10-Q/A 1 form10qa.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q/A

Amendment No. 1

 

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

 

FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2018

 

OR

 

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

 

Commission file number:000-55915

 

12 ReTech Corporation

(Exact name of registrant as specified in its charter)

 

NEVADA   38-3954047

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

10785 W. Twain Ave,

Suite 210

Las Vegas, Nevada

  89135
(Address of principal executive offices)   (Zip Code)

 

530-539-4329

Registrant’s telephone number

 

Securities registered under Section 12(b) of the Act:

 

none

 

Securities registered under Section 12(g) of the Act:

 

Common Stock, par value $.00001 per share

 

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes [  ] No [X]

 

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. [X] Yes [  ] 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 S-T (Sec. 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 [X ] No [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

 

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

 

Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [  ] Smaller reporting company [X] Emerging Growth Company [  ]

 

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 Act). Yes [  ] No [X]

 

The number of shares of common stock ($0.00001 par value) outstanding as of November 19, 2018 was 481,230,265.

 

 

 

 
 

 

Background of the Restatement

 

On November 19, 2018, due to a misapplication of the Accounting Standards, we concluded that our previously issued Consolidated Financial Statements for period ended June 30, 2018, needed to be restated.

 

This Amendment No. 1 to our Quarterly Report on Form 10-Q (the “Form 10-Q/A”) amends our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 previously filed on August 19, 2018 (the “Original Filing”). We are filing this Form 10- Q/A to restate our unaudited consolidated financial statements, financial data and related disclosures as of and for the three-month and six-month periods ended June 30, 2018 and 2017 to give effect to the Restatement. In Note 2. “Restatement of Previously Issued Consolidated Financial Statements,” we have included information regarding the Restatement and specific changes to our previously issued unaudited quarterly financial statements, including details of the adjustments to the previously issued unaudited quarterly financial statements as a result of the Restatement.

 

Explanation of the Restatement

 

The restatement of our unaudited quarterly financial statements and related disclosures primarily relates to the calculation of a derivative liability not reported in our historical unaudited quarterly financial statements for the quarter ended June 30, 2018. In accordance with accounting guidance presented in ASC 250-10 and SEC Staff Accounting Bulletin No. 99, Materiality, management assessed the materiality of these errors and concluded that they were material to the Company’s previously issued financial statements. The primary errors relate to calculation of a derivative liability associated the convertible notes payable.

 

The impact of the Restatement on the Consolidated Statements of Income primarily resulted in increase in the expenses for change fair value of derivative liability and increase in interest expense (three and six months ended June 30, 2018), which ultimately resulted in decreases to net income in the six months ended June 30, 2018. The impact of the Restatement on the Consolidated Balance Sheets primarily resulted in an increase of current liabilities in 2018. The impact of the Restatement adjustments on the Consolidated Statements of Cash Flows resulted in an increase of net cash provided by operating activities in the six months ended June 30, 2018.

 

This Form 10-Q/A amends and restates Items 1, 2, and 4 of Part I and Item 6 of Part II of the Original Filing and no other information included in the Original Filing is amended hereby. Generally, no attempt has been made in this Form 10-Q/A to modify or update the foregoing items, except as required to reflect the effects of the Restatement. Information not affected by the Restatement is unchanged and reflects the disclosures made at the time of the Original Filing. Accordingly, this Form 10-Q/A should be read in conjunction with our filings made with the Securities and Exchange Commission (“SEC”) subsequent to the Original Filing.

 

In accordance with applicable SEC rules, this Form 10-Q/A includes new certifications from our Chief Executive Officer and Chief Financial Officer as Exhibits 31.1, 31.2, 32.1 and 32.2. Subsequent to the Original Filing, we appointed a new Chief Financial Officer. Accordingly, these certifications are signed by our Chief Executive Officer and our Chief Financial Officer as of the date of filing this Form 10-Q/A.

 

 
 

 

12 RETECH CORPORATION

FOR THE THREE AND SIX MONTHS ENDED

JUNE 30, 2018

 

Index to Report

 

    Page
PART I FINANCIAL STATEMENTS  
     
Item 1. Condensed Consolidated Balance Sheets 4
  Condensed Consolidated Statements of Operations and Comprehensive Loss 5
  Condensed Consolidated Statements of Cash Flows 6
  Notes to Condensed Consolidated Financial Statements 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
Item 3. Quantitative and Qualitative Disclosures About Market Risk 39
Item 4. Controls and Procedures 39
     
PART II OTHER INFORMATION 41
     
Item 1. Legal Proceedings 41
Item 1A. Risks Factors 41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42
Item 3. Defaults Upon Senior Securities 42
Item 6. Exhibits 42

 

2
 

 

FORWARD-LOOKING STATEMENTS

 

This document contains “forward-looking statements”. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements or belief; and any statements of assumptions underlying any of the foregoing.

 

Forward-looking statements may include the words “may,” “could,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” or other similar words. These forward-looking statements present our estimates and assumptions only as of the date of this report. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the dates on which they are made. We do not intend, and undertake no obligation, to update any forward-looking statement. You should, however, consult further disclosures we make in future filings of our Annual Report Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and on Annual 10K.

 

Although we believe the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The factors impacting these risks and uncertainties include, but are not limited to:

 

  - our current lack of working capital;
     
  - inability to raise additional financing;
     
  - the fact that our accounting policies and methods are fundamental to how we report our financial condition and results of operations, and they may require our management to make estimates about matters that are inherently uncertain;
     
  - deterioration in general or regional economic conditions;
     
  - adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations;
     
  - inability to efficiently manage our operations;
     
  - inability to achieve future sales levels or other operating results; and
     
  - the unavailability of funds for capital expenditures.

 

For a detailed description of these and other factors that could cause actual results to differ materially from those expressed in any forward-looking statement, please see “Item 1A. Risk Factors” in this document.

