TKLS 10-K
Trutankless, Inc. (TKLS)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
For the fiscal year ended
Commission file number
(Exact name of registrant as specified in its charter)
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(Address of principal executive offices) (Zip Code)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
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 ☐
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.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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).
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) 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. ☐
Indicate by check mark whether the registrant a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ |
Smaller reporting company | |
(Do not check if a smaller reporting company) | Emerging growth company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
As of the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of shares held by non-affiliates of the registrant (computed by reference to the price at which the common equity was last sold) was approximately $
The number of shares of Common Stock, $0.001 par value, outstanding on June 22, 2021 was
DOCUMENTS INCORPORATED BY REFERENCE: None.
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TRUTANKLESS, INC.
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2020
Index to Report on Form 10-K
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASE OF EQUITY SECURITIES | 13 |
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 18 |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 25 |
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | 25 |
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE | 27 |
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS | 31 |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE | 31 |
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements and involves risks and uncertainties that could materially affect expected results of operations, liquidity, cash flows, and business prospects. These statements include, among other things, statements regarding:
·our ability to diversify our operations;
·inability to raise additional financing for working capital;
·the fact that our accounting policies and methods are fundamental to how we report our financial condition and results of operations, and they may require our management to make estimates about matters that are inherently uncertain;
·our ability to attract key personnel;
·our ability to operate profitably;
·deterioration in general or regional economic conditions;
·adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations;
·changes in U.S. GAAP or in the legal, regulatory and legislative environments in the markets in which we operate;
·the inability of management to effectively implement our strategies and business plan;
·inability to achieve future sales levels or other operating results;
·the unavailability of funds for capital expenditures;
·other risks and uncertainties detailed in this report;
as well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forward-looking statements may appear throughout this report, including without limitation, the following sections: Item 1 “Business,” Item 1A “Risk Factors,” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “will likely result,” and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Annual Report on Form 10-K, and in particular, the risks discussed under the caption “Risk Factors” in Item 1A and those discussed in other documents we file with the Securities and Exchange Commission (SEC). We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
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This summary highlights certain information regarding the Company, including its history, its business objectives, and management team. The words “TRUTANKLESS,” “us,” “we,” the “Company” and any variants thereof used in this summary refer to Trutankless, Inc.
The Company’s stock symbol is TKLS, and is presently traded on the OTCQB maintained by OTC Markets Group, Inc. The Company is a reporting company under the rules and regulations of the US Securities and Exchange Commission. The Company’s filings can be reviewed at www.sec.gov.
PART I
ITEM 1. BUSINESS
Trutankless, Inc. was incorporated in the state of Nevada on March 7, 2008. The Company is headquartered in Scottsdale, Arizona and currently operates through its wholly-owned subsidiary, Bollente, Inc., a Nevada corporation incorporated on December 3, 2009.
Trutankless is involved in sales, marketing, research and development of a high quality, whole-house, smart electric tankless water heater that is more energy efficient than conventional products. Management anticipates the Company’s trutankless water heater, with Wi-Fi capability and trutankless’ proprietary apps offered in the iOS and Android store, will augment existing products in the hope automation space.
Overview of Potential Markets and Summary of Marketing Plan
Management intends to focus on the United States residential market initially. For decades Americans have used only tank type water heaters. For most homes, the units hold an average of 40 to 80 gallons of water in a storage tank, are gas or electric fueled and consume excessive energy to keep water hot continuously. In fact, water heaters expend up to 25% of the total energy used by a typical household representing the second largest use of energy in most homes. Depending on household usage, approximately 25 - 50% of the heat created is lost through the walls of the tank and connecting pipes.
There are other problems inherent with traditional tank water heaters:
·Due to the high temperatures and corrosive aspects of water, a typical water heater has a lifespan of 10.7 years.
·Unless replaced beforehand, more than two thirds of water heaters eventually corrode and leak or burst, often resulting in extensive and costly water and mold related damage.
·Due to the large size and other installation requirements often result in the units being installed in garages and utility rooms on the opposite side of the home from the bathroom fixtures. Because of this, an estimated 10,000 gallons of water per household goes down the drain while users wait on the water to get hot at the faucet.
·Traditional tank water heaters take up to 6 to 9 square feet of floor space, which can be especially valuable in multi-family or commercial applications.
·To reduce operating costs, many people adjust the temperature on their water heaters down. Unfortunately, lower temperatures increase the possibility of unhealthy, waterborne bacteria growth.
·To increase water heating capacity, many people will adjust the temperature of their water heaters up. In addition to using more energy, this practice can be dangerous by posing a greater risk of scalding.
·Tankless water heaters are becoming increasingly popular in America because they:
·Produce a continuous, unlimited supply of hot water
·Expend only the energy needed to heat the water used with no “standby” energy loss
·Can last more than twice as long as tank heaters
·Are small and require very little space.
·Are not conducive to bacterial growth
·Are considered very “green” by green conscious builders and consumers.
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Electric tankless water heaters have additional benefits over gas powered models because they can be installed almost anywhere in a home (closets, attics, utility rooms, etc.) where hot water is needed which improves flexibility of floor plan design for builders, architects, and remodelers. In addition, gas tankless water heaters may not be suitable for many applications due to challenges with adequate fuel supply, the need for exhaust vents with specific requirements, and other code-related requirements. In spite of these issues, gas tankless water heaters have enjoyed significant growth in North America because of the efficiency and performance they provide.
Home Automation Overview
Key trends in the home automation space, which is estimated to reach $46.22 Billion worldwide by 2025, have been driven by consumers’ desire for efficiency and lifestyle improvements. Companies like Nest have helped to introduce the Internet of Things to appliances with a direct impact on how users interact with traditional household appliances and have the ability to reduce energy usage. The trend towards integration with voice assistants is also on the rise with key industry leaders like Alexa and Google Assistant playing larger roles in the home automation industry. Insurance and utility companies have joined this trend by partnering with home automation manufacturers by leveraging different devices to build insurance products including discounts and rebates. While home security and safety monitoring are expected to continue to dominate the overall market, management anticipates energy management and HVAC controls and monitors will be one of the fastest growing markets in the U.S. which accounts for 36% of global demand.
Trutankless was designed to replace inefficient tank water heating technology, which is second to HVAC in energy consumption for most homes. Combined with Wi-Fi capabilities, the system can not only save energy it has the ability to inform users and property owners of energy use, water use, and potential issues like leaks or other failures in the plumbing system. Management plans to roll out additional technologies in the future that can integrate with the Company’s trutankless smart apps. Currently, the product has the ability to notify homeowners in the event of water flow while the system is set in away mode. Leak detection, leak damage mitigation, and hot water recirculation for instant hot water at the point of use are becoming major trends in the home automation space. Management believes new products can be introduced into its growing wholesale network to augment trutankless’ momentum and harness growing trends to a fresh audience of plumbing and other home service professionals.
Homebuilders and plumbing companies have begun selling homes with more technology integrations. Lennar Homes for example, the nation’s largest homebuilder, just recently announced the world’s first Wi-Fi Certified communities and employs Amazon’s Alexa voice assistant. Trutankless has also been introduced into Lennar communities, and management expects that trutankless products will share Wi-Fi Certification as well as integration with Alexa’s voice command capabilities, among other improvements to its existing technology platform.
Tankless Industry Overview
The U.S. gas tankless, whole-house, water heater market is dominated by five brands; Noritz, Rinnai, Takagi, Aqua Star by Bosch and Rheem by Paloma. The U.S. electric tankless water heater market is dominated by four companies; Stiebel-Eltron, Rheem (Eemax/EcoSmart), Seisco by Microtherm, Inc., and Power Star by Bosch. Until just a few years ago, there were only a few tankless water heater manufacturers with a presence in the United States, but that is changing. Now, several Japanese and European manufacturers have begun marketing products in the United States, and since 2003, gas tankless products have experienced dramatic growth. Electric tankless systems have not experienced comparable growth due to several factors, primarily product performance, capacity, product quality and electrical power supply and installation issues.
Manufacturers of tank heaters have a competitive advantage due largely to their product categories long established use, name recognition, established distribution and brand position in the marketplace. Many plumbers and other building industry professionals were opposed to changing brands or to tankless systems because many tankless water heaters have been poorly designed in the past. As a result, there is a perception among some contractors that these water heaters are more complicated and generally less dependable than traditional tank heaters. This perception is often passed along to consumers when making buying decisions or inquiring about switching to a tankless water heater. In recent years however, the industry has experienced a contraction in sales of products and services for new building projects. Consequently, higher ticket, higher margin products, such as tankless and solar water heating systems have become a primary growth driver for many plumbers and companies who had traditionally avoided emerging technologies.
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While we believe that our products will have superior performance, such as endless hot water, superior longevity, greater efficiency and lower “life-cycle” costs than traditional tank water heaters, the Company’s success will depend to a large degree on the successful conversion of traditional water heater buyers to tankless water heater buyers. The acquisition price of tankless water heaters (both gas and electric) is greater than traditional tank water heaters, but the overall cost of ownership will be less than that of traditional tank technologies under typical circumstances. Although the public’s awareness of tankless systems has not been strong historically, sales growth in the sector is suggestive of increasing awareness.
Our marketing and promotion plans have been developed to increase the awareness of the Company’s brand as the preferred option to traditional tank systems. Trutankless intends to position itself and its brand to capitalize on the paradigm shift to green-conscious living and development.
Trutankless® Products
We manufacture and distribute trutankless® water heaters, a line of new, high-quality, highly efficient electric tankless water heaters. Our trutankless® water heaters are engineered to outperform and outlast both its tank and tankless predecessors in energy efficiency, output, and durability. It provides endless hot water on demand for a whole household and it also integrates with home automation systems.
We have several features and design innovations which are new to the electric tankless water heater market that we believe will give our products a sustainable competitive advantage over our rivals in the market.
Our trutankless® water heaters are available through wholesale plumbing distributors, including Ferguson, Hajoca, WinSupply locations, Morrison Supply, and several regional distributors. A partial listing of wholesalers may be found on our website (www.trutankless.com).
Our trutankless® water heaters are designed to provide an endless hot water supply because they are designed to heat water as it flows through the system. We believe that our products are capable of higher temperature rise than competitive units at given flow rates because of its improved design and greater efficiency. Our trutankless® water heaters can save energy and reduce operating costs compared to tank systems because unlike tanks, if there is no hot water demand, no energy is being used. In addition, we intend to improve life-cycle costs with an improved design conceived not only to increase efficiency, but also the longevity of our products versus competitive units. Generally, a typical tank water heater lasts about 9 years, whereas gas tankless systems may last longer, but requires more routine maintenance. Our product line is designed to last longer than tank water heaters without any routine maintenance required under most conditions.
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We created a custom heat exchanger for our trutankless® product line that utilizes our patented technology to heat water as it flows through the system, which means customers need not worry about running out of hot water. We believe we’ve selected the best materials available and a collection of exclusive design elements and features to maximize capacity, minimize energy use, and provide a truly maintenance free experience.
Our trutankless® water heaters were officially launched in the first quarter of 2014 and is sold throughout the wholesale plumbing distribution channel. We began generating revenue in the first quarter of 2014. As of the fiscal year ended December 31, 2014, we generated $238,912 in revenue. As of the fiscal year ended December 31, 2015, we generated $265,504 in revenue. As of the fiscal year ended December 31, 2016, we generated $429,582 in revenue. As of the fiscal year ended December 31, 2017, we generated $695,857 in revenue. As of the fiscal year ended December 31, 2018, we generated $1,537,958 in revenue. As of the fiscal year ended December 31, 2019, we generated $1,908,708. As of December 31, 2020, we generated $1,661,278.
In July of 2014, we launched a customizable online control panel for our trutankless® line of smart electric water heaters. From the dashboard, residential and commercial users can obtain real-time status reports, adjust unit temperature settings, view up to three years of water usage data, and change notification settings from anywhere in the world, using a computer or web-enabled smart device at home.trutankless.com.
Additionally, service professionals can also use the www.pro.trutankless.com dashboard to monitor system status on every unit they install, allowing them to proactively contact their customers if a service or warranty appointment is needed.
Our primary markets, Florida, Texas, Arizona, and the rest of the Sunbelt region are centers of growth in the U.S. construction industry with green building at an all-time high, and an unprecedented appliance replacement cycle. We intend to take advantage of these powerful macro-economic trends.
Home.trutankless.com is available as a service to consumers of trutankless® water heaters. We have applications available for download from the Google Play and Apple iOS stores, which like the online control panels, allows monitoring and control of the tankless systems.
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Industry Recognition and Awards
Trutankless® received the Best of IBS 2014 Award for Best Home Technology Product from the National Association of Home Builders (NAHB) at that year’s International Builders Show (IBS) in Las Vegas. The IBS is produced by NAHB and is the largest annual light construction show in the world - featuring more than 1,100 exhibitors and attracting 75,000 attendees including high level decision makers from some of the largest homebuilders in the world as well as plumbing and HVAC professionals from top outfits in major markets.
Trutankless® received the Governor’s Award of Merit for Energy and Technology Innovation for the trutankless line of electric tankless heaters at Arizona Forward’s 2014 Environmental Excellence Awards.
Trutankless® received Kitchen and Bath Business Magazine’s 2014 K*BB Product Innovator’s Award Judges Choice Product.
In 2015, Trutankless was named in Buildings Magazine’s 2015 listing of “Money Savings Products” in the Energy Saving Measures category and received a Special Mention in the Architizer A+ Awards.
That same year, Appliance Design Magazine named Trutankless among the winners of their annual Excellence in Design Award, and the editors of Green Builder Magazine named Trutankless as one of their picks as “Hot Product”.
Consumer Reports Magazine featured Trutankless in its Top 5 Remodeling Trends for 2016, and leading home improvement website, houzz.com, honored the company with 4 consecutive “Best of Houzz” honors from 2014 through 2018.
Customers and Markets
We sell our products to plumbing wholesale distributors and dealers.
Approximately 94% of our sales in 2020, 76% of our sales in 2019, 81% of our sales in 2018, 90% of our sales in 2017, 96.1% of our sales in 2016, 98.3% of our sales in 2015 and 93.5% of our sales in 2014 were to wholesale plumbing equipment distributors for commercial and residential repair and replace applications. We rely on commissioned manufacturers’ representatives to market our product lines. Additionally, our products are sold to independent dealers throughout the United States.
Manufacturing and Logistics
Our principal supplier has been Sinbon Electronics, a contract manufacturer and engineering company based in Taiwan with manufacturing facilities in China, Taiwan, in the U.S., and other global locations. Sinbon handled procurement and supply chain management. We also have our engineering agreements with outside development and production engineers, which is ongoing and currently being executed. In December 2020, we executed a second Manufacturing Services Agreement establishing our pricing and payment terms, warranty, shipping, and delivery terms with a North American manufacturer.
Finished products are generally shipped Free on Board (FOB) and are warehoused at Associated Global Systems located in Phoenix, Arizona. Merchandise is typically shipped using common carriers or freight companies which are selected at the time of shipment based on order volume and the best available rates.
Intellectual Property & Proprietary Rights
We regard substantial elements of our brands and underlying intellectual property as proprietary and attempt to protect them by relying on trademark, service mark and trade secret laws, restrictions on disclosure and transferring title and other methods.
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Our plans are to actively pursue patent and trademark protection for all newly developed products, both domestically and abroad. We have novel and proprietary technologies related to our product line and the central focus of our patent counsel has been successfully building a defensible portfolio of patent claims which have been granted.
To date, we have filed and received a United States federal trademark registration for trutankless® and our logo design with the help of our outside marketing and branding experts and have acquired several unique domain registrations reflective of our online marketing strategy (www.Trutankless.com). During the year ended December 31, 2013, our patent agent filed a provisional patent with the US Patent and Trademark Office with the US Patent and Trademark Office with 37 claims based on our prototype design. Upon completion of our engineered prototype, we filed additional patents with additional claims. We have been able to obtain a formal patent for our tankless water heater with a total of 34 individual and dependent claims. We will continue to protect our intellectual property through confidentiality agreements with vendors and consultants and trade secret protocols employed by employees, consultants, and contractors.
Growth Strategy
Trutankless’ product launched in the first quarter of 2014 and is sold through the wholesale plumbing distribution channel. Gas tankless manufacturers’ support of this sales channel was critical in their ability to quickly capture appreciable market share in the $3.6 billion replacement market. No electric tankless has been available solely through wholesale distributors which have welcomed the arrival of trutankless. Trutankless’ sales and service training programs geared towards plumbers and contractors are the primary focal point of the Company’s sales strategy. Trutankless is employing several outside manufacturers rep agencies to quickly scale sales and educate distributors, plumbers, builders, and contractors.
The Company is also leveraging online marketing strategies and social media. By continually building an immersive and educational web experience at www.trutankless.com. Trutankless is efficiently building brand awareness among consumers. Launch efforts are focused in Arizona, Texas, and the Southeast which accounts for over 1,000,000 electric water heater shipments annually. Licensing and co-branding opportunities are being assessed, since strategic partnerships would eliminate the channel conflicts that have historically obstructed previous electric tankless entries in the marketplace. In the future we may pursue co-branding opportunities to accelerate sales of Trutankless’ products through retail channels.
In addition, we have determined that as part of our growth strategy, we will seek to partner with or acquire entities operating in various fields, with a bias towards green and “clean-tech” sectors. Our management has experience in marketing, product launches, business development strategies, and certain other areas specific to the success of growth companies. We will operate with a view towards identifying acquisition candidates as we seek the rights to provide the market with products and services geared toward environmental responsibility, innovative technology in the plumbing industry, and home automation technology.
We have identified several agents who are well suited to provide consulting to high-growth technology and consumer products companies. We are currently seeking partnership with companies in the green and “clean-tech” sectors possessing technologies, products, or expertise that would help create additional revenues and assist the Company with our own development efforts and product line expansion in the wholesale and retail plumbing channels.
