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or restricted stock, and future
dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model and based
on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense
recorded in future periods.
Prepaid
production costs
In
February 2021, the Company’s subsidiary Medolife Rx entered into a collaboration and joint development agreement with a company
(the “Agent) for Medolife to produce some of its products in the Agent’s facility. Medolife Rx agreed to pay the Agent $300,000
for the right to use the Agents production facility for a term of five years. Medolife Rx will also pay a production fee, as defined,
to the Agent for any production. The Company determined that there is no distinct asset that it is purchasing from the Agent and will
record amortization of the prepaid fee ratably over the life of the contract. As of September 30, 2021, the Company had paid the Agent
the entire fee.
Advertising
costs
Advertising
costs are expensed as incurred. During the nine months ended September 30, 2021 and September 30, 2020, advertising costs totaled $659,626
and $61,284, respectively.
Research
and Development Costs
Costs
incurred for research and development are expensed as incurred. During the nine months ended September 30, 2021 and September 30, 2020,
research and development costs totaled $348,500
and $306,544,
respectively and includes salaries, benefits, and overhead costs of personnel conducting research and development of the Company’s
products.
Net Loss per Share
Basic
net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares
outstanding during the period. Shares used in the calculation of basic net loss per common share include vested but unissued shares underlying
awards of restricted common stock. Diluted loss per share reflects the potential dilution, using the treasury stock method that could
occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the loss of the Company. In computing diluted loss per share, the treasury stock method assumes that
outstanding warrants and convertible notes are exercised and the proceeds are used to purchase common stock at the average market price
during the period. Warrants and convertible notes may have a dilutive effect under the treasury stock method only when the average market
price of the common stock during the period exceeds the exercise price of the options and warrants.
For
the nine months ended September 30, 2021 and 2020, the dilutive impact of common stock equivalents, e.g. stock options, warrants and
convertible notes payable have been excluded from calculation of weighted average shares because their impact on the loss per share is
anti-dilutive.
As
of September 30, 2021, convertible notes of $2,018,564 and accrued interest are convertible into 124,116,500 shares of common stock.
It should be noted that contractually the limitations on the third-party notes (and the related warrant) limit the number of shares converted
to either 4.99% or 9.99% of the then outstanding shares. As of September 30, 2021 and 2020, potentially dilutive securities consisted
of the following:
SCHEDULE OF POTENTIALLY DILUTIVE SECURITIES
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
Stock options
|
|
|
775,000
|
|
|
|
2,732,261
|
|
Unvested restricted shares
|
|
|
1,375,000
|
|
|
|
4,500,000
|
|
Convertible notes payable
|
|
|
124,116,500
|
|
|
|
61,171,291
|
|
Total
|
|
|
126,266,500
|
|
|
|
68,403,552
|
|
Fair
Value of Financial Instruments
The
Company follows the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) for fair value measurements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy
was established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level
1—Quoted prices in active markets for identical assets or liabilities.
Level
2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
Level
3—Unobservable inputs based on the Company’s assumptions.
The
Company is required to use of observable market data if such data is available without undue cost and effort.
The
Company believes the carrying amount reported in the balance sheet for cash, accounts receivable, accounts payable and accrued liabilities,
and notes payable, approximate their fair values because of the short-term nature of these financial instruments.
As
of September 30, 2021 and December 31, 2020, the Company did not have any Level 2 liabilities comprised of the fair value of embedded
derivative liabilities.
Concentrations
of risks
For
the nine months ended September 30, 2021, one customer accounted for 36% of revenue. For the nine months ended September 30, 2020, one
customer accounted for 15% or more of revenue. As of September 30, 2020, one customer accounted for 17% of accounts receivable. No other
customer accounted for 10% or more of revenue or accounts receivable.
As
of September 30, 2021, two vendors accounted for 82% of accounts payable and no other vendor accounted for 10% or more of accounts payable.
As of September 30, 2020, four vendors accounted for 11%, 17%, 14% and 14%, respectively of accounts payable. No other vendor accounted
for 10% or more of accounts payable
The
Company maintains the majority of its cash balances with one financial institution, in the form of demand deposits that are insured by
the Federal Deposit Insurance Corporation, or FDIC. At times, deposits held may exceed the amount of insurance provided by the FDIC.
The Company has not experienced any losses in its cash and believes it is not exposed to any significant credit risk.
