TRUTANKLESS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the six months ended | For the quarter ended March 31, |
| June 30, 2019 | | June 30, 2018 | 2020 | | 2019 |
Cash Flows from Operating Activities | | | | | | |
Net loss | $ | (2,382,823) | | $ | (1,116,230) | $ | (3,502,149) | | $ | (1,134,829) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | | | | |
Shares issued for services | | 505,325 | | 82,749 | | 1,300,000 | | | 450,000 |
Loss on change in derivative liability | | | 501,314 | | | 4,609 |
Rescission and retirement of shares for services | | | (97,380) | | | - |
Loss on extinguishment of notes payable | | | 1,965,284 | | | - |
Depreciation and amortization | | 616 | | 2,880 | | 142 | | | - |
Non cash operating lease expense | | 6,621 | | - | |
Loss on settlement of notes payable | | 126,813 | | - | |
Non-cash operating lease expense | | | 4,061 | | | - |
Amortization of debt discount | | 253,313 | | 154,583 | | 469,009 | | | 122,723 |
Changes in assets and liabilities | | | | | | | | | |
Accounts receivable | | 24,531 | | (115,988) | | (40,561) | | | (117,324) |
Inventory | | 45,391 | | 127,556 | | 70,272 | | | 2,955 |
Prepaid expenses | | 96,654 | | (16,095) | | (957,026) | | | 25,525 |
Customer deposit | | 900 | | - | | - | | | (600) |
Accounts payable and accrued liabilities | | 74,076 | | 142,029 | |
Accounts payable | | | (197,547) | | | (68,071) |
Lease liability | | | (3,518) | | | (2,068) |
Interest payable - related party | | (5,269) | | | - | | 142,029 | | | (7,420) |
Net cash used in operating activities | | (1,253,852) | | | (738,516) | | (346,070) | | | (724,500) |
| | | | | | | | | | |
Cash Flows from Investing Activities: | | | | | | | | | |
Purchase of fixed assets | | - | | | (892) | |
Net cash used in investing activities | | - | | | (892) | | - | | | - |
| | | | | | | | | | |
Cash Flows from Financing Activities: | | | | | | | | | |
Advances | | 22,177 | | - | | - | | | (2,823) |
Lease liability | | (8,122) | | - | |
Proceeds from convertible notes payable | | 112,500 | | 75,000 | | 12,000 | | | 112,500 |
Repayments of convertible notes payable | | (4,800) | | (80,000) | | (12,000) | | | (1,200) |
Proceeds from notes payable | | 137,000 | | 225,000 | | 231,783 | | | 137,000 |
Repayments from notes payable | | | (18,550) | | | - |
Repayments from notes payable - related party | | (30,000) | | - | | - | | | (30,000) |
Repayments on line of credit - related party | | - | | (4,791) | |
Proceeds from sale of common stock, net of offering costs | | 1,157,250 | | | 510,000 | | 175,000 | | | 694,500 |
Net cash provided by financing activities | | 1,386,005 | | | 725,209 | | 388,233 | | | 909,977 |
| | | | | | | | | | |
Net increase in cash | | 132,153 | | | (14,199) | | 42,163 | | | 185,477 |
| | | | | | | | | |
Cash, beginning of period | | 9,668 | | | 78,599 | | 4,342 | | | 9,668 |
| | | | | | |
Cash, end of period | $ | 141,821 | | $ | 64,400 | $ | 46,505 | | $ | 195,145 |
| | | | | | | | | |
Supplemental disclosure of cash flow information | | | | | | | | | |
Cash paid for interest | $ | 11,250 | | $ | 13,700 | $ | 198,270 | | $ | 11,250 |
Cash paid for taxes | $ | - | | $ | - | $ | - | | $ | - |
| | | | | | | | | |
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | | | | | | | |
Recognition of right to use asset and liability | $ | 64,978 | | $ | - | |
Recognition of right of use asset and liability | | $ | - | | $ | 64,978 |
Reclassification of notes payable to convertible notes payable | $ | 100,000 | | $ | - | $ | - | | $ | 100,000 |
Settlement of notes payable and accrued interest for stock payable | $ | 162,904 | | $ | - | |
Convertibles notes and accrued interest settled with stock | | $ | 400,000 | | $ | - |
SeeThe accompanying notes toare an integral part of these consolidated financial statements.
6
TRUTANKLESS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019MARCH 31, 2020
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The Company was incorporated on March 7, 2008 under the laws of the State of Nevada, as Alcantara Brands Corporation. On October 5, 2010, the Company amended its articles of incorporation and changed its name to Bollente Companies, Inc. On June 4, 2018, the Company amended its articles of incorporation and changed its name to Trutankless, Inc.
Nature of operations
The Company is involved in sales, marketing, research and development of a new high quality, whole-house, smart electric tankless water heater that is more energy efficient than conventional products. Management anticipates the Company's trutankless water heater, with Wi-Fi capability and Trutankless' proprietary apps offered in the iOS and Android store, will augment existing products in the home automation space.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Certain information and note disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in the consolidated financial statements for the sixthree months ended June 30, 2019March 31, 2020 should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Form 10-K for the Company’s fiscal year ended December 31, 2018,2019, as filed with the SEC.
The consolidated balance sheet as of December 31, 2018,2019, included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP.
The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the year ending December 31, 2019.2020.
The consolidated financial statements include the accounts of Trutankless, Inc. and its wholly owned subsidiaries. On May 16, 2010, the Company acquired 100% of the outstanding stock of Bollente, Inc. On the date of acquisition,Inc and Bollente International, Inc. was 2.78% owned and controlled 100% by Robertson J. Orr, a majority shareholder and officer and director of Trutankless, Inc. and the acquisition was accounted for by means of a pooling of the entities from the date of inception of Trutankless, Inc. on March 7, 2008 because the entities were under common control. All significant inter-company transactions and balances have been eliminated
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operationseliminated.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ significantly from those estimates.
Cash For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. The carrying value of these investments approximates fair value.
7
Website
The Company capitalizes the costs associated with the development of the Company’s website pursuant to ASC Topic 350. Other costs related to the maintenance of the website are expensed as incurred. Amortization is provided over the estimated useful lives of 3 years using the straight-line method for financial statement purposes. The Company plans to commence amortization upon completion and release of the Company’s fully operational website.
Stock-based compensation
The Company follows ASC 718-10, "Stock Compensation", which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. ASC 718-10 is a revision to SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and its related implementation guidance. ASC 718-10 requires measurement of the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized.
7
Earnings per share
The Company follows ASC Topic 260 to account for the earnings per share. Basic earnings per common share (“EPS”) calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding. During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation.
Inventory
Inventories are stated at the lower of cost (average cost) or market (net realizable value).
Revenue recognition
We recognize revenue in accordance with generally accepted accounting principles as outlined in the Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue From Contracts with Customers, which requires that five basic criteria be met before revenue can be recognized: (i) identify the contract with the customer; (ii) identity the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price; and (v) recognize revenue when or as the entity satisfied a performance obligation.
Revenue recognition occurs at the time product is shipped to customers, when control transfers to customers, provided there are no material remaining performance obligations required of the Company or any matters of customer acceptance. We only record revenue when collectability is reasonably assured.probable.
Fair value of financial instruments
The Company measures fair value in accordance with ASC 820 - Fair Value Measurements. ASC 820 defines fair value estimates discussed herein are based upon certain market assumptions and pertinent information availableestablishes a three-level valuation hierarchy for disclosures of fair value measurements. ASC 820 establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820 establishes a fair value hierarchy which prioritizes the inputs to management asvaluation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of June 30, 2019. The respective carryingfair value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash and accounts payable. Fair values were assumed to approximate carrying values for cash and payables because they are short term in nature and their carrying amounts approximate fair values or they are payable on demand.hierarchy defined by ASC 820 are:
Level 1: The preferred inputs to valuation efforts1 - Inputs are “quotedunadjusted, quoted prices in active markets for identical assets or liabilities” with at the caveat that the reporting entity must have access to that market. Information at this level is based on direct observations of transactions involving the same assets and liabilities, not assumptions, and thus offers superior reliability. However, relatively few items, especially physical assets, actually trade in active markets.measurement date.
Level 2: FASB acknowledged that active markets2 - Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for identical assetsthe asset or liability through correlation with market data at the measurement date and liabilities are relatively uncommon and, even when they do exist, they may be too thin to provide reliable information. To deal with this shortagefor the duration of direct data, the board provided a second level of inputs that can be applied in three situations.instrument’s anticipated life.
Level 3: If inputs from levels 1 and 2 are not available, FASB acknowledges that fair value measures3 - Inputs reflect management’s best estimate of many assets and liabilities are less precise. The board describes Level 3 inputs as “unobservable,” and limits theirwhat market participants would use by saying they “shall be used to measure fair value to the extent that observable inputs are not available.” This category allows “for situations in which there is little, if any, market activity forpricing the asset or liability at the measurement date”.date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Valuation of instruments includes unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
As defined by ASC 820, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale, which was further clarified as the price that would be received to sell an asset or paid to transfer a liability (“an exit price”) in an orderly transaction between market participants at the measurement date.
The reported fair values for financial instruments that use Level 2 and Level 3 inputs to determine fair value are based on a variety of factors and assumptions. Accordingly, certain fair values may not represent actual values of the Company’s financial instruments that could have been realized as of March 31, 2020 or that will be recognized in the future, and do not include expenses that could be incurred in an actual settlement. The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts receivable, receivables from related parties, prepaid expenses and other, accounts payable, accrued liabilities, and related party and third-party notes payables approximate fair value due to their relatively short maturities. The Company’s notes payable to related parties approximates the fair value of such instrument based upon management’s best estimate of terms that would be available to the Company for similar financial arrangements at March 31, 2020 and December 31, 2019.
8
Earlier inFinancial assets and liabilities measured at fair value on a recurring basis are summarized below as of March 31, 2020:
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total |
Liabilities | | | | | | | | | | | | |
Derivative Financial Instruments | | $ | - | | $ | - | | $ | 1,327,828 | | $ | 1,327,828 |
As of March 31, 2020, the standard, FASB explains that “observable inputs” are gathered from sources other than the reporting companyCompany’s stock price was $0.19, risk-free discount rate of 0.15% and that they are expected to reflect assumptions made by market participants.volatility of 263.5%
Recent Accounting PronouncementsThe following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial instruments, measured at fair value on a recurring basis using significant unobservable inputs:
| | Amount |
Balance December 31, 2019 | | $ | 613,716 |
Debt discount originated from derivative liabilities | | | 124,037 |
Financing cost recorded | | | 88,761 |
Change in fair market value of derivative liabilities | | | 501,314 |
Balance March 31, 2020 | | $ | 1,327,828 |
Financial assets and liabilities measured at fair value on a recurring basis are summarized below as of December 31, 2019:
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total |
Liabilities | | | | | | | | | | | | |
Derivative Financial Instruments | | $ | - | | $ | - | | $ | 613,716 | | $ | 613,716 |
As of December 31, 2019, the Company’s stock price was $0.35, risk-free discount rate of 1.60% and volatility of 182%.