Margin Expansion
Cost reduction measures, including outsourcing of key components and certain quality control testing protocols, are currently being undertaken on an expedited basis to rapidly reduce costs and improve manufacturing scalability. Such reductions are expected to take place in stages over the next three quarters and we believe may result in gross sales margins approaching 50% or more, which is far higher than other commodity-heavy technologies, and companies in the sector with mature technologies.
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Market Outlook
Trutankless entered the market in front of the largest water heater replacement cycle ever at a time when homeowners are seeking ways to reduce their carbon footprint without sacrificing comfort. Additionally, statistics have shown a trend towards electric water heating in new construction markets. Florida, Texas, and Arizona, and areas where electric water heaters dominate the market, have been epicenters of the residential new construction strength in the US. In the new construction market, builders are increasingly marketing “green” features and trutankless fit well along with other energy saving innovations.
In commercial markets, projects with a green designation like LEED or EnergyStar recently became the majority. We feel that our commercial line of trutankless products are well suited to thousands of customers in the retail, quick serve and fast casual restaurants, hair salons, education. In addition to residential new construction and replacement markets, we feel the commercial applications for which our products are appropriate represent a large portion of the commercial water heater market.
Additionally, the Federal Government mandated that standard electric water heaters over 55 gallons may not be sold (started in April 2015), effectively forcing the market to use alternative technologies like tankless water heaters. The “electrification” of the overall appliance market has also begun due to the rapid progression of energy generation technologies with more efficient and renewable energy sources seen as a growing and sustainable trend.
Investment Analysis
Trutankless has entered the market with a product that has enjoyed significant trends towards tankless water heating to displace gas tankless water heaters thus far. As a result of the market share growth of gas tankless, we believe TKLS is poised to produce exceptional results in the significant electric water heating market. Management has plans to significantly reduce the cost of goods sold and develop other innovations to supplement existing offerings which will be sold through the existing sales channels and reps which to help ensure sustainable growth over the next 3-5 years.
Recent Developments
In February 2020, we announced that the Company entered into an amended and restated loan agreement with noteholder to repay and convert $1,212,006 balance under facility.
On October 21, 2020, we announced that the Company will be stocking its products at The Home Depot Pro for the first time, continuing its rollout in the wholesale plumbing distribution channel.
On February 4, 2021, we announced that the Company entered into a new manufacturing partnership with Cypress Industries based in Austin, Texas to launch production in North America.
On March 4, 2021, we announced that the Company completed the buildout of a new production laboratory and R&D facility in Scottsdale, Arizona with state of the art research and testing systems for the development of new products.
COVID-19 Pandemic
In December 2019, an outbreak of a novel strain of coronavirus originated in Wuhan, China (“COVID-19”) and has since spread worldwide, including to the Unites States (the “U.S.”), posing public health risks that have reached pandemic proportions (the “COVID-19 Pandemic”). The COVID-19 Pandemic poses a threat to the health and economic wellbeing of our employees, customers and vendors. The operation of all of our facilities is critically dependent on our employees who staff these locations. To ensure the wellbeing of our employees and their families, we have provided all of our employees with detailed health and safety literature on COVID-19, such as the Center for Disease Control (the “CDC”)’s industry-specific guidelines for working with the deceased who were and may have been infected with COVID-19. In addition, our procurement and safety teams have updated and developed new safety-oriented guidelines to support daily field operations and provided personal protection equipment to those employees whose positions necessitate them, and we have implemented work from home policies at our corporate office consistent with CDC guidance to reduce the risks of exposure to COVID-19 while still supporting the families that we serve.
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Like most businesses world-wide, the COVID-19 Pandemic has impacted us financially; however, we cannot presently predict the scope and severity with which COVID-19 will impact our business, financial condition, results of operations and cash flows.
Target Markets
The United States market for residential tank water heaters in 2019 was more than 8.5 million units according to data released by the Air-Conditioning, Heating, and Refrigeration Institute (AHRI). Almost 50% of those shipments were electric water heaters, and the company has found in comparing those statistics with government data, that approximately 90% of tank water heaters shipped in 2019 were intended for “replacement” installations.
Trutankless is initially marketing its products to contractors, home builders, remodelers and distributors in the southern and western U.S. These areas of the country have been selected because of generally higher ground water temperatures, which improves the effects of the performance and capacity of all brands of tankless water heaters. This area of the country also traditionally has the largest share of population growth and new housing starts, accounting for almost two-thirds of all housing starts in 2019, according to recent data. Additionally, the southern U.S., and specifically the southeastern U.S., has the highest usage of electric water heaters.
Distribution Plan
Initially, we will be distributing our first product line throughout the southern and western U.S. using an existing network of plumbing and electrical wholesalers (distributors), manufacturers’ representatives and dealers. We believe that we will continue building existing partnerships with major companies in the building and plumbing industries to rapidly expand awareness of Trutankless and our products in the water heater market in the U.S and Canada.
Sales will continue to be pursued through the following channels:
1.Regional and national plumbing and electrical wholesalers (also called “distributors”);
2.Plumbers and electricians on a direct basis, in those areas where wholesalers have not yet been set up; and,
3.Builders on a direct basis, in those areas where wholesalers & mechanical contractors have not yet been set up.
We will expand sales of the product further by marketing the product directly to consumers over the internet with a series of aggressive and ongoing marketing initiatives. We intend to market to industry professionals and end-users through more traditional marketing efforts as well, including print advertising, attendance of select national trade shows, and attendance of select regional consumer shows. We also expect Trutankless will be successful in providing education, training, and support to our sales and installer networks as part of our distribution and marketing efforts.
We believe our products will be a differentiating factor for industry professionals and builders as they market to their customers. Additionally, our electric tankless products are expected to provide these professionals and their companies with a mechanism to increase revenue and improve gross margin as compared to more traditional water heating products.
Employees
We currently have six full-time employees, including our two officers, and two part-time employees. We expect to increase the number of employees to expand our sales and technical staff. We are using and will continue to use independent consultants and contractors to perform various professional services. We believe that this use of third-party service providers may enhance our ability to contain operating, general expenses and capital costs.
Available Information
Our periodic reports filed with the SEC, which include Form 10-K, Form 10-Q, Form 8-K and amendments thereto, may be accessed by the public free of charge from the SEC. Electronic copies of these reports can be accessed at the SEC’s website (http://www.sec.gov). Copies of these reports may also be obtained, free of charge,
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upon written request to: Trutankless Inc., 7025 E. Greenway Parkway, Suite 200, Scottsdale, Arizona 85254, Attn: Corporate Secretary. The public may read or obtain copies of these reports from the SEC at the SEC’s Public Reference Room at 450 Fifth N.W., Washington, D.C. 20549 (1-800-SEC-0330).
ITEM 1A. RISK FACTORS
If we are unable to attract and retain key personnel, our business could be harmed.
If any of our key employees were to leave, we could face substantial difficulty in hiring qualified successors and could experience a loss in productivity while any successor obtains the necessary training and experience. Our employment relationships are generally at-will. We cannot assure that one or more key employees will not leave in the future. We intend to continue to hire additional highly qualified personnel, but may not be able to attract, assimilate or retain qualified personnel in the future. Any failure to attract, integrate, motivate and retain these employees could harm our business.
We are subject to significant competition from large, well-funded companies.
The industry we compete in is characterized by intense competition and rapid and significant technological advancements. Many companies are working in a number of areas similar to our primary field of interest to develop new products; some of which may be similar and/or competitive to our products.
Most of the companies with which we compete have substantially greater financial, technical, manufacturing, marketing, sales and distribution and other resources than us. If a competitor enters the tankless water heater industry and establishes a greater market share in the direct-selling channel, our business and operating results will be adversely affected.
There is substantial doubt about our ability to continue as a going concern. If we do not continue as a going concern, investors will lose their entire investment.
Our financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The ability of the Company to continue as a going concern is dependent upon our ability to raise additional capital from the sale of common stock and, ultimately, the achievement of significant operating revenues within one year of the date the financial statements are issued. If we are unable to continue as a going concern, stockholders will lose their investment. We will be required to seek additional capital to fund future growth and expansion. No assurance can be given that such financing will be available or, if available, that it will be on commercially favorable terms. Moreover, favorable financing may be dilutive to investors.
The outbreak of the recent coronavirus, COVID-19, or an outbreak of another highly infectious or contagious disease, could adversely affect our business, financial condition, results of operations and cash flow, and limit our ability to obtain additional financing.
The spread of a highly infectious or contagious disease, such as COVID-19, could cause severe disruptions in the U.S. economy, which could in turn disrupt the business, activities, and operations of our customers, as well as our business and operations. The coronavirus outbreak has caused significant disruption in business activity and the financial markets both globally and in the United States. In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0 to 0.25 percent, citing concerns about the impact of COVID-19 on markets and stress in the energy sector. Many states and localities have imposed limitations on commercial activity and public gatherings and events, as well as moratoria on evictions. Concern about the spread of COVID-19 has caused and is likely to continue to cause quarantines, business shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced ability and incentives for some property owners to make mortgage payments, and overall economic and financial market instability, all of which may result a decrease in our business, sell our products and services and cause our customers to be unable to make scheduled loan payments. Therefore, to the extent that economic activity, business conditions and conditions in the financial markets in which we operate remain poor or deteriorate further, our sales, delinquencies, foreclosures and credit losses may materially increase. Such conditions are likely to exacerbate many of the risks described elsewhere in this “Risks Related to Our Business” section. Unfavorable economic conditions may also make it more difficult for us to close new sales and obtain additional financing. Furthermore, such conditions have and may continue to cause the collateral values
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associated our loans to decline. In addition, a prolonged period of very low interest rates could reduce our net income and have a material adverse impact on our cash flows and the market value of our investments.
If COVID-19, or another highly infectious or contagious disease is not successfully contained, we could experience a material adverse effect on our business, financial condition, results of operations and cash flow. Among the factors outside our control that are likely to affect the impact the COVID-19 pandemic will ultimately have on our business are:
·the pandemic’s course and severity;
·the direct and indirect results of the pandemic, such as recessionary economic trends, including with respect to employment, wages and benefits and commercial activity;
·political, legal and regulatory actions and policies in response to the pandemic, including the effects of restrictions on commerce or other public activities, moratoria and other suspensions of evictions or rent and related obligations;
·the timing, magnitude and effect of public spending, directly or through subsidies, its direct and indirect effects on commercial activity and incentives of employers and individuals to resume or increase employment, wages and benefits and commercial activity;
·the timing and availability of direct and indirect governmental support for various financial assets, including mortgage loans, and possible related distortions in market values and liquidity for such assets whose markets have or are assumed to have government support versus possibly similar assets that do not;
·potential longer-term effects of increased government spending on the interest rate environment and borrowing costs for non-governmental parties;
·the ability of our employees and our third-party vendors to work effectively during the course of the pandemic; and
·potential longer-term shifts toward telecommuting and telecommerce;
We are continuing to monitor the spread of COVID-19 and related risks, although the rapid development and fluidity of situation precludes any prediction as to its ultimate impact on us. However, if the spread continues, such impact could grow and our business, financial condition, results of operations and cash flows could be materially adversely affected.
We will require additional financing in order to implement our business plan. In the event we are unable to acquire additional financing, we may not be able to implement our business plan resulting in a loss of revenues and ultimately the loss of your investment.
Due to our very recent start-up nature, we will have to incur the costs of product development, import expenses, advertising, in addition to hiring new employees and commencing additional marketing activities for product sales and distribution. To fully implement our business plan we will require substantial additional funding.
We will need to raise additional funds to expand our operations. We plan to raise additional funds through private placements, registered offerings, debt financing or other sources to maintain and expand our operations. Adequate funds for this purpose on terms favorable to us may not be available, and if available, on terms significantly more adverse to us than are manageable. Without new funding, we may be only partially successful or completely unsuccessful in implementing our business plan, and our stockholders may lose part or all of their investment.
Our internal controls may be inadequate, which could cause our financial reporting to be unreliable and lead to misinformation being disseminated to the public.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, the principal executive and principal financial officer and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
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(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
We have two individuals performing the functions of all officers and directors. Mr. Stebbins, our president and CEO, and Mr. Orr, our secretary and treasurer, have developed our internal control procedures and are responsible for monitoring and ensuring compliance with those procedures. As a result, our internal controls may be inadequate or ineffective, which could cause our financial reporting to be unreliable and lead to misinformation being disseminated to the public. Investors relying upon this misinformation may make an uninformed investment decision.
We depend on certain key employees, and believe the loss of any of them would have a material adverse effect on our business.
We will be dependent on the continued services of our management team, as well as our outside consultants. While we have no assurance that our current management will produce successful operations, the loss of such personnel could have an adverse effect on meeting our production and financial performance objectives. We have no assurance that we will not lose the services of these or other key personnel and may not be able to timely replace any personnel if we do lose their services.
Our ability to attract qualified sales and marketing personnel is critical to our future success, and any inability to attract such personnel could harm our business.
Our future success may also depend on our ability to attract and retain additional qualified design and sales and marketing personnel. We face competition for these individuals and may not be able to attract or retain these employees, which could have a material adverse effect on our results of operations and financial condition.
RISKS RELATED TO OUR INTELLECTUAL PROPERTY AND TECHNOLOGY
If we fail to secure or protect our intellectual property rights, our products and competitors may be able to use our designs, each of which could harm our reputation, reduce our revenues and increase our costs.
We will rely on intellectual property laws to protect our proprietary rights with respect to our trademarks and pending patent. We are susceptible to injury from patent infringement, which may harm our reputation for producing high-quality products or force us to incur additional expense in enforcing our rights. It is difficult and expensive to detect and prevent patent infringement. Despite our efforts to protect our intellectual property, some may attempt to violate our intellectual property rights by using our trademarks and imitating our products, which could potentially harm our brand, reputation and financial condition.
We may face significant expenses and liability in connection with the protection of our intellectual property rights. Infringement claims and lawsuits likely would be expensive to resolve and would require substantial management time and resources. Any adverse determination in litigation could subject us to the loss of our rights to a particular trademark, which could prevent us from manufacturing, selling or using certain aspects of our products or could subject us to substantial liability, any of which would harm our results of operations. Aside from infringement claims against us, if we fail to secure or protect our intellectual property rights, our competitors may be able to use our designs. If we are unable to successfully protect our intellectual property rights or resolve any conflicts, our results of operations may be harmed.
Our reliance on intellectual property and other proprietary information subjects us to the risk that these key ingredients of our business could be copied by competitors.
Our success depends, in significant part, on the proprietary nature of our technology. If a competitor is able to reproduce or otherwise capitalize on our technology, despite the safeguards we have in place, it may be difficult, expensive or impossible for us to obtain necessary legal protection. In addition to patent protection of intellectual property rights, we consider elements of our product designs and processes to be proprietary and confidential. We rely upon employee, consultant and vendor non-disclosure agreements and contractual provisions and a system of internal safeguards to protect our proprietary information. However, any of our registered or unregistered
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intellectual property rights may be challenged or exploited by others in the industry, which might harm our operating results.
RISKS RELATING TO OUR COMMON STOCK
Because our common stock could remain under $5.00 per share, it could continue to be deemed a low-priced “Penny” stock, an investment in our common stock should be considered high risk and subject to marketability restrictions.
Since our common stock is currently under $5.00 per share, it is considered a penny stock, as defined in Rule 3a51-1 under the Securities Exchange Act, it will be more difficult for investors to liquidate their investment even if and when a market develops for the common stock. If the trading price of the common stock stays below $5.00 per share, trading in the common stock is subject to the penny stock rules of the Securities Exchange Act specified in rules 15g-1 through 15g-10. Those rules require broker-dealers, before effecting transactions in any penny stock, to:
·Deliver to the customer, and obtain a written receipt for, a disclosure document;
·Disclose certain price information about the stock;
·Disclose the amount of compensation received by the broker-dealer or any associated person of the broker-dealer;
·Send monthly statements to customers with market and price information about the penny stock; and
·In some circumstances, approve the purchaser’s account under certain standards and deliver written statements to the customer with information specified in the rules.
Consequently, the penny stock rules may restrict the ability or willingness of broker-dealers to accept the common stock for deposit into an account or, if accepted for deposit, to sell the common stock and these restrictions may affect the ability of holders to sell their common stock in the secondary market and the price at which such holders can sell any such securities. These additional procedures could also limit our ability to raise additional capital in the future.
FINRA sales practice requirements may also limit a stockholder’s ability to buy and sell our stock.
In addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority (FINRA) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We currently maintain an executive office 7025 E. Greenway Parkway, Suite 200, Scottsdale Arizona 85254, which consists of approximately 2,625 square feet. Our monthly rent for this office is $4200.00. We currently maintain a research, development, and test lab with office space 15953 N. Greenway Hayden Loop, Scottsdale Arizona 85260, which consists of approximately 1,680 square feet. Our monthly rent for this commercial space is approximately $2,440.00.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASE OF EQUITY SECURITIES
Holders of Common Stock
As of June 10, 2021, there were approximately 403 stockholders of record of our common stock. This number does not include shares held by brokerage clearing houses, depositories or others in unregistered form.
Dividends
The payment of dividends is subject to the discretion of our Board of Directors and will depend, among other things, upon our earnings, our capital requirements, our financial condition, and other relevant factors. We have not paid or declared any dividends upon our common stock since our inception and, by reason of our present financial status and our contemplated financial requirements, do not anticipate paying any dividends upon our common stock in the foreseeable future.
We have never declared or paid any cash dividends. We currently do not intend to pay cash dividends in the foreseeable future on the shares of common stock. We intend to reinvest any earnings in the development and expansion of our business. Any cash dividends in the future to common stockholders will be payable when, as and if declared by our Board of Directors, based upon the Board’s assessment of:
·our financial condition;
·earnings;
·need for funds;
·capital requirements;
·prior claims of preferred stock to the extent issued and outstanding; and
·other factors, including any applicable laws.