Segments
The
Company operates in one segment for the development and distribution of our CBD products. In accordance with the “Segment Reporting”
Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer, who reviews
operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which
is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and
to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds
material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to
their similar customer base and similarities in economic characteristics; nature of products and services; and procurement, manufacturing
and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting”
can be found in the accompanying financial statements.
Recent
Accounting Pronouncements
In
August 2020, the FASB issued ASU No. 2020-06 (“ASU 2020-06”) “Debt—Debt with Conversion and Other Options
(Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40).” ASU 2020-06
reduces the number of accounting models for convertible debt instruments by eliminating the cash conversion and beneficial conversion
accounting models. As a result, the Company’s convertible debt instruments will be accounted for as a single liability measured
at its amortized cost as long as no other features require bifurcation and recognition as derivatives. For contracts in an entity’s
own equity, the type of contracts primarily affected by this update are freestanding and embedded features that are accounted for as
derivatives under the current guidance due to a failure to meet the settlement conditions of the derivative scope exception. The Company
early adopted ASU No. 2020-06 effective January 1, 2021 using the modified retrospective approach. Upon adoption, the following changes
resulted: (i) the intrinsic value of the beneficial conversion feature recorded in 2020 was reversed as of the effective date of adoption,
thereby resulting in an increase in the convertible debentures with an offsetting adjustment to additional paid in capital and (ii) interest
expense recorded in 2020 that was related to the amortization of the discount related to the beneficial conversion feature was reversed
against opening accumulated deficit. The adoption of ASU 2020-06 on January 1, 2021, resulted in a decrease in addition paid in capital
of $823,655, a decrease to accumulated deficit of $320,602, and an increase in total stockholders’ deficit of $503,053.
In
June 2016, the FASB issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC
326”). The standard significantly changes how entities will measure credit losses for most financial assets, including accounts
and notes receivables. The standard will replace today’s “incurred loss” approach with an “expected loss”
model, under which companies will recognize allowances based on expected rather than incurred losses. Entities will apply the standard’s
provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance
is effective. The standard is effective for interim and annual reporting periods beginning after December 15, 2022. The Company is currently
assessing the impact of adopting this standard on the Company’s financial statements and related disclosures.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public
Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s
present or future consolidated financial statements.
NOTE
2 – INVENTORIES
Inventories
are valued at the lower of cost (first-in, first-out) or net realizable value, and net of reserves, consisted of the following:
SCHEDULE OF INVENTORIES
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
|
|
|
Raw materials and packaging
|
|
$
|
32,333
|
|
|
$
|
3,144
|
|
Finished goods
|
|
|
41,415
|
|
|
|
16,076
|
|
Inventories
|
|
$
|
73,748
|
|
|
$
|
19,220
|
|
The
Company has recorded a reserve for slow moving and potentially obsolete inventory. The reserve at September 30, 2021 and December 31,
2020 was $73,125 and
$9,125,
respectively.
NOTE
3 - EQUIPMENT
Equipment,
stated at cost, less accumulated depreciation consisted of the following:
SCHEDULE OF EQUIPMENT
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
704,772
|
|
|
$
|
704,772
|
|
Equipment under construction
|
|
|
75,259
|
|
|
|
35,969
|
|
Equipment, gross
|
|
|
780,031
|
|
|
|
740,741
|
|
Less accumulated depreciation
|
|
|
(592,970
|
)
|
|
|
(540,218
|
)
|
Equipment, net
|
|
$
|
187,061
|
|
|
$
|
200,523
|
|
Depreciation
expense for the nine months ended September 30, 2021 and 2020 was $52,752
and $161,707,
respectively. As of September 30, 2021, the equipment under construction is approximately 70%
complete, and is expected to be completed and placed into service during the year ended December 31, 2021. Equipment under construction
is depreciated only after the asset is placed in service
NOTE
4 - OPERATING LEASE
At
September 30, 2021, the Company has one operating lease for its headquarters office space in Burbank. The lease commenced on January
1, 2020, and has a term for 5
years, with annual fixed rental payments ranging from $90,000
to $101,296.
At September 30, 2021, the balance of the lease’s right of use asset and corresponding lease liability were $300,483
and $336,185,
respectively. At September 30, 2021, the Company is also obligated
under a lease that was abandoned in December 2020. The total due to the lessor for the abandoned lease space is $235,759
and
is recorded as lease settlement obligation at September 30, 2021.