ASU 2016-02 - In February 2016, the FASB issued ASU No. 2016-02, "Leases", ("ASC 842") which amended the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASC 842 is effective for public companies during interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. In July 2018, the FASB issued ASU No. 2018-11, which permits entities to record the right-of-use asset and lease liability on the date of adoption, with no requirement to recast comparative periods.
We adopted ASC 842 effective January 1, 2019 using the optional transition method of recognizing a cumulative-effect adjustment to the opening balance of retained earnings on January 1, 2019. Therefore, comparative financial information was not adjusted and continues to be reported under the prior lease accounting guidance in ASC 840. We elected the transition relief package of practical expedients, and as a result, we did not assess 1) whether existing or expired contracts contain embedded leases, 2) lease classification for any existing or expired leases, and 3) whether lease origination costs qualified as initial direct costs. We elected the short-term lease practical expedient by establishing an accounting policy to exclude leases with a term of 12 months or less, as well as the land easement practical expedient for maintaining our current accounting policy for existing or expired land easements.
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
Management evaluated all relevant conditions and events that are reasonably known or reasonably knowable, in the aggregate, as of the date the consolidated financial statements are issued and determined that substantial doubt exists about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent on the Company’s ability to generate revenues and raise capital. The Company has not generated sufficient revenues from product sales to provide sufficient cash flows to enable the Company to finance its operations internally. As of June 30, 2019,March 31, 2020, the Company had $141,821$46,505 cash on hand. At June 30, 2019March 31, 2020 the Company has an accumulated deficit of $29,915,575.$35,928,131. For the six monthsquarter ended June 30, 2019,March 31, 2020, the Company had a net loss of $2,382,823,$3,502,149, and cash used in operations of $1,253,852.$346,070. These factors raise substantial doubt about the Company’s ability to continue as a going concern.concern within one year from the date of filing.
Over the next twelve months the Company intendsmanagement plans to raise additional capital and to invest its working capital resources in sales and marketing in order to increase the distribution and demand for its products. However, there is no guarantee the Company will generate sufficient revenues or raise capital to continue operations. If the Company fails to generate sufficient revenue and obtain additional capital to continue at its expected level of operations, the Company may be forced to scale back or discontinue its sales and marketing efforts. However, there is no guarantee the Company will generate sufficient revenues or raise capital to continue operations. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
9
COVID-19 Pandemic
In December 2019, an outbreak of a novel strain of coronavirus originated in Wuhan, China (“COVID-19”) and has since spread worldwide, including to the Unites States, posing public health risks that have reached pandemic proportions (the “COVID-19 Pandemic”). The COVID-19 Pandemic poses a threat to the health and economic wellbeing of our employees, customers and vendors. Like most businesses world-wide, the COVID-19 Pandemic has impacted the Company financially; however, management cannot presently predict the scope and severity with which COVID-19 will impact our business, financial condition, results of operations and cash flows.
NOTE 3 - INVENTORY
Inventories consist of the following at:
| June 30, 2019 | | December 31, 2018 | March 31, 2020 | | December 31, 2019 |
Finished goods | 357,931 | | 403,322 | | 36,686 | | | 106,958 |
Total | $357,931 | | $403,322 | $ | 36,686 | | $ | 106,958 |
9
NOTE 4 - NOTES PAYABLE TO RELATED PARTIESACCOUNTS RECEIVABLE, NET
Accounts receivable consist of the following at:
| March 31, 2020 | | December 31, 2019 |
Accounts receivable | | 417,783 | | | 377,222 |
Allowance for doubtful accounts | | (106,841) | | | (106,958) |
Total | $ | 310,942 | | $ | 270,381 |
NOTE 5 - PREPAID CONSULTING EXPENSES
Prepaid consulting expense was $1,410,738 and $481,335 as of the March 31, 2020 and December 31, 2019, respectively. During the three months ended March 31, 2020, the Company issued 4,015,000 shares of stock for consulting agreements with a term ranging from 6 months to 4 years. The Company hasconsidered the market price of the common stock issued and fair value of the services rendered and determined that the market prices of the shares on the date issued of $1,236,390 was the more readily determinable values. The Company recorded amortization of the prepaid stock compensation amounting to $306,987 and $114,397 for the three months ended March 31, 2020 and 2019, respectively.
NOTE 6 - RELATED PARTY
As of March 31, 2020, and December 31, 2019, the Company had two notes payable due to an officer and director of the Company.Company in the amount of $69,150 and $69,150, respectively. The notes have interest rate that range from 0%-8% and are due uponon demand. During the six months ended June 30,
In January 2019, the Company has made payments in the amountexecuted a lease agreement with Templar Asset Group, LLC, a related party. The lease term is one year at a rate of $30,000 towards these notes. As$4,200 per month for a period of June 30, 2019, and December 31, 2018, the outstanding balance on the notes was $4,150 and $34,150, respectively.one year with an option to continue a month to month basis thereafter (See Note 8).
On January 25, 2018,February 5, 2020, the Company agreed to settle a certain $900,000 convertible note payable issued to a shareholder dated August 2, 2016 and $312,006 in accrued interest. As part of the settlement the Company issued 1,000,000, 5 year warrants exercisable at $0.50 per share, valued at $781,755 (See Note 9), 4,000,000 shares of common stock valued at $1,240,000, based on stock price on date of issuance, in settlement of $400,000 of the principal balance of the note, and issued a $100,000 12% securednew $500,000 11% promissory grid notes.note. The issuance of the shares and warrants under the agreement resulted in the noteholder becoming a more than 5% shareholder and a related party.
10
The new note is due in two payments, $250,000 January 2, 2022 and $250,000 on December 31, 2020. AsJanuary 2, 2023. Interest will accrue from the date of June 30, 2019, and December 31, 2018, there was $65,000 and $65,000 outstandingthis Note on the note, respectively.unpaid and outstanding Principal balance to be paid as follows: (a) Fifty-Four Thousand Nine Hundred Ninety-Three and 37/100 Dollars ($54,993.37) on January 4, 2021; plus (b) three hundred thousand (300,000) shares of common Stock, by January 3, 2022, plus (c) six hundred thousand (600,000) shares of common stock on January 3, 2023. The Company evaluated the modification under ASC 470-50 and determined that the modifications were considered substantial and qualified for extinguishment accounting under such guidance. As such the Company recorded a loss on extinguishment of debt of $1,725,879 associated with the excess reacquisition cost of the new debt over the carrying value of the original debt.
Interest expense associated with the related party notes for the sixthree months ended June 3,March 31, 2020 and 2019 was $10,274 and 2018 was $3,951 and $2,334,$1,965, respectively.
NOTE 57 - NOTES PAYABLE
Notes payable consist of the following at:
| June 30, 2019 | | December 31, 2018 | March 31, 2020 | | December 31, 2019 |
Note payable, secured, 12% interest, due July 2020 | | $ | - | | $ | 150,000 |
Note payable, secured, 12% interest, due July 2020 | | | - | | | 100,000 |
Note payable, secured, 12% interest, due January 2020 | $ | 150,000 | | $ | 150,000 | | - | | | 50,000 |
Note payable, secured, 12% interest, due January 2020 | | 100,000 | | | 100,000 | |
Note payable, secured, 12% interest, due January 2020 | | 50,000 | | | 50,000 | |
Note payable, secured, 12% interest, due September 2020 | | -- | | | 50,000 | |
Note payable, secured, 12% interest, due September 2019 | | 100,000 | | | -- | |
Note payable, secured, 12% interest, due July 2020 | | | - | | | 100,000 |
Note payable, secured, 12% interest, due June 1, 2021 | | | 260,000 | | | - |
Note payable, secured, 12% interest, due June 1, 2021 | | | 300,000 | | | - |
Note payable, secured, 12% interest, due October 2019 | | 12,500 | | | -- | | - | | | 5,750 |
Note payable, secured, 12% interest, due March 2020 | | 12,000 | | | -- | | - | | | 12,000 |
Note payable, secured, 12% interest, due March 4, 2021 | | | 12,000 | | | - |
Total Notes Payable | $ | 424,500 | | $ | 350,000 | $ | 572,000 | | $ | 417,750 |
| | | | | | | | | | |
Less discounts | | (38,551) | | | (22,050) | |
Less unamortized debt discounts | | | (2,379) | | | (5,943) |
Total Notes Payable | | 385,949 | | | 327,980 | | 569,621 | | | 411,807 |
Less current portion | | (385,949) | | | (45,717) | | - | | | (411,807) |
| | | | | | |
Total Notes Payable - long term | $ | -- | | $ | 282,263 | $ | 569,621 | | $ | - |
On February 8, 2019,September 2, 2016, the Company issued a $50,000 10%$100,000 12% promissory note. The note iswas due on February 8, 2020 and is convertible at a price of $0.50 per share.September 1, 2017. As an incentive to enter into the agreement the noteholder was also granted 60,00025,000 shares valued at $30,000.$25,000 which was recognized as a debt discount. On May 16, 2019, the maturity date of the note was extended to July 1, 2020 for the issuance of 50,000 shares of common stock valued at $21,000, which was recognized as a debt discount over the extended maturity date, which was recognized as a debt discount over the extended maturity date. As of June 30, 2019, the shares have not been issued and were included in stock payable. As of June 30, 2019, $11,671March 31, 2020, $18,621 of the debt discount has been amortized and the note was shown net of unamortized discount of $18,329.
On January 30, 2019, the Company issued a $100,000 12% promissory note. The note is due on September 30, 2019. As an incentive to enter into the agreement the noteholder was also granted 100,000 shares valued at $50,000. As of June 30, 2019, $31,070 of the debt discount was amortized. As of June 30, 2019, the note was shown net of unamortized discount of $18,930.$2,379.
On February 11, 2019, the Company issued a $12,500 12% promissory note. The note is due on October 11, 2019. As an incentive to enter into the agreement the noteholder was also granted 25,000 shares valued at $12,500. As of June 30, 2019, $7,180 of the debt discount was amortized. As of June 30, 2019, the note was shown net of unamortized discount of $5,320. On May 17, 2019, the Company agreed to settle the note along with $833 in accrued interest for 53,334 shared valued at $13,333. As of June 30, 2019, the shares were not issued and were included in stock payable.
On February 11, 2019, the Company issued a $12,500 12% promissory note. The note is due on October 11, 2019. As an incentive to enter into the agreement the noteholder was also granted 25,000 shares valued at $12,500. As of June 30, 2019, $7,180 of the debt discount was amortized. As of June 30, 2019, the note was shown net of unamortized discount of $5,320.
10
On March 1, 2019, the Company issued a $12,000 12% promissory note. The note is due on March 1, 2020. As of June 30, 2019, the note was shown net of unamortized discount of $0.
Interest expense including amortization of the associated debt discount for the six months ended June 30, 2019 and 2018 was $78,825 and $8,877, respectively.