 

Throughout this Annual Report references to “we”, “our”, “us”, “12 ReTech”, “RETC”, “the Company”, and similar terms refer to 12 ReTech Corporation.

 

3
 

 

PART I

 

ITEM 1. FINANCIAL STATEMENTS

 

12 ReTech Corporation

Condensed Consolidated Balance Sheets

 

   June 30, 2018
(As Restated)
   December 31, 2017 
ASSETS          
Current Assets:          
Cash and cash equivalents  $38,297   $100,264 
Accounts receivable   3,386    2,884 
Prepaid expenses   8,322    1,290 
Other current assets   21,451    13,878 
Total Current Assets   

71,456

    118,316 
           
Fixed assets, net   

41,159

    8,615 
Goodwill   551,111    - 
Software development   133,240    - 
Security deposit   3,935    5,555 
TOTAL ASSETS  $

800,901

   $132,486 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
Current Liabilities:          
Accounts payable and accrued liabilities  $

959,373

   $105,904 
Due to stockholders   714,521    669,126 
Notes payable, net of discounts   

149,905

    - 
Convertible notes payable, net of discounts   

886,457

    408,247 
Derivative liabilities   933,411    - 
Total Current Liabilities   3,643,667    1,183,277 
           
Total Liabilities   3,643,667    1,183,277 
           
Commitments and Contingencies          
           
Series B Preferred Stock, 1,000,000 shares designated; $0.00001 par value $1.00 stated value; 266,000 and 0 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively. Amount is shown net of discounts of $99,533.   

166,467

    - 
           
Stockholders’ Deficit:          
Preferred stock: 50,000,000 authorized; $0.00001 par value:          
Series A Preferred Stock, 10,000,000 shares designated; $0.00001 par value; 5,000,000 shares issued and outstanding at June 30, 2018 and December 31, 2017   50    50 
Common stock: 1,000,000,000 and 500,000,000 authorized at June 30, 2018 and December 31, 2017, respectively; $0.00001 par value; 93,845,670 and 82,200,000 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively   938    822 
Additional paid-in capital   

3,911,047

    1,267,916 
Subscription receivable   (320,000)   - 
Common stock to be issued, 0 and 487,612 shares at June 30, 2018 and December 31, 2017, respectively   -    92,646 
Accumulated other comprehensive income   6,638    1,514 
Accumulated deficit   

(6,607,906

)   (2,413,739)
Total Stockholders’ Deficit   (3,009,233)   (1,050,791)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT  $

800,901

   $132,486 

 

The accompanying notes are an integral part of these consolidated financial statements

 

4
 

 

12 ReTech Corporation

Condensed Consolidated Statement of Operations

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018
(As Restated)
   2017   2018
(As Restated)
   2017 
                 
Revenues  $16,682   $9,018   $25,624   $43,397 
Cost of revenue   36    -    36    451 
Gross Profit   16,646    9,018    25,588    42,946 
                     
Operating Expenses                    
General and administrative   760,627    70,012    1,234,071    142,140 
Professional fees   273,421    

3,093

    505,050    8,827 
Depreciation   1,384    2,908    2,533    6,100 
Total Operating Expenses   1,035,432    76,013    1,741,654    157,067 
                     
Loss from operations   (1,018,786)   (66,995)   (1,716,066)   (114,121)
                     
Other Expense                    
Loss on debt extinguishment   (50,000)   -    (75,000)   - 
Interest expense   (690,643)   -    (838,593)   - 
Change in fair value of derivative liabilities   (933,411)   -    (933,411)   - 
Net Other Expense   (1,674,054)   -    (1,847,004)   - 
                     
Net Loss   (2,692,840)   (66,995)   (3,563,070)   (114,121)
                     
Net Loss Available for Common Stockholders  $(2,692,840)  $(66,995)  $(3,563,070)  $(114,121)
                     
Comprehensive loss: Net Loss  $(2,692,840)  $(66,995)  $(3,563,070)  $(114,121)
                     
Other comprehensive income- foreign currency translation adjustment  $19,778   $6,166   $5,124    - 
                     
Comprehensive Loss  $(2,673,062)  $(60,829)  $(3,557,946)  $(114,121)
                     
Net Loss Per Common Share: Basic and Diluted  $(0.03)  $(0.00)  $(0.04)  $(0.00)
                     
Weighted Average Number of Common Shares Outstanding: Basic and Diluted   86,059,166    50,000,000    84,350,585    50,000,000 

 

The accompanying notes are an integral part of these consolidated financial statements

 

5
 

 

12 ReTech Corporation

Condensed Consolidated Statements of Cash Flows

 

   Six Months Ended 
   June 30, 
   2018
(As Restated)
   2017 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net Loss  $(3,563,070)  $(114,121)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation   2,533    6,100 
Stock based compensation   448,754    - 
Amortization of debt discount   834,966    - 
Amortization of embedded derivative   933,411    - 
Loss on debt extinguishment   75,000    - 
Accretion of interest for note payable   1,854      
Accounts receivable   (502)   (64,000)
Prepaid Expenses   (460)   33,122 
Inventory   -    (820)
Other current assets   (7,573)   - 
Security deposit   1,620    - 
Accounts payable and accrued liabilities   439,604    (3,250)
Net Cash Used in Operating Activities   (833,863)   (142,969)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchases of property and equipment   (2,412)   (3,116)
Cash received from acqusition   779    - 
Software development   (133,240)   - 
Net Cash Used in Investing Activities   (134,873)   (3,116)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from due to stockholders   62,326    91,061 
Repayment of due to stockholders   (16,931)   - 
Proceeds from convertible notes payable   418,824    - 
Costs of issuance of convertible notes payable   (33,824)   - 
Issuance of common stock for cash   211,250    - 
Issuance of Series B Preferred stock   266,000    - 
Costs of issuance of Series B Preferred stock   (6,000)   - 
Net Cash Provided by Financing Activities   901,645    91,061 
           
