The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
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.
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.
Website
The Company capitalizes the costs associated with the development of the Companys website pursuant to ASC Topic 350. Other costs related to the maintenance of the website are expensed as incurred. Amortization is provided over the estimated useful lives of 3 years using the straight-line method for financial statement purposes. The Company plans to commence amortization upon completion and release of the Companys fully operational website.
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
TRUTANKLESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
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 Companys 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 managements 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, 2019 and 2018.
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 managements 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, 2019 and 2018, 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 when common stock equivalents, if any, are anti-dilutive they are not considered in the computation.
Inventory
Inventories are stated at the lower of cost (average cost) or market (net realizable value).
Revenue recognition
We recognize revenue in accordance with 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 the product is shipped to customers, when control transfers to customers, provided there are no material remaining performance obligations required of the Company or any matters of customer acceptance. We only record revenue when collectability is probable.
F-8
TRUTANKLESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
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 instruments anticipated life.
Level 3 - Inputs reflect managements 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 Companys financial instruments that could have been realized as of December 31, 2019 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 Companys 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 Companys notes payable to related parties approximates the fair value of such instrument based upon managements best estimate of terms that would be available to the Company for similar financial arrangements at December 31, 2019 and 2018.
Financial assets and liabilities measured at fair value on a recurring basis are summarized below as of December 31, 2019:
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Financial Instruments
|
|
$
|
-
|
|
$
|
-
|
|
$
|
613,716
|
|
$
|
613,716
|
As of December 31, 2019, the Companys stock price was $0.35, risk-free discount rate of 1.60% and volatility of 182%
F-9
TRUTANKLESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
Financial assets and liabilities measured at fair value on a recurring basis are summarized below as of December 31, 2018:
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Financial Instruments
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
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
|
|
$
|
613,716
|
Recent Accounting Pronouncements
ASU 2016-02 - In February 2016, the FASB issued ASU No. 2016-02, "Leases", ("ASC 842") which amended the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASC 842 is effective for public companies during interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. In July 2018, the FASB issued ASU No. 2018-11, which permits entities to record the right-of-use asset and lease liability on the date of adoption, with no requirement to recast comparative periods.
We adopted ASC 842 effective January 1, 2019 using the optional transition method of recognizing a cumulative-effect adjustment to the opening balance of retained earnings on January 1, 2019. Therefore, comparative financial information was not adjusted and continues to be reported under the prior lease accounting guidance in ASC 840. We elected the transition relief package of practical expedients, and as a result, we did not assess 1) whether existing or expired contracts contain embedded leases, 2) lease classification for any existing or expired leases, and 3) whether lease origination costs qualified as initial direct costs. We elected the short-term lease practical expedient by establishing an accounting policy to exclude leases with a term of 12 months or less, as well as the land easement practical expedient for maintaining our current accounting policy for existing or expired land easements.
In June 2018, the FASB issued ASU 2018-07, "Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting," which modifies the accounting for share-based payment awards issued to nonemployees to largely align it with the accounting for share-based payment awards issued to employees. ASU 2018-07 is effective for us for annual periods beginning January 1, 2019. Management evaluated ASU 2018-07 and determined that the adoption of this new accounting standard did not have a material impact on the Companys consolidated financial statements.
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.
F-10
TRUTANKLESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
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 Companys ability to continue as a going concern. The Companys ability to continue as a going concern is dependent on the Companys 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, 2019, the Company had $4,342 cash on hand. At December 31, 2019 the Company has an accumulated deficit of $32,425,982. For the year ended December 31, 2019, the Company had a net loss of $4,893,230, and cash used in operations of $2,218,326. These factors raise substantial doubt about the Companys ability to continue as a going concern within one year from the date of filing.
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. 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.
NOTE 3 - INVENTORY
Inventories consist of the following at:
|
December 31, 2019
|
|
December 31, 2018
|
Finished goods
|
|
106,958
|
|
|
403,322
|
Total
|
$
|
106,958
|
|
$
|
403,322
|
NOTE 4 - ACCOUNTS RECEIVABLE, NET
Accounts receivable consist of the following at:
|
December 31, 2019
|
|
December 31, 2018
|
Accounts receivable
|
|
377,222
|
|
|
222,959
|
Allowance for doubtful accounts
|
|
(106,958)
|
|
|
(70,569)
|
Total
|
$
|
270,381
|
|
$
|
214,260
|
NOTE 5 - PREPAID CONSULTING EXPENSES
During the years ended December 31, 2019 and 2018, the Company issued 2,094,300 and 730,000 shares of stock for various consulting agreement with terms ranging between 6 months to two years. The Company considered the market price of the common stock issued and fair value of the services rendered and determined that the market prices of the share issued of $1,012,285 and $365,000, respectively were the more readily determinable values. The Company recorded amortization of the prepaid stock compensation amounting to $758,064 and $137,889 for the years ended December 31 2019 and 2018, respectively.
F-11
TRUTANKLESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
NOTE 6 - RELATED PARTY
As of December 31, 2019, and 2018, the Company had two notes payable due to an officer and director of the Company in the amount of $69,150 and $99,150, respectively. The notes have interest rate that range from 0%-8% 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 (See Note 8).
NOTE 7 - NOTES PAYABLE
Notes payable consist of the following at:
|
December 31,
2019
|
|
December 31,
2018
|
Note payable, secured, 12% interest, due July 2020 (see Note 12)
|
$
|
150,000
|
|
$
|
150,000
|
Note payable, secured, 12% interest, due July 2020 (see Note 12)
|
|
100,000
|
|
|
100,000
|
Note payable, secured, 12% interest, due January 2020 (see Note 12)
|
|
50,000
|
|
|
50,000
|
Note payable, secured, 12% interest, due September 2020
|
|
-
|
|
|
50,000
|
Note payable, secured, 12% interest, due July 2020 (see Note 12)
|
|
100,000
|
|
|
-
|
Note payable, secured, 12% interest, due October 2019
|
|
5,750
|
|
|
-
|
Note payable, secured, 12% interest, due March 2020
|
|
12,000
|
|
|
-
|
Total Notes Payable
|
$
|
417,750
|
|
$
|
350,000
|
|
|
|
|
|
|
Less discounts
|
|
(5,943)
|
|
|
(22,050)
|
Total Notes Payable
|
|
411,807
|
|
|
327,980
|
Less current portion
|
|
(411,807)
|
|
|
(45,717)
|
|
|
|
|
|
|
Total Notes Payable - long term
|
$
|
-
|
|
$
|
282,233
|
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. As of December 31, 2019, $12,290 of the debt discount has been amortized and the note was shown net of unamortized discount of $5,443.
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 the splitting the notes the noteholder also agreed to the 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 30, 2019, the Company issued a $100,000 12% promissory note. The note was due on September 30, 2019. As an incentive to enter into the agreement the noteholder was also granted 100,000 shares valued at $45,000 which was recognized as a debt discount. On May 16, 2019, the maturity date of the note was extended to September 30, 2020 for the issuance of 55,000 shares of common stock valued at $23,100 The Company recorded the fair market value of all the shares issued for extensions to financing cost.
F-12
TRUTANKLESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
On February 11, 2019, the Company issued a $12,500 12% promissory note. The note is due on October 11, 2019. As an incentive to enter into the agreement the noteholder was also granted 25,000 shares valued at $12,500, which was recognized as a debt discount. On May 17, 2019, the Company agreed to settle the note along with $833 in accrued interest for 53,334 shares valued at $13,333. At the time of note settlement, the remaining unamortized discount was immediately expensed.
On February 11, 2019, the Company issued a $12,500 12% promissory note. The note is due on October 11, 2019. As an incentive to enter into the agreement the noteholder was also granted 25,000 shares valued at $12,500, which was recognized as a debt discount. As of December 31, 2019, $12,500 of the debt discount was amortized.
On March 1, 2019, the Company issued a $12,000 12% promissory note. The note is due on March 1, 2020.
Convertible notes payable, net of debt discount consist of the following:
|
December 31,
2019
|
|
December 31,
2018
|
Convertible note payable, secured, 12% interest,
due March 2019, convertible at $1 per share
|
$
|
-
|
|
$
|
10,000
|
Convertible note payable, secured, 12% interest,
due May 2018, convertible at $1 per share
|
|
-
|
|
|
50,000
|
Convertible note payable, secured, 12% interest,
due August 2019, convertible at $1 per share
|
|
50,000
|
|
|
50,000
|
Convertible note payable, secured, 12% interest,
due August 2018, convertible at $1 per share
|
|
-
|
|
|
50,000
|
Convertible note payable, secured, 12% interest,
due 120 days after delivery of payment notice from
lender or November 2019, convertible at $0.25 per share
|
|
900,000
|
|
|
900,000
|
Convertible note payable, secured, 12% interest,
due May 2020, convertible at $1 per share
|
|
100,000
|
|
|
100,000
|
Convertible note payable, secured, 12% interest,
due May 2020, convertible at $1 per share
|
|
50,000
|
|
|
50,000
|
Convertible note payable from a shareholder, secured,
12% interest, due May 2020, convertible at $1 per share
|
|
5,000
|
|
|
5,000
|
Convertible note payable from a shareholder, secured,
12% interest, due Feb 2020, convertible at $1 per share
|
|
75,000
|
|
|
75,000
|
Convertible note payable from a shareholder, secured,
4% interest, due October 2020
|
|
75,000
|
|
|
--
|
Convertible note payable from a shareholder, secured,
12% interest, due January 2020, convertible at $0.50 per share
(See Note 12)
|
|
160,000
|
|
|
160,000
|
Convertible note payable, secured, 10% interest,
due Sept 2020, convertible at $0.50 per share
|
|
50,000
|
|
|
--
|
Convertible note payable from a shareholder,12% interest,
due May 2020, conversion price is the lesser of (i) 70%
multiplied by the lowest Trading Price during the previous
twenty-five (25) trading day period ending on the latest complete
Trading Day prior to the date of the note and 70% of the market price.
|
|
337,000
|
|
|
|
Convertible note payable from a shareholder,12% interest,
due May 2020, conversion price is the lesser of (i) 70%
multiplied by the lowest Trading Price during the previous
twenty-five (25) trading day period ending on the latest complete
Trading Day prior to the date of the note and 70% of the market price.
|
|
168,500
|
|
|
|
F-13
TRUTANKLESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
|
December 31,
2019
|
|
December 31,
2018
|
Convertible note payable, secured, 10% interest,
due Sept 2020, convertible at $0.50 per share
|
|
50,000
|
|
|
--
|
Note payable, secured, 12% interest, due May 2020
|
|
31,500
|
|
|
--
|
Convertible note payable, secured, 10% interest,
due October 2021, convertible at $0.50 per share
|
|
23,000
|
|
|
|
|
|
|
|
|
|
Less discounts
|
|
(474,692)
|
|
|
(239,900)
|
Total notes payable, net
|
$
|
1,596,410
|
|
$
|
1,210,100
|
Less current portion
|
|
(1,583,066)
|
|
|
(983,220)
|
|
|
|
|
|
|
Convertible notes payable, net - Long-term
|
$
|
17,242
|
|
$
|
226,880
|
On September 17, 2018, the Company issued a $50,000 10% promissory note. The note is due on September 18, 2020. As an incentive to enter into the agreement the noteholder was also granted 10,000 shares valued at $5,000. On February 9, 2019, the note was amended for the issuance of 50,000 shares of common stock valued at $30,000, the note holder agreed to a convert the note at a price of $0.50 per share. Additionally, the maturity date of the note was changed to February 8, 2020. As of December 31, 2019, the shares have not been issued and were included in stock payable. As of December 31, 2019, $21,513 of the debt discount has been amortized and the note was shown net of unamortized discount of $4,204.
During the year ended December 31, 2016, 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 Companys 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 Companys 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, 2019, $165,516 of the debt discount was amortized and the note was shown net of unamortized discount of $835.
During the year December 31, 2019, the notes holders of $110,000 of the convertible notes agreed to convert the notes and accrued interest at a conversion price of $0.25 per share into 552,767 shares of common stock. The Company evaluated the adjustment of the conversion price under ASC 470, and recorded an additional loss on conversion of $126,813, which was recognized as an expense equal to the fair value of all securities and other consideration transferred in the transaction in excess of fair value of securities issuable pursuant to the original conversion terms.
On December 14, 2018, the Company issued a $50,000 4% convertible note. The note is due on February 14, 2019 and is convertible at a rate of $0.50 per shares. 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 10,000 shares valued at $5,000. As of December 31, 2019, $5,000 of the debt discount was amortized.
On January 25, 2019, the Company issued a $100,000 8% promissory note. The note is due on March 1, 2019 and is convertible at a rate of $0.50 per shares. Additionally, the note holder is due two shares of common stock for every dollar funded. As of December 31, 2019, the note holder has advanced a total of $47,500 and is due 95,000 shares valued at $37,500, and the Company has made payments of $16,000. As of December 31, 2019, there was an outstanding balance on the note in the amount of $31,500. As of December 31, 2019, $31,250 of the debt discount was amortized and the note was shown net of unamortized discount of $6,250.
F-14
TRUTANKLESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
On February 8, 2019, the Company issued a $50,000 10% promissory note. The note is due on September 8, 2020. As an incentive to enter into the agreement the noteholder was also granted 60,000 shares valued at $30,000. As of December 31, 2019, $26,795 of the debt discount has been amortized and the note was shown net of unamortized discount of $3,205.
On February 19, 2019, the Company issued a $25,000 4% convertible note. The note is due on August 19, 2019 and is convertible at a rate of $0.50 per shares. On February 14, 2019, the noteholder agreed to extend the note through October 14, 2020. As an incentive to enter into the agreement the noteholder was also granted 5,000 shares valued at $2,500. As of December 31, 2019, the shares have not been issued and were included in stock payable. As of December 31, 2019, $2,500 of the debt discount was amortized and 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 shares. As an incentive to enter into the agreement the noteholder was also granted 46,000 shares valued at $15,175. As of December 31, 2019, $1,536 of the debt discount was amortized and the note was shown net of unamortized discount of $13,639.
On November 5, 2019, the Company entered into a $562,000 convertible note payable, including a original issue discount of $56,200 pursuant to which we borrowed $337,000, including a $37,000 original issue discount in the first tranche during the year ended December 31, 2019. Interest under the convertible promissory note is 12% per annum, and the principal and all accrued but unpaid interest is due 180 days from funding. The note is convertible at the lesser of (i) 70% multiplied by the lowest Trading Price during the previous twenty-five (25) trading day period ending on the latest complete Trading Day prior to the date of the note and 70% of the market price. As an incentive to enter into the agreement the noteholder was also granted 854,000 shares valued at $307,440. The Company analyzed the conversion feature and determined it was required to be bifurcated and recognized as a derivative liability. The 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. Further, the excess of $203,177 was recognized as a financing cost on the Statement of Operations. As of December 31, 2019, $104,265 of the debt discount has been amortized and the note was shown net of unamortized discount of $232,735.
On November 19, 2019, we entered into a $281,000 convertible note payable, including a original issue discount of $28,100 convertible promissory note pursuant to which we borrowed of $150,000, including a $18,500 discount during the year ended December 31, 2019. Interest under the convertible promissory note is 12% per annum, and the principal and all accrued but unpaid interest is due 180 days from funding. The note is convertible at the lesser of (i) 70% multiplied by the lowest Trading Price during the previous twenty-five (25) trading day period ending on the latest complete Trading Day prior to the date of the note and 70% of the market price. As an incentive to enter into the agreement the noteholder was also granted 427,000 shares valued at $175,070, the Company analyzed the conversion feature and determined it was required to be bifurcated and recognized as a derivative liability. The derivative at inception was valued at $192,226, based on the Black Scholes Merton pricing model. As the fair value of the derivative and the shares issued at inception were in excess of the face amount of the note the Company recorded a debt discount in the amount of $168,500 to be amortized utilizing the effective interest method of accretion over the term of the note. Further, the excess of $104,041 was recognized as a financing cost on the Statement of Operations. As of December 31, 2019, $39,099 of the debt discount has been amortized and the note was shown net of unamortized discount of $129,401.
The embedded conversion feature in the convertible debt instruments above were convertible at issuance which qualified them as a derivative instrument since the number of shares issuable under the note is indeterminate based on guidance in ASC 815-15, Derivatives and Hedging (Topic No. 815-15). Topic No. 815-15 requires the Company to bifurcate and separately account for the conversion features as an embedded derivative contained in the Companys convertible debt.
F-15
TRUTANKLESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
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 30, 2019:
Risk free interest rate
|
|
1.58% - 1.60%
|
Expected term (years)
|
|
0.31 - 0.50
|
Expected volatility
|
|
182% - 193.54%
|
Expected dividends
|
|
0%
|
Interest expense including amortization of the associated debt discount for the year ended December 31, 2019 and 2018 was $782,677 and $637,382, respectively.
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 month basis thereafter. Under ASC 842, this lease is not recorded on the balance sheet as its term is 12 months or less.
F-16
TRUTANKLESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
Undiscounted Cash Flows
As of December 31, 2019, the right of use asset and lease liability were shown on the consolidated balance sheet at $50,234 and $51,912, respectively. The table below reconciles the fixed component of the undiscounted cash flows and the total remaining years to the operating lease liability recorded on the consolidated balance sheet as of December 31, 2019:
Amounts due as of December 31, 2019
|
|
Operating Leases
|
2020
|
|
$
|
20,160
|
2021
|
|
|
20,765
|
2022
|
|
|
21,370
|
Total minimum lease payments
|
|
$
|
62,294
|
Less: effect of discounting
|
|
|
(10,381)
|
Present value of future minimum lease payments
|
|
$
|
51,912
|
Less: current obligations under leases
|
|
|
(14,723)
|
Long-term lease obligations
|
|
$
|
37,189
|
NOTE 9 - STOCK WARRANTS
During the year ended December 31, 2019, we issued 82,500 warrants in conjunction with units which included shares sold for cash to purchase 426,500 shares of the Companys common stock at an exercise price of $1.00 per share. The warrants are exercisable at any time until three (3) years after the closing date.
The following is a summary of stock warrants activity during the year ended December 31, 2019.
|
Number of
Shares
|
|
Weighted Average
Exercise Price
|
Balance, December 31, 2018
|
2,395,624
|
|
$1.00
|
Warrants granted and assumed
|
82,500
|
|
$1.00
|
Warrants expired
|
-
|
|
-
|
Warrants canceled
|
-
|
|
-
|
Warrants exercised
|
-
|
|
-
|
Balance outstanding and exercisable, December 31, 2019
|
2,478,124
|
|
$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, 2019 and 2018:
|
2019
|
|
2018
|
Deferred income tax assets:
|
$
|
9,866,701
|
|
$
|
8,901,506
|
Valuation allowance
|
|
(9,866,701)
|
|
|
(8,901,506)
|
Net deferred tax asset
|
$
|
-
|
|
$
|
-
|
F-17
TRUTANKLESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
Reconciliation between the statutory rate and the effective tax rate is as follows at December 31, 2019 and 2018:
|
2019
|
|
2018
|
Effective Tax Rate Reconciliation:
|
|
|
|
Federal statutory tax rate
|
|
21.0%
|
|
|
21.0%
|
State taxes, net of federal benefit
|
|
0.0%
|
|
|
0.0%
|
Change in valuation allowance
|
|
(21.0)%
|
|
|
(21.0)%
|
Effective tax rate
|
|
0.0%
|
|
|
0.0%
|
As of December 31, 2019, the Company had net operating loss carryforwards of approximately $16,724,000 and net operating loss carryforwards expire in 2021 through 2029. The current years net operating loss will carryforward indefinitely, limited to 80% of the current year taxable income.
The current income tax benefit of $965,195 generated for the year ended December 31, 2019 was offset by an equal increase in the valuation allowance. The valuation allowance was increased due to uncertainties as to the Companys 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, 2019 and 2018 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 $0.001 par value preferred stock and 100,000,000 shares of its $0.001 par value common stock.
The Company has also designated 76,000 shares of Series A Preferred Stock. Each share of Series A Preferred Stock is convertible, at any time, at the option of the holder, is convertible into five shares of our common stock and one warrant to purchase one share of our common stock at $1.00 per share. All Preferred Stock automatically converts into shares of the Companys common stock and warrants after three years from the original issue date of the Preferred Stock. All the Series A Preferred Stock reached it conversion date during the year ended December 31, 2019 and the Company has begun to convert the shares subsequent to year end (See note 12).
During the year ended December 31, 2019, the Company issued 2,679,300 shares of common stock with a fair value of $1,399,852 for services based on the stock price on the date of issuance ranging from $0.33 to $0.84, of which $90,705 is included in stock payable. The Company valued the shares at their fair market value which was considered the most readily determinable value. Additionally, the Company cancelled two consulting agreements entered into during the year ended December 31, 2018. As a result, the Company received and cancelled 100,000 shares of common stock valued at $50,000.
During the year ended December 31, 2019, the Company issued 5,625,000 shares of common stock for $1,472,250 cash at sales prices ranging from $0.25 to $0.50. Additionally, the Company received $61,000 for the sale of common stock which has not been issued and has been recorded as stock payable.
During the year ended December 31, 2019, the Company issued 1,777,777 shares of common stock valued at $598,567 as incentives for certain noteholders to enter into financing agreements.
During the year ended December 31, 2019, the Company issued 606,101 shares of common stock valued at $289,717 to settle certain convertible notes payable and accrued interest.
F-18
TRUTANKLESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
NOTE 12 - SUBSEQUENT EVENT
On February 5, 2020, the Company agreed to settle a certain $900,000 note payable 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, 4,000,000 shares of common stock in settlement of $400,000 of the principal balance of the note, and issued a new $500,000 11% promissory note. The Company also agreed to amend the warrants agreements for 2,631,094 previously granted warrants to the investor to include the same terms as the warrants granted under the settlement agreement.
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.
As part of the agreement the Company also agreed to pay the accrued Interest in two (2) installments as follows: (a) $167,000 due upon execution of the settlement agreement, and (b) $145,006.13) due on January 4, 2021. In addition to the First Interest Payment, Borrower shall also pay to Lender the sum $33,000 as a fee to induce and otherwise compensate Lender for the immediate release of the loan security.
On January 3, 2020, the Company issued 200,000 shares of common stock for $50,000.
On January 30, 2020, the Company issued 64,166 shares of common stock for $32,083.
On April 1, 2020, the Company issued 500,000 shares of common stock for $100,000.
On January 3, 2020, the Company issued 100,000 shares for services with a fair value of $39,290, based on stock price on date of issuance.
On January 30, 2020, the Company issued 15,000 shares for services with a fair value of $4,643, based on stock price on date of issuance.
On February 19, 2020, the Company issued 3,600,000 shares for services with a fair value of $754,560, based on stock price on date of issuance.
On March 10, 2020, the Company issued 300,000 shares for services with a fair value of $74,400, based on stock price on date of issuance.
On March 2, 2020, the Company issued 50,000 shares of common stock in connection with extending certain notes payable.
On January 1, 2020, the Company entered into an agreement to consolidate three notes payable dated February 2, 2018 and May 16, 2019 into one $300,000, 12% note due June 1, 2021. As consideration the Company issued the note holder 175,000 shares of common stock.
On January 1, 2020, the Company entered into an agreement to consolidate two notes payable dated June 11, 2018 and September 6, 2016 into one $260,000, 12% note due June 1, 2021. As consideration the Company issued the note holder 175,000 shares of common stock.
F-19
TRUTANKLESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 2018
On November 5, 2019, we entered into a $562,000, convertible note payable including an original issue discount of $56,200 convertible promissory note pursuant to which we borrowed of $337,000 during the year ended December 31, 2019. On February 7, 2020 we borrowed an additional $225,000, including a original issue discount of $25,000 and granted the noteholder an additional 476,493 shares of common stock.
On February 19, 2020 the Company converted the 76,000 outstanding Series A preferred shares, based on the automatic conversion terms. As of the date of this filing, only 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 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.
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 Companys common stock. For so long as any shares of the Series B Preferred Stock remain issued and outstanding, the holders thereof, voting separately as a class, shall have voting power equal to 51% of the total vote on all shareholder matters of the Company. Upon or after the third anniversary of the initial issuance date, the Company shall have the right, at the Companys 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 approved the issuance of 5,000 shares of the Series B Preferred Stock to the Companys Chief Executive Officer and President, Michael Stebbins, and 5,000 shares of the Series B Preferred Stock to the Companys Secretary and Treasurer, Robertson Orr. The shares were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act of 1933, as amended.
F-20