NOTE 6 - CONVERTIBLE NOTES PAYABLE
Convertible notes payable, net of debt discount consist of the following:
| June 30, 2019 | | December 31, 2018 |
Convertible note payable, secured, 12% interest, due March 2019, convertible at $1 per share | $ | - | | $ | 10,000 |
Convertible note payable, secured, 12% interest, due May 2018, convertible at $1 per share | | - | | | 50,000 |
Convertible note payable, secured, 12% interest, due August 2019, convertible at $1 per share | | 50,000 | | | 50,000 |
Convertible note payable, secured, 12% interest, due August 2018, convertible at $1 per share | | - | | | 50,000 |
Convertible note payable, secured, 12% interest, due 120 days after delivery of payment notice from lender or August 2019, convertible at $0.25 per share | | 900,000 | | | 900,000 |
Convertible note payable, secured, 12% interest, due May 2020, convertible at $1 per share | | 100,000 | | | 100,000 |
Convertible note payable, secured, 12% interest, due May 2020, convertible at $1 per share | | 50,000 | | | 50,000 |
Convertible note payable from a shareholder, secured, 12% interest, due May 2020, convertible at $1 per share | | 5,000 | | | 5,000 |
Convertible note payable from a shareholder, secured, 12% interest, due Feb 2020, convertible at $1 per share | | 75,000 | | | 75,000 |
Convertible note payable from a shareholder, secured, 4% interest, due August 2019 | | 75,000 | | | -- |
Convertible note payable from a shareholder, secured, 12% interest, due January 2020, convertible at $0.50 per share | | 160,000 | | | 160,000 |
Convertible note payable, secured, 10% interest, due Sept 2020, convertible at $0.50 per share | | 50,000 | | | -- |
Convertible note payable, secured, 10% interest, due Sept 2020, convertible at $0.50 per share | | 50,000 | | | -- |
Note payable, secured, 12% interest, due May 2020 | | 32,700 | | | -- |
| | | | | |
Less discounts | | (190,086) | | | (239,900) |
Total notes payable, net | $ | 1,357,614 | | $ | 1,210,100 |
Less current portion | | (1,357,614) | | | (983,220) |
| | | | | |
Convertible notes payable, net - Long-term | $ | -- | | $ | 226,880 |
On September 17,2, 2018, the Company issuedentered into an agreement with the note holder to split a certain note payable dated July 1, 2015 into two notes in the amount of $150,000 and $50,000, 10% promissory note. The note is due on September 18, 2020. As an incentiverespectively. In addition to enter intosplitting the agreementnotes the noteholder was also granted 10,000agreed to extend the due date of the new $50,000 note to July 1, 2018 and on June 4, 2018, for consideration of 15,000 shares the noteholder further agreed to extend the due date of the new $50,000 note to April 1, 2019. On November 15, 2018, both notes were further extended to January 1, 2020 for the issuance of 80,000 shares valued at $5,000.$40,800. On February 9,May 16, 2019, the note was amendedmaturity dates of both notes were extended to July 1, 2020 for the issuance of 50,000 shares of common stock valued at $25,000,$21,000. The Company recorded the fair market value of all the shares issued for extensions to financing cost.
11
On January 1, 2020, the Company entered into an agreement to consolidate three notes payable dated September 2, 2016 and February 2, 2018 into one $300,000, 12% note due June 1, 2021. As consideration the Company issued the note holder agreed to175,000 shares of common stock valued at $68,250 which was recorded as financing expense. The Company evaluated the modification under ASC 470-50 and determined that the modifications were considered substantial and qualified for extinguishment accounting under such guidance. As such the Company recorded a convertloss on extinguishment of debt of $68,250 associated with the note at a price of $0.50 per share. Additionally, the maturity dateexcess reacquisition cost of the note was changed to February 8, 2020. As of June 30, 2019,new debt over the shares have not been issued and were included in stock payable. As of June 30, 2019, $11,493carrying value of the debt discount has been amortized and the note was shown net of unamortized discount of $18,507.original debt.
11
During the year ended December 31, 2016,2018, the Company issued $160,000 of principal amount of 12% secured convertible promissory notes and warrants to purchase our common stock. The notes were due between May and August 2018 and bear interest of percent (12%). The notes are secured by all of the Company’s assets. The outstanding principal amounts and accrued but unpaid interest of the notes areis convertible at any time at the option of the holder into common stock at a conversion price of $1.00 per share. The notes were issued with warrants to purchase up to 160,000 shares of the Company’s common stock which were valued at $119,616. On May 16, 2019, the maturity date of the note was extended to January 11, 2020 for the issuance of 90,000 shares of common stock valued at $45,900. As of June 30, 2019, $119,616March 31, 2020, $165,516 of the debt discount was amortized and the note was shown net of unamortized discount of $0. During the six months ended June
On January 30, 2019, the notes holders of $110,000Company issued a $100,000 12% promissory note. The note was due on September 30, 2019. As an incentive to enter into the agreement the noteholder was also granted 100,000 shares valued at $45,000 which was recognized as a debt discount. On May 16, 2019, the maturity date of the note was extended to September 30, 2020 for the issuance of 55,000 shares of common stock valued at $23,100. The Company recorded the fair market value of all the shares issued for extensions to financing cost.
On January 1, 2020, the Company entered into an agreement to consolidate two notes payable dated June 11, 2018 and January 30, 2019 into one $260,000, 12% note due June 1, 2021. As consideration the Company issued the note holder 175,000 shares of common stock valued at $68,250 which was recognized as a financing cost. The Company evaluated the modification under ASC 470-50 and determined that the modifications were considered substantial and qualified for extinguishment accounting under such guidance. As such the Company recorded a loss on extinguishment of debt of $68,250 associated with the excess reacquisition cost of the new debt over the carrying value of the original debt.
On March 1, 2019, the Company issued a $12,000 12% promissory note. The note was due on March 1, 2020 and was paid in full during the three months ended March 31, 2020.
On March 4, 2020, the Company issued a $12,000 10% promissory note. The note is due on March 4, 2021. On March 4, 2020, the Company issued a $12,000 promissory note. On April 17, 2020, the note and accrued interest in the amount of $12,140 was paid.
12
Convertible notes payable, net of debt discount consist of the following:
| March 31, 2020 | | December 31, 2019 |
Convertible note payable, secured, 12% interest, due August 31, 2019, convertible at $1 per share | | 50,000 | | | 50,000 |
Convertible note payable, secured, 12% interest, due 120 days after delivery of payment notice from lender or November 1, 2019, convertible at $0.25 per share | | - | | | 900,000 |
Convertible note payable, secured, 12% interest, due May 2, 2020, convertible at $1 per share | | 100,000 | | | 100,000 |
Convertible note payable, secured, 12% interest, due May 2, 2020, convertible at $1 per share | | 50,000 | | | 50,000 |
Convertible note payable, secured, 12% interest, due May 22, 2020, convertible at $1 per share | | 5,000 | | | 5,000 |
Convertible note payable , secured, 12% interest, due Feb 24, 2020, convertible at $1 per share | | 75,000 | | | 75,000 |
Convertible notes payable, secured, 4% interest, due October 14, 2020 | | 75,000 | | | 75,000 |
Convertible note payable, secured, 12% interest, due January 11, 2020, convertible at $0.50 per share (See Note 12) | | - | | | 160,000 |
Convertible note payable, secured, 10% interest, due February 8, 2020, convertible at $0.50 per share | | 50,000 | | | 50,000 |
Convertible note payable ,12% interest, due May 2020, conversion price is the lesser of (i) 70% multiplied by the lowest Trading Price during the previous twenty-five (25) trading day period ending on the latest complete Trading Day prior to the date of the note and 70% of the market price. | | 562,000 | | | 337,000 |
Convertible note payable ,12% interest, due May 2020, conversion price is the lesser of (i) 70% multiplied by the lowest Trading Price during the previous twenty-five (25) trading day period ending on the latest complete Trading Day prior to the date of the note and 70% of the market price. | | 168,500 | | | 168,500 |
Convertible note payable, secured, 10% interest, due February 8, 2020, convertible at $0.50 per share | | 50,000 | | | 50,000 |
Convertible note payable, secured, 12% interest | | 18,700 | | | 31,500 |
Convertible note payable, secured, 10% interest, due October 2021, convertible at $0.50 per share due October 17, 2021 | | 29,000 | | | 23,000 |
Convertible note payable, secured, 10% interest, due October 18, 2021, convertible at $0.50 per share | | 26,083 | | | - |
| | | | | |
Less unamortized discounts | | (290,708) | | | (474,692) |
Total notes payable, net | $ | 968,775 | | $ | 1,596,410 |
Less current portion | | (913,692) | | | (1,583,066) |
| | | | | |
Convertible notes payable, net - Long-term | $ | 55,083 | | $ | 17,242 |
On May 2, 2017, the Company issued $100,000 of principal amount of 12% secured convertible promissory notes agreedand 20,000 warrants to convertpurchase common stock. The note is due on May 2, 2020 and is secured by the Company’s accounts receivable and inventory. The outstanding principal amounts and accrued but unpaid interest of the notes and accrued interestis convertible at any time at the option of the holder into common stock at a conversion price of $0.25$0.50 per shareshare. The notes were issued with warrants to purchase up to 10,000 shares of the Company’s common stock at an exercise price of $1.00 per share. As of March 31, 2020, the note was shown net of unamortized discount of $419.
13
On May 2, 2017, the Company issued $50,000 of principal amount of 10% secured convertible promissory notes and 10,000 warrants to purchase common stock. The note is due on May 2, 2020 and is secured by the Company’s accounts receivable and inventory. The outstanding principal amounts and accrued but unpaid interest of the notes is convertible at any time at the option of the holder into 552,767common stock at a conversion price of $0.50 per share. The notes were issued with warrants to purchase up to 10,000 shares of the Company’s common stock at an exercise price of $1.00 per share. As of March 31, 2020, the note was shown net of unamortized discount of $209.
On May 22, 2017, the Company issued $5,000 of principal amount of 10% secured convertible promissory notes and 1,000 warrants to purchase common stock at an exercise price of $1. The note is due on May 22, 2020 and is secured by the Company’s accounts receivable and inventory. The outstanding principal amounts and accrued but unpaid interest of the notes is convertible at any time at the option of the holder into common stock at a conversion price of $0.50 per share. The notes the were issued with warrants to purchase up to 1,000 shares of the Company’s common stock at an exercise price of $1.00 per share. As of March 31, 2020, the note was shown net of unamortized discount of $19.
On February 15, 2018, the Company issued a $75,000 12% secured convertible promissory note. The note was due on February 24, 2020 and is secured by the Company’s accounts receivable and inventory and is currently past due. The outstanding principal amounts and accrued but unpaid interest of the notes is convertible at any time at the option of the holder into common stock at a conversion price of $0.50 per share.
On September 17, 2018, the Company issued a $50,000 10% promissory note. The note is due on September 18, 2020. As an incentive to enter into the agreement the noteholder was also granted 10,000 shares valued at $5,000, based on market value of the shares of $0.50 on the date of issuance. On February 9, 2019, the note was amended for the issuance of 50,000 shares of common stock.stock valued at $30,000 based on market value of the shares of $0.60 on the date of issuance, which was recognized as a debt discount, the note holder agreed to a convert the note at a price of $0.50 per share. Additionally, the maturity date of the note was changed to February 8, 2020. As of June 30, 2019,March 31, 2020, the shares werehave not been issued and were included in stock payable. The Company evaluated the adjustmentAs of March 31, 2020, $30,000 of the debt discount has been amortized and the note was shown net of unamortized discount of $0.