Therefore, there can be no assurance that any dividends on the common stock will ever be paid.
Recent Sales of Unregistered Securities
On January 1, 2020, the Company entered into an agreement to consolidate certain convertible notes payables. As consideration the Company issued the note holder 350,000 shares of common stock valued at $136,500 which was recorded as loss on extinguishment.
On January 3, 2020, the Company issued 200,000 shares of common stock for $50,000 cash at $0.25 per share.
On January 3, 2020, the Company issued 100,000 shares for services with a fair value of $39,000, based on stock price of $0.39 on date of the agreement.
On January 30, 2020, the Company issued 12,000 shares of common stock with a fair value of $4,560, based on the stock price on the date of the agreement as an incentive to restructure a certain note agreement.
On January 30, 2020, the Company issued 52,116 shares of common stock with a fair value of $19,823, based on the stock price on the date of the agreement as an incentive to enter into a certain note payable agreement.
On January 30, 2020, the Company issued 15,000 shares for services with a fair value of $6,390 that were due during the year ended December 31, 2019 and included in stock payable.
On January 31, 2020, the Company issued 476,493 shares of common stock with a fair value of $147,713, based on the stock price on the date of the agreement as an incentive to enter into a certain note payable agreement.
On February 5, 2020, the Company issued 4,000,000 shares for the settlement of debt with a fair value of $1,240,000, based on stock price of $0.31 on date of the agreement.
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On February 5, 2020, the Company issued 3,600,000 shares for services with a fair value of $1,116,000, based on stock price of $0.31 on date of the agreement .
On March 9, 2020, the Company cancelled a consulting agreement entered into during the year ended December 31, 2019. As a result, the Company received and cancelled 500,000 shares of common stock valued $125,000, based on stock price of $0.25 on date of reacquisition.
On March 10, 2020, the Company issued 300,000 shares for services with a fair value of $103,000 based on stock price of $0.23-$0.40 on date of the agreement .
On March 10, 2020, the Company issued 50,000 shares of common stock with a fair value of $12,500, based on the stock price on the date of the agreement as an incentive to restructure a certain note agreement.
On March 11, 2020, the Company received $100,000 in cash proceeds for the issuance of 500,000 shares of common stock, which were issued on April 1, 2020.
On April 2, 2020, the Company filed a certificate of designation of preferences, rights and limitations of a new Series B Preferred Stock with the Secretary of State of Nevada, designating 10,000 shares of preferred stock, par value $0.001 of the Company, as Series B Preferred Stock. The new Series B Preferred Stock does not pay a dividend, does not have any liquidation preference over other securities issued by the Company and are not convertible into shares of the Company’s common stock. For so long as any shares of the Series B Preferred Stock remain issued and outstanding, the holders thereof, voting separately as a class, shall have voting power equal to a controlling 51% of the total vote on all shareholder matters of the Company. Upon or after the third anniversary of the initial issuance date, the Company shall have the right, at the Company’s option, to redeem all or a portion of the shares of Series B Preferred Stock, at a price per share equal to par value.
On April 2, 2020, the Board issued 5,000 shares of the Series B Preferred Stock to the Company’s Chief Executive Officer and President, Michael Stebbins, and 5,000 shares of the Series B Preferred Stock to the Company’s Secretary and Treasurer, Robertson Orr for the purpose of assuring that they retains voting control of the Company. The shares were valued at $ 3,073,595 which was based on the value of the voting rights, which was determined based on the equity value of 51% of outstanding shares using a stock price of $0.11 on April 2, 2020. The $3,073,595 was recognized as shares issued for services included in professional fees expenses on the consolidated Statement of Operations.
On May 1, 2020, the Company issued 1,500,000 shares of common stock for $210,000 as commitment shares for the issuance of a certain note payable issued on May 1, 2020.
On July 9, 2020 the company sold 70,000 shares of common stock and 70,000 warrants for cash proceeds of $7,000. These shares were issued.
On June 5, 2020, the Company issued 1,468,085 shares of common stock $308,298 as commitment shares for the issuance of a certain note payable issued on June 5, 2020.
On June10, 2020, the Company received and cancelled 674,000 shares of common stock valued $175,240, based on stock price on date of reacquisition.
On June 12, 2020, the Company issued 1,300,000 shares of common stock for $175,000.
On June 12, 2020, the Company issued 25,000 shares for services with a fair value of $8,000 based on stock price of $0.32 on date of the agreement.
On June 1, 2020 the Company entered into an agreement to provide 250,000 shares of common stock with a fair value of $60,000 based on stock price of $0.24 on date of the agreement in connection with consulting services.
On June 15, 2020 the Company entered into an agreement to provide 250,000 shares of common stock with a fair value of $42,500 based on stock price of $0.17 on date of the agreement in connection with consulting services.
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On July 9, 2020, the Company issued 420,000 of common stock for $42,000 cash.
On July 30, 2020, the Company issued 15,000 shares for services with a fair value of $2,805 based on stock price of $0.19 on date of the agreement.
On August 1, 2020, the Company issued 80,000 shares for services with a fair value of $15,760 based on stock price of $0.20 on date of the agreement.
On August 1, 2020, the Company issued 50,000 shares to extend the due date of a certain note payable dated May 2, 2017 with a fair value of $9,850, based on stock price of $0.20 on date of the agreement.
On August 3, 2020, the Company issued 320,000 shares for services, of which 220,000 shares were bonus shares with a fair value of $41,800 based on stock price of $0.19 on date of grant.
On August 3, 2020, the Company issued 750,000 of common stock for $75,000 cash.
On August 10, 2020, the Company issued 750,000 shares for services with a fair value of $157,500 based on stock price of $0.21 on date of the agreement.
On August 10, 2020, the Company issued 500,000 of common stock for $50,000 cash.
On August 20, 2020, the Company issued 1,002,919 shares of common stock $183,334 as commitment shares for the issuance of a certain note payable issued on August 20, 2020.
On August 30, 2020, the Company issued 250,000 shares for services with a fair value of $60,000 based on stock price of $0.24 on date of the agreement.
On August 23, 2020, the Company issued 500,000 shares for services with a fair value of $90,000 based on stock price of $0.18 on date of the agreement.
On August 25, 2020, the Company issued 500,000 shares for services with a fair value of $75,000 based on stock price of $0.15 on date of the agreement.
On August 31, 2020, the Company issued 150,000 shares for services with a fair value of $18,000 based on stock price of $0.12 on date of the agreement.
On September 1, 2020, the Company issued 500,000 shares for services with a fair value of $100,000 based on stock price of $0.20 on date of the agreement.
On September 4, 2020, the Company issued 300,000 shares for services with a fair value of $30,000 based on stock price of $0.10 on date of the agreement.
On September 8, 2020, the Company issued 875,000 of common stock for $87,500 cash.
On September 13, 2020, the Company issued 250,000 shares for services with a fair value of $42,500 based on stock price of $0.17 on date of the agreement.
On September 15, 2020, the Company issued 175,000 shares for services with a fair value of $33,750 based on stock price of $0.13 to $0.024 on date of the agreement.
On September 15, 2020, the Company issued 25,000 shares for services with a fair value of $6,000 based on stock price of $0.24 on date of the agreement.
On September 28, 2020, the Company issued 600,000 shares for services with a fair value of $110,000 based on stock price of $0.10 to $0.20 on date of the agreement.
On September 29, 2020, the Company issued 350,000 of common stock for $35,000 cash.
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On September 29, 2020, the Company issued 250,000 shares for services with a fair value of $45,000 based on stock price of $0.18 on date of the agreement.
On September 30, 2020, the Company issued 100,000 of common stock for $10,000 cash.
on October 1, 2020 the Company issued 1,950,000 shares of common stock with a fair value of $390,000 based on stock prices of between $0.20 in connection with consulting services.
On October 5, 2020 the Company sold 1,500,000 shares of common stock and 1,500,000 warrants for cash proceeds of $150,000. As of December 31, 2020, the shares were not issued and included were included in stock payable.
On October 22, 2020, the Company issued 1,210,000 shares for services with a fair value of $269,200 based on stock price between $0.17 and $0.27 on date of the agreement.
On October 22, 2020 the Company sold 500,000 shares of common stock and 500,000 warrants for cash proceeds of $50,000.
On December 16, 2020, the Company issued 1,700,000 shares for services with a fair value of $306,000 based on stock price between $0.15 and $0.20 on date of the agreement.
On December 31, 2020 the Company sold 325,000 shares of common stock and 325,000 warrants for cash proceeds of $32,500.
During the year ended December 31, 2020, the Company issued 500,000 shares to consultant in error and is in the process of the having the shares returned. As of the date of filing the shares have not been returned.
We believe that the issuance and sale of the securities was exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 by virtue of Section 4(2) and Regulation D Rule. The securities were sold directly by us and did not involve a public offering or general solicitation. The recipients of the securities were afforded an opportunity for effective access to files and records of the Registrant that contained the relevant information needed to make their investment decision, including the financial statements and 34 Act reports. We reasonably believed that the recipients, immediately prior to the sale of the securities, were accredited investors and had such knowledge and experience in our financial and business matters that they were capable of evaluating the merits and risks of their investment. The management of the recipients had the opportunity to speak with our management on several occasions prior to their investment decision. There were no commissions paid on the issuance and sale of the securities.
Subsequent Sales & Issuances of Unregistered Securities
On January 4, 2021, the Company entered into an agreement with the note holder of a certain related party notes payable dated February 5, 2020 to convert $200,000 of the principal balance of the note and to extend the payment date of the first interest payment of $54,993.87 to January 2, 2023. As consideration, the Company issued the noteholder 2,200,000 shares of common stock.
On January 6, 2021, the Company entered into a $275,000, 12% convertible note payable including an original issue discount of $25,000. As part of the note agreement the Company also granted the noteholder 982,861 shares of common stock valued $167,086 and 152,000 five year warrants exercisable at $0.125.
On February 8, 2021, the Company entered into an agreement to consolidate two $50,000 notes payable dated September 17, 2018 and February 8, 2019 into one $100,000, 10% note due February 8, 2022 convertible at $0.10 per share. As consideration the Company issued the note holder 100,000 shares of common stock. As of the date of filing the shares have not been issued.
On February 4, 2021, the Company issued 2,175,000 shares for services.
On February 8, 2021, the Company sold 150,000 shares of common stock and 150,000 warrants for cash proceeds of $15,000.
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On February 8, 2021, the Company issued 60,000 shares for services.
On February 17, 2021, the Company issued 116,320 shares in connection with share due from a certain note payable dated January 25, 2019 and included in stock payable as of December 31, 2020.
On February 17, 2021, the Company issued 35,000 shares for services.
On February 17, 2021, the Company sold 1,500,000 shares of common stock and 1,500,000 warrants for cash proceeds of $150,000.
On February 24, 2021, the Company issued 500,000 shares to extend a certain note payable dated January 25, 2019.
On February 24, 2021, the Company sold 100,000 shares of common stock and 600,000 warrants for cash proceeds of $10,000.
On February 24, 2021, the Company issued 3,900,000 shares for services.
On March 17, 2021, the Company sold 2,000,000 shares of common stock for cash proceeds of $200,000.
On June 15, 2021, the Company sold 1,500,000 shares of common stock for cash proceeds of $150,000 which was received during the year ended December 31, 2020 and included in stock payable.
On June 15, 2021, the Company sold 792,590 shares of common stock for cash proceeds of $79,259.
On June 15, 2021, the Company issued 41,600 shares of common stock, in connection with an additional $20,800 advance received on March 3, 2021 related to a certain note payable dated January 25, 2019.
We believe that the issuance and sale of the securities was exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 by virtue of Section 4(2) and Regulation D Rule. The securities were sold directly by us and did not involve a public offering or general solicitation. The recipients of the securities were afforded an opportunity for effective access to files and records of the Registrant that contained the relevant information needed to make their investment decision, including the financial statements and 34 Act reports. We reasonably believed that the recipients, immediately prior to the sale of the securities, were accredited investors and had such knowledge and experience in our financial and business matters that they were capable of evaluating the merits and risks of their investment. The management of the recipients had the opportunity to speak with our management on several occasions prior to their investment decision. There were no commissions paid on the issuance and sale of the securities.
Issuer Purchases of Equity Securities
The Company did not repurchase any of its equity securities during the fourth quarter ended December 31, 2020.
ITEM 6. SELECTED FINANCIAL DATA
This item is not applicable, as we are considered a smaller reporting company.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Background
Trutankless Inc. was incorporated in the state of Nevada on March 7, 2008. The Company is headquartered in Scottsdale, Arizona and currently operates through its wholly-owned subsidiary, Bollente, Inc., a Nevada corporation incorporated on December 3, 2009.
Trutankless is involved in sales, marketing, research and development of a high quality, whole-house, smart electric tankless water heater that is more energy efficient than conventional products. See “Item 1. Business.”
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RESULTS OF OPERATIONS
Revenues
In the year ended December 31, 2020 we generated $1,661,278 in revenues, as compared to $1,908,708 in revenues in the prior year. The decrease in sales was attributable to less sales of our trutankless® residential and light commercial products. Cost of goods sold was $1,304,946, as compared to $1,731,321 in the prior year.
To the knowledge of management, the Company is unaware of any trends or uncertainties in the sales or costs of our products and services for the periods discussed.
Expenses
Operating expenses totaled $7,246,905 during the year ended December 31, 2020 as compared to $3,521,185 in the prior year. In the year ended December 31, 2020, our expenses primarily consisted of General and Administrative of $6,785,900, Research and Development of $187,584 and Professional fees of $273,421.
General and administrative fees increased $3,941,945 from the year ended December 31, 2019 to the year ended December 31, 2020. Professional fees increased due to an increase in consulting fees associated with business development.
Research and Development decreased $229,574 from the year ended December 31, 2019 to the year ended December 31, 2020. Research and Development fees decreased due to fewer consulting fees associated with the Company’s research and development efforts.
Professional fees increased $13,349 from the year ended December 31, 2019 to the year ended December 31, 2020. Professional fees increased due to an increase in legal and accounting fees associated with the normal operations of the business.
Other Expenses
Other expense increased $2,127,084 to $3,676,516 in the year ended December 31, 2020 from $1,549,432 for the year ended December 31, 2019. The increase was the result of the loss on extinguishment of notes payable during the year.
Net Loss
In the year ended December 31, 2020, we generated a net loss of $10,567,089, an increase of $5,673,859 from $4,893,230 for the year ended December 31, 2019. This increase was attributable to an increase in stock based consulting payments.
Going Concern
The financial statements included in this filing have been prepared in conformity with generally accepted accounting principles that contemplate the continuance of the Company as a going concern.
Management evaluated all relevant conditions and events that are reasonably known or reasonably knowable, in the aggregate, as of the date the consolidated financial statements are issued and determined that substantial doubt exists about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent on the Company’s ability to generate revenues and raise capital. The Company has not generated sufficient revenues from product sales to provide sufficient cash flows to enable the Company to finance its operations internally. As of December 31, 2020, the Company had $151,628 cash on hand. At December 31, 2020, the Company has an accumulated deficit of $42,993,071. For the twelve months ended December 31, 2020, the Company had a net loss of $10,567,089, and cash used in operations of $1,474,939. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year from the date of filing.
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Over the next twelve months management plans intends to invest its working capital resources in sales and marketing in order to increase the distribution and demand for its products. If the Company fails to generate sufficient revenue and obtain additional capital to continue at its expected level of operations, the Company may be forced to scale back or discontinue its sales and marketing efforts. However, there is no guarantee the Company will generate sufficient revenues or raise capital to continue operations. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Liquidity and Capital Resources
At December 31, 2020, we had an accumulated deficit of $42,993,071. Primarily because of our history of operating losses and our recording of note payables, we have a working capital deficiency of $2,427,582 at December 31, 2020. Losses have been funded primarily through issuance of common stock and borrowings from our stockholders and third-party debt. As of December 31, 2020, we had $151,628 in cash, $109,966 in accounts receivable, $24,654 in inventory, and $585,460 in short-term prepaid expenses.
Debt Financing
Notes Payable
On September 2, 2016, the Company issued a $100,000 12% promissory note. The note was due on September 1, 2017. As an incentive to enter into the agreement the noteholder was also granted 25,000 shares valued at $25,000 which was recognized as a debt discount. On May 16, 2019, the maturity date of the note was extended to July 1, 2020 for the issuance of 50,000 shares of common stock valued at $21,000, which was recognized as a debt discount over the extended maturity date. As of December 31, 2020, the full amounts of the debt discount have been amortized.
On February 2, 2018, the Company entered into an agreement with the note holder to split a certain note payable dated July 1, 2015 into two notes in the amount of $150,000 and $50,000, respectively. In addition to splitting the notes the noteholder also agreed to extend the due date of the new $50,000 note to July 1, 2018 and on June 4, 2018, for consideration of 15,000 shares the noteholder further agreed to extend the due date of the new $50,000 note to April 1, 2019. On November 15, 2018, both notes were further extended to January 1, 2020 for the issuance of 80,000 shares valued $40,800. On May 16, 2019, the maturity dates of both notes were extended to July 1, 2020 for the issuance of 50,000 shares of common stock valued at $21,000. The Company recorded the fair market value of all the shares issued for extensions to financing cost.
On January 1, 2020, the Company entered into an agreement to consolidate three notes payable above dated September 2, 2016 and February 2, 2018 into one $300,000, 12% note due June 1, 2021. As consideration the Company issued the note holder 175,000 shares of common stock valued at $68,250 which was recorded as financing expense. The Company evaluated the modification under ASC 470-50 and determined that the modifications were considered substantial and qualified for extinguishment accounting under such guidance. As such, the Company recorded a loss on extinguishment of debt of $68,250 associated with the excess reacquisition cost of the new debt over the carrying value of the original debt. As of December 31, 2020, no payment was made and the note balance was $300,000.