Effect of Exchange Rate Changes on Cash and Cash Equivalents   5,124    348 
           
Net decrease in cash and cash equivalents   (61,967)   (54,676)
Cash and cash equivalents, beginning of period   100,264    56,644 
Cash and cash equivalents, end of period  $38,297   $1,968 
           
Supplemental cash flow information          
Cash paid for interest  $-   $- 
Cash paid for taxes  $-   $- 
           
Non-cash transactions:          
Common stock to be issued in current period  $92,646   $- 
Common stock issued in conjunction with convertible notes  $86,602   $- 
Original isssue discount on convertible notes payable  $26,468   $- 
Beneficial conversion feature for convertible notes payable  $811,205   $- 
Common stock issued for acquisition for E-motion (see Note 3)  $80,000   $- 

 

The accompanying notes are an integral part of these consolidated financial statements

 

6
 

 

12 RETECH CORPORATION

Notes to the Condensed Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

NOTE 1. NATURE OF BUSINESS

 

12 Retech Corporation (“we”, “us”, “our”, “12 ReTech”, “RETC”, or the “Company”) was incorporated under the laws of the State of Nevada, U.S. as DEVAGO INC. on September 8, 2014. On June 8, 2017, the Company amended our Articles of Incorporation to change the name to 12 Retech Corporation. At our core, we are a software company whose technology allows retailers to combat the dual threats of Walmart and Amazon — both online and in physical stores. Our microbrand rollup acquisition strategy allows us to demonstrate the effectiveness of our software, devise and test new products, while providing shareholder value through immediate revenue and earnings growth. The Company operates through our subsidiaries on three continents, Asia, North America and Europe.

 

Principal subsidiaries

 

The details of the principal subsidiaries of the Company are set out as follows:

 

Name of Company   Place of Incorporation   Date of Incorporation   Acquisition Date   Attributable Equity Interest %   Business
12 Retail Corporation (“12 Retail”)   Arizona, USA   Sept. 18, 2017   Formed by 12 Retech Corporation   100%   As a holding Company to execute the Company’s microbrand roll up acquisition strategy as well as to penetrate the North American market with our technology to select retailers.
                     
12 Hong Kong Limited (“12HK”)   Hong Kong, China   Feb. 2, 2014   June 27, 2017   100%   Development of our technology and sales of our technology applications.
                     
12 Japan Limited (“12JP”)   Japan   Feb. 12, 2015   July 31, 2017   100%   Consultation and sales of technology applications.
                     
12 Europe AG (“12EU”)   Switzerland   Aug. 22, 2013   Oct. 26, 2017   100%   Consultation and sales of technology applications.
                     

E-motion Fashion Brands, Inc.F/K/A Emotion Apparel, Inc,

Lexi Luu Designs, Inc, Punkz Gear, Skipjack Dive and Dancewear, Cleo VII

 

Re-incorpora-ed, in Utah, USA F/K/I in California,

USA

 

Sept. 9, 2010.

 

Reincorpor-ated on July 6,

2018 and changed its name on

July 26 , 2018

  May 1, 2018   100%   A subsidiary of 12 Retail and is the first microbrand acquired under the microbrand acquisition roll up strategy. Operates its own production facilities that can be utilized by all of the Company’s future microbrands.

 

2. Restatement of Previously Issued Unaudited Interim Consolidated Financial Statements

 

In connection with the preparation and review of the Company’s unaudited financial statements for the quarter ended ended June 30, 2018, management identified certain errors in the Company’s historical interim unaudited financial statements. As a result, the Company concluded that its previously issued unaudited consolidated financial statements for quarter ended June 30, 2018, need to be restated. Within this report, the Company has included restated unaudited interim consolidated financial statements as of, and for the three and six months ended, June 30, 2018. This Note 2 to the unaudited interim consolidated financial statements discloses the nature of the restatement matters and adjustments and shows the impact of the restatement for the three and six months ended June 30, 2018, respectively.

 

The restatement corrects errors primarily related to: (1) the derivative liability embedded in the convertible notes payable, as well as the related interest expense and discounts; (2) goodwill associated with the acquisition of Emotion Fashion Group on May 1, 2018 due to additional liabilities identified which were related to this acquisition, and (3) reclassification of Series B preferred shares from permanent equity to mezzanine.

 

7
 

 

Adjustments needed to correct errors

 

(1) Derivative Liability – Under ASC 480, Distinguishing Liabilities from Equity, a conversion feature of a convertible debt instrument or certain convertible preferred stock would be separated from the convertible instrument and classified as a derivative liability if the conversion feature, were it a standalone instrument, meets the definition of an “embedded derivative” in ASC 815, Derivatives and Hedging. Generally, characteristics that require derivative treatment include, among others, when the conversion feature is not indexed to the Company’s equity, as defined in ASC 815-40, or when it must be settled either in cash or by issuing stock that is readily convertible to cash. When a conversion feature meets the definition of an embedded derivative, it would be separated from the host instrument and classified as a derivative liability carried on the consolidated balance sheet at fair value, with any changes in its fair value recognized currently in the consolidated statements of operations.  The Company classified certain conversion features in the convertible notes issued during 2017 and 2018 as embedded derivative instruments due to down-round ratchet provisions and potential adjustments to conversion prices due to events of default in June 2018, for which made the notes immediately convertible, and accordingly measures and carries the conversion features as derivative liabilities in the consolidated financial statements. Also, the Company determined that the certain notes should be measured and carried at fair value in the consolidated financial statements according to ASC 480, as they are settleable in a variable number of shares based on a fixed monetary amount known at inception. Due to the existence of down round provisions, which create a path-dependent nature of the conversion prices of the convertible notes, the Company decided a Monte Carlo Simulation model. The company recognized a change in derivative liability of $933,411 for the period ended June 30, 2018.