The
components of lease expense and supplemental cash flow information related to leases for the period are as follows:
SCHEDULE OF LEASE EXPENSE AND SUPPLEMENTAL CASH FLOW INFORMATION RELATED TO LEASES
|
|
Nine months ended
September 30, 2021
|
|
|
|
|
|
Lease Cost
|
|
|
|
|
Operating lease cost (included in selling, general, and administrative expense in the Company’s statement of operations)
|
|
$
|
95,586
|
|
|
|
|
|
|
Other Information
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities for 2021
|
|
$
|
93,165
|
|
Weighted average remaining lease term – operating leases (in years)
|
|
|
2.50
|
|
Average discount rate – operating leases
|
|
|
4
|
%
|
SCHEDULE OF SUPPLEMENTAL BALANCE SHEET INFORMATION RELATED TO LEASES
|
|
At September 30, 2021
|
|
Operating leases
|
|
|
|
|
Long-term right-of-use assets
|
|
$
|
300,483
|
|
|
|
|
|
|
Short-term operating lease liabilities
|
|
$
|
105,443
|
|
Long-term operating lease liabilities
|
|
|
230,742
|
|
Total operating lease liabilities
|
|
$
|
336,185
|
|
Maturities
of the Company’s lease liabilities are as follows:
SCHEDULE OF MATURITIES OF OPERATING LEASE LIABILITIES
Year Ending
|
|
Operating Leases
|
|
2021(remainder of year)
|
|
|
26,286
|
|
2022
|
|
|
95,481
|
|
2023
|
|
|
98,345
|
|
2024
|
|
|
139,767
|
|
Total lease payments
|
|
|
359,879
|
|
Less: Imputed interest
|
|
|
(23,694
|
)
|
Present value of lease liabilities
|
|
|
336,185
|
|
|
|
|
|
|
Less current portion
|
|
|
(105,443
|
)
|
Operating lease liabilities, long-term
|
|
$
|
230,742
|
|
Lease
expense was $95,586 and
$171,333 during
the nine months ended September 30, 2021 and 2020, respectively.
NOTE
5 – NOTES PAYABLE
SCHEDULE OF NOTES PAYABLE
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
(a) Notes payable secured by equipment
|
|
$
|
212,875
|
|
|
$
|
438,634
|
|
(b) Note payable, secured by assets-in default
|
|
|
13,350
|
|
|
|
33,350
|
|
(c) Note payable, Payroll Protection Program
|
|
|
134,125
|
|
|
|
134,125
|
|
(d) Note payable, Economic Injury Disaster Loan
|
|
|
160,000
|
|
|
|
160,000
|
|
(e) Revenue sharing agreement
|
|
|
242,800
|
|
|
|
242,800
|
|
Total notes payable outstanding
|
|
|
763,150
|
|
|
|
1,008,909
|
|
Debt discount
|
|
|
(53,667
|
)
|
|
|
(74,817
|
)
|
Notes payable, net of discount
|
|
|
709,483
|
|
|
|
934,092
|
|
Less:
Current portion
|
|
|
415,358
|
|
|
|
482,724
|
|
|
|
|
|
|
|
|
|
|
Long term portion
|
|
$
|
294,125
|
|
|
$
|
451,368
|
|
|
(a)
|
In
April 2020 and May 2020, the Company entered into two financing agreements aggregating $505,646. The notes have a stated interest
rate of 10.9%. The notes were issued at a discount including fees for underwriting, legal and administrative costs along with
deferred financing costs. The deferred financing costs are being amortized over the terms of the notes. The notes are secured by the
Company’s equipment, and require monthly payments of principal and interest of $21,000, and mature in April 2022 and May 2022.
