UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020.

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to ______.

 

Commission File Number 000-56192

 

 

ELECTROMEDICAL TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware (State or Other Jurisdiction of Incorporation)

5047 (Primary Standard Industrial Classification Code Number)

82-2619815 (I.R.S. Employer Identification No.)

 

16561 N. 92nd Street, Ste. 101
Scottsdale, AZ	85260
(Address of principal executive offices)	(Zip Code)

 

(303) 974-4770

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation ST (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	x	Smaller reporting company	x
Emerging growth company	x

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2). ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

On September 30, 2020, 28,810,348 shares of common stock were outstanding.

 

 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION
Item 1.	FINANCIAL STATEMENTS:	1
	CONDENSED BALANCE SHEETS AS OF SEPTEMBER 30, 2020 (UNAUDITED) AND DECEMBER 31, 2019	1
	CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (UNAUDITED)	2
	CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (UNAUDITED)	3
	CONDENSED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (UNAUDITED)	5
	NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS	6
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	24
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	29
Item 4.	CONTROLS AND PROCEDURES	29
PART II. OTHER INFORMATION		30
Item 1.	LEGAL PROCEEDINGS	30
Item 1A.	RISK FACTORS	30
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	30
Item 3.	DEFAULTS UPON SENIOR SECURITIES	30
Item 4.	MINE SAFETY DISCLOSURE	30
Item 5.	OTHER INFORMATION	31
Item 6.	EXHIBITS	31
SIGNATURES		32

 

 

ITEM 1. FINANCIAL STATEMENTS

 

ELECTROMEDICAL TECHNOLOGIES, INC.

 

BALANCE SHEETS

(UNAUDITED)

 

		September 30, 2020				December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents		$	85,477			$	-
Accounts receivable			16,841				15,667
Inventories			62,500				24,694
Prepaid expenses and other current assets			209,791				65,831
Total current assets			374,609				106,192
Other assets			85,601				25,580
Property and equipment, net			754,688				771,094
Total assets		$	1,214,898			$	902,866
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable		$	308,198			$	251,162
Credit cards payable			22,531				31,009
Accrued expenses and other current liabilities			254,038				289,791
Customer deposits			64,780				40,120
KISS liability - related party			-				1,444,761
Convertible promissory notes, net of discount of $684,855			86,145				50,000
Related party notes payable			357,500				105,000
PPP Loan			39,500				-
Notes payable			17,846				59,153
Long term debt, current portion			27,236				25,595
Derivative liabilities			194,307				-
Total current liabilities			1,372,081				2,296,591
Long-term liabilities:
Bank debt, net of current portion			553,203				566,406
Government debt, net of current portion			154,991				-
Related party notes payable			-				213,000
Other liabilities			18,794				11,306
Total liabilities			2,099,069				3,087,303
Commitments and contingencies			-				-
Stockholders’ deficit
Series A Preferred Stock, 1,000,000 shares authorized and 500,000 outstanding			355,000				355,000
Common stock, $.00001 par value, 50,000,000 shares authorized; 28,810,348 and 17,900,639 shares outstanding as of September 30, 2020 and December 31, 2019, respectively			286				177
Additional paid-in- capital			7,474,723				2,713,087
Accumulated deficit			(8,714,180	)			(5,252,701	)
Total stockholders’ deficit			(884,171)	)			(2,184,437	)
Total liabilities and stockholders’ deficit		$	1,214,898			$	902,866

 

See accompanying notes to financial statements

 

 

ELECTROMEDICAL TECHNOLOGIES, INC.

STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		THREE MONTHS ENDED SEPTEMBER 30,								NINE MONTHS ENDED SEPTEMBER 30,
		2020				2019				2020				2019
Net sales		$	205,850			$	270,128			$	557,476			$	625,020
Cost of sales			57,383				75,202				139,892				181,409
Gross profit			148,467				194,926				417,584				443,611
Selling, general and administrative expenses			2,243,377				373,402				3,768,196				1,598,029
Loss from operations			(2,094,910	)			(178,476	)			(3,350,612	)			(1,154,418	)
Other income (expense)
Interest expense			(52,658	)			(10,601	)			(82,168	)			(35,342	)
Change in fair value of related party KISS liability			-				(1,553	)			(7,784	)			(41,257	)
Change in fair value of derivative liabilities			(22,415	)			-				(22,415	)			-
Other income			-				-				1,500				-
Total other expense			(75,073	)			(12,154	)			(110,867	)			(76,599	)
Net loss		$	(2,169,983	)		$	(190,630	)		$	(3,461,479	)		$	(1,231,017	)
Weighted average shares outstanding- basic and diluted			21,875,068				16,681,043				20,201,697				16,567,820
Weighted average loss per share- basic and diluted		$	(0.10	)		$	(0.01	)		$	(0.17	)		$	(0.07	)

  

See accompanying notes to financial statements

 

 

ELECTROMEDICAL TECHNOLOGIES, INC.

STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019

(UNAUDITED)

 

																										Total
		Preferred Stock								Common Stock								Paid in				Accumulated				Stockholders’
		Amount				Shares				Amount				Shares				Capital				Deficit				Deficit
Balance, December 31, 2018		$	-				-			$	162				16,320,823			$	1,447,960			$	(3,508,362	)		$	(2,060,240	)
Issuance of common stock for cash			-				-				1				104,506				79,999				-				80,000
Shares issued for consulting services			-				-				1				150,000				106,500				-				106,501
																							-
Shares issued for software development services			-				-				-				50,000				35,500				-				35,500
Stock-based compensation			-				-				-				-				513,644				-				513,644
Net loss			-				-				-				-				-				(818,969	)			(818,969	)
Balance, March 31, 2019		$	-				-			$	164				16,625,329			$	2,183,603			$	(4,327,331	)		$	(2,143,564	)
Issuance of common stock for cash			-				-				-				-				-				-				-
Shares issued for consulting services			-				-				1				43,461				30,855				-				30,856
Stock-based compensation			-				-				-				-				40,688				-				40,688
Net loss			-				-				-				-				-				(221,418	)			(221,418	)
Balance, June 30, 2019		$	-				-			$	165				16,668,790			$	2,255,146			$	(4,548,749	)		$	(2,293,438	)
Issuance of common stock for cash			-				-				-				42,253				30,000				-				30,000
Shares issued for consulting services			-				-				-				20,000				14,200				-				14,200
Stock-based compensation			-				-				-				-				48,428				-				48,428
Net loss			-				-				-				-				-				(190,630	)			(190,630	)
Balance, September 30, 2019		$	-				-			$	165				16,731,043			$	2,347,774			$	(4,739,379	)		$	(2,391,440	)

 

See accompanying notes to financial statements

 

 

ELECTROMEDICAL TECHNOLOGIES, INC.

STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020

(UNAUDITED)

 

																										Total
		Preferred Stock								Common Stock								Paid in				Accumulated				Stockholders’
		Amount				Shares				Amount				Shares				Capital				Deficit				Deficit
Balance, December 31, 2019		$	355,000				500,000			$	177				17,900,639			$	2,713,087			$	(5,252,701	)		$	(2,184,437	)
Shares issued in conjunction with vendor settlement			-				-				-				10,355				7,352				-				7,352
Shares issued for consulting services			-				-				6				600,000				289,994				-				290,000
Stock-based compensation			-				-				-				-				5,265				-				5,265
Net loss			-				-				-				-				-				(451,241	)			(451,241	)
Balance, March 31, 2020		$	355,000				500,000			$	183				18,510,994			$	3,015,698			$	(5,703,942	)		$	(2,333,061	)
Shares issued in conjunction with convertible promissory note			-				-				1				100,000				42,968				-				42,969
Beneficial conversion feature in conjunction with convertible promissory note			-				-				-				-				8,800				-				8,800
Shares issued to employee for services			-				-				20				2,000,000				599,980				-				600,000
Warrant issued for services			-				-				-				-				85,380				-				85,380
Issuance of common stock for cash			-				-				1				142,857				49,999				-				50,000
Stock-based compensation			-				-				-				-				5,481				-				5,481
Net loss			-				-				-				-				-				(840,255	)			(840,255	)
Balance, June 30, 2020		$	355,000				500,000			$	205				20,753,851			$	3,808,306			$	(6,544,197	)		$	(2,380,686	)
Beneficial conversion feature in conjunction with convertible promissory notes			-				-				-				-				390,000				-				390,000
Conversion of KISS liability- related party shares			-				-				72				7,156,497				1,452,473				-				1,452,545
Shares issued for consulting services			-				-				9				900,000				1,817,991				-				1,818,000
Stock-based compensation			-				-				-				-				5,953				-				5,953
Net loss			-				-				-				-				-				(2,169,983	)			(2,169,983	)
Balance, September 30, 2020		$	355,000				500,000			$	286				28,810,348			$	7,474,723			$	(8,714,180)			$	(884,171	)

 

See accompanying notes to financial statements

 

 

ELECTROMEDICAL TECHNOLOGIES, INC.

STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30,

(UNAUDITED)

 

		2020				2019
Cash flows from operating activities:
Net loss		$	(3,461,479	)		$	(1,231,017	)
Adjustments to reconcile net loss to net cash used in operating activities:
Financing costs on put option liability			-				76,931
Provision for allowance for doubtful accounts			3,765				-
Stock-based compensation expense			2,761,848				754,317
Depreciation and amortization			16,406				18,988
Change in excess fair value of KISS liability- related party			7,784				41,257
Amortization of debt discount			33,038				-
Change in fair value of derivative liabilities			22,415				-
Change in operating assets and liabilities:
Accounts receivable			(4,939	)			(2,239	)
Inventories			(37,806	)			(29,847	)
Prepaid expenses and other current assets			(128,960	)			105,100
Due from Chief Executive Officer			-				10,256
Other assets			(60,021	)			-
Accounts payable			57,036				82,434
Credit cards payable			(8,478	)			(9,942	)
Accrued expenses and other current liabilities			(28,401	)			91,515
Customer deposits			24,660				(95,300	)
Other liabilities			7,488				-
Net cash used in operating activities			(795,644	)			(187,547	)
Cash flows from financing activities:
Repayments on short-term financing			(40,308	)			-
Proceeds from PPP loan			39,500				-
Issuance of convertible promissory note			665,000				-
Repayments on bank debt			(12,471	)			(17,992	)
Related party notes payable-net			24,500				203,000
Proceeds from government debt			155,900				-
Repayments on notes payable			(1,000	)			(107,461	)
Issuance of common stock for cash- net			50,000				110,000
Net cash provided by financing activities			881,121				187,547
Net decrease in cash and cash equivalents			85,477				-
Cash and cash equivalents, beginning of period			-				-
Cash and cash equivalents, end of period		$	85,477			$	-
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest		$	37,408			$	14,805
Taxes		$	-			$	-
Non-cash investing and financing activities:
Issuance of 50,000 shares of stock and put option liability for prepaid software		$	-			$	71,200
Shares issued in conjunction with vendor settlement		$	7,352			$	-
Warrants, common stock and beneficial conversion feature issued in conjunction with convertible promissory note		$	490,000			$	-
Conversion of Kiss liability-related party to common stock		$	1,452,545			$	-
Discount in convertible notes payable due to derivative liabilities		$	171,892			$	-

  

See accompanying notes to financial statements

 

 

ELECTROMEDICAL TECHNOLOGIES, INC.

 

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1.

ORGANIZATION AND NATURE OF BUSINESS

 

Electro Medical Technologies, LLC (“the Company”), was formed in November 2010 as an Arizona limited liability company. In August 2017, the Company converted to a Delaware C Corporation under Electromedical Technologies, Inc. The Company is a bioelectronic engineering company with medical device certifications in the United States (FDA) and Mexico (Cofepris). The Company engineers simple-to-use portable bioelectronics devices, which provide fast and long -lasting pain relief across a broad range of ailments.

 

NOTE 2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Accounting Method

 

The accompanying unaudited financial statements of Electromedical Technologies, Inc. have been prepared in accordance with Accounting Principles Generally Accepted in the United States of America (“GAAP”) for interim financial information and in accordance with Rule 8-03 of Regulation S-X per Regulation A requirements. Certain information and disclosures normally included in the annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. These interim financial statements should be read in conjunction with the audited annual financial statements of the Company as of and for the year ended December 31, 2019. The results of operations for the three months and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the full year.

 

Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities, certain disclosures at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates affecting the financial statements have been prepared on the basis of the most current and best available information. However, actual results from the resolution of such estimates and assumptions may vary from those used in the preparation of the financial statements.

 

Going Concern

 

Since inception, the Company has incurred approximately $8.7 million of accumulated net losses. In addition, during the nine months ended September 30, 2020, the Company used $795,644 of cash from operations and had a working capital deficit of $997,472. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The Company expects to obtain funding through additional debt and equity placement offerings until it consistently achieves positive cash flows from operations. If the Company is unable to obtain additional funding, it may not be able to meet all of its obligations as they come due for the next twelve months. The continuing viability of the entity and its ability to continue as a going concern is dependent upon the entity being successful in its continuing efforts in growing its revenue base and/or accessing additional sources of capital, and/or selling assets.

 

As a result, there is significant uncertainty whether the entity will continue as a going concern and, therefore, whether it will realize its assets and settle its liabilities and commitments in the normal course of business and at the amounts stated in the financial statements.

 

 

Accordingly, no adjustments have been made to the financial statements relating to the recoverability and classification of the asset carrying amounts or the amount and classification of liabilities that might be necessary should the entity not continue as a going concern. At this time, management is of the opinion that no asset is likely to be realized for an amount less than the amount at which it is recorded in the financial statements as at September 30, 2020.

 

Revenue Recognition

 

The FASB issued Accounting Standards Update (“ASU”) No. 2014-09, codified as ASC 606: Revenue from Contracts with Customers, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The Company adopted ASC 606 effective January 1, 2019 using modified retrospective basis and the cumulative effect was immaterial to the financial statements. In addition, the comparative prior period has not been restated.

 

Revenues are recognized when performance obligations are satisfied through the transfer of promised goods to the Company’s customers. Control transfers upon shipment of product and when the title has been passed to the customers. This includes the transfer of legal title, physical possession, the risks and rewards of ownership, and customer acceptance. Revenue is recorded net of sales taxes collected from customers on behalf of taxing authorities, allowance for estimated returns, chargebacks, and markdowns based upon management’s estimates and the Company’s historical experience. The Company’s liability for sales return refunds is recognized within other current liabilities, and an asset for the value of inventory which is expected to be returned is recognized within other current assets on the balance sheets. The Company generally allows a 30 day right of return to its customers. As of September 30, 2020, and December 31, 2019, the sales returns allowance was $6,990 and $3,225, respectively.

 

Certain larger customers pay in advance for future shipments. These advance payments totaled $64,780 and $40,120 at September 30, 2020 and December 31, 2019, respectively, and are recorded as customer deposits in the accompanying balance sheets. Revenue related to these advance payments is recognized upon shipment to the distributor or the end-customer.

 

At the completion of the initial three-year warranty, the Company sells extended warranties for periods ranging from one to three years. Revenue is recognized on a straight-line basis over the term of the contract. As of September 30, 2020 and December 31, 2019, deferred revenue of $38,796 and $24,177, respectively is recorded in connection with these extended warranties.

 

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

 

Accounts Receivable

 

Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts, and the Company generally does not require collateral. As a general policy, the Company determines an allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.

 

The Company recorded an allowance for doubtful accounts of $1,000 at both September 30, 2020 and December 31, 2019,

 

Financial Instruments and Concentrations of Business and Credit Risk

 

The Company elected early adoption of the Accounting Standards Update (“ASU”) 2016-01, Recognition and Measurement of Financial Assets and Liabilities, which eliminates the requirement of the Company to disclose the fair value of its financial instruments as of the balance sheet date. Financial instruments that potentially subject the Company to concentrations of business and credit risks consist of cash and cash equivalents, accounts receivable, and accounts payable.

 

The Company maintains cash balances that can, at times, exceed amounts insured by the Federal Deposit Insurance Corporation. The Company has not experienced any losses in these accounts and believes it is not exposed to any significant credit risk.

 

The Company’s accounts receivable, which are unsecured, expose the Company to credit risks such as collectability and business risks such as customer concentrations. The Company mitigates credit risk by investigating the creditworthiness of all customers prior to establishing relationships with them, performing periodic review of the credit activities of those customers during the course of the business relationship, regularly analyzing the collectability of accounts receivables, and recording allowances for doubtful accounts when these receivables become uncollectible. The Company mitigates business risks by attempting to diversify its customer base.