 

(2) Goodwill– The excess of the purchase price over the fair value of assets acquired, net of liabilities assumed has been recognized as Goodwill. Certain adjustments to the assessed fair values of the assets, liabilities, may be made subsequent to the acquisition date, but within the measurement period, which is up to one year, are recorded as adjustments to Goodwill. As such the goodwill amount has been adjusted $551,110 at June 30, 2018, as it relates to the acquisitions of Emotion Fashion Group. This amount was adjusted as the company found additional liabilities associated with Emotion Fashion Group which lead to an increase in the amount of Goodwill associated with the acquisition of Emotion Fashion Group.

 

(3) Reclassification from Permanent Equity to Mezzanine of Series B Preferred Shares– The Series B Redeemable Convertible Preferred Stock has been reclassified as temporary equity, as it is redeemable by the holder at 15 months after issuance. It has thus have been recorded as mezzanine.

 

8
 

 

The following summarizes the impact of the Restatement on our previously reported unaudited interim Consolidated Balance Sheets, Consolidated Statements of Comprehensive Income, and Consolidated Statements of Cash Flows for the three and six months ended June 30, 2018.

 

Consolidated Balance Sheet

June 30, 2018

 

    As previously                    
    Reported     Adjustment     Restated     Reference  
ASSETS                        
Current Assets:                                
Cash and cash equivalents   $ 38,297     $ -     $ 38,297          
Accounts receivable     3,386       -       3,386          
Prepaid expenses     8,322       -       8,322          
Other current assets     21,451       -       21,451          
Total Current Assets     71,456       -       71,456          
                                 
Fixed assets, net     41,159       -       41,159          
Goodwill     274,137       276,974       551,111       2  
Software development     133,240       -       133,240          
Security deposit     3,935       -       3,935          
TOTAL ASSETS   $ 523,927     $ 276,974     $ 800,901          
                                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                                
Current Liabilities:                                
Accounts payable and accrued liabilities   $ 682,399     $ 276,974     $ 959,373       2  
Due to stockholders     714,521       -       714,521          
Notes payable, net of discounts     149,905       -       149,905          
Convertible notes payable, net of discounts     886,457       -       886,457          
Derivative liabilities     -       933,411       933,411       1  
Total Current Liabilities     2,433,282       1,210,385       3,643,667          
                                 
Total Liabilities     2,433,282       1,210,385       3,643,667          
                                 
Commitments and Contingencies                                
                                 
Series B Preferred Stock, 1,000,000 shares designated; $0.00001 par value $1.00 stated value; 266,000 and 0 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively. Amount is shown net of discounts of $99,533.     3       166,464       166,467       2  
Total Commitments and Contingencies     3       166,464       166,467          
                                 
Stockholders’ Deficit:                                
Preferred stock: 50,000,000 authorized; $0.00001 par value:                                
Series A Preferred Stock, 10,000,000 shares designated; $0.00001 par value; 5,000,000 shares issued and outstanding at June 30, 2018 and December 31, 2017     50       -       50          
Common stock: 1,000,000,000 and 500,000,000 authorized at June 30, 2018 and December 31, 2017, respectively; $0.00001 par value; 93,845,670 and 82,200,000 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively     938       -       938          
Additional paid-in capital     3,541,331       369,715       3,911,046       12  
Subscription receivable     (320,000 )     -       (320,000 )        
Common stock to be issued, 0 and 487,612 shares at June 30, 2018 and December 31, 2017, respectively     -       -       -          
Accumulated other comprehensive income     6,638       -       6,638          
Accumulated deficit     (5,138,315 )     (1,469,590 )     (6,607,905 )        
Total Stockholders’ Deficit     (1,909,358 )     (1,099,875 )     (2,842,766 )        
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT   $ 523,927     $ 276,974     $ 800,901          

 

9
 

 

Consolidated Statement of Operations

 

   Three Months Ended   Six Months Ended 
   June 30, 2018   June 30, 2018 
   As previously Reported   Adjustment   Restated   As previously Reported   Adjustment   Restated   Reference 
                             
Revenues  $16,682   $-   $16,682   $25,624   $-   $25,624      
Cost of revenue   36    -    36    36    -    36      
Gross Profit   16,646         16,646    25,588         25,588      
                                    
Operating Expenses                                   
General and administrative   760,627    -    760,627    1,246,174    -    1,234,071      
Professional fees   273,421    -    273,421    505,050    -    505,050      
Depreciation   1,384    -    1,384    2,533    -    2,533      
Total Operating Expenses   1,035,432    -    1,035,432    1,753,757         1,741,654      
                                    
Loss from operations   (1,018,786)        (1,018,786)   (1,728,169)        (1,716,066)     
                                    
Other Expense                                   
Loss on debt extinguishment   (50,000)   -    (50,000)   (75,000)   -    (75,000)     
Interest expense   (645,560)   45,083    (690,643)   (793,510)   45,083    (838,593)   1 
Change in fair value of derivative liabilities   -    933,411    (933,411)   -    933,411    (933,411)   1 
Net Other Expense   (695,560)   978,494    (1,674,054)   (868,510)   979,214     (1,847,004)     
                                    
Net Loss   (1,714,346)   978,494    (2,692,840)   (2,596,679)   979,214     (3,563,070)     
                                    
Deemed Dividend - Preferred Stock   (140,000)   140,000     -    

(140,000

   140,000     -      
                                    
Net Loss Available for for Common Stockholders  $(1,854,346  $1,118,494   $(2,692,840)  $(2,736,679  $

1,118,494

   $(3,563,070)     
                                    
Comprehensive loss: Net Loss  $(1,714,346)  $978,494   $(2,692,840)  $(2,596,679)  $

978,494

   $(3,563,070)     
                                    