On June 2, 2016, the Company issued $50,000 of principal amount of 12% secured convertible promissory notes and 50,000 warrants to purchase common stock. The note was due on August 31, 2018, was later extended to August 31, 2019, bears interest of twelve percent (12%) and is currently past due. The outstanding principal amounts and accrued but unpaid interest of the notes is convertible at any time at the option of the holder into common stock at a conversion price under ASC 470, and recordedof $1.00 per share. The notes were issued with warrants to purchase up to 50,000 shares of the Company’s common stock at an additional loss on conversionexercise price of $126,813 Which was recognized as an expense equal to the fair value of all securities and other consideration transferred in the transaction in excess of fair value of securities issuable pursuant to the original conversion terms.$1.50 per share.
On December 14, 2018, the Company issued a $50,000 4% convertible note. The note iswas originally due on February 14, 2019 and is convertible at a rate of $0.50 per shares. As an incentive to enter into the agreement, the noteholder was also granted 10,000 shares valued at $5,000.$5,000, based on market value of the shares of $0.60 on the date of issuance, which was recognized as a debt discount. As of June 30, 2019,March 31, 2020, $5,000 of the debt discount was amortized. On February 14, 2019, the noteholder agreed to extend the note through October 14, 2020.
On January 25, 2019, the Company issued a $100,000 8% convertible note. The note is due on March 1, 2019, is currently past due, and is convertible at a rate of $0.50 per shares. On April 29, 2020, the noteholder the note was amended to be due on demand but not before January 25, 2021. Additionally, the note holder is due two shares of common stock for every dollar funded. As of June 30,December 31, 2019, the noteholder advanced a total of $47,500 and is due 95,000 shares valued at $38,250, based on market value of the shares of $0.40 on the date of issuance, and the Company has made payments of $28,800. As of March 31, 2020, there was an outstanding balance on the note in the amount of $18,700. As of March 31, 2020, $38,250 of the debt discount was amortized and the note was shown net of unamortized discount of $0.
On February 8, 2019, the Company issued a $50,000 10% convertible note. The note is due on February 8, 2020. As an incentive to enter into the agreement the noteholder was also granted 60,000 shares valued at $30,000 which was recognized as a debt discount. For the three months ended March 31, 2020, the Company recorded amortization of the debt discount of $4,204 and $4,192, respectively. As of March 31, 2020, $30,000 of the debt discount has been amortized and the note was shown net of unamortized discount of $0.
14
On February 19, 2019, the Company issued a $25,000 4% convertible note. The note is due on MayAugust 19, 2019 and is convertible at a rate of $0.50 per shares.share On February 14, 2019, the noteholder agreed to extend the note through October 14, 2020. As an incentive to enter into the agreement the noteholder was also granted 5,000 shares valued at $2,500. As of June 30, 2019,March 31, 2020, the shares have not been issued and were included in stock payable. As of June 30, 2019,March 31, 2020, $2,500 of the debt discount was amortized and the note was shown net of unamortized discount of $0.
On January 25,October 18, 2019, the Company issued a $100,000 8% promissory grid$23,000 10% convertible note. The note is due on October 17, 2021 and was convertible at a rate of $0.50 per share. As an incentive to enter into the agreement, the noteholder was also granted 46,000 shares valued at $15,175, based on market value of the shares of $0.33 on the date of issuance, which was recognized as a debt discount. During the three months ended March 31, 2020, the Company restructured the note to reduce the conversion price to $0.10 per share and the noteholder advanced another $6,000. As consideration the Company issued an additional 12,000 shares of common stock valued at $4,560 and 232,000 warrants valued at $82,131. The Company evaluated the modification under ASC 470-50 and determined that the modifications were considered substantial and qualified for extinguishment accounting under such guidance. As such the Company recorded a loss on extinguishment of debt of $102,905 associated with the excess reacquisition cost of the new debt over the carrying value of the original debt.
On November 5, 2019, the Company entered into a $562,000 convertible note payable, including an original issue discount of $56,200 pursuant to which we borrowed $337,000, including a $37,000 original issue discount in the first tranche during the year ended December 31, 2019. Interest under the convertible promissory note is 12% per annum, and the principal and all accrued but unpaid interest is due 180 days from funding. The note is convertible at the lesser of (i) 70% multiplied by the lowest Trading Price during the previous twenty-five (25) trading day period ending on the latest complete Trading Day prior to the date of the note and 70% of the market price. As an incentive to enter into the agreement the noteholder was also granted 854,000 shares valued at $307,440. The Company analyzed the conversion feature and determined it was required to be bifurcated and recognized as a derivative liability. The Company analyzed the conversion feature and determined it was required to be bifurcated and recognized as a derivative liability. The derivative at inception was valued at $392,061, based on the Black Scholes Merton pricing model. As the fair value of the derivative and the shares issued at inception were in excess of the face amount of the note, the Company recorded a debt discount in the amount of $337,000 to be amortized utilizing the effective interest method of accretion over the term of the note. On January 30, 2020, the Company borrowed an additional $225,000, including a $19,200 original issue discount. As an incentive the noteholder was also granted an additional 476,493 shares valued at $109,593, the Company analyzed the conversion feature and determined it was required to be bifurcated and recognized as a derivative liability. The derivative at inception was valued at $212,798, based on the Black Scholes Merton pricing model. As the fair value of the derivative and the shares issued at inception were in excess of the face amount of the note the Company recorded a debt discount in the amount of $225,000 to be amortized utilizing the effective interest method of accretion over the term of the note. Further, the excess of $161,011 was recognized as a financing cost on the Statement of Operations. For the three months ended March 31, 2020, the Company recorded amortization of the debt discount of $235,681. As of March 31, 2020, $339,946 of the debt discount has been amortized and the note was shown net of unamortized discount of $222,054. On May 5, 2020, Company paid the principal and accrued interest under the first tranche of $357,852 (See note 12).
On November 19, 2019, we entered into a $281,000 convertible note payable, including an original issue discount of $28,100 convertible promissory note pursuant to which we borrowed of $150,000, including a $18,500 discount during the year ended December 31, 2019. Interest under the convertible promissory note is 12% per annum, and the principal and all accrued but unpaid interest is due 180 days from funding. The note is convertible at the lesser of (i) 70% multiplied by the lowest Trading Price during the previous twenty-five (25) trading day period ending on the latest complete Trading Day prior to the date of the note and 70% of the market price. As an incentive to enter into the agreement the noteholder was also granted 427,000 shares valued at $175,070, the Company analyzed the conversion feature and determined it was required to be bifurcated and recognized as a derivative liability. The derivative at inception was valued at $192,226, based on the Black Scholes Merton pricing model. As the fair value of the derivative and the shares issued at inception were in excess of the face amount of the note the Company recorded a debt discount in the amount of $168,500 to be amortized utilizing the effective interest method of accretion over the term of the note. Further, the excess of $104,041 was recognized as a financing cost on the Statement of Operations. For the three months ended March 31, 2020, the Company recorded amortization of the debt discount of $84,715. As of March 31, 2020, $123,814 of the debt discount has been amortized and the note was shown net of unamortized discount of $44,686. On May 20, 2020, the noteholder agreed to extend the due date of the first tranche of funding until July 25, 201919, 2020(See note 12).
15
The embedded conversion feature in the convertible debt instruments above were convertible at issuance which qualified them as a derivative instrument since the number of shares issuable under the note is indeterminate based on guidance in ASC 815-15, “Derivatives and Hedging (“Topic No. 815-15”). Topic No. 815-15 requires the Company to bifurcate and separately account for the conversion features as an embedded derivative contained in the Company’s convertible debt.
The Black-Scholes model, adopted by management as an appropriate financial model, utilized the following inputs to value the derivative liabilities at the date of issuance of the convertible note through March 31, 2020:
Risk free interest rate | | 0.15% - 1.57% |
Expected term (years) | | 0.132 - 0.50 |
Expected volatility | | 188% - 263.5 |
Expected dividends | | 0% |
On January 8, 2020, the Company issued a $26,083 convertible note. The note is due on January 8, 2022 and is convertible at a rate of $0.50$0.10 per shares. Additionally,As an incentive to enter into the agreement the noteholder was also granted 52,166 shares and 208,664 2-year warrants exercisable $0.125.The issuance of the note holder is two sharesand warrants resulted in a discount from the beneficial conversion feature totaling $26,083, including $13,203 attributable to the conversion feature, $10,566 attributable to the warrants, and $2,313 was attributable to the shares. The excess fair value of common stock for every dollar funded. Asthe consideration given of June 30, 2019,$16,171 was recorded as financing expense. During the three months ended March 31, 2020, $2,962 of the discount was amortized and the note holder has advanced a totalwas shown net of $37,500 and the Company has made paymentsunamortized discount of $14,800. As of June 30, 2019, there was an outstanding balance on the note in the amount of $32,700.$23,121.
Interest expense including amortization of the associated debt discount for the six months ended June 30, 2019 and 2018 was $295,844 and $100,020, respectively.
NOTE 7 - ROYALTY PAYMENTS
The Company has agreed to allow accredited investors the ability to receive a royalty on products sold in an effort to fund its distribution and marketing advances internationally by purchasing units. Each unit represents 0.625% royalty interest in the Gross Margin of product sold by Bollente International, Inc., costing $25,000 per unit.
On October 18, 2017, the Company entered into royalty termination agreements whereas the Company converted all royalties interest into a total of 1,400,000 shares of common stock valued at $700,000. As of June 30, 2019, the Company has issued 1,200,000 shares of common stock and has recorded the balance of the common stock due to stock payable.
NOTE 8 - RESTATEMENT
The Company has restated the financial statementsabove convertible notes for the three months ended March 31, 2020 and 2019 to correct the accounting for the conversion of the convertible promissory notes.
As disclosed in Note 6, the notes holders of $110,000 of convertible notes originally convertible at $1.00 agreed to convert the noteswas $727,493 and accrued interest of the notes at $0.25. The Company evaluated the adjustment of the conversion price under ASC 470, and recorded a loss on conversion of $126,813, which was recognized as an expense equal to the fair value of all securities and other consideration transferred in the transaction in excess of fair value of securities issuable pursuant to the original conversion terms.$184,281, respectively.