 

The Company had three significant customers (“Customers A, B and C”) for the three months ended September 30, 2020 that accounted for approximately 19.3%, 15.2% and 10.7%, respectively, of net sales, and one significant customer for the three months ended September 30, 2019 (“Customer A”), that accounted for approximately 10.0% of net sales. Customer A and Customer B accounted for 17.2% and 12.9% of net sales for the nine months ended September 30, 2020, respectively. Customer A accounted for 15.1% of net sales for the nine months ended September 30, 2019, respectively. There were no amounts outstanding from these customers as of September 30, 2020 and December 31, 2019. Amounts due these customers totaled $0 and $3,100 as of September 30, 2020 and December 31, 2019, respectively for commissions and reimbursements. Customer deposits on hand from Customer A totaled approximately $64,780 and $40,120 at September 30, 2020 and December 31, 2019, respectively. The loss of these customers would have a significant impact on the operations and cash flows of the Company.

 

The Company’s supplier concentrations expose the Company to business risks, which the Company mitigates by attempting to diversify its supply chain. Supplier concentrations consisted of one significant supplier in China (“Supplier A”) that accounted for approximately 86.8% and 80.8% of total net purchases for the three months and nine months ended September 30, 2020 and 0.0% and 81.6% for the three and nine months ended September 30, 2019., respectively. An additional supplier (“Supplier B”), accounted for approximately 100.0% and 11.0% of total net purchases for the three months and nine months ended September 30, 2019, respectively. There were no amounts due these suppliers at both September 30, 2020 and December 31, 2019. The loss of key vendors may have a significant impact on the operations and cash flows of the Company.

 

The estimated fair value of financial instruments has been determined using available market information and appropriate valuation methodologies. However, considerable judgment is often required to interpret market data used to develop the estimates of fair value. Accordingly, the estimates presented may not be indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair value amounts.

 

 

Disclosure of Fair Value

 

The disclosure requirements within Accounting Standards Codification (ASC) Topic 820-10, Fair Value Measurement, require disclosure of estimated fair values of certain financial instruments. For financial instruments recognized at fair value in the Company’s statements of operations, the disclosure requirements of ASC Topic 820-10 also apply. The methods and assumptions are set forth below:

 

·

Cash and cash equivalents are carried at cost, which approximates fair value.

 

·

The carrying amounts of receivables approximate fair value due to their short-term maturities.

 

·

The carrying amounts of payables approximate fair value due to their short-term maturities.

 

·

KISS liability-related party is adjusted to fair value based on the value of the Company as a whole using the discounted cash flow method.

 

Asset and liabilities measured and reported at fair value are classified and disclosed in one of the following categories based on inputs:

 

Level 1 — Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date

 

Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability

 

Level 3 — Pricing inputs include significant unobservable inputs used in determining the fair value of investments. The types of investments, which would generally be included in this category include equity securities issued by private entities.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given investment is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.

 

The levels of the fair value hierarchy into which the Company’s assets and liabilities fall as December 31, 2019 are as follows:

 

		Level 1				Level 2				Level 3				Total
Liabilities
KISS liability- related party		$	-			$	-			$	1,444,761			$	1,444,761
Total fair value		$	-			$	-			$	1,444,761			$	1,444,761

 

See Note 5 for discussion of the Company’s valuation of the KISS liability- related party.

 

 

Inventories

 

Inventories are stated at the lower of cost or market. Cost is determined based on the first-in, first-out cost flow assumption (“FIFO”) while market is determined based upon the estimated net realizable value less an allowance for selling and distribution expenses and a normal gross profit. The Company evaluates the need for inventory reserves associated with obsolete, slow moving, and non-sellable inventory by reviewing estimated net realizable values on a periodic basis. As of September 30, 2020 and December 31, 2019, the Company believes there are no excess and obsolete inventories and accordingly, did not record an inventory reserve. Inventories consist of purchased finished goods.

 

Deferred Offering Costs

 

Costs associated with the Company’s S-1 filings totaled $85,601 and $25,580 as of September 30, 2020 and December 31, 2019, Such costs are included in other assets on the accompanying balance sheets as of September 30, 2020 and December 31, 2019.

 

Property and Equipment

 

Property and equipment is recorded at cost and is comprised of a building and office furniture and equipment. The building is depreciated using the straight-line method over the estimated useful life of 40 years. Office furniture and equipment is depreciated using the double-declining method or the straight-line method over the estimated useful lives of 3 to 7 years.

 

Betterments, renewals, and extraordinary repairs that materially extend the useful life of the asset are capitalized; other repairs and maintenance charges are expensed as incurred. The cost and related accumulated depreciation applicable to assets retired are removed from the accounts, and the gain or loss on disposition, if any, is recognized in the accompanying statements of operations.

 

Impairment of Long-Lived Assets

 

In accordance with FASB ASC Topic 360, Property, Plant and Equipment, long-lived assets such as property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized on long-lived assets when indicators of impairment are present and the undiscounted future cash flows estimated to be generated by those assets are less than the carrying amount of the assets. In such cases, the carrying value of these assets are adjusted to their estimated fair values and assets held for sale are adjusted to their estimated fair values less selling expenses.

 

No impairment losses of long-lived assets were recognized for the nine months ended September 30, 2020 and 2019.

 

Income Taxes

 

Deferred tax assets as of September 30, 2020 consist of an amount insignificant to the financial statements as of September 30, 2020, for which a full valuation allowance would have been present.

 

Sales Taxes

 

FASB ASC Subtopic 605-45, Revenue Recognition – Principal Agent Considerations, provides that the presentation of taxes assessed by a governmental authority that are directly imposed on revenue-producing transactions (e.g. sales, use, and excise taxes) between a seller and a customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. In addition, for any such taxes that are reported on a gross basis, the amounts of those taxes should be disclosed in the financial statements for each period for which a statement of operations is presented if those amounts are significant. Sales taxes for the three and nine month periods ended September 30, 2020 and 2019 were recorded on a net basis. Included in accrued expenses at September 30,2020 and December 31, 2019 is approximately $70,000 and $62,000 respectively, related to sales taxes.

 

 

 

Shipping and Handling Costs

 

The Company included shipping and handling costs in cost of sales on the accompanying statements of operations for the three months ended September 30, 2020 and 2019 and for the nine months ended September 30, 2020 and 2019.

 

Warranty

 

The Company warranties the sale of most of its products and records an accrual for estimated future claims. The standard warranty is typically for a period of three years. Such accruals are based upon historical experience and management’s estimate of the level of future claims. The Company recorded a liability as of, September 30, 2020 and December 31, 2019 of $21,026 and $16,183, respectively, and is included in cost of sales in the statements of operations and within accrued expenses and other current liabilities on the accompanying balance sheets.

 

Advertising

 

Advertising costs are expensed as incurred. Total advertising expenses amounted to $0 for both the three months and nine months ended September 30, 2020 and 2019. Total advertising costs are included in selling, general and administrative expenses on the accompanying statements of operations.

 

Research and Development Costs

 

Research and development costs are expensed as incurred. Total research and development costs amounted to $0 and $14,529 for the three months ended September 30, 2020 and 2019, respectively. Total research and development costs amounted to $0 and $35,610 for the nine months ended September 30, 2020 and 2019, respectively Total research and development costs are included in selling, general and administrative expenses on the accompanying statements of operations.

 

 

Net Loss per Share

 

Net earnings or loss per share is computed by dividing net income or loss by the weighted-average number of common shares outstanding during the period, excluding shares subject to redemption or forfeiture. The Company presents basic and diluted net earnings or loss per share.  Diluted net earnings or loss per share reflect the actual weighted average of common shares issued and outstanding during the period, adjusted for potentially dilutive securities outstanding. Potentially dilutive securities are excluded from the computation of the diluted net loss per share if their inclusion would be anti-dilutive. Potentially dilutive securities include convertible notes payable, warrants, stock options and the KISS liability-related party. As all potentially dilutive securities are anti-dilutive as of September 30, 2020 and 2019, diluted net loss per share is the same as basic net loss per share for each period.