At December 31, 2020, the balance due on these notes was $438,634. During the nine months ended September 30, 2021, the Company made
principal payments of $225,759 and at September 30, 2021, the balance due on these notes was $212,875. At September 30, 2021 and
December 31, 2020, the unamortized discount related to deferred financing charges on these agreements was $53,667 and $74,817,
respectively.
|
|
|
|
|
(b)
|
Note
payable, interest at 8.3% per annum, secured by all the assets of the Company. The note was due January 13, 2019. The note was due
January 13, 2019. The note holder waived the default through December 31, 2020, and it is currently in default and the Company is
in discussion with the note holder to extend the balance. During the nine months ended September 30, 2021, the Company made principal
payments of $20,000 and at September 30, 2021, the balance due on this note was $13,350.
|
|
(c)
|
On
May 7, 2020, the Company was granted a loan (the “PPP loan”) from Bank of America in the aggregate amount of $134,125,
pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act. The PPP loan agreement is dated May 4, 2020,
matures on May 4, 2022, bears interest at a rate of 1% per annum, with the first six months of interest deferred, is payable monthly
commencing on November 2020, and is unsecured and guaranteed by the U.S. Small Business Administration (“SBA”). The loan
term may be extended to April 20, 2025, if mutually agreed to by the Company and lender. We applied ASC 470, Debt, to account
for the PPP loan. Funds from the PPP loan
may only be used for qualifying expenses as described in the CARES Act, including qualifying payroll costs, qualifying group health
care benefits, qualifying rent and debt obligations, and qualifying utilities. The Company believes it used the entire loan amount
for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying
expenses. The Company intends to apply for forgiveness of the PPP loan with respect to these qualifying expenses, however, we cannot
assure that such forgiveness of any portion of the PPP loan will occur. The terms of the PPP loan provide for customary events of default including, among other things,
payment defaults, breach of representations and warranties, and insolvency events. The Company was in compliance with the terms of
the PPP loan and has submitted its application for forgiveness as of September 30, 2021.
|
|
|
|
|
(d)
|
On
September 5, 2020, the Company received a $160,000 loan (the “EID Loan”) from the SBA under the SBA’s Economic
Injury Disaster Loan program. The EID Loan has a thirty-year term and bears interest at a rate of 3.75% per annum. Monthly principal
and interest payments are deferred for twelve months, and commence in June 2021. The EID Loan may be prepaid at any time prior to
maturity with no prepayment penalties. The proceeds from the EID Loan must be used for working capital. The Loan contains customary
events of default and other provisions customary for a loan of this type. The Company was in compliance with the terms of the EID
loan as of September 30, 2021.
|
|
|
|
|
(e)
|
Between
July 7, 2020, and July 29, 2020, the Company issued notes payable to third-party investors totaling $250,000, of which $7,200 was
repaid in 2020. Under the terms of the notes, the Company is to pay 50% of the net revenues beginning on August 21, 2020, for a product
to be designed and produced by the Company. The product has not been produced and therefore no payments have been made to date. The
Company has received a notice of default and demand for payment from three note holders (owed approximately $146,000). The Company
has retained counsel who is in discussion with the note holders.
|
NOTE
6 – CONVERTIBLE NOTES PAYABLE
Convertible
notes payable consisted of the following:
SCHEDULE OF CONVERTIBLE NOTES PAYABLE
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
Unsecured
|
|
|
|
|
|
|
|
|
(a) Convertible notes with fixed discount percentage conversion prices
|
|
$
|
264,500
|
|
|
$
|
180,200
|
|
Put premiums on stock settled debt
|
|
|
113,294
|
|
|
|
127,866
|
|
|
|
|
|
|
|
|
|
|
(b) Convertible notes with fixed conversion prices
|
|
|
1,845,000
|
|
|
|
936,944
|
|
Default penalty principal added
|
|
|
-
|
|
|
|
369,086
|
|
Total convertible notes principal outstanding
|
|
|
2,222,794
|
|
|
|
1,614,096
|
|
Debt discount
|
|
|
(204,230
|
)
|
|
|
(539,282
|
)
|
|
|
|
|
|
|
|
|
|
Convertible notes, net of discount and premium
|
|
$
|
2,018,564
|
|
|
$
|
1,074,814
|
|
Less; Current
portion
|
|
|
2,018,564
|
|
|
|
1,074,814
|
|
Long-term portion
|
|
$
|
-
|
|
|
$
|
-
|
|
|
(a)
|
At
December 31, 2020, the balance due on convertible notes with fixed discount percentage conversion prices was $180,200, with related
put premium of $117,866. During the nine months ended September 30, 2021, the Company issued three convertible notes with fixed
discount percentage conversion prices aggregating $264,500. At the option of the holders, the notes were convertible into shares of
the Company’s common stock at a price per share discount of 25% to 35% of the lowest bid price of the Company’s common
stock within twenty-five days prior to conversion. The notes were treated as stock settled debt under ASC 480-Distinguishing
Liabilities from Equity, and a put premium of $113,294 was recognized and charged to interest expense when the notes were recorded
in 2021. Also during the nine months ended September 30, 2021, note holders converted $180,200 principal and accrued interest of
$18,266 (total of $198,466) into 7,492,676 shares of the Company’s common stock. Upon conversion the related put premiums of
$127,866 associated with these notes were reclassified to additional paid-in capital. As of September 30, 2021, the balance due on
convertible notes with fixed discount percentage conversion prices was $264,500, and the related put premium was
$113,294.