On June 11, 2018, the Company issued $160,000 of principal amount of 12% secured convertible promissory notes and warrants to purchase common stock. The notes were due between May and August 2018 and bear interest of percent (12%). The notes are secured by all of the Company’s assets. The outstanding principal amounts and accrued but unpaid interest of the notes is convertible at any time at the option of the holder into common stock at a conversion price of $1.00 per share. The notes were issued with warrants to purchase up to 160,000 shares of the Company’s common stock which were valued at $119,616. On May 16, 2019, the maturity date of the note was extended to January 11, 2020 for the issuance of 90,000 shares of common stock valued at $45,900. As of December 31, 2020, $165,516 of the debt discount was amortized and the note was shown net of unamortized discount of $0.
On January 30, 2019, the Company issued a $100,000 12% promissory note. The note was due on December 31, 2019. As an incentive to enter into the agreement the noteholder was also granted 100,000 shares valued at $45,000 which was recognized as a debt discount. On May 16, 2019, the maturity date of the note was extended to December 31, 2020 for the issuance of 55,000 shares of common stock valued at $23,100. The Company recorded the fair market value of all the shares issued for extensions to financing cost.
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On January 1, 2020, the Company entered into an agreement to consolidate the above two notes payable dated June 11, 2018 and January 30, 2019 into one $260,000, 12% note due June 1, 2022. As consideration the Company issued the note holder 175,000 shares of common stock valued at $68,250, which was recognized as a financing cost. The Company evaluated the modification under ASC 470-50 and determined that the modifications were considered substantial and qualified for extinguishment accounting under such guidance. As such, the Company recorded a loss on extinguishment of debt of $68,250 associated with the excess reacquisition cost of the new debt over the carrying value of the original debt. During the year ended December 31, 2020, the Company paid $10,973 to the noteholder, and the balance of note was $249,027 as of December 31, 2020.
On March 1, 2019, the Company issued a $12,000 12% promissory note. The note was due on March 1, 2020 has been paid in full as of December 31, 2020.
On March 4, 2020, the Company issued a $12,000 10% promissory note. The note is due on March 4, 2021. On March 4, 2020, the Company issued a $12,000 promissory note. On April 17, 2020, the note and accrued interest in the amount of $12,140 was paid.
On June 2, 2020, the Company entered in to a $345,000 note payable, including an original issue discount of $34,500 promissory note. Interest under the promissory note is 12% per annum, and the principal and all accrued but unpaid interest is due twelve (12) months from funding with monthly payment of $37,150 beginning on September 1, 2020. On September 6, 2020, the note was amended to increase the payments on the note to $41,420 and extended the first payment to October 2, 2020. In addition, as part of the amendment the Company can further extend the due date of the first payment with notice to the noteholder and payment of an extension fee of $4,142. The holder has the right upon an event of default to convert the note and accrued interest into common shares at the closing bid price on the date preceding the notice of conversion. As an incentive to enter into the agreement, the noteholder was also granted 1,468,085 shares valued at $308,298, based on market value of the shares of $0.21 on the date of the agreement which was recognized as a debt discount. During the year ended December 31, 2020, $196,287 of the discount was amortized and the note was shown net of unamortized discount of $146,511. During the year ended December 31, 2020, the Company paid $105,180 to the noteholder, and the balance of note was $239,820 as of December 31, 2020.
On August 20, 2020, the Company entered in to a $278,000 note payable, including an original issue discount of $27,800 promissory note. Interest under the promissory note is 12% per annum, and the principal and all accrued but unpaid interest is due twelve (12) months from funding with monthly payment of $31,136 beginning on November 18, 2020. The holder has the right upon an event of default to convert the note and accrued interest into common shares at the closing bid price on the date preceding the notice of conversion. As an incentive to enter into the agreement, the noteholder was also granted 1,002,919 shares valued at $183,334, based on market value of the shares of $0.1828 on the date of agreement which was recognized as a debt discount. During the year ended December 31, 2020, $76,934 of the discount was amortized and the note was shown net of unamortized discount of $162,488. During the year ended December 31, 2020, the Company paid $27,800 to the noteholder, and the balance of note was $250,200 as of December 31, 2020.
Convertible Notes
On June 2, 2016, the Company issued $50,000 of principal amount of 12% secured convertible promissory notes and 50,000 warrants to purchase common stock. The note was due on August 31, 2018, was later extended to August 31, 2019, bears interest of twelve percent (12%) and is currently past due. The outstanding principal amounts and accrued but unpaid interest of the notes is convertible at any time at the option of the holder into common stock at a conversion price of $1.00 per share. The notes were issued with warrants to purchase up to 50,000 shares of the Company’s common stock at an exercise price of $1.50 per share. As of the December 31, 2020, no payments were made and the balance was $50,000.
On May 2, 2017, the Company issued $100,000 of principal amount of 12% secured convertible promissory notes and 20,000 warrants to purchase common stock. The note was due on May 2, 2020 and is secured by the Company’s accounts receivable and inventory and on August 1, 2020, for the issuance of 50,000 shares valued at $10,000 based on market value of the shares of $0.20 on the date of issuance, was further extended to February 1, 2021. The outstanding principal amounts and accrued but unpaid interest of the notes is convertible at any time at the option of the holder into common stock at a conversion price of $0.50 per share. The notes were issued with warrants to purchase up to 10,000 shares of the Company’s common stock at an exercise price of $1.00
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per share. For the years ended December 31, 2020 and 2019, the Company recorded amortization of the debt discount of $669 and $1,005, respectively. As of December 31, 2020, the note was shown net of unamortized discount of $0
On May 2, 2017, the Company issued $50,000 of principal amount of 10% secured convertible promissory notes and 10,000 warrants to purchase common stock. The note was due on May 2, 2020 and is secured by the Company’s accounts receivable and inventory. On April 22, 2020, the note was extended to May 2, 2021. The outstanding principal amounts and accrued but unpaid interest of the notes is convertible at any time at the option of the holder into common stock at a conversion price of $0.50 per share. The notes were issued with warrants to purchase up to 10,000 shares of the Company’s common stock at an exercise price of $1.00 per share. For the years ended December 31, 2020 and 2019, the Company recorded amortization of the debt discount of $334 and $503, respectively. As of December 31, 2020, the note was shown net of unamortized discount of $0.
On May 22, 2017, the Company issued $5,000 of principal amount of 10% secured convertible promissory notes and 1,000 warrants to purchase common stock at an exercise price of $1. The note was due on May 22, 2020 and is currently in default secured by the Company’s accounts receivable and inventory. The outstanding principal amounts and accrued but unpaid interest of the notes is convertible at any time at the option of the holder into common Fstock at a conversion price of $0.50 per share. The notes were issued with warrants to purchase up to 1,000 shares of the Company’s common stock at an exercise price of $1.00 per share. For the years ended December 31, 2020 and 2019, the Company recorded amortization of the debt discount of $32 and $50, respectively. As of December 31, 2020, the note was shown net of unamortized discount of $0.
On February 15, 2018, the Company issued a $75,000 12% secured convertible promissory note. The note was due on February 24, 2020 and is secured by the Company’s accounts receivable and inventory. On April 22, 2020, the due date of the note was extended to February 15, 2021 for the issuance of 50,000 shares of common stock valued at $8,995 based on market value of the shares of $0.18 on the date of issuance. The Company evaluated the modification under ASC 470-50 and determined that the modifications were considered substantial and qualified for extinguishment accounting under such guidance. As such the Company recorded a loss on extinguishment of debt of $8,995 associated with the excess reacquisition cost of the new debt over the carrying value of the original debt. As of the December 31, 2020, no payments were made and the balance was $50,000.
On September 17, 2018, the Company issued a $50,000 10% promissory note. The note was due on September 18, 2020. As an incentive to enter into the agreement the noteholder was also granted 10,000 shares valued at $5,000, based on market value of the shares of $0.50 on the date of issuance. On February 9, 2019, the note was amended for the issuance of 50,000 shares of common stock valued at $30,000 based on market value of the shares of $0.60 on the date of issuance, which was recognized as a debt discount, the note holder agreed to a convert the note at a price of $0.50 per share. Additionally, the maturity date of the note was changed to February 8, 2020 and the note is currently in default. As of December 31, 2020, the shares have not been issued and were included in stock payable. For the years ended December 31, 2020 and 2019, the Company recorded amortization of the debt discount of $4,204 and $21,513, respectively. As of December 31, 2020, the note was shown net of unamortized discount of $0.
On December 14, 2018, the Company issued a $50,000 4% convertible note. The note was originally due on February 14, 2019 and is convertible at a rate of $0.50 per shares. As an incentive to enter into the agreement, the noteholder was also granted 10,000 shares valued at $5,000, based on market value of the shares of $0.60 on the date of issuance, which was recognized as a debt discount. For the years ended December 31, 2020 and 2019, the Company recorded amortization of the debt discount of $0 and $0, respectively, On February 14, 2019, the noteholder agreed to extend the note through October 14, 2020. As of December 31, 2020, the note was shown net of unamortized discount of $0.
On January 25, 2019, the Company issued a $100,000 8% convertible note. The note was due on March 1, 2019 and is convertible at a rate of $0.50 per shares. On April 29, 2020, the note was amended to be due on demand but not before January 25, 2021 and the conversion price was changed to $0.10 per share. As consideration, the Company granted 140,000 three year warrants exercisable at $0.125 per share and valued at $21,836. The Company evaluated the modification under ASC 470-50 and determined that the modifications were considered substantial and qualified for extinguishment accounting under such guidance. As such the Company recorded a loss on extinguishment of debt of $34,086 associated with the excess reacquisition cost of the new debt over the carrying value of the original debt. Additionally, the reduction of the conversion price resulted in a beneficial conversion feature totaling $12,250. The noteholder is due two shares of common stock for every dollar funded. As of
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December 31, 2020, the noteholder advanced a total of $79,660 and is due 194,320 shares valued at $56,314, based on market value of the shares on the date of the agreement, and the Company has made payments on the principal balance of $35,600. As of December 31, 2020, there was an outstanding balance on the note in the amount of $44,060. For the years ended December 31, 2020 and 2019, the Company recorded amortization of the debt discount of $6,250 and $31,250, respectively. As of December 31, 2020, the note was shown net of unamortized discount of $0.
On February 8, 2019, the Company issued a $50,000 10% convertible note. The note was due on February 8, 2020 and is currently in default. As an incentive to enter into the agreement, the noteholder was also granted 60,000 shares valued at $30,000, which was recognized as a debt discount. For the years ended December 31, 2020 and 2019, the Company recorded amortization of the debt discount of $3,205 and $26,795, respectively. As of December 31, 2020, the note was shown net of unamortized discount of $0.
On February 19, 2019, the Company issued a $25,000 4% convertible note. The note was due on August 19, 2019 and is convertible at a rate of $0.50 per share. On February 14, 2019, the noteholder agreed to extend the note through October 14, 2020. As an incentive to enter into the agreement, the noteholder was also granted 5,000 shares valued at $2,500, which was recognized as a debt discount. As of December 31, 2020, the shares have not been issued and were included in stock payable. For the years ended December 31, 2020 and 2019, the Company recorded amortization of the debt discount of $0 and $0, respectively. As of December 31, 2020, the note was shown net of unamortized discount of $0.
On October 18, 2019, the Company issued a $23,000 10% convertible note. The note is due on October 17, 2021 and is convertible at a rate of $0.50 per share. As an incentive to enter into the agreement, the noteholder was also granted 46,000 shares valued at $15,175, based on market value of the shares of $0.33 on the date of issuance, which was recognized as a debt discount. During the year ended December 31, 2020, the Company restructured the note to reduce the conversion price to $0.10 per share and the noteholder advanced another $6,000. As consideration, the Company issued an additional 12,000 shares of common stock valued at $4,560 and 232,000 warrants valued at $82,131. The Company evaluated the modification under ASC 470-50 and determined that the modifications were considered substantial and qualified for extinguishment accounting under such guidance. As such the Company recorded a loss on extinguishment of debt of $102,905 associated with the excess reacquisition cost of the new debt over the carrying value of the original debt.
On November 5, 2019, the Company entered into a $562,000 convertible note payable, including an original issue discount of $56,200 pursuant to which we borrowed $337,000, including a $37,000 original issue discount in the first tranche during the year ended December 31, 2019. Interest under the convertible promissory note is 12% per annum, and the principal and all accrued but unpaid interest was due 180 days from funding. The note is convertible at the lesser of (i) 70% multiplied by the lowest Trading Price during the previous twenty-five (25) trading day period ending on the latest complete Trading Day prior to the date of the note and 70% of the market price. As an incentive to enter into the agreement, the noteholder was also granted 854,000 shares valued at $307,440. The Company analyzed the conversion feature and determined it was required to be bifurcated and recognized as a derivative liability. The derivative at inception was valued at $392,061, based on the Black Scholes Merton pricing model. As the fair value of the derivative and the shares issued at inception were in excess of the face amount of the note, the Company recorded a debt discount in the amount of $337,000 to be amortized utilizing the effective interest method of accretion over the term of the note. On January 30, 2020, the Company borrowed an additional $225,000, including a $25,500 original issue discount. As an incentive, the noteholder was also granted an additional 476,493 shares valued at $147,713. The Company analyzed the conversion feature and determined it was required to be bifurcated and recognized as a derivative liability. The derivative at inception was valued at $212,798, based on the Black Scholes Merton pricing model. As the fair value of the derivative and the shares issued at inception were in excess of the face amount of the note, the Company recorded a debt discount in the amount of $225,000 to be amortized utilizing the effective interest method of accretion over the term of the note. Further, the excess of $161,011 was recognized as a financing cost on the Statement of Operations. For the years ended December 31, 2020, the Company recorded amortization of the debt discount of $457,735 and $104,265, respectively. As of December 31, 2020, $562,000 of the debt discount has been amortized and the note was shown net of unamortized discount of $0. On May 5, 2020, the Company paid the principal and accrued interest under the first tranche of $357,852 and on August 20, 2020, the Company paid the principal and accrued interest of the second tranche of $239,055. The fair value of the derivative liability associated with the first and second tranches on the date of settlement of $275,728 and $188,276, respectively were reclassified to additional paid in capital.
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On November 19, 2019, the Company entered in to a $281,000 convertible note payable, including an original issue discount of $28,100 convertible promissory note pursuant to which $150,000 was borrowed, including a $18,500 discount during the year ended December 31, 2019. Interest under the convertible promissory note is 12% per annum, and the principal and all accrued but unpaid interest is due 180 days from funding. The note is convertible at the lesser of (i) 70% multiplied by the lowest Trading Price during the previous twenty-five (25) trading day period ending on the latest complete Trading Day prior to the date of the note and 70% of the market price. As an incentive to enter into the agreement, the noteholder was also granted 427,000 shares valued at $175,070. The Company analyzed the conversion feature and determined it was required to be bifurcated and recognized as a derivative liability. The derivative at inception was valued at $192,226, based on the Black Scholes Merton pricing model. As the fair value of the derivative and the shares issued at inception were in excess of the face amount of the note, the Company recorded a debt discount in the amount of $168,500 to be amortized utilizing the effective interest method of accretion over the term of the note. Further, the excess of $104,041 was recognized as a financing cost on the Statement of Operations. On May 20, 2020, the noteholder agreed to extend the due date of the first tranche of funding until July 19, 2020 and is currently past due. On May 20,2020 the Company incurred a default penalty of 50% of the balance of the note amounting to $54,250. For the years ended December 31, 2020 and 2019, the Company recorded amortization of the debt discount of $129,401 and $39,099, respectively. As of December 31, 2020, $168,500 of the debt discount has been amortized and the note was shown net of unamortized discount of $0. As of December 31, 2020, the Company paid the $60,000 toward the principal balance under the first tranche of $60,000. The fair value of the derivative liability associated with the payment of $62,448 was reclassified to additional paid in capital.
On January 8, 2020, the Company issued a $26,083 convertible note. The note is due on January 8, 2022 and is convertible at a rate of $0.10 per shares. As an incentive to enter into the agreement, the noteholder was also granted 52,166 shares and 208,664 2-year warrants exercisable at $0.125. The issuance of the note and warrants resulted in a discount from the beneficial conversion feature totaling $26,083, including $13,203 attributable to the conversion feature, $10,566 attributable to the warrants, and $2,313 was attributable to the shares. The excess fair value of the consideration given of $19,823 was recorded as financing expense. For the years ended December 31, 2020 and 2019, the Company recorded amortization of the debt discount of $12,574 and $0, respectively. As of December 31, 2020, the note was shown net of unamortized discount of $13,509.
On May 1, 2020, the Company issued a $350,000 6% convertible note. The note is due on May 1, 2021 and is convertible at a rate of $0.125 per shares, resulting in a debt discount from a beneficial conversion feature $42,000. As an incentive to enter into the agreement the noteholder was also granted 1,500,000 shares valued at $207,000, which was also recognized as a debt discount. For the years ended December 31, 2020 and 2019, the Company recorded amortization of the debt discount of $166,455 and $0, respectively. As of December 31, 2020, the note was shown net of unamortized discount of $82,545.
On April 30, 2020, the Company issued a $100,000 8% convertible note. The note is due on April 30, 2022 and is convertible at a rate of $0.125 per shares which resulted in a discount from the beneficial conversion feature totaling 20,250. The note holder is due two shares of common stock and eight three-year warrants exercisable at a rate of $0.125 for every dollar funded. As of December 31, 2020, the noteholder advanced a total of $26,000 and is due 52,000 shares valued at $7,740, based on market value of the shares of $0.14 on the date of funding and 208,000 warrants valued at $26,000 which was recorded as financing expense. As of December 31, 2020, the 52,000 shares were not issued and were included in stock payable. For the years ended December 31, 2020 and 2019, the Company recorded amortization of the debt discount of $11,546 and $0, respectively. As of December 31, 2020, the note was shown net of unamortized discount of $14,454.