 

COVID-19

 

On January 30, 2020, the World Health Organization declared the COVID-19 outbreak a “Public Health Emergency of International Concern” and on March 10, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the COVID-19 include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. COVID-19, and actions taken to mitigate it, have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates. While it is unknown how long these conditions will last and what the complete financial effect will be to the company, COVID-19 has had an adverse effect on our business, including our supply chains and distribution systems. While we are taking diligent steps to mitigate disruptions to our supply chain, we are unable to predict the extent or nature of these impacts at this time to our future financial condition and results of operations.

 

Recently Issued Accounting Pronouncements

 

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability, measured on a discounted basis, on the balance sheet for all leases with terms greater than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statements of operations and comprehensive loss. A modified retrospective transition approach is required for capital and operating leases existing at the date of adoption, with certain practical expedients available. The Company is currently in the process of evaluating the potential impact of this new accounting guidance, which is effective for the Company beginning on January 1, 2022. The impact is not expected to be significant.

 

Management does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on the Company’s financial statement presentation or disclosures.

 

NOTE 3.

PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

		September 30, 2020				December 31, 2019
Building		$	875,000			$	875,000
Furniture and equipment			24,987				24,987
			899,987				899,987
Less: accumulated depreciation and amortization			(145,299	)			(128,893	)
		$	754,688			$	771,094

 

Depreciation and amortization expense related to property and equipment was $5,468 for both the three months ended September 30, 2020 and 2019, respectively. Depreciation and amortization expense related to property and equipment was $16,406 and $18,988 for the nine months ended September 30, 2020 and 2019, respectively. Depreciation and amortization are included in selling, general and administrative expenses on the accompanying statements of operations.

 

 

NOTE 4.

NOTES PAYABLE

 

In May 2018, the Company entered into a note payable with a third- party vendor as payment for an outstanding balance in the amount of $43,692. The note is interest free and requires monthly payments of $5,461 beginning June 15, 2018 with the remaining balance due and payable on December 15, 2018. The Company did not make timely payments as of December 15, 2018 which resulted in interest being accrued on the unpaid balance at a rate of ten percent beginning July 31, 2017. The outstanding balance as of September 30, 2020 and December 31, 2019 is 17,846 and $18,846, respectively.

 

Interest expense of $8,028 has been accrued in the Company’s balance sheet as of September 30, 2020, of which $444 and $1,382, respectively, has been recorded in the Company’s statement of operations for the three months and nine months then ended. Interest expense of $494 and $2,014, respectively, has been recorded for the three months and nine months ended September 30, 2019.

 

In October 2019, the Company entered into a future revenue sale agreement. Under the terms of the agreement, the Company agrees to sell $73,336 of its future revenues for a purchase price of $50,500 less transaction fees of $3,115 for a net advance of $47,385. Payments of $375 per day are to be made for principal and interest until the $73,336 is paid in full. The outstanding balance as of September 30, 2020 and December 31, 2019 is $0 and $40,307, respectively.

 

In April 2020, the Company received $39,500 in payroll protection program loans (“PPP”).  These loans provide for certain funding based on previous employment which in part may be forgivable under certain conditions. The remaining portion needs to be repaid over 2 years with a 10-month moratorium on payments and carry a 1% annual interest rate. These loans require no collateral nor personal guarantees. The Company anticipates that this loan will be forgiven in full.

 

Convertible Promissory Notes

 

In May 2018, the Company borrowed $25,000 in conjunction with a convertible promissory note. The note matures in June 2020 and accrues interest at a rate of 8% per annum. The lender has the right at any time to convert the debt into fully paid and non- assessable shares of common stock at a price of $0.71 per share. In October 2019, the lender converted the $25,000 note and unpaid accrued interest of $2,948 into 39,363 shares of common stock. There is no beneficial conversion feature as the conversion price is at fair market value. The proceeds were used for operations.

 

In December 2019, the Company borrowed $50,000 in conjunction with a convertible promissory note. The note matures in May 2020 and is interest free. The lender has the right at any time to convert the debt into fully paid and non- assessable shares of common stock at a price of $0.71 per share. There is no beneficial conversion feature as the conversion price is at fair market value. The proceeds were used for operations.

 

In June 2020, the Company borrowed $110,000 in conjunction with an unsecured convertible promissory note from an investor. Proceeds of $100,000 include an original issue discount of $10,000. A one-time charge of 8% will be applied to the principal amount of $110,000 on the Issuance Date to be paid upon maturity. The note matures on December 15, 2020. The lender has the right at any time to convert the debt into fully paid and non- assessable shares of common stock at a price of $0.35 per share. The number of shares of common stock issuable upon conversion of any conversion amount shall be equal to the quotient of dividing the conversion amount by the conversion price of $0.35.

  

In conjunction with the note issued in June 2020, the Company issued 100,000 shares of common stock to the Investor as well as a warrant to purchase 250,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The warrant expires on June 30, 2023.

 

The common shares and warrants qualified for equity accounting as the warrants did not fall within the scope of ASC Topic 480, Distinguishing Liabilities from Equity. The warrants were measured at fair value at the time of issuance and classified as equity.

 

Each warrant entitles the holder to purchase one share of common stock for $1.00 per share. If held by the initial purchaser of the Private Warrant or certain permitted transferees, the purchase can occur on a cashless basis. The warrants will expire on June 4, 2023 or earlier upon redemption or liquidation.

 

The Company valued the warrants using the Black-Scholes model and recorded the warrants as a reduction of the note included in the debt discount balance. The following table summarizes the assumptions used in the valuation models to determine the fair value of the warrants:

 

Fair Value of Common Share		$	0.51
Exercise Price		$	1.00
Risk Free Rate			0.36	%
Expected Life (Yrs.)			3.00
Volatility			95.00	%

 

 

The Common shares were valued at OTC market price on June 4, 2020. Upon valuation of the common shares and the warrants, the Company allocated the values using a relative fair market value approach. The common shares were valued at $42,969 and the warrants were valued at $48,231. The residual value of $8,800 was recorded as a discount associated with the beneficial conversion feature.

 

The Company shall at all times reserve and keep available out of its authorized common stock a number of shares equal to at least 5 times the full number of shares of common stock issuable upon conversion of all outstanding amounts under these notes. The Company will at all times reserve at least 5,000,000 shares of common stock for conversion.

 

The Company shall have the option, under specific terms in each note, to pre-pay the entire remaining outstanding principal amount of this note in cash plus a premium ranging from 20-50%.

 

Upon the occurrence of any Event of Default (without the need for any party to give any notice or take any other action) for the notes issued in June 2020, the outstanding balance shall immediately and automatically increase to 120% of the outstanding balance immediately prior to the occurrence of the Event of Default (the “Default Sum”). Upon the occurrence of any Event of Default, the note shall become immediately due and payable. In the event of default, the Company would be required to convert the notes at a price of 60% of the lowest trade in the last 25 days prior to default.

  

In July 2020, the Company borrowed $107,500 in conjunction with an unsecured convertible promissory note from an investor. Proceeds of $90,000 include an original issue discount of $7,500 and legal fees of $10,000. The note matures on July 21, 2021. The lender has the right after January 21, 2021 to convert the debt into fully paid and non- assessable shares of common stock at a price of $0.50 per share. Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest accrues at the rate of eight percent (8%) per annum, simple interest, in each case to the extent that the note and the principal amount and any unpaid accrued interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at the rate of 18% per year, simple interest, non-compounding, until paid. A beneficial conversion feature valued at $90,000 has been recorded as a discount on the note.

 

In August 2020, the Company borrowed $215,000 in conjunction with an unsecured convertible promissory note from an investor. Proceeds of $200,000 include an original issue discount of $15,000. The note matures on August 4, 2021. The lender has the right after February 4, 2021 to convert the debt into fully paid and non- assessable shares of common stock at a price of $0.50 per share. Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest accrues at the rate of eight percent (8%) per annum, simple interest, in each case to the extent that the note and the principal amount and any unpaid accrued interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at the rate of 18% per year, simple interest, non-compounding, until paid. A beneficial conversion feature valued at $200,000 has been recorded as a discount on the note.