Other comprehensive income- foreign currency translation adjustment  $19,778    -    19,778   $5,124    -    5,124      
                                    
Comprehensive Loss  $(1,694,568)  $978,494   $(2,673,062)  $(2,591,555)  $

978,494

   $(3,557,946)     
                                    
Net Loss Per Common Share: Basic and Diluted  $(0.02  $

(0.01

)   $(0.03)   $(0.03  $(0.01)   $(0.04)     
                                    
Weighted Average Number of Common Shares Outstanding: Basic and Diluted   86,059,166    86,059,166    86,059,166    84,350,585    84,350,585    84,350,585      

 

10
 

 

Consolidated Statement of Cash Flows

 

   Six Months Ended 
   June 30, 2018 
   As previously reported   Adjusted   Restated   Reference 
CASH FLOWS FROM OPERATING ACTIVITIES:                    
Net Loss  $(2,584,576)       $(3,563,070)     
Adjustments to reconcile net loss to net cash used in operating activities:                    
Depreciation   2,533    -    2,533      
Stock based compensation   448,754    -    448,754      
Amortization of debt discount   273,595    561,371    834,966    1 
Amortization of Embedded Derivative   516,288    417,123    933,411    1 
Loss on debt extinguishment   75,000    -    75,000      
Accretion of interest for note payable   1,854    -    1,854      
Accounts receivable   (502)   -    (502)     
Prepaid Expenses   (460)   -    (460)     
Other current assets   (7,573)   -    (7,573)     
Security deposit   1,620    -    1,620      
Accounts payable and accrued liabilities   439,604    -    439,604      
Net Cash Used in Operating Activities   (833,863)        (833,863)     
                     
CASH FLOWS FROM INVESTING ACTIVITIES:                    
Purchases of property and equipment   (2,412)   -    (2,412)     
Cash received from acqusition   779    -    779      
Software development   (133,240)   -    (133,240)     
Net Cash Used in Investing Activities   (134,873)        (134,873)     
                     
CASH FLOWS FROM FINANCING ACTIVITIES:                    
Proceeds from due to stockholders   62,326    -    62,326      
Repayment of due to stockholders   (16,931)   -    (16,931)     
Proceeds from convertible notes payable   418,824    -    418,824      
Costs of issuance of convertible notes payable   (33,824)   -    (33,824)     
Issuance of common stock for cash   211,250    -    211,250      
Issuance of Series B Preferred stock   266,000    -    266,000      
Costs of issuance of Series B Preferred stock   (6,000)   -    (6,000)     
Net Cash Provided by Financing Activities   901,645         901,645      
                     
Effect of Exchange Rate Changes on Cash and Cash Equivalents   5,124         5,124      
                     
Net decrease in cash and cash equivalents   (61,967)        (61,967)     
Cash and cash equivalents, beginning of period   100,264         100,264      
Cash and cash equivalents, end of period  $38,297        $38,297      
                     
Supplemental cash flow information                    
Cash paid for interest  $-        $-      
Cash paid for taxes  $-        $-      
                     
Non-cash transactions:                    
Common stock to be issued in current period  $92,646        $92,646      
Common stock issued in conjunction with convertible notes  $86,602        $86,602      
Original isssue discount on convertible notes payable  $26,468        $26,468      
Beneficial conversion feature for convertible preferred stock -recognized as deemed dividend  $140,000   $(140,000)   $-    3 
Beneficial conversion feature for convertible notes payable  $634,282    

176,923

   $811,205    1 
Common stock issued for acquisition for E-motion (see Note 3)  $80,000        $80,000      

 

11
 

 

NOTE 3. GOING CONCERN

 

The Company accounts for going concern matters under the guidance of ASU 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern” (“ASU 2014-15”). The guidance in ASU 2014-15 sets forth management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern as well as required disclosures. ASU 2014-15 indicates that, when preparing financial statements for interim and annual financial statements, management should evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. This evaluation should include consideration of conditions and events that are either known or are reasonably knowable at the date the financial statements are issued or are available to be issued, as well as whether it is probable that management’s plans to address the substantial doubt will be implemented and, if so, whether it is probable that the plans will alleviate the substantial doubt.

 

These interim financial statements have been prepared on a going concern basis which assumes the Company will continue to realize its assets and discharge its liabilities in the normal course of business. As of June 30, 2018, the Company has incurred losses totaling approximately $6.6 million since inception, has not yet generated significant revenue from its operations, and will require additional funds to maintain our operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they become due. The Company intends to finance operating costs over the next twelve months through continued financial support from its shareholders, the issuance of debt securities, private placements of common stock and revenues generated from its first mircrobrand acquisition Emotion Fashion Group, Inc. These interim financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

NOTE 4. ACQUISITIONS

 

The Company accounts for all business combinations in accordance with Financial Accounting Standards Board (“FASB”) ASC 805, “Business Combinations” (“ASC 805”), using the acquisition method of accounting. Under this method, assets and liabilities, including any remaining non-controlling interests, are recognized at fair value at the date of acquisition. The excess of the purchase price over the fair value of assets acquired, net of liabilities assumed, and is recognized as goodwill. Certain adjustments to the assessed fair values of the assets, liabilities, may be made subsequent to the acquisition date, but within the measurement period, which is up to one year, are recorded as adjustments to goodwill. Any adjustments subsequent to the measurement period would be recorded as income. Results of operations of the acquired entity are included in the Company’s results from the date of the acquisition onward and include amortization expense arising from acquired assets. The Company expenses all costs as incurred related to an acquisition in the condensed consolidated statements of income.

 

Emotion Fashion Group, Inc. F/K/A E-motion Apparel, Inc.