During year ended December 31, 2020, we issued secured convertible promissory notes in the aggregate principal amount of $435,000 to several accredited investors through a private placement. The convertible notes bear interest at a rate of 10% per annum, mature two years from issuance. The notes and accrued interest are convertible at the option of the noteholder into our common stock at $0.125 per share. As an incentive to enter into the agreements the Company also issued 3,480,000 three year warrants exercisable at $0.125 per share valued at $435,000 (Note 9), which was recorded as a debt discount. During the years ended December 31, 2020 and 2019, $79,789 and $0 of the discount, respectively, was amortized and the note was shown net of unamortized discount of $355,211.
As part of the private placement, the Company paid a consultant a $50,000 retainer and commissions equivalent to 10% of the gross proceeds received from the issuance of convertible notes which were recorded as financing cost.
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Cash Flows from Operating, Investing and Financing Activities
The following table provides detailed information about our net cash flow for all financial statement periods presented in this Annual Report. To date, we have financed our operations through the issuance of stock and borrowings.
The following table sets forth a summary of our cash flows for the years ended December 31, 2020 and 2019:
|
| Year ended December 31, | ||||
|
| 2020 |
| 2019 | ||
Net cash used in operating activities |
| $ | (1,474,939) |
| $ | (2,218,326) |
Net cash used in investing activities |
|
| - |
|
| - |
Net cash provided by financing activities |
|
| 1,622,225 |
|
| 2,213,000 |
Net increase/(decrease) in Cash |
|
| 147,286 |
|
| (5,326) |
Cash, beginning |
|
| 4,342 |
|
| 9,668 |
Cash, ending |
| $ | 151,628 |
| $ | 4,342 |
Operating activities
Net cash used in operating activities was $1,625,039 for the year ended December 31, 2020, as compared to $2,218,326 used in operating activities for the same period in 2019. The decrease in net cash used in operating activities was primarily due to lower volume of units sold and increase in consulting contract cost.
Financing activities
Net cash provided by financing activities for the year ended December 31, 2020 was $1,772,325, as compared to $2,213,000 for the same period of 2019. The decrease of net cash provided by financing activities was mainly attributable to less equity financing.
Ongoing Funding Requirements
As of December 31, 2020, we continue to use traditional and/or debt financing to provide the capital we need to run the business. It is possible that we may need additional funding to enable us to fund our operating expenses and capital expenditures requirements.
Until such time, if ever, as we can generate substantial product revenues, we intend to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. There can be no assurance that any of those sources of funding will be available when needed on acceptable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.
If we are unable to raise additional funds through equity or debt financings or relationships with third parties when needed or on acceptable terms, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts; abandon our business strategy of growth through acquisitions; or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
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Critical Accounting Polices
In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies are disclosed in Note 1 of our audited consolidated financial statements included in the Form 10-K filed with the SEC.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item in not applicable as we are currently considered a smaller reporting company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Financial Statement Schedules appearing on page 38 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
We have had no disagreements with our independent auditors on accounting or financial disclosures.
ITEM 9A (T) CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Principal Executive Officer and Principal Financial Officer, Michael Stebbins, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Report. Based on his evaluation, Mr. Stebbins concluded that our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act 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 chief executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control, as is defined in the Securities Exchange Act of 1934. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal controls, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information.
Our internal control over financial reporting includes policies and procedures that: (i) pertain to maintaining records that in reasonable detail accurately and fairly reflect our transactions; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with generally accepted accounting principles and the receipts and expenditures of company assets are made and in accordance with our management and directors authorization; and (iii) provide reasonable assurance regarding the
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prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements.
Management has undertaken an assessment of the effectiveness of our internal control over financial reporting based on the framework and criteria established in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based upon this evaluation, management concluded that our internal control over financial reporting was not effective as of December 31, 2019.
Our management identified the following material weaknesses in our internal control over financial reporting, which are indicative of many small companies with limited personnel:
·inadequate controls over maintenance of records
·deficiencies in the period-end reporting process and accounting policies;
·inadequate internal controls relating to the authorization, recognition, capture, and review of transactions, facts, circumstances, and events that could have a material impact on the Company’s financial reporting process
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
On May 25, 2021, with an effective date of May 25, 2021, Trutankless filed with the Secretary of State of the State of Nevada, a Certificate of Amendment to the Articles of Incorporation to increase the Company’s authorized shares of common stock from 100,000,000 to 150,000,000 shares.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The members of our board of directors serve for one year terms and are elected at the next annual meeting of stockholders, or until their successors have been elected. The officers serve at the pleasure of the board of directors.
Information as to our current directors and executive officers is as follows:
Name | Age | Title | Since |
Robertson James Orr | 46 | Secretary, Treasurer & Director | May 12, 2010 |
Michael Stebbins | 38 | Chief Executive Officer, President and Director | June 23, 2016 |
Duties, Responsibilities and Experience
Robertson James Orr, has been our Treasurer, Secretary and a Director since May 12, 2010. Mr. Orr attended Arizona State University. In 1998, Mr. Orr assisted in the founding of bluemedia, Inc., a successful large format digital printing company based in Tempe, Arizona. Mr. Orr has been instrumental in growing bluemedia to be one of the premier companies in its vertical with some of the largest companies, projects and events in their portfolio. Most notably, Mr. Orr has lead bluemedia’s relationship with the NFL and has successfully overseen the graphics production, installation and removal for the last seven Super Bowls. Other notable clients include the NBA, NHL, MLB, Kansas City Chiefs, Verizon, InBev, GMR Marketing, Petsmart, and Pepsi. In 2005, Mr. Orr and his Partners in bluemedia started a non-traditional ad agency called Blind Society, which is responsible for the direct to consumer marketing efforts of companies like AT&T, K-Swiss, and Activision. In addition to his entrepreneurial successes, Mr. Orr has been involved with supporting numerous local charitable causes through his work with the Boys & Girls Clubs of Phoenix, St. Joseph the Worker, the MDA and the ADA. He has sat on the Board of Directors for the Tempe Chamber of Commerce as well as other entrepreneurial organizations. He is currently on the Board of Directors for Project Sebastian, a rare disease research nonprofit, as well as he sits on the Sports Advisory Board for the Colangelo College of Business at Grand Canyon University.
Michael Stebbins, has been our Chief Executive Officer since July 29, 2019, President since February 2, 2017 and a Director since June 23, 2016. Mr. Stebbins is also the president and a director of Bollente, Inc., a Nevada corporation and wholly owned subsidiary of the Company. In 2009, Mr. Stebbins assisted in the founding of Bollente, Inc. Mr. Stebbins helped lead the design team that created our trutankless water heater. He oversaw virtually every aspect of launching our trutankless line of water heaters. Working directly with engineering and development teams, he developed several innovations and was instrumental in working on Bollente Inc.’s intellectual property and patents consisting of 29 proprietary claims related to our products. Since substantially completing R/D efforts in 2013, Mr. Stebbins has worked with the rest of management to lead branding, marketing, and sales initiatives, which has resulted in substantial sales growth and business development opportunities. Mr. Stebbins’ experience in the water heater industry dates back to 2003. Prior to co-founding Bollente, Inc., Mr. Stebbins spent time consulting on several product development projects. Mr. Stebbins was named Top 35 Entrepreneurs under 35 by the Arizona Republic.
Indemnification of Directors and Officers
Our Articles of Incorporation and Bylaws both provide for the indemnification of our officers and directors to the fullest extent permitted by Nevada law.
Limitation of Liability of Directors
Pursuant to the Nevada General Corporation Law, our Articles of Incorporation exclude personal liability for our Directors for monetary damages based upon any violation of their fiduciary duties as Directors, except as to liability for any breach of the duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or any transaction from which a Director receives an improper personal benefit. This exclusion of liability does not limit any right which a Director may have to be indemnified and does not affect any Director’s liability under federal or applicable state securities laws. We have agreed to indemnify our directors against expenses, judgments, and amounts paid in settlement in connection with any claim against a Director if he acted in good faith and in a manner he believed to be in our best interests.
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Election of Directors and Officers
Directors are elected to serve until the next annual meeting of stockholders and until their successors have been elected and qualified. Officers are appointed to serve until the meeting of the Board of Directors following the next annual meeting of stockholders and until their successors have been elected and qualified.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires our executive officers and directors, and persons who beneficially own more than ten percent of our common stock, to file initial reports of ownership and reports of changes in ownership with the SEC. Executive officers, directors and greater-than-ten-percent beneficial owners are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based upon a review of the copies of such forms furnished to us and written representations from our executive officers and directors, we believe that as of the date of this filing they were current in their filings.
Code of Ethics
A code of ethics relates to written standards that are reasonably designed to deter wrongdoing and to promote:
1.Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
2.Full, fair, accurate, timely and understandable disclosure in reports and documents that are filed with, or submitted to, the Commission and in other public communications made by an issuer;
3.Compliance with applicable governmental laws, rules and regulations;
4.The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and
5.Accountability for adherence to the code.
We have not adopted a corporate code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.
Our decision to not adopt such a code of ethics results from our having a small management for the Company. We believe that the limited interaction which occurs having such a small management structure for the Company eliminates the current need for such a code, in that violations of such a code would be reported to the party generating the violation.
Corporate Governance
We currently do not have standing audit, nominating and compensation committees of the board of directors, or committees performing similar functions. Until formal committees are established, our entire board of directors, perform the same functions as an audit, nominating and compensation committee.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has, during the past five years:
·been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences);
·had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
·been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
28
·been found by a court of competent jurisdiction in a civil action or by the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
·been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
·been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
ITEM 11. EXECUTIVE COMPENSATION
Overview of Compensation Program
We currently have not appointed members to serve on the Compensation Committee of the Board of Directors. Until a formal committee is established, our entire Board of Directors has responsibility for establishing, implementing and continually monitoring adherence with the Company’s compensation philosophy. The Board of Directors ensures that the total compensation paid to the executives is fair, reasonable and competitive.
Compensation Philosophy and Objectives
The Board of Directors believes that the most effective executive compensation program is one that is designed to reward the achievement of specific annual, long-term and strategic goals by the Company and that aligns executives’ interests with those of the stockholders by rewarding performance above established goals, with the ultimate objective of improving stockholder value. As a result of the size of the Company and only having two officers, the Board evaluates both performance and compensation on an informal basis. Upon hiring additional executives, the Board intends to establish a Compensation Committee to evaluate both performance and compensation to ensure that the Company maintains its ability to attract and retain superior employees in key positions and that compensation provided to key employees remains competitive relative to the compensation paid to similarly-situated executives of peer companies. To that end, the Board believes executive compensation packages provided by the Company to its executives, including the named executive officers, should include both cash and stock-based compensation that reward performance as measured against established goals.
Role of Executive Officers in Compensation Decisions
The Board of Directors makes all compensation decisions for, and approves recommendations regarding equity awards to, the executive officers and Directors of the Company. Decisions regarding the non-equity compensation of other employees of the Company are made by management.
29
Summary Compensation Table
The table below summarizes the total compensation paid to or earned by our current Executive Officers for the fiscal years ended December 31, 2020, 2019 and 2018.
SUMMARY COMPENSATION TABLE | |||||||||
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Name and Principal Positions | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | Non- Equity Incentive Plan Compen- sation ($) | Non-qualified Deferred Compensation Earnings ($) | All Other Compen- sation ($) | Total ($) |
Robertson James Orr(1), | 2020 | 11,000 | -0- | 1,735,198(2) | -0- | -0- | -0- | -0- | 1,746,198 |
Former President, Former CEO, | 2019 | -0- | -0- | -0- | -0- | -0- | -0- | -0- | -0- |
Secretary, Treasurer & Director | 2018 | 4,000 | -0- | 60,000(3) | -0- | -0- | -0- | -0- | 64,000 |
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Michael Stebbins(4), | 2020 | 165,000 | -0- | 1,951,798(5) | -0- | -0- | -0- | -0- | 2,116,798 |
President & Director | 2019 | 165,000 | -0- | -0- | -0- | -0- | -0- | -0- | 165,000 |
| 2018 | 153,750 | -0- | 125,000(6) | -0- | -0- | -0- | -0- | 278,750 |
1.Mr. Orr was appointed President, CEO, Secretary, Treasurer, and Director of the Company on May 12, 2010. On February 2, 2017, Mr. Orr resigned as president and on July 29, 2019, Mr. Orr resigned as CEO.
2.Amount represents the fair market value of 800,000 shares of common stock and 5,000 share of preferred stock issued for services as an employee.
3.Amount represents the fair market value of 120,000 shares of common stock issued for services as an employee.
4.Mr. Stebbins was appointed President of the Company on February 2, 2017 and CEO of the Company on July 29, 2019.
5.Amount represents the fair market value of 1,500,000 shares of common stock and 5,000 share of preferred stock issued for services as an employee.
6.Amount represents the fair market value of 250,000 shares of common stock issued for services as an employee.
Termination of Employment
There are no compensatory plans or arrangements, including payments to be received from the Company, with respect to any person which would in any way result in payments to any such person because of his resignation, retirement, or other termination of such person’s employment with the Company or its subsidiaries, or any change in control of the Company, or a change in the person’s responsibilities following a change in control of the Company, except with respect to a breach of contract on the part of the Company.
Option Grants in Last Fiscal Year
During the years ended December 31, 2020 and 2019, we did not grant any options to our officers and directors.
Employment Agreements
The Company has an employment agreement with the President/CEO to perform duties and responsibilities as may be assigned. The base salary is in the amount of $210,000 per annum plus a bonus of 750,000 shares of common stock upon execution of the agreement and an additional 750,000 shares every 90 days thereafter commencing on October 1, 2020 and ending September 30, 2021 with an option renewal on September 15, 2021.
30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information, to the best of our knowledge, about the beneficial ownership of our common stock on May 27, 2021 relating to the beneficial ownership of our common stock by those persons known to beneficially own more than 5% of our capital stock and by our directors and executive officers. The percentage of beneficial ownership for the following table is based on 83,324,151 shares of common stock outstanding.
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and does not necessarily indicate beneficial ownership for any other purpose. Under these rules, beneficial ownership includes those shares of common stock over which the stockholder has sole or shared voting or investment power. It also includes shares of common stock that the stockholder has a right to acquire within 60 days after May 27, 2021, pursuant to options, warrants, conversion privileges or other right. The percentage ownership of the outstanding common stock, however, is based on the assumption, expressly required by the rules of the Securities and Exchange Commission, that only the person or entity whose ownership is being reported has converted options or warrants into shares of our common stock.
Security Ownership of Management, Directors and Certain Beneficial Owners
Title of Class | Name of Beneficial Owner(1) | Number Of Shares | Percent Beneficially Owned |
Common | Robertson James Orr - Director(2) | 2,256,327 | 2.7% |
Common | Michael Stebbins - CEO and President and Director(2)(3) | 5,964,309(3) | 7.1% |
Common | Built Right Holdings, LLC(4) | 9,430,000 | 11.3% |
| All Directors, Officers and Principal Stockholders as a Group | 17,650,636 | 21.1% |
1.As used in this table, “beneficial ownership” means the sole or shared power to vote, or to direct the voting of, a security, or the sole or shared investment power with respect to Common Stock (i.e., the power to dispose of, or to direct the disposition of, a security).
2.The address of each Officer and Director is c/o Trutankless, Inc., 7025 E. Greenway Parkway, Suite 200, Scottsdale, AZ 85254.
3.Of the total shares of Common Stock owned or controlled by Mr. Stebbins, 350,000 shares are held by White Isle Holdings, Inc., 15,000 shares are held by Core Financial Companies LLC and 2,000,000 shares are held by Level Point Corp.
4.These shares are owned directly by Built Right Holdings, LLC, an Arizona limited liability company, and Rodney Cullum may be deemed to have an indirect interest in these securities as the manager of Built Right Holdings, LLC.
Changes in Control
There are no arrangements, known to the Company, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
As of December 31, 2020 and 2019, the Company had notes payable due to officers and directors of the Company in the amount of $69,350 and $69,150, respectively. The notes have interest rate that range from 0-12% and are due on demand.
In January 2019, the Company executed a lease agreement with Templar Asset Group, LLC, a related party. The lease term is one year at a rate of $4,200 per month for a period of one year with an option to continue a month-to-month basis thereafter.
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On February 5, 2020, the Company agreed to settle a certain $900,000 convertible note payable issued to a shareholder dated August 2, 2016 and $312,006 in accrued interest. As part of the settlement the Company issued 1,000,000, 5 year warrants exercisable at $0.50 per share valued at $781,755 (See Note 9), 4,000,000 shares of common stock valued at $1,240,000, based on stock price on date of the agreement , in settlement of $400,000 of the principal balance of the note, and issued a new $500,000 11% promissory note. The issuance of the shares and warrants under the agreement resulted in the noteholder becoming a more than 5% shareholder and a related party.
The new note is due in two payments, $250,000 January 2, 2022 and $250,000 on January 2, 2023. Interest will accrue from the date of this Note on the unpaid and outstanding Principal balance to be paid as follows: (a) Fifty-Four Thousand Nine Hundred Ninety-Three and 37/100 Dollars ($54,993.37) on January 4, 2021; plus (b) three hundred thousand (300,000) shares of common Stock, by January 3, 2022, plus (c) six hundred thousand (600,000) shares of common stock on January 3, 2023. The Company evaluated the modification under ASC 470-50 and determined that the modifications were considered substantial and qualified for extinguishment accounting under such guidance. As such the Company recorded a loss on extinguishment of debt of $1,725,879 associated with the excess reacquisition cost of the new debt over the carrying value of the original debt.