|
|
|
|
|
(b)
|
As
of December 31, 2020, the balance due on convertible notes with fixed conversion prices was $1,306,030 (including default penalties
of $369,086). During the nine months ended September 30, 2021, the Company issued nine convertible notes with fixed conversion prices
aggregating $1,565,000. In addition, convertible notes with fixed conversion prices totaling $1,030,345 of principal and $43,349
of accrued interest (total of $1,073,694) were converted into 81,640,514 shares of the Company’s common stock. At September
30, 2021, the balance of the due on convertible notes with fixed conversion prices was $1,845,000. The notes are unsecured, convertible
into common stock at prices ranging from $0.015 per share to $0.04 per share, bear interest at 4% to 10% per annum, and mature through
September 14, 2022.
At
December 31, 2020, the net unamortized balance of debt discounts was $539,282, consisting of debt discount related to beneficial
conversion features ($823,655 less accumulated amortization of $320,602, or net of $503,053) and other debt discounts for fees and
original issue discounts (OID) ($52,360 less accumulated amortization of $16,096, or net of $36,229). The Company early adopted ASU
No. 2020-06 (See Note 1) effective January 1, 2021 using the modified retrospective approach. The adoption of ASU 2020-06 on January
1, 2021, resulted in a decrease in addition paid in capital of $823,655, a decrease to accumulated deficit of $320,602, and an increase
in total stockholders’ deficit of $503,053.
The
debt discounts related to fees and OID are amortized over the life of the related notes or are amortized in full upon the conversion
of the corresponding note to common stock. During the nine months ended September 30, 2021, debt discounts of $295,600 were added
related to the twelve convertible notes issued above, and amortization of $146,472 was recorded. At September 30, 2021, the net unamortized
balance of other debt discounts was $204,230.
On May 4, 2021 (“Effective Date”),
the Company entered into a securities purchase agreement (the “SPA”) with Clifton Royale Apartments, LLC (the “Investor”)
pursuant to which the Company issued a 4% unsecured convertible promissory note (the “Note”) in the principal amount of $80,000.
On this date, the Company received proceeds of $80,000.
The maturity date of the Note was November 4,
2021. The Note bears interest at a rate of four percent (4%) per annum, which interest shall be paid by the Company to the Investor in
Common Stock at any time the Investor sends a notice of conversion to the Company. The Investor is entitled to, at its option, convert
all or any amount of the principal amount and any accrued but unpaid interest of the Investor Note into Common Stock, at any time, at
a fixed conversion price for each share of Common Stock equal to $0.01 (as defined in the Note) of the Common Stock as reported on the
OTC Marketplace exchange upon which the Company’s shares are traded during the twenty (20) consecutive Trading Day period immediately
preceding (i) the applicable Effective Date; or (ii) the conversion date. The Company also issued a common stock purchase warrant for
15,000,000 shares (the “Warrant”).
|
NOTE
7 – MEZZANINE EQUITY
The Company
has determined that its shares of the Series B and Series C convertible preferred stock are conditionally redeemable upon
the occurrence of certain events that are not solely within the control of the issuer, and upon such event, the shares would become redeemable
at the option of the holders; accordingly the Series B and Series C convertible preferred stock are classified as “mezzanine
equity” (temporary equity), between liabilities and stockholders’ deficit. The purpose of this classification
is to convey that such a security may not be permanently part of equity and could result in a demand for cash, securities or other assets
of the entity in the future. The shares as valued have been classified as mezzanine equity and presented as such on the consolidated
balance sheet at September 30, 2021 as single line items due to the immaterial par value. The mezzanine equity value is not included
in shareholders’ deficit.
