UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2020.March 31, 2021.
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______ to ______.
Commission File Number 000-56192
ELECTROMEDICAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or Other Jurisdiction Incorporation) | 5047 (Primary Standard Industrial Classification Code Number) | 82-2619815 (I.R.S. Employer Identification No.) |
16561 N. 92nd Street, Ste. 101 | |
Scottsdale, AZ | 85260 |
(Address of principal executive offices) | (Zip Code) |
(303) 974-4770888-880-7888
(Registrant’sRegistrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation ST (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨No x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |
Non-accelerated filer | x | Smaller reporting company | x | |
Emerging growth company | x |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2). ¨x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
On September 30, 2020, 28,810,348March 31, 2021, and May 13, 2021, 30,379,033 and 34,697,316 shares of common stock were outstanding.outstanding, respectively.
TABLE OF CONTENTS
ELECTROMEDICAL TECHNOLOGIES, INC.
(UNAUDITED)
September 30, 2020 | December 31, 2019 | March 31, 2021 | December 31, 2020 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 85,477 | $ | - | $ | 580,774 | $ | 264,913 | ||||||||
Accounts receivable | 16,841 | 15,667 | 21,872 | 17,694 | ||||||||||||
Inventories | 62,500 | 24,694 | 208,503 | 78,712 | ||||||||||||
Prepaid expenses and other current assets | 209,791 | 65,831 | 123,870 | 285,860 | ||||||||||||
Total current assets | 374,609 | 106,192 | 935,019 | 647,179 | ||||||||||||
Other assets | 85,601 | 25,580 | 13,601 | 20,601 | ||||||||||||
Property and equipment, net | 754,688 | 771,094 | 743,750 | 749,219 | ||||||||||||
Total assets | $ | 1,214,898 | $ | 902,866 | $ | 1,692,370 | $ | 1,416,999 | ||||||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 308,198 | $ | 251,162 | $ | 213,331 | $ | 262,614 | ||||||||
Credit cards payable | 22,531 | 31,009 | 22,653 | 23,710 | ||||||||||||
Accrued expenses and other current liabilities | 254,038 | 289,791 | 199,299 | 201,814 | ||||||||||||
Customer deposits | 64,780 | 40,120 | 10,350 | 28,651 | ||||||||||||
KISS liability - related party | - | 1,444,761 | ||||||||||||||
Convertible promissory notes, net of discount of $684,855 | 86,145 | 50,000 | ||||||||||||||
Convertible promissory notes, net of discount of $1,699,181 and $1,277,255, respectively | 404,472 | 257,398 | ||||||||||||||
Related party notes payable | 357,500 | 105,000 | 282,500 | 332,500 | ||||||||||||
PPP Loan | 39,500 | - | ||||||||||||||
PPP loan | - | 39,500 | ||||||||||||||
Notes payable | 17,846 | 59,153 | - | 12,846 | ||||||||||||
Long term debt, current portion | 27,236 | 25,595 | 26,993 | 28,260 | ||||||||||||
Derivative liabilities | 194,307 | - | ||||||||||||||
Derivative liabilities- convertible promissory notes | 1,601,932 | 831,852 | ||||||||||||||
Total current liabilities | 1,372,081 | 2,296,591 | 2,761,530 | 2,019,145 | ||||||||||||
Long-term liabilities: | ||||||||||||||||
Bank debt, net of current portion | 553,203 | 566,406 | 539,664 | 546,552 | ||||||||||||
Government debt, net of current portion | 154,991 | - | 155,900 | 154,302 | ||||||||||||
Related party notes payable | - | 213,000 | ||||||||||||||
Other liabilities | 18,794 | 11,306 | 15,337 | 15,603 | ||||||||||||
Total liabilities | 2,099,069 | 3,087,303 | 3,472,431 | 2,735,602 | ||||||||||||
Commitments and contingencies | - | - | ||||||||||||||
Commitments and contingencies (Note 11) | - | - | ||||||||||||||
Stockholders’ deficit | ||||||||||||||||
Series A Preferred Stock, 1,000,000 shares authorized and 500,000 outstanding | 355,000 | 355,000 | 355,000 | 355,000 | ||||||||||||
Common stock, $.00001 par value, 50,000,000 shares authorized; 28,810,348 and 17,900,639 shares outstanding as of September 30, 2020 and December 31, 2019, respectively | 286 | 177 | ||||||||||||||
Additional paid-in- capital | 7,474,723 | 2,713,087 | ||||||||||||||
Common stock, $.00001 par value, 125,000,000 shares authorized; 30,379,033 and 27,175,800 shares outstanding at March 31, 2021 and December 31, 2020, respectively | 301 | 269 | ||||||||||||||
Additional paid-in-capital | 11,746,183 | 7,957,860 | ||||||||||||||
Accumulated deficit | (8,714,180 | ) | (5,252,701 | ) | (13,881,545 | ) | (9,631,732 | ) | ||||||||
Total stockholders’ deficit | (884,171) | ) | (2,184,437 | ) | (1,780,061 | ) | (1,318,603 | ) | ||||||||
Total liabilities and stockholders’ deficit | $ | 1,214,898 | $ | 902,866 | ||||||||||||
$ | 1,692,370 | $ | 1,416,999 |
See accompanying notes to financial statements
The accompanying notes are an integral part of these financial statements
ELECTROMEDICAL TECHNOLOGIES, INC.
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, | |||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||
Net sales | $ | 205,850 | $ | 270,128 | $ | 557,476 | $ | 625,020 | $ | 166,440 | $ | 214,870 | ||||||||||||
Cost of sales | 57,383 | 75,202 | 139,892 | 181,409 | 41,591 | 64,513 | ||||||||||||||||||
Gross profit | 148,467 | 194,926 | 417,584 | 443,611 | 124,849 | 150,357 | ||||||||||||||||||
Selling, general and administrative expenses | 2,243,377 | 373,402 | 3,768,196 | 1,598,029 | 1,689,383 | 588,150 | ||||||||||||||||||
Loss from operations | (2,094,910 | ) | (178,476 | ) | (3,350,612 | ) | (1,154,418 | ) | (1,564,534 | ) | (437,793 | ) | ||||||||||||
Other income (expense) | ||||||||||||||||||||||||
Interest expense | (52,658 | ) | (10,601 | ) | (82,168 | ) | (35,342 | ) | (1,060,302 | ) | (14,948 | ) | ||||||||||||
Change in fair value of related party KISS liability | - | (1,553 | ) | (7,784 | ) | (41,257 | ) | |||||||||||||||||
Change in fair value of derivative liabilities | (22,415 | ) | - | (22,415 | ) | - | ||||||||||||||||||
Other income | - | - | 1,500 | - | ||||||||||||||||||||
Change in fair value of derivative liabilities- convertible promissory notes | 14,798 | - | ||||||||||||||||||||||
Forgiveness of debt | 50,082 | - | ||||||||||||||||||||||
Other income (expense) | (428 | ) | 1,500 | |||||||||||||||||||||
Total other expense | (75,073 | ) | (12,154 | ) | (110,867 | ) | (76,599 | ) | (995,850 | ) | (13,448 | ) | ||||||||||||
Net loss | $ | (2,169,983 | ) | $ | (190,630 | ) | $ | (3,461,479 | ) | $ | (1,231,017 | ) | $ | (2,560,384 | ) | $ | (451,241 | ) | ||||||
Weighted average shares outstanding- basic and diluted | 21,875,068 | 16,681,043 | 20,201,697 | 16,567,820 | ||||||||||||||||||||
Weighted average loss per share- basic and diluted | $ | (0.10 | ) | $ | (0.01 | ) | $ | (0.17 | ) | $ | (0.07 | ) | ||||||||||||
Weighted average shares outstanding – basic and diluted | 28,557,027 | 18,161,124 | ||||||||||||||||||||||
Weighted average loss per share – basic and diluted | $ | (0.09 | ) | $ | (0.02 | ) |
SeeThe accompanying notes toare an integral part of these financial statements
ELECTROMEDICAL TECHNOLOGIES, INC.
ELECTROMEDICAL TECHNOLOGIES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30, 2019MARCH 31, 2021
(UNAUDITED)
Total | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid in | Accumulated | Stockholders’ | Preferred Stock | Common Stock | Paid - in | Accumulated | Stockholders' | |||||||||||||||||||||||||||||||||||||||||||||||
Amount | Shares | Amount | Shares | Capital | Deficit | Deficit | Amount | Shares | Amount | Shares | Capital | Deficit | Deficit | |||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2018 | $ | - | - | $ | 162 | 16,320,823 | $ | 1,447,960 | $ | (3,508,362 | ) | $ | (2,060,240 | ) | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for cash | - | - | 1 | 104,506 | 79,999 | - | 80,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2020 | $ | 355,000 | 500,000 | $ | 269 | 27,175,800 | $ | 7,957,860 | $ | (9,631,732 | ) | $ | (1,318,603 | ) | ||||||||||||||||||||||||||||||||||||||||||
Shares issued for consulting services | - | - | 1 | 150,000 | 106,500 | - | 106,501 | - | - | 11 | 1,084,120 | 693,826 | - | 693,837 | ||||||||||||||||||||||||||||||||||||||||||
- | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares issued for software development services | - | - | - | 50,000 | 35,500 | - | 35,500 | |||||||||||||||||||||||||||||||||||||||||||||||||
Warrant issued in conjunction with convertible promissory note | - | - | - | - | 420,096 | - | 420,096 | |||||||||||||||||||||||||||||||||||||||||||||||||
Warrants reset in conjunction with convertible promissory notes | - | - | - | - | 1,689,429 | (1,689,429 | ) | - | ||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of convertible promissory notes | - | - | 10 | 1,019,113 | 380,093 | - | 380,103 | |||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | 513,644 | - | 513,644 | - | - | 11 | 1,100,000 | 604,879 | - | 604,890 | ||||||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | (818,969 | ) | (818,969 | ) | - | - | - | - | - | (2,560,384 | ) | (2,560,384 | ) | ||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2019 | $ | - | - | $ | 164 | 16,625,329 | $ | 2,183,603 | $ | (4,327,331 | ) | $ | (2,143,564 | ) | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for cash | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
Shares issued for consulting services | - | - | 1 | 43,461 | 30,855 | - | 30,856 | |||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | 40,688 | - | 40,688 | |||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | (221,418 | ) | (221,418 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2019 | $ | - | - | $ | 165 | 16,668,790 | $ | 2,255,146 | $ | (4,548,749 | ) | $ | (2,293,438 | ) | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for cash | - | - | - | 42,253 | 30,000 | - | 30,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
Shares issued for consulting services | - | - | - | 20,000 | 14,200 | - | 14,200 | |||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | 48,428 | - | 48,428 | |||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | (190,630 | ) | (190,630 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2019 | $ | - | - | $ | 165 | 16,731,043 | $ | 2,347,774 | $ | (4,739,379 | ) | $ | (2,391,440 | ) | ||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2021 | $ | 355,000 | 500,000 | $ | 301 | 30,379,033 | $ | 11,746,183 | $ | (13,881,545 | ) | $ | (1,780,061 | ) |
SeeThe accompanying notes toare an integral part of these financial statements
ELECTROMEDICAL TECHNOLOGIES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS’STOCKHOLDERS' DEFICIT
FOR THE NINE MONTHSPERIOD ENDED SEPTEMBER 30,MARCH 31, 2020
(UNAUDITED)
Total | ||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
Amount | Shares | Amount | Shares | Capital | Deficit | Deficit | ||||||||||||||||||||||
Balance, December 31, 2019 | $ | 355,000 | 500,000 | $ | 177 | 17,900,639 | $ | 2,713,087 | $ | (5,252,701 | ) | $ | (2,184,437 | ) | ||||||||||||||
Shares issued in conjunction with vendor settlement | - | - | - | 10,355 | 7,352 | - | 7,352 | |||||||||||||||||||||
Shares issued for consulting services | - | - | 6 | 600,000 | 289,994 | - | 290,000 | |||||||||||||||||||||
Stock-based compensation | - | - | - | - | 5,265 | - | 5,265 | |||||||||||||||||||||
Net loss | - | - | - | - | - | (451,241 | ) | (451,241 | ) | |||||||||||||||||||
Balance, March 31, 2020 | $ | 355,000 | 500,000 | $ | 183 | 18,510,994 | $ | 3,015,698 | $ | (5,703,942 | ) | $ | (2,333,061 | ) | ||||||||||||||
Shares issued in conjunction with convertible promissory note | - | - | 1 | 100,000 | 42,968 | - | 42,969 | |||||||||||||||||||||
Beneficial conversion feature in conjunction with convertible promissory note | - | - | - | - | 8,800 | - | 8,800 | |||||||||||||||||||||
Shares issued to employee for services | - | - | 20 | 2,000,000 | 599,980 | - | 600,000 | |||||||||||||||||||||
Warrant issued for services | - | - | - | - | 85,380 | - | 85,380 | |||||||||||||||||||||
Issuance of common stock for cash | - | - | 1 | 142,857 | 49,999 | - | 50,000 | |||||||||||||||||||||
Stock-based compensation | - | - | - | - | 5,481 | - | 5,481 | |||||||||||||||||||||
Net loss | - | - | - | - | - | (840,255 | ) | (840,255 | ) | |||||||||||||||||||
Balance, June 30, 2020 | $ | 355,000 | 500,000 | $ | 205 | 20,753,851 | $ | 3,808,306 | $ | (6,544,197 | ) | $ | (2,380,686 | ) | ||||||||||||||
Beneficial conversion feature in conjunction with convertible promissory notes | - | - | - | - | 390,000 | - | 390,000 | |||||||||||||||||||||
Conversion of KISS liability- related party shares | - | - | 72 | 7,156,497 | 1,452,473 | - | 1,452,545 | |||||||||||||||||||||
Shares issued for consulting services | - | - | 9 | 900,000 | 1,817,991 | - | 1,818,000 | |||||||||||||||||||||
Stock-based compensation | - | - | - | - | 5,953 | - | 5,953 | |||||||||||||||||||||
Net loss | - | - | - | - | - | (2,169,983 | ) | (2,169,983 | ) | |||||||||||||||||||
Balance, September 30, 2020 | $ | 355,000 | 500,000 | $ | 286 | 28,810,348 | $ | 7,474,723 | $ | (8,714,180) | $ | (884,171 | ) |
Series A | Total | |||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid in | Accumulated | Stockholders' | ||||||||||||||||||||||||
Amount | Shares | Amount | Shares | Capital | Deficit | Deficit | ||||||||||||||||||||||
Balance, December 31, 2019 | $ | 355,000 | 500,000 | $ | 177 | 17,900,639 | $ | 2,713,087 | $ | (5,252,701 | ) | $ | (2,184,437 | ) | ||||||||||||||
- | - | - | - | - | ||||||||||||||||||||||||
Shares issued in conjunction with vendor settlement | - | - | - | 10,355 | 7,352 | - | 7,352 | |||||||||||||||||||||
Shares issued for consulting services | - | - | 6 | 600,000 | 289,994 | - | 290,000 | |||||||||||||||||||||
Stock -based compensation | - | - | - | - | 5,265 | - | 5,265 | |||||||||||||||||||||
Net loss | - | - | - | - | - | (451,241 | ) | (451,241 | ) | |||||||||||||||||||
Balance, March 31, 2020 | $ | 355,000 | 500,000 | $ | 183 | 18,510,994 | $ | 3,015,698 | $ | (5,703,942 | ) | $ | (2,333,061 | ) |
SeeThe accompanying notes toare an integral part of these financial statements
ELECTROMEDICAL TECHNOLOGIES, INC.