Interest expense associated with the related party notes for the years ended December 31, 2020 and 2019 was $68,237 and $7,968, respectively.
Promoters and Certain Control Persons
We did not have any promoters at any time since our inception in March 2008.
Director Independence
We currently do not have any independent directors, as the term “independent” is defined in Section 803A of the NYSE Amex LLC Company Guide. Since the OTCQB does not have rules regarding director independence, the Board makes its determination as to director independence based on the definition of “independence” as defined under the rules of the New York Stock Exchange (“NYSE”) and American Stock Exchange (“Amex”).
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
(1) AUDIT FEES
Audit and Non-Audit Fees
The following table sets forth fees billed to us by Prager Metis CPAs, LLP, our independent auditors, for the years ended 2020 and 2019 for (i) services rendered for the audit of our annual financial statements and the review of our quarterly financial statements, (ii) services rendered that are reasonably related to the performance of the audit or review of our financial statements that are not reported as Audit Fees, and (iii) services rendered in connection with tax preparation, compliance, advice and assistance.
Fee Category |
| Fiscal 2020 Fees |
| Fiscal 2019 Fees |
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Audit Fees |
| $50,000 |
| $30,474 |
Audit Related Fes |
| - |
| - |
Tax Fees |
| - |
| - |
All Other Fees |
| - |
| - |
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Total Fees |
| $50,000 |
| $30,474 |
Audit fees and audit related fees represent amounts billed for professional services rendered for the audit of our annual financial statements and the review of our interim financial statements. Before our independent accountants were engaged to render these services, their engagement was approved by our Directors.
(2) AUDIT-RELATED FEES
None.
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(3) TAX FEES
See table above.
(4) ALL OTHER FEES
None.
(5) AUDIT COMMITTEE POLICIES AND PROCEDURES
We do not have an audit committee.
(6) If greater than 50 percent, disclose the percentage of hours expended on the principal accountant’s engagement to audit the registrant’s financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees.
Not applicable.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
We have filed the following documents as part of this Annual Report on Form 10-K:
1.The financial statements listed in the “Index to Consolidated Financial Statements” on page 35 are filed as part of this report.
2.Financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3.Exhibits included or incorporated herein: See index to Exhibits.
Exhibit Index
Exhibit Number | Exhibit Description |
Acquisition Agreement and Plan of Merger - dated March 3, 2011(3) | |
Addendum No. 1 to Acquisition Agreement and Plan of Merger - Dated April 27, 2011(4) | |
Agreement and Plan of Merger between Bollente Companies, Inc. and Bollente Name Change Subsidiary, Inc. - Dated June 4, 2018(5) | |
Articles of Incorporation of Bollente Companies, Inc. (Formerly Alcantara Brands Corporation)(1) | |
Certificate of Amendment - Name Change - Dated March 2, 2011(2) | |
Certificate of Change - 50:1 Reverse Split - Dated September 23, 2010(2) | |
Articles of Incorporation of Bollente Name Change Subsidiary, Inc. - Dated June 4, 2018(5) | |
Articles of Merger between Bollente Companies, Inc. and Bollente Name Change Subsidiary, Inc. - Dated June 4, 2018(5) | |
Certificate of Designation of Series B Preferred Stock - Dated April 2, 2020 | |
3(i)(g) | Certificate of Change - Increase Authorized - Dated May 25, 2021* |
Bylaws of Trutankless, Inc. (1) | |
Certification pursuant to Section 302 of the Sarbanes-Oxley Act* | |
Certification pursuant to 18 U.S.C. Section 350* | |
101.INS | XBRL Instance |
101.SCH | XBRL Taxonomy Extension Schema |
101.CAL | XBRL Taxonomy Extension Calculation |
101.DEF | XBRL Taxonomy Extension Definition |
101.LAB | XBRL Taxonomy Extension Label |
101.PRE | XBRL Taxonomy Extension Presentation |
1.Incorporated by reference from the Company’s Registration Statement on Form SB-2 filed on March 19, 2008.
2.Incorporated by reference from the Company’s Quarterly Report on Form 10-Q filed on November 24, 2010.
3.Incorporated by reference from the Company’s Current Report on Form 8-K filed on March 10, 2011.
4.Incorporated by reference from the Company’s Current Report on Form 8-K filed on May 6, 2011.
5.Incorporated by reference from the Company’s Current Report on Form 8-K filed on June 6, 2018
*Filed herewith.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TRUTANKLESS INC.
By: /s/ Michael Stebbins
Michael Stebbins, Chief Executive Officer
Date: June 24, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date |
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/s/ Michael Stebbins Michael Stebbins | Chief Executive Officer (Principal Executive Officer), Director and Principal Financial Officer | June 24, 2021 |
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/s/ Robertson J. Orr Robertson James Orr | Director | June 24, 2021 |
34
TRUTANKLESS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
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F-1 | |
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F-3 | |
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F-4 | |
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F-5 | |
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F-6 | |
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F-7 |
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Trutankless, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Trutankless, Inc. (the Company) as of December 31, 2020 and 2019, and the related statements of income, comprehensive income, stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has not generated sufficient revenues to provide sufficient cash flow as of December 31, 2020, which raises substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. See Critical Audit Matters.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
F-1
Revenue Recognition - Refer to Note 1 to the financial statements
Critical Audit Matter Description
The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services.
Significant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following:
·Determination of whether products and services are considered distinct performance obligations that should be accounted for separately.
·The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation.
·Identification and treatment of contract terms that may impact the timing and amount of revenue recognized.
Given these factors, the related audit effort in evaluating management's judgments in determining revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures related to the Company's revenue recognition for these customer agreements included the following:
·We evaluated management's significant accounting policies related to these customer agreements for reasonableness.
·We selected a sample of customer agreements and performed the following procedures:
oObtained and read contract source documents for each selection, and other documents.
oTested management's identification and treatment of contract terms.
oAssessed the terms in the customer agreement and evaluated the appropriateness of management's application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions.
oPerformed analytical procedures including but not limited to.
·We tested the mathematical accuracy of management's calculations of revenue and the associated timing of revenue recognized in the financial statements.
·Compared amounts to those of prior periods or other expectations by product line, geographic location, and in total.
Going concern - Refer to Note 2 to the financial statements, as well as Going Concern explanatory paragraph above
Critical Audit Matter Description
The Company has not generated sufficient revenues from product sales to provide sufficient cash flows to enable the Company to finance its operations internally. Given these factors, the related audit effort in evaluating going concern was extensive and required a high degree of auditor judgment.
How the critical audit matter was addressed in the audit
Our principal procedures to address this matter were:
·Obtained cash flow forecast from the Company, performed audit procedures to evaluate the reasonableness of the forecast by comparing to historical financial statements, financing agreements and cash infusion by shareholders.
·Obtained subsequent sales information and agreed to shipping records.
/s/ Prager Metis CPAs, LLP
We have served as the Company’s auditor since 2019.
El Segundo, CA
June 24, 2021
F-2
TRUTANKLESS INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2020 |
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ASSETS |
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Current assets |
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Cash | $ |
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Accounts receivable, net |
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Inventory |
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Prepaid consulting expenses |
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Total current assets |
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Other Assets |
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Prepaid consulting expenses - long term |
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Right to use asset |
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Other assets |
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Total other assets |
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Total assets | $ |
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LIABILITIES AND STOCKHOLDERS’ DEFICIT |
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Current liabilities |
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Accounts payable and accrued liabilities |
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Lease liability |
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Accrued interest payable - related party |
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Derivative liability |
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Payroll protection program loan payable |
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Notes payable - related party |
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Notes payable, net of debt discount |
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Convertible notes payable, net of debt discount |
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Total current liabilities |
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Lease liability - long-term |
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Notes payable - long term, net of debt discount |
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Convertible notes payable - long term, net of debt discount |
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Notes payable - related party |
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Total long-term liabilities |
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Total liabilities |
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Stockholders’ deficit |
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Preferred stock, $ December 31, 2020 and 2019, respectively |
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Series B Preferred stock, $ authorized, December 31, 2020 and 2019, respectively |
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Common stock, $ December 31, 2020 and 2019, respectively |
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Additional paid in capital |
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Stock payable |
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Accumulated deficit |
| ( |
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| ( |
Total stockholders’ deficit |
| ( |
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| ( |
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Total liabilities and stockholders’ deficit | $ |
| $ | ||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
TRUTANKLESS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
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| For the years ended December 31, | ||||
| 2020 |
| 2019 | |||
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Revenue |
| $ |
| $ | ||
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Cost of goods sold |
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Gross profit |
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Operating expenses |
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General and administrative |
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Research and development |
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Professional fees |
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Total operating expenses |
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Loss from operations |
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| ( |
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| ( |
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Other income (expenses) |
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Interest expense |
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| ( |
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| ( |
Gain/Loss on change of derivative liability |
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| ( | |
Loss on extinguishment of notes |
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| ( |
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| ( |
Total income (expenses) |
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| ( |
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Net loss before tax provision |
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| ( |
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Tax provision |
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Net loss |
| $ | ( |
| $ | ( |
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Net loss per common share - basic and diluted |
| $ | ( |
| $ | ( |
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Weighted average number of common shares outstanding - basic and diluted |
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The accompanying notes are an integral part of these consolidated financial statements.
F-4
TRUTANKLESS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
| Preferred Stock |
| Common Stock |
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Shares |
| Amount |
| Shares |
| Amount |
| Additional Paid-in Capital |
| Stock Payable |
| Accumulated Deficit |
| Total Stockholders’ Deficit | |
Balance, December 31, 2018 |
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| ( | ||||||
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Stock issued for cash |
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Stock issued for services |
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Stock issued for debt discounts and extensions of notes payable |
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Stock and warrants issued for debt discounts |
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Shares issued for the settlement of notes payable |
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Net loss |
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| ( |
| ( | ||||||
Balance, December 31, 2019 |
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Stock issued for cash |
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Stock issued for services |
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Rescission and retirement of shares for services |
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| ( |
| ( |
| ( |
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| ( | ||||
Share and warrants issued for debt extensions |
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Conversion of preferred stock to common | ( |
| ( |
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| ( |
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Shares and warrants issued to extinguish debt |
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Stock and warrants issued for debt discounts |
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Derivative written off to additional paid in capital |
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Rescission and retirement of shares for debt |
|
| ( |
| ( |
| ( |
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| ( | ||||
Net loss |
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| ( |
| ( | ||||||
Balance, December 31, 2020 |
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| ( |
| ( | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
TRUTANKLESS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the years ended December 31, | ||||
2020 |
| 2019 | |||
Cash Flows from Operating Activities |
|
|
| ||
Net loss | $ | ( |
| $ | ( |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
Shares issued and rescinded for services |
|
|
| ||
Gain/Loss on change in derivative liability |
| ( |
|
| |
Loss on extinguishment of notes payable |
|
|
| ||
Depreciation and amortization |
|
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| ||
Non cash operating lease expense |
|
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| ||
Allowance for doubtful accounts |
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Amortization of debt discount and finance expense |
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| ||
Changes in assets and liabilities |
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Accounts receivable |
|
|
| ( | |
Inventory |
|
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| ||
Prepaid expenses |
| ( |
|
| ( |
Customer deposit |
|
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| ||
Accounts payable |
| ( |
|
| |
Interest payable - related party |
|
|
| ( | |
Net cash used in operating activities |
| ( |
|
| ( |
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Cash Flows from Investing Activities: |
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Net cash used in investing activities |
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| ||
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Cash Flows from Financing Activities: |
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Proceeds from convertible notes payable, net of issuance cost |
|
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| ||
Repayments of convertible notes payable |
| ( |
|
| ( |
Proceeds from notes payable, net of issuance cost |
|
|
| ||
Repayments from notes payable |
| ( |
|
| ( |
Proceeds of notes payable - related party |
|
|
| ||
Repayments from notes payable - related party |
| ( |
|
| ( |
Payments for debt extinguishment costs |
| ( |
|
| |
Proceeds from payroll protection loan payable |
|
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| ||
Proceeds from sale of common stock, net of offering costs |
|
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| ||
Net cash provided by financing activities |
|
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| ||
|
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|
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Net increase in cash |
|
|
| ( | |
Cash, beginning of period |
|
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| ||
Cash, end of period | $ |
| $ | ||
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
Cash paid for interest | $ |
| $ | ||
Cash paid for taxes | $ |
| $ | ||
|
|
|
|
|
|
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: |
|
|
|
|
|
Recognition of right to use asset and liability | $ |
| $ | ||
Recognition of derivative liability | $ |
| $ | ||
Derivative Liability written off to APIC | $ |
| $ | ||
Reclassification of notes payable to convertible notes payable | $ |
| $ | ||
Notes and accrued interest settled with stock | $ |
| $ | ||
Reclassification of convertible notes payable to notes payable - related party | $ |
| $ | ||
Reclassification of convertible notes payable to notes payable | $ |
| $ | ||
Conversion of Preferred Stock to Common Stock | $ |
| $ | ||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
TRUTANKLESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The Company was incorporated on March 7, 2008 under the laws of the State of Nevada, as Alcantara Brands Corporation. On October 5, 2010, the Company amended its articles of incorporation and changed its name to Bollente Companies, Inc. On June 4, 2018, the Company amended its articles of incorporation and changed its name to Trutankless, Inc.
The Company is involved in sales, marketing, research and development of a high quality, whole-house, smart electric tankless water heater that is more energy efficient than conventional products. Management anticipates the Company’s trutankless water heater, with Wi-Fi capability and trutankless’ proprietary apps offered in the iOS and Android store, will augment existing products in the home automation space.
Principles of consolidation
The consolidated financial statements include the accounts of Trutankless, Inc. and its wholly owned subsidiaries. On May 16, 2010, the Company acquired 100% of the outstanding stock of Bollente, Inc. All significant inter-company transactions and balances have been eliminated.
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations. During the year ended December 31, 2019, the Company reclassified certain expenses to General and administrative from professional fees.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ significantly from those estimates.
Cash and cash equivalents
For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. The carrying value of these investments approximates fair value. The Company did not have any cash equivalents as of December 31, 2020 and 2019
Website
The Company capitalizes the costs associated with the development of the Company’s website pursuant to ASC Topic 350. Other costs related to the maintenance of the website are expensed as incurred. Amortization is provided over the estimated useful lives of
Stock-based compensation
The Company records stock based compensation in accordance with the guidance in ASC Topic 505 and 718 which requires the Company to recognize expenses related to the fair value of its employee stock option awards. This eliminates accounting for share-based compensation transactions using intrinsic value and requires instead that such transactions be accounted for using a fair-value-based method. The Company recognizes the cost of all share-based awards on a graded vesting basis over the vesting period of the award.
F-7
The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with ASC 718-10 and the conclusions reached by the ASC 505-50. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by ASC 505-50.
Income Taxes
The Company’s calculation of its tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. The Company recognizes tax liabilities for uncertain tax positions based on management’s estimate of whether it is more likely than not that additional taxes will be required. The Company had no uncertain tax positions as of December 31, 2020 and 2019.
Deferred income taxes are recognized in the consolidated financial statements for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates. Temporary differences arise from net operating losses, differences in depreciation methods of archived images, and property and equipment, stock-based and other compensation, and other accrued expenses. A valuation allowance is established when it is determined that it is more likely than not that some or all of the deferred tax assets will not be realized.
The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability for U.S., or the various state jurisdictions, may be materially different from management’s estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities. Interest and penalties are included in tax expense.
The Company includes interest and penalties arising from the underpayment of income taxes in the statements of operation in the provision for income taxes. As of December 31, 2020 and 2019, the Company had no accrued interest or penalties related to uncertain tax positions.
Earnings per share
The Company follows ASC Topic 260 to account for the earnings per share. Basic earnings per common share (“EPS”) calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding. During periods of net loss, all common stock equivalents are excluded from the diluted EPS calculation because they are antidilutive. Potential equivalent shares of Common Stock as of December 31, 2020 that have been excluded from the computation of diluted net loss per share amounted to
Accounts receivable
Accounts receivable is comprised of uncollateralized customer obligations due under normal trade terms. The Company performs ongoing credit evaluation of its customers and management closely monitors outstanding receivables based on factors surrounding the credit risk of specific customers, historical trends, and other information. The carrying amount of accounts receivable is reviewed periodically for collectability. If management determines that collection is unlikely, an allowance that reflects management’s best estimate of the amounts that will not be collected is recorded. Accounts receivable are presented net of an allowance for doubtful accounts of $182,191 and $106,958 at December 31, 2020 and 2019, respectively.
Inventory
Inventories are stated at the lower of cost (average cost) or market (net realizable value).
F-8
Revenue recognition
We recognize revenue in accordance with ASC 606, Revenue From Contracts with Customers, which requires that five basic criteria be met before revenue can be recognized: (i) identify the contract with the customer; (ii) identity the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price; and (v) recognize revenue when or as the entity satisfied a performance obligation.
Revenue recognition occurs at the time control transfers to customers which is when the product is shipped to customers, when, provided there are no material remaining performance obligations required of the Company or any matters of customer acceptance. We only record revenue when collectability is probable.
Fair value of financial instruments
The Company measures fair value in accordance with ASC 820 - Fair Value Measurements. ASC 820 defines fair value and establishes a three-level valuation hierarchy for disclosures of fair value measurements. ASC 820 establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by ASC 820 are:
Level 1 - Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2 - Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3 - Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Valuation of instruments includes unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
As defined by ASC 820, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale, which was further clarified as the price that would be received to sell an asset or paid to transfer a liability (“an exit price”) in an orderly transaction between market participants at the measurement date.