 

 

In August 2020, the Company borrowed $103,000 in conjunction with unsecured convertible promissory notes from an investor. Proceeds of $100,000 include an original issue discount of $3,000. The notes mature on August 11, 2021. The lender has the right for 180 days from the issuance date to convert the debt into fully paid and non- assessable shares of common stock at a price of $1.00 per share. From the period 180 days from issuance to maturity, the lender has the right to convert the debt into fully paid and non-assessable shares of common stock at a price of 63% of market value. Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest accrues at the rate of ten percent (10%) per annum, simple interest, in each case to the extent that the note and the principal amount and any unpaid accrued interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at the rate of 22% per year, simple interest, non-compounding, until paid. The note has a variable conversion price and the Company recorded an embedded derivative liability. The fair value of the liability totaled $97,654 at the date of issuance.

 

In September 2020, the Company borrowed $107,500 in conjunction with an unsecured convertible promissory note from an investor. Proceeds of $100,000 include an original issue discount of $7,500. The note matures on September 3, 2021. The lender has the right after March 3, 2021 to convert the debt into fully paid and non- assessable shares of common stock at a price of $0.50 per share. Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest accrues at the rate of eight percent (8%) per annum, simple interest, in each case to the extent that the note and the principal amount and any unpaid accrued interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at the rate of 18% per year, simple interest, non-compounding, until paid. A beneficial conversion feature valued at $100,000 has been recorded as a discount on the note.

 

In September 2020, the Company borrowed $78,000 in conjunction with unsecured convertible promissory notes from an investor. Proceeds of $75,000 include an original issue discount of $3,000. The notes mature on September 8, 2021. The lender has the right for 180 days from the issuance date to convert the debt into fully paid and non- assessable shares of common stock at a price of $1.00 per share. From the period 180 days from issuance to maturity, the lender has the right to convert the debt into fully paid and non-assessable shares of common stock at a price of 63% of market value. Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest accrues at the rate of ten percent (10%) per annum, simple interest, in each case to the extent that the note and the principal amount and any unpaid accrued interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at the rate of 22% per year, simple interest, non-compounding, until paid. The note has a variable conversion price and the Company recorded an embedded derivative liability. The fair value of the liability totaled $74,238 at the date of issuance.

 

		As of September 30,
Convertible notes		2020				2019
Principal balance		$	771,000			$	-
Debt discount balance			(684,855)				-
Net Notes balance		$	86,145			$	-
Debt discount is amortized over the term of the note using the effective interest method.

  

The beneficial conversion features and derivatives are initially recorded as a discount to the debt and amortized using the effective interest method. During the nine months ended September 30, 2020, $33,038 of debt discount amortization is recorded as interest expense.

 

 

NOTE 5.

KISS LIABILITY- RELATED PARTY

 

On July 6, 2018, the Company entered into KISS agreement with a related party for a purchase price of $35,000. The purchase price of the KISS agreement is non-interest bearing, matured twelve months from the issuance date on July 6, 2019 and was recorded as KISS liability- related party in the current liabilities section of the Company’s balance sheet. Upon (a) after the maturity date of July 6, 2019; (b) in the event of a “Next Equity Financing” where the Company sells its preferred shares from which the Company receives not less than $1 million dollars; or, (c) a corporate transaction in which all or substantially all of the Company’s assets are sold, merged or consolidated into another entity, the investor may, at his discretion, convert the principal of the KISS into common shares of Company. The Company’s obligation is to convert the KISS note upon election of the investor.

 

(k)              Under the terms of the agreement, the KISS agreement may be converted into a certain amount of “Conversion Shares” at the earlier of the Company’s “Next Equity Financing” or “Corporate Transaction” as defined in the agreement, or at maturity. The Company has calculated the estimated number of conversion shares to be 8,156,497. KISS conversion shares are equal to the quotient obtained by dividing the Conversion Amount by the Conversion Price as defined in the agreement. The conversion price is the quotient resulting from dividing (A) the Valuation Cap by (B) the Fully-Diluted Capitalization immediately prior to the conversion. “Valuation Cap” shall mean (i) US $82,497 for shares converted prior to July 1, 2020 (the “2020 Valuation Cap”)”); (ii) US $106,376 for shares converted prior to July 1, 2022 (the “2022 Valuation Cap”) and (iii) US $142,458 for shares converted on or after July 1, 2022.

 

In October 2019, the related party converted 1,000,000 of the conversion shares at a value of $197,942, which was reclassed to additional paid-in-capital. On September 23, 2020, the related party converted the remaining shares of 7,156,497 at a value of $1,452,575, which was reclassed to additional paid-in-capital.

 

The fair market value of the KISS liability- related party at December 31, 2019 is $1,444,762. Changes in fair market value are recorded as other income in the Company’s statements of operations. The change in fair market value for the three months ended September 30, 2020 and 2019, totaled $0 and $1,553 respectively. The change in fair market value for the nine months ended September 30, 2020 and 2019 totaled $7,784 and $41,257, respectively.

 

The Company determined the fair value of the KISS liability using the estimated enterprise value of the Company, allocating the percentage of fully diluted pro-rata shares to the value of the KISS liability. The Company will mark to market the liability at each reporting period.

 

NOTE 6.

LONG-TERM DEBT

 

Note Payable

 

In March 2015, the Company entered into an $850,000 note payable (the “Original Note Payable”) with a third-party to finance the purchase of its office building. The Original Note Payable consisted of interest-only payments at 4.5% per annum, payable monthly in arrears. The Original Note Payable was collateralized by a deed of trust in the office building. During 2015, the Company refinanced the Original Note Payable with bank debt and a new note payable (“Note Payable”) for the unpaid principal balance.

 

The Note Payable, effective December 31, 2015 was issued for a principal amount of $157,000 and personally guaranteed by the Company’s CEO. Interest began accruing on the interest commencement date of January 1, 2018, at 2% per annum, compounded monthly. The unpaid principal balance and accrued interest is due within ten days of the maturity date on December 31, 2020. The outstanding balance on the Note Payable at December 31, 2018 was $157,000. In August 2019, the Company’s CEO personally repaid $100,000 of the note payable to the third-party and was recorded as a reduction of the CEO’s amount due the Company. In October 2019, the lender converted the remaining balance of $57,000 and unpaid accrued interest of $5,373 into 87,849 shares of common stock.

 

 

Government Debt

 

In June 2020, the Company received a $150,000 economic injury disaster loan (“EIDL”). The loan accrues interest at a rate of 3.75% annually and is collateralized by all personal property and intangible assets of the Company. The loan has a 12-month moratorium on payments, after which monthly principal and interest payments of $731 will be made through the maturity date of June 2050.

 

Bank Debt

 

In September 2015, the Company entered into a credit agreement for a $700,000 term loan with a financial institution. Payment terms consist of monthly payments in arrears of $3,547 for the first year outstanding. The monthly payment then increases to $4,574 until the term loan matures on September 30, 2025, in which the remaining unpaid principal balance and accrued interest is due. The interest rate for the first year was 1.99% per annum and increased to 4.95% per annum for the remaining life of the term loan. The term loan is collateralized by a deed of trust in the office building. The proceeds were used to purchase a building for which the Company’s operations are located. The net principal balance outstanding on the term loan at September 30, 2020 and December 31, 2019 was $581,145 and $592,001, respectively. The term loan is personally guaranteed by the Company’s CEO.

 

In March 2020, the Company entered into an agreement with the financial institution to defer its monthly payments for three months through May 2020. Such payments and additional accrued interest have been deferred to the maturity date of the loan.

 

Related Party Notes Payable

 

In October 2013, the Company entered in to a $45,000 note payable with an individual related to the Company’s CEO. The proceeds were used for operations. Interest began accruing on the interest commencement date of January 1, 2018, at 2% per annum, compounded monthly. The unpaid principal balance and accrued interest is due within ten days of the maturity date on December 31, 2020. In October 2019, the related party lender converted the principal amount of $44,000 and unpaid accrued interest of $1,592 into 64,215 shares of common stock.

 

In July 2017, the Company entered a $250,000 promissory note with its CEO. The proceeds were used for operations and Regulation A+ offering costs. The promissory note began accruing interest on the interest commencement date of October 1, 2018 at 2% per annum, compounded monthly. The unpaid principal balance and accrued interest are due within ten days of the maturity date on September 30, 2020. The note payable and accrued interest are deemed paid in full as of December 31, 2019.

 

The Company entered into additional promissory notes with a related party for $84,500 and repaid $45,000 of promissory notes in the nine months ended September 30, 2020, for a total of $357,500 outstanding. All notes mature at various times in 2020 and 2021. Interest will accrue at 10% per annum from the due date thereon until all principal is paid in full. Proceeds from the loans were used for operations.