 

On May 1, 2018, the Company completed the acquisition of E-motion Apparel, Inc. (“EAI”) a California corporation, pursuant to a Share Exchange Agreement whereby the Company exchanged 1 million of its common shares for 100% of the equity of EAI in a third-party transaction. The fair value of the 1 million shares of common stock issued amounted to $80,000. EAI owns four wholly-owned and majority –owned subsidiaries: Lexi Luu Designs, Inc, (a Nevada Corporation), Punkz Gear, Inc, (a Wyoming Corporation), Cleo VII, Inc. (a Nevada Corporation) and Skipjack Dive & Dance Wear, Inc. (a Nevada Corporation), which together owns five microbrands that were included in this transaction and target specific niche markets: Lexi-Luu Dancewear, Punkz Gear, Cleo VII, Skipjack Dive & Dance Wear and E-motion Apparel, Inc.

 

On July 6, 2018, the Company re-incorporated EAI. in the state of Utah, USA and later re-named as Emotion Fashion Group, Inc. and does business under the brand name, “Emotion Fashions.” Going forward, the Company will operate all brands under the single entity, Emotion Fashion Group.

 

Emotion Fashion Group was founded in 2010 and designs and manufactures women’s apparel and kids dancewear.

 

The acquisition of Emotion Fashion Group, Inc. was accounted for under ASC 805. The following table summarizes the final allocation of assets acquired and liabilities assumed as of the Acquisition Date at estimated fair value.

 

Fair value below:

 

As of May 1, 2018, the assets and net liabilities acquired were as follows:

 

    As Restated  
Cash   $ 779  
Assets (except cash)     62,704  
Goodwill    

551,111

 

Liabilities (Restated)

    (534,593 )
Net assets   $ 80,000  

 

12
 

 

The fair values of the net assets acquired were determined using the market approach, which indicates value for a subject asset based on available market pricing for comparable assets. The fair value of the fixed assets of $32,665 has been determined by a third-party valuation firm and is valued at its estimated liquidation price. The fair value of the debt has been determined using an appropriately required yield and comparing against the stated interest rate on the debt.

 

The purchase price for the acquisition was allocated to the fair value of the assets acquired and liabilities assumed based on the estimates of the fair values at the acquisition date, with the amount exceeding the estimated fair values being recorded as goodwill.

 

The fixed assets are being depreciated over their estimated useful lives of 5 years. Goodwill recorded will not be amortized, but tested for impairment at least annually.

 

The Company assumed the liabilities of the Emotion Fashion Group, which included a disputed $250,000 note that bears a 2% annual interest rate. The fair market value of the note of $148,051 has been determined as the present value of the expected cash flow from the note assuming a market rate of interest.

 

Emotion Fashion Group’ results of operations have been included in the Company’s operating results for the period subsequent to the acquisition on May 1, 2018. Emotion Fashion Group contributed revenues of $897 and a net loss of $22,118 from the date of acquisition through June 30, 2018.

 

Revenues for Emotion Fashion Group were lower because the company was dormant most of 2017 and first quarter of the 2018. This was partly due to the fact that the company moved operations from Los Angeles, CA to Salt Lake City Utah. In additional the company was re-branded and is gearing for its re-launch that began in June 2018.

 

The below table sets forth selected unaudited pro forma financial information for the Company as if Emotion Fashion Group was owned for the entire three and six months ended June 30, 2018 and 2017.

 

   Proforma 
   Six Months Ended 
   June 30, 
  

2018

(As Restated)

   2017 
Revenues  $31,981   $57,205 
           
Net Loss  $(3,582,862)  $324,288 
           
Net Loss Per Share  $(0.04)  $0.01 

 

13
 

 

   Proforma 
   Three Months Ended 
   June 30. 
   2018

(As Restated)

   2017 
Revenues  $23,039   $22,432 
           
Net Loss  $(2,710,261)  $383,051 
           
Net Loss Per Share  $(0.03)  $0.01 

 

The unaudited pro forma information set forth above is for informational purposes only. The pro forma information should not be considered indicative of actual results that would have been achieved if the EAI acquisition had occurred on January 1, 2017. The unaudited supplemental pro forma financial information was calculated by combining the Company’s results with the stand-alone results of EAI for the identified periods, which were adjusted for certain transactions and other costs that would have been occurred during this pre-acquisition period.

 

NOTE 5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. Notes to the unaudited interim condensed consolidated financial statements that would substantially duplicate the disclosures contained in the audited consolidated financial statements for fiscal year 2017 have been omitted. This report should be read in conjunction with the audited consolidated financial statements and the footnotes thereto for the fiscal year ended December 31, 2017 included in the Company’s Form 10-K as filed with the Securities and Exchange Commission on April 16, 2018.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its subsidiaries 12HK, 12JP, 12EU. 12 Retail and Emotion Fashion Group which includes E-motion Apparel, Inc., Lexi Luu Designs, Inc., Punkz Gear, Skipjack Dive and Dance Wear, Inc. and Cleo VII, Inc. All inter-company accounts and transactions have been eliminated. We currently have no investments accounted for using the equity or cost methods of accounting.

 

14
 

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period. Actual results could differ from these good faith estimates and judgments.

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform with the current period presentation.

 

Software Development Costs

 

At June 30, 2018 and December 31, 2017, software development costs totaled $133,240 and $0, respectively. Capitalized costs related to the software under development are treated as an asset until the development is completed and the software is available for sale. The Company will amortize the software costs on a straight-line basis over the estimated life of the software product’s expected life cycle, commencing when the software is first available for general release to customers.

 

Goodwill

 

Goodwill represents the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. The goodwill amount of $551,111 at June 30, 2018 relates to the acquisitions of Emotion Fashion Group. Goodwill is not amortized, but is tested annually for impairment, or if circumstances occur that more likely than not reduce the fair value of the reporting unit below its carrying amount. The Company has determined that there has been no impairment of goodwill at June 30, 2018.