The reported fair values for financial instruments that use Level 2 and Level 3 inputs to determine fair value are based on a variety of factors and assumptions. Accordingly, certain fair values may not represent actual values of the Company’s financial instruments that could have been realized as of December 31, 2020 or that will be recognized in the future, and do not include expenses that could be incurred in an actual settlement. The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts receivable, receivables from related parties, prepaid expenses and other, accounts payable, accrued liabilities, and related party and third party notes payables approximate fair value due to their relatively short maturities. The Company’s notes payable to related parties approximates the fair value of such instrument based upon management’s best estimate of terms that would be available to the Company for similar financial arrangements at December 31, 2020 and 2019.
Financial assets and liabilities measured at fair value on a recurring basis are summarized below as of December 31, 2020:
|
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Financial Instruments |
| $ | - |
| $ | - |
| $ | 302,249 |
| $ |
As of December 31, 2020, the Company’s stock price was $0.20, risk-free discount rate of 0.08% and volatility of 270.90%
F-9
Financial assets and liabilities measured at fair value on a recurring basis are summarized below as of December 31, 2019:
|
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Financial Instruments |
| $ | - |
| $ | - |
| $ | 613,716 |
| $ |
The following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial instruments, measured at fair value on a recurring basis using significant unobservable inputs:
|
| Amount | |
Balance December 31, 2018 |
| $ | - |
Debt discount originated from derivative liabilities |
|
| 277,069 |
Financing cost recorded |
|
| 307,218 |
Change in fair market value of derivative liabilities |
|
| 29,429 |
Balance December 31, 2019 |
| $ | |
Debt discount originated from derivative liabilities |
|
| 261,845 |
Derivative reclassed to additional paid in capital |
|
| (526,452) |
Change in fair market value of derivative liabilities |
|
| (46,860) |
Balance December 31, 2020 |
| $ | |
Recent Accounting Pronouncements
During the year ended December 31, 2020, the FASB (Financial Accounting Standards Board) issued various Accounting Standards Updates relating to the treatment and recording of certain accounting transactions. Management has determined that these recent accounting pronouncements will have no impact on the financial statements of Lake Forest Minerals Inc.
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
Management evaluated all relevant conditions and events that are reasonably known or reasonably knowable, in the aggregate, as of the date the consolidated financial statements are issued and determined that substantial doubt exists about the Company’s ability to continue as a going concern within one year from the date of filing. The Company’s ability to continue as a going concern is dependent on the Company’s ability to generate revenues and raise capital. The Company has not generated sufficient revenues from product sales to provide sufficient cash flows to enable the Company to finance its operations internally. As of December 31, 2020, the Company had $
Over the next twelve months management plans raise additional capital and to invest its working capital resources in sales and marketing in order to increase the distribution and demand for its products. If the Company fails to generate sufficient revenue and obtain additional capital to continue at its expected level of operations, the Company may be forced to scale back or discontinue its sales and marketing efforts. (See note 12 for subsequent capital raises) However, there is no guarantee the Company will generate sufficient revenues or raise capital to continue operations. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
COVID-19 Pandemic
In December 2019, an outbreak of a novel strain of coronavirus originated in Wuhan, China (“COVID-19”) and has since spread worldwide, including to the Unites States, posing public health risks that have reached pandemic proportions (the “COVID-19 Pandemic”). The COVID-19 Pandemic poses a threat to the health and economic wellbeing of our employees, customers and vendors. Like most businesses world-wide, the COVID-19 Pandemic
F-10
has impacted the Company financially; however, management cannot presently predict the scope and severity with which COVID-19 will impact our business, financial condition, results of operations and cash flows.
NOTE 3 - INVENTORY
Inventories consist of the following at:
December 31, 2020 |
| December 31, 2019 | |||
Finished goods |
|
|
| ||
Total | $ |
| $ | ||
NOTE 4 - ACCOUNTS RECEIVABLE, NET
Accounts receivable consist of the following at:
December 31, 2020 |
| December 31, 2019 | |||
Accounts receivable |
|
|
| ||
Allowance for doubtful accounts |
| ( |
|
| ( |
Total | $ |
| $ | ||
NOTE 5 - PREPAID CONSULTING EXPENSES
Prepaid consulting expense was $
NOTE 6 - RELATED PARTY
As of December 31, 2020 and 2019, the Company had notes payable due to officers and directors of the Company in the amount of $
In January 2019, the Company executed a lease agreement with Templar Asset Group, LLC, a related party. The lease term is one year at a rate of $
On February 5, 2020, the Company agreed to settle a certain $900,000 convertible note payable issued to a shareholder dated August 2, 2016 and $312,006 in accrued interest. As part of the settlement the Company issued 1,000,000, 5 year warrants exercisable at $0.50 per share valued at $781,755 (See Note 9),
The new note is due in two payments, $250,000 January 2, 2022 and $250,000 on January 2, 2023. Interest will accrue from the date of this Note on the unpaid and outstanding Principal balance to be paid as follows: (a) Fifty-Four Thousand Nine Hundred Ninety-Three and 37/100 Dollars ($54,993.37) on January 4, 2021; plus (b) three hundred thousand (300,000) shares of common Stock, by January 3, 2022, plus (c) six hundred thousand (600,000) shares of common stock on January 3, 2023. The Company evaluated the modification under ASC 470-50 and determined that the modifications were considered substantial and qualified for extinguishment accounting under such guidance. As such the Company recorded a loss on extinguishment of debt of $
Interest expense associated with the related party notes for the years ended December 31, 2020 and 2019 was $
F-11
NOTE 7 - NOTES PAYABLE
Notes payable consist of the following at:
December 31, 2020 |
| December 31, 2019 | |||
Note payable, secured, 12% interest, due July 2020 | $ |
| $ | ||
Note payable, secured, 12% interest, due July 2020 |
|
|
| ||
Note payable, secured, 12% interest, due January 2020 |
|
|
| ||
Note payable, secured, 12% interest, due July 2020 |
|
|
| ||
Note payable, secured, 12% interest, due June 1, 2022 |
|
|
| ||
Note payable, secured, 12% interest, due June 1, 2021 |
|
|
| ||
Note payable, secured, 12% interest, due October 2019 |
|
|
| ||
Note payable, secured, 12% interest, due March 2020 |
|
|
| ||
Note payable, secured, 10% interest, due June 2021 |
|
|
| ||
Notes payable, secured, 12% interest, due August 2021 |
|
|
| ||
Total Notes Payable | $ | 1,039,047 |
| $ | 417,750 |
|
|
|
|
|
|
Less unamortized debt discounts |
| ( |
|
| ( |
Total Notes Payable |
|
|
| ||
Less current portion |
| (481,021) |
|
| (411,807) |
Total Notes Payable - long term | $ |
| $ | ||
On September 2, 2016, the Company issued a $100,000 12% promissory note. The note was due on September 1, 2017. As an incentive to enter into the agreement the noteholder was also granted 25,000 shares valued at $25,000 which was recognized as a debt discount. On May 16, 2019, the maturity date of the note was extended to July 1, 2020 (see below) for the issuance of 50,000 shares of common stock valued at $21,000, which was recognized as a debt discount over the extended maturity date, which was recognized as a debt discount over the extended maturity date. As of December 31, 2020, the full amounts of the debt discount have been amortized.
On February 2, 2018, the Company entered into an agreement with the note holder to split a certain note payable dated July 1, 2015 into two notes in the amount of $150,000 and $50,000, respectively. In addition to splitting the notes the noteholder also agreed to extend the due date of the new $50,000 note to July 1, 2018 and on June 4, 2018, for consideration of 15,000 shares the noteholder further agreed to extend the due date of the new $50,000 note to April 1, 2019. On November 15, 2018, both notes were further extended to January 1, 2020 (see below) for the issuance of 80,000 shares valued $40,800. On May 16, 2019, the maturity dates of both notes were extended to July 1, 2020 for the issuance of 50,000 shares of common stock valued at $21,000. The Company recorded the fair market value of all the shares issued for extensions to financing cost.
On January 1, 2020, the Company entered into an agreement to consolidate three notes payable above dated September 2, 2016 and February 2, 2018 into one $300,000, 12% note due June 1, 2021. On June 1, 2021, the Company granted 1,000,000 $0.125 warrants to extend the date of the note to June 1, 2022 (See note 12). As consideration the Company issued the note holder
On June 11, 2018 the Company issued $160,000 of principal amount of 12% secured convertible promissory notes and warrants to purchase common stock. The notes were due between May and August 2018 and bear interest of percent (12%). The notes are secured by all of the Company’s assets. The outstanding principal amounts and accrued but unpaid interest of the notes is convertible at any time at the option of the holder into common stock at a conversion price of $1.00 per share. The notes were issued with warrants to purchase up to 160,000 shares of the Company’s common stock which were valued at $119,616. On May 16, 2019, the maturity date of the note was
F-12
extended to January 11, 2020 for the issuance of
On January 30, 2019, the Company issued a $
On January 1, 2020, the Company entered into an agreement to consolidate the above two notes payable dated June 11, 2018 and January 30, 2019 into one $260,000, 12% note due June 1, 2022. On February 24, 2021, the Company issued 500,000 shares to extend the date of the note to May 1, 2023 (See note 12). As consideration the Company issued the note holder 175,000 shares of common stock valued at $68,250, which was recognized as a financing cost. The Company evaluated the modification under ASC 470-50 and determined that the modifications were considered substantial and qualified for extinguishment accounting under such guidance. As such, the Company recorded a loss on extinguishment of debt of $
On March 1, 2019, the Company issued a $
On March 4, 2020, the Company issued a $
On June 2, 2020, the Company entered in to a $345,000 note payable, including an original issue discount of $34,500 promissory note. Interest under the promissory note is 12% per annum, and the principal and all accrued but unpaid interest is due twelve (12) months from funding with monthly payment of $37,150 beginning on September 1, 2020. On September 6, 2020, the note was amended to increase the payments on the note to $41,420 and extended the first payment to October 2, 2020. In addition, as part of the amendment the Company can further extend the due date of the first payment with notice to the noteholder and payment of an extension fee of $4,142. The holder has the right upon an event of default to convert the note and accrued interest into common shares at the closing bid price on the date preceding the notice of conversion. As an incentive to enter into the agreement, the noteholder was also granted 1,468,085 shares valued at $308,298, based on market value of the shares of $0.21 on the date of the agreement which was recognized as a debt discount. During the year ended December 31, 2020, $196,287 of the discount was amortized and the note was shown net of unamortized discount of $146,511. During the year ended December 31, 2020, the Company paid $
On August 20, 2020, the Company entered in to a $278,000 note payable, including an original issue discount of $27,800 promissory note. Interest under the promissory note is 12% per annum, and the principal and all accrued but unpaid interest is due twelve (12) months from funding with monthly payment of $31,136 beginning on November 18, 2020. The holder has the right upon an event of default to convert the note and accrued interest into common shares at the closing bid price on the date preceding the notice of conversion. As an incentive to enter into the agreement, the noteholder was also granted
Interest expense including amortization of the associated debt discount for the years ended December 31, 2020 and 2019 was $
Payroll Protection Program
On May 4, 2020, we received funds under the Paycheck Protection Program, a part of the CARES Act. The loan is serviced by Bank of America, and the application for these funds required us to, in good faith, certify that the current economic uncertainty made the loan necessary to support our ongoing operations. We used the funds for payroll and
F-13
related costs. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on our ability to adhere to the forgiveness criteria. The loan bears interest at a rate of 1.0% per annum and matures on May 4, 2022, with the first payment deferred until November 2020. Under the terms of the PPP, certain amounts may be forgiven if they are used in accordance with the CARES Act. The Company believes that the full amount of the $
Interest expense for the years ended December 31, 2020 and 2019 was $
Convertible notes payable, net of debt discount consist of the following:
December 31, 2020 |
| December 31, 2019 | |||
Convertible note payable, secured, 12% interest, due August 31, 2019, in default |
|
|
| ||
Convertible note payable, secured, 12% interest, due 120 days after delivery of payment notice from lender or November 1, 2019 |
|
|
| ||
Convertible note payable, secured, 12% interest, due February 1, 2021 |
|
|
| ||
Convertible note payable, secured, 12% interest, due February 15, 2021 |
|
|
| ||
Convertible note payable, secured, 12% interest, due May 22, 2020, in default |
|
|
| ||
Convertible note payable, secured, 12% interest, due Feb 15, 2021 |
|
|
| ||
Convertible notes payable, secured, 4% interest, due October 14, 2020, in default |
|
|
| ||
Convertible note payable, secured, 12% interest, due January 11, 2020 |
|
|
| ||
Convertible note payable, secured, 10% interest, due February 8, 2020, in default |
|
|
| ||
Convertible note payable ,12% interest, due May 2020 |
|
|
| ||
Convertible note payable ,12% interest, due May 2020, in default |
|
|
| ||
Convertible note payable, secured, 10% interest, due February 8, 2020, in default |
|
|
| ||
Convertible note payable, secured, 12% interest, due on demand |
|
|
| ||
Convertible note payable, secured, 10% interest, due October 2021 |
|
|
| ||
Convertible note payable, secured, 10% interest, due April 2022 |
|
|
| ||
Convertible note payable, secured, 10% interest, due May 2021, in default |
|
|
| ||
Convertible note payable, secured, 10% interest, due October 18, 2021 |
|
|
| ||
Convertible notes payable, secured, 10% interest, due May through November 2022 |
|
|
| ||
Total convertible notes payable |
| 1,527,893 |
|
| 2,075,000 |
|
|
|
|
|
|
Less unamortized discounts |
| ( |
|
| ( |
Total convertible notes payable, net | $ | 1,062,174 |
| $ | 1,600,308 |
Less current portion |
| ( |
|
| ( |
|
|
|
|
|
|
Convertible notes payable, net - Long-term | $ |
| $ | ||
On June 2, 2016, the Company issued $50,000 of principal amount of 12% secured convertible promissory notes and 50,000 warrants to purchase common stock. The note was due on August 31, 2018, was later extended to August 31, 2019, bears interest of twelve percent (12%) and is currently past due. The outstanding principal amounts and accrued but unpaid interest of the notes is convertible at any time at the option of the holder into common stock at a conversion price of $1.00 per share. The notes were issued with warrants to purchase up to 50,000 shares of the Company’s common stock at an exercise price of $1.50 per share. No payments were made and the balance was $
On May 2, 2017, the Company issued $100,000 of principal amount of 12% secured convertible promissory notes and 20,000 warrants to purchase common stock. The note was due on May 2, 2020 and is secured by the Company’s accounts receivable and inventory and on August 1, 2020, for the issuance of 50,000 shares valued at $10,000 based on market value of the shares of $0.20 on the date of issuance, was further extended to February 1, 2021. On April 20, 2021, the noteholder agreed to extend the maturity date of the note to May 2, 2022 for 100,000 shares of common stock (See note 12). The outstanding principal amounts and accrued but unpaid interest of the notes is
F-14
convertible at any time at the option of the holder into common stock at a conversion price of $0.50 per share. The notes were issued with warrants to purchase up to 10,000 shares of the Company’s common stock at an exercise price of $1.00 per share. For the years ended December 31, 2020 and 2019, the Company recorded amortization of the debt discount of $
On May 2, 2017, the Company issued $50,000 of principal amount of 10% secured convertible promissory notes and 10,000 warrants to purchase common stock. The note was due on May 2, 2020 and is secured by the Company’s accounts receivable and inventory. On April 22, 2020, the note was extended to May 2, 2021. As of the date of filing the note has not been paid and is currently past due. The outstanding principal amounts and accrued but unpaid interest of the notes is convertible at any time at the option of the holder into common stock at a conversion price of $0.50 per share. The notes were issued with warrants to purchase up to 10,000 shares of the Company’s common stock at an exercise price of $1.00 per share. For the years ended December 31, 2020 and 2019, the Company recorded amortization of the debt discount of $
On May 22, 2017, the Company issued $5,000 of principal amount of 10% secured convertible promissory notes and 1,000 warrants to purchase common stock at an exercise price of $1. The note was due on May 22, 2020 and is currently in default secured by the Company’s accounts receivable and inventory. The outstanding principal amounts and accrued but unpaid interest of the notes is convertible at any time at the option of the holder into common stock at a conversion price of $0.50 per share. The notes were issued with warrants to purchase up to 1,000 shares of the Company’s common stock at an exercise price of $1.00 per share. For the years ended December 31, 2020 and 2019, the Company recorded amortization of the debt discount of $
On February 15, 2018, the Company issued a $75,000 12% secured convertible promissory note. The note was due on February 24, 2020 and is secured by the Company’s accounts receivable and inventory. On April 22, 2020, the due date of the note was extended to February 15, 2021 for the issuance of 50,000 shares of common stock valued at $8,995 based on market value of the shares of $0.18 on the date of issuance. On February 12, 2021, the Company issued 500,000 shares to extend the date of the note to February 15, 2022 (See note 12). The Company evaluated the modification under ASC 470-50 and determined that the modifications were considered substantial and qualified for extinguishment accounting under such guidance. As such the Company recorded a loss on extinguishment of debt of $
On September 17, 2018, the Company issued a $50,000 10% promissory note. The note was due on September 18, 2020. As an incentive to enter into the agreement the noteholder was also granted 10,000 shares valued at $5,000, based on market value of the shares of $0.50 on the date of issuance. On February 9, 2019, the note was amended for the issuance of 50,000 shares of common stock valued at $30,000 based on market value of the shares of $0.60 on the date of issuance, which was recognized as a debt discount, additionally, the note holder agreed to change the conversion price of the note to a price of $0.50 per share. On February 8, 2021, the Company entered into an agreement to consolidate the notes into one $100,000, 10% note due February 8, 2022 convertible at $0.10 per share (See Note 12). Additionally, the maturity date of the note was changed to February 8, 2020 and the note is currently in default. As of December 31, 2020, the shares have not been issued and were included in stock payable. For the years ended December 31, 2020 and 2019, the Company recorded amortization of the debt discount of $
On December 14, 2018, the Company issued a $50,000 4% convertible note. The note was originally due on February 14, 2019 and is convertible at a rate of $0.50 per shares. As an incentive to enter into the agreement, the noteholder was also granted 10,000 shares valued at $5,000, based on market value of the shares of $0.60 on the date of issuance, which was recognized as a debt discount. For the years ended December 31, 2020 and 2019, the Company recorded amortization of the debt discount of $0 and $0, respectively, On February 14, 2019, the noteholder agreed to extend the note through October 14, 2020, and is in default as of December 31, 2020. As of December 31, 2020, the note was shown net of unamortized discount of $0.