 

The long-term debt agreements do not contain any financial covenants.

 

 

NOTE 7.

DERIVATIVE LIABILITIES

 

The Company issued debts that consist of the issuance of convertible notes with variable conversion provisions. The conversion terms of the convertible notes are variable based on certain factors, such as the future price of the Company’s common stock. The number of shares of common stock to be issued is based on the future price of the Company’s common stock. The number of shares of common stock issuable upon conversion of the promissory note is indeterminate. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion option and shares to be issued were recorded as derivative liabilities on the issuance date.

 

Based on the various convertible notes described in Note 4. The fair value of applicable derivative liabilities on notes and the change in fair value of derivative liability are as follows for the nine months ended September 30, 2020:

 

		Derivative Liability - Convertible Notes
Balance as of December 31, 2019		$	–
Additions during the period			171,892
Change in fair value			22,415
Balance as of September 30, 2020		$	194,307

 

The fair value of the derivative liabilities – convertible notes are estimated using a Black Scholes pricing model with the following assumptions:

 

Market value of common stock			$0.99-$2.03
Expected volatility			95	%
Expected term (in years)			1
Risk-free interest rate			0.36	%

 

 

NOTE 8.

RELATED PARTY TRANSACTIONS

 

The Company has a promissory note with a related party for $44,000 that was converted into shares of common stock in 2019.

 

In October 2019, the Company entered into an employment agreement with the Company’s CEO. The terms of the agreement include an annual base salary of $240,000 and a signing bonus of $500,000, as well as discretionary annual bonuses and participation in long-term incentive plans. The signing bonus may be paid in shares of the Company’s common stock. The agreement remains in effect until the earlier of the discharge or resignation of the CEO. In conjunction with the agreement, the $500,000 signing bonus has been accrued and included in selling, general and administrative expenses in the accompanying statement of operations during the year ended December 31, 2019.

 

During the nine months ended September 30, 2020, the Company paid the Company’s CEO $27,256 towards the balance of the 2019 signing bonus. Total amount outstanding at September 30, 2020 and December 31, 2019 is $46,204 and $73,460, respectively.

 

The Company entered into additional promissory notes with a related party for $84,500 and repaid $45,000 of promissory notes in the nine months ended September 30, 2020, for a total of $357,500 outstanding.

 

See Notes 5, 6 and 12 for additional related party disclosure.

 

 

NOTE 9.

STOCKHOLDERS’ DEFICIT

 

In January 2020, the Company issued 10,355 shares of common stock to a vendor as settlement for a liability totaling $7,532.

 

In February 2020, the Company issued 200,000 shares of common stock in conjunction with a twelve-month agreement for consulting services at a value of $102,000 or $0.51 per share. The value of the consulting services has been recorded as selling, general and administrative expenses in the Company’s statement of operations. The fair market value of the shares was determined based the on the Company’s closing price on the date of issuance.

 

In February 2020, the Company entered into a six- month consulting agreement with a third party. In conjunction with the agreement, the Company issued the third party 400,000 shares of common stock at a value of $188,000 or $0.47 per share, with the option to issue an additional 900,000 shares at the Company’s discretion. The value of the consulting services has been recorded as selling, general and administrative expenses in the Company’s statement of operations. The fair market value of the shares was determined based the on the Company’s closing price on the date of issuance. In August 2020, the Company issued the 900,000 shares of common stock in conjunction with the consulting agreement at a value of $1,818,000 or $2.02 per share. The value of the compensation has been recorded in selling, general and administrative expenses in the Company’s statement of operations.

 

In April 2020, the Company issued 2,000,000 shares of common stock to one of its employees as compensation for services provided at a value of $600,000 or $.30 per share. The value of the compensation has been recorded as selling, general and administrative expenses in the Company’s statement of operations.

 

On May 1, 2020, the Company issued a warrant to a third party to purchase 100,000 shares of the Company’s common stock at an exercise price of $0.52 per share. The warrant is fully vested upon issuance and expires May 1, 2025. Compensation expense of $37,149 has been recorded in selling, general and administrative expenses in the accompanying statement of operations for the nine months ended September 30, 2020. The Company utilizes the Black Scholes valuation model which relies on certain assumptions to estimate the warrant’s fair value. The assumptions used in the determination of the fair value of the warrant awarded are provided in the table below.

 

Assumptions
Expected volatility rate			95	%
Expected dividend yield			0	%
Average risk-free interest rate			.36	%
Expected term years			5.0

 

In June 2020, the Company received a total of $50,000 from an investor in exchange for 142,857 shares of common stock of the Company at a price of $0.35 per share.

 

In June 2020, the Company issued 100,000 shares of common stock and a warrant to purchase 250,000 shares of common stock in conjunction with a convertible promissory note (see Note 4).

 

 

NOTE 10.

STOCK OPTIONS

 

The Company recorded stock compensation expense of $5,953 and $48,429 during the three months ended September 30, 2020 and 2019, respectively and $16,899 and $110,198 during the nine months ended September 30, 2020 and 2019, respectively. Stock-based compensation is included in selling, general, and administrative expense in the accompanying statements of operations.  Stock-based compensation expense is based on awards ultimately expected to vest. Total unrecognized stock-based compensation cost related to unvested time-based stock options was $9,425 as of September 30, 2020 and is expected to be recognized over a weighted-average period of 12 months.

 

		Number of shares				Weighted Average Exercise Price				Weighted Average Contractual term (years)
Options outstanding at December 31, 2019			445,000				-
Granted			-			$	-
Exercised			-				-
Forfeited						$	-
Expired			-				-
Options outstanding at September 30, 2020			445,000			$	0.71				2.5
Exercisable at September 30, 2020			360,000			$	0.71				2.5
Options exercisable and expected to vest at September 30, 2020			445,000			$	0.71				2.5

 

 

NOTE 11.

COMMITMENTS AND CONTINGENCIES

 

Contingencies

 

The Company is subject to various loss contingencies and assessments arising in the normal course of the business, some of which relate to litigation, claims, property taxes and sales and use tax or goods and services tax assessments. The Company considers the likelihood of the loss or the incurrence of a liability, as well as its ability to reasonably estimate the amount of loss in determining loss contingencies and assessments. An estimated loss contingency or assessment is accrued when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Management regularly evaluates current information available to them to determine whether such accruals should be adjusted. Based on the information presently available, including discussion with counsel and other consultants, management believes that resolution of these matters will not have a material adverse effect on its business, results of operations, financial condition or cash flows.

 

NOTE 12.

SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events that have occurred through the filing date, which is the date that the financial statements were available to be issued and determined that there were no subsequent events or transactions that required recognition or disclosure in the financial statements, except as disclosed below.

 

 

Pursuant to a previous financing commitment entered into September 28, 2020, received on October 1, 2020, the Company borrowed $108,000 in conjunction with unsecured convertible promissory notes from an investor. Proceeds of $100,000 include an original issue discount of $8,000. The notes mature on September 28, 2021. The lender has the right for 180 days from the issuance date to convert the debt into fully paid and non- assessable shares of common stock at a price of 63% of market value. From the period 180 days from issuance to maturity, the lender has the right to convert the debt into fully paid and non-assessable shares of common stock at a price of $1.00 per share. Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest accrues at the rate of ten percent (10%) per annum, simple interest, in each case to the extent that the note and the principal amount and any unpaid accrued interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at the rate of 22% per year, simple interest, non-compounding, until paid.

  

Pursuant to a financing commitment, on October 22, 2020, the Company entered into a Note Purchase Agreement (the “Agreement”) with a third party for the sale of a convertible promissory note in the principal amount of $128,000 at a purchase price of $128,000. The note matures on October 22, 2021. The lender has the right to convert the debt into fully paid and non- assessable shares of common stock at a price equal to 65% of the outstanding share price. Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest will accrue at the rate of ten percent (10%) per annum, simple interest, in each case to the extent that the note and the principal amount and any unpaid accrued interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at the rate of 22% per year, simple interest, non-compounding, until paid.