12
The following tables summarize the corrections on each of the affected financial statement line items as of and for the three months ended March 31, 2019
| As Previously Reported | | Adjustment | | As Restated |
As of March 31, 2019 | | | | | |
Consolidated Balance Sheet | | | | | |
| | | | | |
Accounts payable and accrued liabilities | $ | 1,093,736 | | (39,570) | | $ | 1,054,166 |
Convertible notes payable, net of debt discount | $ | 1,219,868 | | (110,000) | | $ | 1,109,868 |
Total Current Liabilities | $ | 2,828,370 | | (110,000) | | $ | 2,718,370 |
Total Liabilities | $ | 2,981,670 | | (110,000) | | $ | 2,871,670 |
Subscriptions payable | $ | 900,500 | | 276,384 | | $ | 1,176,884 |
Accumulated deficit | $ | (28,667,581) | | (126,814) | | $ | (28,794,395) |
Total Stockholders' Equity | $ | (1,776,175) | | 149,570 | | $ | (1,626,605) |
| | | | | | | |
For the three months ended March 31, 2019 | | | | | | | |
Consolidated Statement of Operations: | | | | | | | |
| | | | | | | |
Loss on conversion of notes payable | $ | - | | (126,814) | | $ | (126,814) |
Other income (expense) | $ | (184,218) | | (126,814) | | $ | (311,032) |
Net loss | $ | (1,134,829) | | (126,814) | | $ | (1,261,643) |
NOTE 98 - COMMITMENTS AND CONTINGENCIES
OfficeOperating Lease Agreements
The Company determines whether or not a contract contains a lease based on whether or not it provides the Company with the use of a specifically identified asset for a period of time, as well as both the right to direct the use of that asset and receive the significant economic benefits of the asset. The Company elected the transition relief package of practical expedients, and as a result, the Company did not assess 1) whether existing or expired contracts contain embedded leases, 2) lease classification for any existing or expired leases, and 3) whether lease origination costs qualified as initial direct costs. The Company elected the short-term lease practical expedient by establishing an accounting policy to exclude leases with a term of 12 months or less.
The Company has entered into lease agreements as a lessee for the use of office space. These lease agreements are classified as operating leases and the liability and right-of-use asset are recognized on the balance sheet at lease commencement. Leases with an initial term of 12 months or less are not recorded on the balance sheet and are recognized as lease expense on a straight-line basis over the lease term. As a result of the adoption of ASC 842, the Company recognized an operating lease liability and right-of-use asset of $64,978.
The discount rate utilized for classification and measurement purposes as of the inception date of the lease is based on the Company's collateralized incremental interest rate to borrow of 12%, as the rate implicit in the lease is not determinable.
During 2018, the Company executed a lease agreement. The lease term is 39 months at a rate of $1,780$1,680 per month with 3% increases beginning January 1, 2021 and rent commencing on January 1, 2019. The Company was required to pay a $1,781 security deposit. On January 1, 2019, the Company has recorded a $64,978 right to use asset and lease liability associated with this lease in accordance with ASC 842. The lease was recorded as at the present value of the minimum lease payments over the 51- month term with a borrowing rate of 12%. As of June 30, 2019, the right to use asset and lease liability were $58,356 and $56,856, respectively.
In January 2019, the Company executed a subleaselease agreement with Templar Asset Group, LLC, a related party. The lease term is one year at a rate of $3,200$4,200 per month for a period of one year with an option to continue a month to month basis thereafter. Under ASC 842, this lease is not recorded on the balance sheet as its term is 12 months or less.
16
Rent expense for the year ended June 30, 2019 and 2018 was $56,481 and $20,400, respectively.Undiscounted Cash Flows
As of March 31, 2020, the right of use asset and lease liability were shown on the consolidated balance sheet at $46,173 and $48,394, respectively. The table below reconciles the fixed component of the undiscounted cash flows and the total remaining years to the operating lease liability recorded on the consolidated balance sheet as of March 31, 2020:
Amounts due as of March 31, 2020 | | Operating Leases |
2020 | | $ | 15,120 |
2021 | | | 20,765 |
2022 | | | 21,370 |
Total minimum lease payments | | $ | 57,255 |
Less: effect of discounting | | | (8,861) |
Present value of future minimum lease payments | | $ | 48,394 |
Less: current obligations under leases | | | (11,205) |
Long-term lease obligations | | $ | 37,189 |
NOTE 109 - STOCK WARRANTS
DuringOn January 8, 2020, the six months ended June 30, 2019, we issued 82,500Company granted 208,664 warrants with terms of 3.3 years exercisable at $0.125 per share with the issuance of a convertible note payable, valued at $19,277. The warrants were valued using the Black-Scholes option pricing model. Assumptions used in conjunctionthe valuation include the following: a) market value of stock on measurement date of $0.38; b) risk-free rate of 1.61%; c) volatility factor of 166%; d) dividend yield of 0%
On January 8, 2020, the Company granted 232,000 warrants 3.3 years warrants exercisable at $0.125 per share with units which includedthe issuance of a convertible note payable, valued at $82,131. The warrants were valued using the Black-Scholes option pricing model. Assumptions used in the valuation include the following: a) market value of stock on measurement date of $0.38; b) risk-free rate of 1.61%; c) volatility factor of 166%; d) dividend yield of 0%
On February 5, 2020, the Company granted 1,965,094 warrants with a term of 5 years exercisable at $0.50 per shares sold for cash to purchase 426,500 shareswarrants, valued $566,269 as part of a note settlement agreement. Additionally, as part of the Company’s common stockagreement the Company modified 1,666,666 previously issued to include the same terms of the warrants issued under the agreement. The Company valued the modification of warrants at an exercise price$215,486, which the difference of $1.00 per share associated with.the fair value of the warrants before and after the modification and recorded the value to loss on extinguishment of notes payable. The warrants arewere valued using the Black-Scholes option pricing model. Assumptions used in the valuation include the following: a) market value of stock on measurement date of $0.30-$0.31; b) risk-free rate of 1.48-1.49%; c) volatility factor of 175-177.6%; d) dividend yield of 0%
On February 19, 2020, the Company converted the 76,000 outstanding Series A preferred shares, based on the automatic conversion terms into 205,000 common shares and 76,000 three year warrants exercisable at any time until three (3) years after the closing date.$1 per share
The following is a summary of stock warrants activity during the three monthsperiod ended June 30,March 31, 2020.
| Number of Shares | | Weighted Average Exercise Price |
Balance, December 31, 2019 | 2,478,124 | | $1.00 |
Warrants granted and assumed | 4,147,758 | | $0.47 |
Warrants expired | - | | - |
Warrants canceled | (1,666,666) | | $1.00 |
Warrants exercised | - | | - |
Balance outstanding and exercisable, March 31, 2020 | 4,959,882 | | $0.56 |
17
The following is a summary of stock warrants activity during the period ended March 31, 2019.
| Number of Shares | | Weighted Average Exercise Price |
Balance, December 31, 2018 | 2,395,624 | | $1.00 |
Warrants granted and assumed | 82,500 | | $1.00 |
Warrants expired | -- | | -- |
Warrants canceled | -- | | -- |
Warrants exercised | -- | | -- |
Balance, June 30, 2019 | 2,478,124 | | $1.00 |
As of June 30, 2019, there are warrants exercisable to purchase 2,478,124 shares of common stock in the Company.
13
| Number of Shares | | Weighted Average Exercise Price |
Balance, December 31, 2018 | 2,395,624 | | $1.00 |
Warrants granted and assumed | 50,500 | | $1.00 |
Warrants expired | - | | - |
Warrants canceled | - | | - |
Warrants exercised | - | | - |
Balance outstanding and exercisable, March 31, 2020 | 2,446,124 | | $1.00 |
NOTE 1110 - STOCKHOLDERS’ EQUITY
The Company is authorized to issue 10,000,0009,990,000 shares of it $0.001 par value preferred stock and 100,000,000 shares of its $0.001 par value common stock.
The Company has also designated 76,000 shares of Series A Preferred Stock. Each share of Series A Preferred Stock is convertible, at any time, at the option of the holder is convertible , into five shares of our common stock and one warrant to purchase one share of our common stock at $1.00 per share. All Preferred Stock will be automatically convertedconverts into shares of the Company’s common stock and warrants after three years from the original issue date of the Preferred Stock. On February 19, 2020 the Company converted the 76,000 outstanding Series A preferred shares, based on the automatic conversion terms into 205,000 common shares and 76,000 warrants have been issued, with the remaining 175,000 shares of common stock still to be issued and recognized as stock payable.
During the six months ended June 30, 2019,On January 3, 2020, the Company issued 1,096,300200,000 shares of common stock for $50,000.
On January 3, 2020, the Company issued 100,000 shares for services with a fair value of $505,325$39,000, based on stock price on date of issuance.
On January 30, 2020, the Company issued 15,000 shares for services. Additionally,services with a fair value of $6,390 that were due during the year ended December 31, 2019 and included in stock payable.
On February 5, 2020, the Company issued 4,000,000 shares for the settlement of debt with a fair value of $1,240,000, based on stock price on date of issuance.
On February 5, 2020, the Company issued 3,600,000 shares for services with a fair value of $1,116,000, based on stock price on date of issuance.
On March 9, 2020, the Company cancelled twoa consulting agreementsagreement entered into during the year ended December 31, 2018.2019. As a result, the Company received and cancelled 100,000500,000 shares of common stock valued at $50,000. The Company valued the share at their fair market value which was considered the most readily determinable value.$125,000, based on stock price on date of issuance.
During the six months ended June 30, 2019,On March 10, 2020, the Company issued 3,001,000300,000 shares for services with a fair value of $75,000 based on stock price on date of issuance.
On March 11, 2020, the Company received $100,000 for the issuance of 500,000 shares of common stock for $823,750 cash. Additionally,stock. As of March 31, 2020, the Company received $333,500 for the sale of common stock which hasshares have not been issued and has been recorded asincluded in stock payable.
During the six months ended June 30, 2019, the Company issued 150,000 shares of common stock valued at $75,000 as incentives for certain noteholders to enter into financing agreements.
18
NOTE 1211 - SUBSEQUENT EVENTS
SubsequentOn April 2, 2020, the Company filed a certificate of designation of preferences, rights and limitations of a new Series B Preferred Stock with the Secretary of State of Nevada, designating 10,000 shares of preferred stock, par value $0.001 of the Company, as Series B Preferred Stock. The new Series B Preferred Stock does not pay a dividend, does not have any liquidation preference over other securities issued by the Company and are not convertible into shares of the Company’s common stock. For so long as any shares of the Series B Preferred Stock remain issued and outstanding, the holders thereof, voting separately as a class, shall have voting power equal to quarter end,51% of the total vote on all shareholder matters of the Company. Upon or after the third anniversary of the initial issuance date, the Company shall have the right, at the Company’s option, to redeem all or a portion of the shares of Series B Preferred Stock, at a price per share equal to par value.
On April 2, 2020, the board issued 5,000 shares of the Series B Preferred Stock to the Company’s Chief Executive Officer and President, Michael Stebbins, and 5,000 shares of the Series B Preferred Stock to the Company’s Secretary and Treasurer, Robertson Orr.
April 1, 2020, the Company issued 1,104,000500,000 shares of common stock for $473,500 cash that was received during the June 30, 2019 and recorded as stock payable.
Subsequent to quarter end, the Company issued 540,000 shares of common stock for services.
Subsequent to quarter end, the Company issued 53,338 shares of common stock for the conversion of debt.$100,000 cash.
On August 2, 2016,November 5, 2019, the Company entered into a Loan Agreement$562,000 convertible note payable, including an original issue discount of $56,200 pursuant to which we borrowed $337,000, including a $37,000 original issue discount in the first tranche. Interest under the convertible promissory note is 12% per annum, and Security Agreement with Built-Right Holdings, LLC,the principal and all accrued but unpaid interest is due 180 days from funding. On May 5, 2020, Company paid the principal and accrued interest under the first tranche of $357,582.