Series
B Convertible Preferred Stock
The terms
of the Certificate of Designation of the Series B Convertible Preferred Stock, which was filed with the State of Nevada on January 12,
2021, state that the shares of Series B Convertible Preferred Stock are convertible into fifty-four percent (54%) of the issued and outstanding
shares of the Company’s common stock on a fully converted basis. Each share of Series B Preferred Stock shall be convertible into
6,750 shares of Common Stock (“Conversion Ratio”), at the option of a Holder, at any time and from time to time, from and
after the issuance of the Series B Preferred Stock. Anti-dilution terms of the preferred may change the conversion ratio. Each holder
of the Series B Preferred Stock shall have the right to vote on any matter that may from time to time be submitted to the Company’s
shareholders for a vote, on an as converted basis, either by written consent or by proxy. Additionally, the shareholders are entitled
to liquidation benefits including a cash payout, the liquidation terms include sales and mergers affection a change in control.
On
December 21, 2020, the Company entered into a Securities Exchange Agreement with Medolife Rx, Inc., a Wyoming corporation, (“Medolife
Rx”) pursuant to which, the Company agreed to acquire 51% of Medolife Rx in exchange for 9,000 shares of newly created Series B
Convertible Preferred Stock, which, were issued to Dr. Arthur Mikaelian upon closing on January 14, 2021. The shares issued to Dr. Mikaelian
on January 14, 2021 were valued based on the conversion number of common shares at the market price on the date of issuance. Due fact
that there Medolife Rx, Inc. was a start-up venture with no net asset value the value associated with the shares of $1,522,198 was charged
to compensation expense during the nine months ended September 30, 2021.
Series
C Convertible Preferred Stock
The
terms of the Certificate of Designation of the Series C Convertible Preferred Stock, which was filed with the State of Nevada on January
12, 2021, state that such Series C Convertible shares have a par value of $0.00001 per share and a stated value of $100 per share (the
“Stated Value”) and each Series C Preferred Share shall be convertible into 6,750 shares of Common Stock (“Conversion
Ratio”), at the option of a Holder, at any time and from time to time, from and after the issuance of the Series C Preferred Stock.
Anti-dilution terms of the preferred may change the conversion ratio. Each holder of the Series C Preferred Stock shall have the right
to vote on any matter that may from time to time be submitted to the Company’s shareholders for a vote, on an as converted basis,
either by written consent or by proxy. Additionally, the shareholders are entitled to liquidation benefits including a cash payout, the
liquidation terms include sales and mergers affection a change in control.
On
January 14, 2021, the Board of Directors of the Company approved the issuance of all 1,000 authorized shares of Series C Convertible
Preferred Stock. 500 shares of Series C Preferred Stock were issued to Trillium Partners LP, and 500 shares of Series C Preferred Stock
were issued to Sagittarii Holdings, Inc. The shares issued to Trillium and Sagittarii were valued at $169,133 based on the conversion
number of common shares at the market price on the date of issuance, and were charged to expense for services during the nine months
ended September 30, 2021.
NOTE
8 – STOCKHOLDERS’ DEFICIT
Common
Stock
Common
stock issued for cash
During
the nine months ended September 30, 2021, the Company issued 44,750,000 shares of common stock under a Form S-1 then in effect at a price
of $0.04 per share. Also during the nine months ended September 30, 2021, the Company issued 12,000,000 shares of common stock in a private
placement of shares at a price of $0.015 to $0.02 per share. Total proceeds of $1,985,000 in cash was received.
During
the nine months ended September 30, 2020, the Company issued 407,408 shares of common stock in a private placement of shares at a price
of $0.26 per share for total proceeds of $124,371.
Common
stock issued for services
During
the nine months ended September 30, 2021, the Company issued 13,964,425 shares of common stock to service vendors with a fair value of
$1,246,934, and 1,000,000 shares of common stock to employees and officers of the Company with a fair value of $69,950. The fair value
of the shares was determined based on the closing price of the Company’s common stock on the date shares were granted, and recorded
as stock compensation in selling, general and administrative expense.
During
the nine months ended September 30, 2020, the Company issued 451,198 shares of common stock to service vendors with a fair value of $104,474.
The fair value of the shares was determined based on the closing price of the Company’s common stock on the date shares were granted,
and recorded as stock compensation in selling, general and administrative expense.