ELECTROMEDICAL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30,
MARCH 31,
(UNAUDITED)
2020 | 2019 | 2021 | 2020 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net loss | $ | (3,461,479 | ) | $ | (1,231,017 | ) | $ | (2,560,384 | ) | $ | (451,241 | ) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
Financing costs on put option liability | - | 76,931 | ||||||||||||||
Provision for allowance for doubtful accounts | 3,765 | - | ||||||||||||||
Stock-based compensation expense | 2,761,848 | 754,317 | ||||||||||||||
Adjustments to reconcile net loss to | ||||||||||||||||
net cash used in operating activities: Stock-based compensation expense | 1,298,727 | 295,265 | ||||||||||||||
Depreciation and amortization | 16,406 | 18,988 | 5,469 | 5,469 | ||||||||||||
Change in excess fair value of KISS liability- related party | 7,784 | 41,257 | ||||||||||||||
Amortization of debt discount | 33,038 | - | ||||||||||||||
Change in fair value of derivative liabilities | 22,415 | - | ||||||||||||||
Forgiveness of debt | (49,783 | ) | - | |||||||||||||
Amortization of debt discount and day one derivative loss and warrant expense | 1,010,601 | - | ||||||||||||||
Change in fair value of derivative liabilities- convertible promissory notes | (14,798 | ) | - | |||||||||||||
Change in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (4,939 | ) | (2,239 | ) | (4,178 | ) | (1,649 | ) | ||||||||
Inventories | (37,806 | ) | (29,847 | ) | (129,791 | ) | (2,600 | ) | ||||||||
Prepaid expenses and other current assets | (128,960 | ) | 105,100 | 161,990 | 13,470 | |||||||||||
Due from Chief Executive Officer | - | 10,256 | ||||||||||||||
Other assets | (60,021 | ) | - | 7,000 | (3,795 | ) | ||||||||||
Accounts payable | 57,036 | 82,434 | (42,284 | ) | 23,611 | |||||||||||
Credit cards payable | (8,478 | ) | (9,942 | ) | (1,057 | ) | (1,472 | ) | ||||||||
Accrued expenses and other current liabilities | (28,401 | ) | 91,515 | 9,817 | 17,315 | |||||||||||
Customer deposits | 24,660 | (95,300 | ) | (18,301 | ) | (95,140 | ) | |||||||||
Other liabilities | 7,488 | - | (265 | ) | 11,186 | |||||||||||
Net cash used in operating activities | (795,644 | ) | (187,547 | ) | ||||||||||||
Net cash (used in) provided by operating activities | (327,237 | ) | 699 | |||||||||||||
Cash flows from financing activities: | ||||||||||||||||
Repayments on short-term financing | (40,308 | ) | - | |||||||||||||
Proceeds from PPP loan | 39,500 | - | ||||||||||||||
Issuance of convertible promissory note | 665,000 | - | ||||||||||||||
Short-term financing | - | (15,643 | ) | |||||||||||||
Repayments on bank debt | (12,471 | ) | (17,992 | ) | (6,556 | ) | (4,175 | ) | ||||||||
Related party notes payable-net | 24,500 | 203,000 | (50,000 | ) | 58,000 | |||||||||||
Proceeds from government debt | 155,900 | - | ||||||||||||||
Issuance of convertible promissory notes | 712,500 | - | ||||||||||||||
Repayments on notes payable | (1,000 | ) | (107,461 | ) | (12,846 | ) | - | |||||||||
Issuance of common stock for cash- net | 50,000 | 110,000 | ||||||||||||||
Net cash provided by financing activities | 881,121 | 187,547 | 643,098 | 38,182 | ||||||||||||
Net decrease in cash and cash equivalents | 85,477 | - | ||||||||||||||
Net increase in cash and cash equivalents | 315,861 | 38,881 | ||||||||||||||
Cash and cash equivalents, beginning of period | - | - | 264,913 | - | ||||||||||||
Cash and cash equivalents, end of period | $ | 85,477 | $ | - | $ | 580,774 | $ | 38,881 | ||||||||
Supplemental disclosures of cash flow information: | ||||||||||||||||
Cash paid during the period for: | ||||||||||||||||
Interest | $ | 16,356 | $ | 14,396 | ||||||||||||
Income taxes | $ | - | $ | - | ||||||||||||
Supplemental disclosures of cash flow information: | ||||||||||||||||
Cash paid during the year for: | ||||||||||||||||
Interest | $ | 37,408 | $ | 14,805 | ||||||||||||
Taxes | $ | - | $ | - | ||||||||||||
Non-cash investing and financing activities: | ||||||||||||||||
Issuance of 50,000 shares of stock and put option liability for prepaid software | $ | - | $ | 71,200 | ||||||||||||
Shares issued in conjunction with vendor settlement | $ | 7,352 | $ | - | $ | - | $ | 7,352 | ||||||||
Warrants, common stock and beneficial conversion feature issued in conjunction with convertible promissory note | $ | 490,000 | $ | - | ||||||||||||
Conversion of Kiss liability-related party to common stock | $ | 1,452,545 | $ | - | ||||||||||||
Discount in convertible notes payable due to derivative liabilities | $ | 171,892 | $ | - | ||||||||||||
Warrants, issued in conjunction with convertible promissory note | $ | 420,096 | $ | - | ||||||||||||
Derivative liabilities issued in conjunction with convertible promissory notes | $ | 974,931 | $ | - | ||||||||||||
Conversion of convertible promissory notes, derivative liabilities and accrued interest into shares of common stock | $ | 380,103 | $ | - |
SeeThe accompanying notes toare an integral part of these financial statements
ELECTROMEDICAL TECHNOLOGIES, INC.
ELECTROMEDICAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2021 AND 2020
(UNAUDITED)
NOTE 1. | ORGANIZATION AND NATURE OF BUSINESS |
Electro Medical Technologies, LLC (“the Company”), was formed in November 2010 as an Arizona limited liability company. In August 2017, the Company converted to a Delaware C Corporation under Electromedical Technologies, Inc. The Company is a bioelectronic engineering company with medical device certifications in the United States (FDA) and Mexico (Cofepris). The Company engineers simple-to-use portable bioelectronics devices, which provide fast and long -lasting pain relief across a broad range of ailments.
NOTE 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Accounting Method
The accompanying unaudited financial statements of Electromedical Technologies, Inc. have been prepared in accordance with Accounting Principles Generally Accepted in the United States of America (“GAAP”) for interim financial information and in accordance with Rule 8-03 of Regulation S-X per Regulation A requirements. Certain information and disclosures normally included in the annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. These interim financial statements should be read in conjunction with the audited annual financial statements of the Company as of and for the year ended December 31, 2019.2020. The results of operations for the three months and nine months ended September 30, 2020March 31, 2021 are not necessarily indicative of the results that may be expected for the full year.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities, certain disclosures at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates affecting the financial statements have been prepared on the basis of the most current and best available information. However, actual results from the resolution of such estimates and assumptions may vary from those used in the preparation of the financial statements.
Going Concern
Since inception, the Company has incurred approximately $8.7$11.7 million of accumulated net losses. In addition, during the ninethree months ended September 30, 2020,March 31, 2021, the Company used $795,644 of cash from$327,237 in operations and had a working capital deficit of $997,472.$1,826,511. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The Company expects to obtain funding through additional debt and equity placement offerings until it consistently achieves positive cash flows from operations. If the Company is unable to obtain additional funding, it may not be able to meet all of its obligations as they come due for the next twelve months. The continuing viability of the entity and its ability to continue as a going concern is dependent upon the entity being successful in its continuing efforts in growing its revenue base and/or accessing additional sources of capital, and/or selling assets.
As a result, there is significant uncertainty whether the entity will continue as a going concern and, therefore, whether it will realize its assets and settle its liabilities and commitments in the normal course of business and at the amounts stated in the financial statements.
Accordingly, no adjustments have been made to the financial statements relating to the recoverability and classification of the asset carrying amounts or the amount and classification of liabilities that might be necessary should the entity not continue as a going concern. At this time, management is of the opinion that no asset is likely to be realized for an amount less than the amount at which it is recorded in the financial statements as at September 30, 2020.March 31, 2021.
Revenue Recognition
The FASB issued Accounting Standards Update (“ASU”) No. 2014-09, codified as ASC 606: Revenue from Contracts with Customers, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The Company adopted ASC 606 effective January 1, 2019 using modified retrospective basis and the cumulative effect was immaterial to the financial statements. In addition, the comparative prior period has not been restated.
Revenues are recognized when performance obligations are satisfied through the transfer of promised goods to the Company’s customers. Control transfers upon shipment of product and when the title has been passed to the customers. This includes the transfer of legal title, physical possession, the risks and rewards of ownership, and customer acceptance. Revenue is recorded net of sales taxes collected from customers on behalf of taxing authorities, allowance for estimated returns, chargebacks, and markdowns based upon management’s estimates and the Company’s historical experience. The Company’s liability for sales return refunds is recognized within other current liabilities, and an asset for the value of inventory which is expected to be returned is recognized within other current assets on the balance sheets. The Company generally allows a 30 day right of return to its customers. As of September 30, 2020,March 31,2021 and December 31, 2019, 2020, the sales returns allowance was $6,990 and $3,225, respectively.$6,990.
Certain larger customers pay in advance for future shipments. These advance payments totaled $64,780$10,350 and $40,120$28,651 at September 30, 2020March 31, 2021 and December 31, 2019,2020, respectively, and are recorded as customer deposits in the accompanying balance sheets. Revenue related to these advance payments is recognized upon shipment to the distributor or the end-customer.
At the completion of the initial three-year warranty, the Company sells extended warranties for periods ranging from one to three years. Revenue is recognized on a straight-line basis over the term of the contract. As of September 30, 2020At March 31, 2021 and December 31, 2019,2020, deferred revenue of $38,796$35,543 and $24,177,$35,200, respectively, is recorded in connection with these extended warranties.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts, and the Company generally does not require collateral. As a general policy, the Company determines an allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
The Company recorded an allowance for doubtful accounts of $1,000 at both September 30, 2020 and December 31, 2019,
Financial Instruments and Concentrations of Business and Credit Risk
The Company elected early adoption of the Accounting Standards Update (“ASU”) 2016-01, Recognition and Measurement of Financial Assets and Liabilities, which eliminates the requirement of the Company to disclose the fair value of its financial instruments as of the balance sheet date. Financial instruments that potentially subject the Company to concentrations of business and credit risks consist of cash and cash equivalents, accounts receivable, and accounts payable.
The Company maintains cash balances that can, at times, exceed amounts insured by the Federal Deposit Insurance Corporation. The Company has not experienced any losses in these accounts and believes it is not exposed to any significant credit risk.
The Company’s accounts receivable, which are unsecured, expose the Company to credit risks such as collectability and business risks such as customer concentrations. The Company mitigates credit risk by investigating the creditworthiness of all customers prior to establishing relationships with them, performing periodic review of the credit activities of those customers during the course of the business relationship, regularly analyzing the collectability of accounts receivables, and recording allowances for doubtful accounts when these receivables become uncollectible. The Company mitigates business risks by attempting to diversify its customer base.