 

Pursuant to a financing commitment, on November 3, 2020, the Company entered into a Note Purchase Agreement (the “Agreement”) with a third party for the sale of a convertible promissory note in the principal amount of $244,853 at a purchase price of $225,000. Proceeds of $225,000 include an original issue discount of $19,853. The note matures on November 3, 2021. The lender has the right to convert the debt into fully paid and non- assessable shares of common stock at a price of $0.50 per share. Conversions are subject to adjustments due to stock dividends, stock splits, rights offerings or combinations, recapitalizations and reorganizations. Interest will accrue at the rate of eight percent (8%) per annum, simple interest, in each case to the extent that the note and the principal amount and any unpaid accrued interest has not been converted into conversion shares (as defined) prior to the maturity date. Interest shall commence accruing on the issuance date and be computed on the basis of a 365-day year. In the event that any amount due hereunder is not paid as and when due, such amounts shall accrue interest at the rate of 18% per year, simple interest, non-compounding, until paid.

 

In October 2020, the Company received a total of $35,000 from investors in exchange for 70,000 shares of common stock of the Company at a price of $0.50 per share.

 

On November 6, 2020, the Company issued 65,000 shares of common stock, at a price of $0.91 per share, in conjunction with a consulting agreement.

 

On November 9, 2020, the Company purchased and returned to treasury stock 87,849 shares of common stock for a purchase price of $36,413.

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

COVID-19 may impact our business.

 

On January 30, 2020, the World Health Organization declared the COVID-19 outbreak a “Public Health Emergency of International Concern” and on March 10, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the COVID-19 include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. COVID-19, and actions taken to mitigate it, have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical areas in which we operate. While it is unknown how long these conditions will last and what the complete financial effect will be to the Company, COVID-19 may have an adverse effect on our business. While we are taking diligent steps to mitigate any possible disruptions to our business, we are unable to predict the extent or nature of these impacts, at this time, to our future financial condition and results of operations.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

The following discussion and analysis should be read in conjunction with the unaudited condensed financial information and the notes thereto included herein, as well as the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and notes thereto contained in our Registration Statement on Form S-1/A-4 for the Year ended December 31, 2019, as filed on July 20, 2020. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under the caption “Cautionary Note Regarding Forward-Looking Statements” in this report, as well as under "Part I – Item 1A - Risk Factors" in our Form S-1/A-4 registration statement filed on July 20, 2020, and elsewhere in this Quarterly Report on Form 10-Q. These statements, like all statements in this report, speak only as of the date of this Quarterly Report on Form 10-Q (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments.

 

Overview and Financial Condition

 

Going Concern

 

The Company sustained continued operating losses during the years ended December 31, 2019 and 2018 and during the nine months ended September 30, 2020. The Company’s continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations to meet its obligations, in which it has not been successful, and/or obtaining additional financing from its shareholders or other sources, as may be required.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern; however, the above conditions raise substantial doubt about the Company’s ability to do so. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classifications of liabilities that may result, should the Company be unable to continue as a going concern.

 

Management is endeavoring to commence revenue-generating operations. While priority is on generating cash from operations through the sale of the Company’s products, management is also seeking to raise additional working capital through various financing sources, including the sale of the Company’s equity and/or debt securities, which may not be available on commercially reasonable terms, if at all. If such financing is not available on satisfactory terms, we may be unable to continue our business as desired and our operating results will be adversely affected. In addition, any financing arrangement may have potentially adverse effects on us and/or our shareholders. Debt financing (if available and undertaken) will increase expenses, must be repaid regardless of operating results and may involve restrictions limiting our operating flexibility. If we issue equity securities to raise additional funds, the percentage ownership of our existing shareholders will be reduced and the new equity securities may have rights, preferences or privileges senior to those of the current holders of our shares of Common Stock.

 

 

Results of Operations

 

The following table sets forth the results of our unaudited operational results for the three months ended September 30,

 

		2020				2019
Net Sales		$	205,850			$	270,128
Cost of goods sold:			57,383				75,202
Gross profit			148,467				194,926
Operating Expenses			2,243,377				373,402
Loss from operations			(2,094,910	)			(178,476	)
Other expense			(75,073	)			(12,154	)
Net Loss		$	(2,169,983	)		$	(190,630	)

 

The following table sets forth the results of our unaudited operational results for the nine months ended September 30,

 

		2020				2019
Net Sales		$	557,476			$	625,020
Cost of Goods Sold			139,892				181,409
Gross profit			417,584				443,611
Operating Expenses			3,768,196				1,598,029
Loss from operations			(3,350,612	)			(1,154,418	)
Other expense			(110,867	)			(76,599	)
Net Loss		$	(3,461,479	)		$	(1,231,017	)

 

 

Operating Results

 

July 1, 2020 through September 30, 2020 Compared to July 1, 2019 through September 30, 2019

 

Our sales totaled $205,850 for the three months ended September 30, 2020 and $270,128 for the three months ended September 30, 2019. The decrease of $64,278 or 24% is primarily related to a decrease in units sold, partially offset by an increase in average selling price. The Company’s inability to secure additional inventory contributed to the decline.

 

Cost of sales and gross margins for the three months ended September 30, 2020 and for the three months ended September 30, 2019 were $57,383 and 72% and $75,202 and 72%, respectively. Our cost of sales consists of the cost of materials and distribution expenses. Cost of sales and gross margins are affected by product mix as well as the mix in the level of sales between commissioned agents and distributors.

 

Selling, general and administrative expenses consist primarily of payroll, commissions, professional fees, sales and marketing, research and development and other operating expenses. Selling, general and administrative expenses totaled $2,243,377 for the three months ended September 30, 2020 and $373,402 for the three months ended September 30, 2019, an increase of $1,869,975 or 500%. The change is primarily due an increase in stock-based compensation expense of $1,775,524, consulting and professional fees of $121,899, and web related expenses of $15,500, partially offset by a decrease in commissions of $48,998 and payroll related expenses of $14,009.Stock-based compensation expense in the three months ended September 30, 2020 included $1,818,000 related to shares issued to a third party for services provided in conjunction with a consulting agreement. The increase in consulting and professional fees relates primarily to costs associated with operating as a public company. The decrease in commissions is related to a decrease in sales as well as a promotion in the 2019 period that did not occur in 2020.

 

Interest expense totaled $52,658 for the three months ended September 30, 2020 as compared to $10,601 for the three months ended September 30, 2019. The increase in interest expense relates primarily to interest incurred in conjunction with the convertible notes entered into during 2020. The Company also recorded $22,415 as an adjustment to the fair value of the derivative liabilities related to convertible promissory notes in 2020.

 

As a result of the foregoing, we recorded a net loss of $2,169,983 for the three months ended September 30, 2020, compared to a net loss of $190,630 for the three months ended September 30, 2019. The increase in net loss is primarily attributed to the increase in selling, general and administrative expenses, decreased gross profit and increase in interest expense.

 

January 1, 2020 through September 30, 2020 Compared to January 1, 2019 through September 30, 2019

 

Our sales totaled $557,476 for the nine months ended September 30, 2020 and $625,020 for the nine months ended September 30, 2019. The decrease is primarily related to a decrease in units sold.

 

Cost of sales and gross margins for the nine months ended September 30, 2020 and for the nine months ended September 30, 2019 were $139,892 and 75% and $181,409 and 71%, respectively. Our cost of sales consists of the cost of materials and distribution expenses. The increase in gross margin is primarily attributed to an increase in average selling price including pricing to certain distributors and the release and sale of previously written off inventory. Cost of sales and gross margins are affected by product mix as well as the mix in the level of sales between commissioned agents and distributors.

 

Selling, general and administrative expenses consist primarily of payroll, commissions, professional fees, sales and marketing, research and development and other operating expenses. Selling, general and administrative expenses totaled $3,768,196 for the nine months ended September 30, 2020 and $1,598,029 for the nine months ended September 30, 2019, an increase of $2,170,167 or about 136%. The change is primarily due to increases in stock-based compensation expense of $2,021,925, payroll related expenses of $44,791 and consulting and professional fees of $170,726, partially offset by put-option financing costs of $75,387 and commissions of $38,140. Stock-based compensation expense in the nine months ended September 30, 2020 includes $600,000 related to shares issued to an employee for services rendered and $2,154,192,000 related to third party consulting agreements. Stock-based compensation expense in the nine months ended September 30, 2019 includes $492,563 related to the sale by the Company’s CEO of 693,750 shares of common stock to certain employees at par value and $239,438 related to third party consulting agreements. The increase in payroll related expenses in the nine months ended September 30, 2020 is primarily related to the Company CEO’s employment agreement entered into in October 2019, partially offset by a decrease in medical insurance premiums and expenses related to a 2019 termination. The increase in consulting and professional fees relates primarily to costs associated with operating as a public company. The decrease in commissions is related to a decrease in sales as well as a promotion in the 2019 period that did not occur in 2020.