During
the nine months ended September 30, 2020, the Company issued 750,000 shares of common stock to consultants and convertible note holders
for services with a fair value of $209,495. The fair value of the shares was determined based on the closing price of the Company’s
common stock on the date shares were granted, and recorded as stock compensation in selling, general and administrative expense.
During
the nine months ended September 30, 2020, the Company issued 1,127,522 shares of common stock to convertible note holders for fees with
a fair value of $107,022. The fair value of the shares was determined based on the closing price of the Company’s common stock
on the date shares were granted, and was recorded as debt discount to be amortized over the term of the related convertible notes payable.
Preferred
Stock
On
April 14, 2020, the Company issued 2,500,000 shares of newly created class of preferred stock, Series A Preferred Stock to the Company’s
Chief Executive Officer in a private placement transaction. The fair value of the Series A Preferred shares was determined to be $465,000
and was recorded as a stock compensation expense in selling, general and administrative expense during the nine months ended September
30, 2020. The Company determined the fair value of the Series A Preferred shares by obtaining an independent valuation of the fair value
of the Company’s Series A Preferred shares.
Restricted
common stock
In
2019, the Company agreed to issue 8,000,000
shares of the Company’s common stock with
vesting terms to Arthur Mikaelian. 1,000,000 shares
vested immediately, and the balance of 7,000,000 shares vest 625,000 shares per quarter over 2.8 years.
The Company accounts for the share awards using a graded vesting attribution method over the requisite service period, as if each tranche
were a separate award. During the nine months ended September 30, 2021 and 2020, total share-based expense recognized related to vested
restricted shares totaled $382,544
and $762,543,
respectively. At September 30, 2021, there was $48,867
of unvested compensation related to these awards
that will be amortized over a remaining vesting period of approximately six months thru March 2022.
The
following table summarizes restricted common stock activity for the nine months ended September 30, 2021:
SUMMARY OF RESTRICTED COMMON STOCK ACTIVITY
|
|
Number of shares
|
|
|
Fair value of shares
|
|
Non-vested shares, December 31, 2020
|
|
|
3,250,000
|
|
|
|
431,411
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(1,875,000
|
)
|
|
|
(382,544
|
)
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Non-vested shares, September 30, 2021
|
|
|
1,375,000
|
|
|
$
|
48,867
|
|
As
of September 30, 2021, no shares have been issued and 4,875,000
vested shares are included in shares to be issued
on the accompanying statement of stockholders’ deficit.
Common
stock issued in conversion of convertible notes payable
During
the nine months ended September 30, 2021, the Company issued 89,133,190 shares of common stock to holders of convertible notes upon the
conversion of convertible notes payable and accrued interest valued at $1,543,570.
Stock
Options
During
the nine months ended September 30, 2021 and 2020, the Company recognized $34,905
and $248,648,
respectively, of compensation expense relating to vested stock options.
During
the nine months ended September 30, 2021, the Company did not issue any options. In April 2020, the Company issued options exercisable
into 300,000
shares of common stock which vested immediately.
The options have an exercise price of $0.14
per share, and expire in 10 years. The total fair value of these options
at grant date was approximately $30,000,
which was determined using the Black-Scholes-Merton option pricing model with the following average assumption: stock price $0.14
per share, expected term ranging from five
years, volatility 236%,
dividend rate of 0%
and risk-fee interest rate of 0.17%.
The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of measurement corresponding with the expected
term of the share option award; the expected term represents the weighted-average period of time that share option awards granted are
expected to be outstanding giving consideration to vesting schedules and historical participant exercise behavior; the expected volatility
is based upon historical volatility of the Company’s common stock; and the expected dividend yield is based on the fact that the
Company has not paid dividends in the past and does not expect to pay dividends in the future.
As
of September 30, 2021, the amount of unvested compensation related to stock options was approximately $22,000
which will be recorded as an expense in future
periods as the options vest.
A
summary of stock option activity during the nine months ended September 30, 2021:
SCHEDULE OF STOCK OPTION ACTIVITY
|
|
Number of options
|
|
|
Weighted Average
Exercise Price
|
|
|
Contractual
Life in Years
|
|
Options Outstanding as of December 31, 2020
|
|
|
4,130,000
|
|
|
|
0.10
|
|
|
|
6.0
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(350,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(3,005,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Options Outstanding as of September 30, 2021
|
|
|
775,000
|
|
|
|
0.10
|
|
|
|
5.5
|
|
Options Exercisable as of September 30, 2021
|
|
|
775,000
|
|
|
$
|
0.10
|
|
|
|
5.5
|
|
At
September 30, 2021, the options outstanding had no intrinsic value.