The Company had threetwo significant customers (“Customers(Customers A B and C”)B), that accounted for approximately 12.4% and 18.6% of net sales for the three months ended September 30, 2020 thatMarch 31, 2021. Customer A accounted for approximately 19.3%, 15.2% and 10.7%, respectively,29.3% of net sales and one significant customer for the three months ended September 30, 2019 (“Customer A”), that accounted for approximately 10.0% of net sales. Customer A and Customer B accounted for 17.2% and 12.9% of net sales for the nine months ended September 30, 2020, respectively. Customer A accounted for 15.1% of net sales for the nine months ended September 30, 2019, respectively.March 31, 2020. There were no amounts outstanding from these customers as of September 30, 2020at March 31, 2021 and December 31, 2019.2020. Amounts due these customers totaled $0$12,500 and $3,100 as of September 30, 2020 and$12,100 at March 31, 2021 December 31, 2019,2020, respectively for commissions and reimbursements. Customer deposits on hand from Customer A totaled approximately $64,780$10,350 and $40,120$28,651 at September 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. The loss of these customers would have a significant impact on the operations and cash flows of the Company.
The Company’s supplier concentrations expose the Company to business risks, which the Company mitigates by attempting to diversify its supply chain. Supplier concentrations consisted of one significant supplier in China (“Supplier A”) that accounted for approximately 86.8%96% and 80.8%94% of total net purchases for the three months ended March 31, 2021 and nine months ended September 30, 2020, and 0.0% and 81.6% for the three and nine months ended September 30, 2019., respectively. An additional supplier (“Supplier B”), accounted for approximately 100.0% and 11.0% of total net purchases for the three months and nine months ended September 30, 2019, respectively. There were no amounts outstanding due these suppliersthis supplier at both September 30, 2020March 31, 2021 and December 31, 2019.2020. The loss of key vendors may have a significant impact on the operations and cash flows of the Company.
The estimated fair value of financial instruments has been determined using available market information and appropriate valuation methodologies. However, considerable judgment is often required to interpret market data used to develop the estimates of fair value. Accordingly, the estimates presented may not be indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair value amounts.
Disclosure of Fair Value
The disclosure requirements within Accounting Standards Codification (ASC) Topic 820-10, Fair Value Measurement, require disclosure of estimated fair values of certain financial instruments. For financial instruments recognized at fair value in the Company’s statements of operations, the disclosure requirements of ASC Topic 820-10 also apply. The methods and assumptions are set forth below:
· | Cash and cash equivalents are carried at cost, which approximates fair value. |
· | The carrying amounts of receivables approximate fair value due to their short-term maturities. |
· | The carrying amounts of payables approximate fair value due to their short-term maturities. |
· |
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 Decemberof March 31, 20192021 are as follows:
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
KISS liability- related party | $ | - | $ | - | $ | 1,444,761 | $ | 1,444,761 | ||||||||||||||||||||||||
Derivative liabilities – convertible promissory notes | $ | - | $ | - | $ | 1,601,932 | $ | 1,601,932 | ||||||||||||||||||||||||
Total fair value | $ | - | $ | - | $ | 1,444,761 | $ | 1,444,761 | $ | - | $ | - | $ | 1,601,932 | $ | 1,601,932 |
The levels of the fair value hierarchy into which the Company’s assets and liabilities fall as of December 31, 2020 are as follows:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Liabilities | ||||||||||||||||
Derivative liabilities – convertible promissory notes | $ | - | $ | - | $ | 831,852 | $ | 831,852 | ||||||||
Total fair value | $ | - | $ | - | $ | 831,852 | $ | 831,852 |
The following table presents changes during the three months ended March 31, 2021 in Level 3 liabilities measured at fair value on a recurring basis:
Fair value- December 31, 2020 | $ | 831,852 | ||
Net unrealized gain | (14,798 | ) | ||
Derivative liabilities in conjunction with convertible promissory notes | 974,931 | |||
Conversion of convertible promissory notes | (190,053 | ) | ||
Fair value- March 31, 2021 | $ | 1,601,932 |
See Note 56 for discussion of the Company’s valuation of the KISS liability- related party.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 September 30, 2020 and December 31, 2019, the Company believes there are no excess and obsolete inventories and accordingly, did not record an inventory reserve. Inventories consist of purchased finished goods.
Deferred Offering Costs
Costs associated with the Company’s S-1 filings totaled $85,601 and $25,580 as of September 30, 2020 and December 31, 2019, Such costs are included in other assets on the accompanying balance sheets as of September 30, 2020 and December 31, 2019.
Property and Equipment
Property and equipment is recorded at cost and is comprised of a building and office furniture and equipment. The building is depreciated using the straight-line method over the estimated useful life of 40 years. Office furniture and equipment is depreciated using the double-declining method or the straight-line method over the estimated useful lives of 3 to 7 years.
Betterments, renewals, and extraordinary repairs that materially extend the useful life of the asset are capitalized; other repairs and maintenance charges are expensed as incurred. The cost and related accumulated depreciation applicable to assets retired are removed from the accounts, and the gain or loss on disposition, if any, is recognized in the accompanying statements of operations.
Impairment of Long-Lived Assets
In accordance with FASB ASC Topic 360, Property, Plant and Equipment, long-lived assets such as property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized on long-lived assets when indicators of impairment are present and the undiscounted future cash flows estimated to be generated by those assets are less than the carrying amount of the assets. In such cases, the carrying value of these assets are adjusted to their estimated fair values and assets held for sale are adjusted to their estimated fair values less selling expenses.
No impairment losses of long-lived assets were recognized for the nine months ended September 30, 2020 and 2019.
Income Taxes
Deferred tax assets as of September 30, 2020 consist of an amount insignificant to the financial statements as of September 30, 2020, for which a full valuation allowance would have been present.
Sales Taxes
FASB ASC Subtopic 605-45, Revenue Recognition – Principal Agent Considerations, provides that the presentation of taxes assessed by a governmental authority that are directly imposed on revenue-producing transactions (e.g. sales, use, and excise taxes) between a seller and a customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. In addition, for any such taxes that are reported on a gross basis, the amounts of those taxes should be disclosed in the financial statements for each period for which a statement of operations is presented if those amounts are significant. Sales taxes for the three months ended March 31, 2021 and nine month periods ended September 30, 2020, and 2019 were recorded on a net basis. Included in accrued expenses at, September 30,2020March 31, 2021 and December 31, 20192020 is approximately $70,000$59,000 and $62,000$58,000 respectively, related to sales taxes.
Shipping and Handling Costs
The Company included shipping and handling costs in cost of sales on the accompanying statements of operations for the three months ended September 30, 2020 and 2019 and for the nine months ended September 30, 2020 and 2019.
Warranty
The Company warranties the sale of most of its products and records an accrual for estimated future claims. The standard warranty is typically for a period of three years. Such accruals are based upon historical experience and management’s estimate of the level of future claims. The Company recorded a liability as of, September 30, 2020March 31, 2021 and December 31, 20192020 of $21,026$15,795 and $16,183, respectively, and$17,483, respectively. The expense is included in cost of sales in the statements of operations and within accrued expenses and other current liabilities on the accompanying balance sheets.
Advertising
Advertising costs are expensed as incurred. Total advertising expenses amounted to $0 for both the three months and nine months ended September 30, 2020 and 2019. Total advertising costs are included in selling, general and administrative expenses on the accompanying statements of operations.
Research and Development Costs
Research and development costs are expensed as incurred. Total research and development costs amounted to $0 and $14,529 for the three months ended September 30, 2020 and 2019, respectively. Total research and development costs amounted to $0 and $35,610 for the nine months ended September 30, 2020 and 2019, respectively Total research and development costs are included in selling, general and administrative expenses on the accompanying statements of operations.
Net Loss per Share
Net earnings or loss per share is computed by dividing net income or loss by the weighted-average number of common shares outstanding during the period, excluding shares subject to redemption or forfeiture. The Company presents basic and diluted net earnings or loss per share. Diluted net earnings or loss per share reflect the actual weighted average of common shares issued and outstanding during the period, adjusted for potentially dilutive securities outstanding. Potentially dilutive securities are excluded from the computation of the diluted net loss per share if their inclusion would be anti-dilutive. Potentially dilutive securities include convertible notes payable, warrants, stock options and the KISS liability-related party. As all potentially dilutive securities are anti-dilutive as of September 30,March 31, 2021 and December 31, 2020, and 2019, diluted net loss per share is the same as basic net loss per share for each period.
COVID-19
On January 30, 2020, the World Health Organization declared the COVID-19 outbreak a “Public Health Emergency of International Concern” and on March 10, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the COVID-19 include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. COVID-19, and actions taken to mitigate it, have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates. While it is unknown how long these conditions will last and what the complete financial effect will be to the company, COVID-19 has had an adverse effect on our business, including our supply chains and distribution systems. While we are taking diligent steps to mitigate disruptions to our supply chain, we are unable to predict the extent or nature of these impacts at this time to our future financial condition and results of operations.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability, measured on a discounted basis, on the balance sheet for all leases with terms greater than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statements of operations and comprehensive loss. A modified retrospective transition approach is required for capital and operating leases existing at the date of adoption, with certain practical expedients available. The Company is currently in the process of evaluating the potential impact of this new accounting guidance, which is effective for the Company beginning on January 1, 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:following as of:
September 30, 2020 | December 31, 2019 | March 31, 2021 | December 31, 2020 | |||||||||||||
Building | $ | 875,000 | $ | 875,000 | $ | 875,000 | $ | 875,000 | ||||||||
Furniture and equipment | 24,987 | 24,987 | 24,987 | 24,987 | ||||||||||||
899,987 | 899,987 | 899,987 | 899,987 | |||||||||||||
Less: accumulated depreciation and amortization | (145,299 | ) | (128,893 | ) | (156,237 | ) | (150,768 | ) | ||||||||
$ | 754,688 | $ | 771,094 | $ | 743,750 | $ | 749,219 |
Depreciation and amortization expense related to property and equipment was $5,468$5,469 for both the three months ended September 30, 2020March 31, 2021 and 2019, respectively. Depreciation and amortization expense related to property and equipment was $16,406 and $18,988 for the nine months ended September 30, 2020 and 2019, respectively.2020. Depreciation and amortization are included in selling, general and administrative expenses on the accompanying statements of operations.
NOTE 4. | NOTES PAYABLE |
In May 2018, the Company entered into a note payable with a third- partythird-party vendor as payment for an outstanding balance in the amount of $43,692. The note is interest free and requires monthly payments of $5,461 beginning June 15, 2018 with the remaining balance due and payable on December 15, 2018. The Company did not make timely payments as of December 15, 2018 which resulted in interest being accrued on the unpaid balance at a rate of ten percent beginning July 31, 2017. The outstanding principal balance as of September 30, 2020 and December 31, 2019 is 17,8462020 of $12,846, and $18,846, respectively.
Interest expenseaccrued interest of $8,028 has been accrued$5,154 was paid in full as of March 31, 2021. Accrued interest of $3,283 was forgiven and included in other income in the Company’s balance sheet as of September 30, 2020, of which $444 and $1,382, respectively, has been recorded in the Company’saccompanying statement of operations for the three months and nine months then ended. Interest expense of $494 and $2,014, respectively, has been recorded for the three months and nine months ended September 30, 2019.
In October 2019, the Company entered into a future revenue sale agreement. Under the terms of the agreement, the Company agrees to sell $73,336 of its future revenues for a purchase price of $50,500 less transaction fees of $3,115 for a net advance of $47,385. Payments of $375 per day are to be made for principal and interest until the $73,336 is paid in full. The outstanding balance as of September 30, 2020 and December 31, 2019 is $0 and $40,307, respectively.
In April 2020, the Company received $39,500 in payroll protection program loans (“PPP”). These loans provide for certain funding based on previous employment which in part may be forgivable under certain conditions. 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 with a 10-month moratorium on payments and carrycarries a 1% annual interest rate. These loans require no collateral nor personal guarantees. The Company anticipates that this loan will bewas forgiven in full.its entirety in February 2021 and has been included in other income in the accompanying statement of operations.
Convertible Promissory Notes
In May 2018, the Company borrowed $25,000 in conjunction with aThe aggregate of convertible promissory note. The note matures in June 2020 and accrues interest at a rate of 8% per annum. The lender has the right at any time to convert the debt into fully paid and non- assessable shares of common stock at a price of $0.71 per share. In October 2019, the lender converted the $25,000 note and unpaid accrued interest of $2,948 into 39,363 shares of common stock. Therenotes is no beneficial conversion feature as the conversion price is at fair market value. The proceeds were used for operations.follows:
Convertible promissory notes | March 31, 2021 | December 31, 2020 | ||||||
Principal balance | $ | 2,103,653 | $ | 1,534,653 | ||||
Debt discount balance | (1,699,181 | ) | (1,277,255 | ) | ||||
Net Notes balance | $ | 404,472 | $ | 257,398 |
In December 2019, the Company borrowed $50,000 in conjunction with a convertible promissory note. The note maturesmatured in May 2020 and is interest free. The lender has the right at any time to convert the debt into fully paid and non- assessable shares of common stock at a price of $0.71 per share. There is no beneficial conversion feature as the conversion price is at fair market value. The proceeds were used for operations.
In June 2020, the Company borrowed $110,000 in conjunction with an unsecured convertible promissory note from an investor. Proceeds of $100,000 include an original issue discount of $10,000. A one-time charge of 8% will be applied to the principal amount of $110,000 on the Issuance Date to be paid upon maturity. The note matures on December 15, 2020. The lender has the right at any time to convert the debt into fully paid and non- assessable shares of common stock at a price of $0.35 per share. The number of shares of common stock issuable upon conversion of any conversion amount shall be equal to the quotient of dividing the conversion amount by the conversion price of $0.35.
In conjunction with the note issued in June 2020, the Company issued 100,000 shares of common stock to the Investor as well as a warrant to purchase 250,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The warrant expires on June 30, 2023.
The common shares and warrants qualified for equity accounting as the warrants did not fall within the scope of ASC Topic 480, Distinguishing Liabilities from Equity. The warrants were measured at fair value at the time of issuance and classified as equity.