On March 4, 2020, the Company issued a $12,000 promissory note. On April 17, 2020, the note and accrued interest in the amount of $12,140 was paid.
On May 5, 2020, the Company issued a $350,000 6% convertible note. The note is due on May 1, 2021 and is convertible at a rate of $0.125 per shares. As an Arizona limited liability company. incentive to enter into the agreement the noteholder was also granted 1,500,000 shares valued at $210,000. As of the date of the filing the shares have not been issued.
On July 26,November 19, 2019, we entered into a $281,000 convertible note payable, including an original issue discount of $28,100 convertible promissory note pursuant to which we borrowed of $150,000, including a $18,500 discount during the year ended December 31, 2019. Interest under the convertible promissory note is 12% per annum, and the principal and all accrued but unpaid interest is due 180 days from funding. On May 20, 2020, the noteholder agreed to extend the maturitydue date of the note to November 1, 2019.first tranche of funding until July 19, 2020
On January 25, 2019, the Company issued a $100,000 8% promissory note. The note was due on March 1, 2019, is currently past due, and is convertible at a rate of $0.50 per shares. On April 29, 2020, the note was amended to be due on demand but not before January 25, 2021 and the conversion price was changed to $0.10. As consideration the Company granted 140,000 3 year warrants exercisable at $0.125 per share.
1419
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This Quarterly Report on Form 10-Q contains forward-looking statements. Any statements contained herein that are not historical fact may deem to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “believes,” “anticipates,” “plans,” “expects,” “intends,” and similar expressions identify some of the forward-looking statements. Forward-looking statements are not guarantees of performance or future results and involve risks, uncertainties and assumptions. These statements include, among other things, statements regarding:
·our ability to diversify our operations;
·inability to raise additional financing for working capital;
·the fact that our accounting policies and methods are fundamental to how we report our financial condition and results of operations, and they may require our management to make estimates about matters that are inherently uncertain;
·our ability to attract key personnel;
·our ability to operate profitably;
·deterioration in general or regional economic conditions;
·adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations;
·changes in U.S. GAAP or in the legal, regulatory and legislative environments in the markets in which we operate;
·the inability of management to effectively implement our strategies and business plan;
·inability to achieve future sales levels or other operating results;
·the unavailability of funds for capital expenditures;
·other risks and uncertainties detailed in this report;
as well as other statements regarding our future operations, financial condition and prospects, and business strategies. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular, the risks discussed under the heading “Risk Factors” in Part II, Item 1A and those discussed in other documents we file with the Securities and Exchange Commission. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
References in the following discussion and throughout this Quarterly Report to “we”, “our”, “us”, “TKLS”, “Trutankless”, “Bollente”, “the Company”, and similar terms refer to Trutankless, Inc. unless otherwise expressly stated or the context otherwise requires.
1520
AVAILABLE INFORMATION
The Company’s stock symbol is TKLS, and is presently traded on the OTCQB maintained by OTC Markets Group, Inc. We file annual, quarterly and other reports and other information with the SEC. You can read these SEC filings and reports over the Internet at the SEC's website at www.sec.gov or on our website at www.trutanklessinc.com. You can also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, NE, Washington, DC 20549 on official business days between the hours of 10:00 am and 3:00 pm. Please call the SEC at (800) SEC-0330 for further information on the operations of the public reference facilities. We will provide a copy of our annual report to security holders, including audited financial statements, at no charge upon receipt of a written request to us at Trutankless, Inc., 15720 N. Greenway Hayden Loop, Suite 2, Scottsdale, Arizona 85260.
General
Trutankless Inc. was incorporated in the state of Nevada on March 7, 2008. On June 5, 2018, we changed our name from Bollente Companies Inc. to Trutankless Inc. The Company is headquartered in Scottsdale, Arizona and currently operates through its wholly-owned subsidiary, Bollente, Inc., a Nevada corporation incorporated on December 3, 2009.
Trutankless is involved in sales, marketing, research and development of a high quality, whole-house, smart electric tankless water heater that is more energy efficient than conventional products. Management anticipates the Company's trutankless water heater, with Wi-Fi capability and trutankless' proprietary apps offered in the iOS and Android store, will augment existing products in the hope automation space.
Trutankless® Products
We manufacture and distribute trutankless® water heaters, a line of new, high-quality, highly efficient electric tankless water heaters. Our trutankless® water heaters are engineered to outperform and outlast both its tank and tankless predecessors in energy efficiency, output, and durability. It provides endless hot water on demand for a whole household and it also integrates with home automation systems.
We have several features and design innovations which are new to the electric tankless water heater market that we believe will give our products a sustainable competitive advantage over our rivals in the market.
Our trutankless® water heaters are available through wholesale plumbing distributors, including Ferguson, Hajoca, WinSupply locations, Morrison Supply, and several regional distributors. A partial listing of wholesalers may be found on our website (www.trutankless.com).
21
16
Our trutankless® water heaters are designed to provide an endless hot water supply because they are designed to heat water as it flows through the system. We believe that our products are capable of higher temperature rise than competitive units at given flow rates because of its improved design and greater efficiency. Our trutankless® water heaters can save energy and reduce operating costs compared to tank systems because unlike tanks, if there is no hot water demand, no energy is being used. In addition, we intend to improve life-cycle costs with an improved design conceived not only to increase efficiency, but also the longevity of our products versus competitive units. Generally, a typical tank water heater lasts about 9 years, whereas gas tankless systems may last longer, but requires more routine maintenance. Our product line is designed to last longer than tank water heaters without any routine maintenance required under most conditions.
We created a custom heat exchanger for our trutankless® product line that utilizes our patented technology to heat water as it flows through the system, which means customers need not worry about running out of hot water. We believe we’ve selected the best materials available and a collection of exclusive design elements and features to maximize capacity, minimize energy use, and provide a truly maintenance free experience.
Our trutankless® water heaters were officially launched in the first quarter of 2014 and is sold throughout the wholesale plumbing distribution channel. We began generating revenue in the first quarter of 2014. As of the fiscal year ended December 31, 2014, we generated $238,912 in revenue. As of the fiscal year ended December 31, 2015, we generated $265,504 in revenue. As of the fiscal year ended December 31, 2016, we generated $429,582 in revenue. As of the fiscal year ended December 31, 2017, we generated $695,857 in revenue. As of the fiscal year ended December 31, 2018, we generated $1,537,958 in revenue. As of the six monthsfiscal year ended June 30,December 31, 2019, we generated $1,058,169$1,908,708. As of the three months ended March 31, 2020, we generated $539,561 in revenue.
In July of 2014, we launched a customizable online control panel for our trutankless® line of smart electric water heaters. From the dashboard, residential and commercial users can obtain real-time status reports, adjust unit temperature settings, view up to three years of water usage data, and change notification settings from anywhere in the world, using a computer or web-enabled smart device at www.home.mytankless.com.home.trutankless.com.
Additionally, service professionals can also use the www.pro.trutankless.com dashboard to monitor system status on every unit they install, allowing them to proactively contact their customers if a service or warranty appointment is needed.
Our primary markets, Florida, Texas, Arizona, and the rest of the Sunbelt region are centers of growth in the U.S. construction industry with green building at an all-time high, and an unprecedented appliance replacement cycle. We intend to take advantage of these powerful macro-economic trends.
1722
Home.trutankless.com is available as a service to consumers of trutankless® water heaters. We have applications available for download from the Google Play and Apple iOS stores, which like the online control panels, allows monitoring and control of the tankless systems.
Industry Recognition and Awards
Trutankless® received the Best of IBS 2014 Award for Best Home Technology Product from the National Association of Home Builders (NAHB) at that year’s International Builders Show (IBS) in Las Vegas. The IBS is produced by NAHB and is the largest annual light construction show in the world - featuring more than 1,100 exhibitors and attracting 75,000 attendees including high level decision makers from some of the largest homebuilders in the world as well as plumbing and HVAC professionals from top outfits in major markets.
Trutankless® received the Governor's Award of Merit for Energy and Technology Innovation for the trutankless line of electric tankless heaters at Arizona Forward's 2014 Environmental Excellence Awards.
Trutankless® received Kitchen and Bath Business Magazine’s 2014 K*BB Product Innovator’s Award Judges Choice Product.
In 2015, Trutankless was named in Buildings Magazine’s 2015 listing of “Money Savings Products” in the Energy Saving Measures category and received a Special Mention in the Architizer A+ Awards.
That same year, Appliance Design Magazine named Trutankless among the winners of their annual Excellence in Design Award, and the editors of Green Builder Magazine named Trutankless as one of their picks as “Hot Product”.
Consumer Reports Magazine featured Trutankless in its Top 5 Remodeling Trends for 2016, and leading home improvement website, houzz.com, honored the company with 4 consecutive “Best of Houzz” honors from 2014 through 2018.
Customers and Markets
We sell our products to plumbing wholesale distributors and dealers.
Approximately 76% of our sales in 2019, 81% of our sales in 2018, 90% of our sales in 2017, 96.1% of our sales in 2016, 98.3% of our sales in 2015 and 93.5% of our sales in 2014 were to wholesale plumbing equipment distributors for commercial and residential repair and replace applications. We rely on commissioned manufacturers’ representatives to market our product lines. Additionally, our products are sold to independent dealers throughout the United States.
Manufacturing and Logistics
Our principal supplier is Sinbon Electronics, a contract manufacturer and engineering company based in Taiwan with manufacturing facilities in China, Taiwan, in the U.S., and other global locations. Sinbon handles procurement and supply chain management. We have a Manufacturing Services Agreement establishing our pricing and payment terms, warranty, shipping, and delivery terms. We are also negotiating our engineering agreement with Sinbon, which is ongoing and currently being re-negotiated.
Finished products are generally shipped Free on Board (FOB) Shanghai via ocean freight and are warehoused at Associated Global Systems located in Phoenix, Arizona. Merchandise is typically shipped using common carriers or freight companies which are selected at the time of shipment based on order volume and the best available rates.
23
Recent Developments
18
In February 2020, we announced that the Company entered into an amended and restated loan agreement with noteholder to repay and convert $1,212,006 balance under facility.
COVID-19 Pandemic
In December 2019, an outbreak of a novel strain of coronavirus originated in Wuhan, China (“COVID-19”) and has since spread worldwide, including to the Unites States (the “U.S.”), posing public health risks that have reached pandemic proportions (the “COVID-19 Pandemic”). The COVID-19 Pandemic poses a threat to the health and economic wellbeing of our employees, customers and vendors. The operation of all of our facilities is critically dependent on our employees who staff these locations. To ensure the wellbeing of our employees and their families, we have provided all of our employees with detailed health and safety literature on COVID-19, such as the Center for Disease Control (the “CDC”)’s industry-specific guidelines for working with the deceased who were and may have been infected with COVID-19. In addition, our procurement and safety teams have updated and developed new safety-oriented guidelines to support daily field operations and provided personal protection equipment to those employees whose positions necessitate them, and we have implemented work from home policies at our corporate office consistent with CDC guidance to reduce the risks of exposure to COVID-19 while still supporting the families that we serve.