On January 25, 2019, the Company issued a $100,000 8% convertible note. The note was due on March 1, 2019 and is convertible at a rate of $0.50 per shares. On April 29, 2020, the note was amended to be due on demand but not before January 25, 2021 and the conversion price was changed to $0.10 per share. As consideration, the Company granted
F-15
The Company evaluated the modification under ASC 470-50 and determined that the modifications were considered substantial and qualified for extinguishment accounting under such guidance. As such the Company recorded a loss on extinguishment of debt of $34,086 associated with the excess reacquisition cost of the new debt over the carrying value of the original debt. Additionally, the reduction of the conversion price resulted in a beneficial conversion feature totaling $12,250. The noteholder is due two shares of common stock for every dollar funded. As of December 31, 2020, the noteholder advanced a total of $79,660 and is due 194,320 shares valued at $56,314, based on market value of the shares on the date of the agreement, and the Company has made payments on the principal balance of $35,600. Subsequent to year end, the Company issued 157,920 shares that are due under the note and included in stock payable as of December 31, 2020 (See note 12).
As of December 31, 2020, there was an outstanding balance on the note in the amount of $
On February 8, 2019, the Company issued a $
On February 19, 2019, the Company issued a $
On October 18, 2019, the Company issued a $
On November 5, 2019, the Company entered into a $562,000 convertible note payable, including an original issue discount of $56,200 pursuant to which we borrowed $337,000, including a $37,000 original issue discount in the first tranche during the year ended December 31, 2019. Interest under the convertible promissory note is 12% per annum, and the principal and all accrued but unpaid interest was due 180 days from funding. The note is convertible at the lesser of (i) 70% multiplied by the lowest Trading Price during the previous twenty-five (25) trading day period ending on the latest complete Trading Day prior to the date of the note and 70% of the market price. As an incentive to enter into the agreement, the noteholder was also granted 854,000 shares valued at $307,440. The Company analyzed the conversion feature and determined it was required to be bifurcated and recognized as a derivative liability. The derivative at inception was valued at $392,061, based on the Black Scholes Merton pricing model. As the fair value of the derivative and the shares issued at inception were in excess of the face amount of the note, the Company recorded a debt discount in the amount of $337,000 to be amortized utilizing the effective interest method of accretion over the term of the note. On January 30, 2020, the Company borrowed an additional $225,000, including a $25,500 original issue discount. As an incentive, the noteholder was also granted an additional 476,493 shares valued at $147,713. The Company analyzed the conversion feature and determined it was required to be bifurcated and recognized as a derivative liability. The derivative at inception was valued at $212,798, based on the Black Scholes Merton pricing model. As the fair value of the derivative and the shares issued at inception were in excess of the face amount of the note, the Company recorded a debt discount in the amount of $225,000 to be amortized utilizing the effective interest method of accretion over the term of the note. Further, the excess of $161,011 was recognized as a financing cost on the Statement of Operations. For the years ended December 31,
F-16
2020 and 2019, the Company recorded amortization of the debt discount of $
On November 19, 2019, the Company entered in to a $281,000 convertible note payable, including an original issue discount of $28,100 convertible promissory note pursuant to which $150,000 was borrowed, including a $18,500 discount during the year ended December 31, 2019. Interest under the convertible promissory note is 12% per annum, and the principal and all accrued but unpaid interest is due 180 days from funding. The note is convertible at the lesser of (i) 70% multiplied by the lowest Trading Price during the previous twenty-five (25) trading day period ending on the latest complete Trading Day prior to the date of the note and 70% of the market price. As an incentive to enter into the agreement, the noteholder was also granted 427,000 shares valued at $175,070. The Company analyzed the conversion feature and determined it was required to be bifurcated and recognized as a derivative liability. The derivative at inception was valued at $192,226, based on the Black Scholes Merton pricing model. As the fair value of the derivative and the shares issued at inception were in excess of the face amount of the note, the Company recorded a debt discount in the amount of $168,500 to be amortized utilizing the effective interest method of accretion over the term of the note. Further, the excess of $104,041 was recognized as a financing cost on the Statement of Operations On May 20, 2020, the noteholder agreed to extend the due date of the first tranche of funding until July 19, 2020 and is currently past due. On May 20, 2020, the Company incurred a default penalty of 50% of the balance of the note amounting to $54,250. For the years ended December 31, 2020 and 2019, the Company recorded amortization of the debt discount of $
The fair value of the derivative liability associated with the tranche on the date of settlement of $62,448 was recorded to additional paid in capital. The fair value of the derivative liability associated with the default penalty of $49,051, was charged it to financing cost.
The embedded conversion feature in the convertible debt instruments above, dated November 5, 2019 and November 19, 2019, were convertible at issuance, which qualified them as a derivative instrument since the number of shares issuable under the note is indeterminate based on guidance in ASC 815-15, “Derivatives and Hedging (“Topic No. 815-15”). Topic No. 815-15 requires the Company to bifurcate and separately account for the conversion features as an embedded derivative contained in the Company’s convertible debt.
The Black-Scholes model, adopted by management as an appropriate financial model, utilized the following inputs to value the derivative liabilities at the date of issuance of the convertible note through December 31, 2020:
Risk free interest rate |
| 0.08% - 1.57% |
Expected term (years) |
| 0.000 - 0.50 |
Expected volatility |
| 263% - 367 |
Expected dividends |
| 0% |
On January 8, 2020, the Company issued a $
On May 1, 2020, the Company issued a $
F-17
1,500,000 shares valued at $207,000, which was also recognized as a debt discount. For the year ended December 31, 2020, the Company recorded amortization of the debt discount of $
On April 30, 2020, the Company issued a $
During year ended December 31, 2020, we issued several secured convertible promissory notes dated between May 5th and November 25th, 2020, in the aggregate principal amount of $
As part of the private placement, the Company paid a consultant a $50,000 retainer and commissions equivalent to 10% of the gross proceeds received from the issuance of convertible notes which were recorded as financing cost.
Interest expense including financing cost and amortization of the associated debt discount on all of the above convertible notes for the year ended December 31, 2020 and 2019 was $
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Operating Lease Agreements
The Company determines whether or not a contract contains a lease based on whether or not it provides the Company with the use of a specifically identified asset for a period of time, as well as both the right to direct the use of that asset and receive the significant economic benefits of the asset. The Company elected the transition relief package of practical expedients, and as a result, we did not assess 1) whether existing or expired contracts contain embedded leases, 2) lease classification for any existing or expired leases, and 3) whether lease origination costs qualified as initial direct costs. We elected the short-term lease practical expedient by establishing an accounting policy to exclude leases with a term of 12 months or less.
The Company has entered into lease agreements as a lessee for the use of office space. These lease agreements are classified as operating leases and the liability and right-of-use asset are recognized on the balance sheet at lease commencement. Leases with an initial term of 12 months or less are not recorded on the balance sheet and are recognized as lease expense on a straight-line basis over the lease term. As a result of the adoption of ASC 842, the Company recognized an operating lease liability and right-of-use asset of $64,978.
The discount rate utilized for classification and measurement purposes as of the inception date of the lease is based on the Company’s collateralized incremental interest rate to borrow of 12%, as the rate implicit in the lease is not determinable.
During 2018, the Company executed a lease agreement. The lease term is 39 months at a rate of $1,680 per month with 3% increases beginning January 1, 2021 and rent commencing on January 1, 2019. The Company was required to pay a $1,781 security deposit.
In January 2019, the Company executed a lease agreement with Templar Asset Group, LLC, a related party. The lease term is one year at a rate of $4,200 per month for a period of one year with an option to continue a month to
F-18
month basis thereafter. Under ASC 842, this lease is not recorded on the balance sheet as its term is 12 months or less.
Undiscounted Cash Flows
As of December 31, 2020, the right of use asset and lease liability were shown on the consolidated balance sheet at $
Amounts due as of December 31, 20120 |
| Operating Leases | |
2021 |
|
| 20,765 |
2022 |
|
| 21,370 |
Total minimum lease payments |
| $ | |
Less: effect of discounting |
|
| (4,946) |
Present value of future minimum lease payments |
| $ | |
Less: current obligations under leases |
|
| ( |
Long-term lease obligations |
| $ | |
Legal Matter
On July 6, 2020 we received a letter from the staff of the Division of Enforcement of the Securities and Exchange Commission (the “Staff”) that indicated the Company may have violated certain rules and regulations regarding a late filing notification filed by the Company and that the Staff is conducting an informal inquiry into the matter. The Staff has asked the Company to voluntarily submit certain information to it and the Company has done so and is cooperating with the Staff into their inquiry. No formal complaint has been filed and we expect to resolve this matter with the Staff without formal litigation. (See Note 12)
NOTE 9 - STOCK WARRANTS
On January 8, 2020, the Company granted
On January 8, 2020, the Company granted
On February 5, 2020, the Company granted
On February 19, 2020 the Company converted the 76,000 outstanding Series A preferred shares, based on the automatic conversion terms into 205,000 common shares and 76,000 warrants have been issued, with the remaining 175,000 shares of common stock still to be issued and recognized as stock payable.
On April 29, 2020, the Company granted
F-19
On May 7, 2020, the Company granted
During the period ending December 31, 2020, the Company granted
During the period ending December 31, 2020 the Company issued
The following is a summary of stock warrants activity during the period ended December 31, 2020.
| Number of Shares |
| Weighted Average Exercise Price |
Balance, December 31, 2019 |
| $1.00 | |
Warrants granted and assumed |
| $0.23 | |
Warrants expired | - |
| - |
Warrants canceled | ( |
| $1.00 |
Warrants exercised | - |
|
|
Balance outstanding and exercisable, December 31, 2020 |
| $0.27 |
The following is a summary of stock warrants activity during the period ended December 31, 2019.
| Number of Shares |
| Weighted Average Exercise Price |
Balance, December 31, 2018 |
| $1.00 | |
Warrants granted and assumed |
| $1.00 | |
Warrants expired | - |
| - |
Warrants canceled | - |
| - |
Warrants exercised | - |
| - |
Balance outstanding and exercisable, December 31, 2019 |
| $1.00 |
NOTE 10 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company recorded the valuation allowance due to the uncertainty of future realization of federal and state net operating loss carryforwards. -The deferred income tax assets are comprised of the following at December 31, 2020 and 2019:
2020 |
| 2019 | |||
Deferred income tax assets: | $ |
| $ | ||
Valuation allowance |
| ( |
|
| ( |
Net deferred tax asset | $ | - |
| $ | - |
Reconciliation between the statutory rate and the effective tax rate is as follows at December 31, 2020 and 2019:
2020 |
| 2019 | |||
Effective Tax Rate Reconciliation: |
|
|
| ||
Federal statutory tax rate |
|
|
| ||
State taxes, net of federal benefit |
|
|
| ||
Change in valuation allowance |
| ( |
|
| ( |
Effective tax rate |
|
|
| ||
F-20
As of December 31, 2020, the Company had net operating loss carryforwards of approximately $
The current income tax benefit of $2,219,089 generated for the year ended December 31, 2020 was offset by an equal increase in the valuation allowance. The valuation allowance was increased due to uncertainties as to the Company’s ability to generate sufficient taxable income to utilize the net operating loss carryforwards which is the only significant component of deferred taxes.
The Company recognizes interest and penalties related to uncertain tax positions in general and administrative expense. As of December 31, 2020 and 2019 the Company has no unrecognized uncertain tax positions, including interest and penalties.
NOTE 11 - STOCKHOLDERS’ EQUITY
The Company is authorized to issue 10,000,000 shares of it $
The Company has also designated
On January 3, 2020, the Company issued
On January 3, 2020, the Company issued
On January 30, 2020, the Company issued
On February 5, 2020, the Company issued
On February 5, 2020, the Company issued
On March 9, 2020, the Company cancelled a consulting agreement entered into during the year ended December 31, 2019. As a result, the Company received and cancelled
On March 10, 2020, the Company issued
On March 11, 2020, the Company received $
On April 2, 2020, the Company filed a certificate of designation of preferences, rights and limitations of a new Series B Preferred Stock with the Secretary of State of Nevada, designating
F-21
value $0.001 of the Company, as Series B Preferred Stock.
On April 2, 2020, the Board issued
On May 1, 2020, the Company issued
On July 9, 2020 the company sold
On June 5, 2020, the Company issued
On June 10, 2020, the Company received and cancelled
On June 12, 2020, the Company issued
On June 12, 2020, the Company issued
On June 1, 2020 the Company entered into an agreement to provide 250,000 shares of common stock with a fair value of $60,000 based on stock price of $0.24 on date of the agreement in connection with consulting services.
On June 15, 2020 the Company entered into an agreement to provide 250,000 shares of common stock with a fair value of $42,500 based on stock price of $0.17 on date of the agreement in connection with consulting services.
On July 9, 2020, the Company issued
On July 30, 2020, the Company issued
On August 1, 2020, the Company issued
On August 1, 2020, the Company issued
On August 3, 2020, the Company issued
On August 3, 2020, the Company issued
On August 10, 2020, the Company issued
On August 10, 2020, the Company issued
F-22
On August 20, 2020, the Company issued
On August 30, 2020, the Company issued
On August 23, 2020, the Company issued
On August 25, 2020, the Company issued
On August 31, 2020, the Company issued
On September 1, 2020, the Company issued
On September 4, 2020, the Company issued
On September 8, 2020, the Company issued
On September 13, 2020, the Company issued
On September 15, 2020, the Company issued
On September 15, 2020, the Company issued
On September 28, 2020, the Company issued
On September 29, 2020, the Company issued
On September 29, 2020, the Company issued
On September 30, 2020, the Company issued
On October 1, 2020 the Company issued
On October 5, 2020 the Company sold 1,500,000 shares of common stock and 1,500,000 warrants for cash proceeds of $150,000. As of December 31, 2020, the shares were not issued and included were included in stock payable.
On October 22, 2020, the Company issued
On October 22, 2020 the Company sold
On December 16, 2020, the Company issued
F-23
On December 31, 2020 the Company sold
During the year ended December 31, 2020, the Company issued 500,000 shares to consultant in error and is in the process of the having the shares returned. As of the date of filing the shares have not been returned.
NOTE 12 - SUBSEQUENT EVENT
On January 4, 2021, the Company entered into an agreement with the note holder of a certain related party notes payable dated February 5, 2020 to convert $200,000 of the principal balance of the note and to extend the payment date of the first interest payment of $54,993.87 to January 2, 2023. As consideration, the Company issued the noteholder
On January 6, 2021, the Company entered into a $
On January 8, 2021, the Company entered into a $
On March 12, 2021, the Company entered into a $
On March 3, 2021, the Company entered into a $
On February 8, 2021, the Company entered into an agreement to consolidate two $50,000 notes payable dated September 17, 2018 and February 8, 2019 into one $100,000, 10% note due February 8, 2022 convertible at $0.10 per share. As consideration the Company is to issue the note holder 100,000 shares of common stock. As of the date of filing the shares have not been issued.
On February 4, 2021, the Company issued
On February 8, 2021, the Company sold
On February 8, 2021, the Company issued
On February 17, 2021, the Company issued 116,320 shares in connection with shares due from a certain note payable dated January 25, 2019 and included in stock payable as of December 31, 2020.
On February 17, 2021, the Company issued
On February 17, 2021, the Company sold
On February 24, 2021, the Company issued
On February 24, 2021, the Company sold
On February 12, 2021, the noteholder of a certain note dated February 15, 2018, agreed to extend the maturity date of the note to February 15, 2022 for 50,000 shares of common stock. As of the date of filing the shares have not been issued.
On February 24, 2021, the Company issued
On March 17, 2021, the Company sold
F-24
On April 20, 2021, the noteholder of a certain note dated May 2, 2017, agreed to extend the maturity date of the note to May 2, 2022 for 100,000 shares of common stock. As of the date of filing the shares have not been issued.
On April 30, 2021, the noteholder of a certain note dated May 2, 2017, agreed to extend the maturity date of the note to May 1, 2022 for 100,000 shares of common stock. As of the date of filing the shares have not been issued.
On June 1, 2021, the noteholder of a certain note dated January 1, 2020, agreed to extend the maturity date of the note to June 1, 2022. In addition, the note was amended to allow for the note holder to covert the note at $0.10 per share. As consideration the Company granted the noteholder 1,000,000 three year warrants exercisable at $0.125.
On July 6, 2020 we received a letter from the staff of the Division of Enforcement of the Securities and Exchange Commission (the “Staff”) that indicated the Company may have violated certain rules and regulations regarding a late filing notification filed by the Company and that the Staff is conducting an informal inquiry into the matter. On April 29, 2021, the Company agreed to pay civil penalties of $25,000 to the Securities and Exchange Commission in settlement of the matter. Payment shall be made in the following four installments: (1) $5,000 within 14 days of entry of the order; (2) $7,500 within 180 days of entry of the order; (3) $6,250 within 270 days of entry of the order; and (4) $6,250 within 360 days of entry of the order.
On June 15, 2021, the Company sold
On June 15, 2021, the Company sold
On June 15, 2021, the Company issued
F-25