Each warrant entitles the holder to purchase one share of common stock for $1.00 per share. If held by the initial purchaser of the Private Warrant or certain permitted transferees, the purchase can occur on a cashless basis. The warrants will expire on June 4, 2023 or earlier upon redemption or liquidation.
The Company valued the warrants using the Black-Scholes model and recorded the warrants as a reduction of the note included in the debt discount balance. The following table summarizes the assumptions used in the valuation models to determine the fair value of the warrants:
Fair Value of Common Share | $ | 0.51 | ||
Exercise Price | $ | 1.00 | ||
Risk Free Rate | 0.36 | % | ||
Expected Life (Yrs.) | 3.00 | |||
Volatility | 95.00 | % |
The Common shares were valued at OTC market price on June 4, 2020. Upon valuation of the common shares and the warrants, the Company allocated the values using a relative fair market value approach. The common shares were valued at $42,969 and the warrants were valued at $48,231. The residual value of $8,800 was recorded as a discount associated with the beneficial conversion feature.
The Company shall at all times reserve and keep available out of its authorized common stock a number of shares equal to at least 5 times the full number of shares of common stock issuable upon conversion of all outstanding amounts under these notes. The Company will at all times reserve at least 5,000,000 shares of common stock for conversion.
The Company shall have the option, under specific terms in each note, to pre-pay the entire remaining outstanding principal amount of this note in cash plus a premium ranging from 20-50%.
Upon the occurrence of any Event of Default (without the need for any party to give any notice or take any other action) for the notes issued in June 2020, the outstanding balance shall immediately and automatically increase to 120% of the outstanding balance immediately prior to the occurrence of the Event of Default (the “Default Sum”). Upon the occurrence of any Event of Default, the note shall become immediately due and payable. In the event of default, the Company would be required to convert the notes at a price of 60% of the lowest trade in the last 25 days prior to default.
In July 2020, the Company borrowed $107,500 in conjunction with an unsecured convertible promissory note from an investor. Proceeds of $90,000 include an original issue discount of $7,500 and legal fees of $10,000. The note matures on July 21, 2021. The lender has the right after January 21, 2021 to convert the debt into fully paid and non- assessable shares of common stock at a price of $0.50 per share. Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest accrues at the rate of eight percent (8%) per annum, simple interest, in each case to the extent that the note and the principal amount and any unpaid accrued interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at the rate of 18% per year, simple interest, non-compounding, until paid. A beneficial conversion feature valued at $90,000 has been recorded as a discount on the note.
In August 2020, the Company borrowed $215,000 in conjunction with an unsecured convertible promissory note from an investor. Proceeds of $200,000 include an original issue discount of $15,000. The note matures on August 4, 2021. The lender has the right after February 4, 2021 to convert the debt into fully paid and non- assessable shares of common stock at a price of $0.50 per share. Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest accrues at the rate of eight percent (8%) per annum, simple interest, in each case to the extent that the note and the principal amount and any unpaid accrued interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at the rate of 18% per year, simple interest, non-compounding, until paid. A beneficial conversion feature valued at $200,000 has been recorded as a discount on the note.
In August 2020, the Company borrowed $103,000 in conjunction with an unsecured convertible promissory notesnote from an investor. Proceeds of $100,000 include an original issue discount of $3,000. The notes mature on August 11, 2021. The lender has the right for 180 days from the issuance date to convert the debt into fully paid and non- assessable shares of common stock at a price of $1.00 per share. From the period 180 days from issuance to maturity, the lender has the right to convert the debt into fully paid and non-assessable shares of common stock at a price of 63% of market value. Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest accrues at the rate of ten percent (10%) per annum, simple interest, in each case to the extent that the note and the principal amount and any unpaid accrued interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at the rate of 22% per year, simple interest, non-compounding, until paid. The note has a variable conversion price and the Company recorded an embedded derivative liability. The fair value of the liability totaled $97,654 at the date of issuance.issuance and has been recorded as a discount on the note. (see Note 6). As of March 31, 2021, the lender converted the principal amount plus accrued interest into 519,113 shares of common stock at prices ranging from $0.1638 to $0.2659.
In September 2020, the Company borrowed $107,500 in conjunction with an unsecured convertible promissory note from an investor. Proceeds of $100,000 include an original issue discount of $7,500. The note matures on September 3, 2021. The lender has the right after March 3, 2021 to convert the debt into fully paid and non- assessable shares of common stock at a price of $0.50 per share. Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest accrues at the rate of eight percent (8%) per annum, simple interest, in each case to the extent that the note and the principal amount and any unpaid accrued interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at the rate of 18% per year, simple interest, non-compounding, until paid. A beneficial conversion feature valued at $100,000 has been recorded as a discount on the note.
In September 2020, the Company borrowed $78,000 in conjunction with an unsecured convertible promissory notesnote from an investor. Proceeds of $75,000 include an original issue discount of $3,000. The notes mature on September 8, 2021. The lender has the right for 180 days from the issuance date to convert the debt into fully paid and non- assessable shares of common stock at a price of $1.00 per share. From the period 180 days from issuance to maturity, the lender has the right to convert the debt into fully paid and non-assessable shares of common stock at a price of 63% of market value. Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest accrues at the rate of ten percent (10%) per annum, simple interest, in each case to the extent that the note and the principal amount and any unpaid accrued interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at the rate of 22% per year, simple interest, non-compounding, until paid. The note has a variable conversion price and the Company recorded an embedded derivative liability. The fair value of the liability totaled $74,238 at the date of issuance.
As of September 30, | ||||||||
Convertible notes | 2020 | 2019 | ||||||
Principal balance | $ | 771,000 | $ | - | ||||
Debt discount balance | (684,855) | - | ||||||
Net Notes balance | $ | 86,145 | $ | - | ||||
Debt discount is amortized over the term of the note using the effective interest method. |
The beneficial conversion featuresissuance and derivatives are initiallyhas been recorded as a discount to the debt and amortized using the effective interest method. During the nine months ended September 30, 2020, $33,038 of debt discount amortization is recorded as interest expense.
On July 6, 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, matured twelve months from the issuance date on July 6, 2019 and was recorded as KISS liability- related party in the current liabilities section of the Company’s balance sheet. Upon (a) after the maturity date of July 6, 2019; (b) in the event of a “Next Equity Financing” where the Company sells its preferred shares from which the Company receives not less than $1 million dollars; or, (c) a corporate transaction in which all or substantially all of the Company’s assets are sold, merged or consolidated into another entity, the investor may, at his discretion, convert the principal of the KISS into common shares of Company. The Company’s obligation is to convert the KISS note upon election of the investor.
(k) Under the terms of the agreement, the KISS agreement may be converted into a certain amount of “Conversion Shares” at the earlier of the Company’s “Next Equity Financing” or “Corporate Transaction” as defined in the agreement, or at maturity. The Company has calculated the estimated number of conversion shares to be 8,156,497. KISS conversion shares are equal to the quotient obtained by dividing the Conversion Amount by the Conversion Price as defined in the agreement. The conversion price is the quotient resulting from dividing (A) the Valuation Cap by (B) the Fully-Diluted Capitalization immediately prior to the conversion. “Valuation Cap” shall mean (i) US $82,497 for shares converted prior to July 1, 2020 (the “2020 Valuation Cap”)”); (ii) US $106,376 for shares converted prior to July 1, 2022 (the “2022 Valuation Cap”) and (iii) US$142,458 for shares converted on or after July 1, 2022.
In October 2019, the related party converted 1,000,000 of the conversion shares at a value of $197,942, which was reclassed to additional paid-in-capital. On September 23, 2020, the related party converted the remaining shares of 7,156,497 at a value of $1,452,575, which was reclassed to additional paid-in-capital.
The fair market value of the KISS liability- related party at December 31, 2019 is $1,444,762. Changes in fair market value are recorded as other income in the Company’s statements of operations. The change in fair market value for the three months ended September 30, 2020 and 2019, totaled $0 and $1,553 respectively. The change in fair market value for the nine months ended September 30, 2020 and 2019 totaled $7,784 and $41,257, respectively.
The Company determined the fair value of the KISS liability using the estimated enterprise value of the Company, allocating the percentage of fully diluted pro-rata shares to the value of the KISS liability. The Company will mark to market the liability at each reporting period.
Note Payable
In March 2015, the Company entered into an $850,000 note payable (the “Original Note Payable”) with a third-party to finance the purchase of its office building. The Original Note Payable consisted of interest-only payments at 4.5% per annum, payable monthly in arrears. The Original Note Payable was collateralized by a deed of trust in the office building. During 2015, the Company refinanced the Original Note Payable with bank debt and a new note payable (“Note Payable”) for the unpaid principal balance.
The Note Payable, effective December 31, 2015 was issued for a principal amount of $157,000 and personally guaranteed by the Company’s CEO. Interest began accruing on the interest commencement datenote. (see Note 6). As of January 1, 2018, at 2% per annum, compounded monthly. The unpaid principal balance and accrued interest is due within ten days ofMarch 31, 2021, the maturity date on December 31, 2020. The outstanding balance on the Note Payable at December 31, 2018 was $157,000. In August 2019, the Company’s CEO personally repaid $100,000 of the note payable to the third-party and was recorded as a reduction of the CEO’s amount due the Company. In October 2019, the lender converted the remaining balance of $57,000 and unpaid accrued interest of $5,373 into 87,849 shares of common stock.
Government Debt
In June 2020, the Company received a $150,000 economic injury disaster loan (“EIDL”). The loan accrues interest at a rate of 3.75% annually and is collateralized by all personal property and intangible assets of the Company. The loan has a 12-month moratorium on payments, after which monthly principal and interest payments of $731 will be made through the maturity date of June 2050.
Bank Debt
In September 2015, the Company entered into a credit agreement for a $700,000 term loan with a financial institution. Payment terms consist of monthly payments in arrears of $3,547 for the first year outstanding. The monthly payment then increases to $4,574 until the term loan matures on September 30, 2025, in which the remaining unpaid principal balance and accrued interest is due. The interest rate for the first year was 1.99% per annum and increased to 4.95% per annum for the remaining life of the term loan. The term loan is collateralized by a deed of trust in the office building. The proceeds were used to purchase a building for which the Company’s operations are located. The net principal balance outstanding on the term loan at September 30, 2020 and December 31, 2019 was $581,145 and $592,001, respectively. The term loan is personally guaranteed by the Company’s CEO.
In March 2020, the Company entered into an agreement with the financial institution to defer its monthly payments for three months through May 2020. Such payments and additional accrued interest have been deferred to the maturity date of the loan.
Related Party Notes Payable
In October 2013, the Company entered in to a $45,000 note payable with an individual related to the Company’s CEO. The proceeds were used for operations. Interest began accruing on the interest commencement date of January 1, 2018, at 2% per annum, compounded monthly. The unpaid principal balance and accrued interest is due within ten days of the maturity date on December 31, 2020. In October 2019, the related party lender converted the principal amount of $44,000 and unpaidplus accrued interest of $1,592 into 64,215 shares of common stock.
In July 2017, the Company entered a $250,000 promissory note with its CEO. The proceeds were used for operations and Regulation A+ offering costs. The promissory note began accruing interest on the interest commencement date of October 1, 2018 at 2% per annum, compounded monthly. The unpaid principal balance and accrued interest are due within ten days of the maturity date on September 30, 2020. The note payable and accrued interest are deemed paid in full as of December 31, 2019.
The Company entered into additional promissory notes with a related party for $84,500 and repaid $45,000 of promissory notes in the nine months ended September 30, 2020, for a total of $357,500 outstanding. All notes mature at various times in 2020 and 2021. Interest will accrue at 10% per annum from the due date thereon until all principal is paid in full. Proceeds from the loans were used for operations.
The long-term debt agreements do not contain any financial covenants.
The Company issued debts that consist of the issuance of convertible notes with variable conversion provisions. The conversion terms of the convertible notes are variable based on certain factors, such as the future price of the Company’s common stock. The number of shares of common stock to be issued is based on the future price of the Company’s common stock. The number of shares of common stock issuable upon conversion of the promissory note is indeterminate. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion option and shares to be issued were recorded as derivative liabilities on the issuance date.
Based on the various convertible notes described in Note 4. The fair value of applicable derivative liabilities on notes and the change in fair value of derivative liability are as follows for the nine months ended September 30, 2020:
Derivative Liability - Convertible Notes | ||||
Balance as of December 31, 2019 | $ | – | ||
Additions during the period | 171,892 | |||
Change in fair value | 22,415 | |||
Balance as of September 30, 2020 | $ | 194,307 |
The fair value of the derivative liabilities – convertible notes are estimated using a Black Scholes pricing model with the following assumptions:
The Company has a promissory note with a related party for $44,000 that was converted into shares of common stock in 2019.
In October 2019, the Company entered into an employment agreement with the Company’s CEO. The terms of the agreement include an annual base salary of $240,000 and a signing bonus of $500,000, as well as discretionary annual bonuses and participation in long-term incentive plans. The signing bonus may be paid in shares of the Company’s common stock. The agreement remains in effect until the earlier of the discharge or resignation of the CEO. In conjunction with the agreement, the $500,000 signing bonus has been accrued and included in selling, general and administrative expenses in the accompanying statement of operations during the year ended December 31, 2019.
During the nine months ended September 30, 2020, the Company paid the Company’s CEO $27,256 towards the balance of the 2019 signing bonus. Total amount outstanding at September 30, 2020 and December 31, 2019 is $46,204 and $73,460, respectively.
The Company entered into additional promissory notes with a related party for $84,500 and repaid $45,000 of promissory notes in the nine months ended September 30, 2020, for a total of $357,500 outstanding.