 

Revenue Recognition

 

Effective January 1, 2018, the Company adopted ASC 606, “Revenue from Contracts with Customers.” The Company has evaluated the new guidance and its adoption did not have a significant impact on the Company’s financial statements and a cumulative effect adjustment under the modified retrospective method of adoption will not be necessary. The will be no change to the Company’s accounting policies.

 

Convertible Debt and Convertible Preferred Stock

 

When the Company issues convertible debt or convertible preferred stock, it first evaluates the balance sheet classification of the convertible instrument in its entirety to determine whether the instrument should be classified as a liability under ASC 480, Distinguishing Liabilities from Equity, and second whether the conversion feature should be accounted for separately from the host instrument. A conversion feature of a convertible debt instrument or certain convertible preferred stock would be separated from the convertible instrument and classified as a derivative liability if the conversion feature, were it a standalone instrument, meets the definition of an “embedded derivative” in ASC 815, Derivatives and Hedging. Generally, characteristics that require derivative treatment include, among others, when the conversion feature is not indexed to the Company’s equity, as defined in ASC 815-40, or when it must be settled either in cash or by issuing stock that is readily convertible to cash. When a conversion feature meets the definition of an embedded derivative, it would be separated from the host instrument and classified as a derivative liability carried on the consolidated balance sheet at fair value, with any changes in its fair value recognized currently in the consolidated statements of operations. 

 

If a conversion feature does not meet the conditions to be separated and accounted for as an embedded derivative liability, the Company then determines whether the conversion feature is “beneficial”. A conversion feature would be considered beneficial if the conversion feature is “in the money” when the host instrument is issued or, under certain circumstances, later. If convertible debt contains a beneficial conversion feature (“BCF”), the amount of the amount of the proceeds allocated to the BCF reduces the balance of the convertible debt, creating a discount which is amortized over the debt’s expected term to interest expense in the consolidated statements of operations.

 

When a convertible preferred stock contains a BCF, after allocating the proceeds to the BCF, the resulting discount is either amortized over the period beginning when the convertible preferred stock is issued up to the earliest date the conversion feature may be exercised, or if the convertible preferred stock is immediately exercisable, the discount is fully amortized at the date of issuance. The amortization is recorded similar to a dividend.

 

15
 

 

Derivative Liabilities and Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are categorized based on whether the inputs are observable in the market and the degree that the inputs are observable. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Observable inputs are based on market data obtained from sources independent of our company. Unobservable inputs reflect our own assumptions based on the best information available in the circumstances. The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels, defined as follows:

 

  Level 1 Inputs are quoted prices in active markets for identical assets or liabilities as of the reporting date.
       
  Level 2 Inputs other than quoted prices included within Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data.
       
  Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs. Unobservable inputs for the asset or liability that reflect management’s own assumptions about the assumptions that market participants would use in pricing the asset or liability as of the reporting date.

 

The Company carries certain derivative financial instruments using inputs classified as “Level 3” in the fair value hierarchy on the Company’s consolidated balance sheets.

 

The Company classified certain conversion features in the convertible notes issued during 2017 and 2018 as embedded derivative instruments due to down-round ratchet provisions and potential adjustments to conversion prices due to events of default and accordingly measures and carries the conversion features as derivative liabilities in the consolidated financial statements. Also, the Company determined that the certain notes should be measured and carried at fair value in the consolidated financial statements according to ASC 480, as they are settleable in a variable number of shares based on a fixed monetary amount known at inception. These fair value estimates were measured using inputs classified as “level 3” of the fair value hierarchy. We develop unobservable “level 3” inputs using the best information available in the circumstances, which might include our own data, or when we believe inputs based on external data better reflect the data that market participants would use, we base our inputs on comparison with similar entities. Due to the existence of down round provisions, which create a path-dependent nature of the conversion prices of the convertible notes, the Company decided a Monte Carlo Simulation model, which incorporates inputs classified as “level 3” was appropriate.

 

Key inputs used in the Monte Carlo Simulation model to determine the fair value of the embedded derivatives and notes at June 30, 2018 are as follows:

 

Inputs    
Volatility (1)     139% - 163%
Risk free interest rate     1.93% - 2.11%
Common stock price     .030
Conversion price     25% - 55% discount to common stock price

 

  (1) “Level 3” input.

 

The “level 3” stock volatility assumption represents the range of the volatility curves used in the valuation analysis based on the actual volatility of the Company’s common stock. The risk-free interest rate is interpolated where appropriate and is based on treasury yields. The valuation model also included a “level 3” assumption the developed as to dates of potential future financings by the Company and potential events of default that may cause a reset of the conversion prices.

 

Beneficial Conversion Feature

 

If a conversion feature of convertible debt or preferred stock provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF”).

 

A BCF related to debt is recorded by the Company as a debt discount. In those circumstances, the convertible debt is recorded net of the discount related to the BCF. The Company amortizes the discount to interest expense over the life of the debt using the effective interest method.

 

A BCF related to preferred stock is recorded by the Company as a discount to preferred stock. In those circumstances, the convertible preferred stock is recorded net of the discount related to the BCF.

 

16
 

 

Commitments and Contingencies

 

The Series B Redeemable Convertible Preferred Stock is classified as temporary equity, as it is redeemable by the holder at a future date. The Series D-1 Preferred Stock will be classified as temporary equity due to the fact that it is redeemable immediately.

 

Earnings per Share

 

The Company follows ASC 260, “Earnings per Share” (“EPS”), which requires presentation of basic EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation. In the accompanying financial statements, basic earnings (loss) per share are computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period.

 

Diluted earnings per share reflects the potential dilution that could occur if securities were exercised or converted into common stock or other contracts to issue common stock resulting in the issuance of common stock that would then share in the Company’s earnings subject to anti-dilution limitations. In a period in which the Company has a net loss, all potentially dilutive securities are excluded from the computation of diluted shares outstanding as they would have an anti-dilutive impact. For the six and three months ended June 30, 2018 and 2017, potentially dilutive common shares consist of common stock issuable upon the conversion of Series A Preferred Stock and Series B Preferred Stock (using the if converted method). All potentially dilutive securities were excluded from the computation of diluted weighted average number of shares of common stock outstanding as they would have had an anti-dilutive impact.

