The Company’s unaudited interim consolidated financial statements for the nine-month period ended September 30, 2019, form part of this quarterly report. They are stated in United States Dollars (US$) and are prepared in accordance with United States generally accepted accounting principles. The comparative period ended September 30, 2018, has been restated to include any applicable changes for the nine month period then ended, in connection with the restatement of the 2018 financial statements, as described below.
These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2018, on Form 10-K, as amended and restated, filed with the Securities and Exchange Commission on October 21, 2019.
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
NOTE 1. OVERVIEW AND NATURE OF BUSINESS
These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2018. Notes to the unaudited interim consolidated financial statements that would substantially duplicate the disclosures contained in the audited consolidated financial statements have been omitted.
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”). The preparation of financial statements in conformity with GAAP 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 that effect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The unaudited interim consolidated financial statements reflect all adjustments consisting of normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of the results for the periods shown. The unaudited interim consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue as a going concern.
NOTE: The following notes and any further reference made to “the Company”, "we", "us", "our" and "Parallax" shall mean Parallax Health Sciences, Inc., and its wholly-owned subsidiaries, Parallax Diagnostics, Inc., Parallax Health Management, Inc., and Parallax Behavioral Health, Inc. unless otherwise indicated.
Business Overview
The Company’s principal focus is on personalized patient care through remote healthcare services, behavioral health systems, and Point-of-Care (“POC”) diagnostic testing. Parallax’s current family of companies that serve as the foundation for its cross-over business model of operations include:
•Parallax Diagnostics, Inc. (“Parallax Diagnostics” or “PDI”) acquired a proprietary Point-of-Care diagnostic immunoassay testing platform and 25 test cartridges for the areas of infectious diseases, cardiac markers, drugs of abuse and various other medical conditions.
•Parallax Health Management, Inc. (“PHM”) develops Remote Patient Monitoring (“RPM”) and telehealth market products and services, and commercializes them, including the Fotodigm® proprietary platform which allows for systems integration with a number of third-party services and solutions.
•Parallax Behavioral Health, Inc. (“PBH”) acquired the intellectual property known as REBOOT™, the acronym for Reliable Evidence-Based Outcomes Optimization Technologies, as well as the Intrinsic Code™ technology, a software platform specifically designed to improve health treatment outcomes through cloud-based and mobile behavioral technology systems that enable its users and user groups to more effectively achieve goals within a prescribed timeline.
Parallax Care™ is the Company’s technology-enabled digital healthcare system, structured with three separate divisions that can operate independently of one another, or integrate services to meet the various needs of the Company’s clientele: Optimized Outcomes, Connected Health and Smart Data. Each of these divisions target a separate vertical market that are synergistic, compliment, and strengthen each other.
Optimized Outcomes
|
REBOOT™ / COMPASS™
Behavioral modification
|
Connected Health
|
Fotodigm® platform
Remote patient monitoring, telehealth, and POC diagnostic testing
|
Smart Data
|
Intrinsic Code™ technology
Actionable insights to behavior modification
|
Operating Segments
The Company’s operations include the following operating segments for financial statement presentation: Remote Patient Monitoring (RPM), Behavioral Health Services (BHS), and Diagnostics/Corporate.
•Remote Patient Monitoring
The Company provides a distinctive technology platform that provides for the complete remote patient care delivery system: the patent-pending Fotodigm® platform, which utilizes proprietary software and technology to bridge clinical behavioral science with technology and logistics for payers, providers and clinical professionals across a variety of wellness and clinical devices, including both fitness and clinical applications. Fotodigm® is a secure and scalable platform for collecting, transmitting and analyzing biometric, pharmaceutical, and health data to healthcare providers, primarily hospitals, accredited nursing operations, and physicians.
7
The RPM segment generates revenues through fees charged for the license and utilization of its proprietary system that provides software integrations of the Fotodigm® platform. Additionally, the RPM segment will generate incremental revenues through the delivery of acute, post-acute and chronic health patient management software systems that enable Parallax customers to bill for and collect payments from patients and third-party payers for telemonitoring and remote services that they deliver.
•Behavioral Health Services
The BHS segment commenced with the acquisition of the REBOOT™ and Intrinsic Code™ technologies in April 2017. The BHS segment will generate revenues primarily through licensing and subscription of software and systems. As of September 30, 2019, the BHS segment had not yet begun full operations, generating limited test market sales.
•Diagnostics/Corporate
The Diagnostics/Corporate Segment supports the costs and operating expenses related to the continued development and exploitation of the Company’s proprietary Target System POS diagnostic platform and processes. In addition, the Diagnostics/Corporate Segment provides management and administrative services to support the Company and consists of certain aspects of the Company’s executive management, corporate relations, legal, compliance, human resources, corporate information technology and finance departments.
Going Concern
The Company has incurred losses since inception resulting in an accumulated deficit of $25,649,201, and a working capital deficit of $5,122,225, and further losses are anticipated. The Company’s ability to continue as a going concern is dependent upon its ability to generate profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due, which may not be available at commercially reasonable terms. There can be no assurance that the Company will be able to continue to raise funds, in which case the Company may be unable to meet its obligations and the Company may cease operations. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.
The Company will require additional financing in order to proceed with its plan of operations, including approximately $3,000,000 over the next 12 months to pay for its ongoing expenses. These cash requirements include working capital, general and administrative expenses, the development of the Company’s product line, and the pursuit of acquisitions. These cash requirements are in excess of the Company’s current cash and working capital resources. Accordingly, the Company will require additional financing in order to continue operations and to repay its liabilities. There is no assurance that the financing will be completed as planned or at all. If the Company is unable to secure adequate capital to continue the Company’s planned operations, the Company’s shareholders may lose some or all of their investment and the Company’s business may fail.
NOTE 2. RESTATEMENT
On October 18, 2019, the Company concluded that the previously issued audited consolidated financial statements as of and for the years ended December 31, 2018 and 2017, should no longer be relied upon. The Company reached its conclusion after consultation with its Audit Committee and a joint discussion with the Company’s independent registered public accounting firm.
The Company has restated its audited consolidated financial statements as of and for the years ended December 31, 2018 and 2017, and interim periods, to reflect adjustments made in connection with the accounting treatment of certain convertible debt (the “Subject Debt”), warrants (the “Subject Warrants”), and convertible preferred stock (the “Subject Preferred Stock”). The adjustments resulted in material overstatements and understatements, the nature and impact of which are further described below.
Valuation of Convertible Debt and Warrant Liabilities:
The Company reviewed the accounting treatment of the Subject Debt, Subject Warrants, and Subject Preferred Stock, and concluded that it was not in accordance with U.S. generally accepted accounting principles. Specifically, the Subject Debt, Subject Warrants and Subject Preferred Stock were not evaluated to determine the impact (if any) of 1) embedded conversion option; 2) beneficial conversion feature; 3) bifurcation; 4) derivative liability; and 5) fair value adjustments and other expenses thereto. A third-party valuation was performed on the Subject Debt, Subject Warrants and Subject Preferred Stock, and the accounting treatment was determined.
The effects of the accounting treatment, all non-cash in nature, resulted in a restatement of convertible debentures and convertible notes payable, additional paid in capital, and accumulated deficit, and the establishment of a derivative liability, resulting in changes to total liabilities and total stockholders’ deficit on the consolidated balance sheets; and a restatement of general and administrative expenses, gain on extinguishment of debt, discount amortization, and interest expense, and the establishment of a loss on fair value adjustments, resulting in changes to net income (loss), net loss per share-basic, and net loss per share-diluted on the consolidated statements of operations; and the restatement of stock compensation/stock option expense, discount amortization, gain on extinguishment of debt, loss on fair value adjustments, debt accretion, and the increase in accounts payable and accrued expenses from operating activities on the consolidated statements of cash flows. The following tables summarize the impacts on the Company’s consolidated financial statements as of and for the nine months ended September 30, 2018:
8
|
September 30, 2018
|
|
|
As Previously Reported
|
|
As Restated
|
|
Increase
(Decrease)
|
|
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
Notes payable, convertible, net of discount
|
$
|
1,241,000
|
|
$
|
350,081
|
|
$
|
(890,919
|
)
|
Total current liabilities
|
|
4,037,238
|
|
|
3,146,319
|
|
|
(890,919
|
)
|
Total liabilities
|
|
6,129,031
|
|
|
5,238,112
|
|
|
(890,919
|
)
|
Additional paid in capital - preferred
|
|
1,415,653
|
|
|
1,699,000
|
|
|
283,347
|
|
Additional paid in capital - common
|
|
9,005,599
|
|
|
11,023,303
|
|
|
2,017,704
|
|
Accumulated deficit
|
|
(15,308,717
|
)
|
|
(16,718,849
|
)
|
|
1,410,132
|
|
Total stockholders' deficit
|
|
(4,734,466
|
)
|
|
(3,843,547
|
)
|
|
(890,919
|
)
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
5,202,944
|
|
|
5,252,498
|
|
|
49,554
|
|
Operating loss
|
|
(5,207,702
|
)
|
|
(5,257,256
|
)
|
|
49,554
|
|
Loss on fair value adjustments
|
|
––
|
|
|
(156,300
|
)
|
|
156,300
|
|
Interest expense, net of income
|
|
(950,601
|
)
|
|
(1,741,726
|
)
|
|
791,125
|
|
Total other income (expenses)
|
|
24,284,963
|
|
|
23,337,538
|
|
|
(947,425
|
)
|
Net income (loss) - continuing operations
|
|
19,077,261
|
|
|
18,080,282
|
|
|
(996,979
|
)
|
Net income (loss)
|
|
18,252,863
|
|
|
17,255,884
|
|
|
(996,979
|
)
|
Net income (loss) per common share - continuing operations - basic
|
|
0.125
|
|
|
0.124
|
|
|
(0.001
|
)
|
Net income (loss) per common share - continuing operations - diluted
|
|
0.089
|
|
|
0.088
|
|
|
(0.001
|
)
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
Net income
|
|
19,077,261
|
|
|
18,080,282
|
|
|
(996,979
|
)
|
Stock compensation/stock option expense
|
|
3,103,390
|
|
|
3,152,943
|
|
|
49,553
|
|
Loss on fair value adjustments
|
|
––
|
|
|
156,300
|
|
|
156,300
|
|
Debt accretion
|
|
––
|
|
|
791,125
|
|
|
791,125
|
|
Increase in accounts payable and accrued expenses
|
|
2,182,548
|
|
|
1,398,093
|
|
|
(784,455
|
)
|
Net cash provided by continuing operations
|
|
824,530
|
|
|
40,074
|
|
|
(784,456
|
)
|
Net cash used by operating activities-discontinued operations
|
|
(824,398
|
)
|
|
(39,942
|
)
|
|
784,456
|
|
Non-Cash Activities:
|
|
|
|
|
|
|
|
|
|
Beneficial conversion feature of convertible promissory notes
|
|
––
|
|
|
347,457
|
|
|
347,457
|
|
Fair value of stock warrants
|
|
––
|
|
|
810,000
|
|
|
810,000
|
|
Embedded conversion option of convertible promissory notes
|
|
––
|
|
|
850
|
|
|
850
|
|
Deemed dividends on preferred stock
|
|
––
|
|
|
283,347
|
|
|
283,347
|
|
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
This summary of significant accounting policies is presented to assist in understanding the Company’s financial statements. These accounting policies conform to accounting principles, generally accepted in the United States of America, and have been consistently applied in the preparation of the financial statements.
The Company’s fiscal year-end is December 31.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.
Changes in the Company’s ownership interests in subsidiaries that do not result in the Company losing control over the subsidiaries are accounted for as equity transactions. When the Company loses control of a subsidiary, a gain or loss is recognized and is calculated as the difference between:
•the aggregate of the fair value of consideration received and the fair value of any retained interest at the date when control is lost;
and
•the carrying amount of the net assets (liabilities) of the subsidiary and any noncontrolling interest.
Upon deconsolidation of a subsidiary, any loans to the former subsidiary made by the Company are measured at fair value at the deconsolidation date. Any difference between the carrying amount of the loan to the subsidiary and its fair value is included as part of the gain or loss calculation upon deconsolidation.
9
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Fair Value Hierarchy
The Company utilizes the three-level valuation hierarchy for the recognition and disclosure of fair value measurements. The categorization of assets and liabilities within this hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy consist of the following:
Level 1: Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2: Inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active or inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument.
Level 3: Inputs to the valuation methodology are unobservable inputs based upon management’s best estimate of inputs market participants could use in pricing the asset or liability at the measurement date, including assumptions about risk.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with maturity of nine months or less at the time of issuance to be cash equivalents. As of September 30, 2019, and December 31, 2018, the Company had no cash equivalents.
Fair Value of Financial Instruments
As of September 30, 2019, and December 31, 2018, respectively, the carrying values of Company’s Level 1 financial instruments including cash and cash equivalents, accounts receivable, accounts payable, and short-term debt approximate fair value. The fair value of Level 3 instruments is calculated as the net present value of expected cash flows based on externally provided or obtained inputs. Certain Level 3 instruments may also be based on sales prices of similar assets. The Company’s fair value calculations take into consideration the credit risk of both the Company and its counterparties as of the date of valuation.
•Derivatives of financial instruments:
Derivatives are initially recognized at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period, with changes in fair value recognized in profit or loss. A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is more than 12 months and it is not expected to be realized or settled within 12 months. Other derivatives are presented as current assets or current liabilities.
•Embedded derivatives:
Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at fair value with changes in fair value recognized in profit or loss. An embedded derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the hybrid instrument to which the embedded derivative relates is more than 12 months and it is not expected to be realized or settled within 12 months. Other embedded derivatives are presented as current assets or current liabilities.
.
The following table represents the Company’s derivative financial instruments:
|
September 30, 2019
|
|
December 31, 2018
|
|
Convertible debentures
|
$
|
––
|
|
$
|
23,925
|
|
Convertible promissory notes
|
|
––
|
|
|
––
|
|
Warrants
|
|
53,920
|
|
|
34,000
|
|
Total derivative liability
|
$
|
53,920
|
|
$
|
57,925
|
|
The following table represents the changes in the Company’s derivative financial instruments:
|
September 30, 2019
|
|
December 31, 2018
|
|
Fair value of derivative liability, beginning
|
$
|
57,925
|
|
$
|
––
|
|
Increase in derivative liability-convertible promissory notes
|
|
9,370
|
|
|
60,350
|
|
Increase in derivative liability-warrants
|
|
105,000
|
|
|
623,900
|
|
Fair value adjustment-debentures
|
|
(8,296
|
)
|
|
(2,500
|
)
|
Fair value adjustment-convertible promissory notes
|
|
(9,370
|
)
|
|
––
|
|
Fair value adjustment-warrants
|
|
(87,475
|
)
|
|
126,375
|
|
Reclassification of warrant carrying value due to reset of exercise price
|
|
––
|
|
|
(750,200
|
)
|
Reclassification to gain (loss) upon extinguished debt
|
|
(13,234
|
)
|
|
––
|
|
Fair value of derivative liability, ending
|
$
|
53,920
|
|
$
|
57,925
|
|
10
Investments
The Company held $1 million and $0 million of equity securities without readily determinable fair value as of September 30, 2019 and December 31, 2018, respectively. The Company records these investments at cost, net of impairment. During the nine-month period ended September 30, 2019, there were no events or changes in circumstances that may have had a significant adverse effect on the fair value of these investments and no impairment was recorded.
Accounts Receivable
Accounts receivable are stated net of an allowance for doubtful accounts. The accounts receivable balance primarily includes amounts due from customers. Charges to bad debt are based on both historical write-offs and specifically identified receivables.
Property and Equipment
Property and equipment is comprised of office and computer equipment and software, furniture and fixtures, and leasehold improvements, recorded at cost and depreciated using the double declining balance method over the estimated useful lives of 5 to 7 years. Repairs and maintenance costs are charged directly to expense as incurred. Major renewals or replacements that substantially extend the useful life of an asset are capitalized and depreciated. See Note 4 for additional information about property and equipment.
Intangible Assets
Product processes, patents and customer lists are amortized on a straight-line basis over their estimated useful lives between 4 and 20 years. Application development stage costs for significant internally developed software projects are capitalized and amortized on a straight-line basis over the useful life, between 2 and 5 years. Costs to extend and maintain patents and trademarks are charged directly to expense as incurred. See Note 6 for additional information about intangible assets.
Goodwill and Other Indefinitely-Lived Assets
Goodwill and other indefinitely-lived assets are not amortized, but are subject to impairment reviews annually, or more frequently if necessary.
Impairment of Long-Lived Assets
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made.
The Company believes that future projected cash flows are sufficient for the recoverability of its long-lived assets, and no impairment exists. There can be no assurance, however, that market conditions will not change or demand for the Company’s products and products under development will continue. Either of these could result in future impairment losses.
Convertible Debt
The Company recognizes the advantageous value of conversion rights attached to convertible debt. Such rights give the debt holder the ability to convert debt into common stock at a price per share that is less than the trading price to the public on the date of the debt. The beneficial value is calculated as the intrinsic value (the market price of the stock at the commitment date in excess of the conversion rate) of the beneficial conversion feature of the debt, and is recorded as a discount to the related debt and an addition to additional paid in capital. The discount is amortized over the remaining outstanding period of related debt using the interest method.
Net Loss Per Share
The computation of basic earnings per share ("EPS") is based on the weighted average number of shares that were outstanding during the period, including shares of common stock that are issuable at the end of the reporting period. The computation of diluted EPS is based on the number of basic weighted-average shares outstanding plus the number of common shares that would be issued assuming the exercise of all potentially dilutive common stock equivalents. Dilutive common stock equivalents consist of shares issuable upon conversion of convertible debt, convertible preferred shares and the exercise of the Company’s stock options and warrants.
Comprehensive Loss
As of September 30, 2019, and December 31, 2018, the Company has no items that represent comprehensive loss and, therefore, has not included a schedule of comprehensive loss in the financial statements.
Revenue Recognition
The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. Revenue is measured based on a consideration specified in a contract with a customer, and excludes any amounts collected on behalf of third parties.
11
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse.
The Company may have net operating loss carryforwards available to reduce future taxable income. Future tax benefits for these net operating loss carryforwards are recognized to the extent that realization of these benefits is considered more likely than not. To the extent that the Company will not realize a future tax benefit, a valuation allowance is established.
As of September 30, 2019, the Company has not yet filed its 2012 through 2018 annual corporate income tax returns. Due to the Company’s recurring losses, it is anticipated that no corporate income taxes are due for these periods.
Stock-Based Compensation
The Company records stock-based compensation using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued.
Recently Adopted Accounting Standards
The Company evaluates the pronouncements of various authoritative accounting organizations, primarily the Financial Accounting Standards Board (“FASB”), the US Securities and Exchange Commission (“SEC”), and the Emerging Issues Task Force (“EITF”), to determine the impact of new pronouncements on US GAAP and the impact on the Company. The Company has recently adopted the following new accounting standards:
Adopted:
In July 2017, the FASB issued ASU No. 2017-11 (“ASU 2017-11”), Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). ASU 2017-11 addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. ASU 2017-11 also addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification®. ASU 2017-11 is effective for the Company for annual periods beginning after December 15, 2018, and interim periods. Early adoption is permitted.
In June 2018, the FASB issued ASU No. 2018-07 (“ASU 2018-07”), Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is effective for the Company for annual periods beginning after December 15, 2018, and interim periods. Early adoption is permitted.
In July 2018, the FASB issued ASU No. 2018-11 (“ASU 2018-11”), Leases (Topic 842), Targeted Improvements. ASU 2018-11 addresses certain issues in implementing ASU 2016-02, Leases, which was issued to increase transparency ad comparability by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing transaction. ASU 2018-11 clarifies 1) comparative reporting requirements for initial adoption; and 2) for lessors only, separating lease and non-lease components in a contract and allocating the consideration in the contract to the separate components. The amendments in this Update related to separating components of a contract affect the amendments in Update 2016-02, which is effective for the Company for annual periods beginning after December 15, 2018, and interim periods. Early adoption is permitted.
Not yet adopted:
In August 2018, the FASB issued ASU No. 2018-13 (“ASU 2018-13”), Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. ASU 2018-13 will be effective for the Company for annual periods beginning after December 15, 2019, and interim periods. Early adoption is permitted. The Company is currently evaluating the impact of the application of this accounting standard update on its financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-15 (“ASU 2018-15”), Intangibles-Goodwill and Other Internal-Use Software (Subtopic 350-40). ASU 2018-15 was issued to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. ASU 2018-15 will be effective for the Company for annual periods beginning after December 15, 2019, and interim periods. Early adoption is permitted. The Company is currently evaluating the impact of the application of this accounting standard update on its financial statements and related disclosures.
Recently Issued Accounting Standards Updates:
There were other various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries. None of the updates are expected to a have a material impact on the Company's consolidated financial position, results of operations or cash flows.
12
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment, net, consists of the following:
|
September 30, 2019
|
|
December 31, 2018
|
|
Computer equipment
|
$
|
6,615
|
|
$
|
3,987
|
|
Medical devices
|
|
45,194
|
|
|
45,194
|
|
Property and equipment, gross
|
|
51,809
|
|
|
49,181
|
|
Accumulated depreciation
|
|
(49,401
|
)
|
|
(49,181
|
)
|
Property and equipment, net
|
$
|
2,408
|
|
$
|
––
|
|
Depreciation expense was $132 and $0 for the three months ended September 30, 2019 and 2018, respectively, and was $220 and $0 for the nine months then ended, respectively.
NOTE 5. OPERATING LEASES
The Company entered into a sub-lease agreement with PearTrack Security Systems, Inc. (“PearTrack”), whose principal is a related party, on December 1, 2017, for its headquarters in Santa Monica, California, with a monthly sub-lease payment of $5,600, on a month-to-month basis, consistent with the underlying lease between PearTrack and property owner. Due to the short-term nature of the sub-lease, the Company has elected to not recognize the operating lease asset and liability, and will expense the rent as incurred.
The Company entered into a sub-lease agreement with AI Assist, Inc. (“AI Assist”) on May 1, 2019, for certain office space located in New York, New York, with a monthly sub-lease payment of $8,900 for a term of fourteen (14) months, maturing June 30, 2020. The right-of-use present value of the sub-lease has been calculated as $118,585, utilizing an implied interest rate of 8%. The operating lease asset and liability will be amortized over the term of the lease.
During the three months and the nine months ended September 30, 2019, respectively, the Company recognized $24,819 and $41,091 in amortization. The present value of future lease payments at September 30, 2019, was $77,494. As of September 30, 2019, the future minimum lease payments are as follows:
|
2019
|
|
2020
|
|
Total
|
|
Operating lease minimum payments
|
$
|
26,700
|
|
$
|
53,400
|
|
$
|
80,100
|
|
Less: amount treated as interest
|
|
1,382
|
|
|
1,224
|
|
|
2,606
|
|
Present value of minimum lease payments
|
$
|
25,318
|
|
$
|
52,176
|
|
$
|
77,484
|
|
The total lease costs are summarized as follows:
|
September 30, 2019
|
|
December 31, 2018
|
|
Operating lease costs
|
$
|
44,500
|
|
$
|
––
|
|
Short-term lease costs
|
|
51,240
|
|
|
73,351
|
|
Total lease costs
|
$
|
95,740
|
|
$
|
73,351
|
|
Lease costs were $43,780 and $16,800 for the three months ended September 30, 2019 and 2018, respectively, and were $95,740 and $53,557 for the nine months then ended, respectively.
NOTE 6. INTANGIBLE ASSETS
The following are the components of finite-lived intangible assets:
|
September 30, 2019
|
|
December 31, 2018
|
|
Products and processes
|
$
|
12,500
|
|
$
|
12,500
|
|
Trademarks and patents / technology
|
|
150,700
|
|
|
150,700
|
|
Customer lists / relationships
|
|
30,000
|
|
|
30,000
|
|
Non-compete agreement
|
|
30,000
|
|
|
30,000
|
|
Marketing related
|
|
64,000
|
|
|
64,000
|
|
Software
|
|
510,300
|
|
|
510,300
|
|
Intangible assets, gross
|
|
797,500
|
|
|
797,500
|
|
Accumulated amortization
|
|
(308,930
|
)
|
|
(218,465
|
)
|
Intangible assets, net
|
$
|
488,570
|
|
$
|
579,035
|
|
Amortization expense for the three months ended September 30, 2019 and 2018, was $30,155 and $29,821, respectively, and for the nine months ended September 30, 2019 and 2018, was $90,465 and $90,465, respectively.
13
NOTE 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of:
|
September 30, 2019
|
|
December 31, 2018
|
|
Accounts payable-vendors
|
$
|
1,014,668
|
|
$
|
830,590
|
|
Credit cards payable
|
|
42,552
|
|
|
42,552
|
|
Payroll taxes payable
|
|
80,922
|
|
|
78,608
|
|
Accrued interest
|
|
229,316
|
|
|
450,187
|
|
Accrued payroll and payroll taxes
|
|
540,908
|
|
|
402,053
|
|
Other liabilities
|
|
426,148
|
|
|
601,148
|
|
|
|
2,334,514
|
|
|
2,405,138
|
|
Reserve-legal fees
|
|
85,000
|
|
|
250,000
|
|
|
|
|
|
|
|
|
Total accounts payable and accrued expenses
|
$
|
2,419,514
|
|
$
|
2,655,138
|
|
Payroll taxes payable includes $17,475 and $17,475 in penalties, and $6,516 and $4,202 in interest, related to unpaid payroll taxes as of September 30, 2019, and December 31, 2018, respectively.
Other liabilities consists of certain payroll tax liabilities in the amount of $426,148 and $601,148 owed as of September 30, 2019, and December 31, 2018, respectively, by the bankrupt entity, RoxSan Pharmacy, Inc., that were not discharged under California bankruptcy laws. The Company has retained a tax resolution specialist to aid the Company in resolving the liability with the taxing agencies on behalf of RoxSan.
During the year ended December 31, 2018, accounts payable and accrued expenses was reduced by $341,606, resulting from the extinguishment of debt consisting of accounts payable-vendors in the amount of $284,714 and accrued interest in the amount of $56,892.
In 2018, the Company established a reserve for future legal fees to be incurred in connection with pending legal actions. As of September 30, 2019, and December 31, 2018, respectively, the reserve balance was $85,000 and $250,000.
NOTE 8. NOTES AND LOANS PAYABLE
Notes and loans payable consists of the following:
|
September 30, 2019
|
|
December 31, 2018
|
|
Short-term:
|
|
|
|
|
|
|
Debentures, convertible
|
$
|
––
|
|
$
|
724,903
|
|
Notes payable
|
|
360,000
|
|
|
––
|
|
Notes payable, convertible , net of unamortized discount
|
|
680,176
|
|
|
296,000
|
|
Total short-term
|
|
1,040,176
|
|
|
1,020,903
|
|
|
|
|
|
|
|
|
Long-term:
|
|
|
|
|
|
|
Debentures, convertible, net of unamortized discount
|
|
––
|
|
|
184,870
|
|
Note payable, convertible
|
|
576,154
|
|
|
720,154
|
|
Note payable-bank
|
|
21,320
|
|
|
28,995
|
|
Total long-term
|
|
597,474
|
|
|
934,019
|
|
|
|
|
|
|
|
|
Total notes and loans payable
|
$
|
1,637,650
|
|
$
|
1,954,922
|
|
Non-related party convertible debt consists of the following convertible promissory notes:
Holder
|
|
Principal
|
|
APR
|
|
Accrued
Interest
|
|
Conversion
Price
|
|
Term/Due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lender Group A
|
|
$
|
20,000
|
|
20%
|
|
$
|
15,840
|
|
$0.10
|
|
05/2018
|
|
Lender Group B
|
|
|
569,176
|
|
12%
|
|
|
36,217
|
|
$0.10 to $.12
|
|
09/2019-04/2020
|
|
Investor Group A
|
|
|
91,000
|
|
10%
|
|
|
18,720
|
|
$0.10
|
|
09/2018
|
|
|
|
|
680,176
|
|
|
|
|
70,777
|
|
|
|
|
|
Long-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph M. Redmond
|
|
|
576,154
|
|
5%
|
|
|
141,096
|
|
$0.10
|
|
07/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total convertible debt
|
|
$
|
1,256,330
|
|
|
|
$
|
211,873
|
|
|
|
|
|
During the nine months ended September 30, 2019, the Company issued 12% convertible promissory notes in the aggregate principal sum of $585,000 (“Lender Group B”) for working capital, of which $556,780 in proceeds was disbursed to the Company after an original issue discount of $28,220. The notes bear interest at a rate of 12% per annum, mature six to twelve months from payment of disbursed proceeds, and contain a repayment provision to convert the debt into shares of the Company's common stock at conversion rates equal to the lower of 1) between $0.10 to $0.12 per share; or 2) at a discount of between 65% to 70% of the 2nd lowest trading prices during the twenty (20) trading days preceding the conversion date. In addition, the Company issued warrants to purchase 2,600,000 shares of the Company’s common stock at an exercise price of $0.15 per share for a period of five (5) years. The notes were discounted for embedded conversion option of $9,370 and warrant fair value of $105,000, reclassified as derivative liabilities.
14
On July 5, 2019, in connection with cash proceeds received in June 2019, the Company issued three (3) Senior Secured Notes (the “Notes”) in the aggregate principal of $220,000, pursuant to certain Note and Purchase Agreements (the “Purchase Agreements”) of the same date. The Notes bears interest at 8% per annum, and mature 180 days from the issuance date (“Maturity Date”). As additional consideration for entering into the Purchase Agreements, 400,000 shares of the Company’s restricted common stock is being issued to each of the note holders, for an aggregate of 1,200,000 shares, valued at $190,200.
As of September 30, 2019, and December 31, 2018, respectively, short-term non-related party debt in the amount $1,040,176 and $1,020,903 consists of $0 and $724,903 in convertible debentures; $360,000 and $0 in notes payable; and $680,176 and $296,000 in convertible notes payable. During the nine months and the year ended September 30, 2019, and December 31, 2018, respectively, notes and debentures in the principal aggregate of $585,000 and $825,000 were issued; principal in the amount of $622,369 and $50,000, along with interest in the amount of $41,519 and $608, was repaid in cash; principal in the amount of $395,000 and $620,000, along with interest in the amount of $2,000 and $55,613, was converted to common stock; losses on extinguishment of debt of $220,469 and $105,320 were incurred; and debt accretion in the amount of $126,766 and $1,087,974, and interest in the amount of $164,447 and $270,142 was expensed. As of September 30, 2019, and December 31, 2018, respectively, a total of $75,069 and $185,741 in accrued interest remains, and is included as an accrued expense on the accompanying consolidated balance sheet.
As of September 30, 2019, and December 31, 2018, respectively, long-term non-related party debt in the amount of $597,474 and $934,019 consists of $0 and $207,500 in convertible debentures, less unamortized discount of $0 and $22,630; $576,154 and $720,154 in convertible notes payable, of which $576,154 and $576,154 is related to pending litigation with a former executive (see Note 18), and subject to compromise; and $21,320 and $28,995 in notes payable to banks. During the nine months and the year ended September 30, 2019, and December 31, 2018, respectively, debentures in the principal aggregate of $0 and $225,000 were issued; principal in the amount of $219,675 and $9,245, along with interest in the amount of $1,176 and $632 was repaid in cash; principal in the amount of $95,142 and $0 was converted to common stock; losses on extinguishment of debt of $168,159 and $0 were incurred; and debt accretion in the amount of $9,816 and $2,370, and interest in the amount of $74,174 and $739,383 was expensed. As of September 30, 2019, and December 31, 2018, respectively, a total of $141,603 and $190,386 in accrued interest remains, and is included as an accrued expense on the accompanying consolidated balance sheet.
The future maturities of notes payable are summarized as follows:
Year
|
|
2020
|
|
2021
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
$
|
576,154
|
|
$
|
21,320
|
|
$
|
$597,474
|
During the nine months and the year ended September 30, 2019, and December 31, 2018, respectively, interest expense on non-related party notes and loans payable in the amount of $238,601 and $1,009,525 was expensed. As of September 30, 2019, and December 31, 2018, respectively, a total of $216,672 and $376,127 in interest has been accrued and is included as part of accrued expenses on the accompanying consolidated balance sheets.
NOTE 9. RELATED PARTY TRANSACTIONS
Related party transactions consist of the following:
|
September 30, 2019
|
|
December 31, 2018
|
|
Related party payables:
|
|
|
|
|
|
|
Accrued compensation
|
$
|
1,000,643
|
|
$
|
869,859
|
|
Cash advances
|
|
473,793
|
|
|
134,861
|
|
Total related party payables
|
|
1,474,436
|
|
|
1,004,720
|
|
|
|
|
|
|
|
|
Debentures, convertible
|
|
––
|
|
|
411,006
|
|
Notes payable, related party
|
|
759,446
|
|
|
––
|
|
Notes payable, convertible, related party
|
|
20,000
|
|
|
491,100
|
|
|
|
|
|
|
|
|
Total related party transactions
|
$
|
2,253,882
|
|
$
|
1,906,826
|
|
Related party convertible debt consists of the following convertible promissory notes:
Note Holder
|
|
Principal
|
|
APR
|
|
Accrued
Interest
|
|
Conversion
Price
|
|
Term/Due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Ogden, Director
|
|
$
|
20,000
|
|
10%
|
|
$
|
986
|
|
$0.10
|
|
12/2019
|
|
As of September 30, 2019, and December 31, 2018, respectively, related parties are due a total of $2,253,882 and $1,906,826, consisting of $1,000,643 and $869,859 in accrued compensation owed to officers; $473,793 and $134,861 in accrued benefits and cash advances from officers and beneficial owners to the Company for operating expenses; $759,446 and $0 in promissory notes; $0 and $411,006 in convertible debentures; and $20,000 and $491,100 in convertible promissory notes.
15
On July 25, 2019, related party convertible debentures in the principal sum of $411,006, plus accrued interest of $42,778, were converted to Senior Secured Promissory Notes (the “Senior Notes”) in the aggregate principal of $759,446. The Senior Notes bear interest at a rate of 8% per annum, with payments of $126,152 plus interest accrued thereon due December 31, 2019; $300,000 due December 31, 2020; and the remaining principal and accrued interest due December 31, 2021. In connection with the exchange, the Company issued the following in favor of the lender, Jorn Gorlach, a related party: 1,380,811 shares of the Company’s restricted Common Stock, valued at $131,315; warrants, valued at $92,150, to purchase 2,528,413 shares of the Company’s Common Stock for a period of five (5) years at an exercise price of $0.10461; and an increase in principal of $305,662. As a result, the Company recognized a net loss on the exchange in the amount of $526,987, net of $2,140 in derivative liability remaining from the warrants issued with the debentures.
In September 2019, $491,100 in related party convertible promissory notes, along with $98,642 in accrued interest, were converted into 5,897,419 shares of the company’s restricted common stock at a conversion price of $0.10 per share.
During the nine months and the year ended September 30, 2019, and December 31, 2018, respectively, $1,003,783 and $1,371,446 in related party compensation was accrued, $573,000 and $510,500 was paid, $300,000 and $0 was converted to common stock; and $0 and $450,000 was converted to preferred stock. In June 2019, $575,132 of related party debt was purchased by non-related-parties (the “Proceeds”). The Proceeds were collected on behalf of the related parties by the Company. Of the $396,500 paid to related parties during the current period, $159,500 was Proceeds. The remaining Proceeds of $415,632 were subsequently loaned to the Company by the related parties for operating expenses.
During the nine months and the year ended September 30, 2019, and December 31, 2018, respectively, $498,870 and $121,949 in benefits were accrued and cash advances were made to the Company by related parties for overhead requirements, of which $159,938 and $115,384 was paid/repaid to related parties.
During the nine months and the year ended September 30, 2019, and December 31, 2018, respectively; interest in the amount of $80,003 and $66,840 was expensed, of which $0 and $798 was paid to the note holders in cash; and $0 and $71,839 was converted to principal. As of September 30, 2019, and December 31, 2018, respectively, a total of $12,643 and $74,060 in accrued interest remains and is included as part of accrued expenses on the accompanying consolidated balance sheets.
In April 2019, the Company entered into an employment agreement with Mr. David Appell to serve as the Company’s Chief Operating Officer. The agreement commenced May 15, 2019, is for an initial term of two (2) years, and provides a base compensation of $250,000 year one, and $275,000 in year two, as well as various performance bonuses, and customary employee benefits. In addition, the agreement includes a grant to purchase 3,000,000 restricted common shares, valued at $201,300, for cash in the amount of $3,000, of which 25% vest immediately, and the remainder vest when certain earnings goals are met; as well as options granted to purchase 3,000,000 shares of the Company's Common Stock at an exercise price of $0.25 per share. The options, valued at $195,600 using the Black-Scholes method, are for a period of five (5) years, and vest annually over the term of the agreement, with an initial vesting of 25%. The assumptions used in valuing the options were: expected term 4.75 years, expected volatility 2.21, risk free interest rate 2.15%, and dividend yield 0%.
NOTE 10. COMMITMENTS AND CONTINGENCIES
On August 13, 2015, the Company issued a secured promissory note in the amount of $20,500,000 (the “Promissory Note”) in connection with the acquisition of RoxSan Pharmacy, Inc. (“RoxSan”). The Promissory Note bore interest at a rate of 6% per annum, and matured August 13, 2018 ("Maturity"). In September 2018, as part of the deconsolidation of RoxSan resulting from its Chapter 7 petition filed on May 14, 2018, management reevaluated the characteristics of the Promissory Note. Included in the evaluation were the following considerations: 1) the related asset is no longer a part of the parent financial statements due to a loss of financial control; 2) the Company is currently in litigation as a result of material breaches by the note holder; 3) the Company has claims against the note holder for losses and damages directly related to the Promissory Note and its underlying assets; 4) there is a high likelihood that no obligation exists. After careful consideration, management has determined that the current characteristics of the liability are contingent in nature, and the debt of $20,500,000 and related $2,278,281 in accrued interest was extinguished in 2018, resulting in a gain of $22,778,281.
On August 31, 2016, as part of the Company’s acquisition of 100% of the issued and outstanding shares of Qolpom®’s common stock and its assets, inventory and intellectual property, the agreement provides for, among other things, the seller to receive up to $2,000,000 through a percentage of revenue generated from RPM business segment (“Revenue Share”), as well as a royalty of 3% (“Royalties”) of certain revenues generated from the Qolpom® intellectual property, as defined in the agreement. As of September 30, 2019, and December 31, 2018, respectively, the present value of future Revenue Share was $450,000 and $430,000; and the present value of future Royalties was $309,000 and $310,000; and are included as part of long-term liabilities on the accompanying consolidated balance sheets.
On April 26, 2017, as part of the Company’s acquisition of certain intellectual property (“Intellectual Property”) from ProEventa, Inc (“ProEventa”), the agreement provides for, among other things, ProEventa to receive a revenue sharing cash earn-out of up to $3,000,000 to be derived from certain net revenue generated by the Company; as well as Royalties of 3% of certain revenues generated from the Intellectual Property, ending at such time as the Company has paid ProEventa $25,000,000, as defined in the agreement. As of September 30, 2019, and December 31, 2018, respectively, the present value of future Revenue Share was $1,189,000 and $1,270,000; the present value of future Royalties was $845,000 and $690,000, and $7,258 and $0 in Royalties payable on earned revenues was accrued.
16
NOTE 11. CONVERTIBLE PREFERRED STOCK
The total number of authorized shares of preferred stock that may be issued by the Company is 10,000,000 with a par value of $0.001 per share.
On March 31, 2019, in connection with the settlement agreement with Mr. Dave Engert, 36,339 shares of the Company’s Series A preferred stock held by Mr. Engert, with a book value of $100,000, were returned to treasury. As a result, preferred paid in capital was reduced by $99,964. On April 1, 2019, dividends owed on the Series A preferred stock were paid in kind with the issuance and immediate return to treasury of 21,121 shares of Series A preferred stock, resulting in a total of 57,500 shares of Series A preferred stock held in treasury (the “Treasury Shares”).
On May 15, 2019, the 57,500 Treasury Shares were reissued for cash in the amount of $69,000. Subsequently, the 57,500 shares of Series A preferred stock were converted into 1,150,000 shares of common stock at a ratio of 20 shares of common stock for each share of preferred stock held.
As of September 30, 2019, and December 31, 2018, respectively, the Company had 977,352 and 1,013,691 shares of preferred stock issued and outstanding.
NOTE 12. COMMON STOCK
Effective December 24, 2018, pursuant to a majority shareholder consent, the Company increased its authorized common stock from 250,000,000 shares to 500,000,000 shares, with a par value of $0.001 per share. On January 28, 2019, the amended articles of incorporation were filed with the state of Nevada.
During the nine months ended September 30, 2019, 1,150,000 shares of the Company’s restricted common stock were issued in connection with the conversion of 57,500 shares of Series A preferred stock, valued at $69,000. As a result, $67,850 was recorded to paid in capital.
During the nine months ended September 30, 2019, 21,987,535 shares of the Company’s restricted common stock were issued in connection with the conversion of non-related party debt in the amount of $1,713,740. As a result, $1,691,753 was recorded to paid in capital.
During the nine months ended September 30, 2019, 5,897,419 shares of the Company’s restricted common stock were issued in connection with the conversion of related party debt in the amount of $589,742. As a result, $583,845 was recorded to paid in capital.
During the nine months ended September 30, 2019, 5,679,167 shares of the Company’s restricted common stock were issued in connection with stock awards to non-related parties, valued at $588,548, including 125,000 shares valued at $8,388 for cash in the amount of $125. As a result, $582,868 was recorded to paid in capital.
During the nine months ended September 30, 2019, 3,000,000 shares of the Company’s restricted common stock were issued in connection with a stock award to David Appell, the company’s Chief Operating Officer, valued at $201,300 for cash in the amount of $3,000, of which 25% vests immediately, and the remainder vest when certain earnings goals are met. As a result, $198,300 was deferred, to be amortized over the vesting terms, and $198,300 was recorded to paid in capital.
During the nine months ended September 30, 2019, 13,875,000 shares of the Company’s restricted common stock were issued in connection with a Simple Agreement Future Equity (“SAFE”) offering, including 4,500,000 issued to related parties, for cash in the amount of $735,000, services valued at $15,000, and $375,000 in related party accrued compensation. As a result, $1,111,124 was recorded to paid in capital.
During the nine months ended September 30, 2019, 1,875,000 shares of the Company’s restricted common stock were issued, valued at $178,700, in connection with the retirement of 4,550,000 warrants. As a result, $176,825 was recorded to paid in capital.
During the nine months ended September 30, 2019, 1,400,000 shares of the Company’s restricted common stock were issued in connection with services valued at $121,000. As a result, $119,600 was recorded to paid in capital.
During the nine months ended September 30, 2019, 2,810,811 shares of the Company’s common stock were issued in connection with debt and debt service valued at $344,514. As a result, $341,704 was recorded to paid in capital.
During the nine months ended September 30, 2019, in connection with an equity funding, 12,000,000 shares of the Company’s restricted common stock were issued for cash in the amount of $1,000,000, of which $500,000 was recorded to subscription receivable. As a result, $988,000 was recorded to paid in capital.
During the nine months ended September 30, 2019, in connection with an investment in securities, 6,666,667 shares of the Company’s restricted common stock were issued for $0.15 per share, valued at $1,000,000. As a result, $993,333 was recorded to paid in capital.
During the nine months and the year ended September 30, 2019, and December 31, 2018, respectively, a total of 76,341,599 and 21,358,611 shares of the Company’s common stock were issued. As of September 30, 2019 and December 31, 2018, respectively, the Company had 234,454,740 and 158,113,141 common shares issued and outstanding.
17
Restricted Stock Awards
During the nine months and the year ended September 30, 2019, and December 31, 2018, respectively, 3,730,000 and 3,660,000 restricted stock awards were granted, valued at $254,350 and $434,000; and 1,654,270 and 6,827,368 restricted stock awards vested, for which $171,555 and $1,095,193 in deferred stock compensation was expensed. As of September 30, 2019 and December 31, 2018, respectively, there remains 7,963,925 and 5,888,195 shares to be vested, and $1,231,604 and $1,148,809 in deferred stock compensation to be expensed over the next eighteen (18) months.
Restricted Stock Awards Activity
|
Number of
|
|
Deferred
|
|
|
Shares
|
|
Compensation
|
|
Outstanding at December 31, 2017
|
9,055,563
|
|
$
|
1,810,002
|
|
Granted
|
3,660,000
|
|
|
434,000
|
|
Vested
|
(6,827,368
|
)
|
|
(1,095,193
|
)
|
Outstanding at December 31, 2018
|
5,888,195
|
|
|
1,148,809
|
|
Granted
|
3,730,000
|
|
|
254,350
|
|
Vested
|
(4,095,932
|
)
|
|
(665,179
|
)
|
Forfeited
|
(675,000
|
)
|
|
(67,537
|
)
|
Outstanding at September 30, 2019
|
5,522,263
|
|
$
|
670,443
|
|
NOTE 13. WARRANTS AND OPTIONS
As of September 30, 2019, and December 31, 2018, respectively, the Company had 49,435,913 and 21,232,500 warrants, and 26,685,000 and 18,060,000 options, issued and outstanding.
During the nine months and the year ended September 30, 2019 and December 31, 2018, respectively, 33,353,413 and 14,077,500 warrants were granted, 4,850,000 and 0 were retired, and 300,000 and 100,000 expired. The warrants carry an exercise price of between $0.001 to $0.60 per share, expire between 2020 to 2024, and were valued at $335,310 and $851,610, using the Black-Scholes method. The assumptions used in valuing the warrants were: expected term between 2 to 5 years; expected volatility 40% to 45%; risk free interest rate between 1.16% to 2.91%; and a dividend yield of 0%. A total of $0 and $113,210 in deferred stock warrant compensation was recorded, and $144.610 and $73,370 was expensed during the nine months and the year ended September 30, 2019, and December 31, 2018, respectively. There remains $92,470 and $98,920 in deferred compensation as of September 30, 2019, and December 31, 2018, respectively, to be expensed over the next twelve (12) months.
Warrants Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Remaining
|
|
Exercise Price
|
|
Weighted
|
|
|
|
Common
|
|
Contractual Life
|
|
Times Number
|
|
Average
|
|
Exercise Price
|
|
Shares
|
|
(in years)
|
|
Of Shares
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.001
|
|
300,000
|
|
3.75
|
|
$
|
300
|
|
$0.17
|
|
$0.01
|
|
75,000
|
|
1.25
|
|
|
750
|
|
$0.18
|
|
$0.10
|
|
2,528,413
|
|
5.00
|
|
|
252,841
|
|
$0.21
|
|
$0.10
|
|
62,500
|
|
3.50
|
|
|
6,250
|
|
$0.29
|
|
$0.10
|
|
250,000
|
|
1.75
|
|
|
25,000
|
|
$0.19
|
|
$0.10
|
|
4,877,500
|
|
1.50
|
|
|
487,750
|
|
$0.21
|
|
$0.10
|
|
250,000
|
|
1.00
|
|
|
25,000
|
|
$0.32
|
|
$0.15
|
|
600,000
|
|
4.50
|
|
|
90,000
|
|
$0.19
|
|
$0.15
|
|
1,000,000
|
|
1.25
|
|
|
150,000
|
|
$0.28
|
|
$0.17
|
|
62,500
|
|
3.50
|
|
|
10,625
|
|
$0.29
|
|
$0.18
|
|
62,500
|
|
3.50
|
|
|
11,250
|
|
$0.29
|
|
$0.20
|
|
2,600,000
|
|
4.50
|
|
|
520,000
|
|
$0.19
|
|
$0.21
|
|
62,500
|
|
3.50
|
|
|
13,125
|
|
$0.29
|
|
$0.21
|
|
100,000
|
|
1.00
|
|
|
21,000
|
|
$0.34
|
|
$0.25
|
|
5,625,000
|
|
4.50
|
|
|
1,406,250
|
|
$0.19
|
|
$0.25
|
|
4,500,000
|
|
3.00
|
|
|
1,125,000
|
|
$0.22
|
|
$0.25
|
|
250,000
|
|
2.75
|
|
|
62,500
|
|
$0.22
|
|
$0.25
|
|
3,250,000
|
|
2.00
|
|
|
812,500
|
|
$0.18
|
|
$0.25
|
|
3,750,000
|
|
1.75
|
|
|
937,500
|
|
$0.19
|
|
$0.25
|
|
13,500,000
|
|
1.50
|
|
|
3,375,000
|
|
$0.21
|
|
$0.25
|
|
475,000
|
|
1.25
|
|
|
118,750
|
|
$0.27
|
|
$0.25
|
|
3,255,000
|
|
1.00
|
|
|
813,750
|
|
$0.32
|
|
$0.25
|
|
1,500,000
|
|
0.75
|
|
|
375,000
|
|
$0.39
|
|
$0.35
|
|
250,000
|
|
1.00
|
|
|
87,500
|
|
$0.32
|
|
$0.60
|
|
250,000
|
|
1.00
|
|
|
150,000
|
|
$0.34
|
|
|
|
49,435,913
|
|
|
|
$
|
10,877,641
|
|
$0.22
|
|
18
|
|
|
|
Weighted
|
|
Warrant Activity
|
Number of
|
|
Average
|
|
|
Shares
|
|
Exercise Price
|
|
Outstanding at December 31, 2018
|
|
21,232,500
|
|
$0.18
|
|
Issued
|
|
33,353,413
|
|
$0.20
|
|
Exercised
|
|
––
|
|
––
|
|
Retired / Cancelled
|
|
(4,850,000
|
)
|
$0.22
|
|
Expired / Forfeited
|
|
(300,000
|
)
|
$0.18
|
|
Outstanding at September 30, 2019
|
|
49,435,913
|
|
$0.22
|
|
During the nine months and the year ended September 30, 2019, and December 31, 2018, respectively, 10,000,000 and 6,000,000 stock options were granted, which vest periodically over a two (2) year period, are exercisable for a period of between 3 to 5 years at an exercise price of between $0.05 to $0.60 per share, and were valued at $900,150 and $833,700 using the Black-Scholes method. The assumptions used in valuing the options were: expected term between 3.00 to 4.75 years; expected volatility between 1.78 to 2.29; risk free interest rate of between 1.69% to 2.78%; and a dividend yield of 0%.
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
Exercise Price
|
|
Weighted
|
|
|
|
Number of
|
|
Contractual Life
|
|
times Number
|
|
Average
|
|
Exercise Price
|
|
Shares
|
|
(in years)
|
|
of Shares
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.05
|
|
90,000
|
|
3.00
|
|
$
|
4,500
|
|
$0.14
|
|
$0.05
|
|
1,140,000
|
|
2.75
|
|
|
57,000
|
|
$0.09
|
|
$0.05
|
|
100,000
|
|
2.25
|
|
|
5,000
|
|
$0.08
|
|
$0.05
|
|
60,000
|
|
1.50
|
|
|
3,000
|
|
$0.06
|
|
$0.05
|
|
170,000
|
|
1.25
|
|
|
8,500
|
|
$0.12
|
|
$0.09
|
|
5,500,000
|
|
3.00
|
|
|
467,500
|
|
$0.20
|
|
$0.10
|
|
500,000
|
|
1.25
|
|
|
50,000
|
|
$0.14
|
|
$0.15
|
|
1,000,000
|
|
1.25
|
|
|
150,000
|
|
$0.14
|
|
$0.25
|
|
3,125,000
|
|
4.75
|
|
|
781,250
|
|
$0.22
|
|
$0.25
|
|
1,000,000
|
|
4.50
|
|
|
250,000
|
|
$0.20
|
|
$0.25
|
|
5,000,000
|
|
3.75
|
|
|
1,250,000
|
|
$0.16
|
|
$0.25
|
|
7,000,000
|
|
3.00
|
|
|
1,750,000
|
|
$0.16
|
|
$0.25
|
|
1,000,000
|
|
1.25
|
|
|
250,000
|
|
$0.15
|
|
$0.25
|
|
1,000,000
|
|
0.75
|
|
|
250,000
|
|
$0.10
|
|
|
|
26,685,000
|
|
|
|
$
|
5,276,750
|
|
$0.20
|
|
|
|
|
|
Weighted
|
|
Options Activity
|
Number of
|
|
Average
|
|
|
Shares
|
|
Exercise Price
|
|
Outstanding at December 31, 2018
|
|
18,060,000
|
|
$0.23
|
|
Issued
|
|
10,000,000
|
|
$0.22
|
|
Exercised
|
|
––
|
|
––
|
|
Expired / Forfeited
|
|
(1,375,000
|
)
|
––
|
|
Outstanding at September 30, 2019
|
|
26,685,000
|
|
$0.20
|
|
During the nine months and the year ended September 30, 2019, and December 31, 2018, respectively, 10,000,000 and 6,000,000 options were issued, 0 and 1,973,189 options were exercised, 1,000,000 and 1,000,000 options expired, and 375,000 and 5,641,811 options were forfeited. A total of $875,700 and $649,327 in deferred stock option compensation was recorded, net of forfeitures, and $526,650 and $572,870 was expensed during the nine months and the year ended September 30, 2019, and December 31, 2018, respectively. There remains $1,744,518 and $1,395,466 in deferred compensation as of September 30, 2019, and December 31, 2018, respectively, to be expensed over the next 15 months.
19
NOTE 14. INCOME TAXES
A reconciliation of the expected statutory federal and state taxes and the total income tax expense (benefit) at September 30, 2019, and December 31, 2018, was as follows:
|
September 30, 2019
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
$
|
(6,458,278
|
)
|
$
|
15,608,209
|
|
Statutory rate (Fed & State(s))
|
|
30%
|
|
|
30%
|
|
|
|
|
|
|
|
|
Computed expected tax payable (recovery)
|
|
(1,797,800
|
)
|
|
4,781,700
|
|
|
|
|
|
|
|
|
Effect of release of net operating loss carryforwards
|
|
(927,100
|
)
|
|
(2,417,700
|
)
|
|
|
|
|
|
|
|
Tax effect of non-deductible expenses:
|
|
|
|
|
|
|
Gain on extinguishment of debt-principal
|
|
––
|
|
|
(6,124,000
|
)
|
Stock compensation/amortization of stock options
|
|
767,700
|
|
|
1,048,500
|
|
Discount amortization
|
|
5,600
|
|
|
837,000
|
|
Other
|
|
1,700
|
|
|
1,500
|
|
Total tax effect of non-deductible expenses
|
|
775,000
|
|
|
(4,237,000
|
)
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
1,949,900
|
|
|
(1,873,000
|
)
|
|
|
|
|
|
|
|
Income tax expense
|
$
|
––
|
|
$
|
––
|
|
|
|
|
|
|
|
|
Reported income taxes:
|
|
|
|
|
|
|
Federal
|
$
|
––
|
|
$
|
––
|
|
State
|
|
––
|
|
|
––
|
|
Total
|
$
|
––
|
|
$
|
––
|
|
The significant components of deferred income tax assets and liabilities at September 30, 2019, and December 31, 2018, are as follows:
|
September 30, 2019
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Net operating loss carried forward
|
$
|
1,930,500
|
|
$
|
––
|
|
Bad debt allowance
|
|
––
|
|
|
––
|
|
Officers’ accrued compensation
|
|
280,000
|
|
|
243,400
|
|
Accrued related party interest
|
|
3,500
|
|
|
20,700
|
|
Valuation allowance
|
|
(2,214,000
|
)
|
|
(264,100
|
)
|
|
|
|
|
|
|
|
Net deferred income tax asset
|
$
|
––
|
|
$
|
––
|
|
During the year ended December 31, 2018, the company realized extinguishment of debt principal in the amount of $20,880,688. Per Internal Revenue Code (“IRC”) Section 108(a) (1) (A) the extinguishment of debt principal is excluded from taxable income for the Company. However, any available tax attributes must be released up and to the amount of the extinguishment. Therefore, net operating loss carryforwards were released for the amount of income excluded from taxable income. The remaining net operating losses available to use toward future taxable income are as follows:
Tax Year
|
|
Net Operating Loss
|
|
Expires
|
|
|
|
|
|
|
2016
|
|
$
|
442,900
|
|
2036
|
2017
|
|
|
2,115,400
|
|
2037
|
2018
|
|
|
548,900
|
|
No Expiration
|
2019 to date
|
|
|
3,791,500
|
|
No Expiration
|
|
|
|
|
|
|
Total
|
|
$
|
6,898,700
|
|
|
As at September 30, 2019, the Company had approximately $6,898,700 of federal net operating losses, of which $4,340,400 have no expiration date. The Company is open to examinations for the tax year 2011 through the current tax year.
20
NOTE 15. DISCONTINUED OPERATIONS
In December 2017, the Company discontinued all operations related to the Retail Pharmacy Segment (RPS) involving the Company’s wholly-owned subsidiary, RoxSan Pharmacy, Inc. (“RoxSan”). On May 14, 2018, pursuant to a unanimous resolution of the Boards of Directors of RoxSan and Parallax Health Sciences, Inc., RoxSan filed a Chapter 7 petition in the United States Bankruptcy Court for the Central District of California. Mr. Timothy Yoo was appointed trustee on May 15, 2018. In connection with the filing, RoxSan sought to discharge approximately $5 million of liabilities owed to various parties, and intercompany loans in excess of $1 million owed to the Company. The Chapter 7 bankruptcy proceeding by was fully discharged and the case was closed on March 13, 2019.
Due to, among other things, the reduction in RoxSan’s cash flows during 2016 and 2017, RoxSan became delinquent in its payroll tax depository obligations, resulting in a liability owed to federal and state taxing agencies in the aggregate of $1,148,811, which includes $601,148 in taxes withheld from employees (“Trust Fund Taxes”), employer taxes of $183,172, and penalties and interest of $364,491 through December 31, 2018. The liability was included as part of the Chapter 7 bankruptcy petition, and certain portions of the liability may be discharged. However, in accordance with California bankruptcy laws, federal and state Trust Fund Taxes are not dischargeable. During the nine months ended September 30, 2019, the company has made payments on behalf of RoxSan to the taxing agencies in the amount of $175,000. As of September 30, 2019, $426,148 in Trust Fund Taxes remains outstanding. The Company has retained a tax resolution specialist and is in communications with the taxing agencies in order to resolve RoxSan’s liability (Note 7).
As a result of the loss of financial control of RoxSan, the Company derecognized the subsidiary effective May 14, 2018. The derecognition resulted in a gain of $4,478,268. The Company also extinguished $22,778,281 in debt and accrued interest related to the acquisition of RoxSan.
The results of the discontinued operations of RoxSan Pharmacy, Inc. for the three and nine months ending September 30, 2018, are summarized as follows:
|
September 30, 2018
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
|
|
|
|
Revenue
|
$
|
––
|
|
$
|
––
|
|
Cost of sales
|
|
––
|
|
|
––
|
|
Gross profit
|
|
––
|
|
|
––
|
|
Sales, marketing and pharmacy expenses
|
|
(24,260
|
)
|
|
170,630
|
|
General and administrative expenses
|
|
(79,006
|
)
|
|
586,993
|
|
Operating income (loss)
|
|
103,266
|
|
|
(757,623
|
)
|
Loss on disposal of assets
|
|
––
|
|
|
(10,000
|
)
|
Interest expense
|
|
(9,493
|
)
|
|
(56,775
|
)
|
Net income (loss) from discontinued operations
|
$
|
93,773
|
|
$
|
(824,398
|
)
|
NOTE 16. SEGMENT REPORTING
The Company has the following business segments: Remote Care Services (RCS), Behavioral Health Services (BHS), and Diagnostics/Corporate (DCS). See Note 1 and 2 for a description of each segment and related significant accounting policies.
The following table is a reconciliation of the Company’s business segments to the consolidated financial statements:
|
Remote Care
Segment
|
|
Behavioral
Health Segment
|
|
Diagnostics/
Corporate
Segment
|
|
Discontinued
Operations
|
|
Consolidated
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
1,395
|
|
$
|
76,350
|
|
$
|
––
|
|
$
|
––
|
|
$
|
77,745
|
|
Gross profit (loss)
|
|
75
|
|
|
64,800
|
|
|
––
|
|
|
––
|
|
|
64,875
|
|
Operating loss
|
|
(204,145
|
)
|
|
(97,700
|
)
|
|
(4,836,369
|
)
|
|
––
|
|
|
(5,138,214
|
)
|
Depreciation and amortization
|
|
6,897
|
|
|
82,320
|
|
|
1,468
|
|
|
––
|
|
|
90,685
|
|
Interest expense
|
|
2,315
|
|
|
––
|
|
|
455,004
|
|
|
––
|
|
|
457,319
|
|
Gain on fair value adjustments
|
|
––
|
|
|
––
|
|
|
105,141
|
|
|
––
|
|
|
105,141
|
|
Loss on extinguishment of debt
|
|
––
|
|
|
––
|
|
|
(915,615
|
)
|
|
––
|
|
|
(915,615
|
)
|
Loss on settlement
|
|
––
|
|
|
––
|
|
|
(33,272
|
)
|
|
––
|
|
|
(33,272
|
)
|
Discount amortization
|
|
19,000
|
|
|
––
|
|
|
––
|
|
|
––
|
|
|
19,000
|
|
Total assets
|
|
906,466
|
|
|
357,247
|
|
|
1,109,592
|
|
|
––
|
|
|
2,373,305
|
|
Goodwill
|
|
785,060
|
|
|
––
|
|
|
––
|
|
|
––
|
|
|
785,060
|
|
Additions to property and equipment
|
|
––
|
|
|
––
|
|
|
2,628
|
|
|
––
|
|
|
2,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
9,399
|
|
|
1,350
|
|
|
––
|
|
|
––
|
|
|
10,749
|
|
Gross profit (loss)
|
|
(6,108
|
)
|
|
1,350
|
|
|
––
|
|
|
––
|
|
|
(4,758
|
)
|
Operating loss
|
|
(277,261
|
)
|
|
(144,218
|
)
|
|
(4,835,777
|
)
|
|
––
|
|
|
(5,257,256
|
)
|
Depreciation and amortization
|
|
6,897
|
|
|
82,320
|
|
|
1,248
|
|
|
––
|
|
|
90,465
|
|
Interest expense
|
|
2,206
|
|
|
––
|
|
|
1,739,520
|
|
|
––
|
|
|
1,741,726
|
|
Gain on disposal of subsidiary
|
|
––
|
|
|
––
|
|
|
5,079,416
|
|
|
––
|
|
|
5,079,416
|
|
Gain on extinguishment of debt
|
|
––
|
|
|
––
|
|
|
22,931,148
|
|
|
––
|
|
|
22,931,148
|
|
Loss on fair value adjustments
|
|
––
|
|
|
––
|
|
|
(156,300
|
)
|
|
––
|
|
|
(156,300
|
)
|
Discount amortization
|
|
(370,000
|
)
|
|
––
|
|
|
3,145,000
|
|
|
––
|
|
|
2,775,000
|
|
Discontinued operations
|
|
––
|
|
|
––
|
|
|
––
|
|
|
(824,398
|
)
|
|
(824,398
|
)
|
Total assets
|
|
915,652
|
|
|
467,007
|
|
|
11,906
|
|
|
––
|
|
|
1,394,565
|
|
Goodwill
|
|
785,060
|
|
|
––
|
|
|
––
|
|
|
––
|
|
|
785,060
|
|
Additions to property and equipment
|
|
––
|
|
|
––
|
|
|
––
|
|
|
––
|
|
|
––
|
|
21
NOTE 17. LEGAL MATTERS
The Company knows of no material developments to its legal matters other than those disclosed below:
Dispute with Former Owner of RoxSan
Action No. SC125702:
In the Matter, action No. SC125702, in the Superior Court of the State of California, County of Los Angeles, West District, the former owner of RoxSan Pharmacy, Inc., Shahla Melamed (“Melamed”), alleges that the Company is in default under the terms of the Purchase Agreement and Secured Note, and the Company’s termination of Melamed’s employment agreement. The Company firmly believes that it had adequate grounds to justify the termination of the employment, that it acted within its rights, and shall prevail in these proceedings. A trial date, previously set for December 2018, is currently set for January 2020.
Action No. SC 124898:
The Company initiated legal action against Melamed and filed a complaint, action number SC 124898, in the Superior Court of the State of California, County of Los Angeles, West District, Parallax Health Sciences, et al. v. Shahla Melamed, et al. The Complaint in that action alleges that Melamed has breached several obligations under the Purchase Agreement, and the Company is seeking to reduce the Secured Note due to undisclosed material changes in the business. A trial date, previously set for December 2018, is currently set for January 2020.
Disputes with Former Executives
Action No. CV2017-052804
On March 9, 2017, Dave Engert former Executive Chairman and director of the Company filed a lawsuit in Arizona and then on or about May 5, 2017, Mr. Engert, changed the venue and filed suit against the Company and RoxSan Pharmacy, Inc. in the United States District Court, Central District of California for an amount exceeding $75,000. On October 23, 2017, the Company filed an answer and counterclaims against Mr. Engert for an amount exceeding $100,000. The counterclaims include possible fraud and negligence committed by Mr. Engert and Mr. J. Michael Redmond, former successor Chairman of Mr. Engert, director, President and Chief Executive Officer of the Company and former President, Chief Executive Officer, Chairman and director of RoxSan Pharmacy, Inc.
On October 8, 2018, a settlement was reached between Mr. Engert and the Company (the “Settlement”). The Settlement includes, among other things, a cash payment to Mr. Engert in the amount of $139,000, and the cancellation of all of Mr. Engert’s equity holdings in the Company, including preferred shares (see Note 11). The Settlement resulted in a net loss to the Company of $33,272. On April 10, 2019, a stipulation for dismissal was filed, and the matter has been fully resolved.
NOTE 18. SUBSEQUENT EVENTS
The Company has evaluated the events and transactions for recognition or disclosure subsequent to September 30, 2019, through the date of the issuance of the financial statements, and has determined that there have been no events that would require disclosure.
* * * * *
22