Like most businesses world-wide, the COVID-19 Pandemic has impacted us financially; however, we cannot presently predict the scope and severity with which COVID-19 will impact our business, financial condition, results of operations and cash flows. However, COVID-19 has caused severe disruptions in client support, development and limited access to the Company’s books and records resulting in limited support from staff and professional advisors. This has, in turn, delayed the Company’s ability to conduct necessary work to finalize its financial statements which may otherwise impact the Company’s ability to complete its Quarterly Report. Notwithstanding the foregoing, we anticipate filing our Quarterly Report on or before June 29, 2020, which is within the 45-day period from the Report’s original filing deadline of May 15, 2020, provided by SEC Release No. 34-88465.
Certificate of Designation – Series B Preferred Stock
On April 2, 2020, we filed a certificate of designation of preferences, rights and limitations (the “Certificate of Designation”) of Series B Preferred Stock (the “Series B Preferred Stock”), with the Secretary of State of Nevada, designating 10,000 shares of preferred stock, par value $0.001 of the Company, as Series A Preferred Stock.
The Series B Preferred Stock does not pay a dividend, does not have any liquidation preference over other securities issued by the Company and are not convertible into shares of the Company’s common stock.
For so long as any shares of the Series B Preferred Stock remain issued and outstanding, the holders thereof, voting separately as a class, shall have voting power equal to 51% of the total vote (representing a super majority voting power) on all shareholder matters of the Company.
Upon or after the third anniversary of the initial issuance date, the Company shall have the right, at the Company’s option, to redeem all or a portion of the shares of Series B Preferred Stock, at a price per share equal to par value.
Additionally, the Company is prohibited from adopting any amendments to the Company’s Bylaws, Articles of Incorporation, as amended, as set forth in the Certificate of Designation, without the affirmative vote of all of the outstanding shares of Series B Preferred Stock. However, the Company may, by any means authorized by law and without any vote of the holders of shares of Series B Preferred Stock, make technical, corrective, administrative or similar changes to such Certificate of Designation that do not, individually or in the aggregate, adversely affect the rights or preferences of the holders of shares of Series B Preferred Stock.
On April 2, 2020, we approved the issuance of 5,000 shares of the Series B Preferred Stock to the Company’s Chief Executive Officer and President, Michael Stebbins, and 5,000 shares of the Series B Preferred Stock to the Company’s Secretary and Treasurer, Robertson Orr. The shares were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act of 1933, as amended.
24
RESULTS OF OPERATIONS
Results of Operations for the three months ended June 30, 2019March 31, 2020 compared with the three months ended June 30, 2018.March 31, 2019.
Revenues
In the three months ended June 30, 2019,March 31, 2020, we generated $419,894$539,561 in revenues, as compared to $354,339$638,275 in revenues in the prior year. The increasedecrease in sales was attributable to less sales of our trutankless® residential and light commercial products. Cost of goods sold was $464,779$246,532 in the three months ended June 30, 2019,March 31, 2020, as compared to $411,985$468,363 in the three months ended June 30, 2018.March 31, 2019. This increasedecrease in cost of goods sold was primarily attributable to an increasea decrease in cost of inventory.
To the knowledge of management, the Company is unaware of any trends or uncertainties in the sales or costs of our products and services for the periods discussed.
Expenses
Operating expenses totaled $887,988$773,760 during the three months ended June 30, 2019March 31, 2020 as compared to $515,647$1,120,523 in the prior year. In the three-month period ended June 30, 2019,March 31, 2020, our expenses primarily consisted of General and Administrative of $421,472,$378,732, Research and Development of $119,841$64,078 and Professional fees of $346,675.$330,950.
General and administrative fees increased $49,133,decreased $17,492, or approximately 13%4% to $421,472$378,732 for the three months ended June 30, 2019March 31, 2020 from $372,339$396,224 for the three months ended June 30, 2018.March 31, 2019. This increasedecrease was primarily due to an increasea decrease in wages and marketing.
Research and development increased $115,355,$13,345, or approximately 2571%26% to $119,841$64,078 for the three months ended June 30, 2019March 31, 2020 from $4,486$50,733 for the three months ended June 30, 2018.March 31, 2019. This increase is attributed primarily to the integration of new materials intoadditional consulting fees associated with the production process.Company’s research and development efforts.
Professional fees increased $207,853,decreased $342,616, or approximately 149%51% to $346,675$330,950 for the three months ended June 30, 2019March 31, 2020 from $138,822$673,566 for the three months ended June 30, 2018.March 31, 2019. Professional fees increaseddecreased due to an increasea decrease in consulting fees associated with business development.
Other Expenses
Other expensesInterest expense increased $40,122$370,602 to $188,307$554,820 in the three months ended June 30, 2019March 31, 2020 from $148,185$184,218 in the three months ended June 30, 2018.March 31, 2019. The increase was the result of an increase in notes payable with interest accruals.
Net Loss
In the three months ended June 30, 2019,March 31, 2020, we generated a net loss of $1,121,180,$3,502,149, an increase of $399,702$2,367,320 from $721,478$1,134,829 for the three months ended June 30, 2018.March 31, 2019. This increase was attributable to increased consulting fees associated with business development and the Company spending more towards developing its technology.
Results of Operations for the six months ended June 30, 2019 compared with the six months ended June 30, 2018.
Revenues
In the six months ended June 30, 2019, we generated $1,058,169 in revenues, as compared to $779,385 in revenues in the prior year. Cost of goods sold was $933,142, as compared to $733,432 in the six months ended June 30, 2018. This increase in cost of goods sold was primarily attributable to an increase in cost of inventory.
To the knowledge of management, the Company is unaware of any trends or uncertainties in the sales or costs of our products and services for the periods discussed.
19
Gross Profit
Our gross profit increased $79,074, or approximately 172%, to $125,027 for the six months ended June 30, 2019 from $45,953 for the six months ended June 30, 2018. This increase in gross profit was primarily attributable to a higher volume of units sold.
Expenses
Operating expenses totaled $2,008,511 during the six months ended June 30, 2019 as compared to $905,475 in the prior year. In the six-month period ended June 30, 2019, our expenses primarily consisted of General and Administrative of $817,696, Research and Development of $170,574, and Professional fees of $1,020,241.
General and administrative fees increased $170,323, or approximately 26% to $817,696 for the six months ended June 30, 2019 from $647,373 for the six months ended June 30, 2018. This increase was primarily due to an increase in wages and marketing.
Research and development increased $166,088, or approximately 3702% to $170,574 for the six months ended June 30, 2019 from $4,486 for the six months ended June 30, 2018. This increase is attributed primarily to the Company spending more towards developing its technology.
Professional fees increased $766,625, or approximately 302% to $1,020,241 for the six months ended June 30, 2019 from $253,616 for the six months ended June 30, 2018. Professional fees increased due to an increase in consulting fees associated with business development.
Other Expenses
Other expenses increased $242,631 to $499,339 in the six months ended June 30, 2019 from $256,708 in the six months ended June 30, 2018. The increase was the result of an increase in notes payable with interest accruals and a loss on settlement of notes payable.
Net Loss
In the six months ended June 30, 2019, we generated a net loss of $2,382,823, an increase of $1,266,593 from $1,116,230 for the six months ended June 30, 2018. This increase was attributable to increased cost of goods sold and consulting fees associated with business development.
Going Concern
The accompanying consolidated financial statements included in this filing have been prepared in conformity with generally accepted accounting principles that contemplate the continuance of the Company as a going concern.
Management evaluated all relevant conditions and events that are reasonably known or reasonably knowable, in the aggregate, as of the date the consolidated financial statements are issued and determined that substantial doubt exists about the Company’s ability to continue as a going concern within one year from the date of this filing. The Company’s ability to continue as a going concern is dependent on the Company’s ability to generate revenues and raise capital. The Company mayhas not havegenerated sufficient revenues from product sales to provide sufficient cash flows to enable the Company to finance its operations internally. As of March 31, 2020, the Company had $46,505 cash on hand. At March 31, 2020, the Company has an accumulated deficit of $35,928,131.
25
For the three months ended March 31, 2020, the Company had a sufficient amountnet loss of $3,599,529, and cash requiredused in operations of $346,070. These factors raise substantial doubt about the Company’s ability to pay allcontinue as a going concern.
Over the costs associated with operatingnext twelve months the Company intends to invest its working capital resources in sales and marketing ofin order to increase the distribution and demand for its products. Management intendsIf the Company fails to use borrowingsgenerate sufficient revenue and securityobtain additional capital to continue at its expected level of operations, the Company may be forced to scale back or discontinue its sales and marketing efforts. However, there is no guarantee the Company will generate sufficient revenues or raise capital to mitigate the effects of cash flow deficits; however, no assurance can be given that debt or equity financing, if and when required, will be available.continue operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and classification of liabilities that might be necessary shouldif the Company beis unable to continue existence.as a going concern.
Liquidity and Capital Resources
At June 30, 2019,March 31, 2020, we had an accumulated deficit of $29,915,575.$35,928,131. Primarily because of our history of operating losses and our recording of note payables, we have a working capital deficiency of $2,246,075$2,432,404 at June 30, 2019.March 31, 2020. Losses have been funded primarily through issuance of common stock and borrowings from our stockholders and third-party debt. As of June 30, 2019,March 31, 2020, we had $141,821$46,505 in cash, $189,729$310,942 in accounts receivable, $357,931$36,686 in inventory, and $130,457$1,410,738 in prepaid expenses. We used net cash in operating activities of $1,253,852$346,070 for the sixthree months ended June 30, 2019.March 31, 2020.
20
Cash Flows from Operating, Investing and Financing Activities
The following table provides detailed information about our net cash flow for all financial statement periods presented in this Quarterly Report. To date, we have financed our operations through the issuance of stock and borrowings.
The following table sets forth a summary of our cash flows for the sixthree months ended June 30, 2019March 31, 2020 and 2018:2019:
| | Six months ended June 30, | | Three months ended March 31, |
| | 2019 | | 2018 | | 2020 | | 2019 |
Net cash used in operating activities | | $ | (1,253,852) | | $ | (738,516) | | $ | (346,070) | | $ | (724,500) |
Net cash used in investing activities | | | - | | (892) | | | - | | - |
Net cash provided by financing activities | | | 1,386,005 | | | 725,209 | | | 388,233 | | | 909,977 |
Net increase/(decrease) in Cash | | | 132,154 | | | (14,199) | | | 42,163 | | | 185,477 |
Cash, beginning | | | 9,668 | | | 78,599 | | | 4,342 | | | 9,668 |
Cash, ending | | $ | 141,821 | | $ | 64,400 | | $ | 46,505 | | $ | 195,145 |
Operating activities - Net cash used in operating activities was $1,253,852$346,070 for the three months ended June 30, 2019,March 31, 2020, as compared to $738,516$724,500 used in operating activities for the same period in 2018.2019. The increasedecrease in net cash used in operating activities was primarily due to a higherlower volume of units sold and increase in research and development and consulting contract cost.