 

Financial Instruments

 

The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued liabilities, due to stockholders and notes payable. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments.

 

Recent Accounting Pronouncements

 

Management has considered all recent accounting pronouncements issued. The Company’s management believes that these recent pronouncements will not have a material effect on the Company’s financial statements.

 

17
 

 

NOTE 6 – FIXED ASSETS, NET

 

Fixed assets, net at June 30, 2018 and December 31, 2017 consist of the following:

 

    June 30, 2018     December 31, 2017  
             
Office equipment   $ 7,622     $ 7,371  
Furniture and equipment     607       607  
Computer     14,077       12,998  
Technical equipment     23,435       23,435  
Truck     6,115       -  
Machinery     35,994       -  
      87,850       44,411  
Less: accumulated depreciation     (46,691 )     (35,796 )
Equipment   $ 41,159     $ 8,615  

 

Depreciation expense for the three months ended June 30, 2018 and 2017 amount to $1,384 and $2,908, respectively. Depreciation expense for the six months ended June 30, 2018 and 2017 amounted to $2,533 and $6,100, respectively.

 

NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Accounts payable and accrued liabilities at June 30, 2018 and December 31, 2017 consists of the following:

 

   June 30, 2018

   December 31, 2017 
         
Accounts payable  $332,349   $30,625 
Accrued expenses   566,031    66,931 
Accrued interest   60,993    8,348 
   $959,373   $105,904 

 

18
 

 

NOTE 8 - STOCKHOLDER TRANSACTIONS

 

Due to stockholders at June 30, 2018 and December 31, 2017 consists of the following:

 

  

June 30, 2018

   December 31, 2017 
Daniel Monteverde  9,652   8,214 
Angelo Ponzetta   547,140    500,798 
Gianni Ponzetta   157,729    160,114 
   $714,521   $669,126 

 

On August 12, 2017, Gianni Ponzetta loaned CHF 60,000 ($62,946 at June 30, 2018 and $61,584 at December 31, 2017) to the Company, which is included in the June 30, 2018 and December 31, 2017 totals. The promissory note is unsecured, bears interest at 1% per annum and is due December 31, 2019.

 

The other amounts due to stockholders are non-interest bearing, unsecured and due on demand.

 

During the six months ended June 30, 2018 and 2017, total advances and expenses paid directly by stockholders on behalf of the Company were $62,326 and $40,766, respectively, and the Company repaid $16,931 and $0, respectively.

 

NOTE 9 – CONVERTIBLE NOTES PAYABLE

 

Convertible notes payable at June 30, 2018 and December 31, 2017 which consists of the following:

 

   June 30, 2018
(As Restated)
   December 31, 2017 
Dated September 15, 2017  $462,500   $387,500 
Dated December 8, 2017   185,292    92,646 
Dated December 12, 2017   185,292    92,646 
Dated March 15, 2018   100,000    - 
Dated April 27, 2018   100,000    - 
Dated May 17, 2018   60,000    - 
Total convertible notes payable   1,093,084    572,792 
           
Less: Unamortized debt discount   (206,627)   (164,545)
Total convertible notes   886,457    408,247 
           
Less: current portion of convertible notes   886,457    408,247 
Long-term convertible notes  $-   $- 

 

For the three months ended June 30, 2018 and 2017, the Company recognized interest expense of $641,933 and $0 respectively, all of which represented the amortization of original issue discounts, debt discounts and beneficial conversion features. The issue discounts and debt discounts are being amortized over the life of the notes using straight line amortization due to the short term nature of the note. Remaining issue discounts and debt discounts of $206,627 will be fully amortized by May 2019.

 

For the six months ended June 30, 2018 and 2017, the Company recognized interest expense of $789,883 and $0 respectively, all of which represented the amortization of original issue discounts, debt discounts, derivative liabilities, beneficial conversion features and accrued interest.

 

The following is the change in derivative liability for the six months ended June 30, 2018:

 

   For the
Six Months Ended
June 30, 2018

(As Restated)

 
Balance - December 31, 2017  $- 
      
Issuance of new derivative liabilities   933,411 
Conversions to paid-in capital   - 
Change in fair market value of derivative liabilities     
Balance - June 30, 2018  $933,411 

 

The Company recognized a change in derivative liability of $933,411 for the period ended June 30, 2018. The derivative liability was determined using the Monte Carlo valuation method as of June 30, 2018.

 

The Company classified certain conversion features in the convertible notes issued during 2017 and 2018 as embedded derivative instruments due to variable conversion prices without a floor, down-round ratchet provisions and potential adjustments to conversion prices due to events of default and accordingly measures and carries the conversion features as derivative liabilities in the consolidated financial statements. Most derivative liabilities were triggered in June 2018, when the notes first became convertible. Also, the Company determined that the certain notes should be measured and carried at fair value in the consolidated financial statements according to ASC 480, as they are settleable in a variable number of shares based on a fixed monetary amount known at inception. These fair value estimates were measured using inputs classified as “level 3” of the fair value hierarchy. We develop unobservable “level 3” inputs using the best information available in the circumstances, which might include our own data, or when we believe inputs based on external data better reflect the data that market participants would use, we base our inputs on comparison with similar entities. Due to the existence of down round provisions, which create a path-dependent nature of the conversion prices of the convertible notes, the Company decided a Monte Carlo Simulation model, which incorporates inputs classified as “level 3” was appropriate.

 

Key inputs used in the Monte Carlo Simulation model to determine the fair value of the embedded derivatives and notes at June 30, 2018 are as follows:

 

Inputs    
Volatility (1)     139% - 163%
Risk free interest rate