See Notes 5, 6 and 12 for additional related party disclosure.
In January 2020, the Company issued 10,355 shares of common stock to a vendor as settlement for a liability totaling $7,532.
In February 2020, the Company issued 200,000 shares of common stock in conjunction with a twelve-month agreement for consulting services at a value of $102,000 or $0.51 per share. The value of the consulting services has been recorded as selling, general and administrative expenses in the Company’s statement of operations. The fair market value of the shares was determined based the on the Company’s closing price on the date of issuance.
In February 2020, the Company entered into a six- month consulting agreement with a third party. In conjunction with the agreement, the Company issued the third party 400,000500,000 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.
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$0.1638 per share. The warrant is fully vested upon issuance and expires May 1, 2025. Compensation expense of $37,149 has been recorded in selling, general and administrative expenses in the accompanying statement of operations for the nine months ended September 30, 2020. The Company utilizes the Black Scholes valuation model which relies on certain assumptions to estimate the warrant’s fair value. The assumptions used in the determination of the fair value of the warrant awarded are provided in the table below.
In June 2020, the Company received a total of $50,000 from an investor in exchange for 142,857 shares of common stock of the Company at a price of $0.35 per share.
In June 2020, the Company issued 100,000 shares of common stock and a warrant to purchase 250,000 shares of common stock in conjunction with a convertible promissory note (see Note 4).
The Company recorded stock compensation expense of $5,953 and $48,429 during the three months ended September 30, 2020 and 2019, respectively and $16,899 and $110,198 during the nine months ended September 30, 2020 and 2019, respectively. Stock-based compensation is included in selling, general, and administrative expense in the accompanying statements of operations. Stock-based compensation expense is based on awards ultimately expected to vest. Total unrecognized stock-based compensation cost related to unvested time-based stock options was $9,425 as of September 30, 2020 and is expected to be recognized over a weighted-average period of 12 months.
Number of shares | Weighted Average Exercise Price | Weighted Average Contractual term (years) | ||||||||||
Options outstanding at December 31, 2019 | 445,000 | - | ||||||||||
Granted | - | $ | - | |||||||||
Exercised | - | - | ||||||||||
Forfeited | $ | - | ||||||||||
Expired | - | - | ||||||||||
Options outstanding at September 30, 2020 | 445,000 | $ | 0.71 | 2.5 | ||||||||
Exercisable at September 30, 2020 | 360,000 | $ | 0.71 | 2.5 | ||||||||
Options exercisable and expected to vest at September 30, 2020 | 445,000 | $ | 0.71 | 2.5 |
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.
The Company has evaluated subsequent events that have occurred through the filing date, which is the date that the financial statements were available to be issued and determined that there were no subsequent events or transactions that required recognition or disclosure in the financial statements, except as disclosed below.
Pursuant to a previous financing commitment entered into September 28, 2020, received on October 1, 2020, the Company borrowed $108,000 in conjunction with an unsecured convertible promissory notesnote from an investor. Proceeds of $100,000 include an original issue discount of $8,000. The notes mature on September 28, 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 63% of market value. 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 $1.00 per share.63% of market value. Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest accrues at the rate of ten percent (10%) per annum, simple interest, in each case to the extent that the note and the principal amount and any unpaid accrued interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at the rate of 22% per year, simple interest, non-compounding, until paid. The note has a variable conversion price and the Company recorded an embedded derivative liability. The fair value of the liability totaled $182,670 at the date of issuance and has been recorded as a discount on the note. The fair value of the derivative liability as of the date of issuance was in excess of the note resulting in full discount of the note and a charge to interest expense. (see Note 6).
Pursuant to a financing commitment, on October 22, 2020, the Company entered into a Note Purchase Agreement (the “Agreement”) with a third party for the sale of a convertible promissory note in the principal amount of $128,000 at a purchase price of $128,000. The note matures on October 22, 2021. The lender has the right to convert the debt into fully paid and non- assessable shares of common stock at a price equal to 65% of the outstanding share price. Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest will accrue at the rate of ten percent (10%) per annum, simple interest, in each case to the extent that the note and the principal amount and any unpaid accrued interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at the rate of 22% per year, simple interest, non-compounding, until paid. The note has a variable conversion price and the Company recorded an embedded derivative liability. The fair value of the liability totaled $81,969 at the date of issuance and has been recorded as a discount on the note. (see Note 6).
Pursuant to a financing commitment, on November 3, 2020, the Company entered into a Note Purchase Agreement (the “Agreement”) with a third party for the sale of a convertible promissory note in the principal amount of $244,853 at a purchase price of $225,000. Proceeds of $225,000 include an original issue discount of $19,853. The note matures on November 3, 2021. The lender has the right to convert the debt into fully paid and non- assessable shares of common stock at a price of $0.50 per share.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.
In OctoberPursuant to a financing commitment, on December 1 2020, the Company receivedentered into a totalNote Purchase Agreement (the “Agreement”) with a third party for the sale of $35,000 from investorsa convertible promissory note in exchange for 70,000the principal amount of $172,800 at a purchase price of $160,000. Proceeds of $147,200 include an original issue discount of $12,800 and fees of $12,800. The note matures on December 1, 2021. The lender has the right to convert the debt into fully paid and non- assessable shares of common stock at a price equal to 70% of the outstanding share price. Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest will accrue at the rate of five percent (5%) per annum, simple interest, in each case to the extent that the note and the principal amount and any unpaid accrued interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at the rate of 22% per year, simple interest, non-compounding, until paid. The note has a variable conversion price and the Company recorded an embedded derivative liability. The fair value of the liability totaled $237,021 at the date of issuance and has been recorded as a discount on the note. The fair value of the derivative liability as of the date of issuance was in excess of the note resulting in full discount of the note and a charge to interest expense. (see Note 6).
In conjunction with the note the Company issued a warrant to purchase 135,000 shares of the Company’s common stock at an exercise price of $1.50 per share. The warrant expires on December 1, 2023. The fair value of the warrant of $190,144 has been recorded as a discount on the note. (see Note 9).
If the Company, at aany 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 $0.50 per share.shares issuable hereunder shall be increased accordingly.
On November 6,Pursuant to a financing commitment, on December 3, 2020, the Company issued 65,000entered 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 $0.91$0.50 per share, beginning 180 days after issuance. Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest will accrue at the rate of eight percent (8%) per annum, simple interest, in each case to the extent that the note and the principal amount and any unpaid accrued interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at the rate of 18% per year, simple interest, non-compounding, until paid. A beneficial conversion feature valued at $66,000 has been recorded as a discount on the note.
Pursuant to a financing commitment, on December 14, 2020, the Company entered into a Note Purchase Agreement (the “Agreement”) with a third party for the sale of a convertible promissory note in the principal amount of $110,000 at a purchase price of $105,000. The note matures on December 14, 2021. The lender has the right to convert the debt into fully paid and non- assessable shares of common stock at a price equal to the lower of $0.55 per share or at a price equal to 63% of the outstanding share price. Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest will accrue at the rate of ten percent (10%) per annum, simple interest, in each case to the extent that the note and the principal amount and any unpaid accrued interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at the rate of 22% per year, simple interest, non-compounding, until paid. The note has a variable conversion price and the Company recorded an embedded derivative liability. The fair value of the liability totaled $229,713 at the date of issuance and has been recorded as a discount on the note. The fair value of the derivative liability as of the date of issuance was in excess of the note resulting in full discount of the note and a charge to interest expense. (see Note 6).
Pursuant to a financing commitment, on February 8, 2021 the Company entered into a Note Purchase Agreement (the “Agreement”) with a third party for the sale of convertible promissory notes in the principal amount totaling $1,000,000 and at a purchase price of $950,000. The first closing occurred upon the execution of the material definitive agreement in the face amount of $500,000, for a purchase price of $475,000. The second closing is in the face amount of $250,000 for a purchase price of $237,500, which was received on March 5, 2021, and the third closing in the face amount of $250,000 for a purchase price of $237,500. The notes mature 1 year from issuance. The lender has the right to convert the debt into fully paid and non- assessable shares of common stock at a price equal to the lower of $0.40 per share or at a price equal to 70% of the outstanding share price. Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest will accrue at the rate of ten percent (10%) per annum, simple interest, in each case to the extent that the note and the principal amount and any unpaid accrued interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at the rate of 15% per year, simple interest, non-compounding, until paid. The note has a variable conversion price and the Company recorded an embedded derivative liability. The fair value of the liability totaled $691,234 at the date of issuance and has been recorded as a discount on the note. The fair value of the derivative liability as of the date of issuance was in excess of the note resulting in full discount of the note and a charge to interest expense. (see Note 6).
The fair value of the derivative liability is estimated using a Lattice pricing model with the following assumptions:
Market value of common stock | $ | 0.5678 | ||
Expected volatility | 254.6 | % | ||
Expected term (in years) | 1.0 | |||
Risk-free interest rate | 0.11 | % |
In conjunction with the note the Company issued a warrant to purchase 2,500,000 shares of the Company’s common stock at an exercise price of $0.40 per share. The warrant expires on February 8, 2026. The relative fair value of the warrant of $420,096 has been recorded as a discount on the note. (see Note 10).
If the Company, at any time while this warrant is outstanding, shall sell or grant any option to purchase, or sell or grant any right to re-price, or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or other disposition) any common stock or common stock equivalents entitling any person to acquire shares of common stock, at an effective price per share less than the then exercise price (such lower price, the “New Issuance Price”), then the exercise price shall be reduced and only reduced to equal the New Issuance Price and the number of shares issuable hereunder shall be increased accordingly.
The beneficial conversion features and derivatives are initially recorded as a discount to the debt and amortized using the effective interest method. For the three months ended March 31, 2021, $1,010,601 of debt discount amortization day one derivative loss and fair market value of warrants are recorded as interest expense. The remaining debt discount of $1,699,181 will be amortized in 2021 and 2022. Additional interest expense of $37,312 and $0 has been recorded during the three months ended March 31, 2021 and 2020, respectively, with a total of $58,747 which is included in accrued and other liabilities.
The company has 72,775,123 shares of common stock reserved in conjunction with its outstanding convertible promissory notes and warrants.
NOTE 5. | LONG-TERM DEBT |
Government Debt
In June 2020, the Company received a $150,000 economic injury disaster loan (“EIDL”). The loan accrues interest at a rate of 3.75% annually and is collateralized by all personal property and intangible assets of the Company. The loan has a 24-month moratorium on payments, after which monthly principal and interest payments of $731 will be made through the maturity date of June 2050.
Bank Debt
In September 2015, the Company entered into a credit agreement for a $700,000 term loan with a financial institution. Payment terms consist of monthly payments in arrears of $3,547 for the first year outstanding. The monthly payment then increases to $4,574 until the term loan matures on September 30, 2025, in which the remaining unpaid principal balance and accrued interest is due. The interest rate for the first year was 1.99% per annum and increased to 4.95% per annum for the remaining life of the term loan. The term loan is collateralized by a deed of trust in the office building. The proceeds were used to purchase a building for which the Company’s operations are located. The net principal balance outstanding on the term loan at March 31, 2021 and December 31, 2020 was $566,657 and $573,213, respectively. The term loan is personally guaranteed by the Company’s CEO.
In March 2020, the Company entered into an agreement with the financial institution to defer its monthly payments for three months through May 2020. Such payments and additional accrued interest have been deferred to the maturity date of the loan.
Related Party Notes Payable
The Company repaid $50,000 of promissory notes with a related party and significant shareholder, in the three months ended March 31, 2021, for a total of $282,500 outstanding. All notes mature at various times in 2020 and 2021. Interest will accrue at 10% per annum from the due date thereon until all principal is paid in full. Proceeds from the loans were used for operations. Interest expense totaled $2,837 and $0 for three months ended March 31, 2021 and 2020, respectively
The long-term debt agreements do not contain any financial covenants.
NOTE 6. | DERIVATIVE LIABILITIES |
The Company issued debts that consist of the issuance of convertible promissory notes with variable conversion provisions. The conversion terms of the convertible notes are variable based on certain factors, such as the future price of the Company’s common stock. The number of shares of common stock to be issued is based on the future price of the Company’s common stock. The number of shares of common stock issuable upon conversion of the promissory note is indeterminate. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion option and shares to be issued were recorded as derivative liabilities on the issuance date.
Based on the various convertible promissory notes described in Note 4, the fair value of applicable derivative liabilities on notes and the change in fair value of derivative liabilities are as follows for the three months ended March 31, 2021:
Derivative Liability - Convertible Promissory Notes | ||||
Balance as of December 31, 2020 | $ | 831,852 | ||
Conversion of convertible notes payable | (190,053 | ) | ||
Additions during the year | 974,931 | |||
Change in fair value | (14,798 | ) | ||
Balance as of March 31, 2021 | $ | 1,601,932 |
The fair value of the derivative liabilities – convertible promissory notes at March 31, 2021 is estimated using a Lattice pricing model with the following assumptions:
Market value of common stock | $ | 0.225 | ||
Expected volatility | 182.6-210.7 | |||
Expected term (in years) | .38-.95 | |||
Risk-free interest rate | 0.13-0.20 | % |
NOTE 7. | RELATED PARTY TRANSACTIONS |
During the three months ended March 31, 2021, the Company paid the Company’s CEO $20,978 towards the balance of the 2019 signing bonus. Total amount outstanding at March 31, 2021 and December 31, 2020 is $0 and $20,978, respectively.
In February 2021, the Company issued 1,100,000 shares of common stock to the Company’s CEO as compensation expense. (see Note 8)
The Company repaid $50,000 during the three months ended March 31, 2021 of related party notes payable.