Investing activities - Net cash used in investing activities for the three months ended June 30, 2019March 31, 2020 was $0, as compared to $892$0 for the same period of 2018. The decrease of net cash used in investing activities was attributable to not purchasing equipment during the current period.2019.
Financing activities - Net cash provided by financing activities for the three months ended June 30, 2019March 31, 2020 was $1,386,005,$388,233, as compared to $725,209$909,977 for the same period of 2018.2019. The increasedecrease of net cash provided by financing activities was mainly attributable to moreless equity financing.
Ongoing Funding Requirements
As of June 30, 2019,March 31, 2020, we continue to use traditional and/or debt financing to provide the capital we need to run the business. It is possible that we may need additional funding to enable us to fund our operating expenses and capital expenditures requirements.
26
Until such time, if ever, as we can generate substantial product revenues, we intend to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. There can be no assurance that any of those sources of funding will be available when needed on acceptable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or relationships with third parties when needed or on acceptable terms, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts; abandon our business strategy of growth through acquisitions; or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
21
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. See Note 1 - Summary of Significant Accounting Policies
There have been no material changes to our critical accounting policies as compared to the critical accounting policies and significant judgements and estimates disclosed in our Notes to Consolidated Financial Statements.Annual Report on Form 10-K/A for the year ended December 31, 2019, filed with the SEC on April 23, 2020.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
This item in not applicable as we are currently considered a smaller reporting company.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
As required by Rule 13a-15 under the Exchange Act, as of the end of the Company’s last fiscal quarter, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of the Company’s current management, including the Company’s Chief Executive Officer and Principal Financial Officer (Principal Financial and Accounting Officer), havewho concluded that the Company’s disclosure controls and procedures wereare not effective as of such date due to material weaknesses in internal control over financial reporting. Our management identified the following material weaknesses in our internal control over financial reporting, which are indicative of many small companies with limited personnel:
·inadequate internal controls relating to the authorization, recognition, capture, and review of transactions, facts, circumstances, and events that could have a material impact on the Company’s financial reporting process.effective.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Principal Financial Officer (Principal Financial and Accounting Officer), as appropriate, to allow timely decisions regarding required disclosure.
27
Changes in internal control over financial reporting
Management reviews the Company’s system of internal control over financial reporting and makes changes to the Company’s processes and systems to improve controls and increase efficiency, while ensuring that the Company maintains an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities and migrating processes.
During the Company’s last fiscal quarter, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
22
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are not presently a party to any material litigation, nor to the knowledge of management is any litigation threatened against us, which may materially affect us.
Item 1A. Risk Factors
The risk factors listed in our 20182019 Form 10-K,10-K/A, filed with the Securities Exchange Commission on April 10, 2019,23, 2020, are hereby incorporated by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
DuringOn January 1, 2020, the six months endedCompany entered into an agreement to consolidate three notes payable dated February 2, 2018 and May 16, 2019 into one $300,000, 12% note due June 30, 2019,1, 2021. As consideration the Company issued 1,096,300the note holder 175,000 shares of common stock valued at $68,250.
On January 1, 2020, the Company entered into an agreement to consolidate two notes payable dated June 11, 2018 and September 6, 2016 into one $260,000, 12% note due June 1, 2021. As consideration the Company issued the note holder 175,000 shares of common stock valued at $68,250.
On January 3, 2020, the Company issued 200,000 shares of common stock for $50,000.
On January 3, 2020, the Company issued 100,000 shares for services with a fair value of $505,325$39,000, based on stock price on date of issuance.
On January 30, 2020, the Company issued 15,000 shares for services. Additionally,services with a fair value of $6,390 that were due during the year ended December 31, 2019 and included in stock payable.
On January 30, 2020, the Company issued 52,166 shares of common stock valued at 16,171 in connection with the issuance of a certain notes payable.
On January 30, 2020, the Company issued 12,000 shares of common stock valued at $3,720 in connection with the modification of a certain notes payable.
28
On February 5, 2020, the Company issued 3,600,000 shares for services with a fair value of $1,116,000
On February 5, 2020, the Company issued 4,000,000 shares for services with a fair value of $1,240,000
On February 19, 2020, the Company converted the 76,000 outstanding Series A preferred shares, based on the automatic conversion terms into 205,000 common shares and 76,000 warrants have been issued, with the remaining 175,000 shares of common stock still to be issued and recognized as stock payable.
On November 5, 2019, the Company entered into a $562,000, convertible note payable including an original issue discount of $56,200 convertible promissory note pursuant to which we borrowed of $337,000 during the year ended December 31, 2019. On February 7, 2020, we borrowed an additional $225,000, including an original issue discount of $25,000 and granted the noteholder an additional 476,493 shares of common stock valued at $147, 713.
On March 9, 2020, the Company cancelled twoa consulting agreementsagreement entered into during the year ended December 31, 2018.2019. As a result, the Company received and cancelled 100,000500,000 shares of common stock.
On March 10, 2020, the Company issued 300,000 shares for services with a fair value of $75,000.
On March 10, 2020, the Company issued 50,000 shares of common stock valued at $50,000.$12,500 in connection with extending certain notes payable.
On March 11, 2020, the Company received $100,000 for the issuance of 500,000 shares of common stock. As of March 31, 2020, the shares have not been issued and included in stock payable.
Warrants and Preferred Stock
On January 8, 2020, the Company granted 208,664 warrants 3.3 years warrants exercisable at $0.125 per share with the issuance of the of a convertible note payable valued at $19,277.
On January 8, 2020, the Company granted 232,000 warrants 3.3 years warrants exercisable at $0.125 per share with the issuance of the of a convertible note payable valued at $82,131.
On February 5, 2020, the Company granted 1,965,094 warrants 5 year warrants exercisable at $0.50 per shares warrants valued $566,269 as part of a note settlement agreement. Additionally, as part of the agreement the Company modified 1,666,666 previously issued to include the same terms of the warrants issued under the agreement. The Company valued the modification of warrants at $215,448, which the difference of the fair value of the warrants before and after the modification.
On February 19, 2020, the Company converted the 76,000 outstanding Series A preferred shares, based on the automatic conversion terms into 205,000 common shares and 76,000 three year warrants exercisable at $1 per share
We believe that the above issuances and sale of the securities was exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 by virtue of Section 4(2) and Regulation D Rule. The securities were sold directly by us and did not involve a public offering or general solicitation. The recipients of the securities were afforded an opportunity for effective access to files and records of the Registrant that contained the relevant information needed to make their investment decision, including the financial statements and 34 Act reports. We reasonably believed that the recipients, immediately prior to the sale of the securities, were accredited investors and had such knowledge and experience in our financial and business matters that they were capable of evaluating the merits and risks of their investment. The management of the recipients had the opportunity to speak with our management on several occasions prior to their investment decision. There were no commissions paid on the issuance and sale of the securities.
29
Subsequent Issuances
On April 2, 2020, the Company filed a certificate of designation of preferences, rights and limitations of a new Series B Preferred Stock with the Secretary of State of Nevada, designating 10,000 shares of preferred stock, par value $0.001 of the Company, as Series B Preferred Stock. The new Series B Preferred Stock does not pay a dividend, does not have any liquidation preference over other securities issued by the Company and are not convertible into shares of the Company’s common stock. For so long as any shares of the Series B Preferred Stock remain issued and outstanding, the holders thereof, voting separately as a class, shall have voting power equal to 51% of the total vote on all shareholder matters of the Company. Upon or after the third anniversary of the initial issuance date, the Company shall have the right, at the Company’s option, to redeem all or a portion of the shares of Series B Preferred Stock, at a price per share at their fair market value which was considered the most readily determinableequal to par value.
DuringOn April 2, 2020, the six months ended June 30, 2019,board issued 5,000 shares of the Series B Preferred Stock to the Company’s Chief Executive Officer and President, Michael Stebbins, and 5,000 shares of the Series B Preferred Stock to the Company’s Secretary and Treasurer, Robertson Orr.
On April 1, 2020, the Company issued 3,001,000500,000 shares of common stock for $823,750$100,000 cash. Additionally, the Company received $333,500 for the sale of common stock which has not been issued and has been recorded as stock payable.
During the six months ended June 30, 2019,On May 1, 2020, the Company issued 150,000 sharesa $350,000 6% convertible note. The note is due on May 1, 2021 and is convertible at a rate of common stock valued at $75,000 as incentives for certain noteholders$0.125 per shares. As an incentive to enter into financing agreements.the agreement the noteholder was also granted 1,500,000 shares valued at $210,000. As of the date of the filing the shares have not been issued.
We believe that the above issuances and sale of the securities was exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 by virtue of Section 4(2) and Regulation D Rule. The securities were sold directly by us and did not involve a public offering or general solicitation. The recipients of the securities were afforded an opportunity for effective access to files and records of the Registrant that contained the relevant information needed to make their investment decision, including the financial statements and 34 Act reports. We reasonably believed that the recipients, immediately prior to the sale of the securities, were accredited investors and had such knowledge and experience in our financial and business matters that they were capable of evaluating the merits and risks of their investment. The management of the recipients had the opportunity to speak with our management on several occasions prior to their investment decision. There were no commissions paid on the issuance and sale of the securities.
Subsequent Issuances
Subsequent to quarter end, the Company issued 1,104,000 shares of common stock for $473,500 cash that was received during the June 30, 2019 and recorded as stock payable.
Subsequent to quarter end, the Company issued 540,000 shares of common stock for services.
Subsequent to quarter end, the Company issued 53,338 shares of common stock for the conversion of debt.
We believe that the above issuances and sale of the securities was exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 by virtue of Section 4(2) and Regulation D Rule. The securities were sold directly by us and did not involve a public offering or general solicitation. The recipients of the securities were afforded an opportunity for effective access to files and records of the Registrant that contained the relevant information needed to make their investment decision, including the financial statements and 34 Act reports.
24
We reasonably believed that the recipients, immediately prior to the sale of the securities, were accredited investors and had such knowledge and experience in our financial and business matters that they were capable of evaluating the merits and risks of their investment. The management of the recipients had the opportunity to speak with our management on several occasions prior to their investment decision. There were no commissions paid on the issuance and sale of the securities.
Issuer Purchases of Equity Securities
The Company did not repurchase any of its equity securities during the period ended June 30, 2019.March 31, 2020.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information.
Subsequent to quarter end, Mr. Robertson Orr gave the Company notice of his resignation from his position as Chief Executive Officer of the Company, which resignation was accepted by the Company on August 14, 2019.None.
On August 14, 2019, the Company appointed Mr. Michael Stebbins to the position of Chief Executive Officer.
30
Item 6. Exhibits.
Exhibit No. | | Description |
| | |
31.1* | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
32.1* | | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
101.INS | | XBRL Instance Document |
| | |
101.SCH | | XBRL Taxonomy Extension Schema |
| | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase |
| | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase |
| | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase |
| | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase |
* Filed herewith.
25
31
SIGNATURES
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.
TRUTANKLESS, INC.
(Registrant)
By: /s/ Michael Stebbins
Michael Stebbins, President,CEO,
Principal Financial Officer and
Principal Executive Officer
Date: August 19, 2019June 3, 2020
2632