 

As a result of the foregoing, we recorded a net loss of $3,461,479 for the nine months ended September 30, 2020, compared to a net loss of $1,231,017 for the nine months ended September 30, 2019. The increase in net loss is primarily attributed to the increase in selling, general and administrative expenses, decreased gross profit and interest expense, partially offset by the change in fair value of the Kiss Liability-related party.

 

Liquidity and Capital Resources

 

During the nine months ended September 30, 2020, our cash and cash equivalents increased by $85,477 reflecting net proceeds from financing activities of $881,221, partially offset by cash used in operations of $795,644. At September 30, 2020, the Company had a working capital deficit of $997,472 and cash on hand of $85,477.

 

 

Operating Activities

 

The increase in cash flows used in operating activities is primarily the result of increased costs related to public Company operations, including costs associated with the Company’s S-1 filing, the decrease in gross profit and increased interest expense.

 

Financing Activities

 

Cash flows provided from financing activities totaled $881,121 for the nine months ended September 30, 2020 as compared to $187,547 for the nine months ended September 30, 2019. The cash flows provided in the 2020 period are primarily the result of the following cash inflows :

 

$665,000 in net proceeds from convertible promissory notes

$155,900 in net proceeds from government debt

$39,500 in net proceeds from PPP loan

$24,500 in net proceeds from related party loans

$50,000 for the issuance of common stock

 

These cash inflows were partially offset by debt repayments totaling $53,779

 

The details of the convertible promissory notes are as follows:

 

In June 2020, the Company borrowed $110,000 in conjunction with an unsecured convertible promissory note from an investor. Proceeds of $100,000 include an original issue discount of $10,000.

 

In July 2020, the Company borrowed $107,500 in conjunction with an unsecured convertible promissory note from an investor. Proceeds of $90,000 include an original issue discount of $7,500 and legal fees of $10,000

 

In August 2020, the Company borrowed $215,000 in conjunction with an unsecured convertible promissory note from an investor. Proceeds of $200,000 include an original issue discount of $15,000.

 

 

In August 2020, the Company borrowed $103,000 in conjunction with unsecured convertible promissory notes from an investor. Proceeds of $100,000 include an original issue discount of $3,000.

 

In September 2020, the Company borrowed $107,500 in conjunction with an unsecured convertible promissory note from an investor. Proceeds of $100,000 include an original issue discount of $7,500.

 

In September 2020, the Company borrowed $78,000 in conjunction with unsecured convertible promissory notes from an investor. Proceeds of $75,000 include an original issue discount of $3,000.

 

In conjunction with the note issued in June 2020, the Company issued 100,000 shares of common stock to the Investor as well as a warrant to purchase 250,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The warrant expires on June 30, 2023.

 

From October 1, 2020 through November 10, 2020, the Company entered into convertible notes totaling $480,853 with net proceeds of $453,000.

 

In October 2020, the Company received a total of $35,000 from investors in exchange for 70,000 shares of common stock of the Company at a price of $0.50 per share.

 

On November 6, 2020, the Company issued 65,000 shares of common stock, at a price of $0.91 per share, in conjunction with a consulting agreement.

 

On November 9, 2020, the Company purchased and returned to treasury stock 87,849 shares of common stock for a purchase price of $36,413.

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

 

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

 

ITEM 4.

CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Management is responsible for establishing and maintaining adequate disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely and reliable financial reporting and the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America.

 

As of the quarter ended September 30, 2020, our principal executive officer and principal financial officer completed an assessment of the effectiveness of our disclosure controls and procedures, to determine the existence of any material weaknesses or significant deficiencies. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting.

 

Based on this evaluation, the Company’s management concluded its internal controls over financial reporting were not effective as of September 30, 2020. The ineffectiveness of the Company’s internal control over financial reporting was due to the following identified material weaknesses and significant deficiencies:

 

 

Material Weakness

 

(1) We lack organizational controls designed to allow us to gather, organize, process, maintain and provide our auditor timely documentation concerning our financial records. This material weakness causes us to not be able to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with US GAAP, and effectively close our books in a timely fashion and report to the Commission consistent with its rules and forms.

 

Significant Deficiency

 

(a) We do not have an Audit Committee – While not being legally obligated to have an Audit Committee, it is management’s view that such a committee, including a financial expert member, is an utmost important entity level control over the Company’s financial statement. Currently the Board of Directors acts in the capacity of the Audit Committee, and does not include a member that is considered to be independent of management to provide the necessary oversight over management’s activities.

 

(b) We do not have procedures in place to update our disclosures to include relevant accounting standards updates.

 

Changes in Internal Control over Financial Reporting.

 

Our management will continue to monitor and evaluate the designation, implementation and effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis and is committed to taking further action and implementing additional enhancements or improvements, as necessary.

 

PART II - OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

There are presently no material pending legal proceedings to which the Company, any executive officer, or any owner of record or beneficially of more than five percent of any class of voting securities is a party, or as to which any of its property is subject, and no such proceedings are known to the Company to be threatened or contemplated against it.

 

ITEM 1A.

RISK FACTORS

 

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On November 6, 2020 we issued 65,000 restricted common shares in exchange for consulting services. The sale was made in reliance on the exemption from registration provided by Section 4.2 of the Securities Act. The beneficial owner was an “accredited investor” and/or “sophisticated investor” pursuant to Section 501(a)(b) of the Securities Act, who provided the Company with representations, warranties and information concerning its respective qualifications as a “sophisticated investor” and/or “accredited investor.” The Company provided and made available to the beneficial owner full information regarding its business and operations. There was no general solicitation in connection with the offer or sale of the restricted securities. The beneficial owner acquired the restricted common stock for its own account, for investment purposes and not with a view to public resale or distribution thereof.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable

 

 

ITEM 5.

OTHER INFORMATION

 

None.

 

ITEM 6.

EXHIBITS

 

The following exhibits are included as part of this report:

 

*Included Herewith

 

**Incorporated by Reference from Registrant’s Form S-1/A filed July 20, 2020.

 

EXHIBIT NUMBER	EXHIBIT NAME
3.1(a)**	Certificate of Incorporation
3.1(b)**	Amendment to Articles of Incorporation January 9, 2020.
3.1(c)**	Amendment to Articles of Incorporation – Increase of Authorized Common Stock.
3.1(d)**	Amendment to Articles of Incorporation – Designation of Series A Preferred Common Stock.
3.1(e)**	Amendment to Articles – Conversion to C Corporation from LLC.
3.(ii)**	Corporate By-Laws
4**	Amendment to Articles of Incorporation – Designation of Series A Preferred Common Stock.
10(i)**	Material Contract – Matthew Wolfson Employment Contract.
10(ii)**	KISS Agreement, Blue Ridge Enterprises, LLC, July 9, 2019.
10(iii)	Convertible Promissory Note, JRD Enterprises III, LLC, July 21, 2020; Incorporated by reference from Form 10-Q for the quarter ended June 30, 2020, filed August 14, 2020.
10(iv)	Convertible Promissory Note, JRD Enterprises III, LLC, August 4, 2020; Incorporated by reference from Form 10-Q for the quarter ended June 30, 2020, filed August 14, 2020.
10(v)*	Convertible Promissory Note, JSJ Investments, Inc., September 28, 2020, as completed October 1, 2020.
10(vi)*	Convertible Promissory Note, Redstart Holdings Corp., October 22, 2020.
10(vii)*	Convertible Promissory Note, JR-HD Enterprises, III, LLC, November 3, 2020
10(viii)*	Settlement Agreement, Iakovos Tsakalidis, November 6, 2020
31.1*	Certification of Principal Executive Officer and Principal Financial Officer, 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 created by Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

 

 

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.

 

Dated: November 16, 2020

 

	ELECTROMEDICAL TECHNOLOGIES INC.
	By:	/s/ Matthew Wolfson
		Matthew Wolfson
		President & Chief Executive Officer
		(Principal Executive Officer)
	By:	/s/ Matthew Wolfson
		Matthew Wolfson
		Chief Financial Officer
		(Principal Financial and Accounting Officer)