NOTE 8. | STOCKHOLDERS’ DEFICIT |
In January 2020, the Company issued 10,355 shares of common stock to a vendor as settlement for a liability totaling $14,585 at $0.71 per share
In February 2020, the Company issued 200,000 shares of common stock in conjunction with a twelve-month agreement for financial advisory consulting services at a value of $102,000 or $0.51 per share. The value of the consulting services has been recorded as selling, general and administrative expenses in the Company’s statement of operations. The fair market value of the shares was determined based the on the Company’s closing price on the date of issuance.
In February 2020, the Company entered into a six- month agreement for financial advisory consulting services with a third party. In conjunction with the agreement, the Company issued the third party 400,000 shares of common stock at a value of $188,000 or $0.47 per share, with the option to issue an additional 900,000 shares at the Company’s discretion. The value of the consulting services has been recorded as selling, general and administrative expenses in the Company’s statement of operations. The fair market value of the shares was determined based the on the Company’s closing price on the date of issuance. In August 2020, the Company issued the 900,000 shares of common stock in conjunction with the consulting agreement at a value of $1,818,000 or $2.02 per share. The value of the compensation has been recorded in selling, general and administrative expenses in the Company’s statement of operations.
In February and March 2021, holders of convertible promissory notes converted principal and accrued interest totaling $190,050 into 1,019,113 shares of common stock.
In February 2021, the Company issued 1,100,000 shares of common stock to the Company’s CEO as compensation expense at a value of $604,890 or $0.5499 per share. The value of the compensation has been recorded in selling, general and administrative expenses in the Company’s statement of operations. The fair market value of the shares was determined based the on the Company’s closing price on the date of issuance.
In February 2021, the Company issued 1,084,120 shares of common stock in conjunction with various agreements for financial advisory consulting services for a value of $693,837 or $0.64 per share. The value of the compensation has been recorded in selling, general and administrative expenses in the Company’s statement of operations. The fair market value of the shares was determined based the on the Company’s closing price on the date of issuance.
NOTE 9. | STOCK OPTIONS AND WARRANTS |
In 2017, the Company’s Board of Directors approved the 2017 Employee and Consultant Stock Ownership Plan, (the “Plan”) as amended February 16, 2021. The Plan provides that the Board of Directors may grant restricted stock units, incentive stock options non-statutory stock options and common shares to officers, key employees and certain consultants and advisors to the Company up to a maximum of 10,000,000 shares. Stock options granted under the Plan have vesting terms determined by the administrator of the Plan. Restricted stock unit grant terms will be set by the administrator and at the discretion of the administrator, be settled in cash, shares, or a combination of both.
The Black-Scholes valuation model was utilized to estimate the fair value of the time-based options. No time-based options were granted during the three months ended March 31, 2021 or the year ended December 31, 2020.
The Company recorded pretax stock compensation expense of $0 and $5,265 during the three months ended March 31, 2021 and 2020, respectively. Stock-based compensation is included in selling, general, and administrative expense in the accompanying statements of operations. Stock-based compensation expense is based on awards ultimately expected to vest.
Number of shares | Weighted Average Exercise Price | Weighted Average Contractual term (years) | ||||||||||
Options outstanding at December 31, 2020 | 445,000 | $ | .71 | 1.5 | ||||||||
Granted | - | - | - | |||||||||
Exercised | - | - | - | |||||||||
Forfeited | - | - | - | |||||||||
Expired | - | - | - | |||||||||
Options outstanding at March 31, 2021 | 445,000 | $ | 0.71 | 1.3 | ||||||||
Exercisable at March 31, 2021 | 420,000 | $ | 0.71 | 1.3 | ||||||||
Options exercisable and expected to vest at March 31, 2021 | 445,000 | $ | 0.71 | 1.3 |
On February 8, 2021, the Company issued a warrant to purchase 2,500,000 shares of the Company’s common stock in conjunction with a convertible promissory note ( see Note 4) The warrant entitles the holder to purchase 2,500,000 shares of the Company’s common stock at an exercise price of $0.40 per share. The warrant expires on February 8, 2026.
The warrant qualified for equity accounting as the warrant did not fall within the scope of ASC Topic 480, Distinguishing Liabilities from Equity. The warrant was measured at fair value at the time of issuance and classified as equity.
The Company valued the warrant using the Monte Carlo pricing model and recorded the warrant as a reduction of the note included in the debt discount balance. The following table summarizes the assumptions used in the valuation model to determine the fair value of the warrant:
Fair Value of Common Share | $ | 0.225-0.47 | ||
Exercise Price | $ | 0.164-$0.40 | ||
Risk Free Rate | 0.41-1.74 | % | ||
Expected Life (Yrs.) | 4.86-5.0 | |||
Volatility | 147.4-154.0 | % |
The relative fair value of the warrant of $420,096 has been recorded as a discount on the note.
During the three months ended March 31, 2021, subsequent convertible promissory note conversions triggered the warrant reset feature, resulting in an increase in underlying shares of common stock to 6,097,561 from 2,500,000 and a change in exercise price to $0.164 per share. The reset was recorded as a reduction to retained earnings and in an increase to additional paid-in-capital of $1,211,350.
During the three months ended March 31, 2021, the subsequent issuance of convertible promissory notes with certain terms and convertible promissory note conversions triggered the warrant reset feature on certain previously issued warrants, resulting in an increase in underlying shares of common stock to 2,759,146 from 1,082,388 and a change in exercise price to $0.164 per share. The resets were recorded as a reduction to retained earnings and in an increase to additional paid-in-capital of $478,079.
The following table summarizes the information with respect to outstanding warrants to purchase common stock of the Company, all of which were exercisable at March 31, 2021:
Date Issued | Exercise Price | Number Outstanding | Expiration Date | |||||||
December 1, 2018 | $ | 0.71 | 100,000 | December 1, 2023 | ||||||
May 1, 2020 | $ | 0.52 | 100,000 | May 1, 2025 | ||||||
June 4, 2020 | $ | 0.164 | 1,524,390 | June 30, 2023 | ||||||
December 1, 2020 | $ | 0.164 | 1,234,756 | December 1, 2023 | ||||||
February 8, 2021 | $ | 0.164 | 6,097,561 | February 8, 2026 | ||||||
9,056,707 |
NOTE 10. | COMMITMENTS AND CONTINGENCIES |
Contingencies
The Company is subject to various loss contingencies and assessments arising in the normal course of the business, some of which relate to litigation, claims, property taxes and sales and use tax or goods and services tax assessments. The Company considers the likelihood of the loss or the incurrence of a liability, as well as its ability to reasonably estimate the amount of loss in determining loss contingencies and assessments. An estimated loss contingency or assessment is accrued when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Management regularly evaluates current information available to them to determine whether such accruals should be adjusted. Based on the information presently available, including discussion with counsel and other consultants, management believes that resolution of these matters will not have a material adverse effect on its business, results of operations, financial condition or cash flows.
NOTE 11. | SUBSEQUENT EVENTS |
The Company has evaluated subsequent events that have occurred through the date of this filing and determined that there were no subsequent events or transactions that required recognition or disclosure in the financial statements, except as disclosed below.
In April and May 2021, holders of convertible promissory notes converted principal and accrued interest totaling $273,179 into 4,268,283 shares of common stock.
In April 2021, the Company issued 50,000 shares of common stock in conjunction with a consulting agreement.agreement for strategic advisory services.
On November 9, 2020,In May 2021, the Company purchased and returned to treasury stock 87,849 sharesreceived proceeds of common stock for a purchase price$237,500 in conjunction with one of $36,413.its convertible promissory notes.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The statements contained in this report that are not statements of historical fact, including without limitation, statements containing the words “believes,” “expects,” “anticipates” and similar words, constitute forward-looking statements that are subject to a number of risks and uncertainties. From time to time we may make other forward-looking statements. Investors are cautioned that such forward-looking statements are subject to an inherent risk that actual results may materially differ as a result of many factors, including the risks discussed from time to time in this report, including the risks described under “Risk Factors” in any filings we have made with the SEC.
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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.
Background
The Company was formed in Nevada in August 30, 2002 as IntelSource Group, Inc. and began operations in 2003. In 2007, IntelSource Group, Inc. merged with ElectroMedical Technologies, LLC. The Company began acting as Electro Medical Technologies, LLC, an Arizona limited liability company on November 9, 2010 after the merger with ElectroMedical Technologies, LLC, a Nevada Company. The Company converted to a corporation in the State of Delaware on August 23, 2017.
Electromedical Technologies is a bioelectronics manufacturing and marketing company. We offer U.S. Food and Drug Administration (FDA) cleared medical devices for pain management.
Bioelectronics is a developing field of “electronic” medicine, which uses electrical impulses over the body’s neural circuitry to try to alleviate pain, without drugs. The human body is controlled by electrical signals sent through the nervous system, which can become distorted after accidents or as a result of disease. The field of bioelectronic medicine aims to safely correct irregularities in the nervous system by modifying the electrical language of the body related to pain relief.
Our mission is to improve global wellness for people suffering from various painful conditions by relieving chronic and acute pain using energy, frequency and vibration as an alternative to pharmaceuticals; and one day, read and modifies electrical signals passing along nerves in the body, to restore long-term health.
Additionally, we have a corporate goal to offer the public effective alternatives to addictive pain -relieving drugs, such as opioids. According to the Society of Actuaries, opioid overdose deaths are now the single largest factor slowing the growth in U.S. life expectancy and has led to stagnation or decreases in life expectancy three years in a row for the first time since 1915–1918, when the country was facing World War I and the Spanish flu pandemic. The U.S. Centers of Disease Control and Prevention (CDC) has reported that, from 1999 through 2017, nearly 400,000 have died from overdoses from prescription or illicit opioids. It is our aim to offer effective alternatives to pain management.
Results of Operations
Overview and Financial Condition
Going Concern
Since inception, the Company has incurred approximately $11.7 million of accumulated net losses. In addition, during the three months ended March 31, 2021, the Company used $327,237 in operations and had a working capital deficit of $1,826,511. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The Company expects to obtain funding through additional debt and equity placement offerings until it consistently achieves positive cash flows from operations. If the Company is unable to obtain additional funding, it may not be able to meet all of its obligations as they come due for the next twelve months. The continuing viability of the entity and its ability to continue as a going concern is dependent upon the entity being successful in its continuing efforts in growing its revenue base and/or accessing additional sources of capital, and/or selling assets.
As a result, there is significant uncertainty whether the entity will continue as a going concern and, therefore, whether it will realize its assets and settle its liabilities and commitments in the normal course of business and at the amounts stated in the financial statements.
Accordingly, no adjustments have been made to the financial statements relating to the recoverability and classification of the asset carrying amounts or the amount and classification of liabilities that might be necessary should the entity not continue as a going concern. At this time, management is of the opinion that no asset is likely to be realized for an amount less than the amount at which it is recorded in the financial statements as at March 31, 2021.
Management is endeavoring to commence revenue-generating operations. While priority is on generating cash from operations through the sale of the Company’s products, management is also seeking to raise additional working capital through various financing sources, including the sale of the Company’s equity and/or debt securities, which may not be available on commercially reasonable terms, if at all. If such financing is not available on satisfactory terms, we may be unable to continue our business as desired and our operating results will be adversely affected. In addition, any financing arrangement may have potentially adverse effects on us and/or our shareholders. Debt financing (if available and undertaken) will increase expenses, must be repaid regardless of operating results and may involve restrictions limiting our operating flexibility. If we issue equity securities to raise additional funds, the percentage ownership of our existing shareholders will be reduced and the new equity securities may have rights, preferences or privileges senior to those of the current holders of our shares of Common Stock.
The following table sets forth the audited results of our operations for the three months ended March 31, 2021and 2020.
2021 | 2020 | |||||||
Net Sales | $ | 166,440 | $ | 214,870 | ||||
Cost of goods sold: | 41,591 | 64,513 | ||||||
Gross profit | 124,849 | 150,357 | ||||||
Operating Expenses | 1,689,383 | 588,150 | ||||||
Loss from operations | (1,564,534 | ) | (437,793 | ) | ||||
Other expense | (995,850 | ) | (13,448 | ) | ||||
Net Loss | $ | (2,560,384 | ) | $ | (451,241 | ) |
Operating Results
January 1, 2021 through March 31, 2021 Compared to January 1, 2020 through March 31, 2020
Our sales totaled $166,440 for the year three months ended March 31, 2021 and $214,870 for the three months ended March 31, 2020. The decrease is primarily related to a decrease in units sold. In 2021, the COVID -19 pandemic had an impact on worldwide manufacturing and supply and affected our ability to replenish inventory. In addition, we were not able to attend trade shows.
Cost of sales and gross margins for the three months ended March 31, 2021 and for the three months ended March 31, 2020 were $41,591 and 75% and $64,513 and 70%, respectively. Our cost of sales consists of the cost of materials and distribution expenses. The increase in gross margin is primarily attributed to an increase in average selling price. Cost of sales and gross margins are affected by product mix as well as the mix in the level of sales between commissioned agents and distributors.
The following table sets forth the operating expenses for the three months ended March 31,2021 and 2020:
2021 | 2020 | Change | ||||||||||
Marketing | $ | 17,611 | $ | 17,650 | $ | (39 | ) | |||||
Commissions | $ | 40,974 | $ | 49,996 | $ | (9,022 | ) | |||||
Payroll related | $ | 752,008 | $ | 136,695 | $ | 615,313 | ||||||
Consulting and professional fees | $ | 828,648 | $ | 342,792 | $ | 485,856 | ||||||
Research and development | $ | 8,300 | $ | - | $ | 8,300 | ||||||
Other operating expenses | $ | 41,842 | $ | 41,017 | $ | 825 | ||||||
$ | 1,689,383 | $ | 588,150 | $ | 1,101,233 |
The following table sets forth the stock- based compensation expense included in the above operating expenses for three months ended March 31, 2021 and 2020:
2021 | 2020 | Change | ||||||||||
Marketing | $ | - | $ | - | $ | - | ||||||
Commissions | $ | - | $ | - | $ | - | ||||||
Payroll related | $ | 604,890 | $ | 2,262 | $ | 602,628 | ||||||
Consulting and professional fees | $ | 693,837 | $ | 293,003 | $ | 400,834 | ||||||
Research and development | $ | - | $ | $ | - | |||||||
Other operating expenses | $ | - | $ | - | $ | - | ||||||
$ | 1,298,727 | $ | 295,265 | $ | 1,003,462 |
Selling, general and administrative expenses consist primarily of payroll related expenses, commissions, consulting and professional fees, sales and marketing, research and development and other operating expenses. Selling, general and administrative expenses totaled $1,689,383 for the three months ended March 31, 2021 and $588,150 for the three months ended March 31, 2020 an increase of $1,101,233 or about 187%. The change is primarily due to increases in stock-based compensation expense of $1,003,462, consulting and professional fees of $85,000 and, research and development costs of $8,300. The increase in stock-based compensation expense for the three months ended March 31, 2021, includes $693,837 related to third party agreements for financial advisory services and $604,890 related to shares of common stock issued to the Company’s CEO as compensation.
The increase in consulting and professional fees relates primarily to costs associated with operating as a public company.
Other expense increased by $982,402 primarily due to an increase in interest expense of $1,045,354, partially offset by a decrease in value of derivative liabilities of $14,798 and $50,082 of forgiven debt. The increase interest expense includes $1,010,601 related to the amortization of debt discount and $37,312 accrued on the convertible promissory notes entered into beginning in June 2020.
As a result of the foregoing, we recorded a net loss of $2,560,384 for the three months ended March 31, 2021, compared to a net loss of $451,241 for the three months ended March 31, 2020. The increase in net loss is primarily attributed to the increase in selling, general and administrative expenses, increase in interest expense and decreased gross profit.
COVID-19 may impact our business.
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 areas in which we operate. While it is unknown how long these conditions will last and what the complete financial effect will be to the Company, COVID-19 may have an adverse effect on our business. While we are taking diligent steps to mitigate any possible disruptions to our business, we are unable to predict the extent or nature of these impacts, at this time, to our future financial condition and results of operations.
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following discussion and analysis should be read in conjunction with the unaudited condensed financial information and the notes thereto included herein, as well as the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and notes thereto contained in our Registration Statement on Form S-1/A-4 for the Year ended December 31, 2019, as filed on July 20, 2020. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under the caption “Cautionary Note Regarding Forward-Looking Statements” in this report, as well as under "Part I – Item 1A - Risk Factors" in our Form S-1/A-4 registration statement filed on July 20, 2020, and elsewhere in this Quarterly Report on Form 10-Q. These statements, like all statements in this report, speak only as of the date of this Quarterly Report on Form 10-Q (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments.
Overview and Financial Condition
Going Concern
The Company sustained continued operating losses during the years ended December 31, 2019 and 2018 and during the nine months ended September 30, 2020. The Company’s continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations to meet its obligations, in which it has not been successful, and/or obtaining additional financing from its shareholders or other sources, as may be required.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern; however, the above conditions raise substantial doubt about the Company’s ability to do so. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classifications of liabilities that may result, should the Company be unable to continue as a going concern.
Management is endeavoring to commence revenue-generating operations. While priority is on generating cash from operations through the sale of the Company’s products, management is also seeking to raise additional working capital through various financing sources, including the sale of the Company’s equity and/or debt securities, which may not be available on commercially reasonable terms, if at all. If such financing is not available on satisfactory terms, we may be unable to continue our business as desired and our operating results will be adversely affected. In addition, any financing arrangement may have potentially adverse effects on us and/or our shareholders. Debt financing (if available and undertaken) will increase expenses, must be repaid regardless of operating results and may involve restrictions limiting our operating flexibility. If we issue equity securities to raise additional funds, the percentage ownership of our existing shareholders will be reduced and the new equity securities may have rights, preferences or privileges senior to those of the current holders of our shares of Common Stock.
Results of Operations
The following table sets forth the results of our unaudited operational results for the three months ended September 30,
2020 | 2019 | |||||||
Net Sales | $ | 205,850 | $ | 270,128 | ||||
Cost of goods sold: | 57,383 | 75,202 | ||||||
Gross profit | 148,467 | 194,926 | ||||||
Operating Expenses | 2,243,377 | 373,402 | ||||||
Loss from operations | (2,094,910 | ) | (178,476 | ) | ||||
Other expense | (75,073 | ) | (12,154 | ) | ||||
Net Loss | $ | (2,169,983 | ) | $ | (190,630 | ) |
The following table sets forth the results of our unaudited operational results for the nine months ended September 30,
2020 | 2019 | |||||||
Net Sales | $ | 557,476 | $ | 625,020 | ||||
Cost of Goods Sold | 139,892 | 181,409 | ||||||
Gross profit | 417,584 | 443,611 | ||||||
Operating Expenses | 3,768,196 | 1,598,029 | ||||||
Loss from operations | (3,350,612 | ) | (1,154,418 | ) | ||||
Other expense | (110,867 | ) | (76,599 | ) | ||||
Net Loss | $ | (3,461,479 | ) | $ | (1,231,017 | ) |
Operating Results
July 1, 2020 through September 30, 2020 Compared to July 1, 2019 through September 30, 2019
Our sales totaled $205,850 for the three months ended September 30, 2020 and $270,128 for the three months ended September 30, 2019. The decrease of $64,278 or 24% is primarily related to a decrease in units sold, partially offset by an increase in average selling price. The Company’s inability to secure additional inventory contributed to the decline.
Cost of sales and gross margins for the three months ended September 30, 2020 and for the three months ended September 30, 2019 were $57,383 and 72% and $75,202 and 72%, respectively. Our cost of sales consists of the cost of materials and distribution expenses. Cost of sales and gross margins are affected by product mix as well as the mix in the level of sales between commissioned agents and distributors.
Selling, general and administrative expenses consist primarily of payroll, commissions, professional fees, sales and marketing, research and development and other operating expenses. Selling, general and administrative expenses totaled $2,243,377 for the three months ended September 30, 2020 and $373,402 for the three months ended September 30, 2019, an increase of $1,869,975 or 500%. The change is primarily due an increase in stock-based compensation expense of $1,775,524, consulting and professional fees of $121,899, and web related expenses of $15,500, partially offset by a decrease in commissions of $48,998 and payroll related expenses of $14,009.Stock-based compensation expense in the three months ended September 30, 2020 included $1,818,000 related to shares issued to a third party for services provided in conjunction with a consulting agreement. The increase in consulting and professional fees relates primarily to costs associated with operating as a public company. The decrease in commissions is related to a decrease in sales as well as a promotion in the 2019 period that did not occur in 2020.
Interest expense totaled $52,658 for the three months ended September 30, 2020 as compared to $10,601 for the three months ended September 30, 2019. The increase in interest expense relates primarily to interest incurred in conjunction with the convertible notes entered into during 2020. The Company also recorded $22,415 as an adjustment to the fair value of the derivative liabilities related to convertible promissory notes in 2020.
As a result of the foregoing, we recorded a net loss of $2,169,983 for the three months ended September 30, 2020, compared to a net loss of $190,630 for the three months ended September 30, 2019. The increase in net loss is primarily attributed to the increase in selling, general and administrative expenses, decreased gross profit and increase in interest expense.
January 1, 2020 through September 30, 2020 Compared to January 1, 2019 through September 30, 2019
Our sales totaled $557,476 for the nine months ended September 30, 2020 and $625,020 for the nine months ended September 30, 2019. The decrease is primarily related to a decrease in units sold.
Cost of sales and gross margins for the nine months ended September 30, 2020 and for the nine months ended September 30, 2019 were $139,892 and 75% and $181,409 and 71%, respectively. Our cost of sales consists of the cost of materials and distribution expenses. The increase in gross margin is primarily attributed to an increase in average selling price including pricing to certain distributors and the release and sale of previously written off inventory. Cost of sales and gross margins are affected by product mix as well as the mix in the level of sales between commissioned agents and distributors.
Selling, general and administrative expenses consist primarily of payroll, commissions, professional fees, sales and marketing, research and development and other operating expenses. Selling, general and administrative expenses totaled $3,768,196 for the nine months ended September 30, 2020 and $1,598,029 for the nine months ended September 30, 2019, an increase of $2,170,167 or about 136%. The change is primarily due to increases in stock-based compensation expense of $2,021,925, payroll related expenses of $44,791 and consulting and professional fees of $170,726, partially offset by put-option financing costs of $75,387 and commissions of $38,140. Stock-based compensation expense in the nine months ended September 30, 2020 includes $600,000 related to shares issued to an employee for services rendered and $2,154,192,000 related to third party consulting agreements. Stock-based compensation expense in the nine months ended September 30, 2019 includes $492,563 related to the sale by the Company’s CEO of 693,750 shares of common stock to certain employees at par value and $239,438 related to third party consulting agreements. The increase in payroll related expenses in the nine months ended September 30, 2020 is primarily related to the Company CEO’s employment agreement entered into in October 2019, partially offset by a decrease in medical insurance premiums and expenses related to a 2019 termination. The increase in consulting and professional fees relates primarily to costs associated with operating as a public company. The decrease in commissions is related to a decrease in sales as well as a promotion in the 2019 period that did not occur in 2020.
As a result of the foregoing, we recorded a net loss of $3,461,479 for the nine months ended September 30, 2020, compared to a net loss of $1,231,017 for the nine months ended September 30, 2019. The increase in net loss is primarily attributed to the increase in selling, general and administrative expenses, decreased gross profit and interest expense, partially offset by the change in fair value of the Kiss Liability-related party.
Liquidity and Capital Resources
During the ninethree months ended September 30,March 31, 2021, our cash and cash equivalents increased by $315,861 reflecting net proceeds from financing activities of $643,098 partially offset by cash used in operations of $327,237. At March 31, 2021 the Company had a working capital deficit of $1,826,511 and cash on hand of $580,774. Working capital deficit totaled $224,579 excluding derivative liabilities – convertible notes-payable of $1,601,932. During the three months ended March 31, 2020, our cash and cash equivalents increased by $85,477$38,881, reflecting net proceeds fromcash provided by operations of $699 and cash provided by financing activities of $881,221, partially offset by cash used in operations of $795,644. At September 30, 2020, the Company had a working capital deficit of $997,472 and cash on hand of $85,477.$38,182.
Operating Activities
Cash flows used in operating activities totaled $327,237 for the three months ended March 31, 2021 as compared to cash flows provided of $699 for the three months ended March 31, 2020. The increase in cash flows used in operating activities is primarily the result of an increase in inventory purchases, a reduction in accounts payable and an increase in the loss from operations impacted by increased costs related to public Company operations including costs associated with the Company’s S-1 filing, theand a decrease in gross profit and increased interest expense.profit.
Financing Activities
Cash flows provided fromby financing activities totaled $881,121$643,098 for the ninethree months ended September 30, 2020March 31, 2021 as compared to $187,547$38,182 for the ninethree months ended September 30, 2019.March 31,2020. The cash flows provided in the 20202021 period are primarily the result of the following cash inflows :
$665,000$712,500 in net proceeds from convertible promissory notes
$155,900 in net proceeds from government debt
$39,500 in net proceeds from PPP loan
$24,500 in net proceeds from related party loans
$50,000 for the issuance of common stock
These cash inflows were partially offset by debt repayments totaling $53,779$62,846.
The detailsIn April and May 2021, holders of the convertible promissory notes are as follows:converted principal and accrued interest totaling $273,179 into 4,268,283 shares of common stock.
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.
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
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.
In August 2020, the Company borrowed $103,000 in conjunction with unsecured convertible promissory notes from an investor. Proceeds of $100,000 include an original issue discount of $3,000.
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.
In September 2020, the Company borrowed $78,000 in conjunction with unsecured convertible promissory notes from an investor. Proceeds of $75,000 include an original issue discount of $3,000.
In conjunction with the note issued in June 2020,April 2021, the Company issued 100,00050,000 shares of common stock to the Investor as well as a warrant to purchase 250,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The warrant expires on June 30, 2023.
From October 1, 2020 through November 10, 2020, the Company entered into convertible notes totaling $480,853 with net proceeds of $453,000.
In October 2020, the Company received a total of $35,000 from investors in exchange for 70,000 shares of common stock of the Company at a price of $0.50 per share.
On November 6, 2020, the Company issued 65,000 shares of common stock, at a price of $0.91 per share, in conjunction with a consulting agreement.agreement for strategic advisory services.
On November 9, 2020,In May 2021, the Company purchased and returned to treasury stock 87,849 sharesreceived proceeds of common stock for a purchase price$237,500 in conjunction with one of $36,413.
its convertible promissory notes.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.
ITEM 4.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Management is responsible for establishing and maintaining adequate disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’sSEC's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely and reliable financial reporting and the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America.
As of the quarter ended September 30, 2020,March 31, 2021, our principal executive officer and principal financial officer completed an assessment of the effectiveness of our disclosure controls and procedures, to determine the existence of any material weaknesses or significant deficiencies. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’sregistrant's financial reporting.
Based on this evaluation, the Company’sCompany's management concluded its internal controls over financial reporting were not effective as of September 30, 2020.March 31, 2021. The ineffectiveness of the Company’sCompany's internal control over financial reporting was due to the following identified material weaknesses and significant deficiencies:
Material Weakness
(1) We lack organizational controls designed to allow us to gather, organize, process, maintain and provide our auditor timely documentation concerning our financial records. ThisManagement identified the following material weakness causes us to not be able to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with US GAAP, and effectively close our books in a timely fashion and report to the Commission consistent with its rules and forms.weaknesses:
Significant Deficiency
(a) We• we do not have an Audit Committee – While not being legally obligated to have an Audit Committee, it is the management’s view that such a committee, including a financial expert board member, is an utmost important entity level control overof the Company’s financial statement.statements. Currently the Board of Directors acts in the capacity of the Audit Committee and does not include a member that is considered to be independent of management to provide the necessary oversight over management’s activities.
(b) We• we have not performed a risk assessment and mapped our processes to control objectives.
• we have not implemented comprehensive entity-level internal controls.
• we have not implemented adequate system and manual controls; and
• we do not have procedures in place to update our disclosures to include relevant accounting standards updates.sufficient segregation of duties.
Changes in Internal Control over Financial Reporting.
Our management will continue to monitor and evaluate the designation, implementation and effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis and is committed to taking further action and implementing additional enhancements or improvements, as necessary.
There are presently no material pending legal proceedings to which the Company, any executive officer, or any owner of record or beneficially of more than five percent of any class of voting securities is a party, or as to which any of its property is subject, and no such proceedings are known to the Company to be threatened or contemplated against it.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On November 6, 2020 weIn February and March 2017, the Company executed a promotion whereby distributors who made purchases during the promotional period would receive credits towards either future purchases of product through September 1, 2017 or shares of stock. Credits totaling $173,955 were earned by such distributors of which $1,010 had been applied against purchases of product. The remaining credit of $172,945 would be satisfied in shares of the Company’s common stock. As of and for the year ended December 31, 2017, an accrual for $170,930 of the amount of the net credits has been recorded as marketing expense in the statement of operations as well as within accrued liabilities on the accompanying balance sheet. The Company recorded the amount as marketing expense as the promotion was provided directly to distributors rather than to end users. In 2018, the Company issued 65,000 restricted243,584 common shares to 25 unaffiliated shareholders earned in exchange for consulting services.the 2017 promotional program. The sale wasissuances were made in reliance onupon the exemption from registration provided by Section 4.24(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. The distributors were “accredited investors” and/or “sophisticated investors” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning their qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to the distributors full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. The distributors acquired the restricted common stock for their own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The beneficial ownerrestricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On December 31, 2017, the Company issued 15,000,000 common shares to Matthew Wolfson (“Wolfson”) for services valued at $697,984. Two million were registered in the Company’s S-1 made effective August 6, 2020. The issuance to Wolfson was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Wolfson was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning his qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Wolfson full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Wolfson acquired the restricted common stock for his own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On September 19, 2018, the Company issued 5,000 common shares to Body Tone, a sole proprietorship (“Body Tone”) for $5,000. The issuance to Body Tone was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Body Tone was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning its respective qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to the beneficial ownerBody Tone full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. The beneficial ownerBody Tone acquired the restricted common stock for its own account, for investment purposes and not with a view to public resale or distribution thereof.thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On October 31, 2018, the Company issued 100,000 common shares to Gene Taubman (“Taubman”) for $100,000. These shares were registered in the Company’s S-1 registration statement made effective August 6, 2020. The issuance to Taubman was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Taubman was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning his qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Taubman full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Taubman acquired the restricted common stock for his own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On November 29, 2018, the Company issued 247,565 common shares to EBI (“EBI”) as a settlement for debt valued at 175,771. The issuance to EBI was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. EBI was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning its qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to EBI full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. EBI acquired the restricted common stock for its own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On January 24, 2019, the Company issued 28,169 common shares to Robert L. Hymers, III (“Hymers”) for $20,000. These shares were registered in the Company’s S-1 registration statement made effective August 6, 2020. The issuance to Hymers was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Hymers was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning his qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Hymers full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Hymers acquired the restricted common stock for his own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On February 7, 2019, the Company issued 20,000 common shares to Chester W. Hedderman (“Hedderman”) for $20,000. These shares were registered in the Company’s S-1 registration statement made effective August 6, 2020. The issuance to Hedderman was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Hedderman was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning his qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Hedderman full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Hedderman acquired the restricted common stock for his own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On February 12, 2019, the Company sold 150,000 common shares to Robert L. Hymers, III (“Hymers”) for services valued at $106,500. These shares were registered in the Company’s S-1 registration statement made effective August 6, 2020. The issuance to Hymers was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Hymers was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning his qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Hymers full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Hymers acquired the restricted common stock for his own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On February 28, 2019, the Company sold 21,126 common shares to Robert L. Hymers, III (“Hymers”) for 15,000. These shares were registered in the Company’s S-1 registration statement made effective August 6, 2020.The issuance to Hymers was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Hymers was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning his qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Hymers full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Hymers acquired the restricted common stock for his own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On March 27, 2019, the Company sold 35,211 common shares to James Hancock (“Hancock”) for $25,000. These shares were registered in the Company’s S-1 registration statement made effective August 6, 2020. The issuance to Hancock was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Hancock was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning his qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Hancock full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Hancock acquired the restricted common stock for his own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On June 28, 2019, the Company sold 43,461 common shares to Robert L. Hymers, III (“Hymers”) for services valued at $30,857. These shares were registered in the Company’s S-1 registration statement made effective August 6, 2020. The issuance to Hymers was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Hymers was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning his qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Hymers full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Hymers acquired the restricted common stock for his own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On July 1, 2019, the Company sold 42,253 common shares to Robert L. Hymers, III (“Hymers”) for $30,000. These shares were registered in the Company’s S-1 registration statement made effective August 6, 2020.The issuance to Hymers was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Hymers was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning his qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Hymers full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Hymers acquired the restricted common stock for his own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On July 1, 2019, the Company sold 10,000 shares to PYP Enterprises (“PYP”) for services valued at $7,100. These shares were registered in the Company’s S-1 registration statement made effective August 6, 2020. The issuance to PYP was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. PYP was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning its qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to PYP full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. PYP acquired the restricted common stock for its own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On July 1, 2019, the Company sold 10,000 common shares to Brenda Andrews (“Andrews”) for services valued at $7,100. These shares were registered in the Company’s S-1 registration statement made effective August 6, 2020. The issuance to Andrews was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Andrews was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning her qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Andrews full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Andrews acquired the restricted common stock for her own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On October 11, 2019, the Company sold 64,215 common shares to Nikolai Ogorodikov (“Ogorodikov”) for conversion of a note and accrued interest. These shares were registered in the Company’s S-1 registration statement made effective August 6, 2020. The issuance to Ogorodikov was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Ogorodikov was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning his qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Ogorodikov full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Ogorodikov acquired the restricted common stock for his own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On October 24, 2019, the Company sold 39,363 common shares to Ben and Carol Howden (“Howden”) for conversion of a note and accrued interest. These shares were registered in the Company’s S-1 registration statement made effective August 6, 2020. The issuance to Howden was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Howden was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning their qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Howden full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Howden acquired the restricted common stock for their own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On October 30, 2019, the Company sold 28,169 common shares to Eyelyn Easson (“Easson”) for settlement of a liability. These shares were registered in the Company’s S-1 registration statement made effective August 6, 2020. The issuance to Easson was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Easson was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning her qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Easson full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Easson acquired the restricted common stock for her own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On November 1, 2019, the Company sold 1,000,000 common shares to Donald Steinberg (“Steinberg”) for conversion of KISS note. These shares were registered in the Company’s S-1 registration statement made effective August 6, 2020. The issuance to Steinberg was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Steinberg was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning his qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Steinberg full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Steinberg acquired the restricted common stock for his own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On January 23, 2020, the Company sold 10,355 common shares to Tim Manning (“Manning”) settlement of a liability. These shares were registered in the Company’s S-1 registration statement made effective August 6, 2020. The issuance to Manning was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Manning was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning his qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Manning full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Manning acquired the restricted common stock for his own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On February 11, 2020, the Company sold 200,000 common shares to Robert L. Hymers, III (“Hymers”) for services valued at $102,000. These shares were registered in the Company’s S-1 registration statement made effective August 6, 2020. The issuance to Hymers was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Hymers was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning his qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Hymers full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Hymers acquired the restricted common stock for his own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On February 27, 2020, the Company sold 400,000 common shares to RedStone Consultants (“RedStone”) for services valued at $188,000. The issuance to RedStone was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. RedStone was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning its qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to RedStone full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. RedStone acquired the restricted common stock for its own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On June 4, 2020, the Company sold 100,000 common shares to Vista Capital (“Vista”) as original issue discount on debt valued at $51,000. The issuance to Vista was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Vista was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning its qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Vista full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Vista acquired the restricted common stock for its own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On June 15, 2020, the Company sold 142,857 common shares to Pro Active Capital (“Pro Active”) for $50,000. The issuance to Pro Active was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Pro Active was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning its qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Pro Active full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Pro Active acquired the restricted common stock for its own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On November 3, 2020, the Company sold 65,000 common shares to PCG Advisory for services valued at $55,900. The issuance to PCG was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. PCG was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning its qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to PCG full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. PCG acquired the restricted common stock for its own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On December 14, 2020 Vista Capital Investments, LLC converted is promissory note of unpaid principal and accrued interest $118,800 in 339,429 shares of common stock. The issuance to Vista was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Vista was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning its qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Vista full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Vista acquired the restricted common stock for its own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On February 18, 2021, Redstart Holdings Corp. converted $30,000 of unpaid principal into 112,824 common shares from a convertible note. The issuance to Redstart was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Redstart was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning its qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Redstart full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Redstart acquired the restricted common stock for its own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On February 22, 2021, Redstart Holdings Corp. converted $35,000 of unpaid principal into 145,833 common shares from a convertible note. The issuance to Redstart was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Redstart was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning its qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Redstart full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Redstart acquired the restricted common stock for its own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On March 9, 2021, Redstart Holdings Corp. converted $15,000 of unpaid principal into 88,600 common shares from a convertible note dated August 11, 2020. The issuance to Redstart was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Redstart was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning its qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Redstart full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Redstart acquired the restricted common stock for its own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On March 10, 2021, Redstart Holdings Corp. converted $23,000 of unpaid principal and $5,150 of accrued and unpaid interest into 171,856 common shares from a convertible note dated August 11, 2020. The issuance to Redstart was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Redstart was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning its qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Redstart full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Redstart acquired the restricted common stock for its own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On March 15, 2021, Redstart Holdings Corp. converted $25,000 of unpaid principal into 152,625 common shares from a convertible note dated September 8, 2020. The issuance to Redstart was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Redstart was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning its qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Redstart full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Redstart acquired the restricted common stock for its own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On March 18, 2021, Redstart Holdings Corp. converted $53,000 of unpaid principal and $3,900 of accrued and unpaid interest into 347,375 common shares from a convertible note dated September 8, 2020. The issuance to Redstart was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Redstart was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning its qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Redstart full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Redstart acquired the restricted common stock for its own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On April 1, 2021, JSJ Investments, Inc. converted $30,000 of unpaid principal into 238,095 common shares from a convertible note. The issuance to JSJ was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. JSJ was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning its qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to JSJ full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. JSJ acquired the restricted common stock for its own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On April 8, 2021, JSJ Investments, Inc. converted $40,000 of unpaid principal into 361,572 common shares from a convertible note. The issuance to JSJ was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. JSJ was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning its qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to JSJ full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. JSJ acquired the restricted common stock for its own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On April 28, 2021, JSJ Investments, Inc. converted $38,000 of unpaid principal and $5,795.07 in accrued interest into 639,539 common shares from a convertible note dated September 28, 2020. The issuance to JSJ was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. JSJ was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning its qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to JSJ full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. JSJ acquired the restricted common stock for its own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On April 28, 2021, Redstart Holdings Corp. converted $30,000 of unpaid principal into 373,134 common shares from a convertible note dated October 22, 2020. The issuance to Redstart was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Redstart was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning its qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Redstart full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Redstart acquired the restricted common stock for its own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On May 6, 2021, Redstart Holdings Corp. converted $20,000 of unpaid principal into 385,356 common shares from a convertible note dated October 22, 2020. The issuance to Redstart was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Redstart was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning its qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Redstart full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Redstart acquired the restricted common stock for its own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
On May 7, 2021, Redstart Holdings Corp. converted $35,000 of unpaid principal into 674,374 common shares from a convertible note dated October 22, 2020. The issuance to Redstart was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D promulgated thereunder, with respect to the issuance of the restricted stock. Redstart was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning its qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to Redstart full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. Redstart acquired the restricted common stock for its own account, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares cannot be sold unless pursuant to an effective registration statement by the Company, or by an exemption from registration requirements of Section 5 of the Securities Act—the existence of any such exemption subject to legal review and approval by the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
None.
The following exhibits are included as part of this report:
*Included Herewith
**Incorporated by Reference from Registrant’s Form S-1/A filed July 20, 2020.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 16, 2020May 14, 2021
ELECTROMEDICAL TECHNOLOGIES INC. | ||
By: | /s/ Matthew Wolfson | |
Matthew Wolfson | ||
President & Chief Executive Officer | ||
(Principal Executive Officer) | ||
By: | /s/ Matthew Wolfson | |
Matthew Wolfson | ||
Chief Financial Officer | ||
(Principal Financial and Accounting Officer) |