NOTE
9 – RELATED PARTY TRANSACTIONS
On
January 14, 2021, the Company completed the acquisition of 51% of Medolife Rx, a company controlled by Arthur Mikaelian (see Note 8).
Prior to the acquisition, Mr. Mikaelian was a consultant and shareholder in the Company. In connection with the acquisition of 51% of
Medolife Rx, Mr. Mikaelian was appointed as a member of the Board of Directors of the Company, and also appointed to serve as the Company’s
Chief Executive Officer, a role which Mr. Mikaelian assumed on January 14, 2021. As Medolife Rx had nominal assets, liabilities, and
operations, proforma information is not presented.
The
Company has an agreement with Mr. Mikaelian in consideration of the Company’s exclusive use of patented technology developed by
Mr. Mikaelian. Pursuant to the agreement, as amended, the Company shall pay a royalty of 25% of all the net income from the sale of licensed
products, as defined with a minimum royalty of $35,000 per month payable in cash or common stock of the Company. During the nine months
ended September 30, 2021 and 2020, the Company recognized royalty expenses of $315,000 and $180,000, respectively.
During
the nine months ended September 30, 2021, the Company recorded revenue of $198,800
from a company controlled by a family member of the Company’s CEO. At September 30, 2021, the related accounts receivable balance
of $198,800 had been fully reserved, and the net amount due from the related party was zero.
During
the nine months ended September 30, 2021, the Company recorded administrative expenses of $628,742 to a company controlled by Mr. Mikaelian.
NOTE
10 – COMMITMENTS AND CONTINGENCIES
COVID-19
During
the nine months ended September 30, 2021, the COVID-19 pandemic has impacted our operating results and the Company anticipates a continued
impact for the balance of the year. In addition, the pandemic may cause reduced demand for our products if, for example, the pandemic
results in a recessionary economic environment which negatively effects the consumers who purchase our products. The Company monitors
guidance from federal, state, and local public health authorities, and has implemented health and safety precautions and protocols in
response to these guidelines. The extent of the impact of the COVID-19 pandemic has had and will continue to have on the Company’s
business is highly uncertain and difficult to predict and quantify at this time.
Contingencies
include obligations for lease agreements, including an abandoned lease space, along with the Company current lease for its headquarters
office (see Note 4).
NOTE
11 – SUBSEQUENT EVENTS
Common
Stock Issued
Subsequent
to September 30, 2021, the Company issued a total of 7,128,571
shares of common stock to convertible note
holders in exchange for the conversion of convertible notes payable and accrued interest.
On November 12, 2021 (“Effective Date”),
the Company entered into a securities purchase agreement (the “SPA”) with Trillium Partners LP (the “Investor”)
pursuant to which the Company issued a 12% unsecured convertible promissory note (the “Note”) in the principal amount of
$82,500. On this date, the Company received proceeds of $75,000.
The maturity date of the Note was November 12,
2022. The Note bears interest at a rate of twelve percent (12%) per annum, which interest shall be paid by the Company to the Investor
in Common Stock at any time the Investor sends a notice of conversion to the Company. The Investor is entitled to, at its option, convert
all or any amount of the principal amount and any accrued but unpaid interest of the Investor Note into Common Stock, at any time, at
a fixed conversion price for each share of Common Stock equal to $0.01 (as defined in the Note) of the Common Stock as reported on the
OTC Marketplace exchange upon which the Company’s shares are traded during the twenty (20) consecutive Trading Day period immediately
preceding (i) the applicable Effective Date; or (ii) the conversion date. The Company also issued a common stock purchase warrant for
8,250,000 shares (the “Warrant”).
The Company initially reserved 30,000,000 of its
authorized and unissued Common Stock (the “Reserved Amount”), free from pre-emptive rights, to provide for the issuance of
Common Stock upon the full conversion and exercise of the Investor Note and Warrant. Upon full conversion of the Investor Note and exercise
of the Warrant, any shares remaining in such reserve will